India Ratings and Research has revised its outlook on the microfinance (MFI) sector to ‘improving’ from ‘neutral’ as it expects growth momentum for the sector to continue in FY24 and credit costs to normalise. For FY24, the rating outlook has been maintained at ‘stable’.
While the pandemic took a heavy toll on MFIs, much of the impact has been absorbed as of December 2022 even as disbursements are expected to further pick-up, aided by the removal of prescriptive cap on lending rates in March 2022.
“The new regulations are positive for the sector and provide all microfinance practitioners with the ability to price in risks while providing a level playing field for NBFC-MFIs in terms of applicable regulations,” the ratings agency said in a note.
Credit costs
NBFC-MFIs incurred cumulative credit costs (credit cost to average AUM) of 11.1 per cent over FY21-H1FY23, with nearly 9 million borrowers estimated to be in default during the pandemic. However, delinquencies and credit costs are expected to now normalise, as bulk of the portfolio has post-covid disbursements and collection efficiencies are steadily improving.
India Ratings pegs credit costs for the sector to improve to 1-3 per cent in FY24 from 1.5-5 per cent in FY23, with the expectations of improved operating buffers resulting in higher profitability. It expects the sector to grow at 20-30 per cent in FY23 and FY24.
“With the regulator wanting banks to implement expected credit loss models, they may reduce the direct exposure to the end-borrowers of this segment and this may prove beneficial to NBFC-MFIs. MFIs could see a higher proportion of unique borrower additions in FY23 and possibly FY24 as the Covid-19 impact continues to wane,” the note said.
On the other hand, it cautioned against two key risks over the next 12-18 months – inflation and elections which may impact the cashflows of a segment of borrowers in FY24 and H1FY25.