Self-regulatory measures aimed at managing over-indebtedness are helping to stabilise stress in the microfinance industry.

According to the Reserve Bank of India (RBI) financial stability report, the delinquency rate for loans that are 31 to 180 days past due increased from 2.15 per cent in March 2024 to 4.3 per cent in September 2024.

In addition to rising delinquency rates, the share of borrowers obtaining loans from four or more lenders rose from 3.6 per cent to 5.8 per cent over the past three years (from September 2021 to September 2024). The report also indicated that the quarterly average ticket size of microfinance loans increased by 43 per cent, rising from ₹35,299 in Q2 FY22 to ₹50,430 in Q2 FY25.

According to Crisil Ratings, four factors have adversely affected the asset quality of microfinance lenders: lending to over-leveraged borrowers, debt waiver campaigns, high attrition rates among field staff, and challenges in debt collection due to extreme weather and elections.

“We have issued additional guidelines to our members that, effective from September 2024, households with microfinance exposure exceeding ₹2 lakh should not be granted any additional loans. Furthermore, for every microfinance loan, there should be a comprehensive credit bureau check at the household level,” said Jiji Mammen, executive director and CEO of Sa-Dhan.

The RBI has established a regulatory framework for microfinance loans, stipulating that loan repayment should not exceed 50 per cent of a household’s monthly income.

“Based on feedback from the ground, the portfolio at risk (PAR) has not deteriorated further for the quarter ending December 2024 compared with September. We are still awaiting the overall industry figures. Collection efficiency is also expected to improve,” Mammen told The Telegraph on Thursday, adding that the self-regulatory measures have generally been effective for the sector.

Industry sources said that the share of households with microfinance exposure exceeding ₹2 lakh has decreased significantly, from 2.5 per cent in March 2024 to 1.5 per cent in June, and around 0.6 per cent as of September 2024.

“The asset quality of the microfinance industry is expected to improve in the coming quarters,” said Kuldip Maity, secretary of AMFI-WB.

Small Finance Bank

City-based VFS Capital, has applied to the RBI for a small finance bank licence. “During the quarter ended December 31, 2024, the Reserve Bank of India received an application under the guidelines for ‘on-tap’ licensing of small finance banks in the private sector from VFS Capital Limited,” said a statement from the RBI.