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Microfinance—no concerns, but staying watchful

The 4QFY24 update from CRIF Highmark puts microfinance gross loan portfolio (GLP) at ~Rs4.4 tn (up ~27% yoy). GLP growth was led by a robust 18% yoy growth in unique active borrowers, indicating an optimistic environment. NBFC-MFIs have slowed a bit, thereby narrowing the growth gap with other lenders. Delinquencies have inched up marginally in select areas, but overall the asset quality situation seems comfortable. While we remain watchful, we expect profitability to stay healthy over the medium term.

GLP growth led by borrower additions; NBFC-MFIs have slowed from peak

CRIF’s data for the microfinance industry shows that business momentum has sustained in 4QFY24. GLP for the industry was ~Rs4.4 tn (up 27% yoy, 9% qoq; Exhibit 1). Borrower additions stayed strong (up ~18% yoy to ~87 mn), while average exposure per borrower was up ~8% yoy to ~Rs51,000 (Exhibits 2 and 4). GLP growth was fairly divergent, with NBFC-MFIs growing faster than other lender categories during FY2023, but growth rates converged in FY2024.

Taking comfort from slower growth and decline in cases of multiple lending

Bihar and UP have been growing faster than the industry in the past two years, but this growth has now slowed down (34% and 38% yoy, respectively) closer to the industry. This convergence adds to our comfort on the sector (and especially on lenders operating in these states). We also saw a rise in cases of multiple lending and indebtedness (Exhibits 11-14) in several states, likely driven by the removal of the 2-lender cap on NBFC-MFIs beginning April 2022, but that appears to have corrected marginally in 2HFY24.

The asset quality situation is largely stable for the industry, although we have seen a marginal increase in delinquency levels. PAR 1-30 (calculated) declined qoq from 1.0% to 0.7%, while PAR 31-90 inched up marginally qoq from 1.1% to 1.2% (highest increase for NBFC-MFIs). The delinquency situation across states has not shown any widespread deterioration, though select pockets have seen a marginal increase in delinquency levels.

No major signs of stress as of now; profitability to stay healthy

The microfinance industry reported healthy and broad-based growth in FY2024. At the same time, a few lenders have indicated marginal weakness in collections in select areas—due to varied reasons such as floods, fraudulent debt waiver schemes, election-related disturbances and employee attrition. Based on credit bureau data and recent conversations with management, we expect the impact of these disturbances to stay confined to small pockets; the probability of a broad-based deterioration in asset quality appears low. We are still in an environment where lenders are optimistic about the business outlook and hence, willing to supply credit. Hence, we believe that profitability for the industry should stay healthy over the medium term. Nevertheless, we continue to watch for any potential concerns from any regulatory intervention or changes in the growth strategy of lenders, given the format of recent growth.

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