India's Microfinance Sector Shows Tentative Recovery Amidst Lingering Challenges

India's microfinance sector is making cautious progress towards recovery after facing significant credit stress, heavy write-offs, and policy reforms over the past two years. The September quarter saw improvements, with bad loan ratios (delinquency) moderating and loan collections picking up, attributed to a return of borrower discipline.

Despite these positive signs, profitability remains under pressure, and significant growth is still some way off. This is largely due to an uneven recovery across different states and among various lenders.

Bandhan Bank reported a steady improvement in its microfinance portfolio, particularly in its key eastern markets. Its 30-day-plus delinquency ratio is now 3.8%, below the industry average of 5.1%, and 90-day-plus delinquencies have improved to 2.04%. However, Bandhan Bank is prioritizing growth in its non-microfinance and secured lending segments to reduce concentration risk and build a more robust loan book.

IDFC First Bank anticipates stress in its microfinance loan portfolio to stabilize within the next six months. Gross slippages in its MFI book fell sequentially, but the reduction in its MFI business significantly impacted its income, though stabilization and growth are expected in the latter half of the fiscal year.

Large write-offs have become a norm for cleaning up legacy stress. CreditAccess Grameen, a major NBFC-MFI, reported substantial write-offs in the second quarter to address loans overdue for more than 180 days. While portfolio at risk (PAR) suggests delinquencies have stabilized, experts note that reduced days-past-due (DPD) doesn't automatically translate to profitability, and credit costs might rise.

Policy reforms introduced in April, such as capping lenders per borrower and restricting total indebtedness, have helped reduce over-leveraging but also slowed down fresh lending. Growth will remain constrained until old loans are cleared and borrowers fall within the new caps.

External factors like erratic monsoon patterns, leading to floods and droughts in various regions, have added stress for rural borrowers by damaging crops and disrupting income streams. Upcoming elections, particularly in Bihar (a key microfinance market), raise concerns about potential political interference or debt waivers, though major players believe past disruptions are unlikely to repeat.

Overall, analysts expect a slow and gradual journey back to normalcy, with FY26 and FY27 possibly showing minimal growth or remaining flat as the sector consolidates.

Impact: This news directly impacts the Indian financial sector, particularly banks and Non-Banking Financial Companies (NBFCs) involved in microfinance. It signals a potential shift in risk assessment and lending strategies within these institutions, affecting their profitability and growth prospects. The recovery pace of the microfinance sector also has broader economic implications for financial inclusion and rural development in India. Rating: 8/10

Difficult Terms Explained: Delinquency Ratio: A measure of how many borrowers are behind on their loan payments. A lower ratio indicates better loan repayment behavior. Write-offs: When a lender officially removes a debt from its books because it is deemed uncollectible. This is done to clean up balance sheets. Portfolio at Risk (PAR): The value of loans that are overdue or are likely to become overdue, indicating potential credit losses. Non-Performing Assets (NPAs): Loans where the borrower has failed to make interest or principal payments for a specified period (usually 90 days). Days-Past-Due (DPD): The number of days a loan payment is overdue. A lower DPD indicates a healthier loan portfolio. NBFC-MFI: Non-Banking Financial Company - Microfinance Institution. These are financial institutions that provide small loans to low-income individuals and small businesses. Concentration Risk: The risk that arises from having too much exposure to a single borrower, industry, or geographic region. Secured Loans: Loans that are backed by collateral, such as property or vehicles, reducing the lender's risk if the borrower defaults. Gross Slippages: The amount of loans that have moved from standard categories to doubtful or loss categories within a given period.