Microfinance credit costs to decline from 7-year high: Report

There has been stabilisation in the collection efficiency from non-overdue accounts since December 2024, apart from which the loan book originated post-implementation of Guardrail 1.0 is seeing relatively better collections than the overall portfolio, indicating better discipline at both the borrower and lender level, the report states.

The third favourable factor is that MFIs are likely to strategically increase their provisioning cover in the March quarter of fiscal 2025 itself, thereby fortifying their balance sheets and limiting any substantial incremental provisioning for fiscal 2026, the report states.

However, the report also lists two key monitorables. One, customer discipline post implementation of Guardrail 2.0 from April 1, 2025, will bear watching. Two, continued disruptions in the collection performance of the Karnataka portfolio (the third largest state) due to the impact of varied ordinance interpretation by borrowers, may prolong the recovery in fiscal 2026.

Crisil Ratings Director Malvika Bhotika said: "With increased collection efforts and guardrails announced by self-regulatory organisations (SROs), the collection efficiency from non-overdue accounts has shown signs of stabilisation at around 98-99 per cent in the past 2-3 months. This is also reflected in fresh slippages to overdues and roll forwards to deeper overdue buckets having plateaued since December 2024."

Lending to over-leveraged borrowers was the primary factor that resulted in higher delinquencies for MFIs in the last fiscal. Resultantly, the reported delinquencies in the 90+ dpd (days past due) bucket are estimated to have more than doubled to around 6.0 per cent as on March 31, 2025, from 2.4 per cent as on March 31, 2024.

However, most MFIs have significantly upped provisions -- the provisioning coverage for stage 3 loans increased to 75 per cent as on December 31, 2024, from around 68 per cent as on March 31, 2024. Crisil Ratings believes MFIs are likely to take accelerated provisioning in the final quarter of fiscal 2025 so as to start fiscal 2026 on a relatively clean slate. Consequently, credit costs are estimated at a seven-year high of 6.5-7.0 per cent for fiscal 2025, thereby significantly impacting profitability for the year.