Context:
According to a recent report by India Ratings (Ind-Ra), the microfinance institution (MFI) sector in India is expected to return to pre-crisis normalcy only by the second half of FY26, owing to profitability challenges, rising costs, and regulatory uncertainties. The credit rating agency has assigned a ‘deteriorating outlook’ to the sector.
Key Highlights
Delayed Recovery Timeline
- MFIs are unlikely to recover to FY24 performance levels before H2 FY26.
- Factors slowing recovery include:
- High operating expenses
- Pressure on lending yields
- Regulatory tightening by State governments
Impact of Tamil Nadu and Karnataka Ordinances
- Both Tamil Nadu and Karnataka introduced ordinances aimed at curbing coercive loan recovery practices by collection agents.
- These regulatory actions have:
- Created repayment anxieties among borrowers
- Affected collection efficiency and loan performance
- Reduced lender confidence in the sector
Profitability and Yield Pressures
- Return profiles of MFIs remain under pressure, particularly in rural and semi-urban segments.
- Yield rationalization and heightened scrutiny have limited MFIs’ ability to price loans profitably.
Banking Sector’s Risk Mitigation
- Banks, which are key lenders to MFIs, are now adjusting risk models and factoring in non-MFI exposure to manage portfolio risks.
- This may reduce overall credit flow to MFIs, further constraining their growth.
