Microfinance Industry Under Pressure As Loan Defaults Climb In Major States

India’s microfinance industry continues to grapple with mounting stress as asset-quality indicators worsen across several major states. Lenders with significant exposure to West Bengal, Uttar Pradesh, Gujarat, Maharashtra and Telangana are seeing increased strain, signalling that the sector is still not out of the woods.

Fresh October data shows a renewed rise in portfolio-at-risk measures despite some stabilisation in early delinquencies.

Industry-wide portfolio-at-risk (PAR 0+) increased by 60 basis points month-on-month in October, reversing some of the sharper rise seen in the first half of the year. The bigger concern, however, remains the steady climb in the PAR 90+ bucket, which also rose by 60 basis points.

Overall, the industry PAR stands at 24%, while for banks it is a much higher 28.7%, highlighting the disproportionate stress being felt by universal banks. Total microfinance loans across lenders now amount to Rs 3.42 lakh crore.

Banks continue to show weaker performance than NBFCs and small finance banks. In October, PAR 0+ for banks rose 110 basis points, compared with only a 20 basis point increase for NBFCs. This follows a first half in which banks saw PAR 0+ surge by 580 basis points while NBFCs recorded a decline of 40 basis points.

Early delinquency trends in the PAR 1–90 bucket also reflect this divergence, with banks rising to 4.4% while NBFCs and SFBs remained lower at 2.8 and 3% respectively. UBS expects near-term slippages to remain relatively elevated, particularly for banks, due to continued forward flows.

State-level trends reveal stark differences. West Bengal, with a 10% market share, continues to deteriorate, with PAR 1–90 rising 70 basis points month-on-month to 4.9 %. UBS attributes part of this rise to collection policy changes by a major lender.

Maharashtra remains weak in early-bucket performance, though signs of moderation are emerging. Karnataka saw a mild rise in overall delinquencies but a sharper increase in the 90+ bucket. Tamil Nadu showed relative stability, while Bihar and Uttar Pradesh saw fresh increases in PAR 0+, signalling renewed stress.

The overall microfinance portfolio has shrunk 16% year-on-year and 10% since March 2025, reflecting both lender caution and weakening repayment behaviour. Despite this, some lenders remain better placed.

UBS maintains a preference for Kotak Mahindra Bank, Axis Bank, Cholamandalam Investment and Finance, and PNB Housing Finance. It also has buy ratings on HDFC Bank, ICICI Bank, Canara Bank and Bank of Baroda.

Sell ratings remain on IDFC First Bank and IndusInd Bank due to weaker exposure profiles. Bandhan Bank and AU Small Finance Bank are rated neutral, while LTF also remains neutral among NBFCs.