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India Ratings in its latest report has said that microfinance players have already come out of the massive hit they took during the pandemic and are likely to report lower credit cost by the end of this fiscal, as growth momentum is on an upswing. It has revised the outlook on the microfinance sector to 'improving' from 'neutral' and has also maintained the stable rating outlook for FY24.

It expects the sector to notch up high double-digit growth of 20-30 per cent, on improved collections and disbursals. It sees the credit cost to improve to 1-3 per cent from 1.5-5 per cent this fiscal. It also said Microfinance institutions (MFIs) have already absorbed the impact of the pandemic by the December quarter. It expects the growth momentum to continue in FY24, as disbursements are picking up, which in turn will lead to higher growth.

According to India Ratings, there are two key risks for the microfinance sector over the next 12-18 months -- inflation and elections. These may impact cash-flows of borrowers in FY24 and in the first half of financial year 2024-25. It mentioned MFIs have incurred cumulative credit costs (credit cost to average AUM) of 11.1 per cent over FY21-H1FY23, as nearly 9 million borrowers were in default through the pandemic. However, it expects delinquencies and credit costs to normalise, as bulk of the portfolio now is based on post-pandemic disbursements and collection efficiencies at consolidated levels are steadily improving.