Reserve Bank of India (RBI) Deputy Governor M Rajeshwar Rao has said that the Microfinance sector suffers from a vicious cycle of over-indebtedness, high interest rates and harsh recovery practices.

About Microfinance

• As per the  Task Force on Supportive Policy and Regulatory Framework for Microfinance set up by National Bank for Agriculture and Rural Development (NABARD) in 1998:
  • Microfinance refers to the “provision of thrift, credit and other financial services and products of very small amounts to the poor in rural, semi-urban and urban areas for enabling them to raise their income levels and improve living standards”.
• Regulatory Framework:  
  • MFIs are governed by the RBI’s Non Banking Financing Company–microfinance institutions (NBFC-MFIs)- Directions, 2022.
  • The Microfinance Institutions Network (MFIN) was started as a self regulatory body for the sector and all the NBFC-MFI are eligible for membership.
    • In 2014, MFIN was formally recognized as a self regulatory body by the RBI. 

Components of Microfinance

• Microcredit: Small loans given to individuals without any collateral, steady employment or verifiable credit history.
  • As per the Reserve Bank of India (RBI): A microfinance loan is defined as a collateral-free loan given to a household having annual household income up to ₹3,00,000.
• Microsavings: Small deposit requirements, no service charges for low income individuals.
• Microinsurance: Affordable low premiums and coverage insurance products to manage risks such as health emergencies, natural disasters, crop failure etc.
• Group Lending: A model where small groups jointly guarantee loans, fostering accountability and reducing default rates.
  • Example: Joint Liability Group (JLG) is an informal group of 4-10 individuals, primarily farmers or rural workers.
    • Loans are secured through mutual guarantees, with shared repayment responsibility.
• Microfinance Institutions (MFI): A large number of organisations with varied size and legal forms offer Microfinance services. 

Status of Microfinance in India

Scale and Outreach

• Contribution: Contributing 2.03 per cent to the gross value added (GVA) to India’s GDP and supporting 1.3 crore jobs.
• Growth: Growth of more than 2,176 per cent in the past 12 years, 
  • Business soared from Rs 17,264 crore in March 2012 to Rs 3.93 lakh crore as of November 2024.
• Gross Loan Portfolio (GLP): Grew by 24.5% to ₹4.33 lakh crore as of March 31, 2024, from ₹3.48 lakh crore in 2023; estimated at ~₹4.5-5 lakh crore in 2025.
• Borrowers: ~7.4 crore unique borrowers with 14.6 crore loan accounts (Dec 2023), predominantly women (~98%).
• SHGs: ~134 lakh SHGs covering 16.2 crore households, with savings of ₹58,893 crore and outstanding loans of ₹188,079 crore (March 2023).
• Delinquency Rates: Loans overdue by >90 days rose to 14% (Sept 2022) from 12% (March 2022); Portfolio at Risk (PAR) at 10.5% (March 2023).
• SHG-BLP: 134 lakh SHGs, ₹58,893 crore savings, ₹188,079 crore outstanding loans (March 2023).
• Contribution to GVA: ~2% in 2018-19; projected to reach 2.7-3.5% by 2025-26 (MFIN-NCAER study).
• Employment: Generates ~130 lakh jobs, primarily in rural areas.
• NPAs: Gross NPAs at ₹50,000 crore (~13% of gross loans, 2025 estimate).
• Sector Overview: NBFC-MFIs (39.97%), Banks (32.53%), SFBs (16.61%), NBFCs (10.68%), Not-for-profits (0.21%).

Regional Disparities

• Geographic Distribution: At present, MFIs operate across 723 districts, including 111 aspirational districts, covering 28 states and 8 Union Territories. 
  • 76% of loan portfolio in rural areas, 24% in urban areas;.
  • 82% of loan portfolio in 10 states; top 5 (Bihar, Tamil Nadu, UP, West Bengal, Karnataka) account for 55%.
• Southern Region: 63% of credit disbursement; avg. SHG loan = ₹5.31 lakh.
• Credit Gap (All-India): 46% (savings-linked SHGs not credit-linked).
• States with Best Credit Linkage: Karnataka (98%), Telangana (96%), AP (89%).
• States with High Portfolio: Bihar, Tamil Nadu, UP, Karnataka, West Bengal account for 58% of industry portfolio.

Significance of the Microfinance Sector in India

• Promotes Financial Inclusion: Microfinance bridges the gap between formal financial services and the rural poor, especially women and marginalised communities.
  • As per NABARD, 144.22 lakh SHGs are savings-linked, covering 17.75 crore households as of March 2024.
• Empowers Women Economically: By targeting mostly women borrowers, microfinance fosters decision-making, entrepreneurship, and income generation.
  • Over 83% of SHGs and 96% of SHG loans disbursed in FY24 were to all-women groups.
• Boosts Rural Livelihoods and Self-Employment: Microloans support agriculture, livestock, petty trade, and microenterprises in rural India, reducing dependence on informal moneylenders.
  • Loan disbursement under SHG-BLP reached ₹2.09 lakh crore in FY24, with Southern and Eastern states as key beneficiaries.
• Reduces Poverty and Vulnerability: Access to microcredit helps poor households invest in income-generating activities, smooth consumption, and manage financial shocks.
  • GRIP (Graduated Rural Income Programme) by NABARD provides returnable grants to ultra-poor women for productive assets.
• Catalyst for Social Development and Collective Action: Microfinance fosters community-based structures like SHGs and JLGs that promote savings habits, discipline, and solidarity.
  • SHG federations are now integrated with NRLM and ONDC for marketing rural products digitally.
• Supports National Development Goals: It contributes directly to SDGs such as poverty reduction (SDG 1), gender equality (SDG 5), and decent work (SDG 8).
  • The sector aligns with government missions like NRLM, PM SVANidhi, Stand-Up India, and Lakhpati Didi Scheme.

Current Crisis

• High NPAs: Gross NPAs reached 16% by March 2025, up from 8.8% in 2024.
• Rising Delinquencies: PAR (>31 days) rose 163% to ₹43,075 crore in FY25.
  • 90+ day delinquency reached 1.16% by March 2024.
• Shrinking Loan Portfolio: Gross Loan Portfolio fell by 13.9% (₹381,200 crore from ₹442,700 crore) in FY25.
• Drop in Profitability: E.g., CreditAccess Grameen’s PAT declined 46.4% despite loan growth.

Major causes of the crisis in India’s microfinance sector

• Over-Indebtedness and Multiple Borrowings: Many borrowers have taken loans from multiple MFIs and informal sources, leading to a vicious cycle of unsustainable debt.
  • Over 6.6 crore unique borrowers, but multiple borrowing relationships have caused delinquencies and over-leverage, especially in Bihar and UP.
• Breakdown of the Joint Liability Group (JLG) Model: The social collateral basis of JLGs has weakened due to changing borrower profiles and poor peer accountability.
  • The JLG model is becoming less effective amid urban migration and reduced community cohesion, as highlighted by RBI.
• High Interest Rates and Operational Costs: MFIs charge 18–26% interest, far higher than commercial banks, due to small ticket sizes and high administrative costs.
  • After RBI deregulated interest rates in 2022, some NBFC-MFIs began charging up to 45%, burdening already-stressed rural borrowers.
• Economic and Climatic Shocks: Frequent economic shocks such as COVID-19, demonetisation, GST rollout, inflation, and extreme weather have disrupted rural incomes.
  • GDP growth slowed to 6.4% in FY25, while floods, heatwaves, and election disruptions further eroded borrowers’ repayment capacities.
• Regulatory and Political Uncertainty: Frequent policy changes, stricter RBI guidelines, and state-level laws against coercive recovery have created confusion and liquidity crunches.
  • Tamil Nadu and Karnataka passed laws against recovery harassment, and campaigns like Karja Mukti Abhiyan reduced repayment discipline by raising expectations of loan waivers.
• Rise of Unregulated or Aggressive Lenders: A few rogue or unregulated MFIs resort to coercive collection, distorting the sector’s image and increasing default risk.
  • Cases of borrower suicides in Karnataka were linked to pressure from collection agents; such incidents have pushed governments to legislate against unethical practices.
• Weak Credit Appraisal and Data Lag: MFIs often lend based on outdated credit bureau data or incomplete income documentation, leading to poor underwriting.
  • There is nearly a one-month lag in borrower credit history updates; this allows multiple MFIs to sanction parallel loans without fully assessing repayment capacity.

key impacts of the crisis in India’s microfinance sector

• Rising Non-Performing Assets (NPAs) Across Institutions: The microfinance crisis has led to a sharp deterioration in loan asset quality, straining institutional balance sheets.
  • As per MFI Pulse, sector-wide NPAs rose to 8.72%, with SFBs reaching a high of 16.72% and not-for-profits at 39.33% by FY24.
• Erosion of Borrower Creditworthiness: Frequent defaults and over-borrowing have tarnished the credit histories of poor borrowers, limiting their future access to finance.
  • Post-Karnataka Ordinance, repayment rates plunged to 30% in Haveri district.
• Breakdown of Repayment Culture: The trust-based repayment ethos that once defined microfinance is weakening, especially in over-penetrated regions.
  • In Bihar and UP, collection rates fell below 90% in FY24 due to borrower fatigue, multiple loans, and expectations of loan waivers (Karja Mukti campaigns).
• Liquidity and Profitability Crisis for MFIs: As repayments decline and defaults rise, MFIs face mounting liquidity stress and falling profits.
  • NBFC-MFI debt funding fell 35.7% YoY in FY25, forcing equity raises to survive.
• Loss of Investor and Lender Confidence: Institutional lenders and banks are becoming cautious in funding MFIs, tightening sectoral credit flow.
  • RBI reduced qualifying asset norms for NBFC-MFIs from 75% to 60%, and lenders are now demanding higher capital buffers and risk premiums from MFIs.
• Disruption in Women’s Empowerment and SHG Progress: Credit inaccessibility and loan stress hamper the social and economic gains made through women’s SHG movements.
  • Despite reaching 17.75 crore households, only 54% of SHGs are credit-linked in 2023–24, with Northern and Central states lagging far behind.
• Rural Economic Vulnerability and Informalization: Poor access to affordable finance pushes rural borrowers towards informal lenders, increasing their exploitation risk.
  • NABARD flagged a growing rural credit gap especially in North-Eastern and Central India where MFIs are retreating, and bank outreach is thin.

Government and RBI Measures to Address the Microfinance Crisis

• SHG-Bank Linkage Programme (SHG-BLP): It was launched by NABARD in 1992 Under this programme, banks were allowed to open savings accounts for SHGs.
  • Bank Sakhis, trained members from SHGs served as intermediaries, aiding SHG members in transactions and application processes.
• Micro Finance Development and Equity Fund by NABARD: NABARD  created the Micro Finance Development and Equity Fund (MFDEF) in 2006 to help MFIs with quasi-equity and subordinated debt instruments.
• Pradhan Mantri Mudra Yojana: It was launched by the government in 2015 for providing loans up to Rs. 10 lakh to the non-corporate, non-farm small/micro-enterprises.
• e-Shakti Programme of NABARD: The primary goal of the E-Shakti Project is to digitise the accounts of various SHGs and to bring the members of the groups under the fold of Financial Inclusion.
• PM Street Vendor’s AtmaNirbhar Nidhi (PM SVANidhi): The Ministry of Housing & Urban Affairs launched this scheme to facilitate collateral free working capital loans of up to INR10,000/ of one-year tenure, to approximately 50 lakh street vendors.
• Kudumbashree: It  is a women empowerment and poverty eradication program launched by the Kerala government in 1998. 
  • It focuses on microfinance, providing women in rural and urban areas with access to savings, loans, and financial support through self-help groups (SHGs). 
• RBI’s Regulatory Framework for Microfinance Loans: 
  • Creation of NBFC-MFIs in 2011: Created a distinct category for microfinance institutions with a focus on customer-centric practices, such as capping borrower indebtedness and transparent pricing.
  • Harmonised Guidelines in 2022:
    • RBI has now set a common household limit of Rs 300,000 for loans to qualify as microfinance. 
    • For entities to qualify for an NBFC-MFI licence, they should have at least 75% of assets in microfinance and the cap on NBFCs was increased to 25% of assets as against 10% earlier.
  • Advisories on Lending: Periodically issued advisories to prevent multiple lending and address unethical practices like “ever-greening” loans.
  • Continuous Monitoring: RBI emphasises real-time data submission to Credit Information Companies (CICs) for effective risk management and regulatory oversight.

State-Level Initiatives to Address the Microfinance Crisis

• Andhra Pradesh Microfinance Ordinance (2010): Andhra Pradesh curbed MFI exploitation with an ordinance targeting high interest and coercive recovery.
  • It stopped loan activities after over 200 suicides, requiring MFI registration with local officials.
• Tamil Nadu Money Lending Entities Act (2025): Tamil Nadu regulated MFIs to ensure transparent lending and stop borrower harassment.
  • The act responded to complaints about coercive recovery practices in 2025 .
• Karnataka Proposed Ordinance (2025): Karnataka planned an ordinance to regulate MFIs and end coercive recovery practices.

Way Forward for the Crisis in India’s Microfinance Sector

• Strengthen Credit Assessment Mechanisms: Introduce real-time, Aadhaar-linked borrower verification and enforce tighter integration with credit bureaus.
  • This will curb multiple lending and reduce over-indebtedness, a core cause of current defaults.
• Diversify Geographic Outreach: Encourage MFIs to expand into underserved regions (e.g., NE, central India) through interest subvention or priority funding incentives.
  • Currently, 84% of the portfolio is concentrated in 10 states, increasing systemic risk.
• Reinforce the Joint Liability Group (JLG) Model: Rebuild peer accountability by combining physical group training with digital monitoring platforms.
  • Strengthening JLG discipline will reduce moral hazard and enhance repayment behaviour.
• Improve Transparency and Cap Recovery Abuses: Mandate public disclosure of interest rates and protect borrowers from coercive collection through strict regulation.
  • Tamil Nadu and Karnataka models of borrower protection should be adopted nationwide.
• Enhance Financial and Digital Literacy: Invest in large-scale campaigns to educate borrowers on rights, interest rates, and grievance redress mechanisms.
  • Many SHG and JLG members remain unaware of loan terms or digital tools for monitoring repayments.
• Strengthen SHG-Bank Linkage Support: Scale up NABARD’s successful initiatives like GRIP, Money Purse App, and M-Suwidha to integrate digital credit with livelihood support.
  • These schemes can help de-risk lending by tying loans to income-generating activities.
• Restore Investor and Lender Confidence: Ensure MFIs maintain adequate capital buffers, publish recovery data transparently, and follow RBI’s prudential norms strictly.
  • A trustworthy environment is critical to attract back institutional funding which has slowed due to high NPAs.

Conclusion

India’s microfinance sector faces persistent crises due to over-indebtedness, delinquencies, and external shocks. Robust regulation, technology, and inclusive financing can ensure its sustainability and social impact.

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