Microfinance: Stricter Lending Norms Will Pose Challenges to Near-term Performance, Says ICRA

Moneylife Digital Team 05 December 2024

Economy & Nation

Following two years of robust expansion, the microfinance sector is facing challenges stemming from borrower over-leveraging, socio-political disruptions and operational challenges related mainly to employee attrition. Further, the sharp increase in the overall overdue book in the first half (H1) of FY24-25 poses significant downside risks to the near-term loan quality of the sector, says a research note.

In the report, rating agency ICRA says it has been highlighting a significant slowdown in microfinance growth in FY24-25 amidst mounting asset quality concerns. "This is likely to result in subdued disbursements and a sharp moderation in non-banking finance companies - microfinance institutions (NBFC-MFIs) assets under management (AUM) growth to less than 5% in FY24-25 from 29% in FY23-24. The overall credit cost is, therefore, projected by ICRA at 5.4%-5.6% for FY24-25 vis-a-vis 2.2% in FY23-24."

In July 2024, one of the industry's self-regulatory organisations 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 strengthen the credit process. It imposed a cap on borrowers' total indebtedness at Rs2 lakh, 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.

ICRA says that while these guidelines are expected to improve credit safeguards, business volumes are also expected to be negatively impacted in the near term.

AM Karthik, senior vice president and co-group head of financial sector ratings at ICRA, says, "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% of the borrowers are expected to be impacted by the new guardrails."

According to the rating agency, the microfinance sector's profitability is expected to face significant headwinds in FY24-25 due to rising credit costs and compressed net interest margins (NIMs). It says, "Declining lending rates and higher funding costs are projected to moderate the return on managed assets (RoMA) to 0.4%-0.8% in FY24-25, down from a record 3.6% in FY23-24."

Given the significant near-term headwinds in growth, asset quality and profitability, ICRA has a negative outlook on the microfinance sector.

"Nonetheless, NBFC-MFIs continue to demonstrate adequate capitalisation with managed gearing estimated at 3.8 times as of September 2024. Incremental capital requirement for FY24-25 remains moderate because of the expected slowdown in growth," the rating agency concludes.

Comments

User

parimalshah1

1 month ago

Better safe than sorry. India does not want to see NPA in microfinance system. Banks are still struggling with recovery of NPAs. ICRA may have its own axe to grind. Rating agencies anyway report caution after the damage is done. They are in total parasites and their so-called rating depends on the fees the client offers.

Economy & Nation

Finally, Amendment Bill Allows 4 Nominees for Bank Accounts

Moneylife Digital Team 06 December 2024

The Lok Sabha on Tuesday passed the Banking Laws (Amendment) Bill, 2024 which allows bank account-holders to have up to four nominees or successive nominations in their accounts. Moneylife Foundation has been demanding successive...

Economy & Nation

Aviom India Housing Flags Fraud, Warns of Payment Delays amid NHB Audit: CNBCTV18

Moneylife Digital Team 26 November 2024

Aviom India Housing Finance Pvt Ltd has informed its creditors about an ongoing audit by the National Housing Bank (NHB) following the discovery of fraudulent transactions during a recent onsite supervisory inspection. The company...