Microfinance Sector Faces Asset Quality Challenges Amid Loan Growth Slowdown

Microfinance disbursements fell over 10% in Q3, with unpaid loans more than doubling to 4.4%. The industry curbs growth, enhancing underwriting and collections to stabilize credit quality. Despite this, the gross loan portfolio grew only 8.5%, with a significant borrower drop. Average loan size increased slightly.

The latest data indicates a notable decline of over 10% in microfinance disbursements during the July-September quarter compared to last year. This downturn arises amidst growing pressures on asset quality, as reported by the industry's self-regulatory body.

Loans overdue for 31-180 days surged to 4.4% by the end of September, more than double the previous year's rate, highlighted by the Microfinance Industry Network (MFIN). In response, MFIN's chief executive, Alok Misra, emphasized a strategic moderation in disbursement growth and an increased focus on robust underwriting and enhanced repayment collections.

Despite the Reserve Bank of India's assurance of manageable sector stress and guidance for stronger underwriting, the overall gross loan portfolio exhibited only an 8.5% growth, with small finance banks significantly contributing to this slow momentum. This cautious approach led to a substantial 19.6% decline in the number of loans disbursed, whereas the average loan size slightly increased. Meanwhile, the number of unique borrowers rose marginally, indicating measures to curb individual debt load.

(With inputs from agencies.)