The Reserve Bank of India (RBI) has stressed on the need for regulated entities, including banks and NBFCs, to monitor the build-up of stress in the microfinance segment going forward.

All lenders have contracted their credit to the microfinance institutions, inducing further stress in the segment. The loan disbursements in the southern region particularly moderated, according to a report by the Reserve Bank of India (RBI).

In case of banks, the loan growth in FY25 to the microfinance segment contracted 14.7% over the year-ago period while for NBFCs-MFI it was negative by 13.7% and small finance banks (SFBs) by 20.2%. Only for other NBFCs it was in the positive zone.

“Going forward, the performance of microfinance loans needs to be closely monitored,” the RBI said in its report on ‘Trend and Progress of Banking in India 2024-25’ released on Monday.

Lenders have faced challenges on the MFI front over the last few quarters due to over-leverage among borrowers. The industry adopted a set of guardrails, including limiting the number of loans that can be given to a single borrower.

The RBI report said the guardrails, introduced by the self-regulatory organisations Microfinance Institutions Network (MFIN) and Sa-Dhan, prioritised "steady and calibrated growth" in the sector.

"The microfinance sector, however, experienced stress, with all lenders, excluding other NBFCs (NBFCs excluding NBFC-MFIs) - recording contraction in credit as of March-end 2025," it added.

The RBI's own revisions in the regulatory framework for microfinance loans, introduced in 2022, by eliminating interest rate caps while introducing standardised rules, laid the foundation for "systemic and sustainable growth" of the sector.

The central bank said that the framework fosters social equity and empowerment by serving as an effective instrument for advancing financial inclusion.

The number of SHGs (self-help groups) accessing credit from banks increased to 55.6 lakh in 2024-25 from 54.8 lakh in the previous year, it said, adding that lower disbursements in the southern region led to a moderation in the amount of loans disbursed by banks to SHGs.

Savings balances of SHGs with banks rose 9.7% to Rs 70,000 crore, while their outstanding loans from banks increased by 17.2 per cent to Rs 3 lakh crore, the RBI report said.

The amount of loans disbursed by banks to joint liability groups (JLGs), which are informal credit groups of small borrowers, declined by 58% during 2024-25, it added.