Eco Survey calls to link microfinance investor exits to social metrics

Economic Survey 2025-26 urges linking microfinance investor exits to social impact metrics, warning that return-driven growth risks over-lending, borrower stress, and financial instability

Exit decisions of investors in microfinance institutions or valuations should be linked with the achievement of pre-specified social purpose metrics rather than exclusively to financial performance, the Economic Survey said, in order to mitigate risks such as dilution of underwriting standards or expansion into riskier borrower segments.

 

“Commercial capital has provided significant benefits in terms of institutional capacity, but PE and VC investment structures generally prioritise growth, profitability, and timely financial exits,” the survey said. “As a result, investment performance is largely assessed through financial indicators, including portfolio growth, earnings milestones, and valuation appreciation.”

 

“Investor exits could be conditioned on evidence of sustained household-level welfare gains, improved resilience indicators, or responsible credit intensity in borrower portfolios,” it said.

 

The sector’s regulator, the Reserve Bank of India, has time and again cautioned against usurious rates charged by microfinance institutions to their borrowers. This is mainly due to the desire of MFI investors for higher returns.

 

With the growing support of private equity and venture capital for the microfinance segment to expand the capital base, the original balance between social objectives and financial stability has weakened, it said.

 

The welfare-linked indicators would help in identifying circumstances where credit expansion may be weakening household balance sheets. Currently, with the focus being on impact metrics, excessive credit intensity, when not matched by robust credit appraisal and borrower capacity, may increase vulnerability and lead to repayment stress. This has led to over-lending, frequent top-ups, and borrower over-indebtedness.

 

“While useful for describing outreach, such indicators do not capture whether borrowers are better off in net terms. In practice, they can unintentionally reward more intensive lending, frequent top-ups, and deeper credit penetration, even in contexts where household repayment capacity is limited,” the Economic Survey said.

 

As a result, the microfinance industry has undergone repeated episodes of stress and a rise in non-performing assets. According to the survey, stress in the MFI segment indicates that rapid expansion of credit, combined with strong financial-return expectations, may lead to vulnerabilities at both institutional and household levels.

 

The MFI segment currently has 95 per cent women borrowers and an 80 per cent rural customer base, as per the Economic Survey. As of March 2025, NBFC-MFIs held a 39 per cent market share by loan outstanding, followed by banks, small finance banks, NBFCs, and others. The sector displayed steady growth, with active borrowers nearly doubling from 330 lakh in FY14 to 627 lakh in FY25, and the gross loan portfolio increasing from Rs 33,517 crore in FY14 to Rs 2.4 trillion in FY25.

 

Due to persistent stress in the MFI segment, the Reserve Bank of India reduced the minimum qualifying assets mandated for microfinance from 75 per cent to 60 per cent of total assets for NBFC-MFIs in June.

 

The Economic Survey emphasised that to make the sector more resilient, greater attention is needed on household balance sheets. This means combining credit with savings and risk-protection products, improving borrower assessments, and using data to spot early signs of over-indebtedness. Over time, measurement should move beyond tracking loan outreach and instead focus on household welfare indicators that are reported regularly.