India’s microfinance sector faces significant challenges as rising borrower indebtedness, regulatory interventions, and operational inefficiencies weigh on asset quality and growth, according to a report by CareEdge Ratings. High levels of borrower debt, increased delinquency rates, and a weakened Joint Liability Group (JLG) model are driving an adverse operating environment, expected to slow the sector’s growth to around 4% for FY25 from double-digit growth in prior years.
In the first half of FY25, the microfinance segment saw a marked increase in delinquencies, which CareEdge Ratings projects to persist. This uptick is linked to growing borrower indebtedness due to multiple loans and increased ticket sizes, now up by 27% over the last three years. Notably, major states like Bihar, Uttar Pradesh, Rajasthan, and Madhya Pradesh experienced sharp rises in 30+ day overdue accounts, with further increases anticipated in the second half of FY25.
Additionally, the JLG model, which relies on peer pressure to ensure repayments, is weakening due to declining center attendance and reduced collective accountability among borrowers. This deterioration in the JLG model, combined with rising borrower defaults, is straining asset quality and impacting the profitability of non-bank financial company microfinance institutions (NBFC-MFIs).
Regulatory scrutiny has intensified as the Reserve Bank of India (RBI) issued ‘cease and desist’ orders to some NBFC-MFIs, preventing them from issuing new loans due to issues like predatory pricing, inadequate transparency, and flawed assessments of borrower income. The report also noted the issue of some borrowers holding multiple fake voter IDs, often marked as new-to-credit (NTC), which has further undermined the sector’s lending integrity.
The RBI has additionally cautioned against ‘loan netting,’ a practice where MFIs reschedule loans to avoid recognizing delinquencies, potentially masking the true extent of non-performing assets.
Declining profit margins
Amid regulatory and operational pressures, profitability metrics for NBFC-MFIs are expected to decline sharply in FY25. CareEdge Ratings projects a fall in return on total assets (RoTA) to approximately 0.4% from 4.3% in FY24, driven by increased credit costs—forecasted to rise to 6%—and compressed net interest margins (NIMs) due to reduced yields. Higher operating expenses, estimated to climb to 5.9% this year, further add to the cost pressures as institutions grapple with a smaller denominator and slower growth.
Despite challenges, banks have remained a critical funding source for MFIs, with over 60% of the segment’s on-book funding sourced from the banking sector. However, rising delinquencies and intensified regulatory scrutiny have prompted banks to adopt a more cautious approach toward lending to smaller MFIs, potentially impacting the latter’s funding stability. Any decline in bank lending or investment support could significantly hinder growth in a sector reliant on external capital.
Additional factors, including high attrition rates among field staff and disruptions from socio-political movements like the “Karja Mukti Abhiyan,” are adding operational hurdles, the report said. The increase in natural disasters and localized issues like heatwaves and election-related disruptions has further contributed to repayment difficulties among borrowers.
Leave a Reply