KOCHI: ESAF Small Finance Bank’s latest numbers tell a story of a quiet retreat from microfinance.
Microloans now form just 49 per cent of ESAF Bank’s total loan book of Rs19,643 crore – down sharply from 73 per cent just two years ago. The drop isn’t a small correction and is not without a stated intent; it reflects a fundamental shift away from microfinance, a business that once defined its model.
ESAF Small Finance Bank MD & CEO Paul K Thomas has consistently maintained that the institution is paring down its microfinance portfolio — and that’s exactly what the numbers now reflect.
Muthoot Finance is planning to slow its microfinance business amid stress in the segment. The company’s Managing Director (MD) George Alexander said the company is ramping up its focus more on gold loans where demand remains strong,
At Manappuram Finance’s microfinance arm, Asirvad, the shift has been more painful. Its assets under management, including gold loans, dropped over 31 per cent year-on-year to Rs 8,189 crore in the March quarter.
The company posted a loss of Rs626 crore for the period, far worse than the Rs188 crore loss in the previous quarter. Credit costs soared as borrower defaults surged due to over-leverage. Operational disruptions and interventions by industry bodies only added to the strain.
Manappuran microloans to shrink
“We expect the MFI portfolio to drop to around 10 per cent of our consolidated book by the end of this year,” said VP Nandakumar, MD and CEO of Manappuram Finance, underlining a clear strategic retreat.
These aren’t isolated cases. A growing number of players in the microfinance space are pulling back, questioning the future of a model that was once synonymous with last-mile financial inclusion.
Delinquencies have been rising, especially in rural and semi-urban pockets where income volatility and multiple borrowings are increasingly common.
Borrower over-indebtedness is now a structural risk. Multiple MFIs often lend to the same borrower, raising repayment burdens and pushing default risk higher.
The group-lending model – long considered the backbone of microfinance – is no longer delivering the reliability it once did. Meanwhile, new-age fintechs are offering faster and easier credit alternatives, leaving traditional MFIs scrambling to stay relevant.
Larger implications
The shift has larger implications for Small Finance Banks. These banks were licensed by the Reserve Bank of India to serve the underserved – primarily through microfinance – where mainstream banks were absent or unwilling to go.
If microfinance shrinks or loses its economic logic, the identity of SFBs comes under pressure. Many of them lack the scale or brand recognition to compete directly with larger commercial banks in retail lending.
The transition isn’t without costs. Asirvad’s net non-performing assets stood at Rs177 crore as of March, and although the figure improved from the previous quarter, profitability continues to be weighed down. ESAF, too, has had to reorient its portfolio – gold loans now make up 29 per cent of its book.
For investors and regulators, this raises difficult questions. If SFBs are forced to pivot away from their core mandate of micro-lending, what remains their distinct value proposition?
For now, the answers are unclear. What is clear, however, is that microfinance – once the engine of inclusive credit – is slowing, and with it, the prospects of those who built their business models around it.
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