New Delhi [India], October 21 : The microfinance sector (MFI) is expected to remain under distress for the entire current financial year, according to a recent report by Motilal Oswal.
The report highlighted that the sector is unlikely to recover soon, with signs of improvement likely to appear only at the beginning of the next fiscal year.
"In our view, the stress in the current cycle will last for the whole of the current financial year, with the sector beginning to exhibit signs of normalization only at the onset of the next fiscal year" said the report.
Over the past 5-6 months, the MFI sector has faced multiple challenges that have significantly worsened asset quality.
The report noted that this stress has led both regulators and the Self-Regulatory Organization (SRO) to intervene, pushing the Microfinance Institutions Network (MFIN) to introduce guidelines aimed at bringing discipline to MFI lending and preventing further deterioration.
Despite these efforts, the report warned that the stress in the sector is likely to affect growth in assets under management (AUM) and negatively impact profitability.
"this surge in sectoral stress is expected to moderate the industry's assets under management (AUM) growth and substantially affect overall industry profitability" the report added.
The report also highlighted that several factors have contributed to the current distress in the microfinance sector. One of the major issues is customer overleveraging, where borrowers have taken on more debt than they can handle, leading to missed payments and lower attendance at center meetings.
Additionally, lending to customers with fake voter ID cards, especially those categorized as new-to-credit (NTC), has further complicated the situation.
Other problems include defaults from intermediaries, known as 'Ring Leaders,' in certain regions, as well as high attrition rates among field officers and branch managers. Natural disasters like heavy rainfall and floods have also worsened the situation by disrupting the income of borrowers, making it difficult for them to repay their loans.
"Not all of these reasons are mutually exclusive, and there is a fair possibility that one could be a cause of the other" the report added.
These challenges have created a complex web of issues that have stalled the sector's growth and raised concerns over its future. Although efforts are being made to stabilize the sector, the road to recovery remains long.
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