List of Abbreviations

Glossary

ABCO

ABCO is an acronym for Active Borrower per Credit Officer. It is a key operational metric in microfinance that measures the client-to- credit officer ratio, indicating the average number of active borrowers managed by each credit officer. It is also commonly referred to as the Case Load. This will also indicate the efficiency of operation, which can impact the operational expenses

Active Borrowers

The individuals whose loan accounts are current have an outstanding loan balance with the MFI, and are under repayment obligation. Individuals who have multiple loans with an MFI should be counted as a single borrower.

Assets Under Management (AUM)

Assets Under Management (AUM) refers to the total value of client loan portfolios that an institution actively manages, including both on- book and off-balance sheet (off-BS) portfolios. This includes all outstanding principal from current, delinquent, and renegotiated loans, but excludes loans that have been written off, on the own book, as well as those securitized or direct assignment assets resting on the securitization partners. AUM reflects the overall scale of financial assets the institution is responsible for, regardless of ownership.

Average Loan Size

Average Loan size represents the client-per- capita loan amount. It is calculated as the Loan portfolio divided by the number of clients of an MFI. It is a key indicator used to assess the scale and depth of credit outreach.

Average Ticket Size (ATS)

Average Ticket Size (ATS) refers to the average loan amount disbursed per loan during a specific period of time. This metric is typically calculated for a defined time period such as monthly, quarterly, or annually, depending on the reporting or analysis needs. It is calculated as the Total Loan Amount Disbursed divided by the Total Number of Loans Disbursed.

Borrowing Cost

The cost of borrowing refers to the total charge incurred for taking a debt obligation, which includes interest payments as well as any additional financial fees (such as processing fees, service charges, insurance premiums, or administrative costs). A percentage of such cost over the total amount borrowed indicates the rate of such cost.

Capital Adequacy Ratio

Capital Adequacy is a key financial indicator used to measure the solvency and risk-bearing capacity of Microfinance Institutions (MFIs). It reflects the institution’s ability to absorb potential losses and protect depositors and creditors. It is the proportion of the equity capital and free reserves or own funds held by an MFI against its total risk-weighted assets. A higher Capital Adequacy Ratio indicates stronger financial health and a greater ability to withstand credit or operational shocks. A minimum requirement of an NBFC-MFI is 15%.

Capital to Total Assets

The Capital to Total Assets ratio is a measure of an institution’s financial strength and stability. It indicates the proportion of an institution’s own capital (or net worth) relative to its total assets.

Co-lending

Co-lending is a financial arrangement in which two or more regulated entities join hands to extend a loan, by taking a fixed share by each entity. It will reflect on the books of all the partnering institutions. Typically, a bank and a non-bank financial institution (NBFC or NBFC-MFI) or HFC can join together to extend credit to a borrower and a prefixed ratio at a weighted average interest rate. The partnership combines the strengths of both entities.

Debt-Equity Ratio

The Debt-Equity Ratio is a key financial metric that indicates the proportion of total debt to total equity held by an institution at a given point in time. It reflects the degree to which an organization is financing its operations through borrowed funds versus own funds or free capital. It also indicates the leverage of capital of an entity

Debt Funding

Debt Funding refers to the portion of a financial institution’s loan portfolio that is financed through external borrowings, rather than from internal accruals or equity capital. It reflects the extent to which an institution relies on borrowed funds, such as loans from banks, financial institutions, or capital markets, to support its lending activities.

External Cost

External Cost refers to the finance cost incurred by Microfinance Institutions (MFIs) on the borrowed funds from external sources, primarily banks and financial institutions. This cost is largely determined by the prevailing lending rates of banks, and as such, it is beyond the direct control of MFIs.

Finance Cost

Finance Cost refers to the actual interest and other financial expenses incurred by a Microfinance Institution (MFI) on the average borrowed funds that remain outstanding during a given period. This metric is crucial for evaluating the cost-efficiency and funding strategy of MFIs, and plays a key role in determining their lending rates and financial sustainability.

Financial Inclusion

Financial Inclusion refers to the delivery of affordable, accessible, and appropriate financial services to disadvantaged and low-income segments of society who are traditionally excluded from the formal financial system. These services include savings, credit, insurance, remittances, pensions, banking services, etc.

Joint Liability Groups

Groups of 4 to 8 borrowers come together to borrow from a financial institution under a joint liability concept, as per which there is an inter se agreement between the members whereby each borrower is liable to repay the loan of each member of the group.

Margin

Margin refers to the difference between the total yield on the loan portfolio and the finance cost incurred to fund that portfolio. It represents the net earnings a Microfinance Institution (MFI) makes from its lending activities before operating expenses and provisions.

Managed Loan Portfolio

Managed Loan Portfolio refers to the loan assets originally originated by Microfinance Institutions (MFIs) but subsequently sold or assigned to a third party, such as a bank, to improve liquidity. Despite the sale, MFIs continue to manage these loans, including activities like collection of repayments and servicing the accounts on behalf of the purchasing institution. This arrangement helps MFIs free up capital while maintaining their relationship with borrowers and ensuring ongoing portfolio management.

Non-Performing Assets (NPA)

A Non-Performing Asset (NPA) is a debt obligation where the borrower has failed to honour repayment commitments, either interest, principal, or both, to the designated lender for a specified period, typically 90 days or more. As a result, the NPA ceases to generate income for the lender in the form of interest or principal repayments. NPAs represent credit risk and affect the financial health and asset quality of lending institutions.

On-book Portfolio (Net Loan Portfolio)

On-book Portfolio (Net Loan Portfolio) refers to the total outstanding principal of all active client loans recorded on the institution’s balance sheet. This includes current, delinquent, and renegotiated loans, but excludes loans that have been written off. Interest receivable is not included, except for Microfinance Institutions (MFIs) that report under Ind-AS, where such interest is recognized as part of the outstanding amount.

Operating Self Sufficiency (OSS)

Operating Self Sufficiency (OSS) measures the extent to which a Microfinance Institution’s (MFI’s) income from operations and investments is sufficient to cover its operating expenses, like operating costs, loan loss provisions, and finance costs (cost of borrowed funds) incurred for conducting the operations. An OSS ratio of 100% or above indicates that the MFI is generating enough income to sustain its operations without requiring subsidies or external support, reflecting financial viability and sustainability.

Outstanding Borrowings

Outstanding Borrowings refer to the total amount of funds that an entity has borrowed and has not yet repaid as of a specific reporting date. This includes all short-term and long- term debt obligations, such as loans, credit lines, bonds, and other forms of financing, net of any repayments made.

Portfolio Quality

Portfolio Quality refers to the level of credit risk present in a loan portfolio, indicating the likelihood of default by borrowers. A high- quality portfolio contains a lower amount of risk, characterized by timely repayments and minimal defaults. Maintaining good portfolio quality is crucial for the financial health and sustainability of lending institutions.

Portfolio at Risk (PAR)

Portfolio at Risk (PAR) indicates the proportion of outstanding amounts of all loan accounts having past due/arrears to the total outstanding loan. In general, PAR 30 refers to the percentage of the loan portfolio that remains unpaid 30 days or more beyond the due date, which would be used as a measure to assess the portfolio quality. Loans with dues overdue by 90 days or more (PAR 90) are generally classified as Non-Performing Assets (NPAs).

Qualifying Assets

Qualifying Assets are loan portfolios created by MFIs adhering to certain conditions as prescribed by RBI, to make the MFIs eligible to be called as MFIs and to raise loans from banks under the Priority Sector Advances Scheme (as per recent RBI norms). For an MFI, 60% of the total ass ets need to be under this category

Return on Assets (RoA)

Return on Assets (RoA) is the universally accepted profitability measure, which, in essence, is the percentage net income earned out of total average assets deployed by MFIs during a given period, typically one financial year. It is a widely used profitability metric that measures how efficiently an institution utilizes its total assets to generate net income.

Return on Equity (RoE)

Return on Equity (RoE) is a key profitability indicator that measures the net income earned by a Microfinance Institution (MFI) relative to its average equity during a given period, typically one financial year. RoE reflects how efficiently an MFI is using its own capital (equity) to generate profits.

Self Help Groups (SHGs)

SHGs refer to groups of 10-20 persons coming together to form an informal community-based institution to meet their common financial and social needs. Most of the SHGs are formed by women from a homogeneous background. SHGs collect regular savings from members and use them for internal lending, before accessing higher amounts from banks.

SHG Bank Linkage Programme (SBLP)

SHGs are linked to mainstream banks for keeping their surplus savings and also to obtain loans. The loan is often given as a multiplier of the total internal savings accrued in a group. It is considered to be an effective strategy to ensure financial inclusion for the unbanked poor people.

Surplus

Surplus refers to the excess of income over expenses. It is calculated as the difference between the yield (i.e., income earned from the loan portfolio) and the total cost (including finance cost, operating expenses, and provisions). It can also be referred to as net margin.

Yield on Portfolio

Yield represents total income from microcredit operation - interest income, processing fee/ service charge – earned out of the average loan portfolio outstanding for a specific period. It does not include investment income. It is a good proxy/surrogate for loan interest rates. It serves as a useful proxy for the effective loan interest rate charged to clients and is often used to assess the pricing structure and earning capacity of the loan portfolio.

Beyond Microcredit - Evolving Role of Micro Lending Institutions (MLIs)

Microfinance and the Evolution of Credit-Plus Activities by MLIs

The earliest microfinance movements were hinged on the developmental and credit programmes which helped in an overall development of the poor families. It was understood by the proponders of microcredit programmes that credit alone was not sufficient to meet the diverse developmental needs of poor households. Hence, they adopted a strategy of going beyond micro-credit, to embracing a wide range of developmental and financial services. Even today many of the MLIs continue to follow the “Credit Plus” activities followed by the MLIs in the earlier days to a provide a comprehensive developmental package to the poor households. Many of these financial services and developmental programmes are tailored for low-income clients. These services include not only credit, but also savings, insurance, remittance, and money transfer services, among others.

Mainstream thinking increasingly supports the notion that poor households benefit more from an integrated package of services rather than credit alone. These institutions act as an alternative to banks for extending financial support directly to the underserved groups. Access to financial services, particularly for credit delivery and last-mile service, strengthens the Government of India (GoI) financial inclusion agenda. Financial inclusion enables investment in quality education and promotes entrepreneurial activity, leading to economic growth. In fact, a recent study 1 by IIT Madras and University of Connecticut has found that financial inclusion significantly improves chances of achieving Sustainable Development Goals (SDGs). G20 Global Partnership for Financial Inclusion (GPFI) identifies financial inclusion as a key enabler for at least 7 out of 17 SDGs. MLIs can combine the reach of the bank with SDGs through their credit plus activities.

Most of these microlending institutions continue to engage in developmental activities, beyond their credit role. The credit- plus activities of MLIs cover two dimensions: business development support (management and vocational training, marketing, technical assistance, product design, legal aid) and social interventions (literacy, education, health). Many also partner with financial institutions to offer savings, insurance, pensions, and social security. On the credit side, several MLIs have evolved beyond a plain vanilla credit product and have diversified into credit products for renewable energy, water and sanitation, health, and affordable housing etc.

This chapter highlights the credit-plus initiatives and diversified financial services offered by Micro Lending Institutions (MLIs).

¹Impact of fintech and financial inclusion on sustainable development goals: Evidence from cross country analysis (https://doi. org/10.1016/j.frl.2024.106573)

6.1 Micro Insurance

Insurance is intended to protect from unforeseen eventualities causing unexpected losses. Insurance, being a critical component of the basket of financial services, plays a significant role in India’s economy. The low- income and vulnerable individuals need them more than anyone as any small losses can affect them significantly. Hence, the concept of micro insurance or affordable insurance products, which can help manage and recover them from such losses. These products provide coverage for life, health and loss of assets.

Apart from protection against mortality, property and casualty risks, it serves as a safety net for individuals and enterprises in urban and rural areas, from unexpected financial hardships. Insurance Regulatory Development Authority of India (IRDAI) serves as the principal regulatory body overseeing the insurance sector in India. It is an autonomous and statutory body under the jurisdiction of the Ministry of Finance, Government of India. As part of the regulatory role, IRDAI aims to insure all of India by 2047, where every citizen has an appropriate life, health and property insurance cover and every enterprise is supported by appropriate insurance solutions. Flagship government schemes such as the Pradhan Mantri Jeevan Jyoti Bima Yojana (PMJJBY), Pradhan Mantri Suraksha Bima Yojana (PMSBY), and Ayushman Bharat are also made accessible to clients by microinsurance institutions, in collaboration with insurance companies.

In order to facilitate penetration of insurance for underprivileged section of the society, the IRDAI has formulated the Micro Insurance Regulations, 2005, to provide micro insurance to the poor. The main thrust of micro insurance regulations is to protect low-income people with affordable insurance products. At first, IRDAI permitted only NGOs and Self-Help Groups to work as insurance intermediaries. After the 2015 regulation change, more organizations and individuals, including Micro Lending Institutions, were allowed to become Micro Insurance Agents. MLIs are mostly involved in extending health insurance cover.

According to information received from microfinance institutions, at least 37 MLIs are offering non-loan protection life insurance products. All MLIs continue to provide credit- linked life insurance to their borrowers, and in many cases, co-obligants are also covered. However, such coverage is typically restricted to the sanctioned loan amount and its tenure.

Data reported by MLIs indicates that around 105.43 lakh lives have been insured under life insurance schemes facilitated through MLIs. In addition, approximately 20.09 lakh individuals have been covered under general health insurance by 17 MLIs, while about 0.20 lakh have been covered under other non- health insurance products by 4 MLIs. For these services, MLIs collaborate with mainstream insurance companies. Institution-wise details of insurance coverage during the past year are presented in Tables 6.1, 6.2, and 6.3.

Table 6.1: MLIs involved in extending Life Insurance (in addition to credit-linked insurance)

Note: The list of MLIs offering these services is not exhaustive

Table 6.2: MLIs involved in Micro Insurance General Health

Note: The list of MLIs offering these services is not exhaustive

Table 6.3: MLIs involved in Micro Insurance General - Non-health

Note: The list of MLIs offering these services is not exhaustive

6.2 Savings

While the RBI restricts MLIs from accepting savings, certain institutions, particularly those in the cooperative sector, are permitted to offer savings products to their members. In contrast, in several countries such as Bangladesh, Nepal, and Cambodia, MLIs are allowed to mobilize member savings, providing both a secure avenue for members to deposit funds and an inexpensive source of capital for the institutions. The MLIs, irrespective of legal form, working as BC partners to banks, can also help in mobilizing smaller savings. Table 6.4 provides an institution-wise break- up of MLIs involved in mobilizing savings. A total of 1.91 lakh clients for whom saving were mobilized by 3 MLIs.

Table 6.4: MLIs involved in Mobilizing Savings

Note: The list of MLIs offering these services is not exhaustive

6.3 Micro Pension

The National Pension System (NPS-Lite) and Atal Pension Yojana (APY) are the two pension schemes available generally to all, apart from insurance-linked pension schemes offered by Insurance companies. The subscriber base under the NPS and APY schemes has seen a gradual growth in the last decade. Atal Pension Yojana (APY), introduced in 2015, is a Micro-pension scheme which is focused on all citizens in the unorganised sector. Microfinance Institutions previously played a significant role as aggregators under the NPS- Swavalamban Scheme. However, following the scheme’s merger into the Atal Pension Yojana in 2015, their direct involvement has considerably declined. The total subscriber base under APY and NPS-Lite combined has reached 674.58 lakh as of March 2025. A small number of MLIs have registered as Points of Presence for NPS Products of Pension Fund Regulatory and Development Authority (PFRDA). However, efforts are being taken to provide microfinance institutions a role in expanding pension coverage and accordingly some discussions are under way.

6.4 Other Development Services

MLIs with their social objectives and many having their origin as social enterprises, have been involved in several other developmental activities, apart from providing micro- insurance and micro-pension services. Besides, the larger NBFC-MFIs have to make use of their CSR funding for this purpose. Some of the MLIs have formed separate entity to take up such activities. These MLIs undertake various other developmental activities such as training and capacity building, empowerment of the community (especially for women), education, financial literacy, health and sanitation, training, livelihood support, enterprise development etc. Based on the data received from microfinance institutions, over 52.31 lakhs clients of these MLIs have been beneficiaries of various developmental activities undertaken during the last financial year. Table 6.5 gives break-up of various categories of activities with which the MLIs are engaged.

Table 6.5: Development Services of Reporting MLIs

Based on data reported by MLIs

Sa-Dhan has collected special reports from MLIs on their development activities undertaken during the last financial year. The details of various development interventions undertaken by the MLIs whose data are available are summarized in Tables 6.6, 6.7, and 6.8.

Table 6.6: MLIs and Livelihoods Interventions

Note: The list of MLIs offering these services is not exhaustive

Table 6.7: MLIs and Education Interventions

Note: The list of MLIs offering these services is not exhaustive

Table 6.8: MLIs and Healthcare Interventions

Note: The list of MLIs offering these services is not exhaustive

6.5 Innovative financing of MLIs

Since its inception, microfinance movement has been seen as a financial market closely linked to the poor local communities working towards helping the poor and unbanked popu- lace at the bottom of the pyramid while gener- ating social empowerment. For microfinance to continue delivering positive outcomes for the poor, the financial sustainability of the in- stitutions involved is essential. In view of this the relationship between diverse financing options and financial sustainability of MLIs is unavoidable. For MLIs to continue to be an investible destination for the bankers and in- vestors it needs to have strong financial and product diversification. In today’s times having a diverse base of financing structures be it through blended financing, end use financing or smart subsidies is paramount to spur finan- cial sustainability and counter inefficiency and dependency. Especially relevant in the context of growing impact of climate change and fre- quent instances of climate extremes that are more likely to endanger clients’ health and their asset base and ultimately affect both di- rectly and indirectly the financial performance of MLIs. Therefore, innovative financing solu- tions around livelihood, health, insurance, clean energy, affordable housing, agriculture etc. need to be explored to augment financial sustainability and multiply outreach of MLIs.