Rural households have increasingly prioritised essential expenses and secured loan repayments over microfinance obligations in recent months, contributing to rising defaults. However, executives are optimistic about an improvement in the sector’s performance in the next fiscal year.
“Post-Covid, job losses and income disruptions significantly impacted borrowers. While liquidity remained abundant, wage growth has lagged, and high food inflation has forced rural households to focus on purchasing essentials and repaying secured loans like home and gold loans over microfinance,” said Sadaf Sayeed, CEO of Muthoot Microfin. “Leverage has risen due to factors such as political events, weather disturbances, and over-lending.”
Asset Quality Deterioration and Regulatory Actions
The microfinance sector has experienced a sharp decline in asset quality during the first half of the fiscal year, driven by issues such as heatwaves, prolonged general elections, and customer overleveraging. Gross non-performing assets (NPA) in the sector reached an 18-month high of 11.6% at the end of September.Adding to the challenges, the Reserve Bank of India (RBI) recently barred two NBFC-MFIs from conducting fresh business due to excessive interest spreads and violations of regulatory guidelines on household income assessment and monthly repayment obligations.
“Overlapping loans to the same customer have further increased leverage across the industry,” said Vineet Chattree, managing director at Svatantra Microfin.
R. Bhaskar Babu, CEO of Suryoday Small Finance Bank, pointed out that significant events like demonetisation in 2016 and the Covid-19 pandemic in 2020 were pivotal in triggering defaults. “The asset book showed signs of stabilisation in September-October, but recovery will be slow. Traditional methods like group meetings are less effective now, and companies must devise unique solutions,” Babu said.
Industry Response and Adjustments
The sector has begun taking corrective measures, with Sayeed noting that the industry has reduced its outstanding loan book by ₹40,000 crore. Additionally, the Microfinance Institutions Network (MFIN), a self-regulatory body, has urged its members to stop lending to customers with overdue loans exceeding ₹3,000 for more than 60 days, tightening the previous norm of 90 days.
