Microfinance lenders in Tamil Nadu are beginning to see early signs of stress, with borrowers in certain pockets delaying or withholding repayments citing the state’s draft money lending Bill.
A senior official from the microfinance industry told FE that some borrowers are refusing repayments, saying that the state government has asked them not to pay.
“We understand from our field-level agents that borrowers in some areas are refusing to pay. They show newspaper clippings to our collection staff and claim the government has asked them not to repay,” the official said.
Another industry executive pointed to a shift in borrower behaviour at the grassroots level. “It’s not alarming yet, but some kind of resistance is definitely building up. It will take at least a quarter or two for things to normalise,” the person said requesting anonymity.
The signs of stress come less than a month after the state government introduced the Tamil Nadu Money Lending Entities (Prevention of Coercive Actions) Bill, 2025. The draft legislation is aimed at protecting borrowers from economically weaker sections, vulnerable groups, farmers, and women self-help groups from coercive recovery practices employed by unregulated and digital lenders.
The Bill explicitly excludes regulated entities such as banks, non-banking financial companies (NBFCs) registered with the Reserve Bank of India (RBI), co-operative societies and co-operative banks. However, lenders point out that the distinction is often lost on the ground.
“The real challenge is at the ground level — people won’t distinguish between regulated and unregulated lenders,” George Alexander Muthoot, MD, Muthoot Finance, told FE.
Belstar Microfinance, a subsidiary of Muthoot Finance, is headquartered in Tamil Nadu with assets under management (AUM) worth Rs 7,970 crore as of March.
“It started in Karnataka and now it is in Tamil Nadu. Technically, the Act is not applicable to NBFC-MFIs. So, it is actually exempted, but then it is only the perception — people on the ground may feel this is applicable for everybody and people may delay payments,” Muthoot had said during the company’s fourth-quarter earnings call.
According to Muthoot, the initial confusion around collections could take one or two quarters to settle. “Initially, there will be some hiccups. After sometime, it has to straighten out. Today, there is a hiccup,” he said, without quantifying the impact.
The Tamil Nadu Bill proposes up to three years’ imprisonment and financial penalties against recovery agents found employing coercive recovery tactics. The provisions have unnerved microfinance lenders and small finance banks (SFBs) in Tamil Nadu — the second-largest market in the Rs 3.85-lakh-crore microfinance industry after Bihar.
Several SFBs and microlenders, including Equitas Small Finance Bank, Ujjivan Small Finance Bank, CreditAccess Grameen, and Manappuram Finance’s Asirvad Microfinance, have exposure in the state and some are already seeing the impact.
For instance, the PAR 90+ ratio (loans overdue for more than 90 days) for CreditAccess Grameen in the state rose to 4.5% of its Rs 25,948-crore gross loan portfolio in Q4FY25, up from 3.2% in the previous quarter.
Jiji Mammen, executive director and CEO of Sa-Dhan, a self-regulatory organisation for the microfinance industry, said the Tamil Nadu Bill clearly excludes regulated entities, and so, a Karnataka-like stress scenario may not play out in the state. “Our only concern is the inclusion of all types of lenders under the ‘coercive’ clause,” he said.
“That term is subjective and could be misused in implementation. Otherwise, even field collections of regulated entities could be seen as coercive, creating hesitation among staff and affecting operations,” Mammen added.