MFIs raise loan-waiver concerns with RBI, finance ministry ahead of polls

Ahead of a clutch of state elections, when political parties typically throw fiscal caution to the win while promising freebies, the microfinance industry - fearing credit discipline impact - has raised the issue of loan waivers with the Reserve Bank of India (RBI) as well as the Ministry of Finance (MoF).

 

Bihar, Assam, Kerala, Tamil Nadu and West Bengal - which go to polls between the latter half of 2025 and the early part of 2026 - account for 42 per cent of microfinance institutions’ (MFIs) portfolio with 3.2 million unique borrowers, discounting those with multiple loan accounts.

 

Leading MFIs, the sector’s self-regulatory organisations (SROs) such as Sa-dhan, and MicroFinance Institutions Network have all sounded the RBI and MoF on rumours of loan waivers in the states headed for polls.

 

In this context, it was pointed out that even the well-meaning Karnataka Micro Loan and Small Loan (Prevention of Coercive Actions) Ordinance (2025) in February had affected collections. The ordinance had excluded RBI-regulated entities in the microfinance business - be they MFIs or banks – but confusion continued within the state administration and customers regarding its scope. The Tamil Nadu Money Lending Entities (Prevention of Coercive Actions) Bill (2025) passed in April to protect vulnerable groups from aggressive tactics used by money-lending firms has also affected MFIs' field collections.

 

In a note, Crisil Ratings said that disruptions by such ordinances to microfinance operations in the two states could hinder the path to recovery.

 

“The ability to control slippages and manage credit costs, and thus profitability, will be crucial in the road ahead,” it said. It added that the Bihar portfolio, which accounts for 15 per cent of MFIs assets under management, “remains under watch as well given the state goes to polls in the third quarter of the current fiscal. In the past, sociopolitical issues have impacted collections during polls in some states”.

 

CRIF High Mark’s latest MicroLend Report released in June this year reveals a deliberate shift from rapid expansion to prudent, quality-focused lending, with lenders prioritising established customers, larger ticket sizes, and reduced borrower leverage.

 

The industry’s gross loan book fell to Rs 3.59 lakh crore in June 2025, down 5.8 per cent quarter-on-quarter and 17 per cent year-on-year (YoY), in sync with the RBI’s push for responsible lending, alongside guardrails from SROs to curb overleveraging. Over the past year, there has been a noticeable shift to safe harbours, with approximately 60 per cent of loans being extended to existing customers with proven repayment histories. The share of loans above Rs 1 lakh in the industry’s portfolio rose to 8.3 per cent YoY in June 2025 from 4.6 with 80 per cent of these being extended to borrowers with vintage of more than two years.

 

Furrowed brows

 

Waiver rumours: Fives states that go to polls between late this year and early next year account for 42 per cent of MFIs' portfolio

 

Unintended fallout: Both the Karnataka Micro Loan and Small Loan (Prevention of Coercive Actions) Ordinance (2025); and the Tamil Nadu Money Lending Entities (Prevention of Coercive Actions) Bill (2025) affected MFIs’ collections even though it was targeted at RBI’s REs.

 

Flight to safety: MFI’s gross loan book fell to Rs 3.59 lakh crore in June 2025, down 5.8 per cent quarter-on-quarter and 17 per cent year-on-year in alignment with the RBI’s push for responsible lending, alongside guardrails to curb overleveraging.