Northern Arc’s FY‑25 sector trends report on non‑banking financial company microfinance institutions (NBFC‑MFIs) provides a detailed picture of how portfolio growth, asset quality and profitability evolved for the firm’s partner institutions. The following article interprets the charts and tables from the report to help readers understand key themes such as geographical concentration, disbursement patterns, asset quality deterioration and the evolving funding environment. Click here to access the deck.
Partner overview and portfolio footprint
Northern Arc’s NBFC‑MFI partners operate across 26 states and four union territories. Bihar, Uttar Pradesh and Tamil Nadu account for roughly 41 % of gross loan portfolio, with Bihar alone contributing 17 % and Uttar Pradesh and Tamil Nadu contributing 14 % and 11 % respectively. The top ten states together account for over 81 % of the total portfolio. The map below illustrates the geographical spread and highlights the high concentration in northern and eastern states.
By March 2025 the partner book stood at ₹98,458 crore and served more than 3 crore borrowers. The same slide notes disbursals of ₹80,932 crore in FY‑25 and indicates that the portfolio at risk over 90 days (PAR 90) averaged 6 % with a current collection efficiency of 90 %. Leverage (Debt/TNW) was around 3.5x and the capital adequacy ratio (CRAR) a comfortable 28.2 %, suggesting adequate capital buffers. The average ticket size for new loans was ₹53 k while profitability remained under pressure, with the partners reporting a PAT/GLP of ‑1.9 % for FY‑25.
Portfolio growth and disbursement trends
AUM expanded rapidly through FY‑22 and FY‑23 — growing 44 % between March 2022 and March 2023. Aggregate AUM peaked at about ₹99,021 crore in March 2024 but declined by 17 % to ₹82,978 crore by March 2025. The bar chart below decomposes AUM into two segments: partners with portfolios larger than ₹5,000 crore (blue bars) and those below that threshold (black bars). Despite the slowdown, larger NBFC‑MFIs continued to dominate; they represented more than 80 % of the overall portfolio through FY‑25.
Disbursement patterns mirrored the AUM cycle. After peaking at ₹63,193 crore in the second half of FY‑24, disbursements fell sharply to ₹32,047 crore in the second half of FY‑25. Smaller NBFC‑MFIs (< ₹5,000 crore) also saw a reduction in disbursements from ₹9,140 crore in H2 FY‑24 to ₹5,396 crore in H2 FY‑25.
Microfinance loans remain the core product for partner NBFCs. Across FY‑25, 90 % of the portfolio comprised group‑based MFI loans; individual loans, MSME credit and other products accounted for the balance. Repayment frequency shifted slightly towards fortnightly schedules: monthly collections still dominated at 72 %, but the share of fortnightly repayments edged up from 11 % in March 2022 to 12 % in March 2025. Regarding end‑use, the mix of agriculture, animal husbandry and business development loans remained broadly stable, though the share of business development loans increased modestly to 29 % by March 2025. Loan‑cycle distribution indicates that more than half of outstanding loans were still in their first cycle, pointing to continued customer acquisition.
The portfolio’s high geographic concentration exposes NBFC‑MFIs to region‑specific risks. Growth in AUM varied widely by state. The panel below shows the share of portfolio outstanding (POS) by state and the compound annual growth rate over the past four years. States like Bihar, Andhra Pradesh and Telangana recorded strong growth (CAGR > 25 %) while more mature markets such as West Bengal and Tamil Nadu experienced de‑growth. The bottom pyramid chart emphasises the concentration: the largest state accounts for 17 % of AUM and the top ten states account for 81 % of the total. Only 31 % of AUM is spread across the top 50 districts.
Asset‑quality metrics deteriorated noticeably in FY‑25. The first panel below decomposes the portfolio into current loans, PAR 0‑90 and PAR > 90 buckets. Current loans fell from 95 % in March 2023 to 89 % in March 2025, while the share of loans overdue more than 90 days (PAR > 90) doubled to 5 %. Current collection efficiency also slipped: for large MFIs (≥ ₹5,000 crore) it declined from about 96 % in March 2024 to 90 % in March 2025. Smaller MFIs (< ₹5,000 crore) saw a similar trend but maintained slightly higher collection efficiency. The bottom charts show movements in PAR 30 and PAR 90 by AUM category. For large MFIs, PAR 30 spiked from 3.0 % in March 2024 to 7.8 % in September 2024 and remained elevated at 10.0 % by March 2025. PAR 90 for large MFIs rose to 6.5 %, while for smaller MFIs it increased more modestly to 3.5 %. These trends underscore rising stress in portfolios of larger lenders.
Delinquencies are not uniform across India. A state‑level heat map shows that Jharkhand, Odisha, Punjab, Gujarat, Rajasthan, Madhya Pradesh, Karnataka, Bihar and Chhattisgarh all reported PAR > 90 ratios above 6 % in FY‑25. In Jharkhand and Odisha, PAR > 90 reached 9 %. District‑level data reveals extremely high stress in pockets such as Morigaon (Assam), Gurdaspur and Pathankot (Punjab), and Balrampur in Chhattisgarh, where over 90 % of outstanding loans were overdue. The distribution of district‑level PAR 90 underscores that a small number of districts drive a disproportionate share of delinquencies.
In response to rising delinquencies, NBFC‑MFIs have taken several remedial measures. The report lists the implementation of Self‑Regulatory Organisation (SRO) guardrails, which cap overall borrower indebtedness at ₹2 lakh and limit the number of MFI lenders to three. Lenders have tightened credit by restricting loans to customers overdue more than 60 days and have reduced interest rates by 50–150 basis points to comply with regulatory guidance. Customer acquisition has slowed: many MFIs now open new branches only in regions with low existing penetration and focus on cross‑selling to existing customers. Additional initiatives include establishing dedicated credit verticals, setting up risk‑containment units, strengthening KYC practices (with a target of seeding PAN in 50 % of accounts by March 2025) and offering digital collections with cashback incentives.
Capitalisation and leverage
Despite rising delinquencies, the sector remains adequately capitalised. Net worth relative to AUM improved from 20.6 % in FY‑23 to 21.7 % in FY‑25, with larger MFIs maintaining higher absolute net worth. The bar chart below shows that partners with AUM above ₹5,000 crore raised ₹2,070 crore of equity in FY‑24 but only ₹24 crore in FY‑25, whereas smaller MFIs (< ₹5,000 crore) raised ₹400 crore in FY‑25. Capital adequacy (CRAR) strengthened to 29.6 % for smaller MFIs and 28 % for larger MFIs. Leverage (Debt/TNW) remained manageable at 3.5x for larger MFIs and 3.3x for smaller MFIs by March 2025.
The funding landscape shifted in FY‑25. Bank borrowings, while still dominant, declined from 53 % of outstanding debt in March 2024 to 51 % in March 2025. The share of debt from foreign banks and investors rose from 14 % to 18 %, and domestic financial institutions’ share increased from 11 % to 9 %. A bar chart comparing funding sources across AUM categories shows that smaller MFIs rely more on foreign investors (25 %) than their larger peers (17 %). Sanction data indicates that banks accounted for roughly 74 % of new sanctions in FY‑25, up from 67 % the year before; NBFC funding declined as alternative sources dried up. Transaction types also shifted: term loans remained the predominant instrument, but the share of pass‑through certificates (PTCs) and debentures increased modestly.
Liquidity buffers varied by size. Charts depicting free cash as a share
of total assets and cash relative to the next two months’ principal and
liability payments show that smaller MFIs (< ₹5,000 crore)
maintained free cash around 8.8 % of total assets in
March 2025, while larger MFIs held about 6.9 %.
Elevated credit costs severely eroded profitability in FY‑25. The ROA tree presented below shows that net interest income and fee yields stood at 13.8 % for smaller MFIs and 14 % for larger MFIs, but credit costs consumed 9.4 % of average GLP for large MFIs compared with 5.1 % for smaller peers. Consequently, profit before tax (PBT)/GLP was marginally positive for smaller MFIs but turned ‑2.6 % for larger ones, translating into a PAT/GLP of ‑0.2 %. The panel on PAT/GLP illustrates the sharp drop from 4.3 % in FY‑24 to around 0.1 % (small MFIs) or ‑0.2 % (large MFIs) in FY‑25.
The bottom panels plot the evolution of yields, cost of funds (COF) and spreads. Yields increased to 26 % for small MFIs and 24.3 % for large MFIs by FY‑25, but spreads narrowed due to rising funding costs. Provisioning buffers moved in tandem: loan‑loss reserves/AUM rose from 2.2 % to 3.0 % for smaller MFIs and from 2.3 % to 5.2 % for larger MFIs. Write‑offs also increased; large MFIs wrote off 8.9 % of AUM over FY‑25 compared with 2.2 % for smaller MFIs.
Credit‑rating agencies paint a cautious outlook for the microfinance sector. CRISIL expects credit costs to touch a seven‑year high of 6.5–7 % in FY‑25 but anticipates improvement in FY‑26 as collection efficiencies stabilise under SRO guardrails and high provisions taken in FY‑25 provide a buffer. ICRA downgraded its sector outlook to “Negative” in February 2025, forecasting AUM growth between ‑5 % and 0 % in FY‑25 and credit costs of 5.4–5.6 %, with profitability (RoMA) hovering near zero. ICRA expects modest growth of 10–15 % and RoMA of 1.3–1.7 % in FY‑26 and estimates funding requirements of ₹15,000–18,000 crore to support growth and refinance maturing lines. India Ratings projects that collection efficiency will remain under pressure in FY‑25 and only improve materially from the second half of FY‑26. While leverage has been cushioned by lower disbursements, credit cost is expected to remain high at 9.6 % in FY‑25 before normalising to around 4 % in FY‑26.
Northern Arc’s FY‑25 NBFC‑MFI report depicts a sector grappling with the after‑effects of rapid expansion during FY‑22–23. Asset quality weakened significantly as PAR 30 and PAR 90 ratios spiked, particularly among larger MFIs and in eastern and central states. Lenders responded by tightening credit, implementing SRO guardrails, slowing new customer acquisition and improving risk management. Despite rising delinquencies, capital adequacy and liquidity buffers remain reasonable, supported by moderate leverage and diversified funding. However, profitability has been squeezed by higher credit costs and operating expenses. Rating agencies expect credit costs to remain elevated through FY‑25 before moderating in FY‑26, and growth to recover only gradually. Investors and stakeholders will need to monitor asset‑quality trends, regulatory developments and funding access closely as NBFC‑MFIs navigate this challenging phase.
Disclaimer
This article is based on Northern Arc’s FY-25 NBFC MFIs sector report. It is intended for informational purposes only and does not constitute investment advice or a recommendation.