/images/ppid_59c68470-image-17754625379708585.webp)
/images/ppid_59c68470-image-177565002566555816.webp)
/images/ppid_59c68470-image-17756500682168977.webp)
/images/ppid_59c68470-image-177565002925341462.webp)
What is the story about?
India’s microfinance sector is witnessing a major structural shift, with informal borrowing among microfinance (MF) customers dropping drastically from 46% in 2011 to just 1% in 2024–25, according to a new study by the National Council of Applied Economic Research (NCAER) for the Micro Finance Industry Network (MFIN).
The survey, covering 10,342 borrowers across 10 states and 19 regulated entities—including banks, NBFCs, NBFC-MFIs, and small finance banks—highlights growing adoption of formal, regulated credit sources.
The findings stress the role of microfinance in providing affordable loans and replacing high-cost informal lending, which typically charged interest rates between 97% and 178% per year.
Digital disbursements and product usage
The study shows 100% of microfinance disbursements are digital, while around 12% of repayments are made through digital channels, a figure expected to grow with increased infrastructure and awareness.
Borrowers largely use loans for income generation, with 75.4% of funds directed to business purposes. Over half of borrowers rely on income from these activities to repay loans, highlighting the sector’s contribution to livelihoods.
Trust and engagement strong among borrowers
Borrower engagement is robust: 97.9% of respondents reported positive staff behaviour, 88% expressed willingness to return to their lender, and nearly all received loans without paying any commission. Awareness of grievance redressal mechanisms and near-universal possession of Aadhaar and voter ID indicate strong institutional trust. About 80% of borrowers also hold PAN cards.
Responsible borrowing and financial inclusion
The study found responsible borrowing behaviour, with an overall Fixed Obligation to Income Ratio (FOIR) of 18.7%, well below the RBI-prescribed 50% limit. Borrowers have an average monthly income of ₹25,844, with a substantial portion allocated to expenses, savings, and repayments.
Regular savings were reported by 97.2% of borrowers, and 84.4% had credit-linked insurance, reflecting the sector’s role in promoting financial discipline.
Average loan size stood at ₹51,222, with a tenure of 23 months, reflecting short- to medium-term credit cycles. State-level variations show rural borrowers are more likely to follow monthly repayment schedules, and education levels differ across regions, with higher shares of uneducated borrowers in Bihar, Uttar Pradesh, and Telangana.
Economic significance
Earlier assessments by NCAER in 2021 estimated that the microfinance sector contributed 2.03% to India’s Gross Value Added (GVA) and supported nearly 1.3 crore jobs, underscoring its importance to the broader economy.
Alok Misra, CEO & Director of MFIN, said, “The key takeaway is the shift towards formal credit, with a sharp decline in informal borrowing and improved borrower outcomes. Strengthening household-level credit assessment and promoting digital adoption will be critical to sustain these trends.”
V Anantha Nageswaran, Chief Economic Advisor to the Government of India, noted, “Microfinance institutions today have a strong relationship of trust with millions of borrowers. This opens opportunities to advance financial literacy, skill development, and income enhancement, supporting sustainable livelihoods and household resilience.”
The survey, covering 10,342 borrowers across 10 states and 19 regulated entities—including banks, NBFCs, NBFC-MFIs, and small finance banks—highlights growing adoption of formal, regulated credit sources.
The findings stress the role of microfinance in providing affordable loans and replacing high-cost informal lending, which typically charged interest rates between 97% and 178% per year.
Digital disbursements and product usage
The study shows 100% of microfinance disbursements are digital, while around 12% of repayments are made through digital channels, a figure expected to grow with increased infrastructure and awareness.
Borrowers largely use loans for income generation, with 75.4% of funds directed to business purposes. Over half of borrowers rely on income from these activities to repay loans, highlighting the sector’s contribution to livelihoods.
Trust and engagement strong among borrowers
Borrower engagement is robust: 97.9% of respondents reported positive staff behaviour, 88% expressed willingness to return to their lender, and nearly all received loans without paying any commission. Awareness of grievance redressal mechanisms and near-universal possession of Aadhaar and voter ID indicate strong institutional trust. About 80% of borrowers also hold PAN cards.
Responsible borrowing and financial inclusion
The study found responsible borrowing behaviour, with an overall Fixed Obligation to Income Ratio (FOIR) of 18.7%, well below the RBI-prescribed 50% limit. Borrowers have an average monthly income of ₹25,844, with a substantial portion allocated to expenses, savings, and repayments.
Regular savings were reported by 97.2% of borrowers, and 84.4% had credit-linked insurance, reflecting the sector’s role in promoting financial discipline.
Average loan size stood at ₹51,222, with a tenure of 23 months, reflecting short- to medium-term credit cycles. State-level variations show rural borrowers are more likely to follow monthly repayment schedules, and education levels differ across regions, with higher shares of uneducated borrowers in Bihar, Uttar Pradesh, and Telangana.
Economic significance
Earlier assessments by NCAER in 2021 estimated that the microfinance sector contributed 2.03% to India’s Gross Value Added (GVA) and supported nearly 1.3 crore jobs, underscoring its importance to the broader economy.
Alok Misra, CEO & Director of MFIN, said, “The key takeaway is the shift towards formal credit, with a sharp decline in informal borrowing and improved borrower outcomes. Strengthening household-level credit assessment and promoting digital adoption will be critical to sustain these trends.”
V Anantha Nageswaran, Chief Economic Advisor to the Government of India, noted, “Microfinance institutions today have a strong relationship of trust with millions of borrowers. This opens opportunities to advance financial literacy, skill development, and income enhancement, supporting sustainable livelihoods and household resilience.”
/images/ppid_a911dc6a-image-177565083354069445.webp)
