India's microfinance institutions see rising delinquencies

CareEdge warns this could hamper incremental bank funding and equity investments.

The microfinance institution (MFI) segment in India is facing increased stress due to rising borrower indebtedness and weakening of the Joint Liability Group (JLG) mode, according to CareEdge Ratings.

Data from the first half of fiscal year 2025 (FY 2025) showed a rise in delinquencies, a trend likely to continue into the next half, impacting the asset quality of underlying loans. 

This escalation in delinquencies poses risks to the growth and profitability of Non-Banking Financial Companies (NBFC-MFIs) within the sector.

The Reserve Bank of India (RBI) recently issued a ‘cease and desist order’ to certain NBFC-MFIs, restricting them from approving or disbursing loans. 

This decision followed concerns over predatory pricing, inadequate transparency in disclosures, and improper assessments of household income and monthly liabilities. Additionally, lending practices involving customers with multiple fake voter IDs have raised integrity concerns. 

The RBI has also flagged the practice of loan netting among MFIs, cautioning banks and MFIs to prevent this from leading to ‘ever-greening’ of delinquent loans.

Whilst CareEdge Ratings highlights the sector’s strong capital structure and support from financiers as stabilising factors, it warns that rising delinquencies could hamper incremental bank funding and equity investments, particularly for smaller NBFC-MFIs.

Moreover, with heightened regulatory scrutiny, MFI players are expected to take a more cautious lending approach, potentially disrupting borrower funding cycles and further increasing delinquency levels.