Credit costs of MFIs likely to go up to 3-3.5% in FY25: CRISIL Ratings

The asset quality of the microfinance portfolio deteriorated in Q1 FY25 as the heatwave across the country adversely impacted the income of borrowers and collections

Reflecting the build-up of stress due to rise in delinquencies, the credit costs of micro finance companies are expected to rise to 3-3.5 per cent in the financial year (FY) 2025 from around 2 per cent witnessed in FY24, according to CRISIL Ratings.

Ajit Velonie, senior director, CRISIL Ratings, told Business Standard that players will be more proactive in making provisions for early bucket delinquencies and having management overlays.

Sensing the prospects on pressures on asset quality in the second quarter ending September, Fusion Finance Ltd, BSE listed MFI, over the weekend said it may be required to make an estimated credit loss (ECL) provisioning between ~500-550 crore in Q2FY25 as compared to ~348 crores provision in Q1FY25.

The asset quality of the micro-finance portfolio deteriorated in Q1FY25 as heatwave across the country adversely impacted the income of borrowers and collections and the rumours about loan waivers, according to Sa-Dhan, a self-regulatory organisation (SRO) for MFIs.

There is an uptick in delinquencies in 30 plus days past due (dpd) bucket in the second quarter (ending September 2024). The collection trend is subdued in some pockets compared to the March quarter.

According to Sa-Dhan, loans with 30+ dpd rose to 2.7 per cent in June 2024, compared to 2.0 per cent in June 2023. The industry is showing the similar kind of situation – rise in 30 plus DPD bucket — in the second quarter (like first quarter) but things should improve thereafter. 

The growth has moderated now as MFIs themselves have decided to be cautious in growing the book, Jiji Mammen, executive director & chief executive officer (CEO), Sa-Dhan said.

The profitability, as measured by return on managed assets (RoMA), was elevated at 3.5-4 per cent in FY24, after a period of subdued profitability during and after the pandemic. Profitability is expected to moderate to around 2 per cent in FY25 due to higher provisioning and marginal increase in operating expenditure as MFIs beef up their collections infrastructure, according to CRISIL.

NBFC-MFls have the ability to adopt risk-based pricing due to removal of cap on interest margins, it added.