Creditaccess, Fusion Finance: Motilal Oswal bet on recovery-guided growth in microfinance

After a turbulent phase, the microfinance industry is now a gradual path to recovery, supported by operational reforms and structural shifts that promise to strengthen the Fundamentals of the sector in the long term. Although the road to standardization is slower than expected, industry experts believe that the worst credit cycle is lagging behind.

Industry Data Indicates That the Gross Loan Portfolio (GLP) Moderated to ₹ 3.5 Trillion as of June 2025, A Sharp ~ 17% year-on-year contraction from ₹ 4.3 Trillion in March 2024. This recalibration reflects a deliberate slowdowndown Accelerated Write-Offs As Players Sought to Strengthen Balance Sheets and Tighten Underwriting Practices. Payments also fell 26% on an annual basis in the first quarter of FY26, in which the cautious attitude was adopted by lenders.

An important engine of the next growth phase of the sector is the approval of digital insurance, stronger monitoring of borrower lapped and the use of own scorecards powered by Bureau and internal data. These measures are the reform of risk frames and create more resilient portfolios. At the same time, product diversification gains strength, in which lenders expand beyond the loans of the traditional Joint Liability Group (JLG) to uncovered business loans, MSME financing and micro loans against real estate re-developments that are expected to reduce cyclicity and improve operational leverage.

Regional variations continue to influence recovery patterns. Although Karnataka has demonstrated the improvement of the efficiency of the collection earlier this year after regulatory challenges, states as Assam remain sensitive due to the limited repayment capacity of the borrower. Seasonal disturbances such as floods in Punjab and Jharkhand have also temporarily put pressure on collections. Nevertheless, the efficiency in the field of collection on branches lies on an improved process, helped by sharper recovery efforts and recovery, even from depreciation pools.

The financing environment, tense in the past year because of the assessment downgrades and infringements of the covenant, has also been set to improve as profitability. Better access to bank financing and relieving loan costs should support the expansion in the medium term.

In the short term, profitability is expected to be weighed by old stress and increased credit costs, with a more meaningful rebound that is expected from the second half of FY26 in FY27. Furthermore, a stronger paying momentum, moderation of credit costs and portfolio diversification will probably stimulate sustainable growth. With discipline, digital acceptance and a sharper focus on portfolio spring, the microfinance industry is ready to be offered stronger, which offers renewed opportunities in India’s financial inclusion landscape.

Credit access: Buy | Target RS 1660

Creditaccess Grameen has navigated the recent stress cycle with accelerated depreciation, which means that limited residual risks on his book remains. Incremental par is stabilized on ~ 40bp and is expected to fall further from 3QFY26, with collective efficiency that improve in all states.

The costs of funds have fallen to ~ 9.7% and will probably fall to ~ 9.5% towards the end of the year, to support margins. While 2QFY26 will reflect the softness of 1q, a stronger AUM growth, operational leverage and lower credit costs are expected from 2HFY26.

We project FY25–28 AUM/PAT CAGR of ~ 20%/~ 59%, with ROA/roe by 5.1%/20%by FY27. Strong discipline and execution justify Premium valuations.

Fusion Finance: Buy | Target RS 240

Fusion microfinance has carried out a strategic and operational refurbishment, which strengthens credit policy, technology and management. This leads to higher payouts, better collections and a lower course.

Fast insurance technical, district risk filters and stronger recovery have improved activa quality, with current speeds <4% and rising writingbacks. Digital onboarding and pre-approved loans (50-60% of the payouts) increase the efficiency of efficiency and ticket sizes.

With stabilization of operations, Fusion focuses on £ 5-5.5 billion monthly payouts, scales to £ 7-8b by adding FY27 at no cost. The profitability should return from 3QFY26, where ROA/ROE reached 4.3%/14% by FY27E.

((Indemnification: Recommendations, suggestions, views and opinions of experts are their own. These do not represent the views of economic times)