Microfinance Credit Costs to Decline : Projected Decline in Microfinance Credit Costs: Report

Mumbai, April 9 (NationPress) Microfinance institutions (MFIs) are anticipated to experience a reduction in credit costs in fiscal 2026, driven by a stabilization in collection efficiency, improved borrower-lender discipline, and an enhancement in provision cover, as per a report by Crisil released on Wednesday.

Since December 2024, there has been a notable stabilization in the collection efficiency from non-overdue accounts. Furthermore, the loan book that originated after the implementation of Guardrail 1.0 is witnessing better collections compared to the overall portfolio, which signifies improved discipline from both borrowers and lenders, the report indicates.

Another positive factor is that MFIs are expected to strategically increase their provisioning cover in the March quarter of fiscal 2025, thereby strengthening their balance sheets and minimizing any substantial incremental provisioning for fiscal 2026, according to the report.

Nevertheless, the report highlights two critical factors to monitor. Firstly, customer discipline following the implementation of Guardrail 2.0 starting April 1, 2025, will be crucial. Secondly, ongoing disruptions in the collection performance of the Karnataka portfolio (the third-largest state) due to various interpretations of ordinances by borrowers may delay the recovery in fiscal 2026.

Crisil Ratings Director Malvika Bhotika remarked: "With enhanced collection efforts and guardrails introduced by self-regulatory organizations (SROs), the collection efficiency from non-overdue accounts has stabilized at around 98-99 percent in the past 2-3 months. This trend is also evident in new slippages to overdue accounts and transitions to deeper overdue categories, which have leveled off since December 2024."

Lending to over-leveraged borrowers was a significant factor that contributed to increased delinquencies for MFIs in the previous fiscal year. Consequently, reported delinquencies in the 90+ dpd (days past due) category are estimated to have more than doubled to approximately 6.0 percent as of March 31, 2025, up from 2.4 percent as of March 31, 2024.

However, the majority of MFIs have significantly raised their provisions—the coverage for stage 3 loans increased to 75 percent as of December 31, 2024, from around 68 percent as of March 31, 2024. Crisil Ratings anticipates that MFIs will adopt accelerated provisioning in the final quarter of fiscal 2025 to commence fiscal 2026 with a cleaner slate. As a result, credit costs are projected to reach a seven-year high of 6.5-7.0 percent for fiscal 2025, which will have a notable impact on profitability for the year.