The stress in the microfinance sector is unlikely to ease soon, and banks expect to see the trend of heightened delinquencies in microfinance loans to continue in the current quarter.
According to bankers, some green shoots in MFI loans are visible, but any decline in delinquencies can only be expected from the next quarter. The new law introduced recently to prevent coercive actions for loan recoveries will impact collections by lenders.
“The new ordinance by the Karnataka government aims to protect borrowers, but it will negatively impact collections of microloan payments. Banks and NBFCs typically outsource the collection process, especially of retail loans, to third party recovery agencies. The new ordinance imposes strict regulations with regard to unregistered recovery agents,” said a senior official of a private bank. “Recovery agencies in other states may also become cautious, which could further impact the microloan collection process.”
To safeguard borrowers from excessive interest rates and coercive recovery tactics, the Karnataka government has promulgated the Karnataka Micro Loan and Small Loan (Prevention of Coercive Actions) Ordinance, 2025. This ordinance, effective immediately, aims to protect borrowers from exploitative lending practices employed by microfinance institutions, money lenders and other lending agencies. However, it does not apply to banks or RBI-registered NBFCs.
Bankers expect delinquencies in the microfinance sector to remain elevated in the current quarter and the result of tightened underwriting over the past few quarters will start yielding results from the next quarter.
“Most of the players in the MFI sector, including us, were always conservative. We also tightened over the last four-five months, and the benefits of these measures will become evident as we move forward,” said Harsh Dugar, executive director, Federal Bank “Stress in microfinance loans is expected to ease either in the early part or later half of the first quarter of the next fiscal. Some green shoots are already visible.”
Banks and NBFCs have witnessed a rise in delinquencies since the start of the current financial year. Banks have become cautious and have decided to go slow on microloans.
“We are cautious about the microfinance segment. We will continue to wait and watch before we press the accelerator,” Sumant Kathpalia, managing director and chief executive officer, IndusInd Bank, told analysts in the earnings call. “I think just pressing the accelerator on disbursement may not be the right approach. We want to wait and watch and see how this plays out…”