Microfinance defaults stay elevated in Q4FY25, says India Ratings

Improvement in delinquencies expected from the second half of FY26, says India Ratings report

Delinquencies in microfinance loans likely stayed elevated in the just concluded March quarter on the back of Karnataka government’s ordinance cracking down on unsecured lending and other challenges, said a report on Thursday.

 

Collection efficiency will likely be affected and sustained improvement in delinquencies is expected from the second half of the financial year (H2 FY26), according to India Ratings. The agency maintained a deteriorating sector outlook for non-banking financial companies (NBFC) and a stable rating outlook for microfinance institutions (MFIs) in FY26.

 

“In the near term, we will continue to watch out for the impact of forward flows on the Karnataka portfolio resulting from the ordinance, the implementation of the three-lender norm from 1 April 2025,” said Karan Gupta, senior director, financial institutions, India Ratings.

 

Delinquencies for NBFCs working as MFIs continued to increase in Q3 FY25) across buckets. Defaults in 90 plus days past due (DPD) —the number of days a loan payment is overdue — increased to 3.5 per cent from 2.8 per cent in Q2 FY25 and 1.8 per cent in Q1 FY25. Delinquencies increased in the 60 plus DPD bucket as well: to 5.6 per cent in Q3 FY25 from 3.9 per cent in Q2 and 2.6 per cent in Q1 FY25. 

 

Growth and disbursements further in Q3 FY25 and are expected to have been sluggish in Q4 FY25. Profitability was affected in Q3 FY25, and most NBFC-MFIs’ net losses widened during the quarter amid a significant increase in credit costs and operating expenses as entities increased their collection efforts, said India Ratings.

 

Despite capital impairments due to losses, the leverage of NBFC-MFIs was supported by a decline in disbursements. Such lenders maintained adequate liquidity to cover the next two to three months of scheduled debt repayment obligations.

 

Annualised credit costs of NBFC-MFIs increased to 13.5 per cent in Q3 FY25 from 9.9 per cent in Q2 and 4.5 per cent in Q1 to provide for higher delinquencies across buckets.

 

For full FY25, the agency expects credit costs to be at 9.6 per cent, which is likely to come down to around 4.0 per cent in FY26, with improving delinquency trends from H2 FY26. The agency will track predicted severe heat waves across northern and western and the progress of monsoon rains.