Nonetheless, regardless of its strong fundamentals, AU’s inventory has remained rangebound for almost 4 years, weighed down by {industry} headwinds. Current stress in unsecured lending has added to the challenges.
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But, the financial institution seems well-positioned for a turnaround now, aided by beneficial macroeconomic circumstances and regulatory assist.
Unsecured loans have weighed on AU’s books
The merger of Fincare Small Finance Financial institution into AU in April 2024 expanded its geographical footprint into southern India and broadened its product portfolio to incorporate microfinance loans. With yields exceeding 25%, these loans considerably outpace AU’s total yield of 14.4%, enhancing its guide yields.
Regardless of the upper credit score prices related to microfinance, the acquisition initially boosted AU’s web curiosity margin (NIM), which rose from 5.1% in Q4FY24 to six% in Q1FY25—the primary quarter post-merger.
Nonetheless, indiscriminate lending over current years within the unsecured phase has led to rising stress, notably in unsecured retail lending. Whereas asset high quality considerations have emerged throughout the board, essentially the most extreme deterioration has been within the unsecured retail phase.
Gross non-performing belongings (NPAs) in microfinance loans surged from 1.1% post-merger to 4.1% in Q3FY25. NPAs in AU’s bank card portfolio climbed from 2% in Q4FY24 to 4.4% within the newest reported quarter, and unsecured private mortgage NPAs jumped from 4.5% to six.3% over the identical interval.
These spikes pushed AU’s total gross NPA from 1.67% in Q4FY24 to 2.3% by December 2024.
Slippages have eroded margins
Larger slippages have pushed up credit score prices.
In AU’s microfinance portfolio, credit score prices stood at 5.41% for the 9 months ended December 2024, up from 3.08% in H1FY25. In the meantime, credit score prices in its bank card enterprise have worsened relative to the {industry}. Whereas the {industry} common hovers at 6-7%, AU’s bank card credit score prices climbed from 8.35% to 9.2%.
Though unsecured loans account for under about 12% of AU’s gross advances, the sharp rise of their credit score prices has disproportionately impacted profitability. Almost half of the financial institution’s total credit score value, which jumped from a traditionally tight vary of 20-60 foundation factors to 1.4% in Q3FY25, may be attributed to unsecured loans.
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Individually, AU’s NIM had already been underneath strain attributable to rising rates of interest affecting its largely fixed-rate mortgage guide. Whereas its aggressive deposit-growth technique—registering a 34% CAGR between FY21 and FY24—improved its credit-deposit ratio from 96% to 84%, it additional strained margins.
The Fincare acquisition in Q1FY25 supplied a short lived reprieve, boosting AU’s high-yielding belongings and moderating the credit-deposit ratio to 89%. Nonetheless, renewed stress in unsecured lending has since triggered NIM to say no once more, dragging AU’s return on belongings (ROA) in Q3FY25 to its lowest degree because the pandemic.
RBI’s crackdown has damage progress
After a number of months spent attempting to sensitize lenders in opposition to the continuing credit score binge, the Reserve Financial institution of India (RBI) in November 2023 raised danger weights on unsecured retail loans and loans to non-banking monetary firms (NBFCs) by 25 share factors. The transfer tightened capital necessities, successfully slowing credit score progress.
AU’s microfinance portfolio has contracted by 10% in FY25 to date, whereas new bank card issuances have declined 9% sequentially. In consequence, total credit score progress has decelerated from 46% in FY24 to roughly 20% in FY25. Reflecting these challenges, AU’s administration just lately revised its FY25 credit score progress steerage downward to twenty% from 25%.
Higher positioned to resist the stress
Regardless of these setbacks, AU’s various buyer base and geographical unfold have helped cushion the impression of retail lending stress.
Distinctive debtors make up 39% of its buyer base—larger than friends—whereas no single state accounts for greater than 12% of its microfinance guide, and no district exceeds 3%. Moreover, about 20% of its microfinance portfolio is roofed underneath the Credit score Assure Fund for Micro Items (CGFMU).
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As for unsecured retail loans, which whole round ₹4,000 crore, ₹1,000 crore comes from private loans that align with {industry} requirements. The remaining ₹3,000 crore in bank card loans, nonetheless, has seen larger delinquencies and credit score prices.
To deal with this, AU carried out corrective measures in Q3 to enhance the credit score high quality of its bank card portfolio. The financial institution has shifted to income-documented underwriting, lowered publicity on current playing cards and new issuances, halted digital card issuance, and strengthened each day transaction monitoring to stop fund misuse. Notably, whereas industry-wide overleveraging has contributed to emphasize, solely 8% of AU’s debtors are related to greater than 5 lenders.
AU additionally follows a stringent provisioning course of, totally writing off microfinance and bank card loans overdue by greater than six months, nicely past the RBI-mandated 25% provisioning requirement. This minimizes the danger of hidden stress on its books.
Moreover, the financial institution has considerably expanded its assortment group, from 600 workers in June 2024 to about 1,500 in December 2024, bettering assortment effectivity. Whereas Q4FY25 should still see elevated stress, recoveries are anticipated to enhance in FY26, resulting in moderating credit score prices and higher margins.
Common financial institution ambitions and macro tailwinds
AU’s software for a common banking licence stays a key potential catalyst. If authorized, it may improve model credibility, enhance deposit mobilization, and decrease funding prices. Nonetheless, whereas the RBI has shaped an exterior advisory committee to evaluation purposes, the timeline and final result stay unsure.
On the macroeconomic entrance, the RBI’s current coverage choices have supplied a welcome aid. Earlier this week, the central financial institution reversed the hike in danger weights on microfinance and NBFC lending, providing a lifeline to microfinance lenders. In response, AU’s inventory gained about 6% on Thursday, even because the broader Nifty 50 index remained flat.
Moreover, the RBI initiated financial easing earlier this month, delivering its first fee minimize after two years of elevated charges. Given that almost two-thirds of AU’s belongings are fixed-rate, this coverage shift is ready to enhance its margins over the subsequent yr.
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Whereas AU faces near-term challenges, the mix of regulatory tailwinds, a diversified portfolio, and proactive danger administration means that its long-term progress story stays intact.
Ananya Roy is the founding father of Credibull Capital, a SEBI-registered funding adviser. X: @ananyaroycfa
Disclosure: The writer doesn’t straight maintain any shares of the businesses mentioned. The views expressed are for informational functions solely and shouldn’t be thought of funding recommendation. Readers are inspired to conduct their very own analysis and seek the advice of a monetary skilled earlier than making any funding choices.
