Is MicroFinance Turning Around?

updated: 10th April 2025, 12:25 pm

Over the last few months, I wrote 5 articles in National newspapers, covering the Micro-finance sector.

When I asked my editor if I should write a 6th article? He politely replied,“Boss, your micro-finance stocks are not moving. There is no interest”

THIS is the 6th article.

That’s why when you subscribe, you’re enabling in-depth, insightful research on ignored sectors in the Indian stock market.

News media & brokerage research reports will never encourage this…

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Let me begin by saying Micro-finance is a VERY RISKY SECTOR.

Nothing you read here is a recommendation.

Cool? Let’s start.

8 out of 13 listed players we track in Micro-finance sector have released a Business Update for Quarter ending March 25.

For context, Micro-finance sector had been going through its own bear market since December 2023.

Most stocks in the sector are down 50% since then.

Trump tariffs can do the sector no harm. It’s perfectly capable of imploding itself.

These 7 players include :

1. Equitas SFB

2. Ujjivan SFB

3. Utkarsh SFB

4. Capital SFB

5. ESAF SFB

6. Suryodhyay SFB

7. CAG - CreditAccessGrameen (NBFC-MFI)

8. Satin CreditCare (NBFC-MFI)

SFB - Small finance Banks.

Their updates range from segment-wise growth tables (Ujjivan) to granular state wise NPA numbers (CAG) to single page formalities (Satin).

I read somewhere that an estimated 70-80% of human communication is non-verbal.

Similarly, investors can learn a lot about a business by paying attention to what the management is saying and what it’s not saying.

Some call it “reading between the lines”, some call its “Investor relations”, some call it “PR”.

Bottom line is companies try to manage how stakeholders perceive them. Just like humans do. And it’s not always malicious.

Here’s a small example.

I’ve rarely seen lenders give out a 5 or 10 year historical perspective in their quarterlies.

Primarily, because their past record is crap. It’s a tough business.

High quality players such as Cholamandalam gives a 15 year historical table. Hard flex 💪🏽.

Bajaj Finance, Muthoot Finance, India Shelter Housing, Aavas Financiers & CreditAccessGrameen show numbers ranging from 5-7 years.

Have you noticed a similar pattern? Let me know in the comments below ⬇️⬇️

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Q4 Business Update - What are we looking at?

When a sector has been in the doldrums for sometime, we’re looking for some kind of “bottoming out”.

Lead indicators, early signals etc.

These lead indicators could be:

1. Pick up in Disbursements (Big signal of turnaround)

2. Improvement in Collection Efficiency

3. Improvement in collection in Karnataka (Event specific)

Let’s collate all the data (provisional FYI) we got so far.

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Disbursements

Granular, segment/state wise disbursement data is available only for Ujjivan & CAG.

But, as a proxy, we can checkout the Q-o-Q Micro-Group Loans AUM growth :

What we learn:

• SFBs are de-growing their JLG (Group) Micro-loans with a passion. This is by design. With the ability to raise deposits, they’re moving “up the risk curve” to secured loans such as Housing, LAP & Gold etc.

• Adding the point above on “perception management”, look at how Equitas is trying to distance itself from being perceived and treated as an MFI player, because it isn’t. anymore.

• Equitas also tells us CE has normalised ex-karnataka. Almost every single player we track communicated something similar in Q3 but Karnataka was still a looming threat then because the MFI law came into effect on February 12th 2025.

• CAG total AUM grew about 5% q-o-q. Disbursements are higher at 7.2% for non-Karnataka loan book. Perhaps, monthly data will be more telling.

• Satin said they grew about 5%. They have sold some loans and written-off some too. So, if AUM grew 5%, disbursements are definitely higher.

• Capital SFB is an anomaly. Zero Group MFI loans.

Capital SFB has zero Micro-finance exposure. 99.8% of its book is secured.

It has Zero write-offs in its entire operating history.

It was the first financial institution to receive a Small Finance Bank License.

Capital has been on my to-dig deeper watchlist for a while now. Since it got listed it has been beaten down and ignored, clubbed as an Small finance bank, with the rest of them.

Bottom line is there is no clear signals of sufficient Disbursements pick-up in MFI segment yet, based on the updates we have so far.

but there is a silver lining.

Collection Efficiency

Of the 7 players who have shared a business update, only 2 - Ujjivan & Equitas have given last few months X-bucket collection efficiency.

X-Bucket Collection Efficiency tracks how much of the current month’s dues were collected from borrowers who were not overdue.

It leaves out past NPA accounts and focuses only on fresh payments.

For micro-finance lenders, this is a clean way to spot early stress in the loan book. A figure above 99% is healthy; any dip could signal brewing issues because it means a higher percentage of CURRENT DUES are not being paid on time and could spill-over into 0-90 Days due buckets, and eventually into NPAs.

“Overall” numbers i.e - INCLUDING Karnataka, for Equitas and Ujjivan are as follows.

Just Karnataka? Here is the situation.

Although, the trend shows an improvement, it’s too early to say that the impact of Karnataka MFI Law has fully played out.

The remaining players are placed as follows :

CAG says X-bucket collection efficiency (excl. karnataka) is 99.6% and for karnataka it is 98.5% in March-25. It’s signalling improving CE in karnataka too.

ESAF says X-bucket collection efficiency is 99.1% in March 2025.

Satin Creditcare says its 99.8%

Suryodhyay has also indicated an improving trend.

Net-Net, the situation is much more positive but I’m not convinced enough to jack up my positions just yet (Not a Recommendation please)

I won’t believe it until I see the full set of numbers for other players too, especially the better ones such as - Arman Financial (Disclosure: Invested).

As far as anecdotal evidence on impact of Karnataka MFI Law is concerned, things aren’t pretty down south, especially in a few district.

We’re in wait and watch mode but it’s evident that fresh NPA flows have substantially reduced. Leverage has come down over last few quarters.

Hope this gave you an overview on the sector.

Will be updating it as more business updates come through.

Rahul Rao, CFA

Note: We have relied on data from www.Screener.in and www.tijorifinance.com throughout this article. Only in cases where the data was not available, have we used an alternate, but widely used and accepted source of information.

The purpose of this article is only to share interesting charts, data points and thought-provoking opinions. It is NOT a recommendation. If you wish to consider an investment, you are strongly advised to consult your advisor. This article is strictly for educational purposes only.

Rahul Rao has been Investing since 2014. He has helped conduct financial literacy programs for over 1,50,000 investors. He helped start a family office for a 50-year-old conglomerate and worked at an AIF, focusing on small and mid-cap opportunities. He evaluates stocks using an evidence-based, first-principles approach as opposed to comforting narratives.

Disclosure: The writer or his dependents HOLD shares in Arman financial.

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