In conversation with Sadaf Sayeed, CEO, Muthoot Microfin Ltd

How would the financial performance in H1FY26 be assessed, what were the primary factors weighing on profitability, and which growth drivers will shape the company’s trajectory over the next 2-3 years?

H1FY26 reflects a positive inflection in our business performance, with operational challenges gradually subsiding and overall activity returning towards normalcy. We witnessed steady normalisation across geographies, supported by improved customer cash flows, strong on-ground demand, and tighter credit discipline. Profitability was restored in Q1 and further strengthened in Q2, indicating improving operating momentum as the year progressed.

From a profitability perspective, near-term pressures in the early part of the year were primarily driven by prudent credit provisioning and higher operating expenses, as we invested in strengthening collections, risk systems, and branch infrastructure. These initiatives resulted in an opex ratio of 6.9 per cent in H1FY26. However, with investments now completed, H2FY26 is expected to benefit from operating leverage as the portfolio scales up. This will lead to a gradual normalisation of the opex ratio to 6.0-6.2 per cent by FY26.

More importantly, these investments have reinforced the business foundation, which is already reflected in improved operational performance, including stronger collections and enhanced asset quality during H1FY26.

Disbursement activity has also picked up, with total disbursements of Rs 4,049 crore, driven by a clear focus on existing customers, thereby supporting portfolio quality. Collections strengthened materially, with X-bucket collection efficiency at 99.8 per cent as of September 2025, alongside a significant improvement in overdue collections. These trends have collectively resulted in a visible improvement in asset quality.

Looking ahead, growth over the next 2-3 years will be driven by multiple structural levers. First, product diversification: with the easing of RBI regulations, we have begun diversifying our loan book by introducing Individual Loans, Gold Loans, and Micro LAP. As of October 2025, our Individual Loan book stands at Rs 460 crore with a pristine portfolio quality. The Gold Loan and Micro LAP books are currently small, as disbursements commenced only in September. We expect these segments to scale up gradually under disciplined risk management frameworks.

Second, geographical expansion and diversification: over the past year, we have expanded into Andhra Pradesh, Telangana, and Assam. We now operate 1,718 branches nationwide. Going forward, we intend to maintain a balanced geographic mix of approximately 50 per cent South and 50 per cent rest of India, which helps diversify risk and support sustainable growth.

Finally, we have executed PTC transactions at more competitive rates. The ongoing rate-cut transmission is expected to reduce our borrowing costs further. In addition, we have increased our lending rates, which will contribute to an improvement in margins. As a result of these measures, we expect our NIMs to be in the range of 12.4-12.7 per cent, supporting sustainable profitability going forward.

Overall, while H1FY26 marked a transition phase, the company is now well positioned for profitable and sustainable growth, supported by improving asset quality, diversified products, geographic balance, and a strengthening customer franchise.

How has asset quality performed, and what steps are being taken to keep GNPA and PAR levels under control?

Asset quality has shown steady and visible improvement, and we are confident of maintaining tight control over GNPA and PAR levels going forward.

The most important indicator for us is credit cost, which is on a clear downward trajectory. Credit cost has reduced sharply from 9.4 per cent in March 2025 to 3.6 per cent in September 2025, which is well below our earlier guided range of 4-6 per cent. Based on current portfolio behaviour and collection trends, we expect to remain at the lower end of this band, and potentially below it, over the coming quarters.

At Muthoot, each branch has a dedicated Credit Officer, and the underwriting process is fully independent of the sourcing team. This independence has been further strengthened, with Credit Officers reporting directly to the central credit head, ensuring objectivity, consistency, and strong risk oversight. This structure mitigates conflicts of interest and reinforces disciplined credit decision-making.

Collections performance has also strengthened materially. Our X-bucket collection efficiency stood at 99.8 per cent as of September 2025, with a similar trend continuing into October, reflecting a focused and effective collection strategy. Stage-3 assets have declined from 4.85 per cent in March 2025 to 4.61 per cent in September 2025, driven by a combination of calibrated write-offs and improved recoveries. Importantly, fresh accretion into NPAs remains under control, highlighting the stronger quality of recent disbursements.

Overall, with tighter credit filters, enhanced risk analytics, strong underwriting governance, and disciplined collections, we believe asset quality will continue to stabilise and improve, keeping GNPA and PAR at comfortable and manageable levels.

With recoveries showing a marked improvement, which measures were most effective in driving this performance?

The improvement in recoveries during H1FY26 was driven by a combination of stronger internal controls, more effective collection execution, improved portfolio quality, and a supportive macroeconomic environment. Together, these factors helped establish a more disciplined and responsive operating framework.

At an operational level, collections were a key priority, and this has translated into measurable outcomes. Collection efficiency improved from 90.7 per cent in Q4FY25 to 93.3 per cent in Q2FY26, driven by tighter monitoring, better field execution, and improved follow-up mechanisms. We also saw meaningful improvement in tele-calling effectiveness, with higher Promise-to-Pay (PTP) generation and better conversion rates, indicating stronger customer engagement and follow-through.

Overdue collections improved sharply. During the last quarter, we collected Rs 57 crore from overdue accounts, translating to approximately Rs 19 crore per month, compared to around Rs 6 crore per month earlier. This significant step-up in recoveries has directly contributed to improving asset quality metrics.

Portfolio quality initiatives also played an important role. We consciously increased our focus on disbursements to existing customers, with 61 per cent of disbursements to repeat customers and 39 per cent to new-to-Muthoot customers. This shift towards customers with established repayment behaviour helped reduce incremental stress and supported recovery performance.

In addition, strengthening the customer franchise remains a key strategic focus. We are prioritising customer retention and exclusivity, ensuring that customers unique to us continue to remain within our ecosystem. As a result, the unique customer ratio has increased to around 39 per cent, reflecting stronger customer stickiness and improved portfolio quality.

Finally, macroeconomic conditions have also been supportive, with steady normalisation across geographies driven by a strong rabi crop and healthy monsoons. Moderating inflation and improved rural cash flows have enhanced borrowers’ repayment capacity, reflected in better portfolio behaviour and collection trends.

Overall, stronger internal execution, focused collection strategies, an improved customer mix, and a supportive rural macro environment have driven the marked improvement in recoveries. These trends are expected to continue into H2FY26, supporting further asset quality normalisation.

In what ways is the company integrating technology, and how is digital adoption helping streamline operations, onboarding processes, and collections?

Over the past year, we have made focused investments in strengthening our front-end and digital capabilities, with technology playing a central role across onboarding, underwriting, customer engagement, and collections.

On the onboarding and risk management side, we have received the Aadhaar-based eKYC licence, enabling us to conduct fully digital KYC for customers. This has significantly improved the speed and efficiency of onboarding, while also strengthening customer identification, fraud prevention, and risk filtration, resulting in better-quality customer acquisition.

In parallel, we have implemented an in-house credit scorecard developed by our risk management team, replacing the earlier bureau-based model. The new scorecard has demonstrated a much stronger correlation with actual portfolio performance, enabling more accurate underwriting decisions, better customer segmentation, and lower underwriting costs, thereby improving overall operating efficiency.

Further, we are strengthening the credit appraisal process, whereby we are partnering with a GenAI-based technology provider. Under this initiative, interactions between field officers and customers will be recorded, with voice data converted into text and translated from vernacular languages into English. This information will be automatically structured into a Credit Appraisal Memo (CAM), enhancing consistency, documentation quality, and credit decision-making while significantly improving our turnaround time in approvals.

Digital adoption at the customer level has also gained strong traction. Of the 34 lakh customers we currently serve, around 18 lakh have downloaded the Muthoot Mahila Mitra app. This has translated into tangible business outcomes, with digital collections now accounting for approximately 25 per cent of total collections, reflecting improved repayment behaviour, higher convenience, and growing customer comfort with digital channels.

From a collections perspective, technology-enabled segmentation has allowed us to deploy dedicated collection teams for DPD customers, enabling sharper focus and better recovery outcomes. This structured approach has further strengthened collection efficiency and asset quality.

Additionally, the company holds an IRDA Corporate Agent licence, which allows us to directly distribute tailored insurance products to our customers. This not only enhances customer protection and engagement but also deepens the overall relationship while supporting cross-sell opportunities in a compliant and technology-enabled manner.

Overall, technology is being leveraged as a strategic enabler, streamlining onboarding, strengthening underwriting and collections, improving customer engagement, and building a scalable and efficient operating platform for future growth.

How have RBI regulations on microfinance influenced the lending model and pricing strategy, and what further regulatory changes are needed to support sustainable growth in the sector?

Regulatory measures have played a constructive role in strengthening discipline and long-term sustainability within the microfinance sector, even though they necessitated near-term adjustments to operating models.

To address the risk of over-indebtedness, the revised regulatory framework has introduced stricter lending norms, capping a borrower’s exposure to a maximum of three lenders. In line with this, Muthoot’s exposure to borrowers with Muthoot plus four lenders has declined sharply, from 8.2 per cent in December 2024 to 3.2 per cent in September 2025, reflecting improved portfolio discipline.

These regulatory changes have prompted lenders to recalibrate underwriting standards, sharpen credit filters, and increase focus on existing and repeat customers with proven repayment behaviour. While this resulted in some moderation in growth during the initial phase of implementation, it has materially improved portfolio quality and reduced incremental stress.

Further, the recent RBI relaxation in qualifying asset norms has enabled microfinance lenders to diversify their loan portfolios, thereby improving credit risk dispersion and reducing over-reliance on traditional JLG lending.

Looking ahead, certain regulatory refinements could further support sustainable sector growth, particularly a continued push towards digital enablement. Wider adoption of eKYC, digital repayments, and consent-based data-sharing frameworks would help lower operating costs, improve efficiency, and enhance risk management across the ecosystem.

Overall, while RBI regulations have required structural adjustments, they have significantly strengthened the foundation of the microfinance sector. With incremental refinements focused on clarity, data availability, and digital adoption, the regulatory framework can further enable responsible and sustainable growth.

What is your outlook for the microfinance industry in 2026 amid rising consumption, rural income recovery, and evolving credit behaviour?

The outlook for the microfinance industry in 2026 is cautiously optimistic, supported by improving macroeconomic conditions, strengthening rural incomes, and a structural shift towards more disciplined and diversified lending models.

As we move into H2FY26 and beyond, macroeconomic conditions remain supportive. Steady normalisation across geographies and healthy monsoons has improved agricultural output and rural cash flows. Moderating inflation has further enhanced borrowers’ purchasing power and repayment capacity. These factors are already reflected in improving portfolio behaviour and collection trends across the sector.

At an industry level, there is a visible evolution in lending models. The sector is gradually moving from a predominantly Joint Group Lending (JLG) model towards Individual Lending, supported by better customer data, credit assessment tools, and maturing borrower profiles. In parallel, lenders are increasingly adopting secured and semi-secured products, such as gold loans and Micro LAP, which help diversify risk and improve portfolio resilience.

Regulatory measures have also played a constructive role. The lender-plus-three framework has helped address over-indebtedness by limiting excessive borrower leverage, while encouraging lenders to focus on responsible growth. Alongside this, lenders have strengthened underwriting standards, tightened credit filters, and increased emphasis on repayment capacity and customer quality, leading to more sustainable portfolio growth.

Overall, 2026 is likely to be a year of healthier, more balanced growth for the microfinance sector, characterised by improving asset quality, better risk management, diversified product offerings, and more mature credit behaviour among borrowers. While growth may be more calibrated than in earlier cycles, it is expected to be far more sustainable and resilient, supported by favourable rural fundamentals and a stronger regulatory framework.