S&P flags risks to Indian microfinance lenders' $35 billion book

Indian microfinance lenders are coming under renewed pressure as weak monsoon prospects and rising prices threaten rural incomes, increasing default risks across the sector's $35 billion loan portfolio, reported Bloomberg.

“A weak monsoon could slow loan growth as lenders tighten underwriting standards and borrowers’ repayment capacity deteriorates,” Geeta Chugh, sector lead for financial institutions at S&P Global Ratings, said in an interview. About 20% of microfinance borrowers have loans from more than two lenders, she estimated, adding that this segment has begun posting much higher delinquency rates than borrowers with few lending relationships.

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Lenders including Bandhan Bank, and non-bank firms such as CreditAccess Grameen, Satin Creditcare Network and Muthoot Microfin, have significant exposure to the sector. At Bandhan Bank, loans to the microfinance and micro-lending sector accounted for 23% of the total loan book at the end of March.

Microfinance sector stabilises

The microfinance sector has been under pressure for the past two years after aggressive lending left many borrowers overleveraged, leading to higher defaults and stricter lending norms. Conditions have started to improve as lenders adopt safeguards to reduce borrower indebtedness and manage portfolio risks in line with industry guidelines.

Outstanding microfinance credit expanded in January-March after contracting for seven straight quarters, according to a Reserve Bank of India report, supporting share prices of firms.

That recovery now faces new risks, said Bloomberg in its report.

Monsoon pressure

India is likely to see below-normal rainfall in July, the peak monsoon month, after recording its driest June in 12 years. A weak monsoon could hurt farm output and rural incomes, reducing households' ability to spend and repay loans. At the same time, rising fuel, fertiliser and food prices linked to the Middle East conflict may keep inflation elevated, adding to the financial strain on low-income borrowers.

Although, the Centre on Tuesday said that the rainfall deficit has come down to 12 per cent, with the first week of July recording above-normal monsoon activity, and asserted that an El Nino year may not necessarily lead to below-normal rainfall.

The situation is being continuously monitored since July receives more than 30 per cent of the monsoon season's rainfall, it added.

Microfinance lenders typically have about 80% of their exposures to rural areas, with 35% of loans linked directly to agriculture, 9% to agriculture-based enterprises and 20% to animal husbandry, Chugh said. While credit quality has improved across most sectors, farming was a laggard and continued to show the highest non-performing loans, the central bank said in its report released in June.

“Macro headwinds, both from the ongoing effect of Middle East crisis and weaker monsoon will fuel inflation and lenders will be cautious towards this sector. If inflation persists, it could further erode borrower repayment capacity and amplify these vulnerabilities,” Chugh said.

(With inputs from Bloomberg)