The Indian microfinance industry is facing significant challenges as bad loans rise and loan portfolios contract, despite measures to limit borrower exposure. Recent data reveals a concerning trend in the sector's financial health, with implications for both lenders and borrowers.

Rising Portfolio at Risk

The microfinance sector has seen a sharp increase in its Portfolio at Risk (PaR) for loans in the 31-180 day bucket. This crucial metric has more than doubled, reaching 5.40% from 2.50% in the previous year. This surge comes despite the implementation of voluntary caps limiting borrowers to three lenders, a measure intended to curb over-indebtedness.

Segment-wise Performance

Different segments within the microfinance sector have experienced varying degrees of stress:

• Banks: PaR increased from 2.50% to 5.40%
• NBFC-MFIs: PaR rose from 2.60% to 6.00%

Long-term Stress Intensifies

The sector is also grappling with mounting long-term stress. The PaR for loans overdue by more than 180 days has seen a significant jump:

• Previous period: 7.60%
• Current period: 13.60%

This nearly 80% increase in long-term delinquencies signals deepening financial distress among borrowers.

Contracting Loan Books

Alongside rising bad loans, the microfinance sector is experiencing a substantial contraction in its loan book:

The overall industry portfolio has shrunk by 7.50% to Rs 3.53 lakh crore. This contraction is also reflected in the number of loan accounts, which have decreased from 14.9 crore to 12.5 crore.

Funding Pressures

NBFC-MFIs are facing increased funding pressures:

• Debt raised: Rs 12,781 crore (down 19.90% year-on-year)
• Equity infusion: Rs 34,582 crore (down 6.20% year-on-year)

Market Share

Despite the challenges, NBFC-MFIs continue to hold the largest market share in the microfinance sector at 39.00%, followed by banks at 33.00%.

The microfinance sector's current struggles highlight the delicate balance between financial inclusion and sustainable lending practices. As the industry grapples with rising bad loans and shrinking portfolios, it may need to reassess its strategies to ensure long-term viability while continuing to serve its target demographic.

Leading microfinance companies in India are taking decisive action to strengthen their financial positions by accelerating bad loan write-offs amid rising non-performing assets (NPAs). This strategic move aims to cleanse balance sheets and present healthier loan portfolios to investors and regulators.

Industry-wide Shift in Write-off Policies

Several major players in the microfinance sector, including CreditAccess Grameen, Fusion Finance, and Muthoot Microfin, have revised their write-off policies to address the challenge of mounting NPAs. These changes represent a significant shift in the industry's approach to managing loan portfolios:

• Fusion Finance has permanently revised its write-off policy, reducing the default period from 240 days to 180 days before writing off bad loans.
• Muthoot Microfin has implemented an even more aggressive approach for its Karnataka loans, conducting accelerated write-offs at 120 days past due, a substantial reduction from its usual 365-day policy.

Immediate Impact on Financial Health

The strategy of accelerated write-offs, which began in December, has already shown promising results:

• Fusion Finance saw its gross NPA improve to 5.40% from 7.92% after a substantial ₹486-crore write-off.
• CreditAccess Grameen reported a decrease in its gross NPA to 4.70% from 4.76%.
• Muthoot Microfin maintained its gross NPA at 4.85%, despite the challenging economic environment.

CreditAccess Grameen: A Closer Look

CreditAccess Grameen, one of the leading microfinance institutions, has demonstrated resilience in its financial structure. An analysis of its latest balance sheet reveals:

Industry Implications and Outlook

The microfinance sector's move towards accelerated write-offs is a proactive step to normalize balance sheets in a challenging economic landscape. This approach not only improves the appearance of loan portfolios but also potentially enhances investor confidence and regulatory compliance.

As these companies continue to adapt their strategies, the microfinance sector may see improved financial health metrics in the coming quarters. However, the effectiveness of these measures will ultimately depend on the underlying economic conditions and the ability of borrowers to repay their loans.

The sector's focus on balance sheet cleansing through accelerated write-offs demonstrates a commitment to transparency and financial prudence, which could set a new standard for financial reporting and risk management in the microfinance industry.