Chapter 4 - Section 4.4Self-Sustainability and Profitability
The Indian microfinance faced the dilemma of achieving the social objectives and making profit. It has always tried to balance both so that the institutions remain strong and capable to deliver credit and at the same time support the clientele who are from the weaker sections in their social needs.
Chapter 4: Section IV
Self-Sustainability and Profitability
The Indian microfinance faced the dilemma of achieving the social objectives and making profit. It has always tried to balance both so that the institutions remain strong and capable to deliver credit and at the same time support the clientele who are from the weaker sections in their social needs.
The impressive growth of the microfinance sector has been driven by regulatory reforms, technological innovations, and government support, enabling millions of low-income households—once excluded from formal financial services—to access credit. However, the sector still faces significant hurdles, including limited access to affordable capital, low financial and digital literacy, and growing risks related to data security. Self-sustainability in microfinance reflects the ability of MLIs to remain financially viable and operationally resilient while serving marginalized communities without dependence on subsidies or grants. It requires balancing revenue generation with cost efficiency, safeguarding portfolio quality, diversifying products, and effectively managing interest rates.
4.4.1 Surplus
At the end of the FY2024-25, around 15% of MLIs posted a negative operating profit and 25% of the reported MLIs posted a negative surplus. The aggregated operating profit recorded for FY 2024-25 is ₹8,171 crores with a net surplus of negative ₹612 crores. The negative net surplus impacts the sustainability of the organisation by eroding its capital base, thereby weakening its ability to absorb shocks. NBFC-MFIs and Limited Companies registered a negative net surplus of ₹669 crores and ₹168 crores, respectively. A negative net surplus also raises concerns about sustainability, making it more challenging to attract investment. During the financial year, only small and large MLIs were able to maintain a positive net surplus of ₹8.24 crores and ₹209.05 crores, respectively. Thus, the net position concerning the surplus based on the data received by Sa-Dhan for this BMR compilation indicates negative (-)₹669 crores as against ₹3,139 crores in the previous year, 2023-24.
4.4.2 Operational Self Sufficiency (OSS1)
Operational Self-Sufficiency is a financial metric for Microlending Institutions (MLIs) that measures their ability to cover total operational, financial, and loan loss costs by the operating revenue from interest, fees, and commissions received by them during a year. Its importance lies in its role as a key indicator of an MLI’s ability to become financially sustainable, grow, expand its outreach, and serve underprivileged populations. However, the dual role of an MLI in furthering affordable credit to low-income households and maintaining a self-sustainable income makes it challenging for the MLIs. The financial year 2024-25, in particular, tested MLIs’ long-term self-sustainability while providing credit at an affordable price. The aggregated OSS for the industry in FY 2024-25 is 104% (mentioned in Figure 4.4.1). This shows that the MLIs barely managed to cover all their expenses from the income received during the year. From Figure 4.4.1, it is evident that this is the lowest OSS over the last 8 years and is almost at the level of FY2020-21, which was the pandemic year. At the individual institution level, six institutions reported an OSS below 100%, indicating that their income was insufficient to cover their total expenses.
Figure 4.4.1: Average OSS of MLIs over the years and its break-up between various categories
There is a direct relation between average loan outstanding per borrower and OSS. It has been observed that higher average loan balances contribute to higher revenue, potentially boosting OSS by increasing operating income. However, this must be balanced against the risk and efficiency implications of lending larger amounts, which could also increase operating costs and negatively impact OSS.
Figure 4.4.2 depicts the change in OSS for various average loan outstanding buckets.
Figure 4.4.2: OSS based on average loan size
Operational Self-Sufficiency (OSS) and yield share a positive relationship only up to a certain threshold; after this threshold, higher yields result in diminishing sustainability. As observed, OSS rises with yields between 15–30%, reflecting increased revenue to cover operating and financial costs. However, when yields exceed 30%, OSS declines. This is because higher interest charges often accompany higher operational complexities, credit risks, and borrower defaults. Excessive repayment burdens can weaken portfolio quality and increase loan losses, eroding financial gains. Additionally, reputational and regulatory pressures associated with high pricing add to costs. Thus, beyond a point, higher yields undermine efficiency and sustainability.
Figure 4.4.3: OSS based on yield category
4.4.3 Profitability Ratios
Return on Assets (RoA2 ) measures how efficiently a Microlending Institution (MLI) generates profit from its total assets. In contrast, Return on Equity (RoE3 ) measures how effectively a company generates profit for its shareholders’ investments. Both are crucial for assessing an MLI’s financial health and management effectiveness, with ROA indicating operational efficiency across all resources and ROE highlighting the returns on investment for shareholders. These are important in the view of attracting debt or equity funding. Analysing ROA and ROE together reveals the impact of leverage (debt) on profitability, providing a comprehensive view of the MLI’s performance and sustainability. Figure 4.4.4 illustrates the distribution of ROA and ROE across various legal forms of MLIs, based on the weighted average value.
Figure 4.4.4: Return on Asset (RoA) and Return on Equity (RoE) across MLI types
FY 2024-25 saw a drop in RoA and RoE in all legal forms and sizes. Figure 4.4.5 indicates the changes in RoA and RoE over various sizes of MLIs.
Figure 4.4.5: Return on Asset (ROA) and Return on Equity (ROE) of MLI: Size-wise
2 RoA = Net Profit/Average Asset
RoE = Net Profit/Average Equity
Conclusion
The analysis of self-sustainability and profitability in Indian microfinance highlights both resilience and challenges. While regulatory support and innovation have enabled outreach, negative surpluses and declining profitability ratios pose a threat to long-term stability. Operational Self-Sufficiency at 104% shows that institutions are only marginally covering costs, with some falling short. The fall in RoA and RoE underscores pressure on efficiency and shareholder returns. Sustaining growth will require MFIs to enhance portfolio quality, diversify income, and control costs while safeguarding affordability. Achieving balanced profitability is crucial for attracting investment, strengthening resilience, and continuing to serve low-income households sustainably.
Box 4.1: End-to-End Digital Transformation in Microfinance Lending
Midland Microfin Ltd., one of India’s leading microfinance institutions, exemplifies how responsible lending can be scaled up through digital transformation. By embracing modern technology across its operations, Midland has successfully built a digitally enabled, transparent, and customer-centric lending ecosystem.
Key Pillars of Transformation:
- End-to-End Digitization: From customer onboarding and credit appraisal to loan disbursement and repayments, Midland has digitized every step of the customer journey
- Customer Empowerment: Clients can now access financial services via mobile platforms, with minimal branch dependency.
- Responsible Lending Embeded: Transparency, affordability checks, borrower education, and data security are integral to every digital initiative.
- Increased Financial Inclusion: Technology enables outreach to underserved communities in rural and semi-urban areas, deepening financial access and trust.
Outcome and value added to the organization with the implementation of digital initiatives in FY 2024–25
1. Modern Cloud Infrastructure
The organisation has transitioned from traditional on-premises servers to advanced cloud-based platforms. This initiative has reduced dependency on physical infrastructure, improved scalability of operations, enhanced agility, and strengthened system availability, while also resulting in significant savings on infrastructure and maintenance costs.
2. Digital Communication Channels (WhatsApp, Chat-Bots, Alerts, Interactive Voice Response, and LED Displays)
Multiple digital communication platforms have been introduced to strengthen engagement with customers. Additionally, Panasonic LED display screens have been installed across branches for both internal and external communication. These measures enable real-time updates, build stronger customer connections, improve financial literacy, enhance brand visibility, and reduce communication costs.
3. Know Your Customer and Anti-Money Laundering Screening (Screenzaa Solution)
Customer due diligence processes have been reinforced by integrating screening against Politically Exposed Persons and global sanctions lists during customer onboarding. This ensures compliance with regulatory requirements, prevents onboarding of high-risk profiles, and increases transparency in customer verification.
4. Finconnect Customer Grievance Redressal Mechanism
A digital grievance redressal system has been deployed to ensure that customer complaints are resolved within one business day. This has considerably reduced turnaround time, strengthened adherence to service commitments, improved customer satisfaction levels, and lowered the manual effort and operational costs associated with complaint handling.
5. Information Technology Asset Management System
A centralized system has been implemented to monitor and manage the complete lifecycle of technology assets and inventories. The system provides visibility and control over assets, reduces redundancies, optimizes operational costs, and enhances audit and compliance readiness.
6. Midfin Customer Service Mobile Application Enhancements
The customer mobile application has been upgraded with additional self-service features. Customers can now apply for loans, track their loan status, make digital repayments, access multilingual support, and obtain digital receipts. These enhancements increase transparency and convenience, expand financial accessibility, and reduce dependency on physical branches.
7. Midfin Collection Tool
A specialized monitoring tool has been introduced to improve the management of nonperforming loans. It enables early identification of overdue accounts, tracks “Promise to Pay” commitments, and enhances visibility into arrears. This improves the efficiency of loan recovery and reduces the overall incidence of non-performing assets
8. Tableau Reporting and Analytics System
A centralized reporting and analytics platform has been adopted to provide comprehensive visibility of business data at all organizational levels. This system enables faster, data-driven decision-making, improves accuracy of reporting, and reduces reliance on manual reporting processes, thereby optimizing efficiency.
In addition to the above-mentioned initiatives, the company has identified several more digital interventions that will be taken up during this financial year to further strengthen efficiency and customer experience.
Midland Microfin Ltd. continues to pioneer responsible digital microfinance by merging innovation with inclusion. With a robust pipeline of digital initiatives, the company is setting new standards in customer experience, operational excellence, and ethical lending practices. The transformation is not just technological—it is social, sustainable, and scalable