AUM of NBFC-MFIs expected to grow 25-30% this fiscal: CRISIL

Assets under management (AUM) of non-bank financial firms and microfinance institutions (NBFC-MFIs) are expected to grow by 25-30 percent in these fiscals amid improved asset quality and continued economic activity, according to Cresel Ratings.

The credit rating agency said that completing these tailwinds will be increased profitability supported by higher net interest margins, adding that the confluence of these factors bodes well for the credit files of NBFC microfinance institutions.

Overall, the assets under management of the microfinance sector is estimated to have exceeded INR 3.4 million as of March 2023, with NBFC-MFIs outperforming microfinance banks, global banks and other lenders. The agency said that NBFC-MFIs now have the largest lending footprint in the microfinance space with assets under management of around INR 1.3 crore.

The growth came on the back of pent-up demand for credit and an increase in card payments (10-15% increase across loan cycles over the past two fiscal years).

Ajit Filoni, Senior Director, Chrisel Ratings, said: “NBFC MFIs’ market share in microfinance credit rose 700 basis points in 33 months to about 38 percent as of December 2022 from about 31 percent as of March 2020.

“Their focus on intra-state penetration means that the top five countries now hold more than half of the assets under management for the industry. Bihar holds the largest share at 12.7 percent, followed by Tamil Nadu (11.1 percent) and Karnataka (10 percent).”

CRISIL said growth in assets under management was accompanied by an improvement in asset quality, as evidenced by a decline in stressed assets (total non-performing assets + restructured assets) to around 6 percent in December 2022 from a peak of around 13 percent in September 2021, and what Estimated at 3 percent as of March 2023.

The agency noted that NBFC’s MFIs have been cleaning up their loan records affected by the pandemic through write-offs and sales to asset-reconstruction companies during the past fiscal year. This, along with lower slippages in recent construction, has helped lower the level of stressed assets.

CRISIL has estimated that overall profitability – as measured by return on assets under management – ​​is expected to exceed 3 percent in fiscal 2024, versus around 1 percent in fiscal 2021 and 2022 and around 1.5-2.0 percent in fiscal 2023.

This improvement will be driven by the adoption of risk-based loan pricing and improved credit underwriting, which will lead to higher profit margins and lower credit costs, respectively.

Credit costs are falling

Credit costs, which peaked at 4-5 percent in the past two fiscal features due to pandemic-related challenges, have begun to level off and have eased to 3.0-3.5 percent (year-on-year) during the first nine months of fiscal 2023.

“It should fall further to 2.0-2.5 per cent this fiscal year because a large portion of AUM now includes payments made in the last 12-15 months, and it has shown a strong collection efficiency of 98-99 per cent.

This reflects the recovery of cash flows for primary borrowers after the liquidity constraints caused by the pandemic. The agency said continued enhancement of its underwriting practices using a comprehensive credit bureau report has also helped.

Prashant Mani, Associate Director, CRISIL Ratings, said: “The average portfolio interest return generated in the last 12 months is estimated to be between 150 and 250 basis points. The higher net interest margin generated along with the lower cost of incremental credit should raise profitability to pre-pandemic levels.”

The agency noted that while the impact of higher interest rates and inflation will be monitored – given the exposure of borrowers to external shocks – the revised regulatory framework will keep MFIs – NBFCs in good stead as it will help build balance sheet reserves and support their credit profile.