Tightening regulations and stricter underwriting standards in Indian microfinance will rein in growth plans for sector lenders and defuse risk buildup for overleveraged borrowers, said S&P Global Ratings.
These same trends, however, will weigh on asset quality given many clients rely on new loans to repay old ones, per credit analyst Shinoy Varghese.
“In our view, many microfinance institutions have tightened their lending norms after the fresh guidelines laid out by the MicroFinance Institutions Network (MFIN).
“This should keep a check on asset quality strains. We expect the non-performing loan ratio to peak by the fiscal year that ends March 31, 2026,” Varghese said.
Microfinance loans typically have tenors below two years and are collateral-free for borrowers with an annual income of up to ₹3 lakh ($3,468).
Financial inclusion
The agency noted that regulatory fluctuations – easing microfinance rules and tightening up again – will remain a core characteristic of the high-risk, high-reward Indian micro finance lending niche.
It observed that India’s poorest borrowers have leveraged up in the past few years in response to easing microfinance rules. Now, the sector is tightening up again.
S&P emphasised that microfinance is critical to financial inclusion in India and can help low-income borrowers to participate in the country’s growth trajectory.
“That’s led to the easing of rules in recent years, to give such individuals more scope to participate in the post-pandemic economic rebound,” said the agency.
“At the same time, loose monitoring allowed borrowers to tap multiple institutions, driving up borrower leverage,” it added.
Credit boom
Moreover, the credit boom was compounded by deregulation in the microfinance lending rates in 2022, making it highly lucrative for lenders.
Such exuberance led the self-regulatory MFIN to begin rolling out tighter borrowing rules in August 2024. Lending in the sector has since contracted.
S&P assessed that a slowdown in lending will also add to asset quality stress. This is because in the microfinance lending boom that followed the pandemic, many borrowers repaid loans to one lender by borrowing from another.
This is why the MFIN began capping lenders last August, and will tighten this further starting April.
