Gross Loan Portfolio (GLP) of the microfinance sector fell 13.9% year on year, that reflects growing borrower stress and reduced lending.

• Microfinance for loans (i.e., microcredit) is the provision of small scale financial services to people who lack access to traditional banking services.(World Bank)

Challenges of Microfinance Institutions(MFIs)

• High Cost of Outreach: MFIs serve remote and underbanked populations through small-ticket loans.
  • India’s MFI outreach remains at 8%, far behind Bangladesh’s 65%.
• High Interest Rates: MFIs charge 12%–30% interest, higher than banks’ 8%–12%.
  • High rates persist due to fixed transaction costs and limited volume.
• Urban Poor Often Ignored: MFIs over-focus on rural poor; only 800 MFIs target urban poor.
• Loan Defaults: High delinquency due to no collateral and poor risk management.
  • Over 70% of payments are late, limiting cash flow and sustainability.
• Overdependence on Banks: 80% of MFI funding comes from commercial banks.
• Lack of Product Diversification: MFIs are largely limited to microcredit.
  • Other services like insurance, savings, remittances are rarely offered.

Government’s Initiatives

• SIDBI’s Micro Finance Scheme: The programme requires participating NGOs/MFIs to provide equity support to access SIDBI finance.
• Self-Help Group – Bank Linkage Programme (SHG-BLP), formulated by NABARD and launched in 1992.