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Growth recalibration on cards in MFI sector; asset quality trend in Q2 remains key watchful

ICICIdirect Research 06 Sep 2024 DISCLAIMER

After an impressive growth in AUM, MFI sector has been reeling under asset quality concerns for last 3 quarters. Collection efficiency has taken a hit resulting in increase in credit cost and NPA number across lenders. Lower collections led to increase in NPA and PAR (Portfolio at risk) wherein PAR90 increased 30 bps QoQ to 1.2%. Increase in delinquencies has led to moderation in credit growth with microfinance sector witnessing first sequential decline in AUM at ₹4.33 lakh crore in June 2024.

While incremental stress formation has been arrested, recovery from earlier slippages continue to remain a challenge. Natural calamities in some pockets also remain a point of pain, though extent of the same is not expected to be substantial. Geographical disparity in terms of collections continue with improvement seen in some northern states, while eastern states witness increased volatility owing to local unrest and climatic hazards.

Borrower over-leverage continue to remain a concern. Thus, Q2 remains watchful to gauge asset quality trend and structural moderation in business growth (owing to caution and cap on exposure and maximum number of lenders imposed by MFIN). Thus, we continue to maintain caution stance on MFI sector, despite correction in valuation until signs of stability emerges.

Lenders (banks and NBFC) scout for diversification in funding sources; margin pressure seen to continue in near term

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