Why in news?
In its 2024–25 report released in October 2025, industry body Sa‑Dhan warned that overdue payments in the microfinance sector have risen to worrying levels. Loans overdue by more than 30 days reached 6.2 percent, and loans overdue by over 90 days climbed to 4.8 percent. These numbers signal rising stress among small borrowers.
Evolution of microfinance in India
Microfinance emerged in the 1990s to provide credit to women and low‑income households without collateral. Self‑help groups and microfinance institutions (MFIs) expanded rapidly, enabling entrepreneurship and income generation. Government‑supported programs such as the SHG‑Bank linkage encouraged mainstream banks to lend to MFIs. After the 2010 Andhra Pradesh crisis, regulations were tightened, but the sector recovered and grew alongside the push for financial inclusion. Today it serves millions of borrowers, mostly in rural and semi‑urban areas.
Reasons behind rising defaults
- Income shocks: Weather extremes, crop failures and sudden illness reduce borrowers’ ability to repay instalments.
- Over‑lending: Multiple loans from different MFIs lead to high indebtedness. Borrowers sometimes take new loans to repay old ones.
- High interest rates and short tenures: Many microloans carry interest of 20–24 percent with weekly repayments, putting pressure on households with irregular incomes.
- Lack of financial literacy: Some clients do not fully understand terms and may misuse funds for consumption rather than productive investment.
- Regional concentration: Economic slowdown in certain states has pushed up delinquencies. Rural stress in eastern and central India has been particularly acute.
Possible solutions
MFIs should adopt responsible lending practices, verify borrowers’ existing debt and offer flexible repayment schedules during crises. Financial literacy campaigns can teach clients budgeting skills. Regulators could cap total indebtedness and encourage banks to lend at lower rates. Linking microcredit with insurance and social protection helps borrowers survive shocks. A balanced approach can preserve the social mission of microfinance while maintaining financial discipline.