Microfinance lenders should look beyond the conventional “high-yielding business” tag for the microfinance sector, said M Rajeshwar Rao, Deputy Governor, RBI even as he expressed concern that pockets of high interest rates and elevated margins continue to persist in microfinance loans.

Rao said that while microfinance has played an important role in financial inclusion, there are some issues which need attention. The sector continues to suffer from vicious cycle of over-indebtedness, high interest rates and harsh recovery practices.

“While some moderation in interest rates charged on microfinance loans has been observed in recent quarters, pockets of high interest rates and elevated margins continue to persist.

“Even lenders having access to low-cost funds have been found to be charging margins significantly higher than the rest of the industry and which in several instances appear to be excessive,” the Deputy Governor said at a recent HSBC event on Financial Inclusion in Mumbai.

He emphasised that the lenders should look beyond the conventional “high-yielding business” tag for the sector and approach it with an empathic and developmental perspective, recognising the socio-economic role that microfinance plays in empowering vulnerable communities.

Low-cost funds

He highlighted that some microfinance lenders having access to low-cost funds have been found to be charging margins significantly higher than the rest of the industry and which in several instances appear to be excessive.

The Deputy Governor observed that the frequency of disruptions in the microfinance sector has increased of late.

“Incidents of high borrower indebtedness, coupled with coercive recovery practices, sometimes lead to tragic consequences. It is in the collective interest of all stakeholders that such disruptions are pre-emptively addressed and avoided.

“In this regard, REs (regulated entities/ lenders) must also enhance their credit appraisal frameworks to prevent over-leveraging of borrowers,” he said.

On recovery practices

Additionally, lenders must eschew any coercive or unethical recovery practices, ensuring that financial services are delivered in a manner that is both responsible and sustainable.

Rao said while the business model may be sound, the organisational structure and the incentive schemes framed to deliver the services may be flawed resulting in perverse outcomes for customers. This calls for an introspection around the models.

Published on June 9, 2025