Do you think the removal of interest rate/margin cap in 2022 resulted in MFIs charging higher rates to customers, which resulted in stress in the sector with increase in borrower indebtedness?
Alok Misra: Interest rate deregulation in India began in 1991, and by 1997, savings rates and small loans were fully deregulated. By 2022, in a financial sector of about ₹300 trillion, only ₹60,000-70,000 crore of NBFC-MFI loans were under interest rate control. NBFC-MFIs had only about a 35 per cent market share. Banks, small finance banks, and mainstream NBFCs never had interest rate caps; rates were left to boards, consistent with post-1991 reforms. To suggest that removing caps for 35 per cent of the microfinance sector caused problems is far-fetched. In April 2022, the weighted average lending rate of NBFC-MFIs was around 24 per cent.
Interest rates have largely remained the same. If institutions were to lend indiscriminately just because caps were removed, two things would happen. First, competition is intense, so charging 30 per cent would mean losing market share. Second, higher interest rates should translate into higher profitability. But over the last eight years, the top 10 NBFC-MFIs have had a return on assets (RoA) of about 1.8 per cent and return on equity (RoE) of around 8 per cent, comparable to the Government of India’s risk-free return. On that count, I do not agree that cap removal has led to problems.
India is credit-starved and MFIs lend to the bottom of the pyramid. Has the sector been more responsible after the removal of the cap?
Sadaf Sayed: Responsibility is evident in the numbers. In 2010, after the Malegaon Committee and rate caps, the sector’s AUM was about ₹20,000 crore. Before the recent slowdown, it had grown to around ₹4.4 trillion. Financial inclusion has expanded significantly, aided by government initiatives such as Jan Dhan, Aadhaar, and mobile connectivity. NBFC-MFIs are also unique in submitting daily credit bureau data voluntarily — covering about 8 crore customers and 12.5 crore loan accounts — through SRO initiatives. This helps track borrower exposure and behaviour and reflects responsible lending. RBI’s approach was gradual — moving from a 26 per cent cap to margin caps and then full deregulation — recognising industry maturity and SRO oversight.
How do you view the RBI embargo on a few MFIs for charging “exorbitant” interest rates?
HP Singh: ‘Exorbitant’ is subjective. An industry cannot grow with its hands tied. Once caps were removed, market dynamics came into play — cost of funds, liquidity, and pricing discipline. Overall, this has been a positive step for inclusion. The creation of a specific NBFC-MFI license itself reflects RBI’s intent to promote inclusion.
Do you think MFIs are more focused on the bottom line than top line?
Karthik Srinivasan: As any industry matures, profitability becomes more important, and microfinance is no exception. However, for most MFIs, the primary objective remains financial inclusion and on-boarding new-to-credit customers. Growth in recent years may have been too fast, leading to some hiccups. Still, the analyst presentations clearly highlight new-to-credit metrics, showing continued focus on inclusion. Profitability is necessary for accessing debt. Tools like direct assignment have helped de-risk balance sheets and improve profitability, supporting the sector’s ability to raise funds and scale inclusion.
MFIN has proposed a limit of three lenders per borrower, whereas the RBI earlier spoke of two. Is this dilution appropriate?
Srinivasan: It is difficult to micromanage lending externally. Overleveraging has occurred across NBFCs, not just MFIs. This segment is more vulnerable to economic shocks, which amplifies risk. Overleveraging depends on whether loans are assessed at an individual or household level.
What explains the contraction in the micro loan portfolio?
Sayed: Several factors are at play. Perceived and actual risk has increased due to macro events such as elections and floods. Fund flows have reduced, particularly for smaller MFIs. This creates a vicious cycle: reduced funding leads to lower disbursement, which affects borrower cash flows and increases delinquency. MFIs then restrict lending as per underwriting norms. MFIs are focusing on retaining good customers and stabilising portfolios. Microfinance loans run off quickly — typically two-year tenures with frequent repayments — so AUM contracts rapidly when disbursements slow. Microfinance is
often blamed unfairly for overleveraging. Lender count alone does not define leverage; borrower income does.
Why are banks becoming cautious about lending to MFIs?
Srinivasan: NBFC-MFIs are single-product entities, while banks are multi-product, and can reallocate capital based on risk appetite. Microfinance is a short-duration asset — 18 to 24 months — so portfolios run down quickly if disbursements slow. As banks grow through long-term retail loans like housing, MFIs become a smaller share of their books.
What support is being sought from the government?
Misra: In 2021, during Covid, there was a double whammy on NBFC-MFI. We had to put a moratorium on loans and collection from borrowers. But, on repayment to lenders, there was no moratorium. So, the Department of Financial Services came up with a ₹7,500 crore guarantee scheme to give confidence to banks that in case of default, the government will pay a major part to the lenders, to boost lending to these players. But, none of them defaulted and banks got all the money back. There was no fiscal impact. So we asked the government if a larger guarantee fund can be instituted of ₹20,000 crore, which will kick-start the virtuous cycle of funding and give confidence to the bank. We hope that can be expedited.
When do you see the cycle turning?
Sayed: We are already witnessing a turn of cycle. Currently, the inflation has reduced. Crops and rains have been good. So, because of those good crops, the vegetable prices have also reduced, due to which affordability of rural households has improved. As the disbursement also improves, and liquidity is infused from RBI and the banks are lending more and, cash flow improves at the bottom of the pyramid. I think the collections will also improve. So the trend is towards the positive.
Srinivasan: We do believe the worst is over. It is still some time away before we see the highs that were recorded earlier. With credit cost coming down, the industry might report 1 per cent RoA in the year. Maybe next year, it will go up.
 "(L-R) Alok Misra, chief executive officer (CEO), Microfinance Industry Network (MFIN); Sadaf Sayed, CEO of Muthoot Microfin; HP Singh, chairman and managing director (CMD), Satin Creditcare; and Karthik Srinivasan, senior vice president & group head,")