Defaults on Microloans Rise 163% in FY2025

What does Microfinance mean?

Microfinance pertains to financial services provided to low-income people or groups who are usually marginalized from conventional banking.

It encompasses microloans, savings, insurance, and remittance services, primarily offered by NBFC-MFIs, Small Finance Banks (SFBs), and traditional banks.

The Reserve Bank of India (RBI) characterizes a microfinance loan as a loan without collateral given to a household earning up to ₹3,00,000 annually.

Major developments in the Microfinance Sector

The microfinance sector's gross loan portfolio decreased by 13.9% year-on-year, falling from ₹4.42 lakh crore in March 2024 to ₹3.81 lakh crore in March 2025.

There is a transition from low-value to high-value loans. Loans exceeding ₹1 lakh increased by 38.5% compared to the previous year, whereas loans below ₹30,000 fell by 35.9% year-on-year.

The count of ongoing microfinance loans decreased from 16.1 crore to 14 crore in FY2025.

Moreover, the percentage of borrowers linked to five or more lenders decreased from 9.7% to 4.9%.

Factors Contributing to Increased Delinquencies

Borrowers Overextending Themselves: Individuals, particularly in rural and semi-urban regions, acquire loans from five or more lenders, resulting in unmanageable debt loads.

Insufficient Credit Evaluation: Numerous microfinance institutions (MFIs), particularly smaller NBFC-MFIs and banks compelled to achieve loan objectives, have softened credit standards and provided loans without thorough background assessments.

Income Instability: The consequences of the pandemic, rising inflation, rural hardship, and absence of secure jobs have all diminished borrowers' ability to repay.

Collection Inefficiencies: Insufficient on-site involvement after COVID, transition to digital, and fragile collection infrastructure in certain regions have hindered recovery initiatives.

Loan Utilization Challenges: A large share of microfinance loans is redirected from income-generating purposes to consumption or social responsibilities (such as weddings, festivals, health crises).

Government Programs concerning microfinance

Pradhan Mantri MUDRA Yojana: In 2015, the Micro Units Development Finance Agency (MUDRA) along with the Pradhan Mantri Mudra Yojana (PMMY) was initiated to enable small enterprises to access micro credit up to Rs.10 lakhs without requiring collateral.

These loans were provided with assistance from MFIs and other affiliated institutions, which MUDRA Ltd. refinanced.

Udyam Assist Platform (UAP): This platform supports informal micro-entrepreneurs (a significant number of whom are MFI clients) in registering as MSMEs to access advantages such as priority sector lending, subsidies, and credit guarantees through various schemes.

Credit Information Sharing Requirement: The RBI has required all microfinance institutions to report to credit bureaus like CRIF High Mark and CIBIL, guaranteeing that borrowers' credit histories are available for accurate evaluation.

The RBI’s Updated Regulatory Framework for Microfinance Loans, 2022 establishes a consistent regulatory structure for all regulated entities (banks, NBFCs, NBFC-MFIs, SFBs) to safeguard borrowers and encourage responsible lending practices.

Path Forward

Credit evaluation tools: It is essential to enhance borrower analysis to prevent over-indebtedness.

Function of Credit Bureaus: Information from organizations such as CRIF High Mark is crucial for detecting signs of stress promptly.

Regulatory Supervision: The RBI and state authorities must guarantee that collection methods are just, and lending standards are adhered to responsibly.

Financial Literacy and Inclusion: It is essential to guarantee that borrowers understand their credit responsibilities and entitlements.