MUMBAI: Banks are expected to tread cautiously in lending to the microfinance sector despite the Reserve Bank of India reducing risk weights for such loans. They will wait for delinquencies to decline in the microfinance industry before increasing their exposure.
Banks will also monitor the effects of a new regulation proposed by the Microfinance Industry Network (MFIN), reducing the maximum number of lenders per borrower from four to three. The new rule will come into effect from April 1.
They will prioritise sectors and borrowers that present lower risk,” said a senior official of a private bank with high exposure to MFIs. “Looking ahead, we will only consider increasing our exposure to the microfinance sector only when we observe a significant and sustained improvement in delinquency rates.”
The RBI on Tuesday announced reduction in risk weights on bank credit to non-banking financial companies and microfinance sector to 100% from 125%.
Banks and microlenders have seen a rise in delinquencies over the past few quarters. Portfolio at risk, defined as unpaid loans for more than 30 days, deteriorated to 8.8% as of December 31, 2024, compared with 3.5% in the year-ago period, according to the latest MFIN data.
“Banks are still struggling with tight liquidity conditions. Consumer incomes have moderated and delinquencies have risen in the MFI segment, which is likely to keep lenders more risk averse for the time being,” said Nomura in its latest report.
Disbursement of microfinance loans has declined 35.8% year-on-year to Rs 22,091 crore during the third quarter ended December 2024. Assets under management of MFIs at the end of December 2024 stood at Rs 1,42,695 crore, showing a decrease of 0.1% over the same period last year.
“The new MFIN guidelines will limit the number of lenders to a borrower to three. This change is expected to restrict credit growth opportunities for all players, including banks, as they will now need to identify borrowers with fewer than three existing loans,” said Anil Gupta, senior vice president, financial sector ratings, ICRA. “With ongoing asset quality concerns, lenders are likely to adopt a wait-and-watch approach. So, even with the reduction in risk weights, an immediate increase in credit to the MFI sector is unlikely.”
MFIN, the self-regulatory organisation for the microfinance sector, in November last year proposed a new cap of three lenders per borrower along with a few other guidelines related to underwriting, KYC and reporting data to credit bureaus. While other guidelines have come into effect from January 1, the rule for limiting the number of lenders to three per borrower will be implemented from April 1.
Source: The Financial Express
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