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Business Standard
15-06-2025
- Business
- Business Standard
Microfinance industry refashions itself amid opportunities and challenges
Central bank has taken a sympathetic view of institutions by easing some lending norms premium Raghu Mohan Listen to This Article 'The microfinance sector continues to suffer from a vicious cycle of over-indebtedness, high interest rates and harsh recovery practices,' said M Rajeshwar Rao, deputy governor at the Reserve Bank of India (RBI), last week. These are tough words from the otherwise soft-spoken Rao, the senior-most in that position at the central bank. He also pointed out the prevalence of Shylock-like tendencies: 'Lenders should look beyond the conventional 'high-yielding business' tag…and approach it with an empathic and developmental perspective, recognising the socioeconomic role that microfinance plays in empowering vulnerable communities.'
Time of India
11-06-2025
- Business
- Time of India
RBI moots apps for feature phones to deepen financial inclusion
Mumbai: The Reserve Bank of India has urged banks and finance companies to launch low-bandwidth apps and flexible products that can reach remote parts of India and underserved populations, as part of its drive towards 100% financial inclusion, said people privy to the development. The RBI has also asked banks and finance companies to ensure that the new apps and digital products have features to prevent cyber fraud. The central bank is urging banks to design digital products that meet the needs of customers using feature phones with low bandwidth since connectivity is a major roadblock in remote parts of the country. All retail banking products are currently available through mobile applications on smartphones. However, not all services are made available on feature phones. The RBI is aiming to bridge this gap. Separately, the RBI said it is planning to review regulations on internet and mobile banking for all banks. Upon taking charge as the RBI governor, Sanjay Malhotra, had started financial inclusion, which implies making financial services available to all citizens, especially the underserved population. The Reserve Bank's Financial Inclusion Index (FI-Index), which measures the extent of financial inclusion in the country, improved from 60.1 in March 2023 to 64.2 in March 2024, according to latest data published by the central bank. The index covers access, usage and quality of financial services. The RBI plans to review the index in FY26. Live Events The RBI is planning to conduct a survey on the usage of digital payments, it said in its latest annual report. The survey will be done to "understand transaction behaviour and challenges faced by users, thereby facilitating evidence-based decision making towards enhancing financial inclusion and making payment systems more effective". The RBI is also encouraging banks to design products that meet customer needs such as flexible repayments, variable savings and seasonally adapted services-enhancing access, usage, and service quality, RBI deputy governor M Rajeshwar Rao said early this month.
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Business Standard
11-06-2025
- Business
- Business Standard
Microfinance loan disbursal falls 25% to ₹1.12 trillion in FY25
Loan disbursed by microfinance institutions (MFIs) have declined by 25 per cent to Rs 1.12 trillion in FY25 reflecting stress in the sector. Loan amount of Rs 1,12,459 crore was disbursed in 2024-25 through 2.2 crore accounts, including disbursement of owned as well as managed portfolio, Microfinance Institution Network (MFIN), an umbrella body of the microfinance institutions (MFIs), said in its report released on Wednesday. MFIs loan disbursement in FY25 was 25.4 per cent lower than the amount disbursed in 2023-24, it said. However, the average loan amount disbursed per account during FY25 was Rs 50,131 which increased by 12.3 per cent in comparison to the last financial year. During the year, the report said, NBFC-MFIs received a total of Rs 57,307 crore in debt funding, a 35.7 per cent decrease from previous year. Banks contributed 78.4 per cent of the total borrowing received followed by non-bank entities 11.9 per cent, ECB 5.1 per cent, All India Financial Institution 3.1 per cent and others 1.5 per cent, it said. Total equity decreased by 1.8 per cent to Rs 35,759 crore as compared to previous year. During the quarter ended March 31, 2025, Asset Under Management (AUM) of MFIs came down by 11.9 per cent to Rs 1,47,279 crore. AUM decreased by 11.9 per cent compared to March 31, 2024 and decreased 2.4 per cent compared to December 31, 2024. In terms of regional distribution of portfolio (AUM), East and North-East accounts for 33 per cent of the total NBFC-MFI portfolio, South 28 per cent, North 17 per cent, West 14 per cent, and Central contributes 9 per cent. Last week, RBI Deputy Governor M Rajeshwar Rao said microfinance continues to suffer from the vicious cycle of over-indebtedness, high interest rates and harsh recovery practices. While microfinance has played an important role in financial inclusion, some issues need attention, Rao had said. "The sector continues to suffer from the vicious cycle of over-indebtedness, high interest rates and harsh recovery practices. While some moderation in interest rates charged on microfinance loans has been observed in recent quarters, pockets of high interest rates and elevated margins continue to persist," he had said.
Indian Express
09-06-2025
- Business
- Indian Express
Microfinance sector suffers from vicious cycle of over-indebtedness, high rates: RBI Deputy Governor Rao
Reserve Bank of India (RBI) Deputy Governor M Rajeshwar Rao has said that the microfinance sector continues to grapple with high indebtedness, elevated interest rates and coercive recovery practices. Speaking at an event on financial inclusion organized by HSBC last week, Rao said that while some moderation in interest rates charged on microfinance loans has been observed in recent quarters, pockets of high interest rates and elevated margins continue to persist. 'The sector (microfinance) continues to suffer from vicious cycle of over-indebtedness, high interest rates and harsh recovery practices,' he said. The deputy governors noted that even lenders having access to low-cost funds have been found to be charging margins significantly higher than the rest of the industry and which in several instances appear to be excessive. The frequency of disruptions in the microfinance sector has increased of late, Rao said, adding that incidents of high borrower indebtedness, coupled with coercive recovery practices, sometimes lead to tragic consequences. The microfinance sector in the country is experiencing a significant surge in delinquencies, with portfolio at risk (PAR), or loans overdue for over 31 days, jumping by 163 per cent to Rs 43,075 crore in the fiscal year ended March 2025, up from Rs 16,379 crore in the previous year. This rise in delinquencies reflects the growing stress in the small borrower segment. Significantly, the microfinance industry's gross loan portfolio (GLP) fell to Rs 381,200 crore as of March 2025, marking a 13.9 per cent fall from Rs 442,700 crore a year ago. Data from CRIF High Mark, a credit information bureau, shows that PAR in the 31-180 days overdue bucket has gone up to 6.2 per cent during FY2025 as against 2.1 per cent in the same period of last year. PAR in the 180 days plus bucket has jumped from 1.6 per cent to 5.1 per cent during the fiscal. 'PAR of 91-180 days and 180 plus days (including write-offs) continue to rise, particularly among banks and small finance banks, followed by NBFC-MFIs, highlighting persistent challenges,' the agency said. According to CRIF High Mark, higher-ticket loans above Rs one lakh have experienced an uptick in all delinquency buckets as their share in POS expands, highlighting the need for greater caution. However, its delinquency is much lower than the lower-ticket sizes, it said. The deputy governor further said that the lenders should look beyond the conventional 'high-yielding business' tag for the microfinance sector and approach it with an empathic and developmental perspective. They should recognise the socio-economic role that microfinance plays in empowering vulnerable communities, he said. 'It is in the collective interest of all stakeholders that such disruptions are pre-emptively addressed and avoided,' he said. Rao asked the regulated entities to enhance their credit appraisal frameworks to prevent over-leveraging of borrowers. They must eschew any coercive or unethical recovery practices, ensuring that financial services are delivered in a manner that is both responsible and sustainable. 'While the business model may be sound, the organisational structure and the incentive schemes framed to deliver the services may be flawed resulting in perverse outcomes for customers. This calls for an introspection around the models,' he said. ENDS
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Business Standard
09-06-2025
- Business
- Business Standard
Microfinance in vicious cycle of debt, high rates, warns RBI deputy guv
India's microfinance sector is facing a "vicious cycle" of borrower over-indebtedness, high interest rates, and coercive recovery practices, Reserve Bank of India (RBI) Deputy Governor M Rajeshwar Rao has warned. Speaking at an event in Mumbai on 5 June, Rao underscored the urgent need for structural reforms in lending practices to ensure responsible and sustainable credit models. 'The [microfinance] sector continues to suffer from a vicious cycle of over-indebtedness, high interest rates and harsh recovery practices,' said Rao, according to the full speech published on the RBI's website on Monday. He noted that even lenders with access to low-cost funds are charging 'significantly higher margins than the industry norm,' which in many cases 'appear excessive.' Although interest rates on microfinance loans have moderated slightly in recent quarters, 'pockets of high interest rates and elevated margins continue to persist,' Rao said, adding that these practices have intensified stress in the sector, particularly in the current financial year. Concerns over mounting stress Commercial banks have already flagged concerns about growing distress in the microfinance ecosystem, driven by borrower indebtedness, falling rural incomes, and election-related disruptions. Rao called for a shift in mindset among lenders, urging them to stop treating microfinance as a 'high-yielding business' and instead prioritise credit discipline and borrower welfare. 'There is a critical need to curb over-leverage and strictly avoid coercive recovery practices,' he said. He added that while many institutions have sound business models, flaws in organisational structures and incentive mechanisms can lead to 'perverse outcomes' for borrowers. 'This calls for an introspection around the models,' he said. Financial inclusion and historical milestones Rao's remarks were part of a broader speech on financial inclusion, where he highlighted the vital role of access to financial services in reducing poverty, fostering social equity, and promoting economic development. Reflecting on India's progress in this area, he cited key milestones including bank nationalisation in 1969, the introduction of Priority Sector Lending, and the launch of the Pradhan Mantri Jan Dhan Yojana (PMJDY). As of 21 May 2025, over 550 million Jan Dhan accounts have been opened, with 56 per cent belonging to women, and cumulative deposits crossing ₹2.5 trillion. Responsible lending and borrower awareness Rao emphasised that increasing access to credit must go hand in hand with responsible lending and financial education. Without adequate awareness, financial inclusion could instead result in poor decision-making, mis-selling, and further debt accumulation. 'To facilitate informed decision-making by the customers and enhance transparency by the lenders, the RBI has mandated that all REs provide a standardised disclosure of key terms and conditions in the form of Key Fact Statement (KFS) to all retail and MSME borrowers,' he noted. Rao's candid comments reflect the central bank's deepening concern over unhealthy practices in India's microfinance space. As the country advances its financial inclusion agenda, the RBI is pushing for a parallel focus on ethical, transparent, and sustainable lending — especially for economically vulnerable populations.
