Overview
- The Microfinance Institution (MFI) segment is currently under significant stress, primarily due to increasing borrower indebtedness and the weakening of the Joint Liability Group (JLG) model. Recent data indicates a rise in delinquencies during H1 FY25, a trend that is expected to persist into the next half year, raising concerns about asset quality of underlying loans. This increase in delinquencies poses risks to the growth trajectory of NBFC-MFIs and their profitability metrics as we navigate this challenging environment.
- Moreover, the RBI has recently imposed a ‘cease and desist order’ on some NBFC-MFIs, preventing them from sanctioning and disbursing loans. The restrictions were due to issues related to predatory pricing, insufficient transparency in disclosures, and improper evaluation of household income and fixed monthly liabilities. Additionally, concerns have been raised about lending to customers with multiple fake voter IDs, often categorised as new-to-credit (NTC) customers, which further undermines the integrity of the lending process. Furthermore, the RBI has raised concerns regarding the practice of loan netting by MFIs and has instructed certain banks and MFIs to ensure that this does not lead to ‘ever-greening of delinquent loans.
- Despite these pressures, CareEdge Ratings finds some reassurance in the sector’s solid capital structure and the overall support from financiers, which has been crucial in maintaining funding stability. However, it remains essential to closely monitor the evolving landscape, as the rising delinquencies may adversely affect incremental bank funding and equity investments, especially in smaller NBFC MFIs. Furthermore, the more cautious approach of MFI players amidst increasing regulatory supervision, may disrupt the funding cycle of borrowers, potentially leading to a further increase in delinquency level.
