Asset quality stress in MFI sector expected to persist in H1 FY26: Report

Asset quality stress in the NBFC-MFI sector surged in 2024-25 amid borrower overleveraging as well as operational challenges, and the pressure is expected to persist in first half of the current fiscal, a report said.

ICRA's July 2025 analysis on the Non-Banking Financial Company - Microfinance Institution (NBFC-MFI) said that the AUM of the sector declined 12 per cent in FY2025.

However, the rating agency said it anticipates growth to resume in FY2026 to 10-15 per cent.

As per the report, asset quality stress surged in FY25 largely due to borrower overleveraging, sociopolitical disruptions, and operational challenges.

ICRA has a negative outlook on the sector, given the lingering asset quality stress and subdued profitability.

Overall stress in FY2025 surged to 15.3 per cent vis-a-vis opening stressed pool of 5.9 per cent as of March 2024 on account of significant deterioration in asset quality in the microfinance sector, the report said.

Given the deterioration in asset quality, the report said the provision cover of NBFC-MFIs increased to about 4.8 per cent of on-book portfolio as on March 31, 2025, from 2.8 per cent as on March 31, 2024.

The AUM of NBFC-MFIs declined by 12 per cent in FY2025 (growth of 29 per cent in FY2024) amid operational challenges and asset quality concerns.

Further, the increase in borrower rejection rates resulted in subdued disbursements, it said.

As per the recent RBI circular dated June 06, 2025, on review of qualifying assets criteria, NBFC-MFIs are now required to maintain qualifying assets of minimum 60 per cent of the total assets over the earlier requirement of 75 per cent.

This shall improve NBFC-MFIs' loan diversity, thereby augmenting their credit risk profile, and enabling them to meet other credit requirements of their end borrowers, ICRA said.