Chapter 3 - Section 3.7Conclusion

To ensure sustainable growth in FY 2025- 26, the MLIs must adopt a multi-faceted ap- proach. This includes focusing on enhanced risk management, leveraging technology, and diversifying their product offerings. The way forward for the MLIs in FY 2025-26, some of which are mentioned below, will hinge on re- calibrating strategies to ensure sustainability, financial inclusion, and regulatory alignment amid heightened sector stress and evolving market conditions.

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3.7 Conclusion

To ensure sustainable growth in FY 2025- 26, the MLIs must adopt a multi-faceted ap- proach. This includes focusing on enhanced risk management, leveraging technology, and diversifying their product offerings. The way forward for the MLIs in FY 2025-26, some of which are mentioned below, will hinge on re- calibrating strategies to ensure sustainability, financial inclusion, and regulatory alignment amid heightened sector stress and evolving market conditions.

1. Strengthened Underwriting and Risk Management

The primary way forward for MLIs is to strengthen their underwriting processes. The industry has seen asset quality stress due to borrower over-leverage and socio-politi- cal disruptions. Therefore, institutions must implement more robust credit assessment frameworks, including real-time credit bureau reporting and accurate household income verification. Also, the MLIs need to have an individual-centric appraisal mechanism even if the borrowers are part of the JLGs.This will help them avoid lending to indebted borrow- ers and manage their Portfolio At Risk (PAR) more effectively.

2. Digital Transformation and Operational Efficiency

The MLIs must accelerate their digital trans- formation to reduce operational costs and improve outreach. This involves adopting digi- tal-first lending models, using fintech partner- ships for credit assessment, and leveraging data analytics to identify and mitigate risks. Investing in technology will also help in diver- sifying into new geographies and reducing dependence on traditional, high-cost branch networks. Automation of processes like loan origination and collections will also address the high field staff attrition rates that disrupt customer relationships and repayment disci- pline. Also the use of AI for better underwrit- ing should also be explored.

3. Diversified Product Offerings and Fund- ing Sources

To mitigate risks associated with a mono-line business, the MLIs should diversify their prod- uct portfolios beyond traditional joint liability group (JLG) loans. This includes offering a wid- er range of products like housing loans, loans against property (LAP), and loans to micro, small, and medium enterprises (MSMEs). The Reserve Bank of India (RBI) has already re- laxed norms, allowing the NBFC-MFIs to hold a larger percentage of non-qualifying assets, which provides an opportunity for strategic diversification. On the funding side, they can explore alternative sources like securitization and co-lending with banks to lower their cost of funds.

4. Adherence to Regulatory and Ethical Practices

The RBI’s new unified regulatory framework for microfinance loans, which includes a sim- plified definition of microfinance loans and the removal of certain quantitative restrictions, is a significant change. NBFC-MFIs must strictly adhere to these regulations, particularly those related to fair pricing and transparent Key Fact Statements (KFS). This focus on ethical practices and borrower protection is crucial for rebuilding investor and public confidence, especially in the wake of concerns over coer- cive recovery tactics. By prioritizing custom- er-centric approaches and financial literacy, the industry can foster a more sustainable and resilient microfinance ecosystem.

In summary, the industry’s progress in FY 2025-26 depends on a mix of regulatory align- ment, digital innovation, risk-sensitive lending, deeper ecosystem integration, and customer- centric approaches to address emerging chal- lenges and sustain inclusive growth. Moreover, the discipline in lending by adopting responsi- ble lending practices is a key to the success of microfinance in the country.