Below is the verbatim transcript of the interview:
Q: Could you tell us currently what proportion of borrowers have loans from four lenders, what proportion of borrowers have indebtedness above ₹2 lakh, and what proportion of borrowers have more than 60 days overdue indebtedness?
A: The first data point is ready in my head, so I can answer that. According to credit bureau data, the number of customers with more than three lenders—that is, four or more—is roughly 5.9%, which you can round off to 6%. Similarly, the number of clients with loans exceeding ₹2 lakh across all microfinance loans is marginally in the same range.
When we talk about the portfolio at risk with more than 60 days default—that is, between 60 and 180 days—the figure would be somewhere in the range of 3-3.5%.
Q: Will the reduction in loan growth impact borrowers since the flow of funds will be constrained, making it harder for them to repay their debts? Additionally, could the cap on lending in the organised segment push borrowers towards the unorganised sector?
A: Let me put this into perspective. First, when we talk about not lending beyond ₹2 lakh and limiting borrowers to no more than three microfinance lenders, we’re referring to around 5-5.5% of clients. Even here, we’re not saying “do not lend.” For example, if a borrower with four lending relationships reduces one and sticks to three lenders, they can still access ₹150,000-175,000, considering the average ticket size of a microfinance loan is ₹50,000. This ensures liquidity remains available; it’s just a step towards higher credit discipline.
Now, addressing your second point: will borrowers turn to informal sector loans? Hypothetically, yes, but practically, no. Over the last 15-20 years, microfinance has reached approximately 8 crore low-income clients. Including their households, this impacts around 35-40 crore individuals. These clients have experienced the benefits of formalised, regulated services delivered at their doorstep with respect and strong client protection measures.
Also read: Tough times for microfinance industry — stress grows as loan defaults rise
This exposure has demonstrated the value of staying within the formal system. By reducing one lender relationship, borrowers will not lose faith in microfinance or turn to informal finance. That’s neither our intention nor what we foresee happening.
Q: How will you ensure that lenders adhere to the guidelines, particularly the cap on lending and indebtedness? Also, concerns have been raised about how loans are being used—for instance, some lenders claim funds are being spent on iPhones or vehicles rather than productive purposes. How do you address these issues?
A: In our sector, we employ a practice called loan utilisation check (LUC). Typically, 30-40 days after a loan is disbursed, the field officer checks whether the funds are being used for their intended purpose. While LUC isn’t 100% foolproof and there might be some co-mingling of funds, these checks ensure that loans are primarily used for livelihood businesses.
Of course, emergencies might lead to deviations—for instance, using ₹10,000 for medical needs—but such cases are exceptions. Strengthening LUC practices further is a priority for us.
As for adherence, the sector body and SRO (Self-Regulatory Organisation) do more than just issue guidelines. We conduct data checks through credit information companies, perform third-party evaluations of member institutions, and track whether guardrails are being respected. Since July, when we introduced new guidelines, our checks have shown positive compliance across the sector.
Q: Do you think the guardrails you’ve introduced will improve the sector’s performance in H2, considering Q2FY25 was challenging for microfinance companies? What trends are you observing on the ground as we progress through Q3?
A: The final Bureau data is still pending; I only have figures up to September. However, feedback from lenders and field reports indicates stabilisation in November. Additionally, the kharif harvest has been robust, and rabi sowing is off to a strong start. With these developments in the rural economy, we expect normalisation by January.
Q: A two-part question: First, you mentioned that 3.5% of microfinance loans are overdue by more than 60 days. Are there specific players whose exposure exceeds this industry-wide average? Second, while stabilisation is expected by January, is there concern that this might be too little, too late?
A: It’s important to strike a balance—neither tightening the strings too much nor delaying action. The 3.5% figure I shared is an approximation for loans overdue by 60-180 days and may vary slightly by ±0.5%. Some institutions may have higher exposure, and others lower, but as a sector body, we don’t see any major deviations causing concern.
Individual institutions are implementing steps like tighter underwriting norms. Simultaneously, we’re tackling core issues like client identification to prevent overlending.
For instance, because Aadhaar isn’t accessible to CICs, we’ve recommended validating voter IDs through Election Commission data. Additionally, we’re encouraging PAN number seeding with client profiles. Recent government updates to PAN cards, such as QR codes, will further strengthen this process. These measures collectively aim to ensure accurate client identification and robust lending practices.
