BS BFSI Insight Summit: SFBs' MFI stress set to ease in 2-3 quarters

The stress in the microfinance portfolios of small finance banks (SFBs) is likely to ease in the coming months, with the sector likely to be ‘out of the woods’ in the next two to three quarters, chiefs of two such lenders said on Wednesday.

 

They were speaking at a session on “Are SFBs ready to convert to universal banks?”, moderated by Subrata Panda of Business Standard.

 

Inderjit Camotra, managing director (MD) and chief executive officer (CEO) of Unity SFB, said the microfinance industry and self-regulatory organisations (SROs) had recognised about 18 months ago that multiple loans were being extended to the same woman (at times up to five to seven loans), much beyond her repayment capacity.

 

“It took the microfinance industry a few quarters to recognise that we have actually done this too hard,” said Camotra. “When the SROs met, we decided not to lend more than three loans to the same woman and not more than ₹1.75 lakh in total outgo. This norm has been adhered to in the last 12-15 months. While the old book has many loans to be repaid, there is a new book with newer underwriting standards, which is more sensible,” Camotra said.

 

Camotra noted that more than 99 per cent of microfinance borrowers are women, and most remain keen to repay. “As time goes by, the old book keeps shrinking, and the problem keeps becoming smaller and the new book keeps growing, giving healthy results. Now is the inflection point of going away from bad times to the decent times (but not yet the good times). In another one or two quarters, I’d say we’ll be out of the woods,” he added. 

 

R Baskar Babu, MD & CEO of Suryoday SFB, agreed, saying the industry had gone through a “very deep” learning phase. “It’s a good time, and we are going to be out of the woods,” he said.

 

“We need to create a model where the customer trusts us, and we have to get them the right policy for, let’s say, life insurance, and create a relationship. We have to work on both sides of the customer’s requirements,” Babu said.

 

While SFBs have grown rapidly over the past few years, their microfinance portfolios have affected asset quality. The MFI segment’s gross non-performing assets (GNPAs) rose to 6.8 per cent in FY25, from 3.2 per cent in FY24.

 

In June 2025, the Reserve Bank of India (RBI) lowered the priority-sector lending (PSL) target for SFBs to 60 per cent from 75 per cent of Adjusted Net Bank Credit (ANBC) or Credit Equivalent of Off-Balance Sheet Exposures (CEOBE), whichever is higher.

 

This move is likely to free up capital and accelerate diversification of SFBs beyond microfinance. Already, the share of MFI loans in SFBs’ total advances has declined to 24 per cent in FY25 from 35 per cent in FY22.

 

According to the panellists, SFBs are trying to diversify their product offerings -- from lending against property in smaller towns to gold loans where idle gold lying with families is converted into working capital for small businesses. Some are also introducing credit-builder cards for those without a credit history. Students, for example, could use such cards to access small credit lines for upskilling.

 

“SFBs may be ‘small’ in name, but not in size,” said Camotra. Together, the 11 SFBs handle around 35 million active customers. Considering an average household size of four, SFBs touch around 140 million people, he said.

 

“We uplift the family from a cycle of poverty to something steady. We release them from the trap of money-lending at a village level. While the rate of interest may seem high, it’s half of what it would have been had they taken from local moneylenders,” he added.