Microfinance default rate tumbles to 5.3% from higher teens seen during pandemic

Financial Services
2 min read

The default rate was 16.7 per cent in June 2021 but has dropped as the economy recovered, says a report.

ETBFSI Research ,
ETBFSI

Published On Jan 20, 2023 at 08:00 AM IST

Read by: 100 Industry Professionals

Read by 100 Industry Professionals

Microfinance default rate tumbles to 5.3% from higher teens seen during pandemic - ET BFSI (3)

The default rate for the microfinance sector has fallen to 5.3 per cent in March 2022 from 16.7 per cent in June 2021 as the industry comes out of Covid induced stress.

“The portfolio at risk (30+ days) for the sector as a whole increased from 1.39 per cent in March 2020 to 9.01 per cent in March 2021. It then fell to 5.27 per cent in March 2022. The spike in 2021 and 2022 was attributable to loans under moratorium. It was also for subsequent restructuring falling due for payment but had a difficult livelihood situation that made loan service impossible,” the Inclusive Finance India Report by ACCESS Development Services.

Advt

Except for some seasonal and event-based developments, net non-performing assets have been less than 1 per cent in the last 20 years.

State-wise distribution

In terms of state-wise distribution of microfinance, the top 5 states accounted for 59 per cent of outstanding loans in FY22, which is lower than the level of 62 per cent in 2021. This decline indicates wider dispersion of MFI loans and thereby reduced concentration risk. Assam, recovering from the recent years of crisis, posted a negative growth of 32.6 per cent. Extreme state action results in a scarcity of credit for microfinance customers; this was the experience of AP and Telangana after the 2010 crisis. Against the national growth rate of 19 per cent in portfolio outstanding, two major states recorded very low growth – West Bengal (2.72 per cent) and Punjab (3.36 per cent).

The microfinance sector grew at a fast pace in 2010-11, however the sector was severely affected by demonetisation disruptions in 2016-17 and also the account of some MFIs becoming banks and their data getting excluded from the MFI segment.

The road ahead

The report said that while customer protection has evolved as a major foundational aspect of new regulations introduced by the government, but these may not be enough in the context of customer satisfaction. Improvements to loan products, aligning loan features to the purposes for which loans are taken and responsiveness to changing needs of customers are all priorities of a future in which customer centricity will be a prime driver of competitive differentiation.

Advt