NBFCs offering MSME loans under Rs 10 lakh against property (micro-lap) may see a slight moderation in their profitability metrics in FY25 and FY26 due to compression in Net Interest Margins (NIMs) and an increase in credit costs, said credit rating agency CareEdge in a report on the MSME sector.
NIM tracks the profitability of a financial institution’s lending activities. It essentially shows the difference between the interest income on loans and investments and the interest paid on liabilities such as deposits and borrowed funds. A high NIM indicates higher income from lending operations.
According to the report, NIM is expected to decline from an estimated 12.8 per cent in FY25 to 12.6 per cent in FY26 while credit costs are likely to jump from 0.8 per cent in FY24 to an estimated 1.1 per cent in FY25 and 1 per cent in FY26.
“Going forward, rising competition and pricing pressures are expected to moderate NIMs while anticipated rate cuts may ease tight liquidity and reduce borrowing costs. Maturing AUM and an expanding micro-loan customer base are likely to increase credit costs, particularly amid stress in the microfinance sector, which could affect Micro LAP delinquency rates,” the report noted.
Consequently, a slight decline in Return on Average Assets (ROTA) is projected for FY25 and FY26.
As per the RBI’s Financial Stability Report 2024 in December last year, microfinance showed signs of stress with rising delinquencies across all ticket sizes and lender types. Small finance banks (SFBs) had recorded the sharpest increase in PAR (portfolio at risk) 31-180 days, which rose from 5.4 per cent in Sep’24 to 7.2 per cent in Dec’24. Similarly, the Rs 30K–Rs 50K loan category experienced the steepest rise in PAR 31-180 days, increasing from 5.3 per cent to 8.1 per cent over the same period.
To address the situation, effective credit portfolio management and robust risk frameworks will be crucial, although improving liquidity may provide some relief, the report said. “With an estimated 15–20 per cent borrower overlap in the microfinance sector, close monitoring of borrower leverage is essential to mitigate default risk.”
“MSME and Micro-LAP NBFC lenders often serving new-to-credit customers need to leverage data and analytics to understand borrowers better to price risk and detect early warning signals accurately,” said Vineet Jain, Senior Director, CareEdge Ratings.
Importantly, the MSME Loan Against Property (LAP) market has seen growth, expanding from Rs 7.5 lakh crore to Rs 11.3 lakh crore over the two years ending September 2024—a 50 per cent increase. Within this market, the Micro LAP segment experienced even higher growth, rising by 60 per cent from Rs 1 lakh crore to Rs 1.6 lakh crore during the same period.
