Banks express no 'stress' as govt directs close monitoring of lending by MFI segment

The government has directed public sector banks to closely monitor lending in the microfinance segment, particularly in co-lending arrangements with shadow banks. It has also asked banks to ensure credit access for the government’s flagship schemes like the Mudra Yojana and PM Vishwakarma and maintain sensitivity during microloan recoveries.In a meeting earlier this week, the finance ministry asked lenders to exercise caution and adhere to due credit appraisal processes while sanctioning unsecured loans, particularly microloans. Banks have responded, stating that there is no significant stress in their retail unsecured portfolios, said people aware of the developments.

“The issue was discussed during the performance review of PSBs. It was suggested that lenders follow the strict underwriting process before sanctioning unsecured loans,” said an official, adding that banks were advised to be sensitive, especially in recoveries from retail and microfinance borrowers.

According to ratings firm ICRA, the AUM growth in microfinance loans and unsecured (personal and business) loans by NBFCs is expected to moderate to 10-12% and 19-21%, respectively, in FY25 compared to 30% and 38%, respectively, in FY24. It also expects NBFC net interest margins to fall by 20-40 basis points (0.2-0.4 percentage points). Most NBFCs have posted diminished profits and rising bad loans in their September-quarter financial results.

A bank executive said lenders conveyed to the government there is no significant stress in their retail lending portfolio, and that they have been cautious in their exposure after the Reserve Bank of India increased risk weights on consumer loans, making them costlier.

“Even the portfolio through co-lending hasn’t shown any worrisome sign of delinquencies,” said the executive. In November 2023, the RBI increased the risk weight on consumer credit for banks and NBFCs to 125% from 100%, requiring lenders to keep aside more capital to cover the risk. Loans to NBFCs by banks were also made costlier under the new directives, which increased risk weights by as much as 25 basis points.On Tuesday, the finance ministry held a performance review of PSBs across multiple dimensions, including financial soundness, digital initiatives, cybersecurity, customer-centric initiatives and financing support for priority sectors such as agriculture, MSMEs, and the government’s flagship financial inclusion schemes.

Last month, financial services secretary M Nagaraju warned that reckless or poor lending rules by microfinance institutions (MFIs) towards self-help groups would harm the sector, and made a case for developing sustainable and inclusive microfinancing methods.