MFIs need to rebuild credibility, confidence to achieve growth: Study

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Microfinance institutions (MFIs) need to rebuild credibility and confidence to achieve sustainable growth, a joint study by consultancy firm PwC and Sa-Dan, a self-regulatory organisation (SRO) of the sector, said.

Microfinance, which is principally underpinned by trust among the stakeholders, who are the borrowers, field officers and lending institutions, has become more transactional, the study said.

Major setbacks like demonetisation and the Covid pandemic have further exacerbated the decline in group culture in microfinance, which has had a widespread impact on repayment discipline and public confidence, the study pointed out.

"Rebuilding credibility and confidence remains a major challenge to achieving sustainable growth", the study said, adding that empowering and equipping customers with adequate information is crucial in regaining their trust.

According to the study, MFIs have also experienced declining support from external stakeholders, including investors and refinancers, over the past few years. This had resulted from increased caution amongst the stakeholders for bottom-of-the-pyramid borrowers.

Financial literacy is the first step towards meaningful inclusion of borrowers and building alternative channels to maintain a connection with borrowers. Capacity building workshops, educational workshops and financial literacy bootcamps should be conducted to inform the customers of their rights, nature of the products offered and their responsibilities, the study said.

Lenders also need to ensure fairness, clarity, consistency and care across their communications, collection practices and customer support.

To improve asset quality, the MFI industry had deliberately focused on low-risk and disciplined customers. The impact of this can be seen in the decline in disbursements from Rs 3,86,287 crore in 2023-24 to Rs 2,85,130 crore in 2024-25. Presently, the industry prefers improved portfolio health over aggressive growth in loan accounts and outstanding balances, the study said.

However, despite this being a beneficial exercise to increase trust in the industry, it is not sustainable in the long term, according to the study.

The process of acquiring customers at the last mile requires extensive attention to balance growth with quality, the study noted.

The risk of over-indebtedness among the borrowers is a critical challenge faced by the MFIs. This is also posing a systemic risk to the MFI sector, potentially leading to higher default rates and financial losses of the micro-lenders, the study said.