Microfinance Sector's Path to Profitability Riddled with Challenges

Microlenders are unlikely to achieve profitability before the fiscal year concludes, a domestic rating agency, Crisil Ratings, reported. The agency indicated that ordinances in Karnataka and Tamil Nadu concerning microfinance institutions' operations might impede the sector's recovery trajectory.

For over a year, lenders have contended with asset quality challenges stemming largely from borrowers with excessive leverage. In response to these difficulties, there has been a cap on the number of lenders per borrower, reinforcing the belief that microfinance is a cyclical business poised for eventual recovery. Crisil Ratings predicts a tough road ahead for microfinance institutions, with profitability expected to normalize only by the fiscal year's end.

The agency highlighted persistent pressure on asset quality despite implementation of guardrails from April 1. Additionally, disruptions by ordinances in Karnataka and Tamil Nadu continue to pose obstacles to recovery. These two states represent a quarter of the overall MFI portfolio, with poll-bound Bihar contributing 15 percent. Monitoring is crucial, especially considering past sociopolitical influences on collections during elections.

(With inputs from agencies.)