India's Microfinance Crisis
The microfinance sector in India is undergoing a significant crisis, marked by a sharp increase in delinquency rates and non-performing assets (NPAs).
Key Statistics and Trends
- The gross non-performing asset (NPA) ratio has risen to 16% at the end of FY25 from 8.8% the previous year.
- In absolute terms, NPAs have increased to ₹61,000 crore by March-end, up from ₹38,000 crore a year ago.
- The sector's cumulative gross loan portfolio has contracted by about 7% due to increasing loan losses.
Sectoral Impact
- Small finance banks reported a 22% sticky loan ratio out of their ₹59,817 crore microfinance loans.
- Universal banks had a 17.5% bad loan ratio on their ₹1.24 lakh crore microfinance exposure.
- The bad loan ratio for NBFC-MFIs was 12.3%, and for other NBFCs, it was 12.8%.
Regulatory and Market Challenges
The regulation of microfinance operations in Tamil Nadu is likely to increase delinquency rates, as was observed in Karnataka following similar legislation.
- The Tamil Nadu Ordinance could worsen market challenges, as seen in Karnataka where the market took two months to stabilize post-regulation.
Impact on Investors
- Investors have suffered significant losses, with companies like Fusion Finance and Spandana Sphoorty Financial experiencing a 66-68% decline in share prices.
- CreditAccess Grameen saw a 23% drop in market value.
- IDFC Bank faced an 18% price decline due to stress in its unsecured portfolio.
Microfinance Loan Dynamics
- Microfinance institutions provide collateral-free loans to low-income households, particularly benefiting women.
- These institutions form joint liability groups (JLG) of women, which serve as intangible collateral for unsecured lending.
