The microfinance industry in India, once heralded as a beacon of financial inclusion, is increasingly grappling with a crisis that threatens to undermine its core mission. At the heart of this issue lies multiple lending—a practice where borrowers access credit from several microfinance institutions (MFIs) simultaneously. While this may seem innocuous at first glance, it has proven to be a key driver of over-indebtedness, borrower distress, and rising defaults, creating ripple effects across the sector.
Microfinance is intended to empower underserved communities by providing small, manageable loans to help them engage in productive activities. However, the reality on the ground often deviates from this ideal. Borrowers, particularly in rural areas, are frequently compelled to take additional loans to meet mounting expenses or to repay existing debts. Without a centralized mechanism to track credit histories across institutions, lenders often extend credit to borrowers who are already overburdened. This cycle of borrowing to repay previous loans pushes many into a debt trap, eroding the financial stability that microfinance seeks to promote.
The distress caused by multiple lending is becoming increasingly evident. Reports of harassment, coercive recovery practices, and even suicides among borrowers in rural India have been on the rise. Karnataka, in particular, has seen a surge in complaints against MFIs, with farmers and other borrowers alleging relentless pressure to repay debts. This mounting unrest has prompted the state government to propose the Karnataka Microfinance Institutions (Regulation of Money Lending) Bill to address borrower harassment. While this is a step in the right direction, it fails to address the deeper structural issue of multiple lending that fuels much of this distress.
The persistence of multiple lending can be traced to a confluence of factors. One major driver is the intense competition among MFIs, as lenders, motivated by aggressive growth targets, often relax due diligence to capture more borrowers. Without a robust credit tracking mechanism, lenders inadvertently overlap in serving the same individuals. Borrowers, for their part, are not blameless either. Many take advantage of the fragmented credit environment, approaching multiple institutions for loans to tide over financial difficulties, sometimes overstating their repayment capacity.
The lack of a comprehensive and centralized credit bureau for the microfinance sector exacerbates the problem. While agencies like CIBIL have extended services to MFIs, their coverage remains incomplete, leaving smaller lenders and informal credit providers outside the ambit of formal monitoring. This fragmented ecosystem allows borrowers to accumulate debts across institutions without triggering any alarms.
The consequences of multiple lending are devastating for both borrowers and the microfinance industry. Borrowers caught in a web of debts often find themselves unable to meet repayment obligations, leading to defaults that strain the financial health of MFIs. The industry, in turn, faces a credibility crisis, as harsh recovery practices and borrower distress tarnish its reputation. If unchecked, this systemic problem could destabilize the sector, undermining its ability to serve the very communities it was designed to uplift.
Addressing the crisis requires urgent and coordinated action. A comprehensive credit bureau that covers all MFIs, regardless of size, is essential to track borrower indebtedness and prevent overlap. Financial literacy campaigns must also play a pivotal role in educating borrowers about the risks of taking multiple loans and the importance of responsible financial planning. Policymakers could explore regulatory measures to limit the number of loans a borrower can access across institutions, ensuring that credit is extended within manageable limits.
Equally important is the need for MFIs to adopt responsible lending practices. Institutions must prioritize borrower assessments over aggressive expansion and growth targets. By focusing on due diligence and building stronger relationships with their clients, MFIs can avoid contributing to the cycle of over-indebtedness.
The Indian microfinance sector has been a global model of financial inclusion, empowering millions of marginalized individuals with access to credit. However, the unchecked growth of multiple lending threatens to derail this progress. Karnataka’s efforts to regulate MFIs and curb borrower harassment are a reminder that the sector cannot afford to overlook systemic issues any longer.
For microfinance to truly fulfill its promise of uplifting the underserved, it must address the structural flaws that enable multiple lending. Only through coordinated policy reforms, better borrower education, and a commitment to ethical lending practices can the sector restore trust and ensure its sustainability. Failure to act now risks not only the financial health of borrowers but also the very foundation of India’s microfinance story.