Muthoot Microfin Limited

Muthoot Microfin reported a modest profit of INR6.2 crores prior to OCI for Q1 FY26, with total comprehensive income reaching INR8 crores, signaling a turnaround after a challenging previous year. The company's asset under management (AUM) reached INR12,252 crores, and the borrower count stood at 34.1 lakh, with 1.1 lakh new customers added during the quarter. This performance is supported by improved macroeconomic trends and robust disbursements in Q4 FY25.

The company successfully reduced its cost of funds by 23 basis points to 10.79% in Q1 FY26, down from 11.02% in the previous financial year, with the incremental cost of borrowing falling below 10% to 9.97%. This rationalization, coupled with revised lending rates (weighted average of 23.5%), led to an improvement in Net Interest Margin (NIM) to 11.5% from 10.9% in Q4 FY25. Management expects further margin expansion as rate cut benefits percolate and through diversified fee income.

Muthoot Microfin maintained a stable GNPA of 4.5%, though Net NPA marginally increased by 24 bps to 1.58%. The company boasts a robust provision coverage ratio of 68.5% for Stage 3 assets, 8.17% for Stage 2, and 1.16% for Stage 1, with an overall coverage of 97% against Stage 3 assets. Credit cost for the quarter was significantly lower at 4.3% compared to 9.4% in the last financial year, and management is confident it will remain at the lower end of guidance or even go below.

In line with a calibrated approach to product diversification, Muthoot Microfin introduced three new product lines: Micro LAP (loans from INR1 lakh to INR10 lakh), gold loans, and individual micro MSME financing. The company is leveraging its existing customer base, identifying 440,000 customers with a credit score of 730+ for these new offerings. A co-lending tie-up with Muthoot FinCorp for gold loans is also in progress, with a 60-40 partnership model and negligible operating expense for Muthoot Microfin.

Collection efficiency has shown significant improvement, with overall ex-bucket collection at 99.2%-99.3%. In Karnataka, 0+ PAR reduced from 15% to 8%, and collection efficiency improved from 83% to 87%. The company recovered INR38 crores from overdue loans in Q1, a substantial increase from the previous monthly average of INR6-7 crores, with July alone seeing INR18 crores in recoveries. This improvement is attributed to better vintage quality of loans originated post guardrail implementation.

Q1 FY26 disbursements totaled INR1,775 crores, which was lower than the previous quarter and year-on-year, partly due to the implementation of Guardrail 2. However, disbursement trends are improving, with July disbursements reaching INR727 crores, up from INR630-640 crores in Q4 FY25. Management expects disbursements to reach INR800-850 crores by September and exceed INR1,000 crores monthly thereafter, which will help rationalize the Q1 opex ratio of 6.9% and bring it within the guided 6.2%.

The company raised INR1,450 crores during the quarter, including INR890 crores through PTCs at favorable rates of 8.5%-8.8%, contributing to the reduced cost of funds. Muthoot Microfin maintains a robust Capital Adequacy Ratio (CAR) of 27.85% and has INR2,000 crores in available liquidity, including prefund and undrawn sanctions. Management noted no restrictions from banks for funding, with public sector banks becoming more active and a positive shift in perception towards NBFCs.