In January this year, Sharana Basava of Kapagal village, in Manvi taluk of Raichur district in north Karnataka, left home saying he was meeting up with some acquaintances. A construction worker who also drove a rented auto to make ends meet, he, however, did not return home that day. His shocked family soon found out that he had died by suicide. The 35-year-old is survived by his aged parents, wife Parvati and three young children.

Parvati alleges that Basava was pushed to take the extreme step owing to continuous harassment from the ‘collection agents’ of the microfinance companies that had lent him about ₹4 lakh. She says the money was borrowed to meet the health needs of Basava’s parents and other household expenses as his work and income had dried up. He was harassed and verbally abused since he had failed to repay a few instalments on time, she says.

Demanding justice, Parvati even mailed her ‘mangalasutra’ (necklace symbolising her marital status) to Karnataka Home Minister Dr G Parameshwara.

Hers is not an isolated case in the State, however.

Jayasheela, a 53-year-old woman from Ambale village, ended her life in January as she was struggling to repay the ₹5 lakh she had borrowed from two microfinance companies. She used the loan money, with repayments scheduled in monthly instalments of ₹20,000, to buy a cow and agricultural tools. When the cow fell sick and died, her income dried up.

Over the last six months, 22 to 38 deaths under similar circumstances have been reported from across the State.

Shying away from linking the deaths directly to microfinance activity, government sources say the causes vary from family problems to land disputes and health issues.

However, the tragic developments do serve as a grim reminder of how microfinance’s lending ecosystem, meant to empower millions financially in underserved communities, can sometimes turn into a death trap.

The gross loan portfolio of microfinance institutions (MFIs) in India stood at a staggering ₹3.91 lakh crore in the third quarter of FY25, according to CRIF data. In Karnataka alone, MFIs support over one crore individuals, including around 63 lakh unique borrowers.

The State’s MFI portfolio surged from ₹16,946 crore in March 2019 to ₹42,265 crore in March 2024, according to data from Microfinance Industry Network (MFIN), an industry body.

Public pressure

Amid rising distress levels among borrowers, there is mounting backlash against the alleged aggressive collection tactics of MFIs; industry players, however, argue that personal or family issues, rather than financial troubles, were driving borrowers over the edge.

Public pressure pushed the Karnataka government to act. In March, the State Assembly passed the Micro Loan and Small Loan (Prevention of Coercive Actions) Bill, which proposes to fully discharge borrowers from repaying loans, including interest, taken from unlicensed and unregistered MFIs.

Other states, too, have had their share of trouble with microfinance activity. Back in 2011, Andhra Pradesh was roiled by more than 70 suicides reportedly linked to the aggressive recovery tactics of MFIs. This sparked national outrage and a regulatory overhaul.

SKS Microfinance, the then leading MFI player, saw its management purged and was eventually salvaged through a merger, under a new identity, with IndusInd Bank.

Similarly, in Assam, in the lead-up to the 2021 State elections, political parties promised loan waivers, prompting many borrowers to stop repayments. This triggered a financial crisis among MFIs. In response, the State introduced the Assam Micro Finance Institutions (Regulation of Money Lending) Act, 2020, to regulate lending and protect borrowers.

Worry over NPA

In Karnataka, MFIs, banded together under the Association of Karnataka Microfinance Institutions (AKMi), blame the current crisis on “a few bad apples”, which are unlicensed and unregulated. They bemoan that the surge in default rates has led to a spike in non-performing assets or NPAs.

In Haveri district, where 26 MFIs have cumulatively disbursed loans worth ₹1,692 crore, AKMi says repayment rates have plummeted to 30 per cent. “Earlier, repayment used to be 90-92 per cent,” says a senior executive of Navachetan Microfinance Ltd, who requested anonymity. He suspects that vested interests and local political leaders are encouraging defaults. This not only impacts the credit scores of borrowers, but also leaves genuine borrowers high and dry as MFIs cut down on lending, he adds.

AKMi worries that organised MFIs are being tarred with the same brush as fly-by-night operators, leading to rising loan delinquencies.

The cumulative loan book of MFIs in Karnataka contracted to ₹34,000 crore by December 2024 from ₹42,000 crore in March 2024 (excluding microfinance loans reflected in banks’ portfolios), and it is projected to slide further after the fourth quarter numbers are tallied.

The recurring troubles raise uncomfortable questions: Are systemic failures embedded in the microfinance model? Is the industry’s foundation structurally flawed?

Recurring hiccups?

Suresh Krishna, former MD of CreditAccess Grameen, co-founder of AKMi and MFIN, and now a committee member of the self-regulatory organisation Sa-Dhan, points to regulatory loopholes: “When the RBI lifted the cap on the number of lenders, many institutions began lending without evaluating how much a person had already borrowed. While credit bureaus provide some insight, they are not foolproof. There’s a lag of almost a month in updating borrower data.”

An industry veteran, requesting anonymity, explains that while microfinance can be a disciplined, near foolproof system, its profitability attracts undisciplined players. “Interest rates are high. From the outside, it looks like a very profitable business — and it is, if managed correctly. But if run poorly, periodic crises can wipe out all profits.”

He adds that the very structure of microfinance — equated monthly or weekly instalments — is often incompatible with the needs of borrowers who invest in small enterprises. “Capital expenditure may be funded through longer-term loans like micro-mortgages but working capital still lacks adequate product support. The industry must develop alternatives to EMI-based lending for businesses.”

Corrective measures

To address the issues adversely impacting the microfinance sector, RBI-recognised industry bodies MFIN and Sa-Dhan have announced key reforms, effective April 1. A primary change is in limiting the number of lenders per borrower to four — a reversal of the post-Covid relaxation.

“People started borrowing from multiple sources, leading to over-borrowing and the strain of managing multiple repayments,” says a senior AKMi official.

Short loan tenures exacerbate the worries, he adds. “Borrowers need a minimum of five-year repayment period, instead of three years.”

Krishna says unregulated players distort the market by flouting the industry’s code of conduct and resorting to aggressive recovery practices.

Looking ahead

The recurrent crises in the microfinance sector underscore the urgent need for stronger safeguards, better-designed loan products and tighter regulatory oversight.

To meet working capital needs, the sector must develop more flexible and enterprise-friendly products, an industry veteran advises.

Krishna adds that real-time credit monitoring could help prevent over-borrowing. “Credit bureau data should be uploaded and accessible in real-time, so lenders know exactly how much a borrower has taken from others,” he says. And to ensure that customer rights are honoured without fail, “there should be greater awareness about the grievance redressal systems in place,” he says.

More Like This

Published on April 13, 2025