Microfinance institutions (MFI) can hope for stability by the first quarter of FY26, with an expected AUM growth of 15 percent, analysts at Motilal Oswal Financial Services (MOFS) have said, acknowledging that stress in the sector may persist for two more quarters.
This is perhaps the first time since 2014 that the Street has turned watchful on microfinance companies, especially the standalone players referred to as NBFC-MFIs.
Echoing MOFS's views, Renish Bhuva, an analyst at ICICI Securities, attributed the decline of the sector to the current economic situation, which has "shifted focus towards collection rather than growth".
The tightening of credit filters and informal directives from the Reserve Bank of India, advising banks to go slow on new microfinance loans for borrowers with existing debts, have also influenced the sector's performance, he said.
"The industry is also currently facing repayment issues due to overleveraged borrowers and high attrition leading to operational difficulties," the MOFS report said, indicating MFIs are facing a crisis of confidence on Dalal Street.
"Upcoming regulatory changes, like MFIN Guardrail 2.0 set for April 2025, could slow loan growth even further," Bhuva said.
This, in turn, may compress profitability, measured as the net interest margin posted by NBFC-MFIs in the upcoming quarter. However, a cut in repo rates, if passed on to NBFC-MFIs may salvage the situation.
Spandana Sphoorty Financial Ltd, for instance, has seen a sharp decline in "buy" calls over the past year. From 100 percent "buy" in January 2024, just 55.6 percent polled on Bloomberg recommended their clients to "buy" the stock this January, with 44.4 percent now advising "hold" recommendation.
The Spandana Sphoorty stock has tanked 77 percent over the past year. The company's Assets Under Management have also decreased 14 percent year-over-year to Rs 8,900 crore, while disbursements have fallen 43 percent to Rs 1,440 crore.
Credit Access Grameen, the largest player in the industry, has also seen "buy" ratings decline from 94.7 percent to 72.2 percent, with "sell" recommendations rising to 11.1 percent.
Fusion Microfinance, which started 2024 with strong "buy" calls, now faces a mixed sentiment with only 10 percent "buy", 40 percent "hold", and a sharp 50 percent "sell" recommendations.
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