Microfinance Sector Warnings Suggest Broader Economic Vulnerabilities

Microfinance Sector in India: Stress and Uncertainty

The latest third quarter report by Sa-Dhan, an industry association, highlights stress in India's most financially vulnerable households. The sector's gross loan portfolio has shrunk to Rs 3.22 lakh crore, down 6 percent sequentially and 17 percent from the year-ago period.

Key Indicators:

• Active unique borrowers have fallen to 685 lakh, down 7 percent from the previous quarter and 12 percent from last year.
• Loan accounts have dropped 23 percent year-on-year.
• Disbursements during the quarter stood at Rs 62,688 crore, up 10 percent sequentially.
• Average ticket size has risen to Rs 61,003, with average outstanding per loan at Rs 29,938.

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The decline in borrower counts suggests income uncertainty, stress in cash flows, or both. Microfinance is typically the first line of credit for low-income households, informal workers, and small entrepreneurs. The government's decision to roll out a Rs 20,000-crore credit guarantee scheme for microfinance institutions is significant, providing a sovereign backstop to banks lending to MFIs and easing funding constraints.

However, this move does not address the underlying stress among borrowers. The spike in PAR 180+ to 15.27 percent is a worrying datapoint, indicating long-duration delinquencies are rising. Borrowers are not just missing instalments; they are staying overdue for longer.

Portfolio at Risk is the percentage of a lender's total money out on loan that is "in danger" because borrowers have missed their payments. The report highlights structural pressures building within the sector, including operating costs and cost of funds rising across categories. Interest rates remain high, ranging upwards of 23 percent for many lenders.

The shift towards larger loans and existing borrowers may stabilise near-term numbers but does not address the underlying issue of weakening borrower capacity. Policymakers and lenders must pay attention to this issue as the cracks are beginning to show.

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