2025-04-30T00:00:00Z

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Kolkata: The microfinance landscape in India is grappling with a worsening crisis, as recent data reveals a staggering rise in delinquency rates among borrowers. The gross non-performing asset (NPA) ratio for the microfinance sector has soared to 16% by the end of the fiscal year 2025, a sharp increase from 8.8% in the previous year. This alarming trend indicates that many borrowers are struggling to meet their loan obligations, threatening the stability of a sector that primarily serves low-income households.

According to information from a credit bureau, in absolute terms, NPAs have escalated dramatically, climbing to 61,000 crore at the end of March from 38,000 crore just a year earlier. This suggests a deteriorating financial environment for microfinance institutions (MFIs), prompting lenders to tighten their lending policies significantly. Over the past year, the sector's cumulative gross loan portfolio has contracted by approximately 7%, as financial institutions are increasingly cautious in response to the rising tide of loan defaults.

Among the various segments of microfinance lenders, the small finance banks have been particularly hard-hit, with a sticky loan ratio of 22%. This means that 22% of the total 59,817 crore in microfinance loans extended by these banks have turned bad. Universal banks have also faced their share of challenges, reporting a 17.5% bad loan ratio against their 1.24 lakh crore exposure in microfinance loans. The data paints a troubling picture of the overall health of the microfinance sector, which has traditionally been a lifeline for many low-income families.

Shweta Daptardar, vice president of diversified financials at Elara Securities, expressed concerns about the future of the sector. The recovery is still at a distance. We may see certain green shoots only by the end of FY26. The asset quality stress may prolong for another two to three quarters, she stated, highlighting the ongoing difficulties faced by both lenders and borrowers as they navigate this turbulent financial environment.

For the non-banking finance company-microfinance institutions (NBFC-MFIs), the bad loan ratio stood at 12.3%, while other non-banking financial companies reported a slightly higher ratio of 12.8%. This persistent issue of high delinquency rates has prompted states like Tamil Nadu to consider regulating microfinance operations more strictly. Observers in the sector have noted that such regulations could inadvertently lead to an increase in delinquency rates, similar to what occurred in Karnataka when it enacted a regulatory law in late February. Daptardar noted, The Tamil Nadu Ordinance will exacerbate the challenge further. The Karnataka market took about two months to settle down after the enactment of the microfinance regulation law. Like in Karnataka, the Tamil Nadu bill is also targeted at unregulated entities but it would destabilize the market for some time.

The financial distress in this sector has resulted in considerable losses for investors, with companies like Fusion Finance and Spandana Sphoorty Financial seeing their share prices plummet by around 66-68% over the past year. CreditAccess Grameen, recognized as the largest NBFC-MFI in the country, has experienced a 23% drop in its market value. Even established banks like IDFC Bank have not been immune, witnessing an 18% decline in stock prices largely due to the stress in their unsecured loan portfolios.

Microfinance institutions play a crucial role in providing collateral-free loans to low-income households, particularly benefiting women, who are often the primary borrowers. These institutions used to leverage joint liability groups (JLGs) of women to provide a form of intangible collateral, enabling them to extend loans to otherwise unsecured borrowers. However, with rising delinquency rates and tightening regulations, the future of microfinance in India appears increasingly uncertain.