Microfinance Sector Delinquencies in India
The microfinance sector in India is currently facing a significant rise in delinquencies, despite the overall banking sector experiencing a 12-year low in non-performing assets (NPAs).
Current Delinquency Statistics
- Microfinance loans to low-income groups have seen the Portfolio at Risk (PAR) — loans overdue by 31-180 days — double to Rs 28,154 crore by September 2024 from Rs 14,617 crore a year ago.
- The delinquency rate in the 31-180 days overdue category increased to 6.8% of the total portfolio of Rs 4.14 lakh crore as of September 2024, up from 3.8% of Rs 3.84 crore in September 2023.
- The incremental rise in PAR was Rs 8,117 crore for the quarter ending September, with a total increase of Rs 13,468 crore for the 12 months ending September, according to the CRIF High Mark report.
- PAR was 4.6% of advances in June 2024.
Geographical Concentration and Contributing Factors
- Bihar, UP, Tamil Nadu, and Odisha accounted for 62% of the incremental delinquency, with Bihar alone seeing a Rs 1,715 crore increase in the three months ending September 2024.
- Key factors for the decline in portfolio quality include over-leverage by borrowers, debt-waiver campaigns, high field-staff attrition, elections, and extreme weather conditions.
Sectoral Impact and RBI Regulations
- Rising delinquencies may increase credit costs for NBFC-MFIs, impacting microfinance sector growth.
- The Reserve Bank of India has set a common household loan limit of Rs 300,000 to qualify as microfinance, applicable to all sector entities.
Outlook and Challenges
- India Ratings and Research (Ind-Ra) revised the microfinance sector outlook to deteriorating from neutral, maintaining a ‘Stable’ rating for FY26.
- Challenges include borrower overleveraging, reduced center attendance, high branch-level attrition, and frauds leading to higher operating and credit costs.
- Ind-Ra expects near-term challenges to continue, with recovery anticipated in the second half of FY26.
- Recent regulatory actions on some entities, concerns about loan pricing, and an increase in risk-weighted assets have heightened lender concerns.