Microlenders went on a lending frenzy. The moment of reckoning has arrived

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Subscribe to enjoy similar stories. Mumbai: Microfinance companies are facing the threat of a funding squeeze as banks and non-bank lenders have already slowed lending to them.

Karnataka’s plan to curb aggressive recovery practices has added to the uncertainty. According to industry experts, downgrades of three major microlenders only increases the risk of further defaults and rating cuts.

“Disbursements from banks have slowed down and they’re not giving fresh loans to MFIs (microfinance institutions)," said Jinay Gala, director, India Ratings and Research Ltd. “This funding tightness could play out for MFIs wherein banks could incrementally roll over their existing debt but giving them new credit lines would be a challenge." A lot of the microlenders could see their book shrinking because lending has slowed and incremental collections are being used to build on-balance sheet liquidity to manage immediate debt repayments or issues pertaining to asset quality and higher provisioning, Gala said.

Last Monday, Icra Ltd and Care Ratings Ltd downgraded Spandana Sphoorthy Financial Ltd after the company announced dismal results owing to rising stress in the MFI portfolio. The rating agencies said the company had breached certain financial covenants in respect of ₹640 crore of borrowings and received requests for early redemption of about ₹200 crore of non-convertible debentures till December.

“SFL’s performance in terms of profitability and asset quality has been impacted during 9M FY2025, on account of various issues including over-indebtedness of borrowers, dilution of credit discipline, elevation at field level attrition etc," said Care Edge, which expects both profitability and asset quality to remain under pressure. Also