Private banks have sharply increased provisions for loans sanctioned to microfinance institutions (MFIs) owing to the rising stress in the sector.

In the second quarter results season, banks like Kotak Mahindra Bank, IDFC First Bank, RBL and IndusInd have made significant provisions for loans to the sector. 

This is in line with the Reserve Bank of India’s (RBI) directions that banks and NBFCs involved in microfinance lending to ensure borrowers fully repay outstanding loans before availing of new ones.

Ashok Vaswani, MD and CEO at Kotak Mahindra Bank said in a post-earning call, “We restricted (microfinance) growth because we called out about 2 quarters ago, we are seeing some strain, and we are being cautious of growing in the MFI space. We expect it to continue for at least the next two quarters then it may get okay.”

In terms of the total rise in fresh slippages for Kotak Mahindra Bank, about one-fourth of the slippages came from the microfinance segment. Provisions surged by 60% to Rs 660 crore. Meanwhile, fresh slippages jumped 43% to Rs 1,875 crore. 

Kotak Mahindra Bank’s management said that the stress build was due to overleveraging along with the slowdown in the rural household economy, leading to a rise in delinquencies. 

Another private sector bank, IDFC First, made provisions of Rs 568 crore, including Rs 315 crore in the microfinance institution business, which has been experiencing stress. In the reported quarter, the microfinance portfolio, as a percentage of an overall loan book, reduced to 5.6% from 6.3% sequentially. This led to a slump of 73% in the net profit. 

V Vaidyanathan, MD and CEO at IDFC First Bank, said: “The bank has been insuring incremental disbursals of its MFI book with the Credit Guarantee Fund for Micro Units (CGFMU) since January 2024, and that 70% of the book will be insured by March 25.”

For IndusInd Bank, slippages rose to `1,798 crore rupees with around Rs 400 crore coming from the microfinance segment. Provisions rose 87% to `1,820 crore. The bank saw its 30-90 days past due rising 2.1%.

ICRA in its latest report projected a 10-12% growth in assets under management in the microfinance sector this current financial year.

Another bank, RBL, saw a sharp dip in its net profit due to a rise in provisions provided for the microfinance and cards segment. The management said that the provisions have not yet peaked, and they would still provide 25% in each quarter. For RBL Bank, total net slippages were Rs 817 crore, with about 231 crore from the MFI segment. The management provided Rs 283 crore of contingent provisions for MFIs and cards.

R Subramaniakumar, MD at RBL Bank said in a post-earning call, “We are seeing some improvements in efficiency and with the industry adopting conservative lending practices, our estimate would be to see this near-term impact bottoming out through Q3 as efficiency trend upward and normalcy coming back in Q4.”

According to a report by CIRF, as of June, the microfinance portfolio was at Rs 432.7 crore, reflecting a quarter-on-quarter (Q-o-Q) decline of 2.3% over March 24. Despite the overall contraction, Banks and NBFC-MFIs continue to dominate the market, with a total share of 72%.

At the same time, the industry witnessed increasing stress with rising delinquencies across all days’ last due bands, observed from March to June. Delinquencies increased across all lender types and ticket sizes, the report said.