Muthoot Microfin Ltd Q4 FY2025 Concall Summary

Key Takeaways

• A loss-making year, framed as exceptional: Full-year PAT loss of INR 222 crores, the first in company history, driven by a credit cost spike to 9.4% (including a INR 230 crore management overlay). Management calls it an exceptional year and guides for a sharp recovery.
• Credit cost is the story, and it peaked: Elevated provisions, especially a jump in Stage 2 coverage to 30.8%, pushed up credit costs. Management believes the NPA cycle has peaked and guides for a 4% to 6% credit cost in FY26.
• Karnataka was the epicenter of stress: A local ordinance against unregulated lending created borrower confusion and a sharp but temporary collection dip. A INR 134 crore portion of the management overlay is earmarked for this portfolio, with a significant recovery expected.
• A deliberate growth reset is underway: AUM grew just 1.3% as the company calibrated disbursements and implemented stricter guardrails, reducing customers with four or more loans from 10.6% to 6.8%. FY26 growth is guided at a cautious 5-10%.
• What to watch next quarter: The pace of provision write-backs, particularly from the Karnataka portfolio, and whether the September timeline for a visible business turnaround holds.

Asset Quality & the Credit Cost Cycle

• Credit cost surge: Full-year credit cost hit 9.4%, driven by a massive increase in Stage 2 provisioning. The management overlay of INR 230 crores was taken to insulate the balance sheet from uncertainties, primarily in Karnataka. Excluding this overlay, credit cost was 7.5%, at the lower end of the guided 7.5%-8.5% band.
• Provisioning breakdown: Stage 2 provision coverage was hiked to 30.8% from 1.06% a year ago and 9.01% in the previous quarter. Stage 3 coverage also increased to 73.3% from 58.72% in Q3. This aggressive provisioning was a response to a new delinquency in Karnataka, with management choosing to provide upfront rather than risk future shocks.
• GNPA peak: GNPA rose ~180 bps to 4.84%, but management asserts this is the peak. The company contrasts its GNPA with an industry figure close to 13%, attributing the outperformance to its credit scorecard, while admitting the model cannot factor in political disturbances.
• Karnataka provision recovery: The bulk of the INR 134 crore Karnataka-specific overlay is expected to be recovered. Management notes that historically, around 60% of provisions come back over 2 to 3 years, as borrowers who stop paying due to external influence eventually resume repayments to protect their creditworthiness.
• Collection efficiency dip: Full-year collection efficiency fell 4.8% to 93.6%, though X-bucket collections held strong at 99.5%. In Karnataka, fresh delinquency peaked in February at 9.1% but has since improved month-on-month to ~95% in April.

Sadaf Sayeed: "Traditionally, not 70%, but around 60% of our provisions come back over a period of 2 to 3 years."

Karnataka, Tamil Nadu & Regulatory Landscape

• Karnataka ordinance impact: Legislation directed at unregulated entities caused speculation and confusion among borrowers, directly impacting collection efficiency. The problem is recent, with the portfolio being less than two months old in terms of delinquency when the provision was made. Management does not anticipate the bulk of this portfolio moving to NPA and eventual write-off.
• Tamil Nadu legislation clarity: A proposed ordinance in Tamil Nadu, the "Prevention of Coercive Lending Practices Act," is proactive and not based on customer grievances. It targets all unregulated lending, not microfinance specifically. The market is mature, no confusion has been created, and collections continue as before with no adverse impact observed.
• Long-term regulatory benefit: Management believes restrictive regulation on unregulated entities will benefit regulated players like Muthoot Microfin in the long run. Unregulated players will exit the space, removing the bad name associated with their practices and protecting borrowers.

Sadaf Sayeed: "In Tamil Nadu on the contrary, there is a very good clarity. The legislation is more driven out of proactive steps that have been taken by the government to avoid coercive lending... it is not taking about microfinance, it is talking about all the lending practices."

Portfolio Quality & Underwriting Changes

• Guardrails working: Implementation of MFIN and Sa-Dhan recommended guardrails increased rejection rates but successfully avoided onboarding overleveraged customers. The proportion of customers with four or more loans reduced from 10.6% in Q2 to 6.8% in Q4, while unique customers increased from 32% to 35%.
• Delinquency insights: An in-depth analysis of the 34-lakh customer base revealed that customers with gold loan exposure have much lower delinquency. The second-lowest category is credit cards, followed by mortgage loans. This insight is now being used to refine the credit scorecard.
• Underwriting overhaul: Multiple changes were made, including a shift to digital with a new eKYC license for better customer authentication. The credit scorecard was revised to include more variables, such as the presence of a gold loan as a positive indicator. A new policy automatically extends loan tenure for installments falling on festival dates to prevent collection disruptions.
• Secured loan strategy: The company plans to build a INR 5,000 crore secured loan portfolio by cross-selling group company products like gold loans, housing loans, and two-wheeler loans. This will replace existing unsecured loans, not overleverage customers, and provide insulation from unregulated lending risks.

Growth, Margins & Profitability Outlook

• Calibrated growth: AUM grew only 1.3% for the year, with disbursements down 16.8% to INR 8,872 crores. Despite this, the company expanded its branch network by 12.7% to 1,699 and increased employee count by 15.3% to 15,989, indicating investment for future growth.
• FY26 growth guidance: Management guides for 5-10% AUM growth, a conservative figure based on the impact of newly implemented guardrails. The company states it has the capacity to grow faster but is choosing caution. The second guardrail, implemented at the start of the financial year, is causing higher rejection rates and impacting operating costs, an effect expected to smooth out in a couple of months.
• NIM and funding cost: Net interest margin is expected to be retained at current year levels, supported by an 18 bps decline in the cost of funds and a recent rate cut.
• ROA/ROE trajectory: For FY26, the company guides for a ~2% ROA and ~10% ROE, driven by moderate growth, rationalized operating costs, and lower credit costs. For FY27, barring any event risk, the target is a return to a ~4% ROA and 18-20% ROE, assuming leverage of 4.5 to 5 times.
• Four-lender-plus book: The portfolio of customers with more than four lenders is expected to be less than 1% or close to 0% by September as these loans naturally wind down.

Sadaf Sayeed: "In the history of Microfin, we have never reported losses. This would be an exceptional year. And hopefully, going forward, we will continue to improve from here and report better results."

Strategic Initiatives & Diversification

• Digital and ESG push: The company received an eKYC license from the Aadhaar authority and achieved a top-tier CareEdge ESG rating of 72.2 within 16 months of listing. Its Muthoot Mahila Mitra app has been downloaded by 18 lakh out of 34 lakh customers.
• Product diversification: New products like Micro LAP and MSDB (a gold-based product) have been launched. The company is also making representations to the RBI to liberalize qualifying asset criteria, which it believes has a high likelihood of success and would open opportunities for multiple new products.
• CGFMU evaluation: The company is critically evaluating the CGFMU credit guarantee scheme. While it helps when credit costs exceed 5%, its limitations (15% coverage cap, 1.5-3% upfront cost, 5% first loss) make it cost-prohibitive when credit costs are lower.
• ECL model enhancement: The ECL model is being expanded to include employment ratios like labor participation rates and per capita income for each state, moving beyond just GDP growth and inflation. This new model will be implemented from Q1 FY26.

Guidance & Commitments

Key Metrics