NBFC-MFI Sector Growth to Dip to 4% in FY25

Abhishek Kumar

28 Mar, 2025

The Non-Banking Financial Company-Microfinance Institution (NBFC-MFI) sector in India plays a crucial role in providing small loans to underserved populations. They assist in filling the gaps in the accessibility of financial services that only banks can provide to the public.

The sector which saw impressive growth post-COVID is currently under significant stress according to a report by CareEdge. It is expected to experience a serious slowdown in growth during the financial year (FY) 2025. Due to the higher credit costs, the return on average assets (RoTA) is predicted to fall from 4.3% in 2024 to just 0.4% from double-digit growth in prior years.

Let’s dive into the article to learn about NBFC-MFI, its growth, and probable reasons for its slowdown in FY2025.   

What is NBFC-MFI?

An NBFC-MFI stands for Non-Banking Financial Company – Micro-Finance Institution and primarily caters to the rural and unorganized markets. It is a financial institution that provides loans without requiring collateral (security). These companies are regulated by the Reserve Bank of India (RBI).

Non-Banking Financial Company – Micro-Finance Institution (NBFC-MFI) is a non-depositary-taking financial institution. It cannot accept deposits like public banks. The following are the certain financial conditions that NBFC-MFI must fulfil;  

1. The capital resource of the company must have a minimum of Rs 5 crores in Net Owned Funds (NOF).  But for the northeast region of India, this amount is reduced to Rs 2 crores.
2. 85% of its total assets must be “qualifying assets”;

• The annual Income of the rural household should not exceed Rs 60,000, and urban or semi-urban household income should not exceed Rs 1,20,000.
• The amount of loan provided to an individual is limited up to Rs 35,000 in the first cycle and Rs 50,000 in subsequent cycles.
• The total debt of the borrower should not exceed Rs 50,000.
• The repayment of loan amount exceeding Rs 15,000 must be done before 24 months.
• The loan is provided without any security. 
• Aggregate 75% of the loans must be for income-generating activities
• Payment of the loan can be done in instalments; weekly, fortnightly, or monthly, whichever fits the borrower.

1. The remaining 15% of the company’s assets can be used for other purposes, following the rules of RBI.
2. In case, NBFC-MFI doesn’t meet the above criteria, it can only lend a maximum of 10% of its total assets for microfinance.

Key Points

From Boom to Stagnation: Transition of the NBFC-MFI Sector

• Post-COVID Recovery– NBFC-MFI saw a magnificent recovery after the Covid-19 pandemic. A good number of growths was seen; about 37% in FY-2023 and around 28% in FY-2024. This reflected a bounce-back from the pandemic’s negative impacts.
• Slowdown in FY25- After a fast recovery, looking forward to FY 2025, it is now on the verge of facing stagnation. According to the report of CareEdge Ratings, the sector is expected to grow by only 4%. This is a challenging period with slower growth and possibly even profitability issues.

Challenges to Profitability

• Rising Credit Costs– The amount of money MFIs have to pay to borrow funds has been going up. This higher cost affects the profitability. Higher interest rates and increased risk might be the reasons for this.
• Compressed Yields- The profits/returns MFI make from the loans they give outare called Compressed Yields. The money MFIs are earning from their loans is getting smaller.
• Impact on Return on Assets (ROTA)- Therising credit costs and shrinking yields impact the Return on Assets. Due to the higher credit costs, the return on average assets (RoTA) is predicted to fall from 4.3% in 2024 to just 0.4% from double-digit growth in prior years.
• More Debt, Bigger Loans- With the average loan amount (“ticket size”) getting bigger, loan amounts have gone up by 27%. Different people are taking out moreloans from different lenders which is also creating a problem.
• Struggling Borrowers- People are taking on more debt than they can handle even from different lenders. This has led to a situation where they are struggling to repay the loans. Larger loan sizes have contributed to this problem. 
• Weakening of the Joint Liability Group (JLG) Model- The Joint Liability Group (JLG) model is a group under which a small number of people as a group borrow money and each of them is responsible for making sure the other member has repaid his part of the loan. If one defaults, then each member of the group could suffer. Initially, this system was seen as successful, but in the current scenario, people are more likely to default on their loans making the whole system less effective. This way it has become harder for microfinance institutions to recover the money they’ve lent out.
• Regulatory Scrutiny on Pricing- Some institutions were found to be charging very high rates, so the government imposed a limitation on the interest rate that an MFI can charge. While it benefits the borrowers, it becomes a challenge to MFIs as they rely on the interest to cover their costs and make a profit. This makes it harder for the institutions to sustain their services.  

• MFI Network’s Advice- Microfinance Institutions (MFI) to hide their financial conditions practices Loan Netting. This way it appears as if the MFI is having no financial crisis and doing well. RBI has warned MFIs against these kinds of practices. It becomes harder to track down the problems which leads to a bigger slowdown.

• Staff Turnover and Fraud- When the staff keeps on changing it becomes difficult to start the relationship between the client and the new employees from scratch. It creates hurdles in maintaining consistent service of the institution. And when any staff or client gets involved in some kind of fraud, it leads to financial losses. The institution is forced to spend more on security and corrective measures making the business less effective.
• Socio-political and Natural Risks- Factors like political instability, changes in government policies, and natural disasters have a very negative impact on these institutions causing delays, higher costs, and even complete operational shutdown.

Resilience and Importance for Financial Inclusion

The NBFC-MFI (Non-Banking Financial Company – Microfinance Institution) sector plays a crucial role in supporting financial inclusion for people of India who are excluded from traditional banking services, such as those in remote areas or from lower economic backgrounds. Before starting a micro finance company in India, it’s essential to initiate micro finance company registration.

The resilience of the NBFC-MFI is notable. From facing the challenges of demonetization in 2016 to the COVID-19 pandemic in 2019, it has come a long way with impressive growth. This ability to bounce back and continue operations, even in tough times, shows the strength and flexibility of the sector.

To Wrap Up

NBFC-MFI, which faced notable growth after overcoming the hard situations of Demonetization and COVID-19, is currently on the road to stagnation. While time is tough for this sector the NBFC-MFI is essential for the economic growth of a country.

For its survival in the financial landscape, NBFC-MFIs will need to adapt to the changing environment, stay innovative, and work closely with regulators.    

To get expert assistance in solidifying your position in the NBFC-MFI sector or NBFC registration, visit https://enterslice.com/.

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