Rating agency ICRA on Wednesday said the evolving asset quality risks will dampen sectoral growth and earnings in the current fiscal, and expected the NBFC-MFIs’ AUM growth to dip to 17-19% in FY2025 from 29% in FY2024.
Notably, in its recent report, ICRA highlighted the increasing delinquencies in the microfinance sector, which is likely to push up the NBFC-MFI credit costs to 320-340 bps in FY2025 from 220 bps in FY2024.
The NBFC-MFIs reported a marginal decline in assets under management (AUM) in Q1 FY2025, it noted.
It further estimated that the non-performing assets (NPAs) have increased by 30 bps in Q1 FY2025.
Lower but healthy return on managed assets
On the earnings front, ICRA expects them to report a lower but healthy return on managed assets (RoMA) of 2.5-2.7% in FY2025 compared to a record high of 3.6% in FY2024.
Increasing cost of funds and downward revisions in lending rates are likely to compress the interest margins of the NBFC-MFIs in FY2025. This, along with asset quality pressure, is expected to moderate their earnings in FY2025.
The robust growth in the last two years has accentuated concerns about potential overleveraging of borrowers in certain regions. Further, farmers’ protests and the Karz Mukti Abhiyan in certain regions, especially Punjab and Haryana, have impacted collections and the asset quality. This, along with climatic conditions and operational challenges, including employee attrition, would keep the asset quality under pressure in the near term.
Adherence to norms remains monitorable
Microfinance Industry Network, one of industry’s self-regulatory organisations, recently introduced guardrails for responsible lending, to strengthen the lending practices and address concerns regarding the overleveraging of borrowers.
The salient features include capping the overall microfinance indebtedness of a borrower to Rs. 2 lakh while restricting the number of microfinance lenders to a maximum of four.
In ICRA’s opinion, while these norms are expected to address the risk to some extent, adherence to the same remains monitorable. ICRA expects some impact on the business volumes in the near term with some borrowers becoming ineligible for microfinance loans under the lending guardrails.
