A comprehensive study conducted by global consultancy PwC and Sa-Dhan, the self-regulatory organization for microfinance institutions, has revealed that India's microfinance sector faces a critical challenge in rebuilding credibility and confidence among stakeholders to achieve sustainable growth.
Trust Deficit in Microfinance Sector
The joint study highlighted that microfinance, which fundamentally relies on trust between borrowers, field officers, and lending institutions, has become increasingly transactional in nature. Major setbacks including demonetization and the COVID-19 pandemic have significantly worsened the decline in group culture within microfinance, creating widespread impacts on repayment discipline and public confidence.
According to the findings, rebuilding credibility and confidence remains a major challenge for achieving sustainable growth in the sector. The study emphasized that empowering customers with adequate information and education is crucial for regaining their trust.
External Support Declining
The research also uncovered that microfinance institutions have experienced decreasing support from external stakeholders, including investors and refinancers, over recent years. This trend stems from increased caution among stakeholders regarding bottom-of-the-pyramid borrowers, creating additional challenges for the sector.
Financial literacy represents the first step toward meaningful inclusion of borrowers and establishing alternative channels to maintain connections with them. The study recommended conducting capacity building workshops, educational sessions, and financial literacy bootcamps to inform customers about their rights, the nature of financial products offered, and their responsibilities.
Shift in Industry Focus
To improve asset quality, the microfinance industry has deliberately focused on low-risk and disciplined customers. This strategic shift is evident in the significant decline in disbursements from ₹3,86,287 crore in 2023-24 to ₹2,85,130 crore in 2024-25. Currently, the industry prefers improved portfolio health over aggressive growth in loan accounts and outstanding balances.
However, the study cautioned that while this approach benefits trust-building in the short term, it's not sustainable for long-term growth. The process of acquiring customers at the last mile requires extensive attention to balance growth with quality.
The research also identified over-indebtedness among borrowers as a critical challenge facing microfinance institutions. This issue poses systemic risk to the entire MFI sector, potentially leading to higher default rates and significant financial losses for micro-lenders.
Lenders need to ensure fairness, clarity, consistency, and care across their communications, collection practices, and customer support to address these challenges effectively, the study concluded.
