Mumbai: The share of stressed loans has risen in the microfinance portfolios of Indian lenders across ticket sizes, adding to concerns about the sector.
Lons that were 31-180 days past due (dpd) rose from 2.15% of the microlending book in March to 4.30% in September, according to the Reserve Bank of India’s latest Financial Stability Report.
In the first half of FY25, impairment among borrowers who had availed loans from multiple lenders and those with higher credit exposure remained high, reflecting the rise in borrower indebtedness, the report said.
The share of borrowers availing loans from four or more lenders increased from 3.6% to 5.8% in the three years through September. The quarterly average ticket size of microfinance loans disbursed during the second quarter ended September rose 43% on-year to ₹50,430.
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“A comparison across select Indian states indicates that indebtedness levels are unevenly distributed, with some regions exceeding the overall average," the report said.
In the quarter ended June, asset quality of the 30-180 dpd loans deteriorated across all the top 10 states that account for 83.7% of the microfinance sector’s assets, according to CRIF Highmark’s quarterly ‘MicroLend’ report for the first quarter released in October.
The maximum portfolio deterioration was seen in Kerala, Tamil Nadu, Orissa and Rajasthan, with a 0.7-1.4% rise in loan delinquencies from the previous quarter. Bihar, which has the highest market share at 15.1%, saw asset quality worsen by 0.5% on-quarter, whereas for other states among the top 10, it was in the range of 0.1-0.6%.
As a result of the rising stress, credit to the microfinance sector by banks, small finance lenders, microfinance institutions (MFIs) and other non-bank financial services companies (NBFCs) lenders decelerated in FY25 so far after witnessing rapid growth in the last three years, according to the Financial Stability Report.
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The microfinance sector grew 24.4% by assets between June 2021 and March 2024 and 11.0% by the number of borrowers. Lending by NBFC-MFIs and other non-bank lenders rose 33.5% and 33.4%, respectively, during the period.
There has been a significant slowdown in microfinance growth in FY25 amid mounting asset quality concerns, rating firm ICRA Ltd said in its 5 December report. This is likely to result in subdued disbursements and a sharp moderation in NBFC-MFIs' asset growth to 0- 5% in FY25 from 29% in FY24.
"The sector is facing challenges stemming from borrower over-leveraging, socio-political disruptions, and operational challenges, largely related to employee attrition," it said. “Further, the sharp increase in the overall overdue book in H1 25 poses significant downside risks to the near-term loan quality of the sector."
It pegged overall credit cost for the sector at 5.4-5.6% in FY25, much higher than 2.2% in FY24.
The slowdown has also likely been led by supervisory actions invoked by RBI in October 2024 after it found that select NBFC-MFIs and other NBFCs were charging exceedingly high interest rates, leading to elevated yield on advances for NBFC-MFI loans, the report said.
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In July 2024, self-regulatory organization ‘Sa-Dhan’ said it had introduced guardrails for responsible lending, to strengthen lending practices and address concerns regarding the overleveraging of borrowers. In August, the other SRO, Microfinance Institutions Network (MFIN), too, said it took proactive steps, and 10 members had reduced their lending rates by up to 150 bps.
Both the entities further tightened their guidelines in November following the RBI action. The revised guidelines include strengthening the credit process, capping borrowers’ total indebtedness at ₹2 lakh for both unsecured retail and microfinance loans, and reduction in the maximum number of microfinance lenders per borrower to three from four.
"While these guidelines are expected to improve credit safeguards, business volumes are expected to be negatively impacted in the near term," ICRA said, adding borrower rejection rates are projected to increase significantly as over 20% of them are seen impacted by the new guardrails. The agency has a ‘negative’ outlook on the sector due to the "significant near-term headwinds on growth, asset quality and profitability".