Indian MFI sector must transform before it’s too late

For decades, India’s microfinance sector was seen as a quiet revolution—a way to offer dignity, capital, and opportunity to the underserved. From dusty village lanes to dense urban clusters, microloans became synonymous with empowerment. It wasn’t perfect, but it worked.

Today, that story is changing.

In boardrooms and branch offices, there’s an uneasy realization: this time feels different. Not like the Andhra Pradesh crisis of 2010 or the cash crunch post-demonetization in 2016. Not even like the pandemic-era delinquencies.

No, this is deeper—a crisis of the model itself.

Indian microfinance: Are numbers telling the full story

As of September 2023

Rs 3.60 lakh crore total loan portfolio
6.24 crore active borrowers
12.2 crore loan accounts
Dominated by NBFC-MFIs (39% market share), followed by banks and small finance banks
Top states: Bihar, Tamil Nadu, Uttar Pradesh, West Bengal, and Karnataka

Sounds healthy, right? On the surface, yes.

But behind those numbers lies a fragile reality.

Borrowers are juggling multiple loans—sometimes 6 or more—from MFIs, SHGs, local moneylenders, and even app-based lenders. Field staff are exhausted. Community ties that once held JLGs together are fraying. And loan officers are under pressure, leading to shortcuts, fraud, and rising stress levels.

Even digital transformation—though strong in back-office operations—has left customer engagement in the last decade. A woman in a rural village may have a smartphone and UPI access, but her microloan still begins with a paper form and a field visit.

Global stories: So how does India compare with other countries where microfinance plays a big role?

Bangladesh – Home to Grameen Bank, Bangladesh continues to innovate. Institutions like BRAC have moved into holistic livelihood financing, combining credit with health, education, and entrepreneurship. They’re using mobile wallets, nano-credit, and real-time data monitoring far more aggressively than many Indian MFIs.
Philippines – MFIs like CARD MRI and fintechs such as Tala are redefining microfinance with digital onboarding, gamified credit scores, and SMS-based financial literacy. Clients can apply for loans from a smartphone, track payments, and even access crop insurance—all in one app.
Kenya – Kenya’s M-Pesa revolution made it a poster child for mobile-first microfinance. Now, platforms like M-KOPA combine microloans with asset financing—offering solar lights, smartphones, and even fridges on pay-as-you-go models. The entire customer lifecycle is digital, with AI managing credit decisions.
Latin America – Countries like Peru and Bolivia use advanced credit bureau integrations and risk-based pricing models. Borrowers with better repayment records enjoy lower interest rates, incentivizing financial discipline.

India – Caught in transition: Despite robust infrastructure—Aadhaar, UPI, Jan Dhan accounts, mobile penetration—India’s microfinance story feels oddly stuck. While backend systems are digitized, the customer interface remains largely manual, opaque, and uniform.

A closer look at the cracks

I’ve worked with MFIs, met borrowers across India, and heard countless stories—some inspiring, others alarming.

Here’s what I see today:

Credit bureau data only tells half the story. Many borrowers now borrow from informal channels or through relatives. Loan stacking is real. In Bihar and parts of Maharashtra, I met women who had borrowed from 4–5 MFIs simultaneously, hiding one loan to repay another.
The JLG model assumes that peer pressure ensures repayment. But in today’s urban settlements, where people barely know their neighbors, this foundation is crumbling. Larger loan sizes without tailored assessment make it worse.
Loan officers are the backbone of the industry—but most feel stuck. Their jobs haven’t changed in a decade, even as they see the world around them evolve. Retention is low. And under pressure, some are taking shortcuts—or worse.
The Assam Act (2020) and the Karnataka Microfinance Bill are signals. Political and social scrutiny is back. The window to self-correct is closing.

What must change now

Here’s my honest belief: the next chapter of Indian microfinance must be radically different.

Not just more tech, but more intelligence. Not just digital backends, but digital relationships. Not just scale, but value.

Every borrower is not the same. A vegetable seller in Tamil Nadu and a tailor in UP may both need ₹30,000—but their repayment ability, digital access, and aspirations differ. Use data—repayment history, phone usage, Aadhaar-linked transactions—to understand people better.

Forget flashy apps for now. Start with:

Digital loan tracking tools borrowers can use on WhatsApp
Community-led digital groups that mimic the JLG spirit
Hybrid servicing—in-person for high-risk borrowers, remote for low-risk digital natives

In fact, a 2023 internal pilot by a leading Indian MFI showed that WhatsApp-based loan reminders reduced delinquencies by 18% in six months.

Alternative data isn’t a buzzword—it’s a necessity. Phone top-ups, mobility patterns, festival spending—all tell a story. Let’s read it.

Reimagine the loan officer role. Offer growth paths, training, better tools, and most importantly, respect. They’re not just field workers—they’re the face of trust.

Managing crises to build a future

The external world has changed. The borrower has changed. The economy has changed.

But microfinance in India hasn’t caught up yet.

We’re still operating like it’s 2010—manual forms, blanket products, trust-based group lending, and repayment pressures that don’t account for changing lives. And in doing so, we’re losing the very people we set out to serve.

What if Indian microfinance became the most customer-centric, tech-empowered, human-first financial system in the world?

What if we stopped seeing borrowers as “segments” and started seeing them as individuals with unique dreams and risks?

What if we led the way not in loan books, but in impact?

That’s the version of microfinance I want to write about next. And I believe we still can.

But only if we choose to reinvent—before we’re forced to.