Microfinance Institutions (MFIs) in India are experiencing a significant surge in credit costs, reaching 9% of average total assets in FY25, up sharply from 2.6% in FY24.
The rise is primarily attributed to higher borrowing expenses and increased provisioning requirements, reflecting a cautious approach toward asset quality management and risk mitigation. Experts predict that elevated credit costs may persist into FY26, impacting profitability and lending strategies.
Why Credit Costs Are Rising
1. Higher Borrowing Expenses
MFIs are heavily dependent on bank borrowings, commercial papers, and institutional funding. Rising interest rates and tighter liquidity conditions have increased funding costs, translating into higher credit costs.
2. Increased Provisions
With potential non-performing assets (NPAs) on the rise, MFIs are maintaining higher provisioning buffers to safeguard against defaults, which contributes to the surge in credit costs.
3. Macroeconomic Factors
Sluggish economic growth, rural income fluctuations, and seasonal repayment pressures have also impacted credit performance, forcing MFIs to adopt conservative accounting practices.
Impact on MFIs
Profit Margins: Higher credit costs reduce net income, especially for smaller MFIs with limited capital buffers.
Loan Pricing: MFIs may pass on part of the cost to borrowers, potentially increasing interest rates for microloans.
Portfolio Strategy: Elevated credit costs may encourage selective lending, focusing on low-risk borrowers and regions with strong repayment histories.
Funding Mix: MFIs may seek longer-term borrowings or equity infusion to manage credit cost pressures.
Outlook for FY26
Analysts expect credit costs to remain elevated in FY26 due to persistent funding challenges and regulatory compliance requirements. However:
Digital collection and fintech integration may help reduce operational costs.
Risk-based pricing and better borrower assessment could mitigate future credit costs.
Policy support and refinancing from banks and NHB may offer some relief to MFIs, ensuring sustainable growth.
FAQ: Rising Credit Costs in MFIs
Q1. What caused MFI credit costs to rise sharply in FY25?
A: Higher borrowing costs, increased provisioning for NPAs, and macroeconomic pressures contributed to the surge.
Q2. How does this affect borrowers?
A: MFIs may slightly increase interest rates or tighten lending, potentially impacting access to microloans.
Q3. Will credit costs decline in FY26?
A: They are expected to remain elevated, though risk management and refinancing may provide relief.
Q4. Which MFIs are most affected?
A: Smaller MFIs with limited capital and higher dependence on external funding are most impacted.
Q5. How can MFIs manage rising credit costs?
A: By diversifying funding sources, adopting digital loan collection, and implementing risk-based loan pricing.
Conclusion
The surge in credit costs for MFIs to 9% of average total assets in FY25 marks a challenging phase for India’s microfinance sector. While necessary for risk management and prudential provisioning, elevated costs may impact lending rates and profitability.
Sustainable growth will depend on innovative funding, technology adoption, and strategic portfolio management to ensure MFIs continue to provide affordable credit to underserved communities.
Published on : 10th October
Published by : SMITA
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