The microfinance industry in India is facing a significant downturn as it enters the second quarter of the fiscal year 2025. A sharp rise in delinquency rates, coupled with a contraction in the portfolio, has put the sector under considerable stress. As of September 2024, delinquency rates have surged to 4.3%, more than doubling from 2% a year earlier, raising alarms among lenders and stakeholders.
Rising Delinquency Rates and Portfolio Contraction
The microfinance portfolio stood at Rs 4.1 lakh crore in September 2024, marking a quarter-on-quarter decline of 4.3% from June, despite a year-on-year growth of 7.6%. The alarming rise in overdue loans reflects increasing financial distress among borrowers.
Key findings from the CRIF Microlend report reveal:
- Borrowers with multiple loans are at higher risk of defaulting, leading lenders to reduce exposure to such categories.
- States like Bihar, Tamil Nadu, Uttar Pradesh, and Odisha have emerged as delinquency hotspots, contributing 62% of incremental defaults.
- Small Finance Banks (SFBs) have borne the brunt, reporting the highest percentage of loans overdue between 31 to 180 days.
While NBFCs and traditional banks hold a dominant market share of 71.3%, the rising delinquency rates across all loan categories highlight the need for robust risk management practices.
Industry Response and Calls for Intervention
In response to the mounting challenges, representatives from leading Microfinance Institutions (MFIs) recently met with M Nagaraju, Secretary of the Department of Financial Services. Key demands included:
1. Tailored Credit Guarantee Scheme: To support both MFIs and borrowers in distress.
2. Special Fund for the Northeast Region: To address unique challenges and facilitate operations in underserved areas.
3. Relaxation of Qualifying Asset Norms: To help MFIs diversify risks and explore alternative lending opportunities.
Nagaraju acknowledged the critical role of MFIs in promoting financial inclusion and emphasized the need for:
- Adoption of sound financial practices to strengthen institutional viability.
- Promotion of digital repayment methods to improve operational efficiency.
- Enhancement of cybersecurity and IT infrastructure to safeguard against risks.
- Creation of a roadmap for resilience, focusing on governance and sustainable growth.
Navigating the Path Forward
The challenges faced by the microfinance sector underscore the need for innovation and adaptation. As delinquencies rise, MFIs must prioritize:
1. Improved Risk Management: Strengthen borrower assessments to tailor lending practices and reduce defaults.
2. Digital Solutions: Invest in technology to streamline repayment processes and enhance accessibility.
3. Operational Resilience: Develop frameworks that ensure sustainable operations even during periods of financial stress.
Collaborative Efforts to Build Stability
Collaboration between industry stakeholders and government bodies will play a crucial role in shaping the future of the sector. Policymakers must craft targeted interventions to address the rising delinquencies while ensuring continued financial inclusion for underserved populations. Through strategic initiatives, technological advancements, and sound governance, the microfinance industry can navigate these turbulent times and lay the foundation for sustained growth and stability.