Microfinance Sector Navigates Debt Burden and Rising Slippages

The microfinance sector is expected to experience a gradual stabilisation towards the end of the third quarter, with a noticeable improvement anticipated from the fourth quarter onwards. This optimistic outlook is contingent upon the effective implementation of guardrails by lenders, as projected by a prominent stock broking firm.

Despite this forecast, the sector continues to grapple with significant headwinds. The portfolio at risk at the sectoral level has yet to reach its peak, and slippages in the second quarter are likely to remain at par with or even exceed those of the first quarter. The anticipated rise in credit costs, necessitated by the escalating stress, will further constrain the upside potential for microfinanciers.

Data from Sa-Dhan revealed that the gross non-performing assets for the microfinance sector stood at a concerning 10.3% at the end of June. Moreover, the industry association’s quarterly report highlighted a deteriorating recovery scenario, as evidenced by the increasing portfolio at risk for all loan buckets below 180 days past due.

In response to the escalating challenges, industry associations Sa-Dhan and the Microfinance Institutional Network have collaboratively introduced two crucial guardrails. These measures aim to mitigate risks by limiting the indebtedness of microfinance borrowers to Rs 2 lakh and restricting the number of microfinance lenders per borrower to four. While these initiatives represent a step in the right direction, the sector’s overall recovery will depend on their effective implementation and the broader economic environment.

Disclaimer: This blog has been written exclusively for educational purposes. The securities mentioned are only examples and not recommendations. It is based on several secondary sources on the internet and is subject to changes. Please consult an expert before making related decisions.