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Large sized micro finance institutions (MFIs) have seen a sharp decline in profitability during Q2FY25 due to higher stress, leading to rating downgrades and share price target cuts by analysts.
Country’s largest MFI by loan assets--CreditAccess Grameen (CA Grameen)—reported 46 per cent year-on-year (y-o-y) and 53 per cent quarter-on-quarter (q-o-q) fall in Q2 net profit at Rs 186 crore, while credit cost rose to ₹420 crore in Q2 from ₹175 crore in Q1. “We have been highlighting from the beginning of FY25 that credit cost in MFI lenders will be 4.0-8.0%. Increasing credit cost and moderating credit growth led to earnings cut by 40% and 26% for FY25E and FY26E. Given the stress in MFI which is likely to persist for next couple of quarters, we downgrade from buy to hold with a target price of ₹900 per share, implying 8% downside from CMP,” brokerage Nuvama said in a note dated October 27.
MFI major Spandana Sphoorty, meanwhile, reported a net loss of ₹216 crore in Q2 as against net profits of ₹125 crore a year ago and ₹456 crore last quarter. The MFI’s impairment on financial instruments more than doubled on quarter to ₹516 crore in Q2, while GNPA shot up by 346 basis points (bps) on year and 227 bps sequentially to 4.86 per cent in Q2.
Lack of borrower discipline
Factors such as higher employee attrition, climate related adverse events, lack of borrower discipline, increasing customer leverage and movements like ‘Karza Mukti Abhiyan’ have collectively led to MFI sector stress, the company said. To counter these issues, the MFI has started offering better incentives to employees to lower attrition rate, and tightened loan sanction norms. “Spandana will not be 4th lender for new-to-Spandana borrowers. For existing borrowers, Spandana will not be fifth lender,” it said.
On September 21, another large MFI, Fusion Finance, said it may be required to make an estimated credit loss (ECL) provisions of ₹500 crore-₹550 crore in Q2, as compared to ₹348 crore provision in Q1, after it conducted an internal review to ascertain the credit quality of loans.
The MFI’s management briefed about the immediate measures taken to tighten credit criteria for new disbursements. These include tighter norms for providing loans to existing and new customers, full scale collection vertical including both feet on street and telecalling infrastructure, augmenting branch team to reduce bandwidth constraints and additional layer of supervisory oversight on few critical processes in low performing branches, and aligning incentive structure to encourage focus on collections.
“Factoring in the higher than expected NPAs/LLP (bad loans and NPA provisions) and the potential impact of elevated stress on growth, we cut FY25E/26E/27E earnings by 86%/30%/22% and resultantly our TP to Rs260/sh (earlier Rs340),” brokerage Emkay Global said in a note.
Separately, CareEdge Ratings downgraded rating on Fusion Finance’s ₹1,500 crore long term bank facilities to “A” from “A+” and changed rating outlook to “negative” from “stable” citing an unexpected sharp deterioration in the company’s asset quality, which negatively impacted its profitability metrics.
Guidance for H2
Bankers are expecting another muted earnings quarter in Q3, and better business performance from Q4 onwards.
“We expect the situation to stabilise in Q3 FY25 and business sentiment should improve in Q4 FY25. The company continues to strengthen its collection effort with additional PAR (portfolio at risk) control measures by deploying senior and experienced field staff and quality control teams on the back of continuous customer engagement in addition to strong underwriting measures,” said Udaya Kumar Hebbar, MD at CA Grameen.
Nonetheless, the MFI has trimmed its FY25 guidance, with loans now expected to grow at 8-12 per cent as against earlier guidance of 23-24 per cent, while credit cost guidance has been raised sharply to 4.5-5 per cent from 2.2-2.4 per cent earlier.
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