Microfinance Sector Faces Stress Amid Lending Practices and Borrower Over-Indebtedness

India’s microfinance sector is under growing pressure as high interest rates, rising NPAs, and borrower over-indebtedness threaten stability. Former HDFC chairman Deepak Parekh has flagged alarming trends, citing asset erosion ratios (AERs) of 15–18% and ₹60,000 crore in NPAs on a ₹3–3.5 lakh crore loan book. He warned that aggressive lending by NBFCs and banks is pushing borrowers beyond their repayment capacity, increasing the risk of defaults. Parekh emphasized that only 25% of an individual’s income should go toward loan repayments to maintain financial health. RBI deputy governor M. Rajeshwar Rao also highlighted the "vicious cycle" of over-indebtedness, high rates, and harsh recovery practices, urging lenders to move beyond profit-driven models and focus on responsible credit assessment. While some rate moderation has been seen, excessive margins persist. The central bank called for stronger governance and enforcement against coercive recovery methods. A balancing act is needed—ensuring sustainable margins while avoiding exploitative lending—to support financial inclusion without deepening debt traps for vulnerable borrowers. Few listed entities include