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NBFC-MFIs likely to see revival in their profitability in FY23: Crisil

Enhanced flexibility to set lending rates will be one of the drivers supporting a revival in the profitability of NBFC-MFIs this fiscal

Crisil Ratings in its latest report has said that non-Banking Financial Company-Microfinance Institutions (NBFC-MFIs) are likely to see revival in their profitability in the current fiscal (FY23), helped by the flexibility to set lending rates under the new regulatory framework for MFIs and lower credit cost. It said the present rising interest rate scenario is unlikely to impact the profitability of NBFC-MFIs as higher borrowing costs would be offset by steeper lending rates, cushioning net interest margins. 

According to the report, enhanced flexibility to set lending rates will be one of the drivers supporting a revival in the profitability of NBFC-MFIs this fiscal. It said the other factors that will support the improvement in profitability include a reduction in credit cost and an increase in permissible household income limit. These, in turn, will help enlarge the market in terms of target borrowers and geographies, especially in hinterland. A number of NBFC-MFIs have increased their lending rates by 150-250 basis points in recent months and this provides reasonable headroom to absorb higher borrowing costs.

The report further said lenders can also dip into their contingency provision buffer created over the past two fiscals to manage asset-quality challenges, if any, in specific states due to natural calamities or socio-political issues - without material impact on profitability. The higher income eligibility threshold and enhanced flexibility to price loans will spur deeper penetration into existing markets and entry into new geographies. That, together with rising demand for loans in rural India should drive NBFC-MFIs' credit growth, which is expected at 25-30 per cent this year. With asset-quality pressures gradually easing and sizable provision buffers created, these lenders' credit cost is expected to decline to around 2.5-2.8 per cent this fiscal.