Indian banks' microfinance loan stress to persist after new, informal regulation, bankers say

RBL Bank

08/11/2024 05:14

By Siddhi Nayak
       MUMBAI, Nov 8 (Reuters) - Indian lenders are bracing for
another wave of defaults in their microfinance portfolios in the
second half of the fiscal year after the banking regulator
recently further tightened rules for such loans, four bankers
said.
    The default rates in microfinance loans -- collateral-free
loans to those with annual income of up to 300,000 rupees
($3,556) -- had already jumped, as evidenced in the
July-September results of IndusInd Bank  INBK.NS , Kotak
Mahindra Bank  KTKM.NS , RBL Bank  RATB.NS  and Bandhan Bank
 BANH.NS .
    The Reserve Bank of India (RBI), both the central bank and
banking regulator, has previously publicly flagged unfair
practices in the sector, including "usurious" interest rates and
"unreasonably high" processing fees.
    Last month, in its latest move, the RBI asked lenders to
stop issuing new microfinance loans to borrowers unless they
have cleared previous loans, three of the bankers said.
    This, however, was conveyed informally, the bankers said,
and could lead to cascading defaults as some borrowers will fail
to repay dues without fresh credit. Banks offered such "netting
off" of loans since many borrowers don't have a steady source of
income, one banker said.
    The RBI did not respond to an email from Reuters. Three
bankers declined to be identified as they are not authorised to
speak to the media.
    Now, as the cessation of the netting-off impact starts
playing out, loan installments will start spiraling and the
stress in the sector should continue this quarter, said
Venkatesh M, managing director of IIFL Samasta Finance.
    "We are still not out of it."
    The impact could last even longer, according to Gaurav Dua,
senior vice-president and head of capital market strategy at
Sharekhan by BNP Paribas.
    "As regulations become stricter, stress will creep up and be
prolonged. We think that this could play out for the next 4-6
months," Dua said.
    Banks and non-bank lenders compete in the microfinance
market, which has led to rapid growth in the availability of
such credit. The total outstanding of such loans jumped by 18.3%
on-year as of June-end, per latest data from industry body MFIN.
    The RBI's instruction to stop netting off, one banker said,
was to prevent evergreening loans -- in which banks extend new
credit to borrowers unable to repay an existing loan, thereby
concealing the true status of non-performing assets (NPAs) or
bad loans.
 
 ($1 = 84.3680 Indian rupees)

 (Reporting by Siddhi Nayak; Editing by Savio D'Souza)
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