Rising delinquencies: Navigating
MFI’s Emerging Challenges
November 12, 2024 l BFSI Ratings
Overview
The Microfinance Institution (MFI) segment is currently under significant stress, primarily due to increasing
borrower indebtedness and the weakening of the Joint Liability Group (JLG) model. Recent data indicates a rise in
delinquencies during H1 FY25, a trend that is expected to persist into the next half year, raising concerns about
asset quality of underlying loans. This increase in delinquencies poses risks to the growth trajectory of NBFC-MFIs
and their profitability metrics as we navigate this challenging environment.
Moreover, the RBI has recently imposed a ‘cease and desist order’ on some NBFC-MFIs, preventing them from
sanctioning and disbursing loans. The restrictions were due to issues related to predatory pricing, insufficient
transparency in disclosures, and improper evaluation of household income and fixed monthly liabilities. Additionally,
concerns have been raised about lending to customers with multiple fake voter IDs, often categorised as new-to-
credit (NTC) customers, which further undermines the integrity of the lending process. Furthermore, the RBI has
raised concerns regarding the practice of loan netting by MFIs and has instructed certain banks and MFIs to ensure
that this does not lead to ‘ever-greening of delinquent loans’.
Despite these pressures, CareEdge Ratings finds some reassurance in the sector's solid capital structure and the
overall support from financiers, which has been crucial in maintaining funding stability. However, it remains
essential to closely monitor the evolving landscape, as the rising delinquencies may adversely affect incremental
bank funding and equity investments, especially in smaller NBFC MFIs. Furthermore, the more cautious approach
of MFI players amidst increasing regulatory supervision, may disrupt the funding cycle of borrowers, potentially
leading to a further increase in delinquency level.
Looking ahead, CareEdge Ratings anticipates a negligible portfolio growth for the industry, projecting a rate of 4%-
5% for FY25. Additionally, rising credit costs and compression in yields are expected to exert further pressure on
profitability, leading to a decline in return on average assets (RoTA) to approximately 0.4% during the same period
compared to 4.3% in FY24. As the sector faces these multifaceted challenges, vigilant monitoring and proactive
management will be key to sustaining its viability and support for underserved communities.
Growing Indebtedness: The Impact of Increased Ticket Sizes and Multiple Loans
The microfinance industry is currently grappling with a significant rise in customer indebtedness, as evidenced by
a 27% increase in the average incremental ticket size over the past three years. This trend, along with borrowers
taking on multiple loans, has elevated overall debt levels. Data shows a consistent rise in the number of accounts
per unique borrower across various states, highlighting the extent of this issue within the microfinance sector. It is
important to note that if other personal loan data were included (gold loan, unsecured personal loans, kisan cards,
etc.), the increase in indebtedness would be even more pronounced, especially at the overall family level for the
borrower families. While the growth in ticket size and multiple lending has boosted disbursements in recent years,
it has also strained borrowers' repayment capacities, leading to increased stress within the sector.
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Rising delinquencies: Navigating MFI’s Emerging Challenges
In response to these challenges, the MFI Network INDIA (MFIN) has advised its members to implement specific
measures, including capping the number of microfinance lenders per borrower at four and limiting total
indebtedness to Rs 2 lakh, aiming to mitigate further risks and enhance financial stability.
Figure 1: Rising Ticket sizes and account per unique borrower
Increase in ticket size…… …. along with rise in account per unique
borrower
2.2 2.2 2.2
2.0 2.1
48,322 1.9
46,145 1.8
1.7 1.8 1.8
41,342
36,384 38,005
1.8 1.8
1.7 1.7
1.6 1.6
1.5 1.5
1.4 1.4
FY21 FY22 FY23 FY24 Q1FY25 BH TN UP KA WB MH OR MP RJ KL
Account per Unique borrower-FY23
Average incremental ticket size
Account per Unique borrower-FY24
Source: Data from CareEdge Ratings sample of NBFC-MFIs and Micrometer
Other factors contributing to rising delinquencies among top 10 states
The increasing borrower indebtedness is compounded by various factors, such as heatwaves, general elections,
and political movements like the “Karja Mukti Abhiyan.” This challenge is further aggravated by the weakening of
the Joint Liability Group model, characterised by a notable decrease in center attendance and diminished peer
pressure and collective accountability, which have historically helped maintain low default rates.
Additionally, high attrition rates among field staff present operational hurdles, as frequent turnover disrupts client
relationships and hampers loan recovery efforts.
States such as Bihar, Uttar Pradesh, Rajasthan, and Madhya Pradesh are experiencing a substantial rise in 30+ day
overdues, as illustrated in the graph below in Q1FY25. CareEdge Ratings anticipates a continued increase in
delinquency rates in Q2FY25 as well.
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Rising delinquencies: Navigating MFI’s Emerging Challenges
Figure 2: 30+ trend among top 10 states
9.00%
8.00%
8.00%
6.70%
7.00%
5.70%
6.00%
5.00% 4.40%
3.90%
4.00% 3.50%
3.20% 3.20%
3.00% 2.40%
1.80%
2.00%
1.00%
0.00%
BH TN UP KA WB MH OR MP RJ KL
Mar-23 Mar-24 Jun-24
Source: Data from CareEdge Ratings sample of NBFC-MFIs and Micrometer
NBFC-MFIs Growth Projected to Sharply Decline
Post-COVID, NBFC MFIs have demonstrated significant growth, achieving approximately 37% year-on-year growth
in FY23 and around 28% in FY24. Key states like Bihar and Uttar Pradesh have played a pivotal role in driving this
expansion, with Bihar emerging as the largest microfinance market in Country.
However, the growth trajectory of NBFC-MFIs is expected to face a significant slowdown in the upcoming fiscal
year, with 4% growth projected for FY 2025. According to CareEdge Ratings, this decline in growth is attributed to
the rising delinquencies within the sector, which are prompting MFIs to become more cautious in their lending
practices. As a result, these institutions are likely to reduce their loan disbursements in the face of increasing credit
risk, leading to a stagnation in their portfolios.
This cautious approach to lending, combined with the growing challenges in maintaining loan recovery rates, is
expected to curb the expansion potential for NBFC-MFIs, marking a sharp contrast to the robust growth seen in
previous years.
Figure 3: Growth to Moderate
1,60,000 37% 40%
33%
1,40,000 35%
28%
1,20,000 30%
1,00,000 25%
80,000 17% 20%
14%
60,000 15%
40,000 10%
4%
20,000 5%
- 0%
FY20 FY21 FY22 FY23 FY24 FY25(P)
NBFC-MFI Growth
Source: Data from CareEdge Ratings sample of NBFC-MFIs
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Rising delinquencies: Navigating MFI’s Emerging Challenges
Profitability Indicators declined due to an increase in credit costs
The microfinance industry has seen notable improvements in profitability over the past two years, due to the RBI’s
removal of the lending rate cap, better asset quality, and reduced leverage. Additionally, operating expenses saw
a slight decline in FY24, benefiting from economies of scale driven by rapid branch expansion.
For the current fiscal year, Net Interest Margins (NIMs) are anticipated to shrink due to rising delinquencies and
reduced yields among several MFI players. Additionally, credit costs are expected to rise notably, with CareEdge
Ratings predicting a jump to 6% for FY25, which could lead to a decline in Return on Total Assets (RoTA) to 0.42%.
Operating expenses are also projected to increase modestly to 5.9%, driven by the impact of a smaller denominator.
Figure 4: Declining Profitability
NIM (%) Opex (%)
5.8% 5.9%
11.4% 5.6% 5.7%
10.4% 10.1% 10.8%
9.1% 8.8% 5.3%
4.7%
FY20 FY21 FY22 FY23 FY24 FY25 (P) FY20 FY21 FY22 FY23 FY24 FY25 (P)
Credit Cost (%) RoTA (%)
6.5% 4.3%
5.0% 3.3%
2.6%
3.7% 3.4%
2.9% 2.6%
1.1%
0.5%
0.4%
FY20 FY21 FY22 FY23 FY24 FY25 (P) FY20 FY21 FY22 FY23 FY24 FY25 (P)
Source: Data from CareEdge Ratings sample of NBFC-MFIs
Capital Structure continue to remain Stable
Investors have demonstrated significant interest in the microfinance industry in recent years, as evidenced by
substantial capital infusions. During FY23 and FY24, the NBFC-MFI sector raised ₹3,010 crore and ₹3,300 crore,
respectively, resulting in improved gearing levels of 3.8x and 3.4x despite considerable disbursements. This
enhancement can be attributed to two main factors: robust internal accruals and continued investor support.
However, with the microfinance sector facing ongoing challenges and increasing regulatory scrutiny, investor
caution and selectivity are expected to rise in the coming periods. From a broader perspective, CareEdge Ratings
anticipate that the microfinance sector's gearing levels will stabilize within a moderate range of 3.8x to 4x over the
next 12 months. It is important to note that any significant increase in gearing beyond the 4x threshold will require
careful oversight, given the inherent characteristics of this asset class.
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Rising delinquencies: Navigating MFI’s Emerging Challenges
Figure 5: NBFC-MFIs Continue to Receive Significant Support from Investors
Equity Infusion Overall gearing
₹ 3300 140000 5.00
₹ 3010 3.8
120000 3.7 3.7 3.8
3.5 3.3 3.4
₹ 2513
4.00
100000
80000
3.00
₹ 1426 ₹ 1431 ₹ 1506 60000 2.00
40000
1.00
20000
0 0.00
FY19 FY20 FY21 FY22 FY23 FY24 FY25
(P)
FY19 FY20 FY21 FY22 FY23 FY24 TNW(Rs Cr) Borrowings(Rs Cr) Gearing (X)
Source: Data from CareEdge Ratings sample of NBFC-MFIs
Banks support critical for the MFI industry
Banks have consistently demonstrated their support for NBFC-MFIs, with their share of on-book funding remaining
between 59% and 62% over the past four years. It is noteworthy that, in addition to direct lending, banks also
provide support to NBFCs through direct assignments and co-lending arrangements.
Refinancing institutions, such as SIDBI, play a vital role as funding partners, contributing approximately 10% to
the overall funding mix.
In accordance with the Priority Sector Lending (PSL) guidelines, banks are required to allocate a specified
percentage of their lending to sectors that foster financial inclusion. NBFC-MFIs, which focus on underserved
segments, are well-aligned with the PSL objectives established by banks.
However, with delinquencies on the rise within the sector, the ongoing support from banks, particularly to smaller
NBFC-MFIs, is under closer scrutiny. Banks are becoming increasingly cautious in their lending decisions, as the
sector grapples with growing challenges, including the effects of predatory lending practices, a lack of transparency,
and heightened regulatory oversight.
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Rising delinquencies: Navigating MFI’s Emerging Challenges
Figure 6: Lender wise breakup of on-book borrowing
2% 4% 4% 2% 4%
100%
3% 3% 6%
4% 7%
90%
24% 21% 22% 20% 17%
80%
70%
60%
50%
40% 57% 59% 61% 62%
60%
30%
20%
10% 15% 13% 9% 10% 10%
0%
FY21 FY22 FY23 FY24 Q1FY25
AIFIs Banks Non Bank Entities ECB Others
Source: Data from CareEdge Ratings sample of NBFC-MFIs and Micrometer
CareEdge View
The NBFC-MFI sector is projected to see only a modest 4% growth in fiscal 2025, indicating a phase of stagnation
due to a range of challenging factors. A major concern is the sharp increase in credit costs, which is expected to
severely affect profitability, potentially bringing the return on average assets (RoTA) down to an estimated 0.4%.
Several key risk factors warrant close attention. The increasing indebtedness of borrowers is a significant challenge,
as larger ticket sizes and multiple loans taken by low-income individuals have led to over-leverage and difficulties
in repayment. Compounding this issue is the weakening of the Joint Liability Group (JLG) model, traditionally a
cornerstone of MFI operations. Declining centre attendance has weakened the peer pressure and collective
responsibility that once helped maintain low default rates. Further, regulators getting more stricter about the
predatory pricing will further impact the profitability of the industry.
In addition to this, the industry faces significant challenges beyond financial and operational risks, including high
staff turnover and rising fraud, both of which disrupt client relationships and loan recovery. These issues, coupled
with vulnerabilities to socio-political risks and natural disasters, further complicate the already difficult operating
environment for NBFC-MFIs, making 2025 a challenging year ahead.
However, despite operating in a vulnerable segment, the NBFC-MFI sector has consistently shown resilience,
overcoming challenges like COVID-19 and demonetization. Its ability to recover and adapt has earned continued
investor support, highlighting the sector's strength and its critical role in financial inclusion. CareEdge Ratings expect
that the sector will also navigate through the current stress and continue playing a vital role in serving underserved
communities.
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Rising delinquencies: Navigating MFI’s Emerging Challenges
Contact
Sanjay Aggarwal Senior Director [email protected] +91 - 22 - 6754 3582/ 8108007676
Neha Kadiyan Director [email protected] +91 - 120- 4452022/ 8130340369
Prabhjyot Kaur Lead Analyst [email protected] +91 - 120- 4452031/ 9540705783
Mradul Mishra Media Relations [email protected] +91 - 22 - 6754 3596/ 9833070317
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