Microfinance credit costs may drop soon

Mumbai

Microfinance credit costs, which hit a seven-year high, are likely to fall in fiscal year 2026, according to a report by Crisil. The drop is expected because of stronger loan collections, better borrower-lender behavior, and stronger financial buffers by microfinance institutions (MFIs).

Collections from non-overdue accounts have been steady since December 2024. Loans given after Guardrail 1.0 — a lending rule change — are being repaid more regularly, showing improved discipline. In addition, MFIs are expected to raise their loan-loss provisions in the March 2025 quarter. This will make their balance sheets stronger and reduce the need for extra financial cover in the next fiscal year.

Still, there are risks. First, how borrowers behave under the new Guardrail 2.0 rules, starting April 1, 2025, needs watching. Second, MFIs are still facing problems in Karnataka — the third-largest microfinance state — where different rule interpretations are causing confusion and delays in collections.

Crisil Ratings Director Malvika Bhotika said collections from non-overdue accounts have stayed around 98–99% in recent months. This has helped reduce new delays in loan payments. In fiscal 2025, many MFIs dealt with more bad loans, mainly due to lending to already over-borrowed customers. Overdue loans in the 90+ days bucket rose to 6% by March 2025, up from 2.4% in March 2024.

Still, MFIs have raised their provisions for bad loans to 75% as of December 2024, up from 68% earlier. With more steps expected before fiscal 2026, Crisil believes credit costs will drop after peaking at 6.5–7% this year.