Worst over for MFIs, funding support crucial: SRO

Mumbai, Oct 10 (PTI) The worst is over for the troubled microfinance institutions, but "adequate funding support" is crucial for the segment serving the bottom-of-the-pyramid access credit going forward, a self-regulatory organisation said on Friday.

The stress in asset quality and consequently on the profitability is expected to continue for some more time and may stabilise in the second half of the fiscal year, Sa-Dhan, the self-regulatory organisation (SRO) for the industry, said.

"The positive part is that the stress pattern has started showing a decline, indicating the worst is over, and there could be a reversal in the decline of the loan outstanding witnessed in the previous FY 2024-25, provided adequate funding support is received," it said in a report.

It said the stress is a "cyclical phase" and will require "self-correction and continued institutional support" to regain stability and growth for the sector.

Strict adherence to regulatory norms, code of conduct, and guardrails is important for long-term stabilisation of the microfinance industry, it added.

Microfinance entities will have to act to improve collections, tighten risk controls, lean into digital transformation, and tap into evolving funding frameworks, which can reap future growth opportunities on a long-term basis, the report said.

It can be noted that after the emergence of stress over the last 18 months, the SROs in the industry adopted a two-phased adoption of guardrails, including ones capping the maximum exposure per borrower and also the number of entities she or he is taking loans from.

The Sa-Dhan report said the guardrails will slow down asset growth for the sector, but will help improve the industry's resilience.

"The long-term growth of the microfinance industry is expected to hinge on improved customer underwriting, digital adoption, policy interventions, and a renewed focus on responsible lending and improved collection practices," it said.

RBI's June 2025 circular reducing the minimum qualifying assets for NBFC-MFIs from 75 per cent to 60 per cent of total assets is a "positive step" which will allow for greater loan diversity, augment credit risk profiles and enable micro-lenders to meet other credit requirements of their borrowers, the report said.

Commenting on the issues in Karnataka and Tamil Nadu, it said the state-level regulatory interventions in two of the biggest MFI markets created some apprehension among the lenders regarding potential operational constraints and increased compliance requirements. PTI AA MR