Outlook 2025: Will the MFI pain continue into the new year?

The rural economy faced significant pressure throughout much of Calendar Year 2024, especially in the microfinance (MFI) segment. This sector is expected to encounter continued challenges moving into 2025.

Sector Performance and Growth Trends

Let’s look at the numbers, the assets under management (AUM) growth, or the loan growth, which was more than 26% year-on-year last year, has declined to less than 9.5% so far in 2024.

Growth is expected to further slow down as lenders battle various issues ranging from over leveraging of customers to credit cost to asset quality, pain, etc. The biggest impact has been seen for Spandana Sphoorty, ESAF Small Finance Bank and CreditAccess Grameen.

In Calendar Year 2023, all these lenders had seen improvement in their asset quality, while asset quality has deteriorated in CY 2024 so far for them.

Except Satin Credit, all of them have seen pain in their asset quality. Highest pain was seen for Fusion Finance. Now, amount-wise, these lenders saw their gross and pay decline by 32% on an average in CY 2023 but it has risen by 79% in CY 2024 so far.

Now, massive rise was seen for Fusion Finance, Spandana Sphoorty and CreditAccess Grameen, with respect to their asset quality deterioration. They also saw their stock price and valuations decline due to lowering of growth and deterioration in asset quality.

So, the highest decline in valuations has been seen for CreditAccess Grameen, Fusion Finance and ESAF SFB as well. Marginal improvement has been seen in low valuations of Ujjivan Small Finance Bank and Utkarsh Small Finance Bank.
Now, stocks have underperformed Nifty this year so far, on a year-on-year basis, while the Nifty has given a return of more than 17% all these lenders focused in MFI segment have given negative returns ranging from as low as 5% to more than 62%.

From 52 week high, the Nifty has given a negative return of nearly about 7%, while these lenders have given negative returns ranging from as low as 31% to as high as 73%. The highest negative return is seen from Fusion Finance Spandana Sphoorty, as well as CreditAccess Grameen.

Outlook for 2025

According to ICRA, the outlook for the MFI sector remains challenging. Stricter lending norms aim to enhance credit safeguards but are expected to hinder short-term performance. Borrower rejection rates may increase, with up to 20% of borrowers potentially affected by new regulations.

NBFC-MFIs are projected to see AUM growth compress to the 0%-5% range in FY25, down from 29% in FY24. Credit costs are expected to remain elevated at 5.4%-5.6%, further straining profitability. Margin compression and operational challenges, including high employee attrition, are additional headwinds. Return ratios, such as ROA, are likely to decline significantly for many lenders.

What Emkay Global says

Brokerage firm Emkay Global visited Bihar and Uttar Pradesh to assess trends in microfinance and other lending segments. They observed that lenders remain optimistic about MFI stress peaking by Q3 of FY25. However, the introduction of new MFIN guidelines—such as the 3-lender and ₹0.15 million cap—is likely to sustain high stress levels. Elevated credit costs and rising stress may impact growth and margins, leading to pre-provision operating profit (PPoP) pressures.

Emkay advises caution in the MFI space, particularly for NBFC-MFIs, due to ongoing challenges. The brokerage has revised its earnings estimates for MFI-heavy players like CreditAccess Grameen, Fusion Finance, and Ujjivan Small Finance Bank. For CreditAccess Grameen, it has lowered the price target from ₹1,100 to ₹900, citing Covid-level stress and elevated provisioning.

On the other hand, Emkay maintains a ‘Buy’ recommendation for Ujjivan, with a price target of ₹45, citing better asset quality and the potential to secure a Universal Banking license. It also retains long-term ‘Buy’ ratings for IIB and RBL, highlighting attractive valuations and lower MFI exposure compared to SFBs and NBFC-MFIs.