Why have microfinance stocks hit 52-week lows today? Check details here

The microfinance industry is currently facing a significant rise in delinquencies, primarily driven by increasing borrower indebtedness, apart from other factors.

Shares of microfinance institution (MFI) Spandana Sphoorty Financial (SSFL), Fusion Finance and CreditAccess Grameen have hit their respective 52-week lows on the BSE on Friday’s intra-day trade on concerns these companies are likely to report weak earnings for the July to September quarter (Q2FY25).

Among individual stocks, SSFL dipped 2.5 per cent to Rs 556 on the BSE in intra-day trade. The stock has corrected 55 per cent from its 52-week high level of Rs 1,243.10 that it touched on January 12, 2024.

Fusion Finance slipped 2 per cent to Rs 236.55 in intra-day trade; it has plunged 24 per cent in the past one month. Meanwhile, CreditAccess Grameen was down 2 per cent to Rs 1,148.10; it has corrected 36 per cent from its 52-week high level of Rs 1,794 that it hit on December 11, 2023.

In comparison, the BSE Sensex was down 0.15 per cent at 82,370 at 10:30 AM on Friday.

 

The microfinance industry is currently facing a significant rise in delinquencies, primarily driven by increasing borrower indebtedness, which has been further compounded by various factors, such as heat waves, the recently concluded general elections, and political movements like the “Karja Mukti Abhiyan.”

This challenge is further aggravated by the weakening of the Joint Liability Group model, characterised by a notable decrease in center attendance, diminished peer pressure and collective accountability, which have historically helped maintain low default rates, according to CARE Ratings.

The microfinance sector continues to be impacted by the inherent risk involved in the segment. These include socio-political intervention risk and regulatory uncertainty, apart from risks emanating from unsecured lending and the marginal profile of borrowers who are vulnerable to economic downturns besides operational risks related to cash-based transactions. 

Also, across the MFI sector, there has been a rise in delinquencies during Q1FY25 owing to rising indebtedness among over-leveraged borrowers, debt-waiver campaigns, continued high attrition among field-level staff and the effects of the heat wave this summer. Many of these trends are expected to persist into the next quarter, raising concerns about borrowers' repayment capabilities.

"This increase in delinquencies poses risks to the growth trajectory of NBFC-MFIs and their profitability metrics as we navigate this challenging environment," CARE Ratings said.

"Customer overleveraging has resulted in higher delinquencies and lower collection efficiencies. After the implementation of MFIN guardrails, disbursements were muted for all three NBFC-MFIs – CreditAccess Gramin, Fusion, and Spandana – in our coverage universe," stated Motilal Oswal Financial Services. The brokerage firm expects a quarter-on-quarter (QoQ) decline of 3 per cent/7 per cent/6 per cent in AUM for CreditAccess/Fusion/Spandana in Q2FY25.

Higher NPA formation will also result in interest income reversals, which could weigh on net interest margin (NIM) of the NBFC-MFIs. Flows into forward asset quality buckets have continued for the last four quarters.

“We expect an increase in PAR90 for all the three MFIs in our coverage and expect significantly high credit costs. Q2FY25 will be the worst quarter in terms of credit costs and we estimate annualised credit costs of approx. 5 per cent/ approx. 20 per cent/16 per cent for CreditAccess Gramin/Fusion/Spandana in this quarter,” Motilal Oswal Financial Services said.

With increased slippages and write-offs in Q1FY25 amid stress in the sector and rising indebtedness among borrowers, credit costs to average assets of SSFL sharply increased to 6.46 per cent in Q1FY25 (versus 2.32 per cent in FY24).

Owing to higher opex, compression in fee and other income and DA income and an increase in credit costs, the annualised RoTA for Q1FY25 for SSFL reduced to 1.72 per cent.

Going forward, the credit costs may further increase in H1FY25 and CARE Ratings expects a further moderation in profitability for the company.

According to CRISIL Ratings, in the past, the microfinance sector has witnessed various events over the years, including regulatory and legislative challenges that have disrupted operations. Some of these events include the Andhra crisis, demonetisation in 2016, Covid-19, and socio-political issues specific to certain states. 

These events have adversely affected the sector, elevating delinquencies and hurting the profitability and capitalisation metrics of NBFC-MFIs. These challenges underscore the vulnerability of the microfinance business model to external risks. Covid-19, in particular, introduced new challenges, aggravating existing vulnerabilities in the sector by heightening credit risks and the likelihood of loan default by borrowers.

While the sector has navigated these happenings, it remains susceptible to issues, including local elections, natural calamities, and borrower protests, which may increase delinquencies for a while. MFIs remain vulnerable to socially sensitive factors and the macroeconomic scenario, the credit rating agency added.

In August, CRISIL Ratings revised its outlook on the long term bank facilities of Fusion Finance to ‘Negative’ from ‘Stable’ while reaffirming its rating at 'CRISIL A+’. The company's commercial paper's rating has been reaffirmed at ‘CRISIL A1+'.