Chapter 1.4Resilient Microfinance
The Self-Help Group (SHG) and microfinance movement began in the 1970s, led by early pioneers like SEWA (Self-Employed Women’s Association), and gained nationwide traction in the 1990s through NABARD’s SHG-Bank Linkage Programme launched in 1992. The microfinance industry in India has traversed a complex journey since its inception in the 1970s, facing multiple crises that have shaped its evolution.
Inclusive Growth Through Resilient Microfinance Nanaiah Kalengada
1.4 Resilient Microfinance
The Self-Help Group (SHG) and microfinance movement began in the 1970s, led by early pioneers like SEWA (Self-Employed Women’s Association), and gained nationwide traction in the 1990s through NABARD’s SHG-Bank Linkage Programme launched in 1992. The microfinance industry in India has traversed a complex journey since its inception in the 1970s, facing multiple crises that have shaped its evolution.
In its early years, the sector grappled with issues of sustainability, weak repayment mechanisms, and limited scalability as NGO- led models struggled to formalize operations. The most significant crisis emerged in 2010 with the Andhra Pradesh microfinance crisis, which marked a turning point in the sector’s governance framework. This crisis prompted RBI to set up the Malegam Committee in 2011, which introduced tighter regulatory controls, including interest rate caps and borrower- level limits, forcing operational restructuring across MFIs.
The sector faced further disruption during demonetization in 2016, when its heavy reliance on cash-based collections led to a spike in defaults. This was followed by the COVID-19 pandemic in 2020–21, which brought a fresh set of challenges. Lockdowns halted field operations, borrower incomes declined, and delinquencies rose. Despite these headwinds, the industry remained largely stable through 2021 and 2022, avoiding collapse due to timely regulatory interventions, including a loan repayment moratorium initially for three months and later extended to six months.
The post-COVID recovery was strong, with the industry’s portfolio growing over 21%, from ₹2.89 lakh crore in 2022 to ₹3.51 lakh crore in 2023. This momentum continued into 2024, with the portfolio expanding by another 18%. However, in hindsight, this rapid growth also contributed to a build-up of borrower over- indebtedness. After about four quarters, the industry is beginning to show early signs of stabilization and recovery in portfolio quality. Despite these cyclical setbacks, the sector has consistently demonstrated resilience and the ability to rebound. Going forward, it will be key to the industry to internalize lessons from these cyclical movements and continue to transform to ensure sustainable, inclusive, and responsible growth.
Some of the key questions as we look at the microfinance model are:
- Does the Joint Liability Group (JLG) model
still hold relevance in today’s ecosystem?
The JLG (Joint Liability Group) model in microfinance was built on the principle of joint liability, where a group of individuals form a group to jointly guarantee each other’s loans. The group’s mutual guarantee acts as a form of social collateral; however, changing borrower behaviour, weakening peer pressure, and urban migration have reduced its effectiveness. In some markets, group discipline has eroded, and borrowers now have access to multiple lenders.
It is time to pivot from the traditional JLG model to a hybrid one that combines the concept of social collateral with individual accountability and leverages the rural con- nectivity & tech stack to reduce the high- touch model. Including real-time credit bureau checks to monitor portfolio, could be a classic use case of leveraging Chat GPT or AI tools for borrower assessments and early warning signals. Where appropriate, lenders could consider transitioning to in- dividual loans for borrowers with a strong repayment history. With the RBI’s revised norms on qualifying assets, such a model becomes a viable and strategic option for microfinance institutions aiming to evolve while maintaining their core inclusion mandate. - Is the high-touch, field-intensive model
scalable in a digital-led credit landscape?
The traditional MFI model is heavily reliant on manual processes, branch infrastructure, face-to-face interactions in group/centre meetings and paper- based systems, which limits the scalability and drives up costs. Meanwhile, fintech’s are scaling rapidly with lower customer acquisition costs.
MFIs need to adopt digital tools for on- boarding, credit appraisal, and collections. Partnerships with fintech’s or leveraging API-based infrastructure (like India Stack, OCEN) can help scale efficiently. Over time, shift lower-value interactions (e.g., reminders, service requests) to IVR & chat- bots while reserving field visits for critical customer engagement. A “phygital” mod- el—combining digital tools with field pres- ence, may be most effective in the near term. - Is the available data sufficient for robust risk
assessment and scalable underwriting?
One of the critical challenges facing the microfinance industry is the recency and depth of credit data, particularly in the case of low-income borrowers. Many of these individuals lack formal credit histories, income documentation, or a digital financial footprint. Additionally, smaller MFIs often operate with limited analytical capabilities, relying heavily on static borrower information provided by credit bureaus or qualitative assessments, which limits their ability to scale underwriting effectively and manage risk dynamically.
While the recent RBI mandate requiring regulated entities to submit data every 15 days and credit bureaus to update records within 7 days is a positive step toward improving data recency, it may still fall short in the context of low-ticket, high-velocity lending. Borrowers’ credit profiles can change materially in shorter timeframes. Therefore, the ecosystem must aim to transition toward daily data submission and updates to enhance the accuracy of risk assessment.
In addition to improving the recency of data in the credit bureaus, getting the SHG data in the credit bureaus would enhance the view of the borrower’s obligation and capacity to pay the loan EMI. Considering both microfinance and SHG are addressing or solving for access to credit to underserved populations, SHG data will strengthen the risk assessment by microfinance institutions. Collaboration with ecosystem enablers like Account Aggregators can also provide richer, real- time data to strengthen underwriting frameworks and improve financial inclusion outcomes. - Are employee attrition and lack of
continuity in customer relationships
undermining trust and retention?
High attrition among field staff, more specifically the loan officer, remains a persistent challenge in the microfinance sector, with attrition rates often hovering around 50%. This is possibly driven by a combination of factors, as field staff frequently operate in high-stress environments, face intense pressure to meet collection targets, limited career advancement opportunities and work within incentive structures that are heavily target-driven. In a high-touch business like microfinance, customer relationships are critical. Disruptions in staff continuity can significantly impact collections as well as opportunities for repeat business, such as cross-sell or upsell. Borrowers may feel disconnected or hesitant to engage with new or frequently changing field officers, and a lack of historical borrower context can lead to weaker field assessments and decision-making.
To address this, the industry must collectively implement a combination of interventions. Leveraging technology is key in terms of maintaining a digital trail of customer interactions that can ensure continuity even when staff change. Diversifying customer touchpoints within the organization—such as through helplines, apps, or dedicated service teams—can reduce over-reliance on the loan officer. Additionally, strengthening employee engagement, improving support systems, and shielding field staff as much as possible from external pressures in the market can help improve morale and retention. By enhancing workforce stability and digitizing customer engagement, the sector can build trust, improve customer retention, and deliver a consistent and high-quality borrower experience over time. - Despite policy and financial interventions,
does the bottom-of-the-pyramid segment
remain structurally vulnerable?
The poorest borrowers often rely on informal incomes with high volatility and lack of safety nets. Even small income shocks like health issues or crop failure can derail their repayment ability.
These questions merit closer examination as India’s microfinance story unfolds, without which the broader vision of inclusive, credit- led growth may remain unfulfilled.