Stress in microfinance

If the business is to remain viable for lenders, law shouldn't hamper them from recovering loans

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HAVING GROWN AT a rapid clip, India's microfinance sector today is in the midst of a crisis. Not only are defaults shooting up, state governments are intervening — legally — to keep lenders from coercing borrowers into repaying loans. Credit bureaus estimate that gross non-performing assets (NPAs) for the space shot up to 16% at the end of March, up from 8.8% a year earlier; in absolute numbers the NPAs stood at a not-so-insignificant ₹61,000 crore, up from ₹38,000 crore. It's not just the small finance banks or non-banking financial companies, but banks too have been hit by bad loans. Not surprisingly, all lenders are reducing exposure to the sector; the gross loan portfolio contracted by about 7% to ₹3.8 lakh crore at the end of March.

The worst may not be over, say banks who believe there could be another two quarters of pain before the defaults start to taper off.