Economic Survey Advocates Household Welfare Focus for Microfinance Sector
The Economic Survey, released on Thursday, has proposed a significant shift in how India's microfinance sector measures success. It recommends prioritizing metrics that track household well-being over traditional indicators of scale, such as the number of borrowers and total loan amounts. This move aims to strengthen a sector that has faced periodic stress and instability.
Commercial Capital's Role and Investor Incentives
The survey acknowledges that commercial capital has played a crucial role in expanding the reach of India's microfinance sector. However, it highlights a critical issue: incentives embedded in private equity and venture capital investment structures have, in some contexts, encouraged growth-driven expansion. This focus on rapid growth may not always align with long-term household welfare, potentially undermining the sector's social objectives.
To address this misalignment, the survey calls for more consistent harmony between impact objectives and investor incentives. It suggests linking exit decisions and valuations to the achievement of social purpose metrics rather than relying exclusively on financial performance. For instance, investor exits could be conditioned on evidence of sustained household-level welfare gains, improved resilience indicators, or responsible credit intensity in borrower portfolios.
Re-centering on Social Objectives
The Economic Survey emphasizes that to re-center the microfinance sector on its original social objectives, scale-based impact metrics must be replaced with household-level welfare indicators. Microfinance was initially conceptualized as a model to improve household resilience, support income stability, and enable gradual asset accumulation. However, as Microfinance Institutions (MFIs) became integrated into capital markets, their operating environment increasingly reflected the incentives associated with growth-oriented commercial investment.
The survey criticizes what it terms 'impact-washing' metrics, advocating instead for indicators that track household-level welfare and financial resilience over time. This approach would ensure that the sector's growth is sustainable and beneficial to borrowers.
Challenges of Overleveraged Borrowers
Data from microfinance industry body Sa-Dhan reveals concerning trends in the sector. The combined microcredit portfolio of 285 microlenders, including banks and non-bank financiers, stood at ₹3.4 trillion as of 30 September 2025, marking a 16% year-on-year decline. The industry has experienced a pronounced slowdown, with the total portfolio shrinking by ₹62,726 crore over the past year and nearly ₹1 trillion over the past 18 months.
India's microfinance sector has been prone to stress, though it has started recovering recently after two years of pressure. Repayment difficulties have largely stemmed from borrowers taking multiple loans simultaneously, leading to overleveraging. In response, the self-regulator Microfinance Institutions Network (MFIN) implemented guardrails in April, capping the number of lenders per borrower at three and restricting the total debt of a single borrower to ₹1.5 lakh.
These measures appear to be having a positive effect. According to a report by India Ratings and Research dated 30 October, the share of microfinance accounts with exposure to more than four lenders fell to 10% in June 2025 from 19% a year earlier. Similarly, accounts with over three lenders decreased to 24.8% from 34.7%.
Conclusion: A Path Forward
The Economic Survey's recommendations highlight a need for a paradigm shift in the microfinance sector. By focusing on household welfare metrics and aligning investor incentives with social impact, the sector can build resilience and better serve its core mission. This approach not only addresses current challenges like overleveraging but also paves the way for sustainable growth that benefits both borrowers and the broader economy.
