Asset quality improving across MFIs but recovery will be gradual, says Investec

Investec cautioned that while the sector is showing signs of recovery, the process will be gradual

As the microfinance sector continues to grapple with rising levels of stressed loans, analysts at Investec believe that the current microfinance cycle may be approaching its final phase. They note that asset quality (AQ) indicators have been showing signs of improvement across several microfinance institutions (MFIs).

Among specific players, Investec identifies CreditAccess Grameen, Ujjivan Small Finance Bank, and L&T Finance as the strongest performers in the space. However, the analysts also caution that while the sector is showing signs of recovery, the process will be gradual, likely leading to further consolidation within the industry. Many institutions are still contending with asset quality concerns and will likely require additional capital to weather the transition, they added.

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Data from January supports this, showing an improvement in collection efficiency—a potential turning point amid ongoing concerns about rising defaults. Nevertheless, the broader health of microfinance loan portfolios remains under strain.

According to figures from CRIF High Mark, the total number of active loans in the microfinance sector declined to Rs 14.3 lakh crore in January 2025, down from Rs 14.6 lakh crore in December 2024, and significantly lower than Rs 15.3 lakh crore recorded in September.

In a recent interaction with CNBC-TV18, Sachin Seth, Chairman of CRIF High Mark, pointed to a "silver lining" in the data. He highlighted a 5 percent improvement in collections for loans overdue by up to 30 days and an 11 percent improvement for loans that were overdue between 31 to 90 days.

However, this positive momentum is counterbalanced by continued deterioration in other parts of the loan book. Seth noted that “the default percentage has gone up,” with the portfolio at risk (PAR) in the 91–180 day bucket increasing from 2.9 percent in March 2024 to 3.6 percent by January 2025. The overall reduction in loan book size also suggests that lenders are taking a more cautious approach to disbursements.

Looking ahead, analysts at S&P Global Ratings expect that tightening regulatory norms and the enforcement of stricter underwriting standards will moderate the growth trajectories of microfinance lenders in India. These measures are likely to help contain risk exposure, particularly among borrowers who are already heavily leveraged.

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