The Rise in Delinquencies in Microfinance Loans
The microfinance sector, a critical pillar of India’s rural credit system, has been facing a sharp rise in delinquencies. The reasons for this troubling trend are multifaceted, encompassing political events, weather-related disruptions, and excessive lending practices, as highlighted by industry executives during a webinar organized by rating agency ICRA. Despite these challenges, there is cautious optimism that the situation may stabilize in the next fiscal year.
Rural Priorities Shift Amid Economic Strain
In the past few months, rural households have shifted their financial priorities. With food inflation biting into household budgets and wage growth stagnating post-COVID-19, many families have chosen to focus on essentials and repay secured loans such as home and gold loans over microfinance obligations. This trend has significantly impacted the repayment capacity of borrowers in the sector, resulting in rising defaults.
“Post-COVID, people suffered job losses, and incomes were impacted. However, due to ample liquidity, loans were still accessible. Wage growth has yet to catch up, and with high food inflation, rural households are prioritizing essentials,” said Sadaf Sayeed, CEO of Muthoot Microfin Ltd. Over-leverage stemming from multiple factors, including political and weather events as well as excessive lending, has compounded the problem.
Sharp Deterioration in Asset Quality
The microfinance sector’s gross non-performing assets (NPA) surged to an 18-month high of 11.6% at the end of September. Factors like the heatwave, the two-month-long general elections, and overleveraging of customers have strained the sector’s asset quality. Regulatory actions have also played a role. In October, the Reserve Bank of India (RBI) barred two NBFC-MFIs from conducting fresh business, citing violations such as charging excessive interest rates and failing to adequately assess household income and repayment obligations.
Structural Challenges and Overlapping Loans
The issue of overlapping loans to the same customers has further exacerbated the sector’s challenges. Vineet Chattree, Managing Director of Svatantra Microfin Pvt Ltd, pointed out that this practice has increased leverage across the industry, making it difficult for borrowers to keep up with repayments.
Historical disruptions like demonetization in 2016 and the COVID-19 pandemic in 2020 have also acted as trigger points for defaults. R. Bhaskar Babu, CEO of Suryoday Small Finance Bank, noted that these events disrupted the traditional group meeting model for repayments, which had been a cornerstone of microfinance operations. “Each company will now have to find its own solution,” he added, emphasizing the need for innovation and adaptation within the sector.
Steps Toward Recovery
Despite the current headwinds, the industry has begun taking steps to address the crisis. According to Sadaf Sayeed, the microfinance sector has reduced its outstanding loan book by ₹40,000 crore as part of its deleveraging efforts. Additionally, the self-regulatory body Microfinance Institutions Network (MFIN) has tightened its lending norms. Members are now advised to refrain from lending to customers with overdue loans of more than 60 days and outstanding amounts exceeding ₹3,000, compared to the earlier 90-day threshold.
Regional Disparities and Natural Calamities
Regional disparities have also played a significant role in the sector’s struggles. High per capita income states like Kerala, Tamil Nadu, and Karnataka have shown relatively better repayment trends. In contrast, states like Odisha, Jharkhand, and Bihar have been hit hard by natural calamities and other socio-economic issues. However, there are signs of improvement post the Kharif crop harvest, as rural households gain liquidity to address overdue loans.
Balancing Returns and Affordability
Balancing profitability with borrower affordability remains a critical challenge for microfinance institutions (MFIs). Sayeed stated that Muthoot Microfin has set a net interest margin target of 12% to 13%, which aims to ensure sustainable returns for investors while keeping interest rates reasonable for borrowers. This balanced approach is vital for the sector to regain stability and maintain its social impact.
Outlook: Stabilization in Sight?
While the current fiscal year has been challenging, industry experts express cautious optimism for the future. The combination of deleveraging efforts, stricter regulatory compliance, and potential economic recovery post-harvest season provides a glimmer of hope. However, the sector must continue addressing structural issues, such as overleveraging and overlapping loans, to build a more resilient framework.
In conclusion, the rise in delinquencies in microfinance loans underscores the need for a holistic approach that considers borrower affordability, effective regulatory oversight, and sustainable lending practices. As a key driver of financial inclusion, the sector’s recovery is essential not only for rural households but also for the broader economy. Stakeholders must collaborate to ensure that microfinance continues to empower communities while navigating the complexities of a dynamic economic landscape.
The image added is for representation purposes only
