The pressure on the portfolios of Indian microfinance lenders (loan giving institutions) is increasing again. Rural incomes are at risk due to price pressures and weak monsoon, increasing the risk of default in the industry's $35 billion loan book. Geeta Chugh, Financial Institutions Sector Lead at S&P Global Ratings, said in an interview with Bloomberg that loan growth could slow down due to a weak monsoon. There is a reason for this also. Lenders are tightening underwriting standards and borrowers' ability to repay their loans is declining. He estimated that about 20 percent of microfinance borrowers have taken loans from more than two lenders. He said that in this segment, the default rate (delinquency rate) is seen to be much higher as compared to the borrowers associated with lesser lenders.
Bandhan Bank Limited and non-bank companies like CreditAccess Grameen Limited, Satin Creditcare Network Limited and Muthoot Microfin Limited have considerable exposure in this sector. At the end of March, the share of loans from microfinance and micro-lending sector in the total loan book of Bandhan Bank was 23 percent. The microfinance sector was under pressure for the last two years. The rapid credit expansion left many borrowers burdened with debt, leading to increased defaults and lenders having to tighten underwriting standards. However, the situation is now beginning to stabilize as lenders have implemented safeguards following industry body guidelines to reduce the debt burden of borrowers and limit overall portfolio risk.
According to the Central Bank report, after seven consecutive quarters of decline, outstanding microfinance credit increased in January-March, which supported the share prices of companies. Now this recovery faces new risks. After witnessing the driest June in 12 years, India is expected to receive below normal rainfall in July – the main month of the monsoon season. Low rainfall adversely affects crop production and agricultural income, reducing the ability of rural households to spend and repay loans. Additionally, rising prices of fuel, fertilizers and food items due to conflict in the Middle East could lead to inflation, putting further pressure on low-income borrowers.
Chugh said about 80 per cent of microfinance lenders' exposure is in rural areas, with 35 per cent of loans directly linked to agriculture, 9 per cent to agro-based enterprises and 20 per cent to animal husbandry. The Central Bank, in its report released in June, said that although credit quality has improved in most sectors, the improvement in the agriculture sector was slow and the highest number of non-performing loans (NPLs) were seen there. Chugh said the impact of the Middle East crisis and weak monsoon are both macro-level challenges that will increase inflation and lenders will remain cautious about the sector. If inflation continues, it could further reduce borrowers' ability to repay their loans and further increase these risks.
