Pricing flexibility, lower credit cost to help revive NBFC-MFIs profitability this fiscal: Report

Non-Banking Financial Company-Microfinance Institutions (NBFC-MFIs) are likely to see revival in their profitability in the current fiscal, helped by the flexibility to set lending rates under the new regulatory framework for MFIs and lower credit cost, according to a report.

Crisil Ratings 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.

"Enhanced flexibility to set lending rates will be one of the drivers supporting a revival in the profitability of NBFC-MFIs this fiscal," the report said on Monday.

The other factors that will support the improvement in profitability include a reduction in credit cost and an increase in permissible household income limit, according to the new framework.

These, in turn, will help enlarge the market in terms of target borrowers and geographies, especially in hinterland, it said.

Agency's Senior Director and Deputy Chief Ratings Officer Krishnan Sitaraman said a number of NBFC-MFIs have increased their lending rates by 150-250 basis points in recent months.

"This provides reasonable headroom to absorb higher borrowing costs," he said.

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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, he said.

The higher income eligibility threshold and enhanced flexibility to price loans will spur deeper penetration into existing markets and entry into new geographies, the report said.

"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," the agency said.

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, it said.

The report said the new regulatory guidelines also focus on the assessment of household income of the borrower besides credit assessment.

The robustness of the income assessment framework and related policies that NBFC-MFIs will implement in the revised dispensation will remain a monitorable, it said.