The Indian microfinance sector has witnessed remarkable growth over the past decade, but it now faces critical challenges that demand immediate attention, according to a recent report by Infomerics Ratings. The report, authored by Manoranjan Sharma, Chief Economist at Infomerics Ratings, provides an in-depth analysis of the sector’s performance, risks, and future outlook.
The microfinance industry currently operates with 168 Micro Finance Institutions (MFIs) across 29 states, serving 64 million borrowers. Notably, 99 percent of these borrowers are women, highlighting the sector’s role in promoting financial inclusion, rural development, and women’s economic empowerment.
The report indicates that NBFC-MFIs (Non-Banking Financial Companies-Microfinance Institutions) have been at the forefront of this growth. As of September 2024, these institutions have supported over 8.1 crore unique borrowers, with a gross loan portfolio (GLP) of ₹4,08,049 crore across 14.6 crore loan accounts. This marks a significant increase from the ₹2.56 lakh crore GLP recorded in 2021. The sector contributes approximately 130 lakh jobs and adds around 2 percent to India’s Gross Value Added (GVA).
Breaking down the composition of the industry, NBFC-MFIs hold a 39.6 percent share of the total portfolio, followed by banks at 32.2 percent, Small Finance Banks (SFBs) at 16.9 percent, and other financial institutions constituting the remainder. NBFC-MFIs remain the largest contributors, with portfolios amounting to ₹1,61,470 crore.
However, the sector’s growth trajectory is accompanied by significant risks. Rising delinquencies are a major concern, with loans worth ₹28,154 crore overdue by 31 to 180 days. The issue of borrower over-leveraging has become particularly pronounced, with 37 percent of borrowers under financial stress. High outreach costs and stringent regulatory oversight further add to the sector’s challenges.
The geographical distribution of these risks is uneven. States such as Bihar, Tamil Nadu, Uttar Pradesh, and Odisha collectively account for 62 percent of total microfinance delinquencies, driven by borrower indebtedness and intensified regulatory measures.
To address these concerns, regulatory bodies such as the Reserve Bank of India (RBI) and industry organizations like the Microfinance Institutions Network (MFIN) have implemented several measures. These include capping the number of lenders per borrower at three, introducing stricter lending norms, and enhancing government support through initiatives like the MUDRA scheme and the Self-Help Group Bank Linkage Program (SHG-BLP).
The sector predominantly relies on the Joint Liability Group (JLG) model, which utilizes social collateral to mitigate credit risks. Currently, 98 percent of microfinance loans are disbursed through this model, with repayment obligations capped at 50 percent of household income to ensure affordability.
Looking ahead, the report emphasizes the need for MFIs to adopt digital lending platforms, diversify funding sources, and implement robust risk mitigation strategies. Additionally, enhancing financial literacy and governance frameworks is crucial to ensure the sector’s long-term sustainability.
While the microfinance industry continues to play a pivotal role in driving financial inclusion in India, the path forward will require a delicate balance between growth aspirations and prudent risk management. The next phase of development hinges on the industry’s ability to adapt to evolving market dynamics while safeguarding the interests of its borrowers.