The microfinance sector in India has experienced a significant downturn, with loan disbursements dropping by 41.7% to 1.19 crore in the quarter ending December 2024, according to a report by credit information company Crif High Mark. This decline is mirrored in the total amount disbursed, which fell by 34.9% to ₹63,440 crore from ₹97,400 crore in the same period the previous year.
A concerning aspect of this downturn is the surge in loans unpaid for 31 to 180 days, which escalated to 6.4% of the portfolio by the end of December 2024, up from 2% a year earlier. This increase in non-performing assets (NPAs) indicates heightened financial stress among borrowers.
The overall microfinance portfolio also contracted, registering a 4% year-on-year decline and a 5.4% decrease from the previous quarter, settling at ₹3.91 lakh crore. This reduction is attributed to industry recalibrations, including regulatory changes, risk realignment, and modifications in underwriting and collection strategies.
The implementation of stricter regulatory guidelines, such as caps on the number of lenders per borrower, has notably reduced portfolio exposure for borrowers with multiple lender associations. Specifically, exposure for borrowers associated with five or more lenders experienced a sharp 36% drop year-on-year.
Geographically, Kerala witnessed the steepest decline in outstanding loans at 15.8%, followed by Rajasthan (11.6%), Odisha (9%), and Tamil Nadu (8.3%). Conversely, Uttar Pradesh showed modest growth of 1.2% year-on-year, with the state, along with Bihar and Tamil Nadu, accounting for 38% of the outstanding microfinance portfolio.
In terms of institutional performance, non-banking financial companies (NBFCs) emerged as the fastest-growing segment with a 17.3% growth rate, driven by a focus on loans exceeding ₹1 lakh. In contrast, other segments, including banks, experienced declines.
This downturn in the microfinance sector underscores the challenges faced by lenders and borrowers alike, highlighting the need for strategic adjustments to navigate the evolving financial landscape.