Microfinance credit quality dips in FY25; NPAs rise to ₹55,000 crore

Microfinance sector sees worsening credit metrics in FY25 with PAR 31-180 and NPAs rising sharply amid disbursal decline and external disruptions, says MFIN

The asset quality of the microfinance portfolio, measured by Portfolio at Risk (PAR) 31–180, deteriorated to 6.2 per cent at the end of Q4FY25, compared to 2 per cent at the end of Q4FY24. Loan disbursals also dropped to ₹1.12 trillion in FY25 from ₹1.50 trillion, according to the Microfinance Industry Network (MFIN). The credit quality decline was attributed to multiple factors such as heatwaves, external incitement, overleveraging concerns, and the Karnataka regulatory issue.

 

Non-performing assets (NPAs) in the microfinance sector rose to nearly ₹55,000 crore—equivalent to 14.8 per cent of gross loans—by March 2025. The portfolio segment that could turn into NPAs, i.e., PAR 91–180, worsened to 3.5 per cent at the end of March 2025, up from 0.9 per cent a year earlier. However, PAR above 180 days declined to 11.3 per cent from 7.9 per cent.

 

The gross loan portfolio (GLP) of microfinance institutions (MFIs) fell to ₹3.75 trillion at the end of March 2025, down from ₹4.24 trillion a year ago. This decline occurred amid the introduction of stronger guardrails by self-regulatory organisations in response to overleveraging concerns. However, the average loan amount disbursed per account rose 12.3 per cent year-on-year in FY25 to ₹50,131.

 

Alok Misra, CEO and Director of MFIN, observed, “FY25 has been a tough year, with multiple factors—heatwave, external incitement, concerns on overleveraging, the Karnataka issue—affecting credit quality. As a consequence, funding to the sector also shrank. Credit costs rose, and GLP fell. However, with the adoption of MFIN-issued guardrails, credit quality is improving. PAR 1–90 for the industry stood at 4.22 per cent as of 31 March 2025.” 

 

Mandates issued by the governments of Tamil Nadu and Karnataka, aimed at curbing coercive loan recovery practices by MFI lenders, also affected collection efficiency.

 

In its press release, MFIN stated, “In terms of geographical coverage, the East, Northeast, and South regions comprise 62.7 per cent of the total microfinance portfolio. Portfolio quality, as measured by PAR 31–180, was 6.3 per cent compared to 2.2 per cent at the end of Q4FY24. The current outlook is positive in terms of improving credit quality, liquidity infusion by the RBI into the banking system, and relaxation of qualifying asset norms for NBFC-MFIs.”

 

On Friday, the Reserve Bank of India (RBI) relaxed the qualifying asset criteria for Non-Banking Financial Companies (NBFCs) to be classified as Microfinance Institutions (MFIs). Under the revised norms, they are required to maintain at least 60 per cent of their assets in microfinance loans, down from the earlier 75 per cent.