- Q3 NPA ratios fell for all three major lenders, hinting at a credit‑quality reset.
- Secured‑loan share rose sharply, lowering portfolio risk.
- Margins (NIM) are expanding, driven by cheaper funding and better collections.
- Analyst forecasts push RoE to double‑digit levels by FY27.
- Valuations have bottomed after five years of de‑rating, presenting a potential entry point.
You’ve been overlooking the micro‑finance rebound—now’s the moment to act.
Why Bandhan Bank’s Margin Recovery Signals a Sector Upswing
Bandhan Bank, India’s largest micro‑finance player, posted a gross NPA of 3.33% at the end of December, down from 5.02% three months earlier. The improvement stems from a strategic sale of ₹3,212 crore bad loans to asset‑reconstruction companies and a disciplined push toward secured lending, which now makes up 57% of its portfolio (up from 48% a year ago). The Net Interest Margin (NIM) edged up 6 basis points to 5.9%, while loan disbursement to joint‑liability groups rose to ₹10,250 crore, underscoring confidence in borrower repayment capacity.
From an investor’s lens, the shift toward secured loans trims exposure to over‑leveraged borrowers and aligns the bank with regulatory guardrails that cap the number of lenders per borrower. This risk‑adjusted growth is the foundation for Motilal Oswal’s upgraded FY27 RoE target of 11% (up from an 8% five‑year average) and a projected Return on Assets (RoA) of 1.3%.
Ujjivan Small Finance Bank: Unsecured Growth with Tightening Credit Discipline
Ujjivan’s unsecured loan book expanded 4% quarter‑on‑quarter to ₹19,372 crore, while total assets grew 22% to ₹37,056 crore. Its gross NPA slipped to 2.38% from 2.68% a year ago, and the NIM surged 30 basis points to 8.2%, the highest among its peers. The bank’s ability to grow unsecured exposure while trimming asset quality concerns reflects a maturing underwriting framework and improved collection efficiency.
Elara Capital now sees Ujjivan delivering a RoA of 1.6% and RoE of 13.4% by FY27, well above the FY26 consensus of 1.3%/10.4%. The upside is anchored in the bank’s robust cost‑to‑income ratio and its focus on tier‑2 cities where formal credit penetration remains low.
CreditAccess Grameen: Pure‑Play Micro‑Finance Re‑Emerges Stronger
CreditAccess Grameen, the pure‑play micro‑finance house, posted a loan portfolio of ₹26,566 crore at quarter‑end, rebounding from a contraction in Q2. Its NIM jumped 60 basis points to 13.9%, a remarkable spread for a lender operating in the high‑cost micro‑segment. Gross NPA ticked up marginally to 4.04% from 3.99% a year ago, but the increase is offset by the higher yield on new loans.
Motilal Oswal lifted FY27 RoA to 4.2% and RoE to 16.5% for CreditAccess, reflecting confidence that the company’s asset‑quality stress has largely resolved and that the firm can sustain its premium pricing power.
Sector‑Wide Guardrails: Why the Tightening Rules Are a Boon, Not a Bane
Regulatory caps on the number of lenders per borrower, introduced after a wave of over‑leveraging, have paradoxically improved portfolio health. By limiting borrower exposure, the industry has seen better collection efficiency and a reduction in repeat defaults. The overall micro‑finance ecosystem now enjoys a higher degree of credit discipline, which translates into more predictable cash‑flows for investors.
Historical Context: From 2020‑22 Bad‑Loan Cycle to 2024 Recovery
Between 2020 and 2022, the Indian micro‑finance sector wrestled with a surge in non‑performing assets (NPAs) as pandemic‑induced job losses hit low‑income borrowers. Stock prices of the three leaders fell an average of 30% over two years, reflecting market pessimism. However, the sector’s fundamentals have since stabilized: funding costs have fallen as the RBI’s repo rate eased, and borrower repayment capacity has improved with gradual economic recovery.
History suggests that once micro‑finance NPAs normalize, earnings multiples tend to re‑rate swiftly. A comparable turnaround in Brazil’s micro‑credit market saw a 4‑x jump in price‑to‑earnings within 12 months after NPAs fell below 5%.
Technical Corner: Decoding the Jargon
- Gross NPA: Total non‑performing assets before provisioning. A key risk indicator.
- Net Interest Margin (NIM): Net interest income divided by average earning assets; measures profitability of core lending.
- Return on Equity (RoE): Net profit divided by shareholder’s equity; reflects how efficiently capital is used.
- Return on Assets (RoA): Net profit divided by total assets; gauges overall asset efficiency.
Investor Playbook: Bull vs. Bear Cases
Bull Case: Continued NPA compression, further rise in secured‑loan share, and sustained NIM expansion drive earnings growth. Valuations, now at sub‑15 × earnings after a five‑year de‑rating, offer a margin of safety. FY27 earnings could rise 20‑25% YoY, delivering double‑digit RoE across the three names.
Bear Case: A resurgence of borrower stress—perhaps from a slowdown in rural employment—could push NPAs back above 5%, eroding margins. Regulatory tightening beyond current caps could also constrain loan growth, leading to a muted earnings trajectory and a re‑rating of valuations.
Bottom line: The sector’s risk‑adjusted return profile has improved markedly. Investors who position now, before the earnings runway fully materializes, stand to capture upside as the market re‑prices the restored fundamentals.