Inflationary pressures, reduction in discretionary cash flows may impact collection of MFIs: Report

New Delhi: Risks such as potential inflationary pressures or reduction in discretionary household cash flows are likely to affect repayment behaviour of microfinance borrowers, even though the West Asia conflict has not directly affected the sector, a Crisil report said.

Moreover, the impact of the El Nino phenomenon on rural incomes will bear watching, the report said.

States such as Karnataka, Tamil Nadu and Bihar have introduced legislations for tighter oversight on unregulated microfinance lending practices, including enhanced borrower protection norms, restrictions on recovery practices and stricter compliance guidelines, it said.


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According to the report, Karnataka saw a moderation in collections, with efficiency declining 5-6 per cent immediately following the implementation of the state's microfinance ordinance in February 2025.

On the other hand, it said, Tamil Nadu and Bihar did not exhibit any material impact on collections as lenders were able to incorporate learnings from the Karnataka experience and adapt their operational approaches accordingly.

The report further said that the collections of microfinance securitised pools has improved sharply after the implementation of guardrails on new loan originations.

Pools originated thereafter reported a 60 per cent reduction in overdue build-up at 1.6 per cent, ten months after securitisation, compared to 3.7 per cent for the pools originated during the stress period of fiscal 2025, it said.

The most significant feature of the guardrails has been their limiting of MFI exposure to over-leveraged borrowers, it said, adding, a calibrated pickup in disbursements, alongside prudent underwriting and responsible collection practices, is contributing to an improved portfolio performance.

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In securitisation, MFIs have further enhanced performance through stricter pool selection filters, including zero-DPD (days past due) criteria and improved geographic diversification, enabling securitised pools to outperform the underlying broader portfolio trends, it said.