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Credit rating agency ICRA in its latest report has said that the increasing delinquencies in the microfinance sector, which is likely to push up the Non-banking finance companies - microfinance institutions (NBFC-MFI) credit costs to 320-340 bps in FY2025 from 220 bps in FY2024. It said the evolving asset quality risks will dampen sectoral growth and earnings in the current fiscal. While demand remains robust, ICRA expects the NBFC-MFIs’ AUM growth to significantly moderate to 17-19% in FY2025 from 29% in FY2024, given the rising concerns on asset quality and operational challenges. On the earnings front, it expects them to report a lower but healthy return on managed assets (RoMA) of 2.5-2.7% in FY2025 compared to a record high of 3.6% in FY2024. 

According to the report, the robust growth in the last two years has accentuated concerns about potential overleveraging of borrowers in certain regions. Further, it said farmers’ protests and the Karz Mukti Abhiyan in certain regions, especially Punjab and Haryana, have impacted collections and the asset quality. This, along with climatic conditions and operational challenges, including employee attrition, would keep the asset quality under pressure in the near term. As per ICRA’s estimates, non-performing assets (NPAs) have increased by 30 bps in Q1 FY2025.

The report said one of industry’s self-regulatory organisations, Microfinance Industry Network, recently introduced guardrails for responsible lending, to strengthen the lending practices and address concerns regarding the overleveraging of borrowers. The salient features include capping the overall microfinance indebtedness of a borrower to Rs 2 lakh while restricting the number of microfinance lenders to a maximum of four. In ICRA’s opinion, while these norms are expected to address the risk to some extent, adherence to the same remains monitorable. It expects some impact on the business volumes in the near term with some borrowers becoming ineligible for microfinance loans under the lending guardrails. It further stated that the NBFC-MFIs reported a marginal decline in assets under management (AUM) in Q1 FY2025. Increasing cost of funds and downward revisions in lending rates are likely to compress the interest margins of the NBFC-MFIs in FY2025. This, along with asset quality pressure, is expected to moderate their earnings in FY2025.