Microfinance sector recorded surge in NPAs to Rs. 50000 crore
Microfinance sector in India recorded non-performing assets (NPAs) of Rs. 50,000 crore at the end of December, 2024. The NPAs of the microfinance sector is about 13 percent of the gross credits. Despite the efforts of RBI to mitigate risk by lowering capital allocation requirements for risky unsecured loans, the NPAs of the microfinance sector hit an all-time high record of Rs. 50,000 crore.
Hike in portfolio at risk (PAR)
The portfolio at risk which could convert into NPA surged to 3.2 percent of the total credit. It was only 1 percent last year. Overall scenario of the microfinance loan portfolio indicates serious concerns about the credit discipline prevailing in the sector.
Cautious Approach
In the midst of a hike in NPAs and the portfolio at risk in the microfinance segment, industry leaders in the market are looking at the future with a careful approach. Managing director of IndusInd Bank, Sumant Kathpalia said that the bank continues to have a prudent approach in terms of the microfinance segment. He stated that the bank’s customer base is indicating early signs of stability and it will be highlighted in the first quarter of the financial year 2026. Though, there is a probability of a rise in slippages in the upcoming quarter of the financial year 2025.
Total share of NPA in microfinance segment
According to the information of Crif High Mark, the total proportion of NPAs, which are due for more than 90 days in the microfinance segment, is about 13 percent. The total credit not paid for about 91 to 180 days accounts to 3.3 percent of the total loans. Also, the loans not paid for more than 180 days are recorded at 9.7 percent of the total loans.
The information does not include the data for the previous six months. It is likely for NPAs of the microfinance sector to hike to 14 percent of total loans or Rs. 56,000 crore, if the previous six months’ data is added to it.
Performance of microfinance sector
In the past three quarters of the financial year, the microfinance sector in India recorded contraction in growth. Even though lenders tried to clean up their financial records by writing off bad assets. Another reason for this subdued performance is giving too many credits to low-income borrowers in order to achieve high growth quickly. It led to further expansion in defaults in the microfinance sector.
Microfinance credit is generally given to women from low-income households with income less than Rs. 3 lakh on yearly basis. These loans usually do not have any collateral leading to becoming risky in terms of economic issues.
Effect on Financial institutions and banks
The hike in NPAs in the microfinance sector indicates high risk for banks largely operating in unsecured lending segments. Though, every unsecured credit does not come in the microfinance sector. Some of the banks with large unsecured loans and currently facing high pressure in the loan segment are IDFC First, RBL Bank, Bandhan Bank, and IndusInd Bank. In the past, Bandhan Bank was a microfinance institution which later changed into a universal bank. At the present times, the bank has about Rs. 56,120 crore of unsecured loan portfolio and 7.3 percent of these unsecured loans are NPAs at the end of December, 2024.
Recently RBI took the decision to lower capital requirement on micro loans given to MFIs to about 75 percent, which was earlier 125 percent. It aided in releasing more capital for creditors to lend and expand their businesses. The unsecured loans offered for the purpose of consumption remain at 100 percent of capital requirement.
Major Concerns of small finance banks and NBFCs
Due to the rising NPAs and potential risk of NPAs in microfinance lending, small finance banks like Utkarsh and ESAF recorded net losses in the third quarter. Small finance banks like Ujjivan, Equitas, Jana, and Suryoday recorded contraction in net profits by about 64 percent, 67 percent, 18 percent, and 42 percent on YoY basis, respectively, in the third quarter.
In terms of NPAs in microfinance loans in universal banks is recorded to be around 15.7 percent. On the other hand, total NPAs in microfinance loans in small finance banks stood at 18.3 percent.
NBFC-MFIs like Spandana and Fusion broke their financial agreement due to recording quarterly losses in a row. The main reasons for these losses were expansion in the number of bad loans and hike in funding costs.
In the past, the microfinance sector acted as a main driver for financial inclusion in the economy. It is now facing serious concerns as lenders are unable to balance both asset quality and growth of the finance institutions.
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