Microfinance business shrinks in Q2 as delinquency rates surge

India's microfinance industry experienced a contraction in the second quarter of the fiscal year 2025 (July-September 2024) due to a surge in late payments, according to a report by Tol. Overdue loans between 30 and 180 days rose to 4.3%, up from 2% a year earlier. The total microloan portfolio decreased by 4.3% compared to the previous quarter, reaching Rs 4.1 lakh crore in September. Despite this quarterly decline, the portfolio showed a year-over-year growth of 7.6%.

Lenders have reduced the number of borrowers with multiple loans, as this group has been experiencing significant defaults. A report by CRIF Microlend indicates a decrease in the number of borrowers with three or more active loans across various states. Microfinance institutions (MFIs) met with the Secretary of the Department of Financial Services, M. Nagaraju, on Wednesday to discuss the industry's challenges. During this meeting, MFIs requested a credit guarantee scheme, a dedicated fund for operations in Northeast India, and relaxed asset norms to diversify risks.

Nagaraju emphasized the importance of strong financial practices and improved viability. He encouraged the adoption of digital repayment methods and stronger cybersecurity measures. "The efforts of MFIs in transforming rural lives are highly valued, and it is essential to build on this momentum to create a more resilient sector," he stated.

Delinquencies have increased across all loan categories, with Bihar, Tamil Nadu, Uttar Pradesh, and Odisha accounting for 62% of the new late payments. Small finance banks were particularly affected, experiencing the highest percentage of loans overdue between 31 and 180 days. Non-banking financial companies (NBFCs) and banks held a 71.3% share of the total microloan portfolio. Loans overdue between 31 and 180 days posed a higher risk for small finance banks, with a delinquency rate of 5.4%, compared to 2.3% for NBFCs as of September 2024. ​