MUMBAI: Kochi-based Muthoot Microfin is hopeful of better days ahead, even as the industry faces several headwinds. The second-largest micro-lender expects the third interest rate reduction earlier last month to attract more customers while improving collections.
The publicly listed company, with a loan book of Rs 12,500 crore as of September 2024, lowered its lending rates for the third time this fiscal in December, by 25 basis points to 23.05 per cent for group loans and by 125 basis points to 22.70 per cent for third-party product loans.
This has compressed its margins to 13.24 per cent. Earlier, in January 2024, it had slashed interest rates by 55 basis points, followed by another 35 basis points in July.
Sadaf Sayeed, Chief Executive of Muthoot Microfin, admitted that the steep rate reductions would squeeze margins but said the company chose to pass on the benefits of cheaper funds to borrowers.
“With increased market borrowings, our cost of funds has come down to 10.3 per cent now,” said Sayeed.
Sayeed based his optimism on the comparatively smaller exposure the company has to Bihar—the largest market for the industry—where the maximum delinquencies have been reported for many months. He also pointed to Eastern Uttar Pradesh, which is facing serious collection issues.
For Muthoot, Tamil Nadu remains the largest market, contributing 23 per cent of the overall business.
“Almost 50 percent of our loans are in the South, where there is no over-leveraging, and so collections are not affected, barring Tamil Nadu, the second-biggest market for the industry in December due to the cyclone. Our exposure to Bihar is only 8 per cent, and our collections are still 95-96 per cent,” Sayeed told TNIE.
“Frankly, our bigger headache is Orissa and Jharkhand. In Odisha, the new BJP government has put on hold many freebies that the previous BJD government had launched in the run-up to the Assembly election. This has led to repayment delays now,” he said, adding that Jharkhand has its own unique issues.
On asset quality, he said overall Gross Non-Performing Assets (GNPA) stood at 2.7 per cent, with non-southern markets reporting 3 per cent and southern markets recording 2.5 per cent in the second quarter. He expects these figures to remain stable in the second half of the fiscal year.
Blaming negative real rural wages and high inflation for the problems facing the industry, where many analysts say a third of the assets are stressed, Sayeed warned that the challenges are likely to persist for some time.
On the funding side, he said the Muthoot Pappachan Group company has bank loans worth Rs 8,000 crore, foreign exchange loans worth Rs 2,000 crore, including Rs 900 crore from Standard Chartered Bank, and domestic debt through Non-Convertible Debentures (NCDs) worth Rs 350 crore.
Another reason for the falling cost of funds is the increased use of the Pass-Through Certificates (PTC) route, where the cost is only 8.5-8.7 per cent.
“Recently, we raised Rs 300 crore of PTC with IndusInd Bank at 8.7 per cent. For the year, the PTC target is Rs 1,000 crore, with Rs 700 crore PTC in Q4,” Sayeed said.
Going forward, Sayeed sees 50 per cent of funding coming from banks, 20 per cent from PTCs, and the rest from other sources such as NCDs and External Commercial Borrowings (ECBs).
Meanwhile, ICRA Ratings, in a recent note, said stricter lending norms for microfinance players would improve credit safeguards but pose challenges to near-term performance, leading to an Asset Under Management (AUM) degrowth of -5 per cent in FY25 from 29 per cent in FY24, and an increase in credit costs to 5.4-5.6 per cent.
Following two years of robust expansion, the sector is facing challenges stemming from borrower over-leveraging, socio-political disruptions, and operational difficulties, including employee attrition.
“The sharp increase in the overall overdue book in H1 poses significant downside risks to the near-term loan quality of the sector, leading to overall credit costs likely to be 5.4-5.6 per cent this fiscal, compared to 2.2 per cent in FY24,” said AM Karthik of ICRA.