RBI Flags High Interest Rates and Coercive Recovery in Microfinance Sector

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