Microfinance Overview
Microfinance Sector Faces Rising Challenges in India: Microfinance provides banking services to low-income individuals or groups who lack access to traditional banking. It promotes financial inclusion and targets marginalized populations. Micro lending institutions (MLIs) have achieved significant rural penetration, with 71% of clients residing in rural areas.
Static GK fact: India’s first microfinance institutions emerged in the early 1990s to address rural credit gaps.
Women-led self-help groups (SHGs) have been pivotal, with 88% of bank-linked SHGs being women-led, driving socio-economic empowerment.
Rising Loan Delinquencies
The latest Sa-Dhan Quarterly Microfinance Report for FY 2024–25 reveals a sharp increase in loan delinquencies. Elevated Portfolio at Risk (PAR) indicates deteriorating asset quality across all buckets. Factors include rural distress, weather shocks, and limited financial literacy among borrowers.
Bihar recorded the highest delinquency, contributing to both the largest outstanding loan amounts and the highest default rates.
Static GK fact: Portfolio at Risk (PAR) over 30 days is a standard indicator used to measure microfinance asset quality globally.
Operational and Financial Challenges
The sector faces significant operational hurdles, including difficulties in staff and client retention. MLIs report a shrinking workforce, impacting service delivery.
Funding costs have risen, with the weighted average Cost of Funds reaching 11.33%, hitting smaller MLIs hardest. This trend has contributed to declining profitability, with a notable rise in MLIs reporting Return on Equity (RoE) below 1%.
Static GK Tip: Microfinance institutions often rely on a mix of equity and wholesale funding, making them sensitive to interest rate changes.
Government Initiatives
To strengthen microfinance, the government has undertaken multiple initiatives:
- SHG-Bank Linkage Program: Encourages SHGs to transition from non-income generating activities to production-based loans, boosting credit volumes.
- Pradhan Mantri MUDRA Yojana: Enables small businesses to access collateral-free microcredit.
- NABARD Refinance Support: Provides long-term refinance facilities to MFIs, improving liquidity and operational stability.
Digital adoption, improved underwriting practices, and responsible lending are expected to be key for the long-term growth of the sector.
Static GK fact: NABARD was established in 1982 to promote sustainable rural development through credit and other facilities.
Future Outlook
Sustainable growth hinges on balancing financial inclusion with prudent risk management. Focus areas include enhanced digital adoption, improved repayment monitoring, and continued policy support to reduce delinquencies and enhance rural credit penetration.
Static Usthadian Current Affairs Table
Microfinance Sector Faces Rising Challenges in India:
| Topic | Detail |
| Reporting Body | Sa-Dhan |
| Report Type | Quarterly Microfinance Report, part of Annual Bharat Microfinance Report |
| FY Covered | 2024–25 |
| Key Issue | Sharp rise in loan delinquencies |
| Worst-performing State | Bihar |
| Rural Client Share | 71% |
| Women-led SHGs | 88% |
| Average Cost of Funds | 11.33% |
| Low RoE MLIs | Significant increase, below 1% |
| Government Programs | SHG-Bank Linkage Program, Pradhan Mantri MUDRA Yojana, NABARD Refinance Support |
