S&P sees risks for Indian microfinance lenders’ $35 billion loan book | Finance News
By Siddhi Nayak and Divya Patil
Indian microfinance lenders are facing renewed strains on their portfolios as price pressures and weak monsoon threaten rural incomes, raising the risk of defaults across the industry’s $35 billion loan book.
“A weak monsoon could slow loan growth as lenders tighten underwriting standards and borrowers’ repayment capacity deteriorates,” Geeta Chugh, sector lead for financial institutions at S&P Global Ratings, said in an interview. About 20 per cent of microfinance borrowers have loans from more than two lenders, she estimated, adding that this segment has begun posting much higher delinquency rates than borrowers with few lending relationships.
Lenders including Bandhan Bank Ltd., and non-bank firms such as CreditAccess Grameen Ltd., Satin Creditcare Network Ltd. and Muthoot Microfin Ltd., have significant exposure to the sector. At Bandhan Bank, loans to the microfinance and micro-lending sector accounted for 23 per cent of the total loan book at the end of March.
The microfinance sector had been under stress for the last two years after rapid credit expansion left many borrowers over-leveraged, driving up defaults and prompting lenders to tighten underwriting standards. However, conditions have begun to stabilize as lenders implement safeguards to curb borrower leverage and limit overall portfolio risk following guardrails from an industry body.
That recovery now faces new risks. India is expected to receive below-normal rainfall in July – the peak month of the monsoon season – after experiencing its driest June in 12 years. Poor rainfall hurts crop output and farm incomes, reducing rural households’ ability to spend and repay debt. At the same time, higher fuel, fertilizer and food costs linked to the Middle East conflict could keep inflation elevated, adding further strain on low-income borrowers.
Microfinance lenders typically have about 80 per cent of their exposures to rural areas, with 35 per cent of loans linked directly to agriculture, 9 per cent to agriculture-based enterprises and 20 per cent to animal husbandry, Chugh said. While credit quality has improved across most sectors, farming was a laggard and continued to show the highest non-performing loans, the central bank said in its report released in June.
“Macro headwinds, both from the ongoing effect of Middle East crisis and weaker monsoon will fuel inflation and lenders will be cautious towards this sector. If inflation persists, it could further erode borrower repayment capacity and amplify these vulnerabilities,” Chugh said.
