Oct 16th 2025|Vapi|4 min read
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Shobha Devi runs a tailor’s shop in the narrow lanes of Vapi, an industrial town in Gujarat. A former teacher, she now earns more from pins and petticoats. “I am proud that I am standing on my own feet,” she says. “That’s by God’s grace.” Some credit also goes to microfinance lenders. One, IIFL Samasta, lent her 65,000 rupees ($732) to expand her business. Part of that funds her daughter’s education and she repays 1,470 rupees every fortnight. She belongs to a group of women with joint responsibility for each other’s loans.
Microfinance was popularised by Grameen Bank in Bangladesh. It is far preferable to village money-lenders, who often demand usurious rates, security or pledges of labour. Microloans are collateral-free; most are to poor women. Today some 60m Indians owe $35bn-worth of such loans, with repayment rates near 95%. The model has lifted millions out of poverty. But after years of rapid growth, it may be in trouble. Microlending has long been a hard business, and both politicians and regulators have made it tougher. Worse still, economic stress is driving up defaults.
Gauging creditworthiness is “a small art”, says Venkatesh N, boss of Samasta. Field officers note everything down to whether a house’s roof is tin or concrete. Despite India’s digital-payment system, over 90% of repayments are in cash, so must be made in person. Last year’s brutal heatwave made the travel required for such home visits trickier, pushing up defaults and lowering officers’ morale. Attrition is still high: staff often defect to outfits such as Swiggy and Zomato, which pay them more to deliver meals and groceries.
Meanwhile, other digital infrastructure remains patchy. In 2018 India’s Supreme Court restricted the use of Aadhaar, the national ID system, for loan verification and reporting. Without a centralised system, borrowers can use duplicate IDs to secure multiple loans, muddying records.
Political interference doesn’t help. Last month the state government of Bihar transferred 10,000 rupees each to 7.5m women. Soon after, officials reportedly asked lenders to pause collections until after state elections. Rumours of debt waivers prompted some borrowers to stop payments, expecting government relief, says Alok Misra of Microfinance Industry Network, a self-regulatory organisation.
A well-intentioned policy change has added to the challenges. In 2022 the Reserve Bank of India created one regulatory framework for all lenders, including banks and microlenders. This means microlenders now face more competition. Consumer choice is good, but “the market moved in aggressively”, admits Samasta’s Mr Venkatesh. Margins are thinner and defaults have risen, as clients can borrow more.
The biggest strain, however, is economic. From 2019 to 2024, real rural wages fell by 0.4% (though they have risen somewhat this year). As incomes stagnated and food prices rose, borrowing increased, says Sadaf Sayeed, chief executive of Muthoot Microfin, a large lender. Under such difficult conditions, few borrowers prioritised repaying unsecured loans. As defaults climbed, lenders struggled and withdrew credit. Borrowers’ inability to refinance then led to more defaults, sparking “a vicious cycle”, adds Mr Sayeed.
Banks, spooked by rising risk, have slowed lending to the non-banks that make nearly 40% of microloans. These depend on term loans and other long-term borrowing, and saw credit growth fall to 15% in the year to March 2024, from 30% a year before. In August the Microfinance Industry Network sought up to $2.2bn in government-backed credit guarantees to shore up liquidity.
Listed lenders have been hit hard, with some companies losing nearly 70% of their market value. In May IndusInd Bank disclosed a $76m accounting error in its microfinance portfolio. In August Manappuram Finance reported a 75% year-on-year drop in quarterly profit as more and more loans soured. The total value of outstanding microloans in India fell year-on-year by 17%, to $41bn in June 2025. Delinquency rates have more than doubled, to 6%, as many borrowers juggle multiple loans.
Mr Misra nevertheless insists that the “fundamentals of the sector remain strong”. If he is wrong, then soon enough borrowers like Shobha will surely be looking to other options. “I have never missed my payments,” she says. “I want to set up a bigger shop, and never want to spread my hands in front of my husband”. ■
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This article appeared in the Finance & economics section of the print edition under the headline “Debtly serious”
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