Stressed Assets Of Microfinance Sector Surge as Credit Growth Slows

Credit to the microfinance sector, which has already been reeling under stress, has decreased by 13.9% in 2024-25 (Apr-Mar), the Reserve Bank of India's Financial Stability Report for June said.

This is because of adoption of tighter underwriting standards by lenders, who were the primary driver behind deceleration in credit growth, which also resulted in a decrease in total active borrowers by 40 lakh.

Bank credit, which accounts for nearly half at 48.3% of the total credit outstanding in the microfinance sector, mirrored this trend, contracting by 13.8% during the same period.

The most concerning development is the sharp increase in stressed assets. Loans overdue by 31 to 180 days, a key indicator of asset quality, jumped from 4.3% in September 2024 to 6.2% in March 2025.

The banking sector's own microfinance loan books were not spared, with their 31-180 days past due ratio rising from 4.7% to 6.5% over the same period.

Despite these headwinds, there are some positive signs such as borrower indebtedness, measured by the proportion of borrowers taking loans from three or more lenders, is on a declining trend. This suggests that efforts to curb over-indebtedness and improve credit discipline may be bearing fruit.

Moreover, the overall resilience of the banking system appears to be improving. The banking stability indicator strengthened in the second half of 2024-25, with improvements seen across all dimensions except profitability.