Navigating the NPA Surge

As per latest reports, non-performing assets (NPAs) in India's peer-to-peer (P2P) lending sector have surged to ?1,163 crore in FY24, more than doubling from ?472.1 crore in FY23.

This increase elevates NPAs to 17% of total P2P lending, raising concerns about the sector's stability. The rise in NPAs is not limited to P2P lenders; microfinance institutions (MFIs) and non-banking financial companies (NBFCs) are also witnessing increasing loan stress, which is eventually leading to mainstream public and private banks.

This trend underscores the urgent need for adopting more responsible practices, which are often overlooked in the pursuit of rapid growth and scale. Many of these fundamental principles, which once served as our foundation, are being overlooked.

It’s time to revisit the basics and course-correct to reverse the current trend.

What can we do as a decision maker or being in a leadership role of a financial institution?

• Strengthen Risk Assessment Frameworks:

Do proper borrower profiling, and implement stricter underwriting standards to identify high-risk borrowers early.

• Enhance Monitoring and Collections:

Implement robust post-lending monitoring systems to track borrower behavior and proactively address repayment challenges through tailored intervention and support programs.

• Financial Literacy and Borrower Support:

Invest in educating borrowers about responsible borrowing, debt management, and financial planning, especially in underserved and rural segments, to improve repayment behavior.

• Focus on Cash Flow-Based Lending:

Assessing borrowers’ actual cash flows rather than over-relying on collateral or superficial credit histories. This ensures loans are aligned with repayment capacity.

In the end, cash is king!

• Strengthen KYC and Due Diligence:

Revisit and tighten basic Know Your Customer (KYC) norms and borrower due diligence to ensure accurate profiling and minimize fraud risks.

• Prioritize Small, Incremental Loans:

Return to issuing small-ticket loans with incremental increases based on proven repayment behavior, particularly for new borrowers.

• Reinforce Relationship-Based Lending:

Focus on building closer relationships with borrowers through regular engagement, fostering trust, and enabling early detection of repayment stress.

• Set Realistic Loan Tenures:

Align repayment schedules with borrowers’ income cycles, especially for informal sector workers, farmers, and micro-entrepreneurs.

• Reduce Concentration Risk:

Focus on onboarding new customers instead of overextending credit to existing ones, ensuring balanced portfolio growth and reduced concentration risk.

• Balance Growth and Risk:

Avoid increasing risk in the pursuit of growth and high efficiency. Optimizing should not mean cutting corners.

All of these may sound simple but ignored, intentionally or unintentionally by financial institutions, however, are the effective ways to build resilience, reduce defaults, and foster long-term growth.

By getting the fundamentals right, financial institutions can mitigate risks, maintain portfolio quality, and strengthen borrower trust for long-term sustainability.

Let’s not forget, it’s a marathon, not a sprint!

Reserve Bank of India (RBI) Sa-Dhan Association Microfinance Industry Network (MFIN) UNDP Sustainable Finance Hub IFC - International Finance Corporation Responsible Finance Fair4All Finance