9 months ago
DFS Secretary Flags MFI Inefficiency, Urges Fair Interest Rates
Imagine special banks for people who don't have much money, called microfinance institutions (MFIs).
The main person in charge of financial services in India thinks some of these MFIs are charging too much interest.
He believes this is because they aren't working as efficiently as they could be.
He wants them to improve how they work so they can charge less interest to people who need loans.
He also said that many young people still don't have access to these financial services, and MFIs need to find new ways to help them.
At the same event, a chairman from NABARD, an organization that helps rural areas, said that the problems in the MFI sector are getting better.
NABARD is also creating a special credit score just for people in villages and for groups that help each other save money.
This new score will help these people get loans more easily because the regular credit scores don't work well for them.
This is important for helping everyone in the villages grow their businesses and improve their lives.
DFS Secretary M. Nagaraju highlighted "inefficiency" in MFIs as the cause for high interest rates, urging them to keep rates reasonable for financial inclusion.
Nagaraju expressed concern over a significant reduction in loan accounts and outstanding amounts in the MFI sector, indicating stress.
Approximately 30-35 crore youth in India still lack access to formal financial services, an area Nagaraju urged MFIs to focus on.
NABARD Chairman Shaji KV stated that stress in the MFI sector is unwinding and mentioned NABARD's development of a 'Grameen Credit Score' for rural populations and SHG members.
MFIs experienced a sharp decline in funding, falling by over half in the fiscal year ended March 2025, with moderate growth expected for the current fiscal year.
- Who
- DFS Secretary M. Nagaraju and NABARD Chairman Shaji KV
- What
- DFS Secretary M. Nagaraju urged Microfinance Institutions (MFIs) to maintain reasonable interest rates due to inefficiencies, while NABARD Chairman Shaji KV discussed sector stress unwinding and NABARD's development of a 'Grameen Credit Score'.
- Where
- A conference organized by Sa-Dhan
- When
- Thursday, November 13, 2025
- Why
- To address concerns over high interest rates in the MFI sector, promote financial inclusion, and improve credit access for underserved populations.
DFS Secretary's Concerns
NABARD Chairman's Outlook & Initiatives
MFI Interest Rates and Efficiency
DFS Secretary's Concerns
DFS Secretary M. Nagaraju expressed concern over 'very uncomfortable' interest rates charged by some MFIs, directly linking them to the institutions' inefficiency and lack of cost efficiency and productivity. He warned that high rates could lead borrowers to default, increasing stressed assets.
NABARD Chairman's Outlook & Initiatives
NABARD Chairman Shaji KV acknowledged that stress in the MFI sector is unwinding and highlighted NABARD's efforts to develop a 'Grameen Credit Score' and a data warehouse for credit history of poorer sections to reduce underwriting costs, suggesting a path toward improved financial operations.
Financial Inclusion and Sector Support
DFS Secretary's Concerns
Nagaraju emphasized the need for MFIs to improve financial inclusion, noting that 30-35 crore youth are still outside the formal financial system. He also called for consolidation and attracting younger talent to MFIs, suggesting a current lack of passion and commitment.
NABARD Chairman's Outlook & Initiatives
KV stressed the importance of borrower protection programs and improving capital productivity through blended finance. He noted that government programs and Digital Public Infrastructure (DPI) continue to support MFIs, with an emphasis on impact alongside financial returns.
Key facts
- DFS Secretary's Observation
- M. Nagaraju noted 'very uncomfortable' interest rates in some MFIs due to their inefficiency.
- Loan Accounts Reduction
- The number of loan accounts in the MFI sector reduced by 45 million by September 2025.
- Outstanding Amount Decrease
- Total outstanding loan amount decreased from Rs 4.4 trillion (March 2024) to Rs 3.4 trillion (September 2025).
- Funding Challenges
- MFI funding dropped by over half in FY ended March 2025, to Rs 58,109 crore, a 55.40% Y-o-Y decrease.
- Projected MFI Growth
- Growth for MFIs is expected to be moderate at 4% Y-o-Y for the current financial year ending March 2026.
- Unbanked Youth
- Approximately 30-35 crore youth remain outside the formal financial system.
- NABARD's Initiatives
- NABARD is developing a 'Grameen Credit Score' and a data warehouse for credit history of poorer sections.
Timeline
Borrowing surged, causing microfinance defaults and caution among lenders.
Then, banks cut funding to weaker microfinance institutions.
Disbursements plummeted, user numbers dropped, prompting a call for review.
A top official cited high rates and inefficiency; others noted improvements.
Quotes
M. Nagaraju
Secretary, Department of Financial Services
“I came across very uncomfortable rates of interest that are actually because of inefficiency in microfinance institutions organisations”
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“What are we doing wrong? Is there something we can improve and are our models right and good for a large section of the population”
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Shaji K V
chairman, National Bank for Agriculture and Rural Development (Nabard)
“Microfinance institutions must push for stronger credit assessment, better risk management, and more diversified portfolios.”
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“Government programmes and DPI continue to support this work, but the emphasis must stay on impact alongside financial returns”
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Sources
Need to introspect on reduction in loan accounts, outstanding in MFI Sector: DFS Secretary
Nagaraju urges MFIs to keep interest rates reasonable
MFIs Told To Keep Interest Rates Reasonable To Foster Financial Inclusion
Inefficiency in MFIs leads to high interest rates: DFS secretary M Nagaraju
