Context:
RBI Deputy Governor M. Rajeshwar Rao, speaking at a Mumbai event on 5 June 2025, raised serious concerns over the deteriorating conditions in India’s microfinance sector. His speech was uploaded to the RBI website on 10 June 2025.
Key Highlights:
Persistent Sectoral Issues
- The microfinance sector is caught in a vicious cycle of:
- High interest rates
- Over-indebtedness of borrowers
- Coercive loan recovery practices
- These systemic problems are creating stress across microfinance portfolios, particularly affecting rural borrowers and low-income households.
Rising Financial Stress in FY26
- Banks have reported growing delinquency and stress in microfinance loans since the beginning of FY26.
- Contributing factors include:
- High borrower leverage
- Decline in rural incomes
- Election-related disruptions
Interest Rates and Margins
- Some lenders, despite access to low-cost capital, are charging excessively high margins, beyond industry norms.
RBI’s Recommendations
- Credit Assessment: Strengthen borrower evaluation to prevent over-leverage.
- Recovery Practices: Strictly avoid coercive recovery tactics.
- Cost Structure Scrutiny: Lenders must introspect whether high yields are driven by operational inefficiencies or unjustified business models.
- Rethinking Incentives: Rao warned that flawed organizational structures and incentive systems could lead to “perverse outcomes” for borrowers.
BS
