Collateral-free, not crisis-free: Microfinance recalibrates for inclusive growth

Various guardrails and restrictions put by lenders on MFIs, may have causes some negative growth in the Indian microfinance sector recently, but these are not real causes for concern. These checks and balances were actually required and there are already ample indications of improvement, if sector analysts are to be believed.

Microfinance, with all its pluses and minuses, has emerged as a cornerstone of India’s socio-economic transformation, fostering financial inclusion and empowering women, small and marginal farmers, artisans, and other vulnerable communities. Millions have been able to access timely and collateral free credit, enabling them to build sustainable livelihoods and enterprises. That’s what Nabard, feels.

And at this outset, it is pertinent to mention here that the most widely discussed issue contributing to the sector-wide stress is the overleveraging of credit, driven by increased borrower exposure and a higher number of lenders. Sensing it, the industry leaders and Self-Regulatory Organizations had come up with additional guardrails, the first set was issued in July 2024 and the next set in April 2025.

These restrictions have brought controls in lending; these guardrails, along with the restrictions on lending put by lenders to MFIs, were also the reasons for the negative growth in the sector.

The situation is expected to improve in the current financial year considering that 91 per cent loans are being utilized for income generation purposes, feels Sa-Dhan, an association of Impact Finance Institutions and an RBI-appointed Self-Regulatory Organisation (SRO) for Microfinance Institutions, which is also the first and largest association of community development finance institutions in India.

Significantly, for the microfinance sector, the total active client base stood at 8.28 crore, and a loan outstanding of Rs3,81,225 crore, at the end of FY2024-25 according to the Credit Information Companies data.

This includes data from Banks, Small Finance Banks (SFBs), Non-Banking Financial Companies (NBFCs), NBFC-Micro-Finance Institutions (MFIs) and other lenders. The client base and loan outstanding for the sector fell by 13 per cent and 14 per cent, respectively.

The Self-Help Group (SHG) Bank linkage showed a positive growth, with the overall outstanding reaching Rs3.04 lakh crore for 84.94 lakh SHGs credit-linked, according to NABARD. There were around 143.3 lakh SHGs with 17.1 crore households being savings-linked under the SHG Bank linkage programme.

That’s not all. There were 13.99 crore loan accounts as on March 31, 2025, according to CRIF Highmark. The shares of different institutions in the loan outstanding are: NBFC-MFIs: Rs1,48,419 crore (39 per cent), Banks: Rs1,24,431 crore (32 per cent), SFBs: Rs59,817 crore (16 per cent), NBFCs: Rs45,042 crore (12 per cent), and Others: Rs3,516 crore (1 per cent).

The shares of loan accounts of various institutions are: NBFC-MFIs: 539 lakhs (39 per cent), Banks: 466 lakhs (33 per cent), SFBs: 216 lakhs (15 per cent), NBFCs: 163 lakhs (12 per cent), and Others: 15 lakhs (1 per cent), going by the findings of the Bharat Microfinance Report 2025, a comprehensive reference on microfinance prepared by Sa-Dhan in partnership with NABARD.

One has to keep in mind that the Micro Lending Institutions (MLIs) are servicing over 6.27 crore active micro clients, with a total loan outstanding of Rs2,38,198 crore, including a managed portfolio of Rs72,930 crore. Business Correspondents contributed the most to the managed portfolio, at Rs53,287 crore.

The loan outstanding per borrower of the reported MLIs works out to Rs38,005, the utilization of loan indicates that about 91 per cent of loans were used for income generation purposes.

The microfinance sector continued to be a ‘feet on street’ model with 3.29 lakh personnel employed in 37,380 branches, at the end of FY 2024-25. Of this 64 per cent of staff were in the field, the share of women in the MLI staff was nine per cent.

The average number of active borrowers per credit officer has shown a decline and was at 299. The reduction in clients should help the MLIs to extend better services, although it adds to the cost of operation. Interestingly, the top five states for microfinancing continues to be Bihar, Tamil Nadu, Uttar Pradesh, West Bengal and Karnataka.