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ICRA highlights significant slowdown in microfinance growth in FY25 amidst mounting asset quality concerns
Dec-06-2024

Credit rating agency ICRA in its latest report has highlighted a significant slowdown in microfinance growth in FY25 amidst mounting asset quality concerns. This is likely to result in subdued disbursements and a sharp moderation in Non-banking finance companies - microfinance institutions’ (NBFC-MFIs) Assets under management (AUM) growth to 0-5% in FY25 from 29% in FY24. Following two years of robust expansion, the sector is facing challenges stemming from borrower over-leveraging, socio-political disruptions, and operational challenges, largely related to employee attrition. 

Further, the report said the sharp increase in the overall overdue book in H1 FY25 poses significant downside risks to the near-term loan quality of the sector. The overall credit cost is, therefore, projected by ICRA at 5.4-5.6% for FY25 vis-a-vis 2.2% in FY24. It noted that in July 2024, one of the industry’s self-regulatory organisations had introduced guardrails for responsible lending, to strengthen lending practices and address concerns regarding the overleveraging of borrowers. These guidelines further tightened in November 2024, include the following norms, apart from other guidelines for strengthening the credit process:

According to the report, the sector’s profitability is expected to face significant headwinds in FY25 due to rising credit costs and compressed net interest margins (NIMs). Declining lending rates and higher funding costs are projected to moderate the return on managed assets (RoMA) to 0.4-0.8% in FY25, down from a record 3.6% in FY2024. ICRA has a Negative outlook on the sector, given the significant near-term headwinds on growth, asset quality and profitability. Nonetheless, NBFC-MFIs continue to demonstrate adequate capitalisation with managed gearing estimated at 3.8 times as of September 2024. Incremental capital requirement for FY25 remains moderate in view of the expected slowdown in growth. 

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