microfinance market: Microfinance sector contracts below Rs 4 lakh crore amid loan disbursal woes

Kolkata: The dimensions of the microfinance sector has contracted to beneath Rs 4 lakh crore from its highest stage of Rs 4.43 lakh crore seen in March 2024 as lenders slowed mortgage disbursal with a number of of them utterly stopping acquisition of new-to-credit clients amid rising asset high quality stress.

The sector’s asset high quality might have additionally worsened as assortment effectivity has faltered for a number of lenders.

Heads of the microfinance lenders nonetheless expressed hope that the sector would bounce again however it could take a few quarters from now. It’s now within the technique of therapeutic with guardrails being in place to guard it from additional degeneration, they stated. The sector contributes 2.03% to the nation’s GDP and helps 13 million jobs.

The excellent gross microfinance mortgage portfolio stood at Rs 3.93 lakh crore on the finish of November, in response to studies submitted to the finance ministry.

The sector’s composite gross mortgage portfolio and mortgage disbursal numbers on the finish of the December quarter will not be accessible but however enterprise updates by a clutch of small finance banks confirmed quarter-on-quarter decline in microfinance portfolio.

Larger non-public banks with important microfinance publicity additionally turned cautious as their capital allocation towards micro loans rose with a number of of them reportedly elevating the chance weightage to 125% from 75% on such loans in July-August final 12 months.India Scores and Analysis final week revised the outlook on the microfinance sector to deteriorating from impartial, whereas sustaining a steady ranking outlook for FY26.Mortgage development will take a backseat except a constant enchancment within the assortment efficiencies is seen, the scores firm stated.

As an illustration, Ujjivan’s gross group microloans fell 8.3% to Rs 13,663 crore on the finish of December 2024 from Rs 14,892 crore three months previous to this. Utkarsh reported an 8.4% quarter-on-quarter dip in group microloans to Rs 9,737 crore whereas Equitas reported a 4.7% fall to Rs 5,369 crore. These are in response to provisional numbers submitted to inventory exchanges. Small finance banks management about 17% of the microfinance sector.

“Close to-term challenges are prone to proceed to play out with a restoration anticipated in 2HFY26,” stated Karan Gupta, head and director monetary establishments, Ind-Ra.

Bandhan Financial institution, the nation’s first microfinance lender turned financial institution, stated that its assortment effectivity for the December quarter was decrease at 97.4% towards 98.1% within the previous quarter. This ratio is with out contemplating the non-performing mortgage accounts.

The gathering effectivity ratio, which is the quantity of mortgage repaid as a share of the compensation demand, was 94.8% for Suryoday Small Finance Financial institution throughout the December quarter towards 98.4% in previous three-month interval.

Lenders corresponding to Spandana Sphoorty Monetary and Satin Creditcare Community earlier introduced to have stopped on-boarding new-to-credit clients to forestall erosion of portfolio high quality.

India Scores & Analysis stated that whereas the delay in implementation of the guardrail associated to the utmost variety of lenders per borrower—to 3 from earlier 4—to April 1, 2025 from January 1, 2025 might assist lenders handle delinquencies within the fourth quarter, medium-term asset high quality stress is predicted to proceed.