Improved availability of loans from microfinance institution (MFI) players, government loans, Kisan Credit Card loans, mudra loans, gold loans and other fintech loans could overleverage the end MFI borrower, impacting repayment capability, cautioned India Ratings and Research (Ind-Ra).

In this regard, the credit rating agency emphasised that, incrementally, the check on household leverage becomes paramount for MFI borrowers.

“Headwinds have appeared for the MFI segment recently due to events including heatwave, elections, field-level attrition, among others. Further, overleveraging in pockets also continues to be a reason for concern,” said Karan Gupta, Director, Financial Institutions, Ind-Ra.

The agency will continue to monitor the development in the sector closely even as MFI players have put corrective actions in place which could take one-to-two quarters to show results, he added.

Ind-Ra assessed that in 1Q (April-June) FY25, the MFI segment saw challenges in the form of lower collections, leading to higher delinquencies as well as a slowdown in assets under management (AUM) growth.

The deterioration also seems more pronounced with the slowdown in AUM growth in 1QFY25 (4QFY24: down 30% year-on-year/yoy; 1QFY25: down 24% yoy).

The agency believes MFI players are working on remediating the reasons for the increase in delinquencies, and it is likely to take one to two quarters for the trend line to revert to normal levels.

Further, seasonality should also provide some relief, with 2H (October-March) FY25 contributing a higher share of the annual business. The agency will continue to monitor the industry’s developments closely over the next two quarters.

The agency noted that recent developments, including guardrails set by the regulatory body Microfinance Industry Network for MFI customers, point towards the rising risk of overheating; thus, adherence to this remains to be monitored.

The MFI borrower cashflow is also burdened by elevated food inflation and the rural slowdown seen in FY24, but there have been early signs of improvement in FY25.

Although not broad-based, the announcement of farm loan waivers in certain states could also temporarily affect the credit culture in those states, cautioned Ind-Ra.

Published on August 27, 2024