Capital crunch, poor asset quality topple small microfinance institutions
About half a dozen microfinance companies across India have defaulted on bank loans after battling asset quality stress and funding crunch for at least six quarters, putting a question mark over the survival of smaller and under-capitalised micro lenders that typically serve low-income borrowers.
Non-banking finance company-microfinance institutions with low capital buffers urgently need funding from banks and bigger, cash-rich, non-bank lenders to ensure they remain in business, people familiar with the matter told ET.
VFS Capital, one of India’s oldest microfinance firms where Bandhan Bank founder Chandra Shekhar Ghosh once worked, is the latest casualty of the asset-quality stress and has joined the swelling list of NBFC-MFI defaulters.
Others that have defaulted on bank loans lately include Navachetana Microfin Services (Karnataka) and Arth Finance (Rajasthan).
Legacy Stress
Inditrade Microfinance (Maharashtra) is also on that list, said multiple people aware of sectoral stress.
“Small and medium sized microfinance institutions are facing a liquidity crunch and it has become difficult for them to operate without any institutional funding support,” said Jiji Mammen, executive director of Sa-Dhan, a self-regulator for the microfinancing industry.
Stress in the sector began building in April last year, after a brief revival from the pandemic blues. At the end of the September quarter this year, the ratio of later-stage portfolios at risk over 180 days (including write-offs) surged to 15.32%, up 9.71% year-on-year and 2.89% sequentially, data from credit bureau Crif High Mark showed. This reflects legacy stress and ongoing portfolio recalibration.
Business Shrinks
India’s micro-loan market contracted to ₹3.46 lakh crore, registering a 17% year-on-year drop, in sync with a near 20% fall in the number of active loans to 132 million. Listed microfinance firms such as Fusion Finance and Spandana Sphoorty Financial suffered net losses in the second quarter, extending the run of negative earnings they reported over the past several quarters. Mainstream lenders such as Bandhan Bank, IndusInd Bank, IDFC First Bank and RBL Bank have also encountered profitability hits on higher credit costs due to the stress in their microfinance portfolios.
VFS Capital, which has a cumulative exposure of ₹143 crore toward five lenders, failed to meet its repayment commitments, showed the minutes of the meeting of the joint lenders held last week. The total overdue amount of VFS stood at ₹82 crore and the dues are unpaid for the past 45 days. ET reviewed the minutes of the lenders’ meeting.
VFS had applied for a small finance bank licence from the Reserve Bank of India (RBI) in January, and withdrew this last month after its financial condition worsened.
Indian Overseas Bank has the highest exposure to VFS, at ₹73 crore. State Bank of India, which has a regular and standard account with VFS to date, said it did not hold any account status meeting with the lender.
But affected lenders, including Bank of Maharashtra and IDBI Bank, told VFS to submit financial statements and a certified book debt statement for the quarters ended June and September. At Navachetana, debt servicing has been delayed since April. People aware of the matter said the company submitted a debt restructuring plan to lenders with the proposal to repay the dues in the next seven years. The company has 19 lenders.
Some of the Navachetana loans from banks have already turned into non-performing assets (NPAs) by legal definition. The MFI delayed payments due to stress in liquidity as a dip in collection efficiency hurt its cash flows, people cited said. Loans not serviced for 90 days are classified as NPAs.
VFS managing director Kuldip Maity did not respond to calls or messages, while Navachetana managing director Nagendra Mali and Inditrade group chairman Sudip Bandyopadhyay declined to comment. Officials with Arth Finance could not be immediately reached for their comment.
Loans under lens
Lenders to these entities have suggested forensic audits.
“For restructuring of bank accounts, it is mandatory to do a forensic audit. Restructuring can be done only if the forensic audit establishes that default is due to business loss,” a person aware of the development said.
In April, Acuite Ratings & Research downgraded Arth Finance’s long-term rating to the default category. Infomerics Ratings downgraded Inditrade Microfinance to junk in October last year for its long-term loan, non-convertible debentures, and short-term fund-based term loan facilities.
Small lenders hit too
Several other small and tiny lenders are also facing liquidity crisis and difficulties in business. Sectoral leaders said that without institutional funding, several other small lenders will be on the brink of default very soon.
“Financial institutions need to become a bit lenient while lending to these smaller entities,” said Mammen of Sa-Dhan. A government guarantee programme can facilitate lending to these entities. We are expecting the government to consider our proposal to provide a guarantee fund for the microfinance sector.”
Meanwhile, Kerala’s Janashree Microfin, having failed to raise the net-owned fund to the minimum level of ₹7 crore, sought an extension of the deadline to March next year.
Non-banking finance company-microfinance institutions with low capital buffers urgently need funding from banks and bigger, cash-rich, non-bank lenders to ensure they remain in business, people familiar with the matter told ET.
VFS Capital, one of India’s oldest microfinance firms where Bandhan Bank founder Chandra Shekhar Ghosh once worked, is the latest casualty of the asset-quality stress and has joined the swelling list of NBFC-MFI defaulters.
Others that have defaulted on bank loans lately include Navachetana Microfin Services (Karnataka) and Arth Finance (Rajasthan).
Legacy Stress
Inditrade Microfinance (Maharashtra) is also on that list, said multiple people aware of sectoral stress.
“Small and medium sized microfinance institutions are facing a liquidity crunch and it has become difficult for them to operate without any institutional funding support,” said Jiji Mammen, executive director of Sa-Dhan, a self-regulator for the microfinancing industry.
Stress in the sector began building in April last year, after a brief revival from the pandemic blues. At the end of the September quarter this year, the ratio of later-stage portfolios at risk over 180 days (including write-offs) surged to 15.32%, up 9.71% year-on-year and 2.89% sequentially, data from credit bureau Crif High Mark showed. This reflects legacy stress and ongoing portfolio recalibration.
Business Shrinks
India’s micro-loan market contracted to ₹3.46 lakh crore, registering a 17% year-on-year drop, in sync with a near 20% fall in the number of active loans to 132 million. Listed microfinance firms such as Fusion Finance and Spandana Sphoorty Financial suffered net losses in the second quarter, extending the run of negative earnings they reported over the past several quarters. Mainstream lenders such as Bandhan Bank, IndusInd Bank, IDFC First Bank and RBL Bank have also encountered profitability hits on higher credit costs due to the stress in their microfinance portfolios.
VFS Capital, which has a cumulative exposure of ₹143 crore toward five lenders, failed to meet its repayment commitments, showed the minutes of the meeting of the joint lenders held last week. The total overdue amount of VFS stood at ₹82 crore and the dues are unpaid for the past 45 days. ET reviewed the minutes of the lenders’ meeting.
VFS had applied for a small finance bank licence from the Reserve Bank of India (RBI) in January, and withdrew this last month after its financial condition worsened.
Indian Overseas Bank has the highest exposure to VFS, at ₹73 crore. State Bank of India, which has a regular and standard account with VFS to date, said it did not hold any account status meeting with the lender.
But affected lenders, including Bank of Maharashtra and IDBI Bank, told VFS to submit financial statements and a certified book debt statement for the quarters ended June and September. At Navachetana, debt servicing has been delayed since April. People aware of the matter said the company submitted a debt restructuring plan to lenders with the proposal to repay the dues in the next seven years. The company has 19 lenders.
Some of the Navachetana loans from banks have already turned into non-performing assets (NPAs) by legal definition. The MFI delayed payments due to stress in liquidity as a dip in collection efficiency hurt its cash flows, people cited said. Loans not serviced for 90 days are classified as NPAs.
VFS managing director Kuldip Maity did not respond to calls or messages, while Navachetana managing director Nagendra Mali and Inditrade group chairman Sudip Bandyopadhyay declined to comment. Officials with Arth Finance could not be immediately reached for their comment.
Loans under lens
Lenders to these entities have suggested forensic audits.
“For restructuring of bank accounts, it is mandatory to do a forensic audit. Restructuring can be done only if the forensic audit establishes that default is due to business loss,” a person aware of the development said.
In April, Acuite Ratings & Research downgraded Arth Finance’s long-term rating to the default category. Infomerics Ratings downgraded Inditrade Microfinance to junk in October last year for its long-term loan, non-convertible debentures, and short-term fund-based term loan facilities.
Small lenders hit too
Several other small and tiny lenders are also facing liquidity crisis and difficulties in business. Sectoral leaders said that without institutional funding, several other small lenders will be on the brink of default very soon.
“Financial institutions need to become a bit lenient while lending to these smaller entities,” said Mammen of Sa-Dhan. A government guarantee programme can facilitate lending to these entities. We are expecting the government to consider our proposal to provide a guarantee fund for the microfinance sector.”
Meanwhile, Kerala’s Janashree Microfin, having failed to raise the net-owned fund to the minimum level of ₹7 crore, sought an extension of the deadline to March next year.
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