The asset growth of non-banking finance companies-microfinance institutions (NBFC-MFIs) is projected to moderate to just 5% in FY25, a significant decline from the robust growth witnessed over the past two years, according to a report by ICRA released on Thursday.
The slowdown is attributed to stricter lending norms and mounting challenges.
Borrower over-leveraging, socio-political disruptions, and operational challenges caused by employee attrition have been identified as key factors impacting growth.
The report highlights that overdue loans have surged sharply in the first half of FY25, posing a significant risk to loan quality in the near term. Additionally, credit costs for NBFC-MFIs are expected to rise steeply from 2.2% in FY24 to 5.4-5.6% in FY25. This, coupled with a compression in net interest margins, is likely to strain profitability.
Industry norms for responsible lending, tightened in July and November 2024, have further impacted the sector. The revised guidelines cap borrower indebtedness at ₹2 lakh and limit the number of lenders per borrower to three. As a result, rejection rates for borrowers are projected to rise significantly, with over 20% of borrowers expected to be affected by the new policies, according to A.M. Karthik, Co-Group Head for Financial Sector Ratings at ICRA.
Declining lending rates and higher funding costs are anticipated to reduce the return on managed assets (RoMA) to 0.4-0.8% in FY25, a steep fall from a record 3.6% in FY24.
The report underscores the significant challenges faced by NBFC-MFIs as they navigate a more stringent regulatory environment and operational hurdles, which could shape the sector’s trajectory in the coming years.
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