Signs of Recovery in India's Microfinance Sector: A Gradual Comeback

The Indian microfinance sector is showing signs of recovery, with improvements in asset quality and increasing loan growth. Despite past challenges, the sector is steadily stabilizing. The recovery is gradual, leading to potential consolidation as weaker players either shut down or merge. Positive momentum from NBFCs and SFBs is evident.

The Indian microfinance sector, which has faced significant challenges in recent times, is now exhibiting early signs of recovery, as indicated by a recent Investec Equities report. The report highlights improvements in asset quality and suggests that the sector's worst phase might have passed.

According to the report, asset quality indicators are showing better performance across multiple microfinance institutions (MFIs), signaling the current cycle's end. Unlike previous crises caused by external factors, this slowdown was due to internal sector challenges, such as poor asset quality and hard operating conditions.

While the recovery is expected to be gradual, it is leading to potential consolidation within the sector, with struggling players requiring capital support. The fourth quarter saw an uptick in loan growth from NBFCs and SFBs, indicating a positive business trajectory. Overall, the sector is inching towards stability and health.

(With inputs from agencies.)