NBFC and fintechs' micro loan play catches regulatory attention

NBFCs and fintechs are filling the gap left by cautious banks in micro lending, even as regulators monitor rising exposure and borrower indebtedness in the segment

Even as the overall indebtedness of micro borrowers has been under control since the introduction of guardrails last year by the Microfinance Industry Network (MFIN), a self-regulatory organisation (SRO), non-banking financial companies (NBFCs) and fintechs are now increasing lending to these bottom of the pyramid segments, a development which is being closely monitored by the regulator. 

Meanwhile, with banks turning reluctant to extend loans to the microfinance institutions (MFIs), the overall loan portfolio of these lenders has fallen 22 per cent since 2024, resulting in nearly 400,000 borrowers moving out of formal finance. 

Following the introduction of the third set of guardrails, which came into effect from April 1 this year, the number of micro lenders per borrower was capped at three by the MFIN. 

Data compiled by the MFIN from CRIF High Mark showed 88.7 per cent of micro borrowers had two or less lenders, and only 6.7 per cent had three lenders. Earlier, there were instances of five or more lenders per borrower. The data also showed 73 per cent of clients have less than ₹60,000 loan outstanding, 20.3 per cent between ₹60,000 and ₹1.2 lakh, and 5.7 per cent of the borrowers have outstanding loans between ₹1.2 lakh and ₹2 lakh. 

However, following the imposition of the borrower cap — which was applicable only to MFIs — NBFCs and fintechs saw this as an opportunity and entered the segment to fill the gap. This has raised concerns because it is not binding for these entities to follow SRO rules for microfinance institutions, including assessment of household income. This could again lead to increase in borrower indebtedness. 

The MFIN is planning to take up the issue with the regulator that other types of lenders are entering the segment without following the guardrails.

 

“Not having access to a robust KYC (know your customer) is also a policy issue as Voter ID is not foolproof and can lead to over indebtedness despite all precautions in underwriting,” said a source. 

Increase in indebtedness of borrowers was one of the reasons for the regulator to come down hard and impose business restrictions on two micro lenders last year. The ban was subsequently lifted. 

A microfinance loan is defined as a collateral-free loan to a household with an annual income of up to ₹3 lakh. 

The sector is slowly recovering from the stress that started last year because drying up of bank funding is delaying the recovery. Banks have turned cautious not only in lending to this sector, they have also slowed down their lending activity to microfinance institutions. This has resulted in a fall in the overall lending portfolio of MFIs. 

Bank funding to NBFC-MFIs in 2024-25 (FY25) was ₹57,307 crore as against ₹89,156 crore in FY24. “It has become worse this year,” said another source.