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Normalization of PAR accretion and revival in Growth key

A loss driven by higher flows/slippages and accelerated write-off

CREDAG reported a loss of Rs1bn in Q3 FY25 as it continued to witness challenges (though lesser than industry) of significant PAR addition, higher slippages, and lower disbursements. Additionally, the acceleration of write-offs (from 270 dpd to 180 dpd) weighed on profits through added provisions and interest reversals

Loan portfolio declined by 1.3% qoq with modest disbursements of Rs50.8bn and write-offs amounting Rs3.8bn (1.5% of September GLP). About 340 bps of fresh PAR was added in Q3 FY25 versus 290 bps in the preceding quarter. Overall collection efficiency (excl. arears) fell from 96.3% to 93.3% on sequential basis. The regular bucket collection efficiency was affected in Oct and Nov due to festivals and TN floods, but marginally recovered in Dec. Higher quantum of new PAR, flows and write-offs drove substantial credit cost of 12% on annualized basis (6.5% in Q2 FY25) while also causing higher interest reversals (Rs0.75bn v/s Rs0.34bn in Q2) which impacted portfolio yield/NIM (contracted by 90-100 bps qoq). Stable employee base and sustained moderate disbursements have been underpinning limited growth in Opex.

Performance could start turning around from Q4 FY25

Leading indicators of the cycle, X bucket collection efficiency and Disbursements, have started turning for CREDAG from December onwards. The monthly PAR 15 accretion rate for the whole book has come down from the peak of 1.34% in November to 0.84% in January so far. It has substantially improved in the key states of KTK, MH, MP and BH, while in TN it has been sticky due to floods/cyclones in recent months and higher employee attrition. Notably, net flows from existing delinquency buckets have also improved with pick-up in resolutions. More than 40% of borrowers in PAR 1-60 are partial paying. Monthly disbursements have also improved from December and management intends to significantly accelerate business volume in Q4 FY25 (implied ask of Rs90bn for achieving guidance of 7-8% loan by end of the year). Borrower addition has substantially gained pace since December with material increase in the contribution of new-to-credit customers.

Latent growth capacity (sub-optimal avg. AUM/Branch - consistent 9-10% pa branch addition), much lesser-than-industry loan officer attrition, improving X bucket collection efficiency, marked deleveraging of customer base, largely unimpacted funding availability and significant decline in competition (most NBFC-MFIs facing multiple constraints and many SFBs/Banks becoming growth averse) represents a conducive landscape for accelerating growth. Between August and December, CREDAG’s customer base has gone through notable deleveraging due to implementation of MFIN guardrails and industry’s focus shifting on collections. Over the aforesaid period, the % of borrowers having CREGAG + 3 or more lenders reduced from 28.6% to 23.6% and the % of borrowers having >Rs2lac unsecured indebtedness (incl. retail loans) declined from 16.7% to 11.6%. Company sees minimal impact on growth from the 3-lender cap rule to come into effect from April 1st with 84% of the borrowers having CREGAG + 3 or more lenders promptly paying and other lenders not being willing or able to retain them.

Likelihood of substantial profitability normalization from Q2 FY26

In our assessment Q4 FY25 would be a quarter of modest profits characterized by lesser PAR creation, better flow rates, elevated write-offs, better revenue due to significant portfolio growth and higher DA income. Versus management’s guidance of 7-8%/18-20% portfolio growth in FY25/26, we estimate 2%/16% at this point. If the normalization trend in PAR accretion continues in the coming 3-4 months, then credit cost should substantially normalize from Q2 FY26 paving way for delivery of strong RoA/RoE. We retain ADD rating on the stock with a lowered 12m PT of Rs1100.

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