Microfinance Struggles Amidst Declining Loan Disbursement

Microfinance institutions (MFIs) in India are facing increasing stress, as loan disbursements fell by a significant 25% to Rs 1.12 lakh crore in the fiscal year 2025, according to a report by the Microfinance Institution Network (MFIN), a prominent umbrella organization for these institutions. This alarming decline echoes a broader trend of financial challenges in the sector.

Despite the overall drop in disbursements, the average loan amount per account climbed to Rs 50,131, representing a 12.3% rise from the last financial year. Yet, debt funding for non-bank financial companies specializing in microfinance reduced substantially by 35.7% to Rs 57,307 crore. Additionally, a minor 1.8% decrease in total equity was reported, setting alarm bells ringing for stakeholders.

The Reserve Bank of India's Deputy Governor, M. Rajeshwar Rao, highlighted ongoing issues plaguing the sector, notably over-indebtedness, high interest rates, and harsh recovery procedures. While there's been some reduction in interest rates, certain areas still suffer from excessive charges, posing a challenge for fully realizing the potential of microfinance in financial inclusion.

(With inputs from agencies.)