Fusion Micro Finance Ltd Management Discussions

ECONOMIC OVERVIEW & OUTLOOK

The Indian economy has remained resilient during FY25 amidst ongoing global uncertainties including geopolitical uncertainties and trade tensions. As per the second advanced estimates of National Statistics Office (NSO), the real GDP is estimated to grow by 6.5% in FY 2024-25 while nominal GDP is expected to grow by 9.9% in FY 2024-25.

The countrys relatively more stable growth is supported by private consumption, especially in rural areas, and strong macroeconomic fundamentals. According to NSO data, Private Final Consumption Expenditure (PFCE) is expected to register a growth of 7.6% in 2024-25 as compared to 5.6% during previous year (Source - NSO).Rural economy continued to be strong with rural demand remaining healthy. Rural areas have experienced a notable rise in consumer spending, with per capita expenditure growing by 9.2% in 2025, surpassing the 8.3% growth observed in urban regions.

Indias economy is set to experience buoyancy owing to continued healthy private consumption and improved capital expenditure from the government. Along with these, factors such aspositive momentum in agricultural activity, and continued resilience in services sector among others will also contribute towards stable growth trajectory. However, uncertainties in global trade, strained geopolitical relationships, and volatile global financial conditions continue to cast a shadow.The Reserve Bank of India (RBI) in its April 2025 Monetary Policy Statement has projected the GDP growth to be 6.5% in FY 202526. International Monetary Fund (IMF) projects India to remain the fastest growing large economy in the world in 2026 as well with continued optimism from consumers and businesses regarding the economic outlook (Source - RBI).

INDIAN MICROFINANCE INDUSTRY

The Indian microfinance sector in FY25 navigated a period of consolidation amidst rising operational headwinds and regional disparities. While the sector experienced muted growth compared to previous years, it continued to serve as a critical driver of financial inclusion. Network expansion and targeted digital adoption helped maintain engagement across priority segments, particularly among rural and semi-urban populations.

The sector witnessed divergent growth patterns across regions. The states in the North, West, and South showed

signs of recovery and moderate expansion, while East, Northeast, and Central India largely remained at previous year levels due to localized stress and borrower overleverage. Regulatory refinements, particularly the Digital Lending Guidelines and data protection measures, have begun influencing lending models and risk frameworks across MFIs..

The year was marked by a sharp strategic pivot across the industry towards:

• Customer lifecycle management with focused retention efforts

• Deepening engagement with New to Credit customers

• Deployment of bureau-linked credit filters and score- based underwriting

Despite a challenging year for portfolio quality—with the industry GNPA rising notably—there is optimism that the corrective measures underway, such as digitized collections, centralized underwriting, and agency model overhauls, will begin yielding results in FY26.

A. Opportunities

• Geographic Focus: Continued expansion in underpenet rated states, particularly in southern and central belts

• Score-Based Lending: Deeper integration of bureau scores and alternate data for credit decisioning

• Product Innovation: Launch of customized offerings such as Fusions UJALA product tailored for credit- disciplined customers

• Data-Driven Collections: Use of Propensity Models and flow-rate analytics for enhancing recovery in delinquent buckets

• Governance & Risk Practices: Stronger internal controls, field-level digitization, and real-time tracking frameworks

B. Threats

• Rural Economic Volatility: Persistent income shocks due to climate-linked events or agrarian distress

• Macroeconomic Pressures: Inflationary risks and interest rate cycles affecting borrower repayment behavior

• Sectoral Overlap: Increased customer overlap across lenders leading to higher indebtedness and credit stress

• Rising NPAs: Industry-wide GNPA deterioration poses risks to capital adequacy and provisioning norms

MICROFINANCE INDUSTRY-KEY TAKEAWAYS (AS OF CRIF HIGH MARK MICROLEND REPORT MAR 2025)

The microfinance Gross Loan Portfolio (GLP) stood at Rs 381.2K crore in Mar25, declining 13.9% YoY and 2.6% QoQ as lenders recalibrated strategies to manage stress.

Softening in new originations is also evident, with active loans decreasing from 16.1 Cr in Mar24 to 14.0 Cr in Mar25.

The overall active customer count has seen a reduction, moving from 8.7 Cr to 8.3Cr over the same period, reflecting ongoing industry scenario. Disbursements rose 12.2% QoQ to Rs 71.5K Cr in Mar25, likely influenced by seasonal factors, though the 38.0% YoY decline reflects a continued focus on portfolio quality and discipline.

Loans between Rs 30k- Rs 50k declined by 6.7% QoQ, while those <Rs 30k contracted further by 8.0% QoQ, with steeper YoY reductions. The portfolio share of Rs 30k- Rs 50k loans also dropped by 5.5% YoY. Loans in the Rs 50k- Rs 80k range saw moderate QoQ declines but grew 3.6% in YoY share. Despite a small base, loans above Rs 80k— particularly those over Rs 1L—grew beyond industry trends, indicating a shift toward higher-ticket loans, likely among existing customers.

NBFC-MFIs drove the recovery in disbursements, posting a strong 28.5% QoQ growth, likely reflecting a lending shift or seasonal rebound (JFM quarter), though YoY decline remains steep at 36.3%. Banks recorded modest QoQ growth, but their YoY decline continues to highlight broader industry challenges. (SFBs) saw a 3.9% QoQ drop and a sharp 52.2% YoY contraction, underscoring persistent stress in the segment.

Loans < Rs 30K and Rs 30K- Rs 50K saw moderate QoQ growth yet sharp YoY declines (-57.6% and -50.1%), indicating a shift away from smaller-ticket lending that traditionally supported the JLG model. Rs 50K- Rs 80K loans showed a sharper increase in overall share (YoY basis). Similarly, loans above Rs 1L grew posted the highest QoQ growth (+29.9%), despite a small base, reinforcing the trend toward higher-value lending.

Overall, 11.7% ofborrowers had >3 active lender associations as of Mar25, declining from 12.6% in Dec24. States like Tamil Nadu and Karnataka saw declines in borrowers with multiple lender associations while states like West Bengal and Maharashtra recorded more modest declines (up to 4 lenders) compared to others. Overall, the industry-wide trend indicates consolidation, with a visible moderation in borrowers maintaining multiple credit relationships.

COMPANY OVERVIEW

Fusion Finance is a registered NBFC-MFI which operates on a Joint Liability Group lending model of Grameen. Established in 2010, the Company focuses on reaching out to the underserved and unbanked populace of the country providing financial servicesto rural women. Thus, 100% of its client base comprises womenliving in rural and peri-rural areas. While the Companys core business model is to provide financial support to this segment, disseminating financial literacy & awareness to its customers is an integral part of its core strategy. Adjacent to this initiative is the companys CSR policy which focuses on key activities like Health, Hygiene, Sanitation, Primary Education in catchment areas ofits operations. In 2019, the company introduced MSME loans, focusing on missing middle segment of the MSME sector.

Head quartered in Gurgaon, the Companys operations are spreadacross 22 Indian states including 3 Union Territories and managed by an experienced and enthusiastic workforce.

OPERATIONAL PERFORMANCE

Fusion continued to strengthen its operational backbone in FY25 despite sectoral stress. The Company has its presence across 22 states, reaching a total of 1,571 branches as of March 2025, up from 1,297 a year ago. However, as part of a cautious growth approach, AUM stood at Rs 8,980 crore at the end of FY25 as compared to Rs 11,476 crore in FY24.

The total active clients were 32.1 lakh in FY25 as against 38.6 lakh in FY24. The decline was influenced by tighter underwriting norms (e.g., Fusion+2 cap), guardrails for overleveraged customers, and a deliberate scale-down of disbursements in high-risk geographies. Despite this, the launch of a new credit-disciplined customer product and a 32% share in digital collections showcased operational maturity and adaptability.

FINANCIAL PERFORMANCE

Total income decreased slightly by about 1.80% YoY and stood at Rs 2,369 crore while Net Interest Income reduced by about 0.82% YoY and stood at Rs 1,285 crore in FY25. Net Interest Margin was at 10.21% for FY25 vs 11.22% in FY24. Gross NPA increased to 7.92% in FY25 from 2.89% in FY24. However, with stringent measures implemented during the fiscal year, Gross NPA came down in Q4FY25 from the peak of 12.58% in Q3FY25. Loss After Tax for FY25 stood at Rs 1,224.54 crore. Pre-provision Operating Profit stood at Rs 736.48 crore during the year.

OUTLOOK 2025-26

Looking ahead to FY26, the sector is expected to recalibrate towards profitable and responsible growth, with a strong focus on portfolio quality, customer selection, and digital governance frameworks. Fusions roadmap is aligned with these priorities and includes:

• Strengthening customer segmentation via behavior- based products and targeted underwriting

• Expanding the UJALA product line, which caters to high-discipline borrower cohorts

• Scaling digital channels for collections and servicing, targeting 40%+ digital share

• Continuing process quality rollout across 500 branches and deepening real-time field data support

• Stabilizing the GNPA trajectory through deeper integration of Propensity Scoring, agency performance tracking, and AM-led branch turnaround plans

As the rural economy continues to be a critical pillar of Indias growth narrative, the microfinance sector— especially institutions like Fusion—will play a pivotal role in empowering women entrepreneurs, driving selfemployment, and deepening the reach of formal credit.

INTERNAL CONTROL AND ITS ADEQUACY

The Company believes in maintaining a strong internal control framework and sees such a framework as an essential prerequisite for the growth of business. The Company has well-documented policies, procedures and authorization guidelines in place. Additionally, an efficient independent internal audit system is in place to conduct audit of all branches, regional offices, Corporate Office and the Head Office.

Fusion has internal control systems in place that enables it to monitor performance, strategy, operations, business environment, procedures, funding, risk and internal control.

Internal Audit in the Company is focused on independently reviewing the processes and controls of the organization. It assists the Company in accomplishing its objectives by bringing in a systematic and disciplined approach to evaluate and improve the effectiveness of Companys internal control, risk management and governance processes.

The internal auditors carry out extensive audits throughout the year across all locations penetrating all functional areas and submit their reports to the Audit Committee.

RISKS AND CONCERNS

Risk management is embedded in the Companys operating framework. The Company believes that managing risks helps in maximizing returns, ensuring quality portfolio, process optimization and no surprises.

The Company has integrated risk management practices into governance and operations. Appropriate risk framework i.e., policies, processes, systems and tools have been established to identify, measure, monitor, report and mitigate all the material risks. The Company follows 3 lines of defense approach for managing risks. At the first line of defense are the various Business and Support functions, second line is made of Risk Management and Compliance function, and third line of defense is the Internal Audit function.

Risk Management policies and processes have been designed for periodic review and mitigation of all the material risks faced by organization including credit risk, market risk, operational risk, reputation risk, liquidity risk, technology risk, business and strategic risk, legal and compliance risk. These policies are reviewed annually to ensure that any changes in macro or internal business environment are reflected in the Companys operating framework. The Risk Management Plan forms the basis for implementation of risk management strategies and practices in detail

Risk Management function at Fusion is an enterprisewide independent function backed by a qualified team of specialists with deep industry experience who develop frameworks and methodologies for assessing and mitigating risks. It further provides periodic reports to Management and Board Risk Committee encompassing the risk profile of the Company across various risk areas, enabling the relevant stakeholders to take timely and informed decisions.

HUMAN RESOURCE

At Fusion, our people continue to be our greatest strength and the cornerstone of our long-term strategy. As the industry continues to evolve, so too has the role of Human Resources—shifting from a traditional recruitment function to a critical enabler of engagement, capability development, and workforce retention.

We are steadfast in our commitment to cultivating a value-driven culture anchored in Responsibility, Respect, Transparency, Governance, Collaboration, and Customer Focus. In FY 2024-25, our HR initiatives were directed at empowering employees through robust frameworks, targeted resources, and structured support systems designed to unlock potential across diverse roles and geographies.

Our employee engagement strategy was strengthened through more frequent and meaningful touchpoints, feedback loops, and focused interventions that promote both professional development and personal well-being. We enhanced our talent management practices to prioritize career progression, holistic wellness, and timely

recognition, while embedding agility and consistency across the employee lifecycle. In alignment with our evolving business landscape, we accelerated the use of technology and data-driven insights to enhance HR processes and reinforce operational alignment.

Looking ahead, we will continue to invest in our people, ensuring they have the capabilities, culture, and clarity needed to drive sustainable growth and long-term value creation.

CAUTIONARY STATEMENT

Certain statements made in the Management Discussion and Analysis Report relating to the companys objectives, projections,outlook, expectations, estimates and others may constitute forward looking statements within the meaning of applicable laws and regulations. Actual results may differ from such expectations whether expressed or implied. Several factors could make significant difference to the Companys Operations. These include climatic and economic conditions affecting demand and supply, government regulations, taxation, and natural calamities over which the Company does not have any direct control.

Financial Ratios for FY2024-25 as compared with FY2023-24