Non-banking finance companies – microfinance institutions’ (NBFC-MFIs) are likely to see subdued disbursements and a sharp moderation in assets under management (AUM) growth to 0- 5 per cent in FY25 from 29 per cent in FY24 amidst asset quality concerns, according to ICRA.
The sector’s profitability is expected to face significant headwinds in FY2025 due to rising credit costs, which is expected to be at 5.4-5.6 per cent for FY25 (2.2 per cent in FY24) and compressed net interest margins (NIMs), per the rating agency’s assessment. .
ICRA observed that following two years of robust expansion, the NBFC-MFI sector is facing challenges stemming from borrower over-leveraging, socio-political disruptions, and operational challenges, largely related to employee attrition.
Further, the sharp increase in the overall overdue book in H1 FY2025 poses significant downside risks to the near-term loan quality of the sector. Borrower rejections rates are projected to increase significantly.
In July 2024, one of the industry’s self-regulatory organisations had introduced guardrails for responsible lending, to strengthen lending practices and address concerns regarding the overleveraging of borrowers.
These guidelines were further tightened in November 2024 to include norms such as a cap on borrowers’ total indebtedness at ₹2 lakh, now encompassing unsecured retail loans in addition to microfinance loans; and a reduction in the maximum number of microfinance lenders per microfinance borrower to three from four, apart from other guidelines for strengthening the credit process.
AM Karthik, Senior Vice President & Co-Group Head – Financial Sector Ratings, ICRA, said: “While the revised lending guardrails are designed to promote responsible lending and mitigate risks of borrower overleveraging, they are expected to create near-term challenges for NBFC-MFIs. Borrower rejection rates are projected to increase significantly as over 20 per cent of the borrowers are expected to be impacted by the new guardrails.”
ICRA assessed that declining lending rates and higher funding costs are projected to moderate the return on managed assets (RoMA) to 0.4-0.8 per cent in FY25, down from a record 3.6 per cent in FY24.
Negative sectoral outlook
The agency has a negative outlook on the sector, given the significant near-term headwinds on growth, asset quality and profitability.
Nonetheless, NBFC-MFIs continue to demonstrate adequate capitalisation with managed gearing estimated at 3.8 times as of September 2024. Incremental capital requirement for FY2025 remains moderate in view of the expected slowdown in growth.
