MFI stress now evident: RBI's small-loan fears turning real

The microfinance sector saw asset quality deteriorate sharply in the September quarter with the share of doubtful loans surging to an 18-month high of 11.6%, seemingly validating the regulatory warnings about the accelerating sectoral exposure.

Bad assets climbed 140 basis points (bps) in the three months to September. One bp is a hundredth of a percentage point.

"Most firms have started to see stress in the MFI (microfinance) segment, largely on overleveraging aspects. Slippages are rising among banks, including IDFC First, Bandhan, AU Small Finance, IndusInd and RBL, not to mention the increase in NBFCs and NBFC-MFIs," said Prakhar Agrawal, analyst, Elara Securities.


Collateral-free credit given by banks or non-banks to low-income households-those with annual income of less than ₹3 lakh -is treated as microfinance loans. Women are the primary beneficiaries of such loans.

Breach of Debt Covenants
Both the regulator and the government have raised concerns about the segment over the past few months.

IndusInd Bank, among the major private-sector lenders to have apparently been affected, lost more than a fifth in the immediate aftermath of its quarterly earnings in the last week of October on an unexpected increase in provisioning against advances.

Among the for-profit entities, the bad loan ratio from their microfinance portfolio was the highest for the small finance banks--at 15.3% at the end of September. For non-bank lenders, this was at 13.4%, and 12.1% for private sector banks, said sources, citing data compiled by a credit bureau company. The ratio was the lowest at 8.5% for the NBFC-MFIs category.

However, a section of the industry believes the MFIs, mostly the smaller and unlisted ones, have evergreen loans and under-report their bad loan situation.

For the not-for-profit MFIs, which have less than 1% market share, the bad loan ratio surged to 37.4%.

Still Unstable
"The system datapoints and our checks suggest stabilisation is yet to take place," Elara's Agarwal said. "Thus, we remain guarded with an 'avoid' stance over bottom fishing at this moment."