Asset Quality Stress Surges in NBFC-MFI Sector Amid Operational Challenges

The NBFC-MFI sector witnessed a surge in asset quality stress in FY2025 due to borrower overleveraging and operational challenges. ICRA's report indicates a decline in AUM by 12% and anticipates a recovery in FY2026. A recent RBI circular might enhance loan diversity and reduce credit risks.

The NBFC-MFI sector is grappling with increased asset quality stress, as outlined in ICRA's July 2025 report. Rising borrower overleveraging and operational difficulties led to a significant decline in the sector's Assets Under Management (AUM) by 12% in FY2025, after a robust growth of 29% in FY2024.

According to the report, the sector's asset quality stress deterioration is linked to socio-political disruptions and increased borrower rejection rates. Consequently, ICRA has assigned a negative outlook to the sector, citing the lingering pressure on asset quality and a reduction in profitability.

Looking forward, a new RBI circular mandating NBFC-MFIs to maintain a lower qualifying assets threshold could diversify loan portfolios, improving credit risk profiles. Furthermore, ICRA expects growth to resume in FY2026, potentially boosting stability in this financially crucial sector.