Micro lenders turn to secured loans to negate asset quality pressures

Microfinance lenders are expanding into secured products such as gold, mortgage and MSME loans as RBI's revised norms and asset quality pressures push them to diversify portfolios

Microfinance institutions (MFIs), which face asset quality headwinds time and again mainly due to external shocks, are diversifying their loan book by focussing more on secured products like gold and mortgage. The move comes after the Reserve Bank of India (RBI) relaxed the minimum qualifying asset (QA) requirement for MFIs to 60 per cent of total assets from the earlier 75 per cent.

 

Data compiled from October-December quarter numbers shows MFIs like CreditAccess Grameen, Satin Creditcare, and Spandana Sphoorthy have cut down their micro loan book significantly this year.

 

These lenders are increasingly expanding into segments such as micro, small, and medium enterprise (MSME) loans, loan against property (LAP), affordable housing finance, and vehicle loans to diversify their portfolio.

   

“The RBI norm on change in QA criteria for microfinance entities to 60 per cent is welcome. It gives us an opportunity to create a secured lending business from a portfolio diversification perspective,” said Manoj Kumar Nambiar, managing director (MD), Arohan Financial Services Ltd.

 

“We are exploring secured loan products like gold, home improvement, vehicle and LAP, and will launch at least one next financial year," Nambiar added.

 

Industry players said that apart from regulatory changes in terms of lowering QA criteria, the sociopolitical environment in several states has been a key factor behind diversification. 

 

Microfinance lenders operate extensively in states such as West Bengal, Tamil Nadu, Bihar, Assam, and Karnataka among others, where the governments introduced legislations to regulate MFIs and check coercive collection practises.

 

The diversification trend is likely to gain momentum as the microfinance sector matures, Satin CreditCare Network MD H P Singh said in the investor call for the third quarter of financial year 2025-26 (Q3FY26).

 

“Growth in MFI assets under management (AUM) is expected to be around 10-15 per cent, whereas subsidiaries (Satin Housing Finance and Satin Finserv) have grown 40-50 per cent and will continue to grow at the same numbers. We are growing our subsidiaries pretty strongly. So, for us, I think, 10-15 per cent growth in the microfinance space is probably very cautious and very good,” Singh said.

 

Recently, the Bihar government passed a legislation on MFIs aimed at tightening oversight of these lenders, and protecting borrowers from coercive recovery practices. Previously, Karnataka and Tamil Nadu had also passed laws along similar lines.

 

Additionally, the microfinance sector faced stress due to borrower over-indebtedness, and regional disruptions. Since microfinance loans are typically unsecured and concentrated among similar borrower groups, lenders face higher risks as repayment trends weaken, experts said.

 

“As we operate in unsecured segments, we have to charge a higher rate of interest... But continuous hiccups in the form of legislation, and climate issues (floods, etc.) have led MFIs to render structurally lower growth and lower profitability,” said a senior executive at a leading non-banking financial company (NBFC)-MFI.

 

While microfinance will remain the core business for most NBFC-MFIs, the share of such loans in total portfolios is gradually declining, industry players said.

 

“We had indicated in our medium-term goal that the growth rate of microfinance would be lingering in the early teens, and the rest of the growth will come from retail. We are also seeing that retail is actually outperforming our guidance a little bit. It's possible that retail will have a little more share than what we anticipated in the growth trajectory,” said Ganesh Narayanan, chief executive officer (CEO) & MD of CreditAccess Grameen, in the investor call for Q3FY26.

 

Diversification into secured and semi-secured segments is expected to improve balance-sheet stability, expand customer relationships, and reduce vulnerability to political or economic disruptions in the microfinance sector, said industry experts.