FY23 MFI Outlook: Worst is Over; Likely Revival In Growth

India Ratings and Research (Ind-Ra) has revised its outlook on the microfinance sector to neutral for FY23 from negative. The agency has also revised the rating outlook on small-mid non-banks microfinance institutions (NBFC-MFIs; including those with over 50% of assets under management (AUM) in microfinance) to Stable for FY23 from Negative, while maintaining large NBFC-MFIs (group-owned entities or AUM > INR50 billion) on a Stable rating Outlook.

Ind-Ra opines that the COVID-19 impact on credit costs has been largely absorbed, there is a likelihood of normalised growth for MFIs, collections especially on post-covid disbursements have recovered and refinance has become relatively easy. Moreover, there are increased viability expectations for small-mid NBFC-MFIs after the implementation of harmonisation guidelines, as entities could revise their lending rates. This could improve pre-provision operating profit (PPOP) margins and provide higher tolerance to withstand credit costs.

Credit Cost Expectation Declines

As collections ramped-up in December 2021 from June 2021, Ind-Ra expects the credit cost for FY23 will be lower than in FY22. The decline would largely be a function of growth, provision coverage and recovery from restructured loans (could be significant for some MFIs); eventual credit costs in FY23 could decline to 1.5%-5% (4-7% in FY22) with median of around 3%, depending on the aforementioned factors; entities with credit costs at higher end would be outliers.

MFIs in states such as Assam, West Bengal, Kerala and specific districts of Maharashtra and Gujarat where there was delayed easing of lockdown restrictions under both covid waves along with other regional issues would see higher slippages, especially those that have provided longer moratoriums.