Higher rates, increasing credit costs to temper profits for micro finance cos says S&P

Rising delinquences in India’s micro finance sector is expected to increase credit costs to more than 5% in the current fiscal as risks that borrowers will default has increased, analysts at Standard & Poors (S&P) said.

Credit costs will ease but will still stay high at more than 3% next fiscal, impacting profitability for micro finance companies as return on average assets (ROAA) will fall by 60 to 65 basis points to 3.85%, the analysts said in a call. One basis point is 0.01 percentage point.

Shinoy Varghese, associate director, financial institutions ratings at S&P said delinquences are expected to rise especially in the micro finance industry as lenders tighten their belts after recent regulatory actions.

“We have seen upto 12 lenders to one borrower and that number will come down as many lenders will not roll over their loans. The risk that borrowers will default willfully has also increased,” he said.

Higher cost of borrowings for non banking finance companies (NBFCs) due to increase in interest rates and higher risk weightage by banks is likely to impact their profitability.

“Stronger players will have nore access to funds. We expect margins for our rated portfolio to remain stable. The expected reduction in RBI policy rates will reduce some pressure on NBFCs but funding costs are likely to rise as investors will demand a higher premium from the sector,” said Deepali Seth Chhabria, associate director, South and Southeast Asia at S&P Global.Chhabria said that a slowdown in credit growth for banks and continued competition for deposits will likely compress bank margins by atleast 10 basis points.In the medium term (by FY2030) S&P expects microfinance loans to grow at about 23% quicker than the industry.

“The Microfinance Industry Network (MFIN), a self-regulatory organization, has limited the number of lenders to a borrower to four; it also limited indebtedness to Rs 2 lakh. This clubbed, with asset quality challenges has led lenders to curtail growth to this segment. Hence, for the next few quarters we expect subdued growth in this segment,” Chhabria said.

Last week, the RBI banned Asirvad Micro Finance, Arohan Financial Services, DMI Finance, and Navi Finserv from sanctioning and disburing loans due to pricing concerns. The business restrictions on these non-banking financial companies (NBFCs) apply with effect from October 21, 2024.

Navi is owned by Flipkart co-founder Sachin Bansal while Asirvad is a subsidiary of Manappuram Finance.

S&P said RBI’s actions will curtail lenders’ overexuberance, enhance compliance and safeguard customers, though compliance costs will increase, impacting smaller players more.

However, India’s large digital ecosystem and relatively low leverage means there is enough scope for these lenders to grow.