Assets under management of NBFC-MFIs is expected to grow 25-30 per cent in FY24 aided by improving asset quality, continued traction in economic activity, and rising profitability, supported by higher net interest margins.
“The confluence of these factors augurs well for the credit profiles of NBFC-MFIs,” Crisil Ratings said in a note, adding that growth over the last two fiscals has been driven by pent-up demand for credit and a 10-15 per cent increase in ticket-size of disbursements.
The microfinance sector’s AUM is estimated at Rs 3.4 lakh crore as of March 31, with NBFC-MFIs outpacing small finance banks, universal banks and other lenders with AUM of Rs 1.3 lakh crore. The market share of MFIs rose 700 bps in 33 months to 38 per cent as of December 2022, from 31 per cent as of March 2020.
The top five states’ AUM comprises over half of the industry AUM, with Bihar having the largest share at 13 per cent, followed by Tamil Nadu at 11 per cent and Karnataka at 10 per cent.
Asset quality improves
The growth in AUM has been accompanied by an improvement in asset quality, as reflected in stressed assets (gross non-performing assets + restructured assets) falling to around 6 per cent in December 2022 from a peak of 13 per cent in September 2021, and to an estimated 3 per cent as of March 2023.
“NBFC-MFIs have been cleaning up their pandemic-impacted loan books through write-offs and sale to asset reconstruction companies. This, coupled with lower slippages in recent originations, has helped bring down their stressed assets level,” CRISIL said.
Overall profitability, measured as the return on managed assets, is seen exceeding 3 per cent in FY24, compared with 1.5-2.0 per cent in FY23 and around 1 per cent in FY21 and FY22. This will be led by adoption of risk-based loan pricing and improved credit underwriting, which would lead to higher margins and lower credit costs, also aided by the 150-250 bps increase in average interest yield on loans over the last 12 months.
MFIs’ credit costs have peaked at 4-5 per cent over the past two financial years, owing to pandemic-related challenges. As the collection efficiency for loans given over the past 12-15 months has been strong at 98-99 per cent, credit costs have started stabilising and fell to 3-3.5 per cent as of December 2022 and are seen falling to 2.0-2.5 per cent for FY23 as a whole.
“This reflects restoration of cash flows of underlying borrowers after the pandemic-driven liquidity constraints. Continued strengthening of underwriting practices with usage of a comprehensive credit bureau report has also helped,” it said.