Microfinance delinquencies nearly double in aYear: Report

The incremental rise in the 31-180 days PAR category of microfinance institutions stood at Rs 8,117 crore for the quarter ended September, taking the overall incremental rise in PAR to Rs 13,468 crore for the 12 months ended September, according to a CRIF High Mark report. PAR was 4.6 per cent of advances in June 2024.

Bihar, UP, Tamil Nadu, and Odisha accounted for 62 per cent of the incremental delinquency, with Bihar reporting a Rs 1,715 crore rise in delinquency for the three months ended September 2024. Bihar was followed by UP with a rise of Rs 1441 crore in PAR, Tamil Nadu Rs 1,009 crore and Orissa Rs 995 crore, the report said.

Several factors contributed to this decline in portfolio quality. MFIs were lending to over-leveraged borrowers and they taking on too much debt, leading to repayment difficulties. Further debt-waiver campaigns by states and politicians to waive off debts have disrupted the repayment cycle. There was high field-staff attrition with frequent changes in field staff, affecting the quality of loan disbursal and collection.

Elections and extreme weather conditions hindered loan recovery efforts. This rise in delinquencies may push up the credit cost for NBFC-MFIs, potentially impacting the microfinance sector’s growth.

The slowdown in the economy has also contributed to the indebtedness and stress in the microfinance sector. The Reserve Bank of India has set a common household limit of Rs 300,000 for loans to qualify as microfinance. This limit applies to all entities in the microfinance sector.

On the other hand, gross non-performing assets (GNPA) ratio of scheduled commercial banks (SCBs) declined to a 12-year low of 2.6 per cent of advances in September 2024, says the Reserve Bank of India.

India Ratings and Research (Ind-Ra) recently revised the outlook on the microfinance (MFI) sector to deteriorating from neutral, while maintaining a ‘Stable’ rating Outlook for FY26.

The agency says that there are multiple headwinds for the sector such as borrower overleveraging for both MFI loans and non-MFI loans, reduced centre attendance, high attrition at branch levels and instances of frauds, all leading to a higher operating and credit cost for the sector in the medium term.

“Ind-Ra has revised the sector outlook on MFIs to deteriorating from neutral, while maintaining a Stable rating outlook for FY26. Near-term challenges are likely to continue to play out with a recovery expected in 2HFY26. The Stable rating Outlook factors in adequate capitalisation and liquidity buffers and sufficient PPoP (pre-provision operating profit) margins which will help absorb the current asset quality downturn,” said Karan Gupta, Head and Director Financial Institutions, Ind-Ra.

The asset quality challenges faced by the sector and covenant breaches by players could lead to tighter funding from lenders. This could also lead to lenders assessing their incremental disbursements, thereby requiring monitoring of the rollover of the existing debt. This could impact the growth outlook for the sector in the medium term, it said.