Is This The End Of Microfinance In India As We Know It? — Profit Insights

Back in 2004-05, the National Bank for Agricultural and Rural Development first experimented with the joint liability group model in microfinance. For the better part of the last two decades, this model has driven the growth and acceptability of microfinance in India.

Borrowing heavily from Muhammad Yunus's successful Grameen Bank model from Bangladesh, the JLG model in India depended on groups of women keeping each other accountable for repayment of loans.

But experts believe that it might be time to retire this model now, or at least for lenders to reinvent it.

This comes as the financial year ending March 2025 turned out to be one of the worst years for microfinance lenders across the banking and non-banking universe. As of March 31, the outstanding loan book for the microfinance industry shrank to Rs 3.8 lakh crore, compared with Rs 4.4 lakh crore a year ago.

While loans at risk in the 1-30 days past due bucket have improved to 1.4% in March 2025, compared to the peak of 2.1% in September, longer-term loan defaults are only rising, according to a recent CRIF Microlend report.

Loan portfolio at risk in the 91-180 days past due bucket rose to 3.4% as of March 2025, compared with 3.2% in December 2024 and 0.9% in March 2024. Similarly, loans which are in default for over 180 days rose to 5.1% in March, compared with 3.7% in December and 1.6% a year ago, the CRIF Microlend report says.

Part of the reason for this is the over-exuberance among microfinance lenders since the Covid-19 pandemic. According to the top official at a large microfinance lender, companies have exceeded their lending limits in a number of geographies, with some customers having availed loans from as many as five lenders. This has led to the large loan defaults in the segment.

The higher delinquencies have also hurt profitability for lenders.

On Friday, microlender Spandana Sphoorty reported a net loss of Rs 434 crore in the quarter ended March 31, compared with a net profit of nearly Rs 129 crore a year ago. This was largely because of the Rs 603 crore impairment cost reported by the lender, providing for loan losses. Its gross non-performing asset ratio worsened to 5.63% at the end of FY25, compared with 4.85% as of December 31, 2024.

Similarly, CreditAccess Grameen reported a profit of Rs 47 crore for the fourth quarter, down 88% year-on-year. Though, this was better than the Rs 99 crore loss it reported in the December quarter. The lower profitability was a direct result of a Rs 583 crore impairment cost the lender recorded in the January-March period, which rose nearly four times from last year.

In its statement to the exchanges, Spandana Sphoorty highlighted that FY25 results were affected by a host of internal and external factors, including the JLG model weakening.

Why Is The JLG Model Failing?

The joint liability group model worked on the principle of a group of borrowers keeping each other accountable.

Typically, the lender would create a group of 5-10 women (sometimes even larger) who would borrow funds for their needs. The group was given due financial literacy training and was expected to ensure adequate repayments are made by all members.

In situations when one member was unable to pay their dues, the other members would chip in and make good on the payment. They would then resolve the default among themselves. This model was based on weekly meetings and regular engagement between members and lenders.

Lenders also hired agents from within the community to ensure that there were social consequences for bad credit behaviour.

While this model made the microfinance industry in India, it has shown significant cracks as well. Like everything else, Covid has had a role to play here as well.

"During the Covid pandemic physical meetings became difficult to convene or monitor. This problem has since persisted with attendance among JLG members dwindling," said Jiji Mammen, executive director and CEO at the self-regulatory organisation Sa-Dhan.

Group sizes have also shrunk, Mammen says. Earlier, a group had around 20-25 members, which has now reduced to barely 5-6 members.

Alok Prasad, a senior microfinance expert and founder CEO of MFIN, said that the classic JLG-based lending model ought to be regarded as a sunset industry.

"The model in its original form was posited on strong social cohesion and a readiness amongst members to support each other. But now, the monthly outgo can be large, and people have become less inclined to bear that kind of financial burden for a non-paying member," Prasad said.

Moreover, the outstanding loans have grown in size. While the average ticket size was between Rs 25,000 and 30,000 earlier, this has changed to Rs 50,000 and 53,000 now.

If one member defaulted in the past, the others could chip in and take care of the instalment. After some time, the members would settle the dues among themselves. But with the size of these payments having become bigger, it has become challenging for other members to support a defaulter, Mammen said.

Dwijaraj Bhattacharya and Misha Sharma of Dvara Research note that there has been some stagnation in rural incomes, which have not kept in tandem with outstanding debt.

“Income rise has not been in tandem with the rise in debt in rural households. Dvara’s survey of nearly 1,100 households shows that around...10% of households are above 1.2. This indicates that they are essentially in a deficit in their finances,” Bhattacharya and Sharma said.

Further, there is a misalignment of incentives among ground officers and management of companies. This may need to be fixed soon, the Dvara Research team told NDTV Profit.

Can It Be Saved?

Microfinance companies are in dire need to reinvent themselves, as the core of their business is now under tremendous pressure.

According to the microfinance industry official quoted above, lenders who continue to depend on the JLG model are likely to face continued pressure on their business. Unless microfinance companies fully pivot to an individual loan model, things seem difficult, this official said.

In fact, lenders are already talking about pivoting.

Microfinance lender Spandana Sphoorty is working on customising its lending models as well. In his last conference call that former MD Shalabh Saxena hosted before exiting the company, he spoke about the need for such a model.

"We are proceeding towards a credit decisioning model, which is apart from the JLG...which is more data-driven, more customised at an individual level and not really one size fits all," Saxena had told analysts on April 23. "Having said which, the soul of the model will continue and should continue to be the JLG model."

Microfinance lenders have to get more creative and develop microfinance version 2 for addressing emerging behaviour patterns and client needs. Among other things, they need to think more like fintech companies and harness technology to reduce operating costs and better manage portfolio quality, says Prasad.

Mammen of Sa-Dhan believes that while companies need to invest in better technology, they also need to go deeper in their transformation and prioritise staff training. While training is happening, the quality of this training might need more work.

To this effect, Sa-Dhan is working on a certificate training programme with the Indian Institute of Banking & Finance. Additionally, the SRO is in discussions with the National Skill Development Corporation to develop a training programme as well.