The asset under management (AUM) growth of Microfinance institutions’ (MFIs) may decline to less than 5% in the current fiscal from 29% in FY24, hit by mounting asset quality concerns, Icra said in a report. The sector’s profitability is expected to face significant headwinds in FY25 due to rising credit costs and compressed net interest margins.
Following two robust years, the sector is facing challenges stemming from borrower over-leveraging, socio-political disruptions and operational challenges — largely related to employee attrition.
Further, the sharp increase in the overall overdue book in H1FY25 poses significant downside risks to the near-term loan quality of the sector. The overall credit cost is, therefore, projected at 5.4-5.6% for FY25 compared to 2.2% in FY24.
In July, one of the industry’s self-regulatory organisations introduced guardrails for responsible lending to strengthen lending practices and address concerns regarding the overleveraging of borrowers. These guidelines were further tightened in November. A cap was imposed on borrowers’ total indebtedness at Rs 2 lakh, encompassing unsecured retail loans in addition to microfinance loans, and a reduction in the maximum number of microfinance lenders per borrower to three from four.
While these norms may improve credit safeguards, business volumes are expected to be negatively impacted in the near term, said Icra. “While the revised lending guardrails …promote responsible lending and mitigate risks of borrower overleveraging, they are expected to create near-term challenges for NBFC-MFIs. Borrower rejection rates are projected to increase significantly as over 20% of the borrowers are expected to be impacted by the new guardrails,” said AM Karthik, senior VP & co-group head – financial sector ratings, Icra.