Rising Defaults May Impact MFIs For Two More Quarters, Says Incred Capital’s Jignesh Shial

The concern in the microfinance institution sector over increasing defaults is likely to remain for at least two more quarters, according to Jignesh Shial, director of research and head of the BFSI sector at InCred Capital Financial Services Pvt.

“At least for FY25, the pain might stay elevated and we should be able to see overall bounces remaining a little higher than what we had seen in the last two years,” Shial told NDTV Profit.

“Post this, we again need to analyse whether things remain stable and settle down or not,” he added.

Shial attributed this concern to the overleveraging of the MFI sector on the back of the Reserve Bank of India relaxing norms for the space in 2022.

The central bank removed pricing curbs on microfinance loans given by financial institutions in 2022. Previously, there were limits set on the maximum interest rate that a microfinance lender could charge on loans which were set at a maximum of 10–12 percentage points above the institutions' cost of funds or 2.75 times the average base rate for the top five commercial banks.

“The moment the restrictions got lifted there was an overheating and they took two years to continue growing at that pace and that overleveraging is now getting reflected in the form of slippages,” he said.

“Along with it, a slowdown or a weaker momentum or cyclicality generally visible in rural areas is also one of the reasons we are seeing the pain,” Shial added.

As soon as the RBI relaxations came into effect, the supply and demand for loans increased, the analyst noted.

“MFIs are generally geographically concentrated. They generally have two or three states which occupy 40–50% of the book. So if any state sees some kind of pain, the entire portfolio starts seeing the results,” he explained.

However, borrowers like CreditAccess Grameen can see a little less volatility, Shial commented.

“If the pain is across areas, they will also see some volatility but compared to others I think they could do better,” he said.

Spandana Sphoorty is another MFI name that the analyst suggested.

“I think there is some kind of volatility visible because they have been spreading exposure across areas more recently,” he said.

Shial, however, warned that all MFIs would face issues if the sector itself is in pain.