Over-Leverage Blues: Borrowers Pay One Microlender Over Another As Funding Dries

Over-leveraged microfinance borrowers are opting to repay one loan over another as credit discipline across the sector deteriorates, five people aware of the matter told NDTV Profit.

Collection efficiency across banks and microfinance institutions on full-paying customers has dropped in the September quarter, while partial paying and non-paying customers have risen.

The portfolio at risk of CreditAccess Grameen Ltd.'s borrower has risen to 4.9% in the July–September period, sharply higher than 2.5% a quarter ago and 1.3% a year ago. Portfolio at risk for over 90 days also rose to 1.9% in the September quarter as compared to 1.1% a quarter ago and 0.6% a year ago. PAR is defined as an outstanding loan portfolio that is at default.

Third-party interventions and cash-flow constraints due to low rainfall last year, followed by a severe heat wave in the April–June period have resulted in high delinquencies. However, delinquency flow rates are expected to stabilise in October–December and and improve in January–March, CreditAccess Grameen said in its investor presentation.

Lenders like Satin Creditcare Network Ltd., Spandana Sphoorty Financial Ltd., Equitas Small Finance Bank Ltd., ESAF Small Finance Bank Ltd. and Bandhan Bank Ltd. have also witnessed similar trends.

"That could happen if you have multiple lenders, then everyone would be chasing you for repayments," Karthik Srinivasan, group head-financial sector ratings at ICRA, said. "They could be distributing payments across lenders or choosing to pay one over the other."

Last month, self-regulatory organisation MicroFinance Institutions Network introduced new rules for members, including bringing down maximum lenders to a borrower from four to three. It said the maximum indebtedness of a microfinance borrower would be set at Rs 2 lakh worth of unsecured loans.

While this move is a net positive in the medium term, it can reduce liquidity to weaker borrowers and result in quicker rise in delinquencies in the second half of the current financial year. Commentary by some companies around stress peaking in October–December might prove too optimistic, UBS Securities had said in a recent report.

Microfinance lenders have been slowing down loan growth since the start of this fiscal. Microfinance non-banking financial companies disbursed 50 lakh loans worth Rs 24,807 crore in the September quarter in comparison to 57 lakh loans worth Rs 26,216 crore in the June quarter, according to the latest Micrometer report by the MFIN.

Bankers believe that the impact of tight credit conditions, higher delinquencies and a slowdown in disbursements could very well spill over into the next fiscal.

"Nature of the problem will slow down, but confidence to go and lend and incrementally build a book on that will still be a challenge," Jinay Gala, director at India Ratings & Research, said. "Disbursements will fall in the second half as compared to previous year and this slowdown will continue in the early part of FY26 as well."

Another reason why microlenders can face challenges is because of tight funding as there is growing risk aversion towards the sector.

Growth for the sector will flatten or decline in the current fiscal and may remain muted next year due to funding crunch for incremental growth till the time asset quality challenges subsidies, India Ratings had said in a report.

Recent regulatory actions on some companies because of concerns around loan pricing and increase in risk weights has also made lenders cautious towards the sector.

Till September-end, funding through banks remained 66% of the MFIs' mix, followed by 12.9% from securitisation, 11.9% from bonds, 9.10% from external commercial borrowings and the rest from commercial papers, the ratings agency said.

Outstanding borrowings by microfinance NBFCs fell 3.7% quarter-on-quarter to Rs 97,315 crore as of Sept. 30, according to the Micrometer report.