Ujjivan Small Finance Bank revealed its intention on Friday to offload ₹270 crore worth of micro-banking loans, which include a mix of non-performing assets and previously written-off accounts, to asset reconstruction companies (ARCs). The bank shared this decision in a filing with the stock exchanges.

Breaking down the loan pool, ₹208 crore constitutes non-performing loans, while ₹62.36 crore is attributed to loans that the bank has already written off. To cover potential losses, Ujjivan has made provisions amounting to 85.61% of the value of these micro-banking loans.

The announcement comes against the backdrop of growing difficulties within the microfinance industry, which has faced heightened stress during the July–September quarter. Numerous banks and microfinance institutions have reported significant challenges, leading to widespread operational strain.

The sector’s troubles stem from various issues. Chief among them is customer over-indebtedness, resulting in repayment challenges and lower attendance at centre meetings. Compounding the situation are loans disbursed to individuals presenting fraudulent voter ID cards, often classified as new-to-credit (NTC) customers. Defaults by intermediaries or ‘ring leaders’ in specific regions have further worsened the scenario. Additionally, high attrition rates among field officers and branch managers have created further disruptions.

Natural calamities have also played a role in aggravating the crisis. Intense rainfall and floods in several areas have impacted borrowers’ earnings, making it harder for them to meet repayment commitments. These cumulative factors have placed immense pressure on the microfinance ecosystem, raising questions about its sustainability.

Despite these obstacles, industry experts believe that there may still be interest in purchasing such loan portfolios, provided the pricing is appealing. Market insiders speculate that if banks like Ujjivan offer these loans at approximately 10% of their book value, they could attract potential buyers. The success of this initiative will ultimately depend on how the loans are priced and the overall sentiment in the ARC market at the time of sale.