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Informist, Wednesday, Jul. 2, 2025

 

NEW DELHI - India's microfinance sector will continue to face headwinds in the first half of 2025-26 (Apr-Mar), led by the impact of the implementation of the three-lender norm from Apr. 1, India Ratings and Research Wednesday said. A crackdown by a few state governments on collections by unregulated entities will also add to the stress for the sector, the rating agency said.

 

"The MFI (microfinance) sector is likely to see a return to normalcy only in 2HFY26," Karan Gupta, director and head - financial institutions at India Ratings said in a release. Microfinance institutions have also been impacted by the rising operating expenses and structural weakening of the Joint Liability Group lending model, India Ratings said.

 

The Microfinance Institutions Network, the sector's self-regulatory body, has set a rule from Apr. 1, where borrower's access is limited to a maximum of three lenders. The Karnataka government has brought an ordinance, penalising unregulated microfinance institutions and lenders for coercive loan recovery practices. A similar bill was also passed by the Tamil Nadu legislative assembly in April.

 

According to India Ratings, the recently issued ordinances have created repayment ambiguities. Challenges arising from the ordinance in Karnataka and bill in Tamil Nadu would also alter the sector's return profile in the medium term and lead to higher operating expenses, India Ratings said. "Lenders thus have tweaked their business models to factor even non-MFI loans exposure in the borrower's leverage, thereby impacting net additions of new customers."

 

The microfinance sector has been under stress for some time now. According to data from the Reserve Bank of India, credit to the sector decreased by 13.9% in FY25. Total active borrowers also fell by 4 million in FY25, the central bank said in its Financial Stability Report released Monday. Bank credit to the sector, which forms 48.3% of total credit outstanding to the sector, contracted 13.8% in FY25, the RBI said.  End

 

Reported by Shubham Rana

Edited by Vandana Hingorani

 

 

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