Asset quality stress surged in FY2025 amid borrower overleveraging, sociopolitical disruptions, and operational challenges; pressure expected to persist in H1 FY2026. The AUM of NBFC-MFIs declined by 12% in FY2025; however, ICRA anticipates growth to resume in FY2026 to 10-15%. ICRA has a Negative outlook on the sector, given the lingering asset quality stress and subdued profitability.

• Overall stress (SMA + GNPA + write-offs + SR) in FY2025 surged to 15.3% vis-à-vis opening stressed pool (SMA + GNPA + SR) of 5.9% as of March 2024 on account of significant deterioration in asset quality in the microfinance sector; stress expected to persist in H1 FY2026.
• Asset quality weakened across lender categories in FY2025, with banks more impacted, while NBFCs reported lower GNPAs due to aggressive write-offs and sale of stressed portfolio to ARCs.

Source: ICRA’s sample set of companies comprising 4 banks, 6 small finance banks, 2 NBFCs and 12 NBFC-MFIs; ICRA Research; Opening stressed pool (Mar 31, 2024) = (SMA + GNPA + SR) / AUM as on Mar 31, 2024; Stressed witnessed in FY2025 (Mar 31, 2025) = (SMA + GNPA + SR + write-offs) / AUM as on Mar 31, 2024

Exhibit: Lender overlap as of September 30, 2024

Source: ICRA’s sample set of companies comprising ~45% of the AUM of NBFC-MFIs; ICRA Research