Sa-Dhan reaches out to individual lenders to open the liquidity tap for small and medium MFIs

MFIs faced headwinds in FY25 due to, among other things, borrower over-indebtedness (a result of competitive lending, where multiple lenders lend to the same borrower), strained repayment capacities and recovery challenges | Photo credit: iStockphoto

Sa-Dhan is reaching out to individual banks and financial institutions to get them to lend to small and medium microfinance institutions, demonstrating that the worst is over for the microfinance sector in terms of asset quality challenges.

The Self-Regulatory Organization for Microfinance Institutions (MFIs) has started this initiative even as the government is believed to be finalizing a guarantee mechanism, which will provide comfort to lenders in lending to MFIs.

“We are talking to the top management of various banks and financial institutions and trying to convince them that things are now much better in the MFI sector,” said Jiji Mammen, executive director and CEO..

MFIs faced headwinds in FY25 due to, among other things, borrower over-indebtedness (a result of competitive lending, where multiple lenders lend to the same borrower), strained repayment capacities and recovery challenges.

However, now that the industry’s SROs have put in place guardrails, including capping the maximum number of microfinance providers per borrower at three, setting a limit of ₹2 lakh on the borrower’s total indebtedness, and banning loans to borrowers with arrears of more than ₹3,000 for more than 60 days, things seem to be looking up for the industry.

liquidity problems

Mammen underlined that, apart from the six largest MFIs, the majority of them face liquidity problems.

“Lenders, be it Nabard, SIDBI or banks, would rather lend to the top five out of six MFIs… It is the small and medium MFIs that are facing problems in terms of liquidity. So it is an across-the-board issue, barring a few in the top tier,” he said.

In his latest Bharat Microfinance ReportSa-Dhan noted that capital inflows are an important element for the early stabilization of the MFI sector. It suggested that the MFIs should also look at the other options for raising money, including raising money from the market.

Once capital injection into the sector normalizes, it is expected to show positive growth, which is likely by the second half of the year, the SRO said.

Referring to the latest regulatory standard that allows MFIs to hold up to 40 percent of total assets in non-qualified assets, Mammen noted that unless funds are available, these lenders cannot consider portfolio diversification..

Published on October 13, 2025