Microfinance Portfolio Declines 14% Amid Asset Quality Concerns

The microfinance sector is facing significant challenges, with its loan portfolio shrinking by 14 percent year-on-year, totaling Rs 3.81 lakh crore by the end of the March quarter. A report from Crif High Mark highlights ongoing issues with asset quality, despite a slight improvement in short-term loan delinquencies. The industry, which primarily serves low-income borrowers, is grappling with over-leverage and multiple lending relationships, prompting new measures aimed at stabilizing credit health.

Loan Portfolio Decline

The microfinance sector has experienced a notable contraction in its loan portfolio, which fell to Rs 3.81 lakh crore by the end of March. This represents a 14 percent decrease compared to the previous year. The report by Crif High Mark indicates that while loans overdue by up to 30 days improved slightly from 1.8 percent in December to 1.4 percent in March, other categories of delinquencies are on the rise. This trend underscores the ongoing difficulties lenders face in recovering loans, particularly in a challenging economic environment.

The past year has been particularly tough for the microfinance industry, which focuses on providing small loans to borrowers at the bottom of the economic pyramid. Factors such as over-leverage among borrowers and the prevalence of multiple lending relationships have contributed to the deterioration of asset quality. In response, the industry has implemented measures to limit borrowers to a maximum of four lender relationships, a strategy aimed at stabilizing credit health and reducing the risk of default.

Regional Variations in Lending

The contraction in the microfinance portfolio has not been uniform across regions. Tamil Nadu and Karnataka have seen the most significant declines, with lenders reducing their exposure due to the threat of regulatory changes. This has resulted in a 7 percent quarter-on-quarter decrease in gross lending in these states. Conversely, West Bengal has bucked the trend, reporting a 1.5 percent increase in lending during the same period.

The overall number of active loans has also dropped, falling from 14.6 crore in December to 14 crore by the end of March. New loan disbursements during the first quarter of the year totaled 1.33 crore, a sharp decline from 2.40 crore in the same period last year, although it was slightly higher than the 1.2 crore disbursed in the previous quarter. This decline in new loans reflects the cautious approach lenders are taking in response to the current economic climate.

Shift Towards Higher-Value Loans

In light of the ongoing challenges, the microfinance sector is shifting its focus towards higher-value loans. The report indicates that loans exceeding Rs 1 lakh have seen a substantial year-on-year growth of 38.5 percent, while loans below Rs 30,000 have decreased by 36 percent. This strategic pivot suggests that lenders are prioritizing more substantial loans that may offer better returns and lower risk.

Despite the current difficulties, Crif High Mark expresses optimism about the sector’s long-term sustainability. The report notes that while lending remains cautious and stress persists in certain areas, improvements in early-stage loan performance and a gradual shift towards higher-quality credit segments are encouraging signs. Lenders are making deliberate choices that favor resilience and stability, indicating a potential path toward more inclusive growth in the future.

Future Outlook for the Microfinance Sector

Looking ahead, the microfinance sector is laying the groundwork for stronger growth, according to Ramkumar Gunasekaran, director and head of sales at Crif High Mark. He emphasizes that as institutions recalibrate their strategies and regulatory frameworks evolve, the sector is poised for a more sustainable future. The focus on higher-quality credit segments and improved asset management practices may help mitigate the challenges currently faced by the industry.

Gunasekaran’s insights reflect a broader belief that the microfinance sector can emerge from its current struggles with a renewed emphasis on stability and long-term impact. As lenders adapt to the changing landscape, the hope is that they will foster a more resilient and inclusive financial ecosystem for underserved communities.

Observer Voice is the one stop site for National, International news, Sports, Editor’s Choice, Art/culture contents, Quotes and much more. We also cover historical contents. Historical contents includes World History, Indian History, and what happened today. The website also covers Entertainment across the India and World.

Follow Us on Twitter, Instagram, Facebook, & LinkedIn