New Delhi [India], May 5 : The net interest margins (NIMs) of microfinance institutions (MFIs) are expected to shrink in the financial year 2025 ended in march, due to emerging challenges in asset quality and declining yields, according to a recent report by Mavenark Advisors.
The report mentioned that this comes after two years of improvement driven by the Reserve Bank of India's move to remove the cap on lending rates, better asset quality, and reduced leverage. However, the sector now appears to be entering a more challenging phase.
It said "The microfinance industry has seen notable improvements in profitability over the past two years, due to the RBI's removal of the lending rate cap, better asset quality, and reduced leverage. For the current fiscal year, Net Interest Margins are anticipated to shrink due to rising asset quality concerns and reduced yields among several MFI players".
One of the key concerns is the rising number of delinquencies. According to the report, the increase in repayment delays, which began in the first half of FY25, has continued into the second half of the fiscal year. This trend is now putting pressure on the financial performance of non-banking financial companies operating in the microfinance space (NBFC-MFIs).
Due to this rise in delinquencies, the growth trajectory of NBFC-MFIs is likely to be impacted, with overall growth expected to slow to just 4 per cent in FY25.
The report warned that the worsening asset quality could also drive up credit costs significantly, which are projected to rise to 6 per cent for the year.
This rise in credit costs may further affect profitability, particularly Return on Total Assets (RoTA), which is expected to decline as a result. Operating expenses are also likely to see a moderate increase, partly due to the effect of a shrinking denominator caused by slower balance sheet expansion.
Overall, the outlook for the microfinance sector in FY25 appears cautious, as players navigate a combination of asset quality stress, shrinking margins, and rising expenses.
The report suggests that MFIs will need to focus on strengthening their credit assessment frameworks and improving collection efficiency to manage the emerging risks.
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