Being South-based helped us manage asset quality issues better: Sadaf Sayeed, MD & CEO, Muthoot Microfin

Relatively, yes, the situation has worsened. But it is not like a COVID kind of a scenario. Credit cost has increased, but that was anticipated because in the past two years the credit cost was very subdued, and there was a good amount of growth. But the scenario cannot continue forever. Microfinance goes through cycles.

There are 2 – 3 years which are very good, and then one odd year which will have a challenge. This is that year. The good part is that there is no particular event which has created this. Rather it’s a multitude of events such as elections, the heat wave, a bit of attrition in the industry playing a role and the rains.

Why are elections such a big deal, because unlike in the past, there has been no promise of loan waiver?

There are two aspects to elections. One is the loan waiver, which did not happen from the political parties, but there was Karzmukti Andolan which was going on. On the back of elections, there were hopes that there would be some sort of a waiver and there were local activists.

But that was supposed to be localised to Punjab…

It was in Punjab. But there were smaller pockets in UP and Maharashtra where this activity was seen and affected delinquency a little bit.

But more importantly, because of the election code of conduct, the gathering of people and carrying cash was limited. This (central elections) was a kind of a long-tailed election and there was a slowdown in disbursement.

How are you addressing the issue of over concentrated book in South India region?
Kerala, Tamil Nadu, Karnataka contribute almost 49 per cent of the loan book. We have just entered Andhra and Telangana, which is also contributing to further growth. In these areas, the collection efficiency is much higher. In Kerala and Karnataka, the collection efficiency is at 98 percent. In Tamil Nadu, it's around 97 percent. In Andhra and Telangana, it is 100 percent collection efficiency.

These states are helping us to overcome this difficult time. Challenges are in the northern states such as Bihar, Odisha and Jharkhand. But since our portfolio exposure there is slightly lower as compared to the South, we have been able to report better numbers and our performance is looking better.

Our strategy has always been to have 50 percent of our portfolio in the South and 50 percent in the rest of the country. Currently, we are focusing more on our existing customers.

We aim to open more branches in the northern, western and the Eastern states as well. We are open to inorganic growth options too as it gives us an opportunity to venture into a geography where we are not very strong.

Like with any microfinance company, your provisioning cost is also gone up sharply…

We have taken a slightly higher provision this time. Even if we look at our ECL provisions, the requirement was around Rs 230 crore, but we have created a buffer provision, which is about Rs 31 crores. Credit cost has at around 3.8 percent per cent. Our guidance for credit cost was 3 per cent. In the microfinance space in Q3 and Q4 disbursements and collections are also much better. We anticipate that credit cost will ease down and we think that this (Q2) is the peak of delinquency.

What about the pricing flexibility?

Costs have come down significantly. The top 10 NBFC-MFIs constitute almost 70 - 80 percent of the portfolio operating at a capital adequacy in excess of 25 percent. That helps in bringing down the overall cost and maintaining a healthy NIM (net interest margin) over cost of fund. We have cut costs twice this calendar year,  55 bps in January and another 35 bps in July. We are anticipating another cut in the coming days. So definitely we have enough margin.

The net interest margin is around 13.26 per cent and for the half year of FY25, NIM was at 12.96 per cent. We have enough buffer that we should be able to cut costs and still maintain the profitability guidance. We have also been able to reduce our cost of funds by 18 bps from the last year, same period. In the long run, we should be able to bring the cost of funds further down and we will share the benefit of that reduction to our customers.

You been tapping the non-banking liability channels for funding as well. What’s your plan on that front?

Currently, 50 percent of our funding comes from banks and around 22 percent comes from structured products like direct assignment and PTC that we do with banks. So in total, banks account for 70 percent of our funding. The balance is coming from NCDs. We have done an ECB raise recently of $ 118 million with multiple foreign banks participating.

We are strengthening that source of capital and will continue to do more ECBs. Our strategy is that the mix of 70:30 (banks : non-banks) proportion to 60:40 in the next 12-18 months. In the long run, we would like to have a 50-50 kind of mix.