NBFC-MFIs' AUM expected to grow by 22-25% in FY2023 driven by buoyant demand and likely increase in average ticket sizes: ICRA

Posted On : 2022-10-10 22:08:04( TIMEZONE : IST )

NBFC-MFIs' AUM expected to grow by 22-25% in FY2023 driven by buoyant demand and likely increase in average ticket sizes: ICRA

ICRA Ratings carries a Stable outlook for the non-banking financial companies-microfinance institutions (NBFC-MFIs), driven by the expected healthy growth in the assets under management (AUM) and the improvement in profitability. NBFC-MFIs reported a healthy rebound in the growth in their AUM in H2 FY2022 after having witnessed subdued growth in H1 FY2022. The industry saw accelerated disbursements in H2 FY2022, given the buoyant demand, healthy systemic liquidity, and the steady increase in economic activity. The disbursements are expected to remain healthy in the current year and as outlined in a recently released report, ICRA expects NBFC-MFIs and micro finance focused small finance banks (SFBs) to witness growth of 22-25% in their AUM in FY2023.

Mr. Sachin Sachdeva, Vice President and Sector Head, Financial Sector Ratings, ICRA, says, "Led by favourable factors in H2 FY2022, NBFC-MFIs registered an overall growth of 25% in their AUM in FY2022 with the AUM crossing Rs. 1,00,000 crore as on March 31, 2022. However, with disbursements slowing down, NBFC-MFIs saw a decline in the annualised growth rate of the AUM to 8% in Q1 FY2023 as the industry was busy implementing the revised regulatory framework. Nevertheless, given the buoyant demand and the expected increase in the average ticket size (given higher loan eligibility under the new regulatory framework), the growth in the industry's AUM in the remaining quarters is expected to improve significantly. We estimate the full year growth of 22-25% in FY2023."

The asset quality had weakened quite sharply in Q1 FY2022 because of the localised lockdowns imposed by various states on account of the second wave of the pandemic, which impacted the collection process of the entities. It also impacted the recovery in the cash flows of the affected borrowers. Therefore, the marginal borrowers slipped into the non-performing advances (NPA)/overdue category during this period as reflected in the increase in the 90+ days past due (dpd) in H1 FY2022. Nevertheless, the industry saw gradual improvement in H2 FY2022 and Q1 FY2023.

The improvement in collections helped the industry register an improvement in delinquencies in H2 FY2022 followed by a further recovery in Q1 FY2023. The 90+ dpd of 5.7% (for ICRA sample of NBFC-MFIs) as on March 31, 2022 was higher than rating agency's estimate of 5% as slippages from the restructured book remained high. However, with further write-offs and recoveries, the 90+ dpd improved to around 5% by June 30, 2022. For FY2023, a significant decline in delinquencies is expected driven by some recoveries and write-offs by the entities. The ratings agency retains its estimate of 90+ dpd at around 2% by March 31, 2023. On the liquidity front, NBFC-MFIs and SFBs continued to maintain a healthy liquidity profile in FY2022 though a marginal decline was seen to reduce the negative carry. On-book liquidity, as a percentage of the AUM, stood at around 18% as on March 31, 2022 for the sample of NBFC-MFIs compared to around 20% as on March 31, 2021 (around 15% as on March 31, 2020). For NBFC-MFIs and SFBs combined, the on-book liquidity, as a percentage of the AUM, stood at around 16% as on March 31, 2022 compared to around 19% as on March 31, 2021 (around 15% as on March 31, 2020).

From profitability perspective, MFIs and SFBs combined witnessed reduction in operating profitability in FY2022 because of pressure on net interest margins and increase in operating expenses. This along with elevated credit costs led to decline in return on average managed assets (RoMA) to 0.3% in FY2022 from 0.6% in FY2021. This was primarily on account of SFBs and small MFIs (AUM < Rs. 1,500 crore) with both categories reporting losses in FY2022. Whereas large MFIs (AUM > Rs. 1,500 crore) witnessed reduction in credit costs and hence improvement in RoMA in FY2022.

Mr. Sachdeva adds, "ICRA expects a significant improvement in profitability in FY2023 driven by an increase in margins because of the higher pricing flexibility of NBFC-MFIs and reduction in credit costs in FY2023. Nevertheless, the performance of restructured portfolio remains a monitorable as a part of the restructured portfolio of several entities was still under moratorium as on March 31, 2022. FY2024 is expected to witness a further improvement with the profitability crossing the pre-Covid level."

Source : Equity Bulls


ICRARatings NBFC MFI HealthyGrowth AUM Profitability Improvement