Muthoot Microfin Limited

Muthoot Microfin reported a challenging Q4 and full FY25, with a net loss of INR401 crores for the quarter and INR222 crores for the year. This was primarily driven by an elevated credit cost of 9.4% for FY25, which included INR230 crores of management overlay. Gross NPA (GNPA) rose to 4.84% in Q4 FY25 from 3.03% in the previous quarter, reflecting the impact of a challenging microfinance environment and specific regional issues. Despite the losses, the company maintained a strong capital adequacy of 27.9% and INR700 crores of liquidity, aiming to build a stronger, insulated balance sheet.

The company achieved a top-tier ESG rating of 72.2 (ESG 1 from CareEdge), the highest in the financial services sector, underscoring its commitment to environmental, social, and governance aspects. Muthoot Microfin also secured an eKYC license from the Aadhaar authority, which is expected to improve customer identification, prevent fraud, and support its digital transformation. Digital adoption is strong, with 1.8 million customers having downloaded the Muthoot Mahila Mitra app out of 3.4 million total customers. Furthermore, 740 e-clinics in branches provided 10.2 lakh consultations, aiding customer retention and well-being.

Asset quality saw an increase in GNPA to 4.84% in Q4 FY25. However, the company significantly increased its provisioning, with Stage 2 provision rising to 30.8% (from 1.06% a year ago) and Stage 3 provision to 73.3% (from 58.72% in Q3). The full-year credit cost was 9.4%, but excluding the INR230 crores management overlay, it was 7.5%, aligning with the lower end of previous guidance. Total write-offs for the year amounted to INR538 crores. Management anticipates a credit cost of 4-6% for FY26, expecting a reversal of some provisions and recovery from write-offs.

Muthoot Microfin's AUM grew by 1.3% to INR12,357 crores for FY25, with disbursements of INR8,872 crores, 16.8% lower than the previous year due to a calibrated strategy. The company is focusing on diversifying its portfolio by leveraging analytics on its 3.43 million customers, of whom 1.27 million have retail loan exposures. This includes tapping into opportunities for secured loans like gold loans, housing loans, and two-wheeler loans, aiming to build a INR5000 crore secured loan portfolio. This strategy aims to retain customers, increase wallet share, and enhance portfolio security, with a growth target of 5-10% for FY26.

The microfinance sector faced challenges from overleveraging and SRO guardrails, impacting disbursements. The Karnataka legislation, though aimed at unregulated entities, caused initial speculation and affected collection efficiency, which has since improved to 95% in April. In Tamil Nadu, a new proactive legislation targeting coercive lending practices by unregulated entities has not caused any disturbance, with X-bucket collection efficiency remaining 99.6%. The company expects the number of customers with four or more lenders to reduce to near zero by September, as loans wind up, indicating effective management of overleveraging.

For FY26, Muthoot Microfin guides for a credit cost of 4-6% and a credit growth of 5-10%. They expect to retain Net Interest Margin and operating expenses in the same range as FY25. The company targets a Return on Assets (ROA) of approximately 2% and a Return on Equity (ROE) of 10% for FY26. Looking further ahead, for FY27 onwards, they aspire to achieve an ROA of around 4% and an ROE of 18-20% with 4.5-5 times leverage, provided no unforeseen events occur. Management is confident that strategic initiatives and a robust balance sheet will drive improved performance.