MUMBAI, India, Nov. 15 -- Reserve Bank of India issued the following speech:
Distinguished guests, members of the microfinance industry, ladies and gentlemen - good evening.
Let me begin by thanking MFIN for inviting me to share my perspectives with you. The release of the 6th edition of MFIN's publication Micro Matters, Macro View could not be more timely. The sector is moving from cautious consolidation towards a modest recovery, and I am sure the insights in this publication will be of immense value to all stakeholders and contribute to the sector's development.
Why microfinance matters
2. Microfinance serves the grassroots - poor households at the bottom of the pyramid of our economy. Measured by its loan book, the sector is a relatively small share of aggregate non-food credit. But size is not the right yardstick. Its true significance lies in its reach - 6.6 crore borrowers2 - and in its impact. One study pegged the sector's cumulative contribution to Gross Value Added (GVA) at 2.03 per cent in 2018-19, expected to reach 2.7 per cent by 2025-263. That is the outsized impact we can create when coordinated efforts are directed at uplifting the economically vulnerable and bringing them into the formal financial system.
3. We must, however, also be clear-eyed about the risks. Prolonged geopolitical uncertainty and extreme climate events weigh disproportionately on low-income households, with their low savings and inadequate cover against weather extremes. And when the microfinance sector goes through a downturn, the consequences are far more enduring for such borrowers. A loss of access to credit, or an adverse credit history, can constrain her financial opportunities and livelihood for a long time to come.
4. That is why it is imperative for the industry to strengthen its lending practices, uphold responsible credit standards and build greater resilience to withstand emerging challenges. At the Reserve Bank, we are conscious of the social and economic importance of this sector, and we have been shaping a regulatory architecture that helps build a responsible, resilient and sustainable microfinance sector.
5. This evening, I would like to reflect on four themes: the rules that govern the sector; the conduct we expect of lenders; the credit information on which sound lending depends; and the role of self-regulation.
The regulatory architecture
a. Prudential Rules
6. Let me begin with the prudential rules. Over the past three decades, regulation of the sector has travelled a long way - from an entirely unregulated environment at the turn of the millennium, to rule-based regulation in the 2010s, to the principle-based framework that prevails today. Each phase was shaped by the circumstances and requirements of its time. The current framework is principle-based and entity-agnostic. It draws on a decade of experience gained by the industry and on borrowers' need for flexible credit, while keeping appropriate prudential and conduct safeguards firmly in place. At the RBI, we believe principle-based regulation reduces the potential for 'creative compliance', avoids the 'tick-box approach' and obviates the need for frequent updates4.
7. The framework issued in 2022 was a paradigm shift. It introduced a level playing field among regulated entities, empowered borrowers through greater disclosures by lenders, and addressed over-indebtedness and harsh recovery practices through several innovative measures. At its heart are two quantitative parameters. First, households with an annual income of up to ₹3 lakh are eligible for microfinance loans from regulated entities. Second, a household's monthly loan repayment to income ratio - the FOIR5, in industry parlance - is capped at 50 per cent, so that households do not borrow beyond their ability to service.
8. The industry has asked us to revisit both: to raise the income threshold, and to make the FOIR limit more accommodative by including only the interest component of certain loans and excluding the principal component. Let me respond to each. But first, a general point. RBI's regulations are reviewed periodically so that they remain relevant and adapt to changes in the on-ground reality. We have also formed an Advisory Group on Regulation (AGR) to institutionalise industry feedback and channel it into the periodic review of regulations.
9. On the income threshold, a review will be undertaken depending on our assessment of the need for such a revision and on developments in the industry. Meanwhile, the industry must fortify its household income assessment and reporting processes - to maintain credibility, and to prevent the misuse of any change in regulatory thresholds.
10. On FOIR, the intent is simple: to prevent borrowers from becoming over-indebted, while ensuring that a reasonable share of household income remains available for essential consumption and other living expenses. Excluding some loans from the calculation would defeat this purpose, tinker with the sanctity of the limit and understate household leverage. Let us also remember that 50 per cent is already a liberal threshold, given the thin financial cushion of low-income households and their vulnerability to economic shocks.
11. The evidence bears this out. A recent study6 finds that the average microfinance borrower spends just 18.7 per cent of her monthly household income on loan repayment, while close to two-thirds goes towards consumption. NABARD's periodic Rural Economic Conditions & Sentiments Surveys7 show similar results - consumption and other expenses account for roughly three-fourths of monthly household income, leaving the rest for loan repayment and savings. In such a scenario, an accommodative view on FOIR may be uncalled for. From a risk management perspective, the regulatory FOIR should be treated as a prudential maximum - not a target that every household has to meet.
b. Responsible business conduct
12. Let me now turn from prudential rules to conduct. Lenders may seek to sharpen their competitive edge in many ways. In my view, responsible conduct is the ultimate moat. It reinforces borrowers' trust, preserves their dignity and increases confidence in the formal financial system - and that ultimately shows up as customer retention and higher bottom lines.
13. Consider the opposite. An undisclosed charge, subtly added. An unsolicited product, forcefully bundled. An additional service, mis-sold. A recovery, undertaken inhumanely. Each of these reeks of irresponsible business conduct. Each is detrimental to the lender's long-term business prospects, and each risks tarnishing the reputation of the entire financial sector.
14. The sector essentially needs to deal effectively with three issues: over-indebtedness of borrowers, high interest rates charged by lenders, and harsh recovery practices. The Reserve Bank's responsible business conduct framework for regulated entities seeks to address all three.
15. Responsible lending must begin even before a loan is sanctioned, with one critical question: does the borrower fully understand the financial commitment she is making? This matters most where customers depend on field staff to explain the terms and conditions of a loan. Our instructions require all communication with the borrower to be in the vernacular, or in a language the borrower understands. A Key Facts Statement (KFS) must be provided before the loan contract is executed, its contents explained, and an acknowledgement of the borrower's understanding obtained.
16. Here I would draw an important distinction - between mindful consent and what may be termed 'pseudo consent', where borrowers sign every document without adequate information on what it contains. Mindful consent equips borrowers with the information they need to make an informed decision. Pseudo consent is a mere compliance formality, devoid of any meaningful impact.
17. On pricing, a sustainable lending model must allow lenders to recover costs and manage risks, while ensuring that borrowers are treated with respect. Our regulations require regulated entities to adopt a Board-approved interest rate model for microfinance loans, taking into account relevant factors such as cost of funds and risk premium, along with an internal ceiling on the interest rate and all other charges. We are currently seeing an upward shift in the lending rates charged on microfinance loans by all categories of regulated entities, partly driven by higher credit costs in the preceding quarters. The freedom to determine lending rates carries with it a responsibility - to ensure that pricing is transparent, reasonable and justifiable.
18. Beyond disclosure and pricing, our Directions also prescribe requirements on fair lending practices, staff conduct and grievance redressal for microfinance borrowers. Our intent is clear: every transaction between a regulated entity and its customer must be executed with adequate transparency, informed consent and a clear understanding of the terms by the customer. Recent regulatory interventions - the Amendment Directions on advertising, marketing and sale of financial products and services, and those on recovery of loan dues and engagement of recovery agencies - underscore this intent.
19. Beyond these three core issues, let me flag two other developments that deserve the industry's attention.
20. The first is the steady, continuous rise in the Average Ticket Size (ATS) of microfinance loans. Larger loans are growing significantly, while smaller loans appear to be losing traction8. This may reflect lenders' growing confidence in borrowers with an established credit history. But it also calls for careful attention to the risks of over-indebtedness - including the practice of taking larger loans to repay existing obligations, and the potential overstatement of household income to enhance loan eligibility. There is a further risk: an excessive focus on existing borrowers may exclude new-to-credit households from the formal financial system. Meaningful financial inclusion must both broaden and deepen access to financial services. An imbalanced approach risks leaving a section of low-income households out of our economic growth. The industry must therefore adopt a balanced and inclusive approach that serves both existing and first-time borrowers, while maintaining responsible credit delivery and sustainable growth.
21. The second is internal grievances - a challenge rooted in the sector's unique structure. Given the socio-economic profile of microfinance borrowers, financial literacy must be promoted ahead of credit delivery. The sector therefore relies on a high-touch operating model, with field functionaries playing a pivotal role. In such a setting, unresolved employee grievances can pile up and pose a challenge to the operational resilience of lending institutions. Regulated entities must proactively address and resolve internal grievances to ensure uninterrupted credit delivery to borrowers.
Credit information reporting
22. Let me now turn to the information on which sound lending depends. Sustainable growth of the microfinance sector rests on a robust credit information ecosystem, which stands on two pillars: the availability of credit information, and its quality. A comprehensive credit profile of borrowers strengthens credit underwriting, mitigates the risk of over-indebtedness and promotes responsible lending - reinforcing the sector's long-term sustainability.
23. The Reserve Bank has taken several measures in the recent past to reduce information asymmetry, enhance data quality and improve customer satisfaction. These include mandating the availability of a free full credit report to individuals, the appointment of internal ombudsman by CICs, extending the Reserve Bank's Integrated Ombudsman Scheme to CICs, and introducing a framework for compensating customers for delayed rectification of their credit information. To ensure that lenders have more up-to-date information, we have also recently increased the frequency of reporting: instead of fortnightly, Credit Institutions are now required to submit credit information to CICs at least four times a month.
24. Even so, we have observed divergent practices in the reporting of microfinance loans. While Credit Institutions usually report these loans in the Microfinance segment of CICs, certain lenders, specifically banks, have been reporting some microfinance loans in the Consumer segment. Such divergence affects the consistency, accuracy and credibility of the credit information maintained by CICs. To ensure accurate and robust reporting by all Credit Institutions, CICs have been advised to disable the option of microfinance reporting in the Consumer segment and to migrate the relevant data from the Consumer segment to the Microfinance segment within a stipulated time.
25. I would also like to highlight the Grameen Credit Score (GCS) initiative. Pursuant to the Union Budget 2025-26 announcement on developing GCS for tailored credit assessment of rural borrowers, the CICs have developed GCS models. These are specialised credit risk scoring models designed for the unique characteristics and financing needs of rural lending, thereby facilitating improved access to formal credit in rural and semi-urban areas. The initiative is expected to strengthen financial inclusion by enabling more accurate and reliable credit assessments of rural borrowers. Credit Institutions are currently evaluating the effectiveness of the GCS provided by CICs. SROs may also provide inputs on the initiative, which will help develop a robust credit underwriting process for the entire sector.
The role of SROs
26. This brings me to self-regulation. In a principle-based regime, SROs assume particular significance in fostering consensus among industry participants and developing collective mechanisms to address recurring challenges. Recent developments have demonstrated the ability of self-regulation to steer the sector towards corrective action. At present, the combination of an overarching regulatory framework and self-prescribed entity-level safeguards appears to be serving the industry well. Because these safeguards are formulated by the industry, for the industry, they enjoy a higher degree of voluntary acceptance and foster a stronger compliance culture.
27. At the same time, a word of caution. Guidelines issued by SROs without prior regulatory approval may inadvertently venture into areas of regulatory ambiguity or diverge from the broader regulatory intent. So, while building consensus towards disciplined lending, SROs should refrain from what could be construed as interpretations or clarifications of existing regulatory provisions. This distinction is essential to ensure that self-regulation remains aligned with the established regulatory framework.
Way forward
28. Let me conclude. India has a vibrant financial ecosystem, with multiple categories of lenders serving varied segments of borrowers as per their niche and expertise. Microfinance is served by both banks and NBFCs, fostering healthy competition. But competition must translate not only into better service delivery and faster turnaround times, but also into fair and competitive lending rates.
29. As lenders pursue growth and profitability, they must keep the customer at the centre. The terms explained before a loan, the charges applied during its tenure, the products offered alongside it, and the response to a borrower in difficulty - together, these determine the character of an institution's relationship with its customers. Customer protection and business growth are not conflicting objectives. They are mutually reinforcing imperatives that must progress hand in hand to ensure the long-term sustainability and credibility of the financial sector.
30. In the end, responsibility and resilience are two sides of the same coin. Resilience cannot be achieved without responsible conduct; and responsibility, once embedded in an organisation's culture, is bound to build resilience. As technological change gathers pace and AI takes over a large part of decision-making, customer welfare must remain our guiding trail - one that can steer us through turbulent periods and lead us towards a responsible, resilient and sustainable microfinance sector.
Thank you.
1 Contributions by RBI colleague Shri Yash Goel, Manager.
2 Live customer base as of June 2026 as reported in CRIF Highmark's Microlend report.
3 Present and Potential Contribution of Microfinance to India's Economy, a report published by the National Council for Applied Economic Research (NCAER) in March 2021.
4 An excerpt from Regulation by RBI: Some Reflections - Lecture delivered by Shri Sanjay Malhotra, Governor, Reserve Bank of India at the Second V.K.R.V. Rao Memorial Lecture, Delhi School of Economics, New Delhi, November 20, 2025.
5 Fixed Obligation to Income Ratio.
6 Assessing the Effectiveness of Regulated Small Borrowing in India, a study by NCAER published in March 2026.
7 The survey may be considered a proxy for microfinance households, considering 82% of active microfinance borrowers belong to rural region as per Bharat Microfinance Report 2026.
8 As reported in CRIF Highmark's Microlend report.
Disclaimer: Curated by HT Syndication.
