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RBI concerns over Small Finance Banks
Banking, Equities, Markets - January 30, 2025

RBI concerns over Small Finance Banks

RBI concerns over Small Finance Banks

Overview
It has been reported that the Reserve Bank of India (RBI) has become uneasy about a few small financing banks (SFBs) because of increased asset quality stress and excessive concentration risks.

According to three executives monitoring the industry, the banking regulator has also instructed these banks to look into mergers in order to increase their size and reduce the risks of concentration. According to one of the individuals, the RBI has “close supervision” over small finance institutions. Additionally, one solution that has been considered at the regulatory level to alleviate the issues is bank consolidation.

According to another executive, the regulator met with these lenders’ management a few months ago. The supervisory stakeholders were also concerned about gaps in succession planning and corporate governance at several of these SFBs.

NPAs on the rise
Due to the continuous strain in the microfinance industry, which saw the average gross non-performing assets (NPA) increase to an 18-month high of 11.6% at the end of September 2024, small financing institutions with a larger percentage of microloans are in the most difficult position.

Collectively, non-performing assets (NPAs) accounted for 15.3% of these lenders’ total microlending portfolio. Although industry-level data until the end of December is not yet available, quarterly results indicated that the overall sectoral asset quality is probably going to deteriorate.

Concentration Issues remain persistent
Concentration issues affect small financing banks in two ways. First, a lot of people are heavily exposed to the microfinance industry, which has been experiencing a lot of stress. Second, a small number of these banks are highly exposed to areas of greater stress.

According to the CEOs of major firms, these problems might be resolved by combining these banks or by merging with larger organizations that have substantial financial resources. Further, as per a prominent microfinance practitioner, it might make sense for banks that operate in different regions to merge since it would mitigate the concentration risk.

A Standing External Advisory Committee (SEAC) was previously established by the RBI to review applications for Small Finance Banks (SFBs) and Universal Banks. The Reserve Bank of India’s Department of Regulation would provide the committee with secretarial support, the RBI had stated in a release.

Category Risks
Coming to category risks, for example, ESAF Small Finance Bank’s native state of Kerala and its neighboring state of Tamil Nadu account for 57% of its gross advances, with unsecured loans accounting for 56% of the total. In a similar vein, Utkarsh Small Finance Bank has 916 banking locations spread over five states: Uttar Pradesh, Bihar, Jharkhand, Odisha, and Maharashtra. Of these, two-thirds of total loans fall into the category of unsecured microfinance.

That area is the primary focus of the Northeast Small Finance Bank, which combined with the fintech startup Slice, based in Bengaluru.

The majority of SFBs reported yearly increase in deposit mobilization that was higher than the average for the banking sector. Despite starting from a low foundation of Rs 6,484 crore a year ago, Suryoday leads the field with a 49.7% year-over-year rise to Rs 9,708 crore at the end of December.

In the third quarter, the bank’s gross non-performing assets (NPAs) increased to 5.5% of its total advances of Rs 9,563 crore. While lending increased 16% to Rs 19,057 crore, Utkarsh recorded a 33.5% year-over-year increase in deposits to Rs 20,172 crore.

The SFB ecosystem was established by the RBI to improve loan availability to micro and small businesses as well as the agricultural industry.

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Hike in costs of funding possibly affect margins of NBFCs

Hike in costs of funding possibly affect margins of NBFCs

The Non-Banking Financial Companies (NBFCs) in India are expected to face burdens in their profit margins in the third quarter of December, 2024. The reasons for this is due to increasing liquidity issues and also a spike in cost of funds. Apart from this, both the NBFCs and microfinance firms have a large portion of unsecured loans. Due to a significant portion of unsecured loans, both of them are expected to face issues of late loan repayments.

NBFCs margins
The Elara Securities’ analyst, Shweta Daptardar states that the NBFCs are expected to record a fall of 13 basis points on a year-on-year basis in net interest margins (NIMs). Here, a single basis is about 0.01 in percentage point.

In the situation of increasing cost of funds, NBFCs are focusing more on diversification of liability. It will help the companies to spread out their financial risks. The third quarter of the current financial year is anticipated to observe the increasing burden on NIM and also high cost of managing loans.

The firms are trying to maintain their profitability through making provisions for potential losses due to delayed or non-payment of interest and principal amount. They are also focusing on enhancing operational efficiency of the company. Despite this, NBFCs are projected to record a fall in return on assets in the third quarter.

Further the brokerage firm Elara projected the growth of advances to fall to less than 18 percent on a year-on-year basis compared to the growth of 20 percent in the previous financial year. Elara also states that this weakening growth can possibly be observed in the NBFCs until the completion of the current financial year 2025. The reason for this is due to issues such as balance sheet risks, funding issues, and challenges occurring during changing business models.

Asset quality of NBFCs
Abhijit Tibrewal, an analyst of Motilal Oswal stated that the improvement of NBFCs’ loan quality projected in the second half of the current financial year will not be seen in the third quarter of the current financial year. As there was no big distress of decline, the quality of loans (assets) will either stabilize or fall slightly.

For microfinance firms, the cost of loans is anticipated to persist high and are further projected to rise high. The exception to high loan costs is only power and affordable housing finance companies. The loan cost is projected to rise high for vehicle financing firms and other diversified financing firms as well. The only exception in vehicle financing firms is Mahindra and Mahindra Finance.

Further the brokerage firm states that the net profit growth of its firms under coverage universe to be around 8 percent on a year-on-year basis. This growth is affected by factors such as persistent higher cost of loans, burden of weak NIM, and also pressures faced by microfinance firms in this third quarter again.

Many large NBFCs will start to announce their results from 20th January, 2024 onwards. L&T Finance is the first NBFC to announce its result.

Bunty Chawla, an analyst of IDBI Capital states that the expansion of credit book growth is expected to slow in the third quarter. The reason for this is weakening growth in auto financing. He further states that contraction in loan quality of both housing finance firms and NBFCs. The risk of stage 3 Assets ( loans repayment overdue more than 90 days) for housing finance and NBFCs is projected to be increasing by every quarter. It is because of lack of collection of loan payments and also adverse impact of unpredictable rainfall.

The retail NBFCs are anticipated to be affected by increased regulations, regional issues and also excessive structural leveraging. The major burden of NBFCs is located in retail credit which amounts to 35 percent of the total NBFC loans. In contrast to this, the micro finance only contributes to about 3.4 percent total credit and 9.6 percent of total retail advances. This situation is quite a matter of issue.

The third quarter is not only a quarter of worry due to high asset cost, the fourth quarter of this financial year is also expected to face issues. NBFCs’ non-performing assets in the third quarter is projected to surge by 6 basis points and hike in loan costs by 56 basis points on a year-on-year basis. The reason for this is ongoing difficulties in the industry. It is also due to the cautious approach taken by companies towards provisioning for potential losses. The reason for keeping more funds for potential losses is due to stricter rules of supervision.

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NBFC & HFC Loan Growth to Slow in FY25 Amid Softer Demand and RBI Norms

NBFC & HFC Loan Growth to Slow in FY25 Amid Softer Demand and RBI Norms

Overview
A Jefferies study projected that the loan growth of Indian Non-Banking Financial Companies (NBFCs) and Housing Finance Companies (HFCs) (apart from Infrastructure Finance Companies (IFCs)) would slow to 17% in FY25 from 21% in FY24. According to the research, this moderation is the result of softer macroeconomic conditions, which have led to a decline in loan demand. It predicted that growth would level off and settle at healthy levels in FY26e. It predicted that growth would level off and settle at healthy levels in FY26e. With the exception of IFC, we anticipate that sector loan growth will slow to 17% in FY25e (compared to 21% in FY24) and level off around these levels in FY26e. Additionally, according to an article published in the Economic Times, most lenders recorded reduced credit growth in the three months due to a combination of factors, including slower consumer demand, risk aversion toward unsecured loans, and lackluster deposit growth until late into the December quarter.

RBI’s guidelines on lending to NBFCs led to a slowdown in credit growth
According to the research, this moderation has been aided by a cyclical downturn in industries like automobiles as well as decreased lending to unsecured and microfinance loans (MFI), in accordance with RBI advice.

In November of last year, the RBI released guidelines on the NBFC’s lending criteria which increased risk weights on bank funding to NBFCs. This acted as the preliminary reason behind the slowing down in credit growth. The shadow banks diversified their funding sources as a result of this action. These days, NBFCs are more often using the domestic capital market to raise money through bonds and the international market to access dollar bonds and syndicated loans. Put this in figures, compared to a 19% increase in the same time in 2023, lending growth to the NBFC sector fell to 7.8% year-over-year in the two weeks ended November 29, 2024. As a result of this slowdown, sectoral deployment data issued by the RBI showed that credit growth to the services sector decreased from 22.2% year over year to 14.4%.

In absolute terms, credit to the NBFC sector was Rs 15.75 trillion at the end of the two weeks ending November 29, 2024, as opposed to Rs 15.48 trillion at the end of the two weeks ending March 22, 2024, according to RBI data. In its most recent “trend and progress report,” the RBI emphasized that NBFCs must further diversify their funding sources as a risk mitigation tactic because, notwithstanding recent moderation, their reliance on banks is still significant.

Jefferies report further stated that during 1HFY25e, growth moderation was comparatively milder in other areas, although it has been significant in unsecured PL, consumer lending, and MFI.

According to the RBI’s Financial Stability Report, shadow bank loan growth slowed to 6.5% on a half-year-on-half-year (H-O-H) basis in September 2024 after the RBI increased risk weights on NBFC lending to specific consumer credit categories and bank lending to NBFCs. The RBI claims that the upper-layer NBFCs segment, which is mainly made up of NBFC-Investment credit companies and has a large percentage of retail lending (63.8%) in its loan book, was where the effects of the credit moderation were most noticeable. Nonetheless, middle-layer NBFCs—apart from government-owned NBFCs—maintained strong credit growth, particularly in portfolios of retail loans.

Additionally, private placement is the preferred method for bonds listed on reputable exchanges, and NBFCs continue to be the biggest issuers in the corporate bond market. NBFCs tried to diversify their funding sources by issuing more listed non-convertible debentures (NCDs) in the face of a slowdown in bank direct lending. In order to diversify their funding sources and keep total expenses under control, NBFCs are now taking out more foreign currency loans. Nevertheless, the RBI has issued a warning that, to the extent that these NBFCs remain unhedged, the increase in foreign currency borrowings may present currency concerns.

Asset Under Management of NBFCs on a decline
According to the research, NBFCs’ Asset Under Management (AUM) growth is anticipated to decrease to 20% in FY25 from 24% in FY24. HFCs might, however, experience better AUM growth, increasing from 11% in FY24 to 12–13% in FY26. Further, economic activity is expected to rise in FY26, which would help stabilize growth in the sector.For the FY25–27 period, the coverage AUM (excluding IIFL) is expected to grow at a CAGR of 19%, which is slightly higher than the 18% predicted for FY25. As of September 2024, the growth in loans for Housing Finance Companies (HFCs) and NBFCs has decreased from 22% in March 2024 to 20%.

Further, the slowdown has been most noticeable in consumer financing, MFI loans, and unsecured personal loans, while growth in other areas has slowed down somewhat in the first half of FY25. About 30% of NBFC and HFC lending is provided by infrastructure finance companies (IFCs), whose share of the sector’s asset under management (AUM) growth slowed to 15% in September 2024 from 18% in March 2024.

Sectoral credit growth trends to follow in 2025
By segment, incremental growth trends in 2025 are probably going to differ. Auto loans and other segments are forecast to stabilize and possibly pick up if macroeconomic conditions improve as planned, the research noted, even if growth in unsecured loans and MFI loans is predicted to remain muted throughout the first half of the year.

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The Resilient Growth Story of India’s NBFC Sector

The Resilient Growth Story of India’s NBFC Sector

India’s Non-Banking Financial Companies (NBFCs) are poised for continued growth, supported by a robust economy, sound balance sheets, and a well-diversified portfolio. Operating in one of the world’s fastest-growing economies, NBFCs play a pivotal role in addressing the credit needs of unbanked and underbanked segments through their specialized business models and innovative credit appraisal techniques.

Economic Backdrop and Strategic Positioning
India’s status as the fifth-largest and fastest-growing large economy creates a favorable environment for credit expansion. NBFCs, with their last-mile credit delivery capabilities and strong reliance on technology, have become indispensable in the Indian financial system. They hold a significant 22% market share in the credit sector and cater to various niche segments, ranging from vehicle finance to microfinance.

Strengthened by reduced leverage ratios—from 4.5x in FY20 to 3.1x in FY24—and improved asset quality, NBFCs have demonstrated resilience even through challenges like the COVID-19 pandemic. The reduction in Net NPAs from 3.4% in FY20 to 1.1% in FY24 reflects their strengthened risk management frameworks and shift toward retail lending.

Sectoral Insights and Growth Expectations
Commercial Vehicle (CV) Financing
The CV financing segment is projected to grow at 15% in FY25, up from 11% in FY24, driven by higher ticket sizes and strong demand for used vehicles post-BS-6 norms. Asset quality is expected to improve, with GNPA levels forecasted to decline to 4.6% by FY25, while credit costs stabilize at around 2.0%.

Home Loans
Housing finance continues to perform well, with AUM growth projected at 13.5% in FY25. The segment boasts low credit costs (0.5%) and improving asset quality, with GNPA levels expected to decrease from 4.1% in FY22 to 2.6% in FY25. Challenges in this space are primarily linked to high-yield wholesale loans rather than mainstream retail loans.

Affordable Housing Finance
The affordable housing segment shows robust growth potential, with AUM expected to grow at 23% in FY25. However, GNPA and credit costs are anticipated to edge up slightly to 1.3% and 0.5%, respectively, due to the relatively higher risk profile of self-employed borrowers. Policy interventions like interest subsidies could provide additional tailwinds.

Gold Loans
The gold financing sector is expected to sustain over 15% AUM growth in FY25 despite rising competition from banks. While tonnage growth remains subdued, NBFCs are mitigating asset quality concerns through flexible auction processes. GNPA levels are projected at 2.8%, with minimal credit costs.

Microfinance Institutions (MFIs)
The microfinance sector faces significant challenges, with AUM growth projected at a modest 4% in FY25. Asset quality issues, rising credit costs (6.5%), and borrower over-leverage remain key concerns, potentially dragging RoA to 0.4%. Further deterioration in economic conditions could push credit costs as high as 8.5%, highlighting the sector’s vulnerability.

Evolving Funding Dynamics
The growing interconnectedness between banks and NBFCs is evident, with bank finance to NBFCs nearly doubling to 9.4% over the past seven years. However, the RBI’s push for funding diversification has prompted NBFCs to explore alternatives like domestic capital markets and external commercial borrowings (ECBs).

Future Outlook
NBFCs’ ability to innovate, leverage technology, and cater to underserved markets positions them as critical players in India’s financial ecosystem. Their resilience and adaptability ensure they remain key contributors to economic growth, enabling inclusive financial development and addressing credit demand in niche micro-markets.

With strengthened fundamentals and a customer-centric approach, NBFCs are well-positioned to navigate emerging challenges and capitalize on growth opportunities in India’s evolving financial landscape.

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The Rise in Delinquencies in Microfinance Loans

The Rise in Delinquencies in Microfinance Loans

The microfinance sector, a critical pillar of India’s rural credit system, has been facing a sharp rise in delinquencies. The reasons for this troubling trend are multifaceted, encompassing political events, weather-related disruptions, and excessive lending practices, as highlighted by industry executives during a webinar organized by rating agency ICRA. Despite these challenges, there is cautious optimism that the situation may stabilize in the next fiscal year.

Rural Priorities Shift Amid Economic Strain
In the past few months, rural households have shifted their financial priorities. With food inflation biting into household budgets and wage growth stagnating post-COVID-19, many families have chosen to focus on essentials and repay secured loans such as home and gold loans over microfinance obligations. This trend has significantly impacted the repayment capacity of borrowers in the sector, resulting in rising defaults.

“Post-COVID, people suffered job losses, and incomes were impacted. However, due to ample liquidity, loans were still accessible. Wage growth has yet to catch up, and with high food inflation, rural households are prioritizing essentials,” said Sadaf Sayeed, CEO of Muthoot Microfin Ltd. Over-leverage stemming from multiple factors, including political and weather events as well as excessive lending, has compounded the problem.

Sharp Deterioration in Asset Quality
The microfinance sector’s gross non-performing assets (NPA) surged to an 18-month high of 11.6% at the end of September. Factors like the heatwave, the two-month-long general elections, and overleveraging of customers have strained the sector’s asset quality. Regulatory actions have also played a role. In October, the Reserve Bank of India (RBI) barred two NBFC-MFIs from conducting fresh business, citing violations such as charging excessive interest rates and failing to adequately assess household income and repayment obligations.

Structural Challenges and Overlapping Loans
The issue of overlapping loans to the same customers has further exacerbated the sector’s challenges. Vineet Chattree, Managing Director of Svatantra Microfin Pvt Ltd, pointed out that this practice has increased leverage across the industry, making it difficult for borrowers to keep up with repayments.

Historical disruptions like demonetization in 2016 and the COVID-19 pandemic in 2020 have also acted as trigger points for defaults. R. Bhaskar Babu, CEO of Suryoday Small Finance Bank, noted that these events disrupted the traditional group meeting model for repayments, which had been a cornerstone of microfinance operations. “Each company will now have to find its own solution,” he added, emphasizing the need for innovation and adaptation within the sector.

Steps Toward Recovery
Despite the current headwinds, the industry has begun taking steps to address the crisis. According to Sadaf Sayeed, the microfinance sector has reduced its outstanding loan book by ₹40,000 crore as part of its deleveraging efforts. Additionally, the self-regulatory body Microfinance Institutions Network (MFIN) has tightened its lending norms. Members are now advised to refrain from lending to customers with overdue loans of more than 60 days and outstanding amounts exceeding ₹3,000, compared to the earlier 90-day threshold.

Regional Disparities and Natural Calamities
Regional disparities have also played a significant role in the sector’s struggles. High per capita income states like Kerala, Tamil Nadu, and Karnataka have shown relatively better repayment trends. In contrast, states like Odisha, Jharkhand, and Bihar have been hit hard by natural calamities and other socio-economic issues. However, there are signs of improvement post the Kharif crop harvest, as rural households gain liquidity to address overdue loans.

Balancing Returns and Affordability
Balancing profitability with borrower affordability remains a critical challenge for microfinance institutions (MFIs). Sayeed stated that Muthoot Microfin has set a net interest margin target of 12% to 13%, which aims to ensure sustainable returns for investors while keeping interest rates reasonable for borrowers. This balanced approach is vital for the sector to regain stability and maintain its social impact.

Outlook: Stabilization in Sight?
While the current fiscal year has been challenging, industry experts express cautious optimism for the future. The combination of deleveraging efforts, stricter regulatory compliance, and potential economic recovery post-harvest season provides a glimmer of hope. However, the sector must continue addressing structural issues, such as overleveraging and overlapping loans, to build a more resilient framework.

In conclusion, the rise in delinquencies in microfinance loans underscores the need for a holistic approach that considers borrower affordability, effective regulatory oversight, and sustainable lending practices. As a key driver of financial inclusion, the sector’s recovery is essential not only for rural households but also for the broader economy. Stakeholders must collaborate to ensure that microfinance continues to empower communities while navigating the complexities of a dynamic economic landscape.

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Microfinance Sector Tightens Lending Norms Amid Asset Quality Stress

Microfinance Sector Tightens Lending Norms Amid Asset Quality Stress

The microfinance sector in India, which has been grappling with severe asset quality challenges, is set to undergo a transformation. The Microfinance Institutions Network (MFIN), one of the two self-regulatory organizations for the sector, has introduced a stricter framework aimed at addressing over-indebtedness and restoring stability to the industry. These new measures, effective January 2025, are expected to safeguard the sector’s long-term sustainability while ensuring financial inclusion remains intact.

The Crisis in Microfinance
Over the past few quarters, the microfinance sector has witnessed a sharp deterioration in asset quality. Data for September reveals that the sector’s gross non-performing assets (NPAs) surged to 11.6%, an 18-month high. This distress stems from a combination of external and structural factors:

Adverse Weather Events: Heatwaves have disrupted the livelihoods of borrowers, primarily from the agrarian and informal sectors, hampering their repayment capacity.
Political Disruptions: The two-month-long general elections created uncertainties, delaying financial transactions and economic activities in rural and semi-urban regions.
Overleveraging of Borrowers: The ease of access to credit had led to borrowers taking multiple loans, often beyond their repayment capacity.
The Reserve Bank of India (RBI) has also flagged regulatory violations. Last month, it barred two Non-Banking Financial Company-Microfinance Institutions (NBFC-MFIs) from issuing fresh loans for charging excessive interest spreads and misjudging household income while assessing repayment obligations.

MFIN’s New Guardrails
To mitigate these challenges and bolster the sector’s resilience, MFIN has rolled out revised norms. These measures are expected to limit over-indebtedness while ensuring borrowers are not overwhelmed by repayment burdens.

Stricter Lending Criteria:
MFIN has requested its members to cease lending to delinquent customers with overdue loans exceeding 60 days and an outstanding amount greater than ₹3,000. Previously, the threshold was 90 days. Loans overdue for more than 90 days are classified as non-performing, so this change seeks to encourage earlier intervention.

Reduced Lender Cap:
The maximum number of lenders a borrower can approach has been reduced from four to three. This measure aims to address overleveraging, a critical issue that has exacerbated repayment stress among borrowers.

Loan Indebtedness Cap:
Total microfinance loans to a single borrower were capped at ₹2 lakh in July 2024. MFIN has now clarified that this cap includes unsecured retail loans, not just microfinance loans, further limiting the borrower’s exposure to debt.

Interest Rate Rationalization:
Members have been urged to review their interest rate structures to ensure efficiency gains are passed on to borrowers. Other than processing fees and credit life insurance, no additional charges can be deducted from sanctioned loan amounts.

Balancing Growth with Prudence
The revised norms are expected to curtail credit delivery, particularly for borrowers at the bottom of the income pyramid. While this may slow down the growth trajectory of microfinance institutions in the short term, it is a necessary step toward ensuring sustainable financial inclusion. By tightening lending norms, MFIN aims to address the root causes of the sector’s crisis—over-indebtedness and inefficient credit delivery.

MFIN Chief Executive Alok Misra emphasized, “The sector has been taking voluntary steps in line with emerging issues, going above and beyond RBI regulations. We are confident that these measures will make the sector more resilient.”

Broader Implications for the Sector
The implementation of these norms will have significant implications for both borrowers and microfinance institutions:

Reduced Over-Indebtedness:
By capping the number of lenders and tightening credit assessment criteria, MFIN aims to minimize the risk of borrowers defaulting due to excessive debt.

Improved Asset Quality:
Stricter norms for overdue accounts will encourage early intervention and better recovery rates, ultimately reducing NPAs.

Enhanced Borrower Protection:
The inclusion of unsecured retail loans in the ₹2 lakh cap ensures a holistic approach to assessing borrower indebtedness, preventing instances of financial distress.

Pressure on MFIs’ Profit Margins:
The sector may face margin pressure as institutions revise interest rates and align operations with the new norms. However, this trade-off is essential for long-term stability.

The Way Forward
MFIN’s proactive measures are a testament to the sector’s commitment to addressing its challenges head-on. However, this transformation will require collective effort from all stakeholders—regulators, institutions, and borrowers.

The Reserve Bank of India’s oversight will remain critical to ensuring compliance and safeguarding borrower interests. Simultaneously, microfinance institutions must focus on enhancing operational efficiencies and leveraging technology for better credit assessment and delivery.

While these changes may momentarily impact credit flow to the underserved segments, they are pivotal in laying the foundation for a resilient and sustainable microfinance ecosystem. By addressing over-indebtedness and prioritizing asset quality, the sector can continue to play its vital role in advancing financial inclusion and empowering underserved communities.

Conclusion
The Indian microfinance sector is at a crossroads. The challenges it faces are significant, but the steps being taken by MFIN reflect a deep understanding of the need for systemic change. By tightening lending norms, rationalizing interest rates, and capping indebtedness, the sector is positioning itself for sustainable growth.

As these measures come into effect in January 2025, their success will depend on how effectively microfinance institutions adapt to the new regulatory environment. Ultimately, these changes will not only stabilize the sector but also strengthen its ability to uplift millions of borrowers, driving financial inclusion and economic empowerment across the country.

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Unlocking opportunities: Muthoot Microfin IPO analysis

Unlocking opportunities: Muthoot Microfin IPO analysi

Muthoot Microfin Ltd – IPO Note

Price Band: Rs. 277-291

Issue Date: 18th Dec-20th Dec

Recommendation: Apply

Company Overview: 

Muthoot Microfin Limited, a subsidiary of the Muthoot Pappachan Group, is a microfinance institution dedicated to empowering women in rural areas across India. Specializing in micro-loans, the company offers a diverse portfolio of financial products, including group loans for livelihood solutions, individual loans, and life betterment solutions such as mobile phone and solar lighting loans. Additionally, it addresses health and hygiene needs through sanitation improvement loans. Muthoot Microfin Limited also provides secured loans in the form of gold loans and its unique Muthoot Small & Growing Business (MSGB) loans, emphasizing support for small businesses. The company’s focus on social impact is evident in its commitment to fostering economic growth and improving living standards in underserved communities.

Company Profile:

  • Muthoot Microfin Limited is a leading microfinance institution in India, with a strong focus on serving women entrepreneurs in rural areas. The company is a part of the Muthoot Pappachan Group, a diversified conglomerate with a presence in various sectors.
  • Muthoot Microfin is the fourth largest NBFC-MFI in India in terms of gross loan portfolio. The company has a wide reach across 18 states and UTs, with over 1,340 branches and 3.19 million active customers. Muthoot Microfin has a robust IT infrastructure and a focus on digital collections. The company also has a strong presence in Tamil Nadu, with a market share of over 16%.
  • In recent years, Muthoot Microfin has been expanding its operations beyond South India. The company has opened over 700 branches in North, West, and East India, constituting 52.76% of its total branches. This expansion is a key part of Muthoot Microfin’s strategy to become the leading microfinance institution in India.
  • Muthoot Microfin is a well-established and respected company with a strong track record of financial performance. The company is well-positioned to continue to grow and expand in the future.

The Objects of the Issue:

  • Fund existing operations and exciting new initiatives like tech upgrades and geographic reach.
  • Boost capital to meet future needs and ensure growth.
  • Gain stock market visibility and access future capital.
  • Facilitate sale of shares by existing investors.

Outlook and Valuation:

  • Historically concentrated in South India, Muthoot Microfin has recently expanded its operations into North, West, and East India.
  • As of March 31, 2023, the company has 596 branches in North, West, and East India, representing 50.85% of total branches.
  • This expansion strategy is aimed at increasing the company’s footprint and customer base across diverse regions in India.
  • Growth Strategy: The company’s strategy of expanding across various geographies in India is expected to contribute to its ongoing growth in the coming years.
  • Competitive Landscape: According to the Red Herring Prospectus (RHP), Muthoot Microfin identifies Equitas Small Finance Bank Limited, Ujjivan Small Finance Bank Limited, CreditAccess Grameen Limited, and Suryoday Small Finance Bank Limited as some of its listed competitors.
  • Understanding the competitive landscape helps investors assess the market dynamics and positioning of the company.
  • Valuation and Peer Comparison:
    1. The company’s valuation is compared with peers in the microfinance and small finance banking sector.
    2. Peers’ average P/E (Price-to-Earnings) ratio is 18.22x, ranging from 6.33x to 26.67x.
    3. Muthoot Microfin’s P/E multiple, based on post-issue diluted FY23 EPS of Rs.11.54, is 25.23x at the higher price band.
    4. The assessment suggests that, compared to peers, the issue is considered fully priced in or fairly valued.
    5. At the higher price band, Muthoot Microfin’s listing market capitalization is projected to be approximately – Rs.4159.96 crores.
      ISSUE OFFER  
      Price band (INR) 277-291
      Bidding date DEC 18 – DEC 20, 2023
      Total IPO size (Cr) 960
      Fresh issue (Cr) 760
      Offer for sale (Cr) 200
      Market lot 51
      Face value (INR) 10
      Listing on NSE, BSE
      Retail Allocation 35%
      Rating Subscribe

Competitive Strengths:

  • Strong Brand and Market Leadership: Backed by a highly established financial services conglomerate, ensuring trust and brand recognition. Holds a significant market share in India, demonstrating experience and operational expertise.
  • Reliance on rural economies makes the company susceptible to agricultural downturns and economic fluctuations. Fosters income generation and economic activity in rural areas.
  • Focus on underpenetrated regions and product diversification indicates significant growth potential.
  • Aligns with social responsibility goals, potentially attracting ESG-conscious investors.
  • Wide geographical reach with over 1,340 branches, ensuring customer accessibility.
  • In-house technology development facilitates efficient loan disbursement and monitoring.
  • “Mahila Mitra” app promotes convenient payment methods for customers.
  • Offers various loan products, mitigating risk and catering to diverse needs.

Key Strategies:

  • Expand branch network and identify borrowers across India, not just South.
  • Build user-friendly platforms for smooth loan access and service.
  • Offer new loans and leverage referrals to grow customer base.
  • Diversify Funding: Tap new investors beyond traditional channels to fuel expansion.
  • Highlight social impact and invest in talent for sustainable growth.

Key Concerns:

  • Rural Vulnerability: Microfinance primarily serves rural populations, susceptible to agricultural downturns, weather fluctuations, and economic shifts. These external factors can impact borrowers’ repayment capacity and expose the company to loan defaults.
  • Regulatory Risks: The microfinance sector faces evolving regulations, some potentially affecting interest rates, loan sizes, and lending practices. Adapting to these changes without compromising profitability could be challenging.
  • Competition: The microfinance space is increasingly competitive, with established players and new entrants vying for market share. Maintaining a competitive edge in terms of interest rates, customer service, and technology could be costly.
  • High Credit Exposure: Muthoot Microfin’s loan portfolio is concentrated in a specific market segment. This concentration, while offering potential rewards, also exposes the company to higher risks if economic conditions in that segment deteriorate.
  • Customer Risk: Microfinance institutions (MFIs) often serve customers in the lower-income segments. Economic uncertainties or shocks affecting these customers may impact their ability to repay loans, leading to increased default risks.
  • Interest Rate Risk: The microfinance industry is vulnerable to interest rate fluctuations. Changes in interest rates can affect borrowing costs for both the MFI and its customers, influencing repayment dynamics.
  • Non-Performing Assets (NPA) Risk: An increase in non-performing assets or provisions can adversely affect the company’s financial health. This may result from economic downturns, borrower distress, or other factors impacting the repayment capacity of the customer base.
    Company Total income

           (ML)

    		 EPS P/E NAV Face value/Share
    Muthoot Microfin Limited 14463.44 14.19 20.5 139.15 10
    Peer group       1  
    Equitas Small Finance Bank Limited 48314.64 4.71 17.57 46.44 10
    Ujjivan Small Finance Bank Limited 47541.90 5.88 6.33 20.25 10
    CreditAccess Grameen Limited 35507.90 52.04 26.67 326.89 10
    Spandana Sphoorty Financial Limited 14770.32 1.74 381.72 436.58 10
    Bandhan Bank Limited 183732.50 13.62 17.32 121.58 10
    Suryoday Small Finance Bank Limited 128811 7.39 22.31 149.28 10
    Fusion Micro Finance Limited 17999.70 43.29 12.60 230.74 10
    PARTICULARS

    (In millions)

    		 FY23 FY22 FY21
    Equity share capital 1401.98 1333.33 1141.71
    Other equity 14856.51 12032.46 7757.19
    Net worth 16258.49 13365.79 8898.90
    Total Borrowings 51230.25 32969.85 25382.26
    Revenue from Operations 12906.45 7286.23 6227.84
    EBIDTA 7884.86 4256.60 3272.17
    PBT 2128.70 647.21 90.55
    Net profit 1638.89 473.98 70.54
    PAT 1639 474 70.4
    Total assets 85292 55915 41839

The image added is for representation purposes only

 

RBI Charts Course for Sustainable Growth: Inflation Control as the Key

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Bata India Ltd. posted its highest ever quarterly sales:
Markets, Result Updates - July 15, 2022

Spandana Spoorty: Q4FY22 result update

Spandana Spoorty: Q4FY22 result update.

Spandana Spoorty, a microfinance company, posted its March 22. The firm witnessed a 50% jump in PAT at Rs. 75 Cr. for the quarter ended in March 2022 compared to Rs. 49.3 Cr in March FY21. The firm’s consolidated total income was Rs. 1480 crore, up from Rs. 1505.6 crore in FY21 YOY. The total expenses for the company grew from Rs. 723 Cr. in FY21 to Rs. 1141 Cr. in FY22 YOY. The delay in publishing the results is due to management-level issues.

FY22 was an action-packed year for the company, starting with eliminating operational inefficiency and rolling out Vision 2025. The remedial measures included: i) appointing an experienced core team manager; ii) settling disruptions with the former MD and CEO by paying a one-time amount. iii) reorganising business processes in accordance with new RBI guidelines. iv) developing Vision 2025 with an ROA  of at least 4.5% and an ROCE of at least 20%.

Q1FY23 has witnessed an improvement in collection efficiency and asset quality. AUM growth continued to remain weak due to changes in the management team and stood at 6,581CR, which was 19% down YOY. The borrower base fell from Rs. 26 Cr. in Q3FY22 to Rs. 24 Cr. in Q4FY22. The average ticket size grew to Rs. 28,000 in Q4 compared to Rs. 25,849 in the previous quarter. The cost/income ratio increased to 69.8 in Q4 from 41.3 in FYQ3. due to the transition cost towards rocess of 40Cr. to the prior MD and CEO. AUM per branch moderated to 5.9Cr in Q4Fy22 due to muted disbursement. The asset quality deteriorated. GNPL was at 15.0%, NNPL was at 6.0% and PCR (Provision Coverage Ratio) was at 60.0% compared to 49.9% in Q3FY22. The liquidity for the company was adequate with Rs. 728 Cr in cash and cash equivalents for March 2022.

The microfinance industry is well poised to grow 4x over the next 8 years, helped by strong macro winds and economic growth. The company has a coverage of 24% in the rural areas and has a potential to cover 76.6%. The new MFI regulation will also help the company to accomplish its goals with new policy introduced. The firm intends to take a calibrated move in their refinements for new process and new products. 

The management expects AUM to reach Rs. 15000 Cr by FY2025.The company has identified 7 additional states with favourable factors for a quick surge in the microfinance book and places to grow organically in the existing states. The new states will avoid concentration and provide a paperless experience to their clients. As per the new plan, there will be approximately 1,500 branches; employee count will be around 12,500–13000; AUM/branch will be 10Cr. and 4 lakh loan clients and intends to have a secured 10%–15% secured book comprising of LAP, housing loans, gold loans etc.

The microfinance company is all set to meet the aspirations of rural India with a 2000CR–3000CR opportunity. Many analysts are bullish on the stock and expect it to be in the Rs. 500-Rs. 540 range by September 2023. The stock is currently trading at Rs.410 and has a market cap. of Rs.2,877Cr. The share price is down from its high of Rs. 727.40. The script opened at Rs.405 on Friday and touched an intraday low of Rs.403.

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