Active microfinance loan accounts fell to 133 million in FY25 from 149 million in FY24. Evidence from the Andhra crackdown (Breza and Kinnan, 2018) documented 11-15 per cent declines in rural consumption and income when access to microcredit was cut off. The policy task is to expand access steadily while minimising collateral damage to livelihoods.
Harmonise partnership rules and supervise risk: India’s credit architecture now spans universal banks, small finance banks (SFBs), NBFCs and fintechs, linked through direct assignments (DA), co-lending, lending service provider, and business correspondent arrangements. The direction is right but anomalies remain. Universal banks and NBFCs can co-lend, SFBs cannot. Income from DA assignments can be recognised upfront unlike in other formats. Default guarantees are permitted in co-lending but not for direct origination. Some NBFC types must follow income-based targeting while others do not. These inconsistencies constrain capacity and create arbitrage.
A clearer framework would focus supervision on where risk actually is. What matters systemically is each bank’s overall exposure to non-banks across all funding arrangements — on- and off-balance sheet — rather than the label on any single transaction. At the same time, keep the principle that the originator/servicer must commit capital in an appropriate and adequate form so incentives are aligned. In parallel, PSL should be refined by increasing weighting for underserved segments and districts to address regional disparities.
Reduce funding fragility: Bank funding — direct and via NBFC balance sheets and off-balance-sheet instruments — remains the dominant source of household credit. This channel concentration makes the system prone to sudden-stop behaviour: When banks pause, last-mile credit stalls. Progress has been made on capital-market access but depth is still thin for many mid-market NBFCs. To diversify liabilities and provide continuity through stress, policy efforts are needed to provide market-making support for NBFC bond issues and securitised instruments.
Move from crude lender caps to credible income assessment: Early micro-lending relied on joint liability, and bureau discipline later strengthened behaviour on both sides. In today’s context of multiple lenders, seasonal and opaque incomes, and diverse livelihoods, a blunt rule such as “no more than three lenders per customer” is fraught with exclusion risks, particularly for more entrepreneurial households that need growth capital. There is potential for underwriting the customer and ascertaining repayment capacity using income proxies, occupational archetypes and soft information available with front-line workers.
This is a topic for a Reserve Bank of India technical committee to define minimum standards, validation protocols and governance for income assessment models. Encouragingly, the Ministry of Statistics and Programme Implementation has announced an inter-ministerial working group to guide an all-India household income survey; its outputs can anchor calibration and benchmarking for such standards.
Why does this matter? Amidst the din about over-leverage and multiple lenders, the macro picture is modest: Household debt is 42 per cent of GDP, below other emerging markets; regional disparities persist; informal borrowing remains; and universal banks still struggle to meet PSL consistently. The policy question is how to steadily expand access while minimising disruptions to economic activity. Put together, these changes convert a system prone to boom-bust cycles into something far more steady.
The writers are chair, and executive vice-chair of Dvara Holdings; and managing trustees of Dvara Trust
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