RBI Urges Microfinance Vigilance Amid Challenges in Southern States

The Reserve Bank of India (RBI) advises microfinance institutions to closely monitor financial stress as loan disbursements decrease in southern India. Despite regulatory adjustments to foster growth and inclusion, the sector faces challenges, including borrower over-leverage. Measures implemented aim to stabilize and sustainably develop the microfinance sector.

The Reserve Bank of India (RBI) has sounded an alert for microfinance institutions, advising them to keep a close eye on potential financial stress within their operations. The advice comes as the RBI noted a decline in loan disbursements in southern states during the fiscal year 2025.

The central bank's 'trend and progress in banking' report highlights the industry's efforts to enhance performance amidst challenges, including borrower over-leverage. This situation has compelled the microfinance community to adopt regulatory measures such as capping the number of loans per borrower.

Regulatory revisions introduced by the RBI in 2022, aimed at fostering systemic growth, have removed interest rate caps while establishing standardized regulations. The report emphasizes the sector's commitment to social equity by enhancing financial inclusion and points out the increase in self-help group activities, despite a general contraction in credit disbursement to joint liability groups.

(With inputs from agencies.)