TN, Karnataka rules may delay MFI recovery

Mumbai

Crisil Ratings has warned that microfinance institutions (MFIs) may not return to profitability before the end of the current fiscal year, due to state-level regulatory hurdles and legacy loan issues. The agency said that new ordinances in Tamil Nadu and Karnataka could disrupt recovery efforts, especially since both states account for 25% of the MFI portfolio.

The Tamil Nadu ordinance, effective from June 9, is similar to Karnataka’s law, which has already caused collection rates to drop to 80–85%, below normal levels. Meanwhile, poll-bound Bihar, which holds 15% of the MFI portfolio, is also under close watch. Historically, collections have been impacted in some states during elections due to sociopolitical tensions.

Crisil noted that although collection efficiency has improved to 98–99% and loan slippages are decreasing, MFIs still face challenges. Around 14% of loans are with over-leveraged borrowers linked to more than three MFIs, down from 23% in December 2024, but still considered risky.

New industry guardrails from April 1 aim to cap lenders per borrower, but older loans continue to impact asset quality. Crisil expects credit costs to reduce from 7.7% in FY25 to 6% in FY26, but said profitability will normalize only by Q4 FY26.

The sector’s strengths lie in its healthy capital base and adequate liquidity, especially among well-rated firms. However, the ability of MFIs to manage slippages and adapt to state-level regulations will be crucial for sustainable recovery in the coming months.