NPA in Microfinance sector increased to all time high of Rs.50,000 crore

Non-performing assets (NPAs) in India’s microfinance sector have reached an all-time high of ₹50,000 crore, accounting for 13% of total loans as of December 2024. This sharp rise in bad loans comes despite the Reserve Bank of India’s (RBI) decision to ease capital requirements for risky unsecured loans.

Rise in Bad Loans in Microfinance

Microfinance institutions (MFIs) provide small loans to low-income individuals and small businesses, often without requiring collateral. However, many borrowers have struggled to repay their loans due to economic challenges, leading to a surge in NPAs. The increase in bad loans highlights concerns about financial stability in the sector.

RBI’s Move to Ease Capital Rules

In an effort to boost credit flow and reduce financial stress on lenders, the RBI recently lowered the capital buffer requirement for unsecured loans. This means that financial institutions are not required to set aside as much money as before to cover potential loan defaults. While this policy was aimed at encouraging lending, some experts worry that it could lead to higher risks in the microfinance sector.

Growing Concerns Over Loan Defaults

The rise in NPAs suggests that many borrowers are facing difficulties in repaying their loans, possibly due to job losses, inflation, and economic slowdowns. If the situation continues to worsen, it could impact banks, non-banking financial companies (NBFCs), and other lenders involved in microfinance.

Industry experts are now calling for stricter loan monitoring and better risk management to prevent further financial instability in the microfinance sector. Meanwhile, policymakers and financial regulators are expected to review the impact of RBI’s recent measures on the lending ecosystem.