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However, increasing customer indebtedness, rising average ticket size and a gradual shift from the Joint Liability Group model to individual loans pose the risk of overleveraging for the industry, CareEdge said. The evolving global macroeconomic environment and the continuation of support from impact funds and PE investors at the same pace will also be critical and needs to be closely monitored.

The portfolio of NBFC-microfinance institutions is expected to grow 28% y-o-y in fiscal 2024 on the top of 17% and 37% Y-o-Y growth recorded in FY22 and FY23, according to a CareEdge report.

“NBFC-MFIs have surpassed banks in the overall microfinancing landscape, constituting approximately 40% of the total outstanding microfinance loans as of March 31, 2023, compared to 34% for banks,” the report said.

CareEdge Ratings anticipates growth momentum to continue, however, increasing customer indebtedness, rising average ticket size and a gradual shift from the Joint Liability Group (JLG) model to individual loans pose the risk of overleveraging for the industry, it said. Also, considering the inherent nature of its asset class, NBFC MFIs are highly prone to event-based risks, such as political, geographical uncertainty and susceptibility to natural calamities. Moreover, the evolving global macroeconomic environment and the continuation of support from impact funds and PE investors at the same pace will also be critical and needs to be closely monitored.The tailwinds

The removal of the lending rate cap by the Reserve Bank of India (RBI) has enabled MFIs to engage in risk-based pricing, which has boosted net interest margins (NIMs) and, in turn, increased returns on total assets (RoTA).

Credit costs have declined from their peak in FY 2021 but remain higher than pre-Covid levels, with a portion of the restructured book slipping into NPA. CareEdge Ratings expect NIMs to continue improving, resulting in RoTA rising to approximately 3.8% for FY 2024, aided by controlled credit costs of approximately 2.5% for the same year.

Asset quality, although on an improving trend, still remains moderate as compared to the pre-Covid level owing to additional slippages arising from the restructured portfolio. The MFI sector has taken the cumulative impact on the credit cost of around 19% of the portfolio, as on March 31, 2020, from FY21 to FY23 due to Covid-19. However, with an improving collection efficiency trend, GNPA is expected to improve to 2.0% in FY24 from a peak of 6.26% for FY22.

In terms of capital structure, NBFC-MFIs have managed to raise around Rs 3,000 crore of equity in FY23, compared to around Rs 1,500 crore and Rs 1,430 crore in FY2021 and FY2022, respectively, indicating a renewed interest from investors. “Nevertheless, due to the current global turbulence, investors are likely to exercise greater caution and

selectivity in the future. Additionally, with increased support from investors and rising disbursement levels, the gearing level was 3.7x and 3.8x as of March 31, 2022, and March 31, 2023, respectively. The gearing level for the MFI sector is however envisaged to moderately increase to around 4.1x by March 31, 2024,” the CareEdge report said.

NIM push

The NBFC-MFIs have demonstrated an enhancement in net interest margins (NIMs), registering approximately 10.1% during FY23, as opposed to the 9% recorded in both FY21 and FY22. “This upswing can be attributed to the abolition of the lending rate cap regime in the revised RBI regulations and reduced interest income reversals due to the improved asset quality,” it said. While the comprehensive influence of the revised regulations is yet to fully materialise, the projection from CareEdge Ratings foresees a further escalation of NIMs in FY24. “Notably, the ratio of operating expenses to average assets has sustained a relatively elevated level of approximately

5.8% throughout FY23. This trend is propelled by the rapid expansion of branches, augmented technological advancements, and escalated compliance in alignment with the revised regulatory framework outlined by the RBI,” it said.

  • Published On Aug 24, 2023 at 08:00 AM IST

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