Microfin business shrinks 4% in a quarter as defaults double in a year

MUMBAI: The microfinance industry shrank in Q2 FY25 as delinquency rates on their loans, where instalments are overdue by 30 to 180 days, jumped to 4.3 per cent in September 2024 from 2 per cent a year ago. Besides shrinking their portfolio, lenders brought down the number of borrowers with multiple loans - the category with the maximum number of defaults.

The microfinance portfolio stood at Rs 4.1 lakh crore as of September, registering a quarter-on-quarter decline of 4.3 per cent compared to June and a year-on-year growth of 7.6 per cent . According to the CRIF Microlend report, which reviews small-ticket loans at the end of Q2 FY25, portfolio exposure to borrowers with three or more active lender associations has decreased, and the proportion of such borrowers has fallen across different states.

Given the stress in the industry, MFIs - in a meeting with M Nagaraju, secretary of the Department of Financial Services, on Wednesday - sought a credit guarantee scheme tailored for MFIs and borrowers, a special fund for operations in the Northeast, and relaxation in qualifying asset norms to diversify risks.

Representatives of large MFIs and industry bodies MFIN and Sa-Dhan attended the meeting. Nagaraju emphasised the need for MFIs to adopt robust financial practices and strengthen their viability to serve rural communities better. He urged institutions to promote digital repayment methods while enhancing cybersecurity and IT infrastructure. Stressing governance improvements, he called for a roadmap to reinforce the sector.

He also acknowledged the role of MFIs in supporting rural livelihoods and financial inclusion. "The efforts of MFIs in transforming rural lives are valued, and it is essential to build on this momentum to create a more resilient sector," Nagaraju said.

The microfinance sector has seen a significant rise in delinquencies across all categories of non-performing loans. Bihar, Tamil Nadu, Uttar Pradesh, and Odisha accounted for 62 per cent of the incremental delinquencies. Small finance banks were the worst affected lender category, reporting the highest proportion of loans overdue by 31 to 180 days. NBFCs and banks maintained their dominance in the market, holding a combined 71.3 per cent share of the portfolio.

Delinquencies continued to rise across all bands during Q2 FY25, spiking across all ticket sizes and lender types, especially in the top 10 states. The PAR (portfolio at risk) for loans overdue by 31 to 180 days was higher for SFBs (5.4 per cent ) compared to other major lenders. However, NBFCs reported the lowest PAR 31-180 (2.3 per cent ) as of September 2024.

Source: THE TIMES OF INDIA, 09th January, Mumbai