Despite recent measures by stakeholders that offer a glimmer of hope, the path to normalisation remains uncertain, marking a critical phase for the industry.
These challenges and potential recovery pathways were the focus of a recent panel discussion featuring key experts: Aishwary Khandelwal, Associate Director at India Ratings & Research; Chandan Thakur from Sa-Dhan; Anu Jogesh, Doctoral Researcher at the London School of Economics & Political Science; and Sachin Seth, Regional MD for India & South Asia at CRIF.
Anu Jogesh shared ground-level insights into the impact of the Microfinance Institutions Network’s (MFIN) recent directive to limit borrowers to three loans, while Sachin Seth highlighted findings from CRIF’s latest report.
The report revealed a concerning rise in loan delinquencies, with loans at risk in the 31-to-90-day category reaching 2.8% and those in the 90-to-180-day bracket at 2.4%, culminating in a total risk percentage of 5.2% as of September 2024.
Below are the excerpts of the interview.
Q: Sachin, if you can lay down the data itself according to the scoring sheet, have the default rate increased for MFI borrowers?
Seth: All of us are seeing that stress for the last couple of quarters, and as per the latest report CRIF has released just recently, there is obviously a bit of a stress, which continues. Specifically the numbers, when we talk about loan at risk between, let us say, 31 to 90 days, it is almost 2.8% and if you take 31 to 90 plus 90 and 180 together, it comes to about 5.2% and that’s obviously a bit of increase from the previous quarter. So definitely, it continues to be a bit stress at this moment.
Q: This number is as of what October?
Seth: This number is as of cut off September end because obviously the data gets pulled and then get processed and the report gets published. So October, November, December, data is awaited.
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Q: Chandan, what is the situation on the ground? Do you think December things improved or they are pretty stressed, because otherwise, MFIN would not have pushed back the deadline?
Thakur: Sachin had already mentioned, the number has increased a bit. However, I would also like to highlight while the number has increased and in the first quarter itself, a few major reasons, one was like, of course, the general election, the climate issues, the unprecedented heat. One more thing is that I would like to highlight post-COVID we know, the demand in the sector. I mean, the loan has gone up in terms of disbursement and all but in terms of the employment generation, to pay back the loan that is still not up to the mark even in the rural area. So, unemployment, or in terms of the repayment capacity, is not as much in terms of the pre-COVID era so that is one of the reason the number has gone up.
However, we are optimistic in terms of the good kharif season and some preventive measures has been taken by both the SROs. So things are getting better with every passing days. We are sure, in the last quarter, result would be better in terms of the favorable for the sector. And hopefully from next financial year onwards, we will be back to the normal.
Q: You are saying that December numbers, by your guess, would be better than the September numbers. I know it’s anecdotal, but is that your guess?
Thakur: It would be more or less same. I mean, September number and December numbers will be more or less same. The March figure would be better.
Q: Aishwary would you say that Q3 would have been just stable, or could it have gotten worse?
Khandelwal: Q3 delinquencies is expected to peak out in terms of the delinquencies numbers. The decline in delinquencies is expected to stop now from the fourth quarter onwards, but the stress in the microfinance sector, we believe still two-three quarters, we expect it to stay. The normalisation is expected from second half of FY26 itself. What we have mentioned it in the report, because if you look at the stage two loans, which is 30 to 90 day past due (DPT) continues to increase, which indicates that there is still stress in the sector which would be coming out in the third quarter results also. So unless this stage two loans declines the stress will continue to be evolved in the next quarter also. So the normalcy in the delinquency is still two, three quarters away.
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Q: Anu Jogesh you were touring in rural India when the news came that MFIN is asking all the lenders to restrict the number of loans to three per borrower. How was it received?
Jogesh: It was very slow, but what I saw is that even what they call center heads, women who are part of these baithaks, who are essentially head of the joint liability groups were also struggling to pay back. These are supposed to be borrowers who have the capacity to pay back well and were struggling. We heard from loan officers that essentially, there were people leaving houses and going away, well, they say absconding, but they are likely going to be with their husbands who are in cities to try and earn something to come back. Because it’s important to note where this money is coming from, what’s paying back.
As one of your guests said, it’s not rural and farm income that’s largely paying this back. It’s often when I sit with these baithaks it is women waiting on the phone for their husbands who do paint polish, or do construction work or drive taxis in Mumbai, Bangalore, Pune, to essentially pay that money back. It’s literally that interest payment, they are waiting for money to essentially come in.
Q: So bringing down to three borrowers is not easy, because you are usually taking one loan to pay for the other?
Jogesh: exactly you are taking one loan to pay for the other, and if you are not, because you suddenly have a limit, you are depending on your local relationships. So a lot of loan officers call this pipelining, which is, I need money, I have exhausted my number, so I have borrowed in your name, and then I have left and left you to pay it back.
Q: Mr. Seth, what’s your sense, has the number of borrowers with four loans increased in the third quarter?
Seth: As we are seeing the trend, and based on, purely on the data, while we have observed that the SROs are working towards sort of putting guardrails, etc. or implementation of that, but I think many of the lenders consciously have started doing that, and we are also seeing the improvement of that. If you see the data we have published, it shows that there is a percentage point improvement.
Whatever lending is happening today, there is a percentage point improvement in terms of number of lenders to a borrower is coming down. So which shows that there is a conscious effort being made, and probably this is one of the reason. I am sure if these guardrails are put in my SROs and people follow these guardrails, I am sure this will have a positive impact, though, the quantum of impact is still unknown. It will only be reflected in next couple of quarters. But definitely this is a positive sign, and this is something which is already started showing benefit.
For full interview, watch accompanying video
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