MFI Risks Rise with Overleveraging in Bihar, UP

Chennai: Increasing borrower leverage, especially in states like Bihar and Uttar Pradesh, is a key concern for the micro-finance segment.

Post the pandemic and implementation of harmonisation guidelines including the removal of interest rate caps, the ease of funding from banks to non-banks, along with a growing need for priority sector loans led to substantial growth in disbursement by existing MFI lenders in FY24. For MFI borrowers, the check on household leverage becomes paramount, as improved availability of loans from MFI players, government loans, Kisan Credit Card loans, mudra loans, gold loans, and other fintech loans could overleverage the end MFI borrower, impacting repayment capability.

“Headwinds have appeared for the MFI segment recently due to events including heatwave, elections, field-level attrition, among others. Further, overleveraging in pockets also continues to be a reason for concern,” finds Ind-Ra.

Bihar and Uttar Pradesh grew at a significant pace over the last three-four years making Bihar the largest state in terms of outstanding AUM in the MFI industry since July 2023. Bihar and Uttar Pradesh grew at a CAGR of 30.5 per cent and 35.7 per cent over FY22-FY24 compared to the overall MFI CAGR of 18.1 per cent.

With growth in AUM, concerns regarding overleveraging of MFI borrowers continue to increase, especially at a faster pace in these states. The increasing average loan outstanding per borrower and rising interest rates have led to an increase in monthly debt obligations of the borrower. This, when seen in conjunction with the average monthly wages of the state, highlights increased credit risk of borrowers mainly in those states where wages are on the lower side like West Bengal, Bihar, Uttar Pradesh, Maharashtra, and Odisha. Some states such as Kerala and Tamil Nadu, despite a high average loan outstanding per borrower, stood comfortably supported by high wages in these states. West Bengal continues to show the highest overleveraging,

Further, mid and small-sized NBFC-MFIs were operating at high debt/equity levels. Ind-Ra notes that some of these NBFC-MFIs have raised capital recently to contain their leverage and some are in the advanced stages of raising equity. These NBFC-MFIs have a high concentration in Uttar Pradesh and Bihar.