Strong business momentum may continue in MFIs

Strong business momentum may continue in MFIs

By Jyotivardhan Jaipuria

NBFC-MFI stocks have witnessed a meaningful run over the last 15-18 months — on the back of strong revival in growth and marked improvement in asset quality post the sharp deterioration witnessed in Covid. Removal of 10% cap on NIMs for NBFC-MFIs has further aided NIM and return ratios. The obvious question for investors is what next for the MFI stocks. Should they hold or are these stocks at peak prices?

NIMs for NBFC-MFI should hold strong/rise in an environment where banks are witnessing margin compression. NBFC-MFIs have already witnessed approximately 140-150 bps NIM expansion after the removal of interest rate cap of 10%. Given a fixed rate book coupled with peaking funding costs, NIMs for NBFC-MFIs should remain healthy at 10.5-11%.

Medium term outlook for growth remains sanguine as most estimates suggest an overall addressable market at `7.5-8 trillion (current loans, including self-help groups stand at sub `5 trillion). From a geographical distribution standpoint, eastern and southern India are fairly penetrated though penetration levels in north and west India are low. Self help groups are losing steam while most banks/NBFCs are going relatively slow on the segment in a bid to diversify their loan book. As ticket sizes increase coupled with a rising customer base, NBFC-MFIs could arguably grow at +20% CAGR over the next 3-4 years.

Asset quality pain for the MFI sector is now largely behind us—NBFC-MFI GNPLs/restructured book peaked at ~6.3/9.5% levels in March 22 – these have fallen to +3% levels for FY23. Provisioning coverage ratios for most of these companies are in excess of 70%. Despite a relatively lacklustre monsoon, we gather from our interactions with the companies that asset quality remains largely comfortable. Credit costs during Covid stood in excess of 5% but stood at ~3.5% in FY23— these will likely moderate further and will be one of the key earnings drivers.

Despite a spate of events witnessed between 2016-2021 (demonetisation, Assam MFI crisis, Covid), NBFC-MFIs have displayed resilience with average RoEs of 11-12%. Most NBFC-MFIs are well capitalised and poised to generate RoAs ranging from3.5-4% levels. With leverage at ~4x we expect that the NBFC-MFIs would generate healthy mid/high teen RoE over the next couple of years. The future of this sector is bright!

(The writer is founder & MD, Valentis Advisors)