Microfinance Crisis: India’s microfinance sector is facing a massive crisis. Loans worth ₹50,000 crore have turned bad, creating huge pressure on banks and financial institutions. The situation is alarming, as the percentage of non-performing assets (NPA) has touched 13% of the total loan amount. But why is this happening? And what does it mean for banks and borrowers?
Microfinance in Deep Trouble
Microfinance institutions provide loans to low-income groups, especially small traders, the poor, and women with an annual income of less than ₹1 lakh. These loans are given without any guarantee, making them highly risky. The problem? More and more people are unable to repay their loans. Currently, for every ₹100 lent, ₹13 is not coming back.
The “portfolio at risk” has also jumped from 1% to 3.2%, and loans overdue for more than 180 days have touched a shocking 99.7%. If we include those institutions that have not reported data in the last six months, the total bad loans could be around ₹56,000 crore.
Which Banks Are at Risk?
Banks with heavy exposure to microfinance are in big trouble. Bandhan Bank is struggling with an NPA of 5.61%, while small finance banks like ESAF and Utkarsh are reporting huge losses. Even big names like IndusInd Bank, IDFC First Bank, and RBL Bank are feeling the heat.
Equitas, Jana Bank, and Ujjivan Small Finance Bank have also reported declining profits. If this situation continues, the impact could spread to the entire banking sector, leading to more financial instability.
Why Is This Happening?
Three major reasons are driving this crisis. First, banks have aggressively given loans beyond borrowers’ repayment capacity. Second, economic challenges like the COVID-19 pandemic, inflation, and job losses have made it difficult for people to repay loans. Third, since microfinance loans are given without collateral, the risk of defaults is always high.
To tackle this crisis, the RBI has reduced the risk weight on microfinance loans from 125% to 75%, allowing banks to secure more capital and continue operations. The government and RBI are trying to stabilize the sector, but will these efforts be enough?
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