MFIs need to rebuild credibility and trust to achieve sustainable growth: study

Microfinance institutions (MFIs) need to rebuild credibility and trust to achieve sustainable growth, according to a joint study by consultancy PwC and Sa-Dan, an industry self-regulatory organization (SRO).

Microfinance, which is mainly supported by trust between the stakeholders, namely the borrowers, field officers and credit institutions, has become more transactional, the study said.

Major setbacks such as demonetization and the Covid pandemic have further exacerbated the decline in group culture in microfinance, which has had a widespread impact on repayment discipline and public confidence, the study found.

“Regaining credibility and trust remains a major challenge to achieving sustainable growth,” the study said, adding that empowering and equipping customers with adequate information is crucial to regaining their trust.

According to the study, MFIs have also faced declining support from external stakeholders, including investors and refinancers, in recent years. This was due to increased caution among stakeholders regarding borrowers at the bottom of the pyramid.

Financial literacy is the first step toward meaningful borrower inclusion and building alternative channels to maintain a connection with borrowers. Capacity building workshops, educational workshops and financial literacy boot camps should be organized to educate the customers about their rights, nature of products offered and their responsibilities, the study said.

Lenders must also ensure honesty, clarity, consistency and diligence in their communications, collection practices and customer support.

To improve asset quality, the MFI sector had consciously focused on disciplined, low-risk clients. The impact of this can be seen in the decline in disbursements from Rs 3,86,287 crore in 2023-24 to Rs 2,85,130 crore in 2024-25. Currently, the industry prefers better portfolio health over aggressive growth in credit accounts and outstanding balances, the study said.

While this is a useful exercise to increase confidence in the sector, the research finds this is not sustainable in the long term.

The end-stage customer acquisition process requires extensive attention to balance growth and quality, the study said.

The risk of over-indebtedness among borrowers is a crucial challenge for MFIs. This also poses a systemic risk to the MFI sector, potentially leading to higher default rates and financial losses for the microlenders, the study said.

Published on November 15, 2025