MUMBAI: For the troubled microfinance sector, the road to recovery is getting longer with the normalisation of profitability is expected only by end of the current fiscal, that too if slippages are arrested and the top states normalises faster, says a report.
Though from April 2025, MFIs exposure to over-leveraged borrowers have been contained, slippages from the legacy portfolio will keep asset quality under pressure, Crisil Ratings said in a report Wednesday. Furthermore, disruptions caused by ordinances in some key states like Karnataka and Tamil Nadu could hinder the path to recovery, the report warned further.
The ability to control slippages and manage credit costs, and thus profitability, will be crucial in the road ahead.
According to Malvika Bhotika, a director with the agency, while the current bucket collections have stabilised at 98-99% and there has been some reduction in fresh slippages, around 14% of loans as of end-June, remains extended to borrowers transacting with more than three microfinance lenders. While this has come down from 23% of loans as of December 2024, the portfolio remains very vulnerable to slippages, especially after the April when the industry voluntarily decided to go slow on fresh disbursals to overleveraged borrowers.
According to an estimate of the agency, almost a fourth of the loans with more than three lenders is in the 31-180 days bucket as of June.
Furthermore, the performance of Tamil Nadu, Karnataka and Bihar, which together account for 43% of the industry, remains monitorable. The impact of the recent ordinances in Tamil Nadu (akin to the one in Karnataka already) on MFIs will be key to how portfolio quality evolves in the state.
For Karnataka, while the decline in collections after the ordinance has been stanched, overall collections are in the range of 80-85% for the past few months, well below historic levels. The Bihar portfolio (which is the largest 15% of the industry AUM) remains under watch as well given that the state goes to polls a few months down the line. In the past, socio-political issues have impacted collections during polls in some states.
According to Prashant Mane, an associate director of the agency, given these factors, the credit cost, while coming down somewhat from the 7.7% seen last fiscal, is still expected to remain high at around 6% this fiscal. Consequently, overall profitability is likely to normalise only by fourth quarter of this fiscal.