MFI stocks trade 7-58% down as finances come under pressure, management issues emerge

MFIs are trying to aggressively increase collection efficiencies which has led to a spike in their credit costs and operating costs.

The shares of four listed microfinance institutions (MFI) fell anywhere between 7 percent and 58 percent in the last one year as the sector grappled with pressure on its books while being rattled on the management front due to a host of issues.

The stock price of CreditAccess Grameen, the country’s largest MFI, went down 7.2 percent since September 29, 2023. Fusion Microfinance suffered the steepest drop as its shares shed 58.46 percent in the one year to September 26, 2024. Spandana Sphoorty’s share price fell by 28.97 percent and Muthoot Microfin saw its shares losing 11.55 percent since it went listed in December 2023.

While high provisioning costs kept the accounts under pressure through the last few months, some unfavourable developments on the management front made the situation worse for the microlenders. Fusion Microfinance, for example, on September 22 said it would make an estimated credit loss (ECL) provisioning of up to Rs 550 crore for Q2FY25 from Rs 350 crore in the previous quarter. The lender began looking out for a CEO after Devesh Sachdev, its chief executive and managing director, decided to take over as chairman of the company.

The headwinds for the MFIs turned rougher as the businesses came under stress in some states recently. In Q1FY25, several MFIs saw pressure on their books, which not only dented their profitability, but also drove some of the MFIs into the red.

Fusion Microfinance reported a loss of Rs 36 crore in Q1FY25 as against a profit of Rs 120 crore a year back. Spandana Sphoorty Financial saw its net profit shrink 53 percent on-year in the June quarter owing to increase in delinquencies. It ended the quarter with a net of Rs 55.7 crore as against Rs 119.5 crore last year.

Ratings agency ICRA said in a report earlier this year that the growth of the microfinanciers would moderate to 23-25 percent in fiscal 2025 from nearly 30 percent growth seen in FY23.

On September 25, Moneycontrol reported exclusively how unfavorable market conditions may force Asirvad Micro Finance to defer its plans to go public.

Collection efficiency remains a challenge

Ratings agency Crisil in a report on September 26 said that the collection efficiency of MFIs has dropped on a monthly basis. “The average monthly collection efficiency dropped to 96 percent in the first quarter of this fiscal and further to 94 percent so far in the second quarter, from an average of 98 percent last fiscal.

The falling collection efficiency, which stood at 98-99 percent for the microlenders, has been a concern. An executive at an MFI said that in the last couple of quarters, collection has dropped due to factors like elections and heatwaves. “Collection efficiency across the industry has seen a sharp fall but this was majorly due to the restrictions imposed due to the general elections and the heatwaves sweeping through some geographies,” the executive said.

Prashant Mane, associate director of CRISIL Ratings, said aggressive attempt by the lenders to step up their collection efficiency has led to a spike in their credit costs and operating costs. “Despite the increase in credit costs and operating costs as collection efforts intensify, the overall profitability, though lower, is expected to remain adequate at 2-2.5 percent for the sector,” he said.