Kolkata: The microfinance sector in India is currently facing a severe crisis, as delinquency rates have surged to alarming levels, nearly doubling in recent times. According to recent data, the gross non-performing asset (NPA) ratio for this vital sector skyrocketed to 16% at the end of the fiscal year 2025, up from 8.8% the previous year. This steep rise in NPAs can largely be attributed to the crumbling of the joint liability-based lending model, which has been a cornerstone of microfinance operations.

In absolute figures, the total NPAs within the sector surged to 61,000 crore by the end of March, dramatically increasing from 38,000 crore just one year prior. This troubling data was gathered from a reputable credit bureau, illustrating the scale of the crisis. Over this same period, the overall gross loan portfolio of microfinance institutions contracted by approximately 7%, as lenders tightened their lending practices in direct response to increasing loan defaults.

Among various types of microfinance lenders, those in the small finance bank segment reported the highest sticky loan ratio, with 22% of their cumulative 59,817 crore in microfinance loans turning problematic by the end of the last fiscal year. In comparison, universal banks faced a slightly better scenario, with 17.5% of their 1.24 lakh crore of microfinance exposure classified as non-performing. The situation remains dire, as Shweta Daptardar, Vice President at Elara Securities, noted, The recovery is still at a distance. We may see certain green shoots only by the end of FY26. The asset quality stress may prolong for another two to three quarters.

For the non-banking finance company-microfinance institutions (NBFC-MFI) group, the bad loan ratio was reported at 12.3%, while other non-banking finance companies (NBFCs) experienced a slightly higher ratio of 12.8%. The looming regulatory environment in Tamil Nadu, which is set to impose stricter regulations on microfinance operations, is expected to exacerbate the already rising delinquency rates. Observers have drawn parallels to a similar situation in Karnataka, where new microfinance regulations were enacted in late February, resulting in an immediate spike in delinquency rates.

Daptardar commented, The Tamil Nadu Ordinance will exacerbate the challenge further. The Karnataka market took about two months to settle down after the enactment of the microfinance regulation law. Like in Karnataka, the Tamil Nadu bill is also targeted at unregulated entities but it would destabilize the market for some time.

The repercussions of this sectoral stress have been profound, significantly eroding investors' wealth. For instance, lenders such as Fusion Finance and Spandana Sphoorty Financial have witnessed staggering declines in their share prices, plummeting by approximately 66% to 68% over the past year. Meanwhile, CreditAccess Grameen, the largest NBFC-MFI in India, has experienced a 23% drop in its market valuation, and IDFC Bank saw a decrease of 18%, primarily due to the strain in its unsecured loan portfolio.

The microfinance institutions provide collateral-free loans to low-income households, typically those earning less than 3 lakh annually. Women are the primary beneficiaries of these financial products, as lenders often form joint liability groups (JLG) of women to act as a form of intangible collateral, facilitating otherwise unsecured lending.