Microfinance stress eases, SFB asset quality set to improve

Mumbai: Gross non-performing assets (GNPAs) of small finance banks (SFBs) are expected to decline by about 1.2 percentage points to 2.6-2.8 per cent by March 2027 from 3.8 per cent in March 2026 and 4.4 per cent in March 2025, Crisil Ratings said on Wednesday.

The improvement is expected to be driven by the normalisation of the microfinance business, stronger risk management and stable asset quality across other lending segments.

The microfinance portfolio had experienced elevated credit stress over the past two financial years because of borrower over-leveraging. Although microfinance accounted for around 30 per cent of SFB advances, it contributed disproportionately to overall delinquencies.

SFBs responded by calibrating growth, strengthening underwriting practices and tightening risk-management standards, including aligning with the microfinance industry’s Guardrails 2.0 framework.

Banks also wrote off around 7 per cent of their outstanding portfolio as of March 2024, largely involving microfinance loans.

“As newer vintages originated under the revised guardrails season and account for a larger share of the overall microfinance book, asset quality is expected to improve further,” said Aparna Kirubakaran, director at Crisil Ratings.