Jefferies on MFIs: Asset quality concerns deepen amid declining disbursements

Jefferies has raised concerns about the microfinance sector, citing a 29% year-over-year decline in disbursements during Q2FY25, leading to a 4% quarter-over-quarter reduction in assets under management (AUM) to ₹4.1 trillion. Notably, both the number of borrowers and average loan ticket sizes have decreased for the first time in several years. Overdue loans have risen from 2.7% in June 2024 to 4.4%, particularly among highly leveraged borrowers.

This trend suggests that asset quality may take time to normalize, potentially impacting earnings due to loan unwinding. Institutions such as Utkarsh, Spandana, and CreditAccess Grameen have a higher proportion of borrowers with four or more loans, indicating increased risk exposure, while Bandhan Bank appears better positioned.

Advertisement

Recent regulatory actions have intensified these challenges. In October 2024, the Reserve Bank of India (RBI) barred four non-banking financial companies from issuing new loans due to violations in pricing and lending practices, highlighting the sector’s regulatory scrutiny.

Additionally, in November 2024, Indian banks anticipated increased defaults in their microfinance portfolios following informal regulatory changes by the RBI, further complicating the sector’s outlook.