Microfinance sector to remain in distress in FY 25 – Motilal Oswal
The microfinance industry in India is anticipated to face challenges throughout the ongoing fiscal year, as per a recent study conducted by Motilal Oswal, with New Delhi as its backdrop.
The sector is predicted to face a prolonged recovery period, showing potential signs of resurgence in the early stages of the upcoming fiscal year, as emphasized in the report.
The report stated that, based on their perspective, the pressure in the ongoing cycle will persist throughout the present fiscal year, with indications of the sector returning to normalcy expected only as the next fiscal year commences.
For about half a year, the microfinance industry has encountered several obstacles that have notably deteriorated the quality of its assets.
According to the report, the stress situation prompted regulatory bodies and the Self-Regulatory Organization (SRO) to step in, prompting the Microfinance Institutions Network (MFIN) to implement guidelines to instill discipline in MFI lending practices and halt any further decline.
The report cautioned that, despite these endeavors, the sector’s stress is expected to hamper the growth of assets under management (AUM) and have an adverse effect on profitability.
According to the report, the anticipated increase in sector-specific pressure is likely to dampen the growth of assets under management (AUM) within the industry and have a considerable impact on overall industry profitability.
The current state of the microfinance sector is under distress due to various factors, as emphasized in the report. Among these factors, customer overleveraging stands out as a significant concern. This entails borrowers accumulating excessive debt beyond their capacity, resulting in payment defaults and reduced participation in center gatherings.
Moreover, the situation has been made even more intricate by extending loans to individuals holding counterfeit voter ID cards, particularly those classified as new-to-credit (NTC) customers.
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.
The report mentions that not all of these reasons are necessarily independent, and there is a likelihood that one factor could be influencing another.
ANI reported that the sector’s growth has been hindered by a tangled array of challenges, leading to uncertainties about its future. Despite ongoing efforts to restore stability, the journey towards recovery is expected to be lengthy.
