Chapter 4 - Section 4.3 - SubSection 4.3.2Income Analysis

The primary source of income for MLIs is the interest earned on their loan portfolios, supplemented by various fees and commissions, including service charges, processing fees, and revenues from non-credit products. Profitability depends on the ability to generate sufficient revenue to cover both operating and financial costs, with interest, fees, and commissions historically forming the bulk of financial income. However, this heavy reliance on loan-related revenue poses a challenge: any increase in expenses can be offset only in two ways—either by raising interest rates, fees, or commissions (which directly increases the burden on borrowers), or by incurring losses. Consequently, understanding and analysing the revenue streams of MLIs is crucial for institutions aiming to strengthen profitability, diversify income sources, and reduce overdependence on borrowers. The total revenue generated by MLIs during FY2024-25 is `36,221 crores, out of which 81% is from interest income from the loan portfolio. The total income has increased by 10% from the income of FY2023-24, which is lower than the growth rate of FY2023-24 (18%).

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Break-up of Income

4.3.2 Income Analysis

The primary source of income for MLIs is the interest earned on their loan portfolios, supplemented by various fees and commissions, including service charges, processing fees, and revenues from non-credit products. Profitability depends on the ability to generate sufficient revenue to cover both operating and financial costs, with interest, fees, and commissions historically forming the bulk of financial income. However, this heavy reliance on loan-related revenue poses a challenge: any increase in expenses can be offset only in two ways—either by raising interest rates, fees, or commissions (which directly increases the burden on borrowers), or by incurring losses. Consequently, understanding and analysing the revenue streams of MLIs is crucial for institutions aiming to strengthen profitability, diversify income sources, and reduce overdependence on borrowers. The total revenue generated by MLIs during FY2024-25 is ₹36,221 crores, out of which 81% is from interest income from the loan portfolio. The total income has increased by 10% from the income of FY2023-24, which is lower than the growth rate of FY2023-24 (18%).

3 Margin here refers to the difference between expenses per borrower and income per borrower.
4 Calculated as aggregated total expenses (finance, human resource, admin and other expenses) of all MLI divided by the total active borrower.
5 Calculated as aggregated total income of all MLIs divided by total active borrowers.
Figure 4.3.6: Break-up of Income

4.3.2.i Yield on Loan Portfolio

Yield is a vital indicator in microfinance as it reflects both sustainability and efficiency. Since MLIs provide small, collateral-free loans to low-income clients, operating costs and risks are high. Yield ensures that institutions earn sufficient interest and fees to cover expenses, absorb credit risks, and maintain investor confidence. It also serves as a benchmark for efficiency, highlighting whether operations are sustainable and efficient. However, yields must strike a balance between financial viability and client affordability, as excessively high rates undermine the social mission of microfinance Thus, yield is central to ensuring both growth and responsible financial inclusion. Historically, over the last two decades, yield has been mostly between 20-22%.

The industry experienced its lowest yield between 2020 and 2022, a result of the pandemic’s shock. Following two years, i.e., 2022-2023 and 2023-24, the yield returned to the pre-COVID level. However, in FY2024- 25, it again fell behind. This highlights the challenges faced by the MLIs during the year (2024-25) in terms of external shocks such as climate change, loan waiver rumours, and internal issues like repayment stress, higher attrition, etc.

Figure 4.3.7: Yield Trend of MLIs

A similar trend of lower yield compared to the previous year (FY2023-24) prevails for different legal types and sizes of MLIs.

Figure 4.3.8: Yield on Portfolio across MLIs