NBFC-MFI sector growth to nosedive to 4% in FY25: CareEdge Ratings

Hemmed in by a range of challenging factors, the NBFC-MFI sector in India is projected to see only modest growth of four per cent in the financial year 2025. Post-COVID, NBFC-MFIs demonstrated significant growth, achieving approximately 37 per cent year-on-year (Y-o-Y) growth in FY23 and around 28 per cent in FY24, indicating a phase of stagnation, according to CareEdge Ratings.

 

Rising credit costs and compression in yields are expected to exert further pressure on the profitability of non-banking finance companies operating as microfinance institutions (NBFC-MFIs). This may lead to a decline in return on average assets (RoTA) to approximately 0.4 per cent during the same period, compared to 4.3 per cent in FY24.

 

As the sector faces these multifaceted challenges, vigilant monitoring and proactive management will be key to sustaining its viability and support for underserved communities.

 

Several key risk factors warrant close attention. The increasing indebtedness of borrowers is a significant challenge, as larger ticket sizes and multiple loans taken by low-income individuals have led to over-leverage and repayment difficulties. Compounding this issue is the weakening of the Joint Liability Group (JLG) model, traditionally a cornerstone of MFI operations, it added.

 

Despite operating in a vulnerable segment, the NBFC-MFI sector has consistently shown resilience, overcoming challenges like COVID-19 and demonetisation. Its ability to recover and adapt has earned continued investor support, highlighting the sector's strength and its critical role in financial inclusion. The sector will also navigate through the current stress and continue playing a vital role in serving underserved communities, CareEdge Ratings said.

 

Declining centre attendance has weakened the peer pressure and collective responsibility that once helped maintain low default rates. Additionally, stricter regulatory scrutiny on predatory pricing is expected to impact the industry’s profitability, it added.

 

In addition to financial and operational risks, the industry faces significant challenges, including high staff turnover and rising fraud, both of which disrupt client relationships and loan recovery. These issues, coupled with vulnerabilities to socio-political risks and natural disasters, further complicate the already challenging operating environment for NBFC-MFIs.