Increasing delinquencies in the microfinance sector is likely to push up the NBFC-MFI credit cost to 320-340 bps in 2024-25 from 220 bps in the previous financial year, according to an Icra report.
Non-banking financial companies – microfinance institutions’ (NBFC-MFIs) AUM growth is also likely to moderate to 17-19 per cent in the current financial year from 29 per cent in 2023-24 amid rising concerns about asset quality, it said.
The report said the robust growth in the last two years has accentuated concerns about potential over leveraging 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.
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"This, along with climatic conditions and operational challenges, including employee attrition, would keep the asset quality under pressure in the near term. As per Icra’s estimates, non-performing assets (NPAs) have increased by 30 bps in Q1 FY2025," it said.
Prateek Mittal, assistant vice president and sector head – financial sector ratings, Icra said micro finance exposure in Bihar and Uttar Pradesh has grown at a compound annual growth rate (CAGR) of 36 per cent and 46 per cent, respectively in FY2021-FY2024 compared to the overall industry growth of 19 per cent during the period.
"In addition, the average loan outstanding per borrower has been increasing and was relatively higher in relation to per capita income of these states," Mittal said.
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On the earnings front, Icra expects NBFC-MFIs to report a lower but healthy return on managed assets (RoMA) of 2.5-2.7 per cent in 2024-25 compared to a record high of 3.6 per cent in the previous fiscal.
Increasing cost of funds and downward revisions in lending rates are likely to compress the interest margins of the NBFC-MFIs in 2024-25, Icra said.
This, along with asset quality pressure, is expected to moderate their earnings in the current financial year, it added.
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