Microfinance pain seems to be not over yet with Indusind Bank looking to sell bad assets

Microfinance industry has been witnessing strong growth in last couple of fiscals to reach gross loan portfolio of ₹4.33 lakh crore (as per MFinIndia) led by increase in both ticket size as well as new inclusion serving ~14.9 crore accounts.

High yield offered by the micro-finance segment has led to increased focus (organically and through acquisition route) of formal large and mid-sized financier (banks as well as NBFCs) which has aided continued healthy growth in FY21-24.

External problems including heatwave, elections and aggressive lending practices have led to borrowers taking loans from multiple MFIs, resulting in over-indebtedness (exposure with 4+ lenders is estimated at ~10-12% in the industry) and repayment challenges. There has been a notable rise in early-stage delinquencies, with collection efficiency dropping to 94% in Q2 FY25 from 98% in the previous fiscal year. Thus, valuation of NBFC-MFIs, SFBs and banks, with substantial exposure to micro-finance segment, has witnessed an impact owing to concerns emanating from moderation in business growth as well as deterioration in asset quality.

IndusInd Bank has witnessed a massive decline of ~38% YTD and ~28% in last 3 months (post Q2FY24 results) in valuation amid micro-finance exposure at ~9.2% of advance. While GNPA in MFI segment witnessed sequential increase of ~138 bps to 6.54%, building of contingent provision of ₹525 crore, emanated concerns on probability of delinquencies.

Outlook for MFI sector continue to remain challenging with stricter norms on lending to hinder business growth as well as collection efficiency in 2HFY25. Moderation in credit growth, margin erosion and elevated credit cost is expected to act headwind impacting RoA for the players with substantial exposure to MFI segment.

While exposure to over-leverage borrowers is estimated in single digit for IndusInd Bank, however, higher credit cost and moderation in growth amid increasing caution is expected to impact return ratios in 2HFY25. Sale of unsecured microfinance loans worth ₹1,573 crore (reserve price set at ₹85 crore) involving over 10.61 lakh borrowers is being offered on all cash basis is undertaken. Thus, we remain caution on the industry.