Stock Market Outlook 2025: This Sector Is Struggling, Thanks To Overdue Loans - Motilal Oswal

The microfinance sector in India is grappling with significant challenges, as highlighted in a recent report by Motilal Oswal, it noted that states like Bihar are emerging as hotspots for overdue loans, reflecting deep regional disparities in the microfinance landscape.

India's Microfinance Landscape: Broad Inequality

The report highlighted that while some regions maintain healthier loan portfolios, Bihar accounts for a disproportionate share of overdue loans, pointing to broader inequalities in financial inclusion. It said "The uneven distribution of microfinance penetration and its associated risks is another prominent issue. States like Bihar disproportionately account for high overdue loans".

The report emphasized that these regional imbalances not only highlight the uneven penetration of microfinance but also expose operational inefficiencies. These inconsistencies raise concerns about the efficacy of existing policies and highlight the need for tailored approaches to address the unique socio-economic challenges of different states.

A major concern flagged in the report is the issue of overleveraging. Many borrowers, burdened with excessive debt from multiple lenders, face repayment difficulties. The report said that this situation has worsened due to loopholes in borrower identification processes. In 2017, the sector moved from Aadhaar -based identification to voter ID-based verification.

India's Microfinance Landscape: Use Multiple IDs

Unlike Aadhaar, voter IDs lack a centralized and secure system, enabling some borrowers to use multiple voter IDs to secure loans from various lenders. This malpractice has exacerbated overleveraging, increasing the risk of loan defaults.
"Although voter IDs serve as verification documents, they lack the secure, centralized nature of Aadhaar, enabling some borrowers to use multiple voter IDs to secure loans from several lenders" said the report.

The microfinance institutions (MFIs) are also facing performance challenges, with rising provisioning requirements to safeguard against potential bad loans. Additionally, overleveraging and high-interest rates have eroded borrower trust in some regions, further straining the financial health of MFIs. 

The report warned that without immediate intervention, these issues could escalate into a systemic crisis, threatening the sustainability of the microfinance sector.
Addressing these challenges will require robust regulatory measures, improved borrower identification processes, and region-specific strategies to promote financial inclusion and stability. (ANI)