Microfinance replaces informal credit: Report

MUMBAI: A structural shift is reshaping India’s microfinance sector, with regulated lenders displacing informal sources as borrowing from moneylenders fell to 1% in 2024–25 from 46% in 2011, according to a survey by Microfinance Industry Network and National Council of Applied Economic Research.

The survey, which covered 10,342 borrowers across 10 states, shows a maturing market where formal credit has become the primary source of finance for rural and semi-urban households. According to the report, microfinance now serves as the main driver of livelihoods rather than a fallback option.

Digital adoption has reshaped disbursement, with nearly 100% of loans now credited directly into bank accounts of around 75 million women borrowers. According to the survey, this has reduced leakages and improved turnaround time, with average loan disbursal completed within six days. However, repayments remain largely cashbased. Only 12% of borrowers use digital modes such as UPI, while 88% continue to repay through cash collections conducted during group meetings. The report said this gap reflects a digital divide, as 61% of borrowers own smartphones but remain reluctant to transact digitally due to low financial literacy and concerns over fraud.

The survey finds that microfinance lending is predominantly income-generating rather than consumption-led. Over 75% of loans are used for enterprise activities. According to the data, 48.1% of borrowers used credit to expand existing businesses, 14.4% to start new ventures, and around 13% for agriculture and allied activities. “Microfinance has become a bridge to opportunity and financial independence,” the report said, adding that 78% of borrowers contribute to household income.

Cost arbitrage remains a key driver of the shift away from informal credit. The average effective interest rate for regulated microfinance is around 33%, far lower than rates charged by informal lenders. According to the report’s qualitative findings, moneylenders charge between 97% and 178% annually and often demand gold as collateral.


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