Daijiworld Media Network - Mumbai

Mumbai, Mar 19: After months of financial stress caused by borrower overleveraging, India’s microfinance sector is showing signs of improvement, according to a new report by HSBC Research. The sector has witnessed better loan collections and higher disbursements in February, leading to a more optimistic outlook.

The report suggests that while microfinance institutions (MFIs) are expected to see a positive turnaround in 2025, certain hurdles still need to be addressed. One key indicator of recovery is the improvement in “X bucket” collection efficiency, which refers to accounts that had no overdue payments at the end of the previous month. The efficiency rate in most states improved to 98.5-99.5% in February, signaling stronger repayment behavior among borrowers.

This positive shift has also contributed to reducing high employee attrition rates, a major concern for the industry over the past year. However, disruptions remain in Karnataka, where a government ordinance in February created significant operational challenges for MFIs. The proposed state bill seeks to exempt borrowers from repaying loans, including interest, borrowed from unlicensed and unregistered MFIs, raising concerns over financial stability in the region.

Despite these obstacles, individual MFIs have implemented measures to mitigate risks and stabilize their operations. Looking ahead, credit costs for MFIs are expected to decline in the April-June quarter as asset quality improves. However, new regulations coming into effect on April 1, which cap lending limits for borrowers, may push credit costs higher again.

The report also highlights that banks with microfinance exposure have a stronger long-term growth potential compared to standalone MFIs. With improving asset quality and attractive valuations, banks are positioned to generate better returns for investors. HSBC Research notes that banks, due to their diversified portfolios and resilient earnings, are likely to outperform standalone MFIs in the long run.