Microfinance Loan Stress Eases, But Growth Remains Sluggish

The microfinance sector is seeing a reduction in loan stress, with portfolio at risk ratios improving as repayments increase, notably loans overdue up to six months falling to 6% from 8.1%. This improvement is attributed to regulatory actions and improved lender discipline after a period of high delinquencies driven by exuberant lending by Non-Banking Financial Companies (NBFCs) in FY22-23.

Despite better repayment trends, write-offs remain high at around 15%, hindering profitability. Banks, which had largely exited the market or focused on larger loans, also show high write-offs (17.3% including overdue over six months).

Overall loan portfolio growth has contracted by 22% year-on-year as lenders, especially banks, remain conservative. NBFCs are cautiously increasing loan originations on a sequential basis, but year-on-year declines persist.

Borrower indebtedness has decreased, with fewer borrowers holding loans from multiple lenders. Analysts predict that significant growth in microfinance lending is unlikely before fiscal year 2027, with funding resources remaining tight.

Impact: This news significantly impacts NBFCs and banks involved in microfinance lending. Improved asset quality is positive for their financial health, but slow growth will cap immediate profit recovery and valuation upside. Investor sentiment towards the sector may remain cautious until consistent growth and reduced write-offs are observed. Impact Rating: 7/10.

Difficult terms: Portfolio at risk ratios: Measures the proportion of loans in a portfolio that are likely to default or have already defaulted. Delinquencies: Loans where the borrower has failed to make payments on time. Write-offs: Loans that a lender has determined are unrecoverable and has removed from its balance sheet as a bad debt. Evergreening of loans: A fraudulent practice where a lender issues new loans to borrowers to help them repay existing loans, creating a false impression of repayment. Gross loan portfolio: The total amount of money lent out by a financial institution before deducting any provisions for loan losses. Loan originations: The process of creating new loans, from application to disbursement. Covenants: Conditions or restrictions set by lenders in loan agreements that borrowers must adhere to. Disbursals: The act of paying out money, typically in the context of loans. Sequential basis: Comparing a period to the immediately preceding period (e.g., Q2 vs. Q1).