Inefficiency in MFIs leads to high interest rates: DFS secretary M Nagaraju

DFS secretary M Nagaraju flags a sharp fall in loan accounts and disbursals, urges MFIs to introspect, consolidate operations, and revive passion for financial inclusion

The reduction in the number of loan accounts and the outstanding amount during the last financial year is a cause of concern and stress for microfinance institutions (MFI), Secretary, Department of Financial Services, M Nagaraju said on Thursday, highlighting “inefficiency” in MFIs that leads to higher rates of interest. 

Emphasising the need for introspection by the sector, the DFS secretary expressed concern that people in desperate need may borrow at high rates, but they may not be able to return the amount. “I came across very uncomfortable rates of interest that are actually because of inefficiency in microfinance institutions organisations,” Nagaraju said, urging the MFIs to keep interest rates reasonable to foster financial inclusion. 

“What are we doing wrong? Is there something we can improve and are our models right and good for a large section of the population,” Nagaraju said while addressing a conference organised by Sa-Dhan, an association of Impact Finance Institutions. “There is a need for stronger infrastructure, diagnostics and sector-wide services that can support sustainable microfinance,” he said. 

Calling for consolidation in the MFI sector, Nagaraju said that the number of loan accounts had reduced by 45 million by September 2025. The total outstanding amount in the loan accounts had gone down from ₹4.4 trillion as of March 2024 to ₹3.4 trillion as of September 2025, he said. 

He said that the microfinance sector has become the most important pillar for economic and inclusive growth and needs to focus on improving financial inclusion in the country. He said that despite a large number of government schemes, 30-35 crore youth still need to be financially included. 

“The government would like to continue to support MFI for financial inclusion and women empowerment… The passion and commitment is missing in MFIs now… There is a need to attract the younger generation,” Nagaraju said. 

MFIs typically receive funding lines from banks, non-banking financial institutions, Small Industries Development Bank of India, and the National Bank for Agriculture and Rural Development. They also raise funds through bonds. MFIs saw their funding crash by more than half in the financial year ended March 2025, declining to ₹58,109 crore, which works out to a fall of 55.40 per cent year-on-year (Y-o-Y). 

A report by CareEdge Ratings said that the growth for MFIs is expected to remain moderate at 4 per cent Y-o-Y for the current financial year ending March 2026. 

Speaking at the conference, Shaji K V, chairman, National Bank for Agriculture and Rural Development (Nabard) said they are working on building a model for Grameen Credit Score and collaborating with smaller MFIs on the same. A data warehouse with credit history of poorer sections is also being created within Nabard to reduce the cost of underwriting, he said. 

He highlighted the need for borrower protection programmes and improving the productivity of capital by using blended finance mechanisms. “Microfinance institutions must push for stronger credit assessment, better risk management, and more diversified portfolios. Government programmes and DPI continue to support this work, but the emphasis must stay on impact alongside financial returns,” he said.