Kolkata: The size of the microfinance sector has contracted to below Rs 4 lakh crore from its highest level of Rs 4.43 lakh crore seen in March 2024 as lenders slowed loan disbursal with several of them completely stopping acquisition of new-to-credit customers amid rising asset quality stress.
The sector's asset quality may have also worsened as collection efficiency has faltered for several lenders.
Heads of the microfinance lenders however expressed hope that the sector would bounce back but it may take a couple of quarters from now. It is now in the process of healing with guardrails being in place to protect it from further degeneration, they said. The sector contributes 2.03% to the country's GDP and supports 13 million jobs.
The outstanding gross microfinance loan portfolio stood at Rs 3.93 lakh crore at the end of November, according to reports submitted to the finance ministry.
The sector's composite gross loan portfolio and loan disbursal numbers at the end of the December quarter are not available yet but business updates by a clutch of small finance banks showed quarter-on-quarter decline in microfinance portfolio.
Bigger private banks with significant microfinance exposure also turned cautious as their capital allocation against micro loans rose with several of them reportedly raising the risk weightage to 125% from 75% on such loans in July-August last year.
India Ratings and Research last week revised the outlook on the microfinance sector to deteriorating from neutral, while maintaining a stable rating outlook for FY26.
Loan growth will take a backseat unless a consistent improvement in the collection efficiencies is seen, the ratings company said.
For instance, Ujjivan's gross group microloans fell 8.3% to Rs 13,663 crore at the end of December 2024 from Rs 14,892 crore three months prior to this. Utkarsh reported an 8.4% quarter-on-quarter dip in group microloans to Rs 9,737 crore while Equitas reported a 4.7% fall to Rs 5,369 crore. These are according to provisional numbers submitted to stock exchanges. Small finance banks control about 17% of the microfinance sector.
"Near-term challenges are likely to continue to play out with a recovery expected in 2HFY26,” said Karan Gupta, head and director financial institutions, Ind-Ra.
Bandhan Bank, the country's first microfinance lender turned bank, said that its collection efficiency for the December quarter was lower at 97.4% against 98.1% in the preceding quarter. This ratio is without considering the non-performing loan accounts.
The collection efficiency ratio, which is the amount of loan repaid as a percentage of the repayment demand, was 94.8% for Suryoday Small Finance Bank during the December quarter against 98.4% in preceding three-month period.
Lenders such as Spandana Sphoorty Financial and Satin Creditcare Network earlier announced to have stopped on-boarding new-to-credit customers to prevent erosion of portfolio quality.
India Ratings & Research said that while the delay in implementation of the guardrail related to the maximum number of lenders per borrower—to three from earlier four—to April 1, 2025 from January 1, 2025 could help lenders manage delinquencies in the fourth quarter, medium-term asset quality pressure is expected to continue.
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Heads of the microfinance lenders however expressed hope that the sector would bounce back but it may take a couple of quarters from now. It is now in the process of healing with guardrails being in place to protect it from further degeneration, they said. The sector contributes 2.03% to the country's GDP and supports 13 million jobs.
The outstanding gross microfinance loan portfolio stood at Rs 3.93 lakh crore at the end of November, according to reports submitted to the finance ministry.
The sector's composite gross loan portfolio and loan disbursal numbers at the end of the December quarter are not available yet but business updates by a clutch of small finance banks showed quarter-on-quarter decline in microfinance portfolio.
Bigger private banks with significant microfinance exposure also turned cautious as their capital allocation against micro loans rose with several of them reportedly raising the risk weightage to 125% from 75% on such loans in July-August last year.
India Ratings and Research last week revised the outlook on the microfinance sector to deteriorating from neutral, while maintaining a stable rating outlook for FY26.
Loan growth will take a backseat unless a consistent improvement in the collection efficiencies is seen, the ratings company said.
For instance, Ujjivan's gross group microloans fell 8.3% to Rs 13,663 crore at the end of December 2024 from Rs 14,892 crore three months prior to this. Utkarsh reported an 8.4% quarter-on-quarter dip in group microloans to Rs 9,737 crore while Equitas reported a 4.7% fall to Rs 5,369 crore. These are according to provisional numbers submitted to stock exchanges. Small finance banks control about 17% of the microfinance sector.
"Near-term challenges are likely to continue to play out with a recovery expected in 2HFY26,” said Karan Gupta, head and director financial institutions, Ind-Ra.
Bandhan Bank, the country's first microfinance lender turned bank, said that its collection efficiency for the December quarter was lower at 97.4% against 98.1% in the preceding quarter. This ratio is without considering the non-performing loan accounts.
The collection efficiency ratio, which is the amount of loan repaid as a percentage of the repayment demand, was 94.8% for Suryoday Small Finance Bank during the December quarter against 98.4% in preceding three-month period.
Lenders such as Spandana Sphoorty Financial and Satin Creditcare Network earlier announced to have stopped on-boarding new-to-credit customers to prevent erosion of portfolio quality.
India Ratings & Research said that while the delay in implementation of the guardrail related to the maximum number of lenders per borrower—to three from earlier four—to April 1, 2025 from January 1, 2025 could help lenders manage delinquencies in the fourth quarter, medium-term asset quality pressure is expected to continue.
( Originally published on Jan 12, 2025 )
