In today’s Finshots, we dive into whether the micro-finance industry’s ₹2,440-crore write-off spree is a genuine reset or just a fresh coat of paint on an old crack.

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The Story

₹2,440 crores!

That’s the amount that vanished from the books of five major microfinance lenders between January and March 2025 alone. CreditAccess Grameen, Fusion Micro Finance, Muthoot Microfin, Satin Creditcare and Spandana Sphoorty took the hit together. And the worst part? They wrote off loans worth over 8 times what they wrote off a year ago, hoping to walk into the next financial year with squeaky-clean ledgers and fresh lending capacity.

This is the industry’s most dramatic clean-up since COVID-19 disrupted cashflows in 2020, which prompts the question: why are these companies cleaning up their balance sheets nearly 5 years later?

To answer that, we must, well, go back to 2020. The pandemic hit, livelihoods were disrupted and repaying even tiny EMIs became a struggle. Take a look at this, for instance:

This chart shows the annual default rate of India over the last 10 years. At first glance, it might seem like defaults have remained relatively contained, especially in the last two years. But there’s something important hiding in plain sight here. The “overall” default rate masks the pain within high-risk borrowers — the very segment that microfinance lenders primarily cater to. As you can see, there was a sharp uptick in the subprime loan (high-risk) default rate in the year 2020, and it continues to stay elevated. 

So, while the broader system may have recovered in the years since, the aftershocks in this high-risk segment are still playing out. That’s what makes the ₹2,440-crore write-off in 2025 so significant. It’s less about current defaults and more about cleaning up the long tail of loans that went sour five years ago.

Now, usually, if a borrower skips a payment, the lender tries to restructure the loan or recover dues over time. But the pandemic led to so many missed loan repayments, that people just couldn’t catch up. Over the next couple of years, the stress quietly accumulated. NBFC-MFIs (that is, non-banking financial companies that do microfinance) kept kicking the can down the road by reclassifying loans, restructuring accounts and extending tenures. But that could only work for so long. Eventually, those unpaid dues had to be either repaid or written off.

And the latter is exactly what’s happening right now.

Nearly 5 years on, companies are finally flushing out their bad apples. The rationale? A reset for the new financial year, so they can start lending again with cleaner books and better capital adequacy ratios. After all, no lender wants old defaults haunting their credit reports, especially when demand for fresh loans is booming.

In fact, rural cash flows are actually reviving because crop procurement has been excellent, and construction has also been picking up. In theory, this should be a good time to recover old dues. Yet, lenders are choosing to write them off instead.

And that’s what makes the timing so surprising, which prompted one question: Is this a genuine turning point or just an accounting spring clean?

See, microfinance works on social trust. Lenders give small-ticket, unsecured loans to borrowers who often lack formal credit histories. This is what keeps this system running. And to recover dues, loan officers regularly visit borrowers, track repayments and encourage peer pressure within borrowing groups to keep defaults in check.

However, in recent years, the sector’s rapid expansion, especially in underserved or over-penetrated geographies, has sometimes compromised underwriting quality. Loans are disbursed in crowded pockets and multiple lenders unknowingly serve the same borrower. That overlap weakens discipline and raises the risk of over-borrowing.

And then there’s regulation. The RBI’s 2022 guidelines were supposed to bring tighter borrower checks and lender accountability. But implementation varies widely across the board. Some players follow prudent norms. Others chase growth at the cost of caution.

However, there’s another reason why this clean-up could be happening now. And this has a lot to do with the ombudsman. You see, in 2024, the RBI started cracking down harder on microfinance lenders. It wasn’t just about poor collections or rising NPAs. The regulator had a bigger concern. It found that several NBFC-MFIs were charging steep, almost predatory interest rates. Some weren’t properly assessing a borrower’s repayment capacity. Others were violating norms around how much debt a single borrower could take on.

So, the RBI stepped in and ordered certain NBFCs to cease operations altogether, reinforced caps on total indebtedness and demanded tighter adherence to income verification rules. It also emphasised that lenders should not engage in multiple lending without proper checks. And its message was clear: “Clean up your act or face the consequences.”

And that may have been the final nudge the industry needed.

The ₹2,440 crore in write-offs, then, aren’t just a financial reset. It was also part of a broader regulatory course correction. One that forces MFIs to stop rolling over bad loans or misclassifying them as standard, and instead face reality head-on.

So, while it might look like a wave of balance sheet hygiene, it’s also a sign that the RBI’s pressure is working. Lenders are finally tightening their books. Not just to look good for investors, but because the regulator is watching more closely than ever. And if this leads to a more disciplined, borrower-friendly lending environment, then maybe, just maybe, the inconvenience today will be worth a better tomorrow.

Until then…

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