Microfinance Industry Shrinks Amid Rising Delinquencies

The microfinance industry experienced a contraction in Q2 FY25, with delinquency rates on loans overdue by 30 to 180 days surging to 4.3% in September 2024 from 2% the previous year. This has led to a decrease in the microfinance portfolio, which stood at Rs 4.1 lakh crore as of September, marking a quarter-on-quarter decline of 4.3% and a year-on-year growth of 7.6%.

Efforts to Stabilize the Sector

In response to the industry's stress, MFIs have sought a credit guarantee scheme tailored for MFIs and borrowers, a special fund for operations in the Northeast, and relaxation in qualifying asset norms to diversify risks. During a meeting with M Nagaraju, secretary of the Department of Financial Services, representatives of large MFIs and industry bodies emphasized the need for robust financial practices and digital repayment methods to enhance the sector's resilience.

Impact Across Regions and Lenders

Delinquencies have risen significantly across all categories of non-performing loans, with Bihar, Tamil Nadu, Uttar Pradesh, and Odisha accounting for 62% of the incremental delinquencies. Small finance banks were the most affected, reporting the highest proportion of loans overdue by 31 to 180 days. Despite these challenges, NBFCs and banks continue to dominate the market, holding a combined 71.3% share of the portfolio.