Icra Predicts NBFC-MFIs' Profitability To Rise 2.7-3.0% In FY24

Icra expects the profitability (ROMA) of non-banking financial companies-microfinance institutions (NBFC-MFIs) to improve further to 2.7-3.0 per cent in FY24 and 3.2-3.5 per cent in FY25, from 2.1 per cent in FY23. 

This comes in the wake of an increase in margins, given the growing share of the new portfolio originated at higher rates, post the implementation of the new MFI regulations in FY23 and the lower credit costs.

Icra estimates that a large part of the credit cost pertaining to the Covid-19 pandemic was absorbed till FY23. In addition, the collection efficiencies have improved to the pre-covid levels. 

Thus, the residual credit cost, which would have to be absorbed in FY24, shall be lower. This coupled with improvement in net interest margins (NIMs), would help NBFC-MFIs report an uptick in their profitability in the current and the next fiscal. 

NBFC-MFIs witnessed a robust expansion of 38 per cent in their assets under management (AUM) in FY23, and Icra expects the growth to remain healthy at 24-26 per cent in FY24 and 23-25 per cent in FY25, albeit lower than the highs seen in FY23. 

Sachin Sachdeva, Vice President and Sector Head, Financial Sector Ratings, Icra, says, “NBFC-MFIs witnessed a much higher expansion in their AUM compared to growth reported by other lenders including banks in FY23. Consequently, the share of NBFC-MFIs in the overall industry AUM increased considerably to around 40 per cent as on March 31, 2023 from 35 per cent a year-ago, while the share of banks declined to 34 per cent from 40 per cent during this period."

He adds that this was primarily driven by a sharp increase in the loan outstanding per borrower. "NBFC-MFIs reported a note-worthy increase in the average number of accounts per unique borrower, which indicates that more entities are chasing the same set of borrowers. Thus, the industry needs to remain cautious on borrowers’ indebtedness level.” 

With the impact of the Covid-19 pandemic waning, delinquencies have been improving over the last few quarters. The 90+ days past due (dpd) of Icra’s sample set of companies, which had peaked at 6.2 per cent by the end of H1 FY22, started improving from Q3 FY22. 

Even after adjusting for slippages from the restructured book, the 90+ dpd continued to improve and was reported at 2.5 per cent as on March 31, 2023. This was driven by write-offs, the sale of delinquent portfolios to asset reconstruction companies and recoveries. 

For FY24, Icra expects a further dip in delinquencies by around 40-60 basis points (bps) with the 90+ dpd expected to be at a steady-state level of 1.92 per cent in the near-term.

The liquidity position of the NBFC-MFIs also remains adequate at 12 per cent of AUM as on March 31, 2023 for the Icra sample set of entities, though the same has declined from 18 per cent a year ago to meet the qualifying assets criteria as applicable under the new NBFC-MFI regulations. 

Sachdeva concludes, “With the revised regulatory framework in place, NBFC-MFIs raised their lending rates in FY23. With the full impact of the higher yields yet to be reflected, Icra expects further improvement in the NIMs in FY24. This coupled with expected reduction in credit cost would help the industry witness improvement in return on average managed assets by 60-90 bps in FY2024.”