Sentiment Likely To Turn Positive For MFIs; Banks Better Placed, Says HSBC
According to HSBC's research, X bucket collection efficiencies in most Indian states other than Karnataka have increased to 98.5-99.5% in February.
Microfinance institutions that have been under stress due to overleveraging of borrowers for few months are witnessing a turnaround in sentiment on the back of better collections and higher disbursements in February, HSBC Research said in a note.
While the global brokerage firm expects sentiment for the MFIs to turn positive in 2025, it also said that impact of certain events still needs to be addressed.
According to HSBC's research, X bucket collection efficiencies in most Indian states other than Karnataka have increased to 98.5-99.5% in February.
X bucket means those accounts which are not having any overdue as at the end of previous month. X bucket collection efficiency represents collections of that particular month’s EMI from such X bucket accounts during that particular month divided by total EMIs from all such X bucket accounts.
The improvement in collection efficiency has also led to a reduction in high employee attrition rates over the last year.
While the ordinance promulgated by the state government in Karnataka saw a substantial disruption in MFI operations in February, HSBC Research said that individual MFIs have taken steps to address the impact rapidly.
The global brokerage firm expects credit costs for these micro lenders to dip in Apr-Jun due to improvement in asset quality in the current quarter.
However, the new guardrails by the microfinance institutions network that will come into effect on April 1 capping the lending to borrowers will lead to a rise in credit costs.
CreditAccess Grameen continues to remain the best placed MFI player in the industry but in the long run, banks with MFI exposure would have higher potential loan growth and more earnings resilience than an MFI, it said.
The brokerage said that Equitas Small Finance Bank and Ujjivan Small Finance Bank are better placed because of turnaround in asset quality and are likely to give better returns given their attractive valuations.
MFI players will see some moderation in loan growth and a higher run-rate of credit costs and lower return on assets after a recovery in this cycle.
