Microfinance loan performance needs close monitoring, RBI cautions NBFCs

The RBI has flagged rising stress in microfinance loans, urging NBFCs to balance growth with sound practices, even as overall asset quality in the sector improved

While the asset quality of the overall non-banking finance sector (NBFC) improved at the end of March 2025, NBFC–microfinance institutions (MFIs) saw a deterioration, and the Reserve Bank of India (RBI) has cautioned that going forward the performance of microfinance loans needs to be closely monitored.

 

Why has the RBI cautioned on microfinance loan performance?

 

Additionally, the RBI stressed that NBFCs should continue diversifying their funding sources and balance their growth aspirations with sound and fair practices to ensure inclusive growth and financial stability. They also need to be vigilant about emerging technological and cyber challenges, besides promptly addressing customer grievances.

 

 

According to RBI data, asset quality at NBFC–microfinance institutions deteriorated, with the gross non-performing assets (GNPA) ratio rising to 4.1 per cent at end-March 2025 from 2.0 per cent a year earlier, while the net non-performing assets (NNPA) ratio increased to 1.2 per cent from 0.6 per cent over the same period.

 

How has stress in the microfinance segment evolved?

 

This deterioration was attributed to underlying stress in the sector and recovery challenges. At end-September 2025, the GNPA and NNPA ratios of the NBFC sector remained at the same levels as at end-March 2025.

 

“For the microfinance sector, the revised regulatory framework, introduced in 2022, by eliminating interest rate caps while introducing standardised rules, led to systemic and sustainable growth of the sector. Additionally, the guardrails introduced by Microfinance Institutions Network (MFIN) and Sa-Dhan helped the sector to grow in a calibrated manner,” the RBI said, adding that going ahead regulated entities need to monitor the build-up of stress in the segment.

 

How did overall NBFC asset quality perform in 2024-25?

 

That said, the asset quality of the sector as a whole showed further improvement in 2024-25. The GNPA ratio declined to 2.9 per cent at end-March 2025 from 3.5 per cent at end-March 2024. The NNPA ratio also followed a downward trajectory, reflecting effective resolution of non-performing assets and adequate provisioning.

 

What does RBI data show on NBFC funding patterns?

 

The RBI also highlighted that although the share of borrowing from banks in total borrowings of NBFCs moderated, it continued to be significant. NBFCs rely mainly on bank borrowings and debentures as their primary sources of funding. The combined share of these sources, however, declined marginally from 74.2 per cent at end-March 2024 to 72.9 per cent at end-September 2025.

 

According to RBI data, 36 per cent of NBFC borrowings came from banks till September 2025, down from 37.2 per cent at end-March 2025. During this period, borrowings through debentures rose to constitute 36 per cent of overall borrowings in September from 35.3 per cent in December.

 

“The share of aggregate borrowings from banks in total borrowings of NBFCs continued to be significant, although it has shown some moderation in recent years,” the RBI said. The central bank, in November 2023, had increased risk weights on bank loans to NBFCs, which, among other objectives, was aimed at reducing NBFCs’ dependence on bank funds and encouraging diversification into other funding sources.

 

How are growth, profitability and capital adequacy trends shaping up?

 

The RBI also noted that NBFCs continued to post strong balance sheet growth, with the sector recording double-digit expansion at end-March 2025, surpassing the pace seen a year earlier. On the asset side, loans and advances grew by 19.4 per cent at end-March 2025, with upper-layer NBFCs reporting faster growth than those in the middle layer.

 

The maturity profile of assets and liabilities also improved. At end-March 2025, more than two-thirds of loans and advances extended by NBFCs, as well as their borrowings, had maturities beyond 12 months, indicating a lower degree of asset-liability mismatch and helping mitigate liquidity stress.

 

However, profitability came under pressure. Total income growth moderated at end-March 2025 due to a slowdown in interest income, largely driven by NBFCs in the middle layer. Expenditure increased during the period, reflecting higher interest costs, increased provisioning for non-performing assets, and write-offs of bad debts. The combination of slower income growth and rising expenses led to a higher cost-to-income ratio and a contraction in net profits.

 

Key performance indicators, including return on assets (RoA), return on equity (RoE) and net interest margin (NIM), also moderated across NBFC layers. Notably, RoA and RoE for NBFC–microfinance institutions turned negative during 2024-25.

 

Despite these pressures, NBFCs remained well capitalised. The capital to risk-weighted assets ratio (CRAR) stood at 25.9 per cent at end-March 2025, significantly above the regulatory minimum of 15 per cent. As a precautionary measure, NBFC-MFIs further strengthened their capital buffers during 2024-25. At end-September 2025, the CRAR of the NBFC sector remained robust at 24.9 per cent.