Microfinance institutions' profitability to rise to 2.7-3 per cent this fiscal: Report

Mumbai: Lower credit cost on the back of better collections and asset quality, as well as higher pricing of new loans will help standalone microfinance institutions this fiscal to report higher profitability, which is likely to improve to 2.7-3 per cent, says a report.

Microfinance Institutions (MFIs) have recouped from the pandemic and have clawed back market share leadership from banks. They closed FY23 with a 40 per cent market share, 600 basis points higher than the previous year while banks saw their share declining to 34 per cent from 40 per cent in FY22.

Icra Ratings, in a report on Monday, said MFIs are likely to report a growth of 24-26 per cent in loan sales this fiscal and 23-25 per cent in FY25 when they are also likely to see a further spurt in profitability to 3.2-3.5 per cent. MFIs profitability stood at 2.1 per cent in FY23. Profitability of these institutions is likely to improve to 2.7-3 per cent in FY24 and 3.2-3.5 per cent in FY25. This is expected on the back of an increase in margins, given the growing share of the new portfolio originated at higher rates after the implementation of the new regulations in FY23 and lower credit cost, the rating agency said.

It has estimated that a large part of the credit cost pertaining to the pandemic was absorbed by FY23. In addition, collection efficiencies have improved to the pre-pandemic-levels. Thus , the residual credit cost, which would have to be absorbed in FY24, shall be lower, the report said. Higher loan rates will also help in improvement in net interest margins, and thus an uptick in profitability. MFIs saw a robust expansion of 38 per cent in assets in FY23 and the agency has projected the growth to remain healthy at 24-26 per cent in FY24 and 23-25 per cent in FY25, albeit lower than the highs seen in FY23.

Sachin Sachdeva, a vice-president at the rating agency, said MFIs saw a much higher expansion in their assets compared to banks' MFI book in FY23, leading to an uptick in their overall industry assets to 40 per cent as of March 2023 from 34 per cent in FY22. However, this was primarily driven by a sharp increase in the loan outstanding per borrower. MFIs reported an increase in the average number of accounts per borrower, which indicates that more entities are chasing the same borrower and also the rising indebtedness of the borrowers. With the impact of the pandemic waning, delinquencies have been improving over the last few quarters.

The 90+ Days Past Due (DPD), which had peaked at 6.2 per cent in the first half of FY22, started improving from Q3 of FY22. Even after adjusting for slippages from the restructured book, the 90+ DPD improved to 2.5 per cent as of March 2023. This was driven by write offs, sale of delinquent portfolios to asset reconstruction companies and recoveries, as per the report. For FY24, the agency has projected a further 40-60 basis points decline in delinquencies with the 90+ DPD expected to be at a steady-state level of 1.9-2.1 per cent in the near-term. Their liquidity position also remains adequate at 12 per cent of assets as of March 2023, down from 18 per cent FY22 as they have to meet the qualifying assets criteria under the new MFI regulations.