Microfinance: India
This is a collection of articles archived for the excellence of their content. |
Contents |
The top recipients of loans
2019: TN, West Bengal account for 29%
July 12, 2019: The Times of India
Two states, Tamil Nadu and West Bengal, account for 29% of loans from microfinance institutions (MFIs) in the country and the top 10 states account for 83% of all small loans outstanding as of March 2019.
The total outstanding microfinance loans in West Bengal was 15% and 14% Tamil Nadu. The eight other states among the top ten are Bihar (10%), Karnataka (8.5%). Maharashtra (7%), Assam (6.7%), Odisha (6.4%), Uttar Pradesh (6%), Madhya Pradesh (5.5%) and Kerala (3.8%). According to Microfinance Plus, a report brought out jointly by Sidbi and Equifax, the highest growth in MFI loans was recorded in Bihar followed by Assam.
In FY19, fresh loan disbursal stood at Rs 2.1 lakh crore, an increase of 36% over FY18, while disbursal in terms of volume grew 20%. NBFC-MFIs hold the largest share of portfolio in microcredit with a total loan outstanding of Rs 68,156 crore, accounting for 38% of the total industry portfolio.
Delinquency level improved across all the days past due categories. Portfolio at risk, which indicates the early delinquency rates, has comedown to1.4% in FY19 from 4.7% in FY18.
2022
From: June 21, 2023: The Times of India
See graphic:
Indian states with the highest penetration of micro finance, presumably as in 2022
Status of microfinance, microloans
Growth, 2017-19; Delinquent districts
May 13, 2019: The Times of India
Microfinance in India: the ten districts with the most defaults, presumably as in 2018.
From: May 13, 2019: The Times of India
See graphics:
Microfinance in India: Growth, 2017-19;
Microfinance in India: the ten districts with the most defaults, presumably as in 2018.
Microfinance recovers
India's microfinance industry — anchored by banks, NBFCs and MFIs – now has a clientele of more than 42 million. The sector hit a hard patch during demonetisation. And in the months following demonetisation, non-performing assets (NPAs) as a percentage of loans hit highs of 14-15%. But the sector has since recovered. Despite loan waivers and election season, the microfinance sector in India now has a default rate of 2.9%. However, there are still some districts and regions which show stress.
2019-22
From: March 26, 2022: The Times of India
See graphic:
Microfinance sector’s contribution to gross value added, 2019- 22
2020-2024
Chandrima Banerjee, February 1, 2025: The Times of India
From: Chandrima Banerjee, February 1, 2025: The Times of India
Small loans were supposed to save the world. Where formal lenders can be unwilling to risk lending to the poorest and informal ones charge extortionate interest rates, microfinance loans were said to be the solution to ensure access to credit for the poorest sections.
But these loans keep going bad, finds Chandrima Banerjee
2018-2024
July 1, 2025: The Times of India
From: July 1, 2025: The Times of India
In the financial heart of Mumbai, Reserve Bank of India (RBI) issued an unusually sharp rebuke to the microfinance industry. Rajeshwar Rao, a deputy governor of RBI, decried the “excessive” interest rates and margins charged by lenders — even those flush with low-cost capital. His speech at a recent summit on financial inclusion was not just rhetoric; it was a shot across the bow of an industry long celebrated as a tool for poverty alleviation but increasingly seen as a source of financial distress.
Dismal Numbers
The latest numbers tell a dismal tale. As of March 31, the share of microfinance loans that are overdue by one to six months has jumped to 6.2%, up sharply from just 2% a year previously, indicating a significant rise in repayment delays. The size of the industry has also shrunk with 4.2 crore active MFI (microfinance institution) borrowers — a 9.2% drop from the previous year — while the sector’s AUM (assets under management) stood at Rs 1.47 lakh crore, down 11.9% year-on-year.
Roughly 37% of borrowers now juggle debts from multiple lenders, a worrying sign of over-indebtedness. Small finance banks have borne the brunt: their delinquency rate rose to 5.4% in the second quarter of fiscal year 2025.
Human Toll In Hinterlands
The sector’s human toll is most plainly seen in stories that trickle out of India’s hinterlands. In a village near Shahjahanpur, Uttar Pradesh, Ajit, a grocer, borrowed Rs 40,000 through his wife from Midland Microfin to open a shop. After deductions, he received Rs 38,000. His EMI was Rs 2,540 for 18 months. Factoring upfront costs, a rough calculation shows that the effective annual cost of funds works out to 28%, as against the simple interest rate of 20%.
“I paid most of the EMIs on time, but defaulted on two or three, when there was illness in the family,” says Ajit. A medical emergency involving his nephew forced Ajit and his brothers — subsistence farmers — to reallocate funds. Now, he is hounded by collectors. “I’m ready to pay the remaining EMI but cannot pay more than that,” he says, recalling how agents once used to canvass the village, encouraging people to borrow. Repayment pressure, he says, “is taking a toll on family finances”.
A similar strain is evident in Bengal. Namta Das, a resident of East Midnapore, said: “We have been taking loans from several microfinance companies since a long time, but this time govt-run 100 days’ work is uncertain, and we have no money in hand.” In Hooghly, Manas Das received Rs 2 lakh to set up a sweets shop but found the actual interest rate “far higher than initially communicated”.
In Odisha’s Mayurbhanj, farmer Kabita Mohanta finds herself entangled in a web of microfinance loans that is becoming increasingly difficult to escape. “I have three outstanding loans from multiple companies,” she says. “They charge exorbitant interest rates — between 21% and 30%. I took Rs 75,000 from one company, Rs 40,000 and Rs 30,000 from two others.” Borrowers, Beware
Easy access to credit has also encouraged borrowing for consumption and non-productive expenditure, such as weddings and festivals, making household finances unsustainable. Many borrowers, having taken multiple loans for such purposes, now find themselves trapped in cycles of debt without matching income streams.
In Bihar, the paradox deepens. Munna Kumar Mahto, a driver in Patna with a PhD, earns Rs 20,000 monthly. His wife and daughter add Rs 18,000 more by working as domestic helps. To buy land and pay associated costs, Munna borrowed Rs 1.1 lakh — bribes to agents included — from two NBFC-MFIs. He is now contemplating a third loan. “Somehow, we manage to pay the EMI,” he says, “but life here is tough.”
His neighbour, Ajay Kumar of Katihar, spoke of a darker side: the enduring grip of private lenders, or mahajans, even amid rising institutional credit. Local parlance distinguishes between “licence holders” (openly operating) and “unlicensed mahajans” (covert agents), he says, the latter thriving in bazaars and driving up NPAs.
The consequences can be tragic. In Maharashtra’s Yavatmal, infamous for farmer suicides, Vinita Chirote, a cottonfield labourer, took a Rs 40,000 loan to build a house. Repayments are Rs 2,100 a month. “She does not know what awaits her now,” says Manish Jhadav, an activist. “Many were driven to suicide because of recovery agents’ insults.” Because few women have land in their name, these deaths are not classified as agrarian suicides.
“We raised the issue for a long time,” said Kishore Tiwari, a former state adviser on farm distress. Prem Chavan, deputy sarpanch of a village, describes the intrusive recovery process for loans advanced to women’s joint liability group: “All the women in the group must remain present... or else they have to cough up a fine.”
Harassment From Agents
Across the industry, the squeeze is showing. NBFC-MFI defaults above 90 days have risen. Share prices of lenders with microfinance exposure — Bandhan, IndusInd, RBL — plunged to 52-week lows. Bihar, Tamil Nadu, Uttar Pradesh, Odisha and Karnataka now account for 62% of all delinquencies — a concentration that evokes the 2010 Andhra Pradesh crisis. In Karnataka, the story took another twist. The state govt passed a law to regulate illegal moneylending in 2023, but many borrowers misread it as a govt-backed debtrelief scheme. Several MFIs said this misconception triggered a wave of strategic defaults, with borrowers halting repayments, believing loans would be waived.
Borrowers have also begun speaking out about harassment by recovery agents. Marutesh H, a factory worker from Kuramkote village in Tumakuru, says agents locked his house during his mother’s 11thday death ritual in 2021. “I had taken a Rs 2.5 lakh loan in 2018 and paid over Rs 4.5 lakh, but they kept harassing us,” he says. In Jan, fearing further intimidation, he fled to Bengaluru with his family. In Hubballi, Meharunnisa Sunkad says agents from Belstar Microfinance came repeatedly during a bereavement, “Even when men were away.” Police eventually intervened after she called the microfinance helpline.
Mohanta, too, has similar experiences. “If someone misses a fortnightly payment, agents sit outside their homes, using abusive language and creating a public spectacle,” she says. “They even enter houses in the absence of male members.”
The situation has forced many residents to flee. “People leave secretly at night, migrating to other states to escape the humiliation,” she says. “These companies have become the new usurers, exploiting poor villagers with predatory practices.”
She recounts a tragic incident from the previous year: “A college student in our area witnessed recovery agents humiliating his parents. Unable to bear the shame, he died by suicide.” A woman from Odisha’s Ganjam district said a microfinance company locked her house after she failed to pay two consecutive EMIs. “I, along with my husband and children, went to Hyderabad to work. My kids had to drop out of school due to our migration,” she says.
A Vicious Cycle
In a small way, the microfinance defaults are similar to the US sub-prime crisis. Former RBI governor Raghuram Rajan, in the chapter ‘Let them eat credit’ in his book Fault Lines, describes how easy credit has been used as a palliative to paper over the growing inequality in income, how using credit to finance a better lifestyle has been leading to more indebtedness. Credit contagion has begun to spread. Suresh Ganapathy of Macquarie notes that microfinance stress is spilling into auto and business loans, especially in Karnataka and Tamil Nadu. Bihar’s portfolio remains the largest — and, for now, relatively stable.
Regulators are tightening the screws. RBI has nudged the industry to cap unsecured loans at Rs 2 lakh and, in tandem with MFIN (MicroFinance Institutions Network), limited lenders to four per borrower. New rules to formalise grievance redress, impose lending bans only for arrears above Rs 3,000, and mandate MFI registration have all been rolled out. The measures have slowed lending, but may improve long-term stability.
Alok Misra of MFIN, reacting to RBI’s new guidelines, welcomed a key rule tweak: lowering the qualifying asset threshold for NBFC-MFIs from 75% to 60%. Previously, excess cash from fresh equity or slow disbursement caused inadvertent regulatory breaches, deterring investors. “The new norm will allow for more balanced portfolio construction and enable MFIs to cater to clients in the ‘missing middle’, including those moving to MSMEs and micro-housing,” Misra said.
Sliver Of Hope
Meanwhile, Bihar offers a rare glimmer of hope. The state’s Economic Survey for 202425 noted a rise in MFI lenders from 42 in 2022 to 64 in 2024. Loan disbursal jumped from Rs 4,503 crore to Rs 25,458 crore. NPAs for commercial banks declined from 7.5% to 5.9%, and for regional rural banks from 30.4% to 23.8%. Small finance banks posted the lowest NPA, 1.9%. The state credits “collaborative efforts of both banks and govt.”
For all the promise microfinance once held, its resurgence of late bears too much resemblance to its troubled past. The tension between financial inclusion and financial exploitation continues to define the industry’s uneasy tryst with the bottom of the pyramid.
Inputs from Abhay Singh, Neha Lalchandani, Santoshkumar B, Sangamesh Menasinakai, Udit Prasanna Mukherji, Suman Mondal, Falguni Banerjee, Shishir Arya & Hemanta Pradhan
