Is India’s largest microfinance player facing a deeper crisis?

The Karnataka Ordinance is materially different (and better from an industry standpoint) primarily because it categorically excludes all MFIs registered with the RBI. Besides this, the terms of the Karnataka ordinance are eerily similar to those of the Andhra Pradesh ordinance. For example, both require lenders operating in the respective states to register themselves with the district authorities, along with all the employees responsible for dealing with the customers on the ground. Both require lenders to disclose interest rates transparently. Both ordinances even attempted to regulate interest rates, too, but were unsuccessful.

In Karnataka, the requirement for “unregulated entities” to register with district authorities essentially opens them up to prosecution. But it is also likely to have consequences on regulated entities such as CreditAccessGrameen. For example, delinquency rates are expected to shoot up even for regulated MFIs as borrowers struggle to differentiate between regulated and unregulated entities. However, the expectation is that this ‘disruption’ will be temporary.

The impact on CreditAccess Grameen

In its Q3FY25 investor communication, CAG highlighted that its PAR 15+, i.e. Portfolio-at-Risk (% of Portfolio becoming overdue by 15+ days) accretion had slowed since November 2025. This means a lower percentage of loans are moving into the unpaid buckets, lowering the expected Gross NPAs in the near term.

Fig 2: Source: CreditAccessGrameen / Q3FY25 Investor Presentation

However, since the Karnataka Ordinance was put into effect on February 13, the Karnataka loan book is once again showing higher PAR accretion.

Fig 3: Source: CreditAccessGrameen February 2025 Business Update

The monthly PAR15+ accretion rate for CAG’s loan book in Karnataka increased from 0.72% in January 2025 to 2.02% in February-end.

Fig 4: Source: CreditAccessGrameen February 2025 Business Update

So, despite continued improvement in incremental PAR trends, Karnataka remains a cause for concern.

But there is a fundamental concern about the MFI model itself. Investors believe that the sector is cyclical and is likely to bounce back eventually.

However, Nitin Mangal and Pranav Bhavsar of Trudence Capital Advisors challenge this view. They think that unlike the past cycles, this time, it indeed might be different because:

1. Agri incomes have grown by 5% from FY17 to FY23, according to a Ministry of Finance statement dated 31 January 2025. During the same period, average loans/borrower have increased at an annualised 13% rate.

2. Because end-use verification is challenging, a meaningful percentage of loans are used for consumption, which challenges the very basis of why MFI loans exist – employment generation and asset creation.

3. Borrower behaviour has changed. Unlike in the past cycles when borrowers believed that there would be consequences of not paying up, owing to local “ringleader” culture and pre-election farm loan waiver promises, the credit culture has severely deteriorated, especially in some of the eastern states.

4. The JLG (Joint Liability Group) model, the bedrock of the MFI model, seems to be faltering post Covid. With lower “social collateral”, asset quality is likely to be higher compared to past cycles.

The above factors point towards a concerning trend for the MFI sector.

As for Karnataka and CAG, the management is optimistic and believes that the “situation will normalise in 1-2 months”. We think it might take longer. But even if the Karnataka issue normalises in a quarter or two, CAG, as the largest microfinance player, has to contend with a larger issue: Will it continue to dominate an industry that is undergoing a slow and painful transition away from the JLG model? The real test awaits.

Note: We have relied on data from http://www.Screener.in and http://www.tijorifinance.com throughout this article. Only in cases where the data was not available have we used an alternate but widely used and accepted source of information.

Rahul Rao has helped conduct financial literacy programmes for over 1,50,000 investors. He also worked at an AIF, focusing on small and mid-cap opportunities.

Disclosure: The writer and his dependents hold shares in Arman Financial Ltd.

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