| 6 Annual Report | 2024-2025 stagnation, and climate shocks, fin-influencers or aggregators along with rising incidents of financial vandalism—populist loan waiver campaign promises that disrupt repayment culture and fuel wide spread defaults. Together, these challenges call for urgent, systemic intervention to preserve the sector’s integrity and unleash its full potential. To overcome the structural and operational challenges facing India’s microfinance sector— and to enable it to become a pillar of Viksit Bharat—the following ten actionables are strongly recommended: 1. Reliable and Authenticated KYC: The foundation of responsible lending is knowing your customer. In the wake of the Supreme Court’s Aadhaar ruling (2017), most MFIs have moved to Voter ID—which lacks uniqueness as of today. The government should help reinstate e-KYC via Aadhaar for regulated financial entities or mandate the use of C-KYC to ensure a unified, tamper-proof system. This will reduce duplication, fraud, and improve authentic KYC checks. 2. Real-Time Credit Bureau Reporting: Given the unsecured nature of microfinance loans, credit underwriting must rely on up-to-the-minute borrower data. The RBI should mandate daily credit bureau updates from all lenders on the microfinance portfolio, along with the integration of KYC-linked deduplication to prevent multiple simultaneous borrowings. This is crucial for risk mitigation and portfolio quality. 3. Sustainable and Transparent Pricing: Delivering doorstep, unsecured loans to remote communities involves real costs. A healthy microfinance ecosystem needs to attract long-term capital, which requires the potential for ~ 15%+ equity returns. The sector to double its outreach to make formal credit available widely will need an estimated over $4 bn in fresh equity investment. This will also help the entities to leverage through debt from the banking sector and/or the capital markets to grow. The industry also needs to shift to risk-based pricing —a real necessity for differentiation and reward for credit discipline. 4. Legal Protection Against Financial Vandalism: The proposed Ban on Unlawful Lending Activities (BULA) Bill from GoI is a welcome move to curb predatory & unregulated lending. But an equally important requirement is an Anti-Financial Vandalism (AFV) Bill, aimed at deterring individuals or groups who disrupt legitimate repayment through misinformation or populist promises of potential loan waivers. This will deter opportunistic interference and protect credit behaviour with institutional lending frameworks. 5. Climate Risk Protection for Borrowers: As climate shocks intensify, the livelihoods of microfinance borrowers—especially in agriculture and informal sectors—are increasingly vulnerable. The sector needs a climate-linked borrower protection product that covers interest costs during short-term repayment deferrals due to natural disasters, complementing existing credit life insurance schemes. 6. Workforce Development with Accountability: Microfinance can generate large-scale rural employment. A national program for certified financial inclusion professionals can prepare youth for roles across lending, insurance, pensions, and investments. Simultaneously, a sector-wide employee bureau must track misconduct, ensuring that fraud or negligence does not go unchecked across institutions as all this leads to higher credit costs. 7. Strengthening Corporate Governance: Lending to financially vulnerable populations is a responsibility-heavy activity, and boards must demonstrate active oversight. Institutions must adopt strong governance practices around growth strategy, provisioning norms, pricing models, and executive compensation & incentives, aligning them with long-term sustainability and regulatory expectations. 8. Reforming Collections and Recovery Frameworks: Collection is integral to lending. The sector must transition toward digital, cashless collections to reduce costs and increase efficiency. For recovery, enforcement mechanisms—within the RBI’s Code of Conduct—should be allowed. Credit bureau reporting, Lok Adalats, co applicant’s and cross check of credit discipline for government benefit programs can instil a significant seriousness on repayment discipline. Not paying after taking a loan should not be an option – very critical to build Managing Director’s Address
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