Budget 2025: MFIs seek refinancing window, credit guarantee scheme amid rising stress

microfinance

At a time when the microfinance industry has run into a rough patch with rampant delinquencies and sluggish credit growth, the sector looks up to the Union Budget 2025 for a revival package with a dedicated funding window and a robust credit guarantee mechanism.

Experts are hoping for a level playing field for non-bank lenders with banks through access to Aadhar to  help prevent over-leverage and secure better KYC.

“As we prepare for the budget and in light of the recent headwinds storming the microfinance industry, we hope the government will extend support through a dedicated funding window and a robust credit guarantee mechanism, particularly as borrowing costs continue to spiral,” said HP Singh, chairman and managing director of Satin Creditcare.

Finance Minister Nirmala Sitharaman will table the Union Budget for 2025-26 on February 1.

Sadaf Sayeed, chief executive officer of Muthoot Microfin, is looking up the finance minister to propose refinement of the Credit Guarantee Fund for Micro Units (CGFMU) with removal of the FLDG structure.

The department of financial services, which operates under the Union finance ministry, had set up National Credit Guarantee Trustee Company Ltd (NCGTC) to act as a common entity to manage and run various credit guarantee trust funds. Under this, CGFMU guarantees for loans up to a specified limit of Rs 10 lakh, sanctioned by banks or NBFCs or MFIs or other financial intermediaries engaged in providing credit facilities to eligible micro units. The MFI sector wants an overdraft loan amount of Rs 10,000 sanctioned under PMJDY accounts to also be eligible to be covered under the credit guarantee fund.

The industry believes that this expected measure by the government in the Union Budget will help it come out of stress faster than anticipated.

The microfinance industry came in the news a couple of months back because of rising concern over lenders charging higher interest rates to borrowers. Reports of higher delinquencies, over leveraging, and impact of the new regulations followed up quickly. A rise in non-performing assets (NPAs) in the sector is also driving up provisions for the microfinance institutions (MFIs), taking a toll on their financial health.

According to the CRIF report, asset quality of microlenders in three states of Bihar, Uttar Pradesh and Kerala deteriorated sharply by September 2024. The portfolio at risk (PAR) for the Kerala in 31-180 days went up to 7.2 percent as on September 2024 from 2.1 percent a year back. PAR for Bihar and Uttar Pradesh too reached 5.5 percent and 4 percent from 1.9 percent and 0.9 percent in this time, the report showed.

"The Q2FY25 witnessed further increase in delinquencies across all DPD bands. Delinquencies spiked across all ticket sizes and lender types, particularly in the top 10 states," it said.

Last year, then RBI governor Shaktikanta Das had cautioned the microfinance lenders against steep interest rates they had been charging. "It has also been observed in some microfinance institutions and NBFCs that the interest rates on small value loans are high and appear to be usurious," he said.

Das added that the regulatory freedom enjoyed by the REs in respect of interest rates and charges should be used judiciously to ensure fair and transparent pricing of products and services.

After this, self-regulatory organisations (SROs) for microfinance institutions (MFIs) have released guidelines for lowering the rates by 100-150 basis points as some lenders have been charging hefty interest in several states.

MicroFinance Institutions Network (MFin) and Sa-Dhan are the SROs for the sector. In addition to a cut in rates, MFin had introduced proactive steps, including adoption of guardrails.

In November, MFin had introduced the new cap, with key changes being the measure to reduce number of lenders to a borrower to three, from four earlier. It also recommended to cap the indebtedness of an MFI borrower to Rs 2 lakh. Later, it deferred the implementation of a cap on lenders to each borrower to April 1.