The credit cost of microfinance institutions (MFIs) in FY24 is expected to remain lower than the average of about 2.5 per cent between FY17-22, according to an ICICI Securities report.

Microfinance lenders are close to the end of the longest asset quality cycle (FY17-22) – starting with demonetisation in FY17, the floods, NBFC (non-banking finance company) crisis in FY18-19, and lastly Covid in FY21-22, said I-Sec research analysts Renish Bhuva and Chintan Shah.

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The analysts said while lenders have remained resilient as reflected in 25 per cent Assets Under Management (AUM) CAGR (compounded annual growth rate) between FY17-21, the average credit cost stood elevated at about 2.5 per cent as against less than 50 basis points during FY14-16.

However, during 9M (April-December) FY23, most players had shown a sharp improvement in their credit cost trajectory.

“Further, we believe recent judgements (Telangana High Court on February 14, 2023) from the higher authorities would provide better clarity on the MFI regulatory framework, and also eliminate any possibility of dual regulations. Andhra Pradesh and Telangana have not participated in the MFI growth journey during the past decade,” the analysts said.

They said the Telangana High Court’s judgement would open up fresh MFI lending in these two states at an accelerated pace.

Also read:Microfinance loans to see good traction

They estimated that the two states offer a combined potential growth opportunity of about Rs 60,000 crore (more than 20 per cent of the industry AUM as on September 2022). As on September 2022, only about 5 per cent of the total MFI lending opportunity had been captured by players in these two states.

“Overall, we believe the MFI sector is well poised to deliver 20 per cent plus AUM growth and 3.5 per cent plus sector Return on Assets by FY24E,” the analysts said.

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