Syllabus: GS3/ Economy
Context
- India’s microfinance sector has witnessed a 163% surge to Rs 43,075 crore in loan delinquencies in FY2025.
What is Microfinance?
- Microfinance refers to financial services offered to low-income individuals or groups who are typically excluded from traditional banking.
- It includes microloans, savings, insurance, and remittance services, mostly extended by NBFC-MFIs, Small Finance Banks (SFBs), and banks.
- Reserve Bank of India (RBI) defines a microfinance loan as a collateral-free loan provided to a household with an annual income up to ₹3,00,000.
Key trends in Microfinance Sector
- The gross loan portfolio of the microfinance sector dropped by 13.9% year-on-year, from ₹4.42 lakh crore in March 2024 to ₹3.81 lakh crore in March 2025.
- There is a shift from low-ticket to high-ticket loans. Loans above ₹1 lakh grew by 38.5% year-on-year, while those under ₹30,000 declined by 35.9% year-on-year.
- The number of active microfinance loans fell from 16.1 crore to 14 crore during FY2025.
- Additionally, borrowers associated with five or more lenders dropped from 9.7% to 4.9%.
Reasons for Rising Delinquencies
- Overleveraging by Borrowers: Borrowers, especially in rural and semi-urban areas, take loans from 5 or more institutions, leading to unsustainable debt burdens.
- Weak Credit Appraisal: Many microfinance institutions (MFIs), especially smaller NBFC-MFIs and banks under pressure to meet loan targets, have relaxed credit norms and lent without robust background checks.
- Income Instability: The aftermath of the pandemic, inflationary pressures, rural distress, and lack of stable employment have all reduced the repayment capacity of borrowers.
- Collection Inefficiencies: Lack of field-level engagement post-COVID, digital migration, and weak collection infrastructure in some areas have hampered recovery efforts.
- Loan Utilisation Issues: A significant portion of microfinance loans are diverted from income-generating activities to consumption or social obligations (e.g., weddings, festivals, health emergencies).
Government Initiatives related to microfinance
- Pradhan Mantri MUDRA Yojana: In 2015, the Micro Units Development Finance Agency (MUDRA) and Pradhan Mantri Mudra Yojana (PMMY) were launched to allow small businesses to borrow micro credit up to Rs.10 lakhs without collateral.
- These loans were given with the help of MFIs and other member institutions, which were refinanced by MUDRA Ltd.
- Udyam Assist Platform (UAP): The platform helps informal micro-entrepreneurs (many of whom are MFI clients) register as MSMEs and avail benefits like priority sector lending, subsidies, and credit guarantees under different schemes.
- Credit Information Sharing Mandate: RBI has mandated all microfinance lenders to report credit bureaus, such as CRIF High Mark and CIBIL, ensuring that borrowers’ credit histories are accessible for proper assessment.
- RBI’s Revised Regulatory Framework for Microfinance Loans, 2022 provides a uniform regulatory framework for all regulated entities (banks, NBFCs, NBFC-MFIs, SFBs) to ensure borrower protection and promote responsible lending.
Way Ahead
- Credit assessment tools: There is a need to strengthen borrower evaluation to curb over-indebtedness.
- Role of Credit Bureaus: Data from agencies like CRIF High Mark is essential in identifying patterns of stress early.
- Regulatory Oversight: RBI and state governments need to ensure that collection practices are fair, and lending norms are responsibly followed.
- Financial Literacy and Inclusion: There is a need to ensure that borrowers are aware of their credit obligations and rights is critical.
Source: IE
