Microfinance Industry Positioning For Down Cycle, Says HDFC Securities

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HDFC Securities Institutional Equities

The Rs 4.2 trillion microfinance industry has witnessed a strong 20% compound annual growth rate over FY21-24, driven by a simultaneous increase in borrower count (13% CAGR) and average exposure (6% CAGR).

We argue that the bureau-reported industrywide borrower count for FY24 is fraught with data integrity risk and blindsides stakeholders into under-estimating customer leverage.

Our analysis suggests that the pan-India micro-credit penetration stands at more than 40% (FY12: less than 12%), with top states such as Bihar (>80%) and Tamil Nadu (>50%) appearing significantly elevated.

Further, high growth (~29% CAGR ex-Bandhan bank Ltd.), largely driven by circumventing the RBI's harmonisation guidelines, has resulted in borrowers overleveraging in select pockets.

We expect credit costs to remain elevated in FY25 and FY26 alongside muted loan growth. We hack our FY25/26E forecasts for lenders with an MFI-heavy portfolio under coverage.

We downgrade Creditaccess Grameen Ltd. and Ujjivan Small Finance Bank Ltd. to ADD (from Buy) and Bandhan Bank Ltd. to Reduce (from ADD).

Among other lenders with an MFI-heavy portfolio, we carry a Reduce rating on IndusInd Bank and RBL bank Ltd.

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