Delinquency

Example

In FY2025, India’s microfinance sector experienced a significant increase in delinquencies, with an alarming 163% rise to ₹43,075 crore. The total gross loan portfolio stood at ₹3.81 lakh crore, resulting in a delinquency rate of approximately 11.3%. For unsecured business loans, the delinquency rate was 3.8% as of March 2025, while small-ticket personal loans (under ₹10,000) had the highest default rates.

Key Components

• Delinquency Rate: This represents the proportion of delinquent loans in relation to the total loan portfolio and is calculated as:

  Delinquency Rate=(Delinquent Loans/Total Loan Portfolio)×100

• Days Past Due (DPD): This refers to the number of days a payment is overdue. Common delinquency buckets include 31–180 days and 180+ days.

• Portfolio at Risk (PAR): PAR measures the share of loans overdue by more than 31 days. In FY2025, PAR (31–180 days) is 6.2%.

• Borrower Profile: Delinquency rates are typically higher among borrowers with multiple loans, low income, or those living in rural areas.

Benefits

• Early Warning: High delinquency rates serve as an early indicator of emerging risks, allowing lenders to intervene proactively.

• Credit Discipline: Monitoring delinquency encourages responsible borrowing and lending, helping both borrowers and financial institutions avoid future issues.

• Regulatory Oversight: The tracking of delinquency rates assists regulators and institutions in ensuring financial system stability and addressing systemic risks.

Challenges

• Rising Defaults: Overdue loans surged in FY2025, hurting lender profits and the sector's stability.

• Income Volatility: Many borrowers face unstable incomes, especially after the pandemic. This makes repayment defaults more likely.

• Collection Issues: Poor recovery systems and the move to digital platforms make it tough to collect overdue loans.

• Regulatory Pressure: With rising delinquencies, financial institutions face more scrutiny and compliance demands from the Reserve Bank of India (RBI).

• Financial Exclusion: Higher delinquency rates limit credit access for underserved and low-income groups, worsening financial exclusion.

Conclusion

Delinquency is key for assessing loan portfolio health and spotting credit risks. It acts as an early warning for lenders. However, rising delinquency rates can strain the financial sector and profits. As delinquencies increase, especially post-pandemic, financial institutions must improve collection systems, boost borrower support, and adapt to new regulatory demands to manage risks well.