RBI asks microlenders to monitor stress build-up

The Reserve Bank of India (RBI) on Monday asked microfinance institutions to monitor the stress build-up on their books going forward. In the trend and progress in banking report for FY25, which comes amid a raft of measures impacting the industry in Karnataka and Tamil Nadu, the RBI also said disbursements were lower in southern States in the fiscal year. Noting that a slew of measures have been taken by the industry to improve its performance, the report said, “Going ahead, regulated entities need to monitor the build-up of stress in the segment.

Over the last few quarters, lenders have faced challenges on the MFI front, stemming from over-leverage among borrowers, which led to the industry coming together and adopting a set of guardrails, including limiting the number of loans that can be given to a single borrower. The RBI report said the guardrails, introduced by the self-regulatory organisations Microfinance Institutions Network (MFIN) and Sa-Dhan, prioritised “steady and calibrated growth” in the sector.

“The microfinance sector, however, experienced stress, with all lenders, excluding other NBFCs (NBFCs excluding NBFC-MFIs) -recording contraction in credit as of March-end 2025,” it added. The RBI’s own revisions in the regulatory framework for microfinance loans, introduced in 2022, by eliminating interest rate caps while introducing standardised rules, laid the foundation for “systemic and sustainable growth” of the sector, it said. The central bank also said that the framework fosters social equity and empowerment by serving as an effective instrument for advancing financial inclusion.

The number of SHGs (self-help groups) accessing credit from banks increased to 55.6 lakh in 2024-25 from 54.8 lakh in the previous year, it said, adding that lower disbursements in the southern region led to a moderation in the amount of loans disbursed by banks to SHGs. Savings balances of SHGs with banks rose 9.7 per cent to Rs 70,000 crore, while their outstanding loans from banks increased by 17.2 per cent to Rs 3 lakh crore, the RBI report said. The amount of loans disbursed by banks to joint liability groups (JLGs), which are informal credit groups of small borrowers, declined by 58 per cent during 2024-25, it added.