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MFI stress nearing an inflection point

ICICIdirect Research 12 Sep 2025 DISCLAIMER

The microfinance sector has endured a pronounced slowdown over the past year, with industry AUM contracting to ~₹3.6 lakh crore as of June 2025, reflecting a decline of ~17% YoY.
Active loan accounts fell to 13.2 crore from 15.93 crore, and unique client base also shrank materially, underscoring the stress triggered by elevated delinquencies, tighter funding flows, and muted disbursements — NBFC-MFI loan disbursements fell by ~25% YoY in FY25.
These headwinds translated into subdued growth and rising overdue buckets, with PAR 180+ (Portfolio at Risk - metric used to assess the credit risk with higher number indicating greater risk) spiking to ~12%.
Encouragingly, recent trends suggest that the worst may be behind. The credit bureau noted that portfolio performance has shown green shoots, with early-and mid-stage delinquency levels (loans overdue for 30 to 90 days) improving from 3.1% in December 2024 and 2.7% in March 2025 to 2.4% in June 2025, signaling strengthening repayment discipline.
In line with this, Ujjivan’s management recently highlighted steady improvement in collections reaching ~99% and revival in disbursements. With macro tailwinds supportive and credit flow gradually resuming, a broad-based normalisation is expected from H2FY26.
Against this backdrop, CreditAccess Grameen stands out as the most compelling play on the MFI recovery theme. Its scale advantages, diversified liabilities at competitive cost, and proven underwriting provide a strong platform to capture the rebound, positioning it to deliver superior risk-adjusted returns as credit costs taper and disbursement accelerates. Thus, we remain positive on the stock with a target of ₹1450, valuing the stock at ~2.4x FY27E BV.

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