MFI Stress Narrative is Overblown: Aavishkaar’s Vineet Rai

Vineet Rai, founder and vice-chairman, Aavishkaar Group and a prominent voice in the impact investing space, has a clear message for those sounding alarm bells about stress in the microfinance (MFI) industry: the reality is far more nuanced.

As someone with deep insights into the sector, Rai believes that while challenges exist, they are often misinterpreted, creating a narrative that exaggerates the issues. The group runs its MFI business through the Kolkata-headquartered Arohan Financial Services, which is spread across 17 states with assets of over ₹7,000 crore (as of June 2024).

“What we all knew, one year ago — last September — was that there was a buildup of stress. So, all the actions were already taken, and now you are only seeing the results,” Rai tells Fortune India at the sidelines of the ongoing Sankalp Bharat Summit in Varanasi. “They (banking analysts) write based on the results, but they are pretty much six months behind in their analysis,” says Rai.

This lag in analysis comes amid certain data points indicating pressure on borrowers. According to a report by Crif High Mark, a credit information company, there was a 17.2% increase in borrowers with more than five active loan accounts as of June 2024 compared to the previous year. States such as West Bengal and Karnataka recorded the highest growth in such over-indebted borrowers.

“People are quick to jump to conclusions about MFI being the cause of such stress,” Rai counters. “But the industry doesn’t operate like that. These are exceptional circumstances driven by external factors — it has nothing to do with the fundamentals of MFI.” He draws on a simple analogy: “If it doesn’t rain, why wouldn’t people struggle for food? And if there’s no food, how will they repay their loans?”

Asset quality data adds another layer to the discussion. The largest stress in the sector, according to Crif High Mark, was observed in the 31–180 days overdue category, where 2.7% of loans were unpaid as of June, up from 2.1% in March. While this indicates rising short-term stress, Rai sees it as a manageable challenge rather than a systemic flaw.

He is quick to dismantle the often-sensational headlines that label MFIs as inherently risky because they provide unsecured loans. “Yes, they’re unsecured, but so are all unsecured loans in India —and they’re all struggling, not just MFIs,” says Rai.

“This quarter will be much better, and soon, everyone will forget the issues because nobody focuses on consistently good news,” Rai asserts. He mentions that the September quarter marked the peak of challenges, and from here, the sector is poised for recovery. “The September quarter was the last bad quarter. Things will just keep improving.”

Rai comments should be seen in the context of a broader trend of growth in the sector.

Data from the Microfinance Institutions Network shows the MFI loan portfolio grew by 24.5% YoY in FY24 to ₹4,33,697 crore, with loan accounts increasing from 130 million to 149 million. This growth, he believes, underscores the resilience of the sector.

Referring to inflationary pressures and their impact on rural demand, Rai says, “It’s not that rural demand hasn’t picked up. In fact, right now, if you read the pre-economic survey, it actually says urban demand is a challenge.”

Rai points to a cyclical pattern in both rural and urban demand. “Rural demand went down first, and now urban demand is following. Next quarter, people will start writing, ‘Oh my God, urban demand is going down.’ Of course, it is — rural demand went down first, so naturally, there will be an impact on urban demand tomorrow.”

With new regulations on the horizon, effective January 2025, such as the cap on borrowers’ indebtedness to ₹2 lakh and a limit of three MFI loans per borrower starting January 1, 2025, the sector is evolving to address these concerns.

For Rai, the stress narrative around MFIs is more of a misunderstanding than a reflection of the sector’s potential. “It is difficult to be intelligent, hence, it’s easy to build a narrative.”