Ouch! Microfinance Loan Disbursals Squeeze 25% in Q4FY25, Faced with Rising Defaults, Tightened Rules, and Heatwaves
Loan distribution through microfinance declines by 25% in Q4 as a result of escalating loan repayment failures.
Unfortunately, the microfinance loan spigot shut off a bit in Q4FY25 as lenders hunkered down in response to mounting defaults and tightened regulations. Disbursals plummeted by a quarter to a staggering ₹1.12 lakh crore, marking a significant drop from ₹1.48 lakh crore in the previous year's fourth quarter [1][2].
According to a recent report from Microfinance Institutions Network (MFIN), a self-regulating body for the sector, the number of accounts receiving loans dipped to a sobering 22 million during the quarter, compared to 34 million in Q4FY24 [1]. Alok Misra, CEO and director at MFIN, shared the sentiment, acknowledging that FY25 was a challenging year for the industry. "The heatwave, external incitement, overleveraging concerns, and the Karnataka issue all played a role in distracting our focus from growth, negatively impacting credit quality, and consequently decreasing funding to the sector," said Misra [1].
NBFC-MFIs, bank portfolios, and small finance banks' microfinance portfolios reported declines, with the former and the latter shrinking by 13.7% and 15% respectively [1]. However, the average loan amount per account during FY25 rose by 12.3% to ₹50,131 [1].
In light of the deteriorating credit quality, it's no surprise that the delinquency rates also took a hit. Portfolios at risk (PAR) exceeding 90 days ballooned to 5.4% in March 2025, approaching triple the rate of 2.4% in the previous year [1]. Similarly, PARs between 31 and 180 days rose to 6.2% during the same period [1].
On a positive note, MFIN's guardrails are starting to exhibit their stabilizing effects on credit quality, with PARs between 1 and 90 days standing at a relatively healthier 4.22% [1]. Macquarie, a global brokerage, noted that the changes in loan limits and the number of lenders per borrower are helping to bring much-needed discipline to the sector [1].
Whether it's minding your money better or your mental health, prudence seems to be the name of the game in the microfinance sector. Stay tuned as we keep a weather eye on the sector's development.
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References
- Business Today: Microfinance loan disbursals dropped 25% in Q4FY25 amid rising defaults and tightened lending norms
- Economic Times: Tightened lending norms affecting microfinance sector, says Alok Misra, MFIN's MD & CEO
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What Prompted the Deterioration of Credit Quality in the Microfinance Sector?
- Regulatory Clampdowns: Tightened lending norms introduced by self-regulatory organizations like MFIN significantly reduced the pool of eligible borrowers, leading to a decline in loan disbursals [2].
- Overleveraging: Caution among lenders due to the risks associated with overleveraging and increasing NPAs [1].
- Environmental and Economic Factors: The microfinance sector was impacted by external factors such as heatwaves and economic uncertainties, which affected borrower ability and lender confidence [1].
- The microfinance sector faced a challenge in FY25 due to factors such as tightened regulatory norms, environmental issues like heatwaves, overleveraging concerns, and external economic uncertainties.
- These factors led to a decline in loan disbursals, with the quarterly number plummeting by a quarter to ₹1.12 lakh crore in Q4FY25, compared to ₹1.48 lakh crore in the previous year's fourth quarter.
- The deterioration in credit quality was evident, with Portfolios at Risk (PAR) exceeding 90 days ballooning to 5.4% in March 2025, more than triple the rate of 2.4% in the previous year.
- However, in an encouraging sign, MFIN's guardrails are starting to show their stabilizing effects on credit quality, with PARs between 1 and 90 days standing at a relatively healthier 4.22% [1].
