The credit bureau CRIF High Mark's latest report on microfinance, 'Microlend', has it that at end-June 2024, the systemic book at ₹4.32 trillion, marked a quarter-on-quarter decline of 2.3 per cent even though on a year-on-year basis, it is up 20.3 per cent. A closer look at the numbers also shows a rise in delinquencies across all time-bands (or days-past-due as it is called in the trade). Microfinance institutions (MFIs) are applying the brakes.
How did we get here? Is it rampant over-leveraging - of the kind seen in retail lending?
"It's not so. As per bureau data only around 1.5 per cent of the borrowers have loan outstanding in excess of ₹2 lakh with 15 per cent having exposures to more than two lenders," says Alok Misra, chief executive officer (CEO) and director, Microfinance Institutions Network (MFIN). And the regulatory norm that annual loan repayments are not to exceed 50 per cent of households' annual income is a robust check against overleveraging.
That said, "non-reporting of EMIs in retail loans and non-EMI based products like gold loans could lead to underwriting issues".
MFIN (a self-regulatory organisation or SRO for microlending) thought this was serious enough and issued guidelines on October 7 specifying ways to consider missing EMIs in underwriting. Interestingly, this came a week before the Reserve Bank of India's (RBI's) diktat: Asirvad Micro Finance and Arohan Financial Services had to cease and desist from sanction and disbursal of loans, effective October 21. A couple more - DMI Finance, and Navi Finserv - also met the same fate, but they were non-MFIs.
What we are seeing in the MFI space was forewarned.
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