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Asset Under Management of non-banking financial company-microfinance institutions (NBFC-MFIs) is expected to grow 25-30% in FY24, on the back of improving asset quality, higher economic activity, and rising profitability, said CRISIL Ratings.
The growth in AUM has been accompanied by declining stressed assets which fell to about 6% in December 2022 from a peak of ~13% in September 2021 and to an estimated ~3% as of March 2023, the rating agency said. Stressed assets include gross non-performing assets and restructured assets.
Overall, the AUM of microfinance sector is estimated to have crossed Rs 3.4 lakh crore as of March 2023, with NBFC-MFIs outpacing small finance banks, universal banks and other lenders. NBFC-MFIs now have the largest lending footprint in microfinance with an AUM of ~Rs 1.3 lakh crore. The growth has come on the back of pent-up demand for credit and increase in ticket-size of disbursements, up 10-15% across loan cycles over the past two fiscals.
“The market share of NBFC-MFIs in microfinance credit rose 700 basis points in 33 months to ~38% as of December 2022 from ~31% as of March 2020. Their focus on intra-state penetration has meant top five states now comprise over half of the industry AUM. Bihar has the largest share at 12.7%, followed by Tamil Nadu (11.1%) and Karnataka (10%),” said Ajit Velonie, Senior Director, CRISIL Ratings.
Financial Profile
The rating agency said that NBFC-MFIs have been cleaning their loan book, which had deteriorated due to the impact of the pandemic, through write-offs and sale to asset reconstruction companies since last fiscal. This, coupled with lower slippages in recent originations, has helped bring down their stressed assets level.
Moreover, profitability is expected to exceed 3% in fiscal 2024, compared with ~1% in fiscals 2021 and 2022 and ~1.5-2.0% in fiscal 2023. The improvement will be driven by adoption of risk-based loan pricing and improved credit underwriting, which would lead to higher margins and lower credit costs.
Further, credit costs has started to stabilise and fell to 3.0-3.5% (annualised) during the first nine months of fiscal 2023, compared with 4-5% in the past two fiscals that was due to the challenges from the pandemic. The rating agency expects the credit costs fo fall further to 2.0-2.5% this fiscal as most of tha AUM now comprises of disbursements made in the past 12-15 months and these assets have exhibited strong collection efficiency of 98-99%. This reflects restoration of cash flows of underlying borrowers after the pandemic-driven liquidity constraints. In addition, continued strengthening of underwriting practices and comprehensive credit bureau report have also helped in credit costs declining.
“The average interest yield on portfolio generated in the past 12 months is estimated to have risen by 150-250 bps. The resultant higher net interest margin along with lower incremental credit cost, should lift profitability to the pre-pandemic levels,” said Prashant Mane, Associate Director, CRISIL Ratings.
The rating agency further stated that higher interest rate and inflation would continue remain key monitorables, given the vulnerability of borrowers to external shocks. However, the revised regulatory framework will support the NBFC-MFIs in good stead as it will help build balance-sheet buffers and support their credit profiles.