The impact of El Niño-related weather disruptions on rural borrowers has eased as rainfall conditions improved, with cash flows showing signs of recovery, Sadaf Sayeed, chief executive officer of Muthoot Microfin, said in an interview with Mint.
“Rain was deficient by 43% initially… The deficit reported now is only around 12% and we are seeing every week that the rain is covering up the deficit,” Sayeed said. “The impact is not so much. There is a cash flow which has improved at the bottom of the pyramid. That is why our collection has also improved.”
Rural borrowers accounted for over 97% of Muthoot Microfin’s ₹14,457 crore of assets under management in Q1. The company, one of India’s large microfinance lenders, reported a sharp improvement in asset quality and profitability in the June quarter.
The improving rural environment allows Muthoot Microfin to accelerate its strategy of diversifying beyond traditional group lending. Group lending in microfinance is where groups of people receive small loans together, with joint liability and without physical collateral.
The CEO said it had initially targeted a 75:25 mix between group lending and non-group lending for FY27 but achieved about 24% non-group lending in the first quarter itself. It has now raised the target to a 70:30 mix for the full year.
The company’s overall collection efficiency—the percentage of scheduled loan payments that borrowers actually pay back—rose to 97.97% in Q1 from 93% a year earlier. Gross non-performing assets declined to 3.7% from 4.85% a year earlier.
Loan diversification
The company has been building individual loans, gold loans and small-enterprise loans as part of its diversification. Its small-enterprise loan portfolio crossed ₹3,200 crore in Q1, with quarterly disbursements of ₹1,051 crore. Agriculture accounted for over 30% of the company’s small-enterprise loans, followed by services at 31.7%, animal husbandry at 21.1%, trading at 10.3% and manufacturing at 6.5%.
“We have built a ₹3,200 crore portfolio and it is growing very steadily,” Sayeed said, adding that delinquency in the individual-loan portfolio was almost zero.
The company also benefited from a decline in credit costs. Credit costs stood at 2.6% in Q1, compared with 4.33% a year earlier, while net interest margin was 12%.
Sayeed said the cost of funds declined 14 basis points sequentially to 10.13% from 10.27%. The company expects its cost of funds to move into single digits during FY27, helped by an upgrade in its credit rating to AA-minus by Crisil at the end of June.
Sayeed said the company has significant funding headroom, with about ₹5,000 crore of sanctions in hand and ₹1,300 crore of liquidity on its balance sheet.
“That is all which is driving this profit and going forward also the profit would be good,” he said.
Muthoot Microfin has consequently raised its FY27 AUM growth guidance to 18-20% from 12-15% earlier. Sayeed said the company expects to surpass the revised 20% growth guidance. It has also raised its return-on-assets guidance to 2.5-3.3%, from 2.5-3%, while maintaining its net interest margin guidance at 12.3-12.5%.
Muthoot Microfin ended FY26 with AUM of ₹14,300 crore and expects to cross ₹17,000 crore in FY27. It plans about ₹11,000 crore of additional disbursements during the remainder of the financial year, Sayeed said.
Challenging phase
Despite the improvement, Sayeed said lenders need to remain cautious because the microfinance sector is still going through a challenging phase.
“Larger entities have enough liquidity, while smaller entities don't have enough liquidity. So, the customers which were being catered to by the smaller entities are available for taking loans,” he said.
Muthoot Microfin plans to add about 70 branches in FY27, with Andhra Pradesh and Assam among the markets identified for expansion.
The company currently has about 3.25 million active clients. Sayeed said 72% of disbursements go to existing Muthoot customers, while 28% are to new customers. The company wants to increase the share of new customers while broadly maintaining a 70:30 mix.
Sayeed said the government's ₹20,000 crore credit guarantee scheme for microfinance institutions was a welcome move, but implementation needs some tweaking. According to him, offtake under the scheme has been limited, at about ₹3,300 crore.
One challenge is that banks need to first lend 5% of the allocation to smaller MFIs before receiving a guarantee on the entire amount, making it difficult for banks to identify eligible smaller institutions. Muthoot Microfin has received a ₹1,000 crore sanction under the scheme, the maximum amount, and expects disbursement soon, Sayeed said.
“Some amount of tweaking in the regulation is required for that whole ₹20,000 crore to be utilized,” he said.
The company is targeting AUM of about ₹30,000 crore by 2030, Sayeed said, as it expands its individual, gold and small-enterprise loan businesses alongside its traditional microfinance portfolio.