Borrower indebtedness in microfinance declines to 11.7%: RBI report

Despite rising stress in microfinance portfolios, RBI notes decline in borrower indebtedness as tighter underwriting and regulatory caps limit over-lending

Even as the ratio of stressed assets in the microfinance sector has increased in the second half of the financial year 2025 (H2FY25), the borrower indebtedness is showing a declining trend at 11.7 per cent, according to the Reserve Bank of India (RBI’s) Financial Stability Report.

 

The stressed assets in the segment increased, with 31-180 days past due (dpd) rising to 6.2 per cent in March 2025 from 4.3 per cent in September 2024.

 

The banking sector also saw an increase in stress in their microfinance portfolio with 31-180 dpd rising to 6.5 per cent from 4.7 per cent.

 

“However, borrower indebtedness, measured by the share of borrowers availing loans from three or more lenders, is showing a declining trend,” RBI said.

 

While, as the microfinance sector was under stress, credit to the sector decreased by 13.9 per cent in 2024-25. 

 

The bank credit to the sector, which forms 48.3 per cent of total credit outstanding to the sector, contracted by 13.8 per cent in 2024-25. According to RBI, “Adoption of tighter underwriting standards by the lenders was the primary driver behind deceleration in credit growth, which also resulted in a decrease in total active borrowers by 40 lakhs.”

 

The two self-regulatory organisations (SROs) for the microfinance sector -- MFIN and Sa-Dhan -- had tightened norms for its members to reduce the stress in the sector, imposing a ₹ 200,000 limit on loans, and capping the number of lenders per borrower at three. The SROs also requested its members to stop lending to delinquent borrowers with defaults of over ₹3000 to 60 days instead of 90 days earlier.

 

Deputy governor M Rajeshwar Rao in his speech on June 9, 2025 at HSBC’s event for Financial Inclusion highlighted the vicious cycle of over-indebtedness, high interest rates and harsh recovery practices in the microfinance sector.

 

He said that while some moderation was seen in interest rates charged, however in the recent quarters there have been pockets of high interest rates with elevated margins.

 

“The lenders should look beyond the conventional ‘high-yielding business’ tag for the sector and approach it with an empathic and developmental perspective, recognising the socio-economic role that microfinance plays in empowering vulnerable communities,” he said.