By Rahul Rao
2024 has been a painful year for Microfinance players. In this latest episode of ‘Microfinance mayhem’, listed Microfinance companies are down by more than 40-50% over the last year. Even banks with an MFI (Microfinance Institutions) book as small as 6% of Total loans are getting punished (IDFC First Bank) by the market.
There is no doubt the beat down has been indiscriminate, which is exactly what makes for a potential investment opportunity.
But First, Here’s what went wrong
The root of the current MFI issue is overleveraging combined with a slowing economy which are impacting cash flows of borrowers and consequently their repayment ability.
This is leading to elevated delinquencies and impacting the profitability of the sector. This issue stems from a few key factors:
- The RBI’s uniform microfinance lending guidelines, while well-intentioned, led to an increase in eligible loan amounts. This resulted in a rapid escalation of loan sizes and overall borrower indebtedness.
- Removal of Loans per borrower cap has also led to a sharp increase in overleveraging.
- Removal of pricing caps have led to some notorious players charging ‘usurious’ interest rates.
- The industry is also experiencing a decline in group discipline. This, combined with overleveraging, has led to higher delinquencies and a spike in credit costs.
In response, the MFI self-regulatory body (SRO) announced on 2nd November 2024 that it will be implementing 7 ‘covenants’ to tackle with the ongoing challenge. However, on January 4th the SRO announced that one of the key covenants announced earlier i.e. – capping of lenders per borrower to three has been delayed for implementation until April 1st 2025.
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According to Sadaf Sayeed, CEO Muthoot Microfin, there was a “need for analysing the impact the impact of 4 lender (cap) norms before further tightening…in the meantime leverage amongst borrowers has been unwinding. MFI portfolio is down from 4.4 Lac Cr in March 24 to 4 Lac Cr in September 24”. Total MFI portfolio in December has degrown further.
Is the comeback on the horizon?
Over the last week, 12 MFI players we are tracking closely were up in Intraday trade on Thursday 9th January 2025.
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