He notes that while short-term hurdles remain, improved loan performance and consistent demand indicate initial signs of recovery. Enhanced funding access and disciplined lending practices are expected to foster gradual growth, even though the sector must remain cautious about potential risks.
These are edited excerpts from the interview.
Q: To begin with, what are your thoughts on the scheme? The size has expanded from ₹7,500 crore to ₹20,000 crore. Notably, a fee of 0.5% and a ceiling of 20% of the assets under management (AUM), or ₹300 crore per microfinance institution (MFI), have been introduced. Does this represent a significant improvement? Will this alone change the situation? The duration is set for six months, of course.
A: This is a remarkable step taken by the government. We have advocated for this over the last six to eight months, and finally, progress has been made; I am grateful to them. ₹20,000 crore is substantial, and as the government has indicated, it will aid around 40 to 50 lakh borrowers. With this guarantee, banks can leverage approximately ₹25,000 crore in funding to the sector, specifically for the NBFC-MFIs, which would significantly boost the sector.
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The sector’s portfolio has declined. Comparing it to March 2024, this drop is approximately 28%, from ₹433,000 crore to about ₹310,000 crore. We have alerted the government that during this funding winter, around 50 to 60 lakh customers have exited the formal finance sector, and we believe this liquidity will help us bring them back, thereby providing a boost to the sector.
Q: For banks and NBFCs, lending decisions are not solely based on guarantees, especially since this is not a 100% guarantee—they rely on credit ratings, risk assessments, and underwriting. While asset quality for MFIs has improved in the 1–90 days past due category, delinquencies in the 180-days-plus bracket have risen to nearly 16%. What impact will this have on lender confidence, and could the advantages of the scheme be restricted to well-rated MFIs with stronger promoters?
A: As you mentioned, the one to 90 days, which reflects recent lending, has decreased to 1.9%, which is quite normal and even better than figures from two to three years ago. While the 180-day-plus delinquency rate is around 15%, these loans that appear as 15% are already provisioned for by all NBFCs under the expected credit loss (ECL) system as per Indian Accounting Standards (Ind AS).
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After around 90 days, provisioning becomes 100%. Therefore, these are older loans categorized under the 180-plus bucket, and the provisions are already accounted for in the balance sheets. Regarding new loans, as you pointed out, the one to 90 days, or extending it up to 120 days, is behaving normally, which should provide reassurance. These older loans have been accounted for and should not be a cause for alarm.
Q: Do you believe asset quality has reached its lowest point for the segment?
A: Yes, because for the past four months, it has been gradually increasing each month. The January figures indicate that one to 30 days is at 0.8% and 31 to 90 days is at 1.1%, totaling 1.9% for the one to 90 days category. Even when compared to three years ago, this is similar. Additionally, it is essential to consider that asset quality is measured against the gross loan portfolio. A 1.9% figure in a declining gross loan portfolio reflects a denominator effect. If the sector had continued to grow and distribute at the same rate, these numbers could have been lower—perhaps not 1.9%, maybe around 1.2%, which would be a strong figure.
Q: The average ticket size of MFI loans has significantly increased to around ₹61,000, primarily due to repeat lending to better-verified, higher-rated borrowers instead of new customers. Do you anticipate that this borrower mix and lenders’ risk assessment will meaningfully change with the ₹20,000 crore guarantee? Furthermore, considering past delays and challenges in accessing payouts from the credit guarantee trust, how confident are lenders about the scheme’s effectiveness?
A: In 2022, the guarantee scheme launched due to COVID had an outlay of ₹7,500 crore. Out of this amount, which would have facilitated funding around ₹10,000 crore, only ₹11–12 crore went into default, necessitating recourse. This is a negligible figure and shouldn’t raise concerns. Regarding the average ticket size rising to ₹60,000, repeat customers who have been with you for six or seven cycles, having higher loan amounts, shouldn’t raise alarms.
Also Read: Govt unveils new ₹20,000 crore MFI credit guarantee scheme to ease funding stress
For new-to-credit or first-cycle customers, the loan amounts would be even smaller, around ₹40,000 or ₹45,000, which along with inflation and price changes, has stayed aligned. So, the ticket size issue is relatively minimal.
Q: What are your thoughts on the Bihar MFI bill, and how significant will its impact be on the industry? It constitutes 15% of the market, although RBI-regulated entities are exempt.
A: The bill was approved by the Legislative Council on February 26th, and we are nearly a month past that. We are not observing any adverse effects, and we remain hopeful that this will continue.
