NPLs in microfinance segment to peak by FY26 end: S&P Global Ratings

Tighter lending norms, including those becoming operational from April for microfinance institutions in India, will keep a check on asset quality strain, and the non-performing loan ratio in microloans segment is expected to peak by the financial year 2025-2026 (FY26), global rating agency S&P said on Wednesday.

 

India's poorest borrowers have leveraged up in the past few years in response to easing microfinance rules. Now the sector is tightening up again. Such regulatory fluctuations will remain a core characteristic of this high-risk, high-reward lending niche, S&P Global Ratings said in a statement.

 

The credit boom was compounded by deregulation in the microfinance lending rates in 2022, making it highly lucrative for lenders. Such exuberance led the self-regulatory organisation (SRO) of the industry Microfinance Institutions Network (MFIN) to begin rolling out tighter borrowing rules in August 2024. Lending in the sector has since contracted.

 

A slowdown in lending will also add to asset quality stress. This is because in the microfinance lending boom that followed the pandemic, many borrowers repaid loans to one lender by borrowing from another. This is why the MFIN began capping lenders last August, and will tighten this further starting April.

 

According to Micro Finance Institution Network (MFIN) data, the portfolio at risk - share of loans which are overdue for 30-180 days - shot up to 6.4 per cent in December 2024 from 2.0 per cent in December 2023. The gross loan portfolio in the microfinance segment shrunk by 3.5 per cent year-on-year (Y-o-Y) basis to ~3.85 trillion at end of December on curtailed funding and strict credit underwriting.

 

Tightening regulations and stricter underwriting standards in Indian microfinance will rein in growth plans for sector lenders and defuse risk buildup for overleveraged borrowers. “However, these same trends will weigh on asset quality given many clients rely on new loans to repay old ones.” said Shinoy Varghese, credit analyst, S&P Global Ratings.