Loan Stress Eased To A Four-Quarter Low

This article examines the evolving dynamics of India’s microfinance sector in 2025, focusing on the surprising observation that loan stress has eased to a four-quarter low as of September 2025, according to Sa-Dhan’s microfinance report. 

We unpack what this means, why it matters for borrowers and lenders, and what structural forces are shaping the sector’s asset quality, loan growth, and lending practices.

Microfinance Stress Eases, But Challenges Persist

After several quarters of heightened stress in small-ticket credit, data from the Bharat Microfinance Report 2025 indicates that the share of microfinance loans overdue by more than 90 days, a key measure of stress, has come down to around 3.27 per cent in the quarter ended September 2025, from roughly 4 per cent at the end of December 2024. 

This four-quarter low suggests the sector may be stabilising after a period of rising non-performing loans (NPLs) and cautious lending.

However, beneath this improvement lies a complex picture: lenders have curtailed disbursements and tightened underwriting standards, while stressed portfolios remain elevated relative to historical norms. The easing of stress therefore reflects not only better repayment behaviour but also a shrinking loan book and more disciplined lending.

Transitioning from a period of deteriorating asset quality to stability raises several questions: What changed? Are MFIs (microfinance institutions) out of trouble? And what structural shifts are influencing credit access at the grassroots?

Microfinance Stress Hits Four-Quarter Low — What the Data Shows

When analysts talk about “loan stress,” they’re referring to the proportion of loans that are overdue beyond certain thresholds, typically 90 days or more, often classified as non-performing assets (NPAs). Recent data suggests that microfinance loan stress has edged down for the first time in a year.

According to a market summary drawing from Sa-Dhan’s report, the ratio of loans outstanding for more than 90 days past due fell to 3.27 per cent in the September 2025 quarter. This figure represents a four-quarter low in stress, providing some encouragement to lenders who had been grappling with elevated delinquencies.

Microfinance Stress Trend (Quarter-End)
 

This table shows that although microfinance stress remains above pre-FY23 levels, the decline in overdue loans suggests improved repayment discipline or portfolio cleanup by lenders. The improvement reflects both borrower behaviour and lenders’ deliberate slowdown in new loans, which reduces fresh stress but also limits credit access.

The decrease in stress is particularly meaningful given that the sector saw sharp delinquencies in FY 2024-25 — with measures like PAR 30+ (loans overdue 30+ days) rising and NPL ratios climbing.

Why Stress Declined: Lenders Tightened Credit and Borrower Risk Fell

Several factors explain why stressed loans eased:

A. Tightened Underwriting and Guardrails
Industry self-regulators Sa-Dhan and MFIN introduced stricter norms — such as caps on the number of lenders per borrower and loan outstanding limits. These limits reduced over-lending and helped lower borrower indebtedness, which had stood at 11.7 per cent in mid-2025.

B. Reduction in High-Risk Borrowers
Lenders also curtailed loans to borrowers with multiple active loans, thereby reducing exposure to overleveraged customers, a key source of defaults.

C. Cautious Lending Slowed Portfolio Growth
Credit delivery to microfinance borrowers shrank, disbursements in some quarters fell nearly 30 per cent versus prior periods, reflecting a deliberate de-risking approach.

As banks and NBFC-MFIs reduced loan books and tightened evaluation criteria, short-term delinquency eased because fewer high-risk loans were made. However, this cautious stance also means hindered credit access for new and existing borrowers.

What Rising Stress Levels Earlier Indicated — And Why They Matter

Before the recent easing, the microfinance sector faced rising stress that alarmed lenders and analysts. Reports for FY 2024-25 showed that overdue loans and delinquencies had surged, with ratios like PAR 30+ and NPL percentages climbing sharply.

This earlier stress was driven by several structural challenges:

• Overleveraged borrowers taking loans from multiple lenders, increasing default likelihood.
• Economic volatility for low-income borrowers, whose income streams are irregular.
• Increased operational costs and competition with digital lenders, impacting collections and risk management.

Persistent stress had even prompted lenders to consider credit guarantee schemes and other risk-sharing mechanisms to support microfinance institutions — indicating the depth of pressure at times. 

What This Means for Borrowers, MFIs, and the Financial System?

The reported improvement in stress ratios carries different implications for different stakeholders:

Borrowers:
The easing of stress may indicate improved repayment capacity or portfolio sanitisation, but credit access remains cautious. While fewer loans become overdue, new credit is harder to obtain, potentially limiting the ability of low-income households to finance enterprise or livelihood needs.

MFIs and Lenders:
A lower ratio of overdue loans strengthens balance sheets and reduces provisioning requirements. However, profitability and loan growth prospects remain under pressure, with some institutions facing funding constraints and slower expansion.

Financial System:
Microfinance is considered key to financial inclusion because it serves borrowers with limited access to formal banking. A stable asset quality trend may encourage more investment, but sustained recovery depends on funding flows, borrower support programs, and regulatory clarity.

Conclusion

The observation that microfinance loan stress is at a four-quarter low by September 2025 is cautiously positive. It suggests that the worst of the repayment stress may be behind the sector, thanks to tighter underwriting, reduced over-lending, and disciplined portfolio management.

However, this trend does not mark a full recovery. A combination of shrinking loan books, cautious new lending, and capital constraints still constrains growth prospects. For borrowers, disciplined lending offers protection but limits access. For lenders, improved metrics reduce short-term risk but require longer-term strategies to sustainably expand credit.

In essence, while the easing of stress is welcome, stabilising the microfinance ecosystem will require a balance between credit discipline, borrower welfare, and inclusive lending practices.
 

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