Microfinance nonbanking companies are expected to see a slowdown in growth to 0-5% due to mounting concerns around asset quality as per the financial investment institution ICRA. Non-Banking Finance Companies- Microfinance Institutions have seen robust growth for two years. But the sector is facing a period of turbulence. The overall delinquency for the first half of FY2025 increased significantly causing concern for the short-term credit quality of the sector. The overall credit cost is therefore projected by ICRA at 5.4-5.6% for FY2025 compared to 2.2% in FY2024.

The challenges faced by the sectors are socio-political disruptions, borrower overleveraging, rising nonperforming assets and operational challenges related to employee attritions. Moreover, regulatory changes which might help in the long term are likely to cause significant pain in the short and medium term. Credit agencies like ICRA and CARE have expressed concerns about a lot of MFIs and downgraded their credit rating owing to their depreciating assets.

In July 2024, one of the self-regulatory bodies of the Microfinance Sector introduced guidelines for responsible lending. These guidelines were reinforced in November 2024 to strengthen the credit process. A borrower cap of 2 lakh on unsecured retail loans was introduced in addition to the microfinance loans. The ratio of microfinance lenders to microfinance borrowers is to be increased to three from four.

Rating agencies like ICRA forecast affecting 20-25% of borrowers, particularly in the lower income bracket, costing approximately 1lakh crore loan across sectors. These regulations are aimed at improving transparency, long-term stability, and reducing over-indebtedness.

“While the revised lending guardrails are designed to promote responsible lending and mitigate risks of borrower overleveraging, they are expected to create near-term challenges for NBFC-MFIs. Borrower rejection rates are projected to increase significantly as over 20% of the borrowers are expected to be impacted by the new guardrails,” said AM Karthik, Senior Vice-president of credit rating agency ICRA.

Declining lending rates, rising credit costs, and compressed net interest margins (NIM) are projected to challenge profitability, moderating the return on managed assets (RoMA) and impacting lending volumes. Incremental lending is also likely to worsen, adding to the already existing liquidity pressures among borrowers. This trend suggests a period of tightened credit conditions, with lenders and borrowers needing to adopt strategic measures to manage the evolving landscape.