Asset quality stress in the microfinance (MFI) sector has doubled in the April to September 2024 period, with loans due more than 31 to 180 days rising to 4.30% at the end of September 2024 versus 2.15% at the end of March 2024, the Financial Stability Report showed. Borrower indebtedness rose sharply, with the share of borrowers availing loans from four or more lenders increased from 3.6% in September 2021 to 5.8% at the end of September 2024.
“Among borrowers who had availed loans from multiple lenders and those with higher credit exposure, impairment remained high,” RBI noted.
With the rise in stress credit to the microfinance sector by banks, microfinance NBFCs and other non-banks financial institutions decelerated after witnessing rapid growth during the last three years. RBI data showed that, credit to the microfinance sector grew by 24.4% between June 2021 and March 2024. During the same period the number of borrowers grew by 11%. Microfinance NBFCs had the biggest share in lending growth at 33.5%.
The quarterly average ticket size of microfinance loans disbursal has rose by 43% between September 2021 and September 2024. during this period the average loan size grew from Rs 35,299 to Rs 50,430.
As credit to the microfinance sector surged in the post-pandemic period, a few non-bank lenders were found charging exceedingly high interest rates, which invoked supervisory actions by the Reserve Bank in October 2024.
The microfinance and fintech industries have been grappling with the issue of customers having more than four loans with a total outstanding of more than Rs 2 lakh.
Banks are also de-risking themselves from micro finance loans by restricting book growth. Another way banks are eliminating risk is by moving away from the young millennial population which is considered to be the largest culprit in maxing out credit cards and not repaying them.
“Our customer level indebtedness reduced 6% sequentially with average loan exposure per customer at Rs.39,685, amongst the lowest in the industry,” Sumant Kathpalia, MD, IndusInd Bank had said in the recent post earnings analyst call.
The stress due to overleveraging along with the slowdown in the rural household incomes, has prompted an increase in delinquency that could play out over the next two to three quarters.
““Growth in excess of 20% has resulted in over-leveraging and this segment is very vulnerable. When MFI slips you don’t recover much and I don’t think MFI is a book that banks can stomach well,” said Suresh Ganapathy, managing director, financial sector research, Macquarie Capital.
The RBI has highlighted its apprehensions around a few outliers who charge usurious interest rates along with unreasonably high processing fees and frivolous penalties.
