37 | Annual Report | 2024-2025 of financial inclusion, but the industry is facing a growing set of structural, operational, and regulatory challenges that could hinder its growth trajectory. One of the most persistent issues is the weakness in KYC compliance. Since the 2017 Supreme Court ruling that restricted Aadhaar’s use, MFIs have increasingly relied on Voter ID for onboarding, leading to data inaccuracies, borrower duplication, and gaps in verification. Compounding this, credit bureau updates vary from daily to monthly across institutions, weakening real-time credit assessment and increasing the risk of over-lending. Operational risks are also mounting. Post-COVID, the industry has seen attrition rates spike, often crossing 40%, eroding borrower relationships and weakening repayment discipline. Meanwhile, aggressive loan disbursals by some MFIs, driven by demand for larger ticket sizes, have led to over-borrowing, especially in regions where underwriting standards are diluted or fintech lending lacks sufficient face-to-face due diligence. Governance lapses, such as poor board oversight on pricing, growth strategy, and incentive policies, have further dented institutional credibility. A major knowledge gap persists around reducing-balance interest rates, leading borrowers to misunderstand effective interest burdens. While borrowers may perceive a 24% rate as INR 24 interest per INR 100, the actual burden is closer to INR 13.47, yet such misperceptions, coupled with informal lenders charging up to 240%, continue to distort credit behaviour. Macroeconomic and external pressures are adding to the sector’s headwinds. Rising inflation, stagnant rural wages, extreme weather events, and loan waiver rhetoric, often amplified by “finfluencers” on social media, are disrupting repayment norms and fuelling delinquencies. Asset quality deterioration has become a critical concern. This has led to a ~14% YoY contraction in loan portfolios, in loan portfolios, as lenders tighten risk controls. Profitability is also under pressure. Net Interest Margins (NIMs) have come under strain due to falling yields and elevated credit costs. As a result, AUM has degrown sharply in FY25, down by ~14% as compared to the previous year. Regulatory tightening by the SROs is adding further stress. The imposition of Indebtedness Cap of INR 2 Lakh per borrower, a limit of three lenders per client, and the exclusion of fintechissued default loss guarantees are expected to drive up rejection rates and slow disbursal momentum. Operational challenges remain stubborn. High compliance burdens, rising tech investments, and difficult field conditions are pushing up costs. Over-leveraging, weak borrower profiling, and geographic stress, particularly in states like Bihar, Tamil Nadu, Uttar Pradesh, and Odisha, are amplifying repayment risks. Despite microfinance’s priority sector status, smaller MFIs continue to struggle with high cost of funds, as the benefits of policy rate cuts fail to transmit evenly across the ecosystem. AROHAN’S WAY FORWARD – FY 2026 As Arohan moves into FY 2026, it does so with renewed purpose and a clear strategic vision, anchored in its commitment to delivering ethical, borrower-centric, and sustainable financial services to underserved communities across India. In a sector shaped by shifting customer expectations and evolving regulatory norms, Arohan remains steadfast in its core mission: ensuring that every loan extended is not just a financial transaction, but a meaningful step toward empowerment and inclusion. Guided by the principle of “responsibility with scale,” Arohan is focused on deepening its outreach while preserving the highest standards of credit quality, customer protection, and operational transparency. By continuously tailoring its offerings to the dynamic needs of low-income households, the company reaffirms its role as a responsible lender committed to long-term financial resilience and upliftment. Looking ahead, Arohan will continue to bridge the financial divide by enhancing access to affordable credit and essential financial services – with a focus on innovation keeping in mind the changing dynamics in the economically marginalised population segment. Our product offerings across Saral, Micro Enterprise Loan and Arohan Privilege on the Organic side and the Term Loans/Direct Assignments, and Sourcing & Collection we do on the MFI Alliances side help us address a wide segment in the geographies we operate in. Innovations like Sahbhaagi - the first MFI loyalty programme, Sarathi - the first MFI Balance Transfer product, Nirnay - the first Credit Scoring model in the MFI space moving to a riskbased pricing, Aadhaar based e-KYC are good examples. With a strong emphasis on creating value for all stakeholders, the organisation is poised for sustained growth through a blend of organic expansion, strategic partnerships, and
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