Fusion Micro Finance expects consistent margin expansion, says MD Sachdev

Newly listed Fusion Micro Finance reported a net profit of Rs 95 crore in the July-September quarter on the back of healthy net interest income and 27 percent disbursement growth. Gross bad loans inched up to 3.83 percent of its portfolio from 3.67 percent in the previous quarter.

The lender has made more than adequate provisioning for stress, said promoter and managing director Devesh Sachdev. The second largest microlender expects funds raised from its initial public offering in the first week of November and internal accruals to fuel growth for the next couple of years.

In an interview to Moneycontrol, Sachdev alleviated concerns over margin compression and said net interest margins will improve consistently to 11.2-11.5 percent. Edited excerpts:

Growth of assets under management has been quite strong this quarter at 54 percent year-on-year. What are the growth drivers?

Growth is coming from two-three large levers. We are very well-diversified and we are in 19 states of India. We are in states where there is good potential to grow such as Uttar Pradesh and Bihar. We are a very rural focused lender... Since we are a rural microfinance institution, the overlap with our customer segment is only 12 percent.

The second driver is that out of a thousand branches, 400 branches have come up in the last three years. This network is really helping give growth. Another factor is that credit demand in rural areas is very robust. Our understanding of the geographies is high, our systems and processes are completely digitised. We have reduced turnaround time from 12 days to just four days.

Disbursement growth is 27 percent year-on-year, which is healthy but it has sort of stagnated in the past two quarters. Any reason?

More than stagnation, I would see this as consistent performance. Consistency is our key strength. Leave aside the Covid times, if I take you back to pre-Covid, our disbursement numbers before 2020, there is consistency. It is showing a consistent QoQ growth of 8 percent.

We are not a company where most disbursements are bunched to the last busy quarter. In the next two quarters also, we would be growing disbursement at 5-10 percent… It is a more calibrated approach and this approach also reflects in the numbers such as average ticket size.

What is your growth target for FY23 and the next couple of years?

In H1, we have already grown 18 percent. We are seeing a strong FY23. Our base will also be larger as we grow, so the same level of growth cannot be sure. What we are focusing on is calibrated growth.

One factor analysts noticed during the IPO was that margins are on a declining trend. What is the outlook here?

Our margins have, in fact, increased in Q2. One was the Covid provisioning, there was an interest reversal in the last two years. Also, under new regulations, we are able to price our risk adequately.

What we will see is a consistent improvement in NIMs (net interest margins) from here on and margins would hover around 11.2-11.5 percent. This has already started reflecting. Our new book under new pricing since May is showing this. Our portfolio quality is looking better.

Your ECL impairment shows a jump in Q2. Credit costs have also increased. Can you explain the stress and where is it coming from?

There is a management overlay (excess provision). Whenever we have good quarters, we would keep floating provision to manage down cycles. As a policy, we have 100 percent provisioning for 90-day-and-above past dues. We have very consistent return ratios.

Has the MFI market completely recovered from the pandemic blow?

It has largely normalised. If you look at our outstanding portfolio, 93-94 percent has been sourced post-April 2021. The collection efficiency of that portfolio matches pre-Covid levels. The customer has shown huge resilience, they are aspirational in nature and they have a strong credit culture and they want to keep their record clean.

You have a very healthy capital ratio but there is potential credit growth. When would you see the need to raise more capital?

We are very clear. We want to maintain a capital adequacy of 20 percent. Whenever we see this going below 20 percent, we would come to the market. Hopefully, we will have enough internal accruals along with the IPO money for growth in the coming year.