Microfinance woes not over yet as Karnataka sees fresh wave of bad loans, says InCred Equities

Karnataka, which accounts for about 10 percent of India's mainstream microfinance market, is experiencing a surge in bad loans, estimated at high-single to early-teen percentages in Q4FY25, wrote analysts at InCred Equities. The rise in defaults is being driven by overleveraging, sub-lending, and a recent state ordinance.

Analysts visiting key microfinance hubs in the state observed that lenders are increasingly cautious, given the changing dynamics. Karnataka had previously ranked among the top-performing states in terms of asset quality in Q3FY25, with only a modest increase in early delinquencies. However, Q4FY25 has brought a sharp deterioration, with a noticeable spike in early-stage defaults.

Adding to the stress, new customer additions in Karnataka have virtually stalled. The stricter lending restrictions—which limit borrowers to no more than three active loans and cap ticket sizes at Rs 2 lakh—have also led to a decline in loan renewals.

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