Detailed Rationale

Crisil Ratings has downgraded its long-term rating on the bank facilities of Fusion Finance Limited (erstwhile Fusion Microfinance Limited – Fusion) to ‘Crisil A-’ from ‘Crisil A’ and removed it from ‘Rating Watch with Developing Implications’ and assigned a ‘Stable’ outlook. The short-term rating has been reaffirmed at ‘Crisil A1’.

 

The rating action is driven by continued challenges in in the company’s asset quality leading to significant increase in provisioning and consequent losses. Crisil Ratings also notes that the company has increased the provisioning coverage for both gross stage 2 and gross stage 3 advances. This is expected to result in a relatively lower provisioning requirement for the upcoming period. Despite this, the company’s overall earning profile is expected to remain muted over the near term.

The rating also factors in the company’s plan to raise incremental capital of ~Rs 800 crore in the near term. The management has indicated that the company is in advanced stages of filing for rights issue and is seeking requisite approvals for the same. This round of equity infusion has already been factored into the rating considering the timing and quantum of this infusion will be crucial to sustain capitalisation at healthy levels, until profitability restores to normalcy.

 

In Q3 2025, the company reported a loss of Rs 719.3 crore (normalized loss of Rs 380 crore) on account of incremental provisioning of Rs 572.29 crore and a decline in net interest income for the quarter. Owing to this sequential and higher than expected moderation in profitability since Q1 2025, the company’s nine monthly loss for fiscal 2025 was Rs 1060 crore which factored in credit costs of Rs 1615 crore (including Rs 416 crore of write offs).

 

The provisioning requirement surged over 9MFY2025 led by a spike in slippages due to pervading ground level challenges like over-indebtedness and high attrition of field staff since Q1 2025. Incremental provisioning for Q3 2025 was Rs 572.29 crore and includes one off items like reversal of ~Rs 95-98 crore interest accrued for Stage 3 accounts pertaining to Q1 and Q2 FY 25. Beyond this, the company also had a reversal of Rs 280 crore of deferred tax assets during the quarter. Net stage 2 and Net stage 3 stood at 1.4% and 1.7% respectively as on December 31, 2024.

 

In the first quarter of fiscal 2025, the company had identified ~55000 stressed accounts across SMA buckets, which were highly likely to become NPAs in the near term owing to over leveraging at ground level. With incremental slippage over Q2 2025 and Q3 2025, the annualized credit cost increased to 18.3% in 9MFY25 from 3.1% for full fiscal 2024 and 2.2% for the full year prior. This resulted in a nine monthly return on managed assets (RoMA’ annualized) of -12% as against a full year RoMA of 4.3% for full fiscal 2024 and 4.3% for the full year prior. As these ground level challenges are likely to continue over majority of Q4 of fiscal 2025 as well, the company’s asset quality and profitability are expected to remain vulnerable over the near to medium term. The pace and magnitude at which asset quality and overall profitability restore to normalcy, will remain a key monitorable and a rating sensitivity factor.

 

To combat the ground level challenges and increase recoveries, the company has strengthened its collections efforts and implemented stricter disbursement policies. Crisil Ratings notes that the collection efficiency in the current bucket for January 2025 was 97.7% - stable compared to that for the previous month. Also, net roll forwards into PAR 1-30 bucket reduced from 2.94% in October 2024 to 1.03% in January 2025, from PAR 1-30 bucket to PAR 31-60 bucket – net roll forwards have reduced from 60.92% to 41.05% between the respective periods. Beyond this, the provision coverage ratio (PCR) on Stage II assets increased from 59.7% on September 30, 2024, to 72.5% December 31, 2024 whereas that for Stage III assets has increased from 76.2% to 87.9% over the same period, thereby reducing the base of unprovided assets. Hence, the provisioning requirement for the upcoming period is expected to be lower than previous quarters.

 

The company has also calibrated its growth strategy and adapted a cautious disbursement approach. Disbursements for Q3 FY2025 were lower at Rs 1168 crore as against Rs 2713 crore in the corresponding quarter last year. This has led to reduction in overall assets under management (AUM) to Rs 10599 crore as on December 31, 2024 (Rs 11476 crore as on March 31, 2024; Rs 9296 crore as on March 31, 2023; and Rs 6786 crore as on March 31, 2022).

 

Basis the moderation in performance over 9M 2025, the company had breached certain financial covenants (in respect of borrowings amounting to Rs 5,288 crores as at December 31, 2024) resulting in these borrowings becoming repayable on demand. The Company has obtained an extension, albeit of less than 12 months, from testing date for said breaches from lenders whose borrowings as of December 31, 2024 aggregate Rs 4,145 crores. As observed by the auditors in the disclosed financials for Q3 FY25, the company’s ability to continue as a going concern is dependent on obtaining waivers from demand by lenders for immediate repayment of borrowings for a period of at least twelve months from the balance sheet, and/or securing sufficient funds through other sources such as (i) successful sale of loans; (ii) rights issue; (iii) refinancing of borrowings. Any dilution in lender confidence – denoted by call back of debt lines or the company’s inability receive adequate waivers for covenant breaches and/or to raise external funds in the near term, will be a key rating sensitivity factor.

 

Most recently, the ‘Karnataka Micro Loan and Small Loan (Prevention of Coercive Actions) Ordinance, 2025’ has been made effective from February 12, 2025 – with the objective to control coercive collection practices followed by various organisations offering microfinance loans. While the government has clarified that companies registered with RBI (including NBFCs and NBFC-MFIs) are exempted from this ordinance, it would be challenging for the ground level borrowers to differentiate between registered and non-registered companies. Historically, Karnataka has remained one of the better performing states for the sector. Though, given the fluidity around applicability of the ordinance, the collections during Q4 2025 are expected to be subdued. Nonetheless, Fusion’s AUM exposure to Karnataka is only about ~1% thus incremental impact, if any, is not expected to be very material.       

 

The overall credit profile of Fusion, however, remains supported by its established market position with regional diversity in portfolio and adequate capitalisation. These strengths are partially offset by prolonged deterioration in asset quality and profitability due to exposure to borrowers with inherently modest credit profiles and susceptibility to local socio-political issues in the microfinance sector.

 

Fusion is among the top five microfinance institutions (MFIs) in India, with its assets under management (AUM) of Rs 10,599 crore as on December 31, 2024. Over fiscal 2024, AUM had witnessed a growth of 23% year-on-year and stood at Rs 11,476 crore as of March 31, 2024 (Rs 9,296 crore as of March 31, 2023). However, with emergence of ground level challenges, the business witnessed de-growth over 9M 2025 by 7.6%.

Analytical Approach

Crisil Ratings has considered the standalone business and financial risk profiles of Fusion.

Key Rating Drivers & Detailed Description

Strengths:

Established market position and track record with regionally diversified presence

Incorporated in 2010, Fusion has an established track record of operations across business cycles, including landmark challenges such as demonetisation and the Covid-19 pandemic. Fusion’s AUM stood at Rs 10,599 crore as on December 31, 2024, having de-grown from Rs 11,476 crore as of March 31, 2024 (Rs 9,296 crore in March 31, 2023) on account of prevailing challenges in the microfinance sector. Its market position is supported by geographical diversity in the loan portfolio which has increased over time, with highest exposure to a state at 24.5% (Uttar Pradesh) as of December 31, 2024. On the same date, the exposure to the top three states was 54.04% (Uttar Pradesh, Bihar and Odisha) of the overall AUM. The company benefits from its large network of1404 MFI branches and 102 SME branches in over 496 districts across 22 states, with a strong focus on rural and semi-urban areas.

 

In light of recent ground level stress levying pressure on asset quality, the company has stopped disbursements in over 100 branches and has calibrated its growth strategy in certain states which are exhibiting lower collection efficiency. As against Rs 7341 crore disbursed in 9M 2024, the overall disbursements in 9M 2025 dropped to Rs 5,815 crore of which Rs 2987 crore was disbursed in Q1 FY25, Rs 1661 crore in Q2 2025 and a further lower amount of Rs 1168 crore was disbursed in Q3 2025.

 

While the company’s overall market position continues to benefit from its established track record in the microfinance sector, vast geographical presence and sizable outstanding portfolio; a prolonged inability to restore business growth while overcoming asset quality challenges and maintaining it at sound levels, remains critical.

 

Healthy capitalisation

Fusion has maintained healthy capital position backed by steady accretion in the form of incremental capital from investors as well as internal accruals. While networth, at Rs 1806 crore as of December 31, 2024, has declined from Rs 2848 crore as of March 31, 2024 on account of negative accruals over 9M 2025, it still remains adequate in relation to the scale and nature of business. Further, metrics like tier I and overall capital adequacy ratio (CAR) remain comfortable at 20.1% and 22.2%, respectively, on December 31, 2024. Adjacently, with the depletion of networth, gearing inched up marginally to 4.0x as of December 31, 2024 from 3.4x, a quarter ago. The company had a cumulative accretion of Rs 892 crore in the past two fiscals, which has strengthened the capital position, thus providing room for growth and buffer for shock absorption. This cushion will be further bolstered by Rs 800 crore of planned capital infusion and, its timing will remain a key monitorable.

 

Capital position is expected to remain adequate in the near term, benefiting from the incremental round of capital raising planned over the next 1-2 quarters. However, any reduction in the quantum and deferment in timing of infusion, will remain critical. A continued erosion of networth due to losses, adversely impacting the buffer in capitalisation metrics could be a sensitivity factor.

 

Weaknesses:

Prolonged deterioration in asset quality and profitability due to exposure to borrowers with inherently modest credit profiles

A significant portion of the portfolio comprises microfinance loans to clients with below-average credit risk profiles and lack of access to formal credit. Typical borrowers are cattle owners, vegetable vendors, tailors, tea shops, provision stores and small fabrication units. The income flow of these borrowers could be volatile and depends on the local economy — any economic slowdown could lead to potential pressure on cash flow at the household level, thereby restricting repayment capability.

 

After remaining stable for most of fiscal 2024, Fusion’s asset quality deteriorated over 9M 2025 due to emergence of ground level disruptions like over-leveraging of borrowers, prolonged impact of heat waves and elections and heightened attrition at field level. As these issues have aggravated over 9M 2025 – impacting the overall microfinance sector, Fusion’s delinquencies also spiked. As on December 31, 2024, GNPA stood at 12.6% - continuing to sequentially rise from 9.41% on September 30, 2024, 5.46% on June 30, 2024 and 2.89% on March 31, 2024.  With a rise in delinquencies, credit costs also surged to 18.3% (annualised) for nine months ended December 31, 2024 from 3.1% for fiscal 2024 and 2.2% for fiscal 2023 – leading to a loss of Rs 1060 crore for 9MFY25 as against a full year profit of Rs 505 crore, a year earlier.[1]

 

On December 31, 2024, the stock of 30+ dpd was 17.0% as against 4.0% on March 31, 2024. For customers that have loans from Fusion+>=4 lenders, 0+ PAR was 8.8% as on December 31, 2024. Against its cumulative Stage I, II and III assets as on December 31, 2024, the company has an ECL provision cover of ~16% on its on-book portfolio. The company has taken corrective measures to curtail the deterioration of asset quality. This includes steps like strengthening collections team, controlling disbursements in regions exhibiting higher stress. Resulting from these measures, early signs of restoration are visible. Current bucket collection efficiency for January 2025 was 97.7%  as compared to 96.4% October 2024.. Also, net roll forwards into PAR 1-30 bucket reduced from 2.94% in Oct’24 to 1.03% in Jan’25, from PAR 1-30 bucket to PAR 31-60 bucket – net roll forwards have reduced from 60.92% in Oct’24 to 41.05% in Jan’25. Crisil Ratings also notes that Fusion has not sold any portfolio to asset reconstruction companies (ARCs) but has written off Rs 161 crore in Q3 FY25 as against Rs 196 crore in Q2 FY25 and Rs 58 crore in Q1 FY25. Total write offs done in fiscal 2024 were Rs 319 crore. These early signs of restoration in collections and resolution and an increased ECL coverage on stressed assets, is expected to result in a relatively lower provisioning requirement for the upcoming period. As on December 31, 2024, the net stage 3 assets stood at 1.7% , having declined from 2.4%, a quarter ago.

 

While majority of the stressed portfolio has been provided for, incremental slippages will continue over the near term though at a declining rate. Thus, provisioning requirement for incremental slippages to NPA is expected to start reducing by the end of the fiscal. However, in context of increased indebtedness of the identified borrowers and prevailing stress in certain geographies where Fusion has predominant presence, incremental slippages in the near term beyond the identified portfolio, and the impact of provisioning requirement stemming from this – on the overall profitability, will remain a key monitorable.

 

Potential risk from local socio-political issues in the microfinance sector

In the past, the microfinance sector has witnessed various events over the years, including regulatory and legislative challenges that have disrupted operations. Some of these events include the Andhra crisis, demonetisation in 2016, Covid-19, and socio-political issues specific to certain states. These events have adversely affected the sector, elevating delinquencies and hurting the profitability and capitalisation metrics of NBFC-MFIs. These challenges underscore the vulnerability of the microfinance business model to external risks. Covid-19, in particular, introduced new challenges, aggravating existing vulnerabilities in the microfinance sector by heightening credit risks and the likelihood of loan default by borrowers.

 

While the sector has navigated these happenings, it remains susceptible to issues, including local elections, natural calamities, and borrower protests, which may increase delinquencies for a while. MFIs remain vulnerable to socially sensitive factors and the macroeconomic scenario.

[1]This includes deferred tax asset reversal of 280 crore 

Liquidity: Strong

Fusion has a comfortable asset-liability management (ALM) profile, with cumulative positive mismatches across all buckets up to one year as on December 31, 2024. The company had cash and equivalents of Rs 1052 crore as on January 31, 2025 and the unutilised bank lines in term loans stood at 1223 crore as on the same date. Liquidity Cover stood at 2.1 times for 1 month factoring nil collections. In fiscal 2024, the company raised about Rs 8,814 crore through term loans, non-convertible debentures, and direct assignment. Incrementally, they have raised about Rs 4456 crore from April’24 to Dec’24 in form of term loan, external commercial borrowings of Rs 3446 crore and Rs 1010 crore in form of Direct Assignment.

Outlook: Stable
The capital position of the company is expected to benefit from the planned equity raise. Asset quality and earnings profile are expected to remain vulnerable over the near term and gradually restore to normalcy thereafter.

Rating Sensitivity Factors

Upward Factors

• Increase in scale of operations while maintaining asset quality
• Significant and sustained restoration in profitability (RoMA above 2%) while maintaining healthy capitalisation

 

Downward Factors

• Lack of improvement in asset quality or/ and earnings profile.
• Moderation in capital position – evidenced by a decline in tier I capital adequacy ratio to below 18%
• Any material change in the quantum of equity proposed to be raised and/or a significant delay in the timing of this infusion

About the Company

Fusion was incorporated in 1994 as Ambience Fincap Pvt Ltd and later in 2009 was takeover by Mr. Devesh Sachdev and changed name to Fusion Microfinance, now renamed as Fusion Finance. Fusion started operations as a non-deposit-accepting non-banking financial company in 2010 and was converted into an MFI on January 28, 2014. The company provides financial services to poor women and predominantly follows the joint-liability group model, wherein each group has 5-7 members. The loans are provided mainly for agricultural and allied activities, business activities, and establishment and expansion of micro enterprises. As on December 31, 2024, the company had a network of 1404 MFI branches and 102 SME branches in over 496 districts across 22 states, with a strong focus on rural and semi-urban areas.

 

Promoted by Mr Devesh Sachdev, the company has attracted high-pedigree domestic and global investors over the years. After capital infusion in fiscal 2019 and the third quarter of fiscal 2020, Warburg Pincus (through Honey Rose Investment Ltd) acquired a 48.6% stake in Fusion, becoming the largest shareholder. This marked the exit of Belgian Investment Company (Belgian), NMI Frontier (NMI), RIF North II (RIF) and Small Industries Development Bank of India (SIDBI) from the investor group and reduction in the stakes held by Global Financial Inclusion Fund (Global Financial), Creation Investments and Oikocredit. Post the recent IPO, Warburg Pincus remains the majority shareholder along with the exit of Global Financial and Oikocredit

Key Financial Indicators

Particulars as on	Unit	March 2024	March 2023	March 2022
		Actual	Actual	Actual
AUM (IGAAP)	Rs crore	11,476	9,296	6,786
Total income	Rs crore	2,412	1800	1,201
Profit after tax (PAT)	Rs crore	505	387	22
RoMA*	%	4.3	4.3	0.3
GNPA (Stage 3)	%	2.9	3.5	5.7
Adjusted Gearing	Times	3.4	3.3	4.8

*on an annualized basis

 

Particulars as on	Unit	December 2024	December 2023
		Actual	Actual
AUM (IGAAP)	Rs crore	10599	10693
Total income	Rs crore	1893	1737
Profit after tax (PAT)	Rs crore	-1060	373
RoMA*	%	-12.0	4.3
GNPA (Stage 3)	%	12.6	3.0
Adjusted Gearing	Times	4.7	3.3

*on an annualized basis

Any other information: Not Applicable