Muthoot Microfin Ltd Q2 FY2025 Concall Summary

Key Takeaways

• A deliberately cautious quarter: AUM grew 15% but management held back disbursements, prioritizing portfolio resilience over speed after spillover stress from Q1 and fresh disruption from excessive rains in Bihar and Gujarat.
• Provisioning jumped to build a buffer: A ₹31 crores management overlay was created, pushing Stage 2 coverage from ~1% to ~11%, as the company chose to absorb near-term pain for a more predictable credit cost structure ahead.
• The South is the stable anchor: 51% of the portfolio sits in southern states, with Kerala collecting at 98% on time and Tamil Nadu and Karnataka also healthier, insulating the book from the worst of the industry's delinquency pressures.
• Credit cost confidence is explicit: Management expects credit cost to land "much lesser" than the 3%-3.5% guidance, citing improved recovery rates, a dedicated collection team, and a pivot toward existing, tested customers.
• What to watch next quarter: Whether the promised Q3 cycle turn actually materializes, the pace of the 4+ lender exposure decline from 10.9%, and the speed at which the 60% existing-customer disbursement mix shifts toward the 70-30 target.

Portfolio Stress & the Deliberate Slowdown

• Spillover met fresh shocks: Q1's multitude of pressures carried into Q2, and were compounded by excessive rains in Bihar, Gujarat and other parts. Disbursements grew quarter-on-quarter but stayed flat year-on-year as a result.
• Growth was available but refused: Management stated there is "no hindrance" to growing at 25%, but chose to calibrate down, describing the posture as building a sustainable and resilient business rather than chasing AUM in a non-conducive environment.
• The vintage problem: 60% of the portfolio is borrowers with less than two years of vintage, a legacy of the earlier branch-expansion phase. Delinquency in the 0-2 year cohort runs at 6.8% for Muthoot+3, versus 2.7% for the six-year vintage, a gap management attributes to over-leverage and extraneous reasons.
• Multiple lending is the core risk: 10.6% of customers now have four or more lenders, and 14% of those are delinquent. Higher exposure above ₹2 lakhs is also correlated with higher delinquency, reinforcing the case for the industry's new guardrails.
• The pivot to existing customers: Disbursements to existing Muthoot customers rose to 60% last month, up from a 50-50 split earlier, and management targets a 70-30 mix. These are described as "tried and tested and loyal," with lower delinquencies than new-to-Muthoot borrowers.
• Second-cycle policy tightened: The required servicing period before a customer becomes eligible for a second-cycle loan was extended from nine months to twelve months, adding another layer of caution.

Sayeed: "We don't want to go and lend very aggressively. So as I said that we want to build a sustainable and resilient business. So we are being cautious."

Credit Quality & Provisioning

• The ₹31 crores overlay: A management overlay was built this quarter because the environment is evolving and the credit cost trajectory is not crystal clear. Stage 2 saw a larger spillover, and while the ECL model suggested 1% cover was sufficient, management wanted better cover for consistency and sustainability.
• Stage 2 coverage jumped: Coverage moved from ~1% to ~11% due to the temporary swelling of the Stage 2 bucket. Management expects some rollback from Stage 2 and Stage 3, and does not see the need for too much additional overlay going forward.
• Buffer provision stands at ₹153 crores: The gap between IRAC cover and ECL cover is described as sufficient to cover any risk.
• Write-off policy: Loans are written off at 365 days past due, or earlier for specific accounts where there is no hope of recovery or contactability. Management does not anticipate write-offs going "much higher" and expects them well within projections.
• Recovery on NPAs: Historical recovery rate is 40%-44%, and with the strengthened collection team, management expects similar or better recovery.
• PAR30 trajectory: Currently at 5.1%, versus a traditional 3%-3.5% in normal circumstances. The 0-30 day bucket recovers 90%, with 10% spilling over and getting collected in subsequent buckets. Steady-state PAR30 should settle below 3%.
• Collection efficiency stabilized: Already stabilized; October showed a stable trend despite the last few days being Diwali holidays. Southern states lead: Kerala at 98%-plus, Karnataka at 97.6%, Tamil Nadu at 97%.
• Credit cost guidance: Management is confident credit cost will be below the 3%-3.5% guidance, citing improved recovery from the 90+ bucket quarter-on-quarter, strengthening collection teams, regulatory guardrails reducing over-lending, and the focus on existing customers.

Sayeed: "We would like to give our investor a sustainable, predictable kind of a credit cost structure which with this kind of cover we will be able to provide."

Underwriting & Risk Infrastructure

• Three-source income triangulation: Muthoot assesses household income through customer-declared income, contact-point verification where the credit officer calculates sales with margin, and credit bureau reported income from other players. The lower of the three assessed incomes is used.
• Scorecard-driven underwriting: A scorecard with Equifax analyzes 40 parameters, classifying customers into low-risk, very low-risk, medium-risk, and high-risk. Only low-risk and very low-risk customers are taken.
• Independent credit function: 1,750 credit employees operate with underwriting independent of sourcing. The rejection rate runs at 35%-40%, though it reduced recently because the deliberate shift to existing customers means fewer new applications are being screened.
• Four-lender norm already embedded: MFIN introduced the four-lender guardrail, but Muthoot's credit process was already objective and strict, so the company did not face a sudden new challenge of large rejections.
• No lending to overdue customers: Any customer more than 30 days past due, Muthoot does not lend, whether internally or externally. Management pushed back on a news report about RBI asking NBFCs to stop netting off loans, stating there is no circular from the RBI on the matter.
• MML Plus 4 exposure rose but should reverse: The 4+ lender exposure rose from 6.76% in March to 10.9% in September because guardrails were new and only March bureau data was available then. Management believes this "should continue to trade down in the coming quarters" as other institutions implement the SRO guidelines.

Sayeed: "We not only do a credit bureau of the customer, we also do a credit bureau report of the coapplicant and any other earning member at the household and we not only check the Microfinance Bureau, we also check the Consumer Credit Bureau where there are any other loans for the customer."

Natural Calamity Insurance: A Differentiator

• Product paid a huge dividend: The Natural Calamity Insurance product saw 19,183 claims in the last quarter, of which 19,023 were received. An additional ~20,000 claims from the Odisha cyclone and Bihar floods are in process. The claim-to-settlement ratio is ~99.2%.
• How it works: When customers are displaced by events like the Odisha cyclone, the repayment obligation goes away from the borrower and insurance covers it. Claims are filed immediately after a flood impact, with the customer sending a photo, and are typically settled within the 0-30 day bucket. If settlement is delayed, the loan moves to higher buckets.
• Four insurance partners: The company partners with four insurance companies, including a leading state bank-backed company.

Operations & Collection Restructuring

• Dedicated collection team being built: A team growing from ~200 to 500+ people will focus on 30+ day arrears, freeing field officers from arrear follow-up to focus on business. This is expected to improve productivity without materially increasing opex.
• Opex to stay in range: Despite hiring more collection staff, opex will remain around 6% or just marginally below.
• Digital adoption dipped temporarily: Digital collection and acquisition shares fell slightly in Q2 because the primary focus is on ensuring timely recovery, so cash payments are accepted, and Bihar, which contributed ~44% of the portfolio, had an impact. This is described as a temporary phenomenon.
• Analytics team picking the best: An analytics team of ~20 people is used to select the "cream of the cream" customers from the existing base, supporting the pivot toward lower-risk disbursements.

Guidance & Commitments

Key Metrics