MFIs post robust profit and healthy asset quality in Q1

Assets managed by NBFC-MFIs are expected to grow by as much as 30 percent in FY24, domestic ratings company CRISIL said in a report.

Microfinance institutions reported robust profit and healthy asset quality, driven by growth in disbursements in the April-June quarter, a Moneycontrol analysis of the top five MFIs showed.

CreditAccess Grameen reported net profit rose 151 percent to Rs 348 crore in the first quarter of FY24. Its gross non-performing assets (GNPA) fell to 0.89 percent from 3.11 percent and its net NPAs (NNPA) narrowed to 0.27 percent from 1.15 percent.

Muthoot Microfinance, the MFI arm of Muthoot Pappachan Group, reported a net profit of Rs 32 crore, jumping from Rs 2.4 crore last year. Muthoot Microfin’s GNPA remained high among peers but fell to 2.75 in June from 6.31 percent in June 2022. Its NNPA fell to 0.51 percent from 1.18 percent.

Fusion Microfinance said profit rose 60 percent to Rs 120 crore. GNPA dipped 0.4 percent to 3.2 percent and its NNPA eased to 0.78 percent from 1.3 percent.

Annapurna Microfinance said net profit climbed over sixfold to Rs 64.2 crore.

Spandana Sphoorty's net profit jumped to Rs 119 crore from a loss of Rs 220 crore last year.

Healthy asset quality

It’s been a roller-coaster ride for the MFI sector since the 2010 crisis in the erstwhile state of Andhra Pradesh. The then state government introduced severe curbs on MFIs after reports of suicides by members. This resulted in loan recovery rates dropping to 10 percent from 99 percent earlier.

Alongside the profit growth in the first quarter, disbursements by MFIs was strong and their customers increasingly adopted digital services.

Disbursements for CreditAccess Grameen and Fusion Microfinance grew 122 percent and 15 percent, respectively. Whereas Spandana's disbursements grew by 26 percent.

Manoj Nambiar, managing director of Arohan Financial Services, said earlier that digital lending would drive growth and inclusion in the MFI sector.

“Demand for digital services among microfinance customers is increasing as they are attracted to digital services due to the flexibility factor, rewards, cashbacks and since they are easy to use,” Nambiar said in an exclusive interview with Moneycontrol.

Also, in the past few months, banks have been aggressive in lending to MFIs. Some lenders acquired MFIs while others are looking for partnerships and co-lending deals.

Kotak Mahindra Bank acquired Lucknow-based Sonata Microfinance in February 2023. Yes Bank MD Prashant Kumar told Moneycontrol earlier that the bank plans to acquire an MFI soon.

What’s next?

Even with the changing landscape and the entry of banks, MFIs are unlikely to go out of business. They play a crucial role in bridging the gap between formal lenders and the unbanked rural segments. However, to stay competitive, MFIs must reconsider their business models, adapt to tough times, and lower operating costs.

According to a June 2023 report by Microfinance Institutions Network (MFIN), a Reserve Bank of India-recognised self-regulatory organisation, assets managed by MFIs increased by 22 percent to Rs 3.48 lakh crore in FY23.

NBFC-MFIs continued to be the largest provider of micro-credit in terms of loans outstanding, with their share of the total portfolio rising to 40 percent from 35.2 percent in the previous year.

Banks held the second place with a share of 34 percent, followed by small finance banks at 16.6 percent. Other NBFCs accounted for an 8.5 percent share and other MFIs for 1 percent.

Also read: Interview| Digital lending to be the next big thing in microfinance: Arohan Finance MD

Total loan disbursals by MFIs during FY23 increased 23 percent to Rs 2.96 lakh crore from Rs 2.39 lakh crore in the previous financial year.

Assets managed by NBFC-MFIs are expected to grow by as much as 30 percent in FY24, domestic ratings company CRISIL said in a report in June. Asset quality and profitability will also improve, it said.

“NBFC-MFIs have been cleaning up their pandemic-impacted loan books through write-offs and sale to asset reconstruction companies through last fiscal. This, coupled with lower slippages in recent originations has helped bring down their stressed assets level,” CRISIL said in the report.