The microfinance sector is facing significant challenges as overleveraged borrowers are missing timely installments. This situation has forced lenders to slow down new loan sales, resulting in a sharp 24 percent decline in disbursements for the first quarter of the current year, following a 30 percent drop in the previous quarter.
In the June quarter, collections for microfinance institutions (MFIs) fell, leading to higher delinquencies and a slowdown in the growth of assets under management, which grew by just 24 percent in the reporting quarter. This came on top of the 30 percent decline in new loan sales observed in the March quarter, according to a report by India Ratings.
Bihar and Uttar Pradesh (UP) experienced significant growth over the last three to four years, with Bihar becoming the largest MFI market since July 2023. During fiscal years 2022 through 2024, Bihar and UP grew by 30.5 percent and 35.7 percent, respectively, compared to the overall industry growth of 18.1 percent. Tamil Nadu saw growth of 21 percent during this period.
The industry had been performing well since the pandemic, aided by harmonisation guidelines such as the removal of interest rate caps and easy funding from banks, which were also seeking priority sector loans. These factors contributed to substantial loan growth.
“MFIs are facing challenges due to several factors, including heatwave conditions across the country, general elections, and field-level attrition. Additionally, overleveraging in some areas remains a concern, prompting MFIs to take corrective actions that may take one or two quarters to yield full results. Despite this, new loan generation has already fallen by 24 percent in Q1. Seasonal trends may provide some relief in the second half of the year, contributing a higher share of annual business,” the report states.
The report also highlights recent developments, including new regulatory guardrails set by the Microfinance Industry Network, indicating a rising risk of overheating in the sector.
Any slowdown in disbursements could impact asset quality, as borrowers rely on credit for their business activities. Typically, having more than four lenders or active loans per borrower increases delinquencies and necessitates robust risk controls to prevent borrower overleveraging.
States like Bengal, Bihar, UP, Maharashtra, and Odisha are experiencing rising delinquencies, partly due to minimal wage increases. In contrast, Kerala and Tamil Nadu, which have higher wages, are faring better despite high average loan outstanding per borrower. Bengal, while still showing the highest overleveraging, is on a declining trend as MFIs have reduced disbursements in the state over recent years.