Indian Microfinance Sector Faces Prolonged Stress: Recovery Hinted Post-FY26

The Indian microfinance sector is experiencing significant stress, with loan growth anticipated to remain subdued until FY26, according to Morgan Stanley. A decline in asset management growth and rising non-performing assets continue to plague the industry, with several MFIs reporting substantial falls in growth and high credit costs.

The Indian microfinance industry is grappling with persistent stress and is expected to witness restrained loan growth for several more quarters, according to a report by Morgan Stanley. The report indicates that recovery is only expected by the second or third quarter of FY26. Recent quarters have experienced either slowed or negative growth in assets under management (AUM) for microfinance institutions (MFIs), with some institutions reporting sharp quarterly declines. In 4QFY25, certain institutions saw double-digit declines in their growth metrics.

Highlighting specific companies, the report reveals Spandana Sphoorty recorded a severe drop of 24 percent, while Asirvad MFI experienced an 18 percent fall. IndusInd Bank and Fusion MFI reported declines of 5 percent. Bandhan Bank noted a 7 percent drop in 1QFY26. However, even institutions like IIFL Samasta and Muthoot Micro, which reported positive growth, did so at a considerably reduced rate than witnessed in previous quarters.

The report also underscores a worsening of Gross Non-Performing Assets (GNPA) or gross stage 3 ratios. Notably, Fusion MFI's GNPA surged from 2.9 percent in 4QFY24 to 12.6 percent by 3QFY25. Elevated credit costs reflect increased expenditures to cover potential loan defaults. Other financial entities such as Muthoot Micro, Belstar MFI, and CREDAG exhibit high cumulative credit costs, indicating ongoing profitability pressures. Delinquencies, particularly loans overdue between 31-180 days, remain alarmingly high, at 7.1 percent for NBFC-MFIs and 6.6 percent for banks by March 2025. NBFC delinquency rates were noted at 3.8 percent, indicating a broader trend of escalating asset quality deterioration and a sluggish growth trajectory throughout FY25.