Overview of the Crisis
- Rising Delinquency Rates: India’s microfinance sector is grappling with a sharp increase in delinquency rates, nearly doubling over the past year.
- NPA Ratio: The gross non-performing asset (NPA) ratio for the sector surged to 16% at the end of FY25, up from 8.8% in the previous year. This significant jump reflects the deepening financial stress within the industry.
Financial Impact
- Increase in NPAs: In absolute terms, NPAs in the sector reached a staggering ₹61,000 crore by March-end 2025, a marked increase from ₹38,000 crore in the previous year.
- Sectoral Strain: The rise in NPAs highlights the financial strain on microfinance institutions (MFIs), which have been struggling to maintain their lending models and recover loans.
Key Factors Contributing to the Crisis
- Decline of Joint Liability Lending Model: The joint liability-based lending model, once a cornerstone of microfinance, appears to be crumbling, contributing significantly to the deterioration in repayment rates.
- Economic Pressure: Borrowers, particularly from rural and low-income segments, are facing heightened financial pressures, which are impacting their ability to repay loans, thereby escalating delinquency rates.
Implications for the Microfinance Sector
- Potential Collapse of Lending Models: The significant rise in NPAs and the collapse of traditional lending models are raising concerns about the long-term sustainability of India’s microfinance industry.
- Impact on Borrowers: The crisis also threatens to hinder access to crucial financial resources for marginalized communities that rely on microfinance for livelihood support and economic empowerment.
Moving Forward
- Reforms and Solutions: Experts suggest that urgent reforms are needed to address the growing crisis, including improvements in lending models, better repayment collection mechanisms, and enhanced support for borrowers facing financial distress.
