Sa-Dhan, the self-regulatory organisation for the microfinance sector, is rolling out additional guardrails for its member lenders from June 1. Executive director and CEO Jiji Mammen discusses with Narayanan V about the rationale behind the new norms, the weakening of the Joint Liability Group (JLG) model, and the possible implications of Tamil Nadu’s proposed Money Lenders Bill. Excerpts:
What are the new guardrails all about?
In July 2024, the CEOs of microfinance institutions (MFIs) decided to introduce some guardrails to bring discipline into the sector. These included capping total household exposure at ₹2 lakh, mandating credit bureau checks before lending, and avoiding lending to borrowers with over ₹3,000 in outstanding dues across loans. That move brought some order. For instance, the share of MFI loans with over four or five lenders has dropped from 7% to 4%.
After our review meeting in April 2025, we felt stronger measures were still needed to ensure long-term stability. So, the norms were tightened. Now, in addition to the ₹2 lakh cap (including all types of loans, like retail), we’ve capped the number of lenders per borrower at three. Second, a borrower is now eligible for a top-up loan only if they have repaid 50% of the earlier loan, or if 12 months have passed since disbursement. We have also tightened the NPA threshold. We have restricted lending to borrowers with defaults of over ₹3,000 to 60 days from 90 days earlier. The idea is to bring it down to 30 days. Anyone with over ₹3,000 in defaults across loans will not be eligible for fresh loans.
How challenging is it to measure household income?
It’s definitely still a challenge, primarily because we’re dealing with people who have informal sources of income. Any assessment has to be done meticulously. If a loan officer spends more time with the borrower — discussing income sources, household indebtedness, etc. — they can get a fairly good idea, though it’s not foolproof.
However, microfinance staff often work under pressure to meet targets, which limits the time they can spend on each case. As a result, proper income assessment sometimes gets compromised.
Even credit bureau checks aren’t entirely reliable due to delays in data submission. Around 60–70% of the microfinance portfolio is reported daily — mainly by the larger MFIs who have systems in place. But banks typically update data every 15 days (down from 30 earlier), and it takes another 7 days to process that data. So, there’s a lag of about 20–22 days, even among regulated institutions. Moreover, many lenders — like cooperative societies, cooperative banks, and Nidhi companies — don’t report data to credit bureaus at all. Add to this the large volume of informal lending, and the overall picture becomes even more complicated.
What percentage of the microfinance portfolio is under stress, and when do you see things easing out?
As per credit bureau data, around 5% of the industry’s assets under management (AUM) fall under portfolio at risk (PAR), which are loans overdue between 30 and 179 days. I wouldn’t say it is entirely under stress, but about 60–70% is likely under some degree of stress. We had expected the stress to ease by the middle of this financial year, post the second quarter. However, the Karnataka Microfinance Bill caused a significant disruption. Now, Tamil Nadu also introduced a similar bill. However, I remain optimistic that by the end of Q2, we should start seeing a turnaround for the industry.
Lenders say the JLG lending model is collapsing. Do you agree?
JLG was a good model when it started, and even today, it’s still considered the best available model for this segment. But yes, there has been some weakening. In the early days, JLG meetings were well-attended — women borrowers would gather, make payments, and even if someone couldn’t pay, they’d still attend and seek time. The core idea was that if one member couldn’t pay, others would cover the amount.
That worked when loan sizes were small — say, ₹500–₹600 per installment — and group sizes were larger, around 15–20 members. Today, group sizes have shrunk to 4–5, and the average loan ticket size has gone above ₹50,000. So, the monthly installment is now ₹2,500–₹3,000. If someone defaults, it’s much harder for a smaller group to cover that amount. That’s where the strain is showing.
Also, earlier people attended meetings regularly. Now, with digital payments and group leaders collecting money, many feel there’s no need to attend. So yes, the model is weakening. In my assessment, 80% of the industry portfolio is still under the JLG model. Unless we have a better alternative, JLG is still the best fit for this segment. We are advising MFIs to continue with the model but strengthen individual credit assessment and tweak the approach to make it more effective.
How will the Tamil Nadu Money Lenders Bill impact the sector?
We worked hard to limit the adverse impact of the Karnataka Bill. The original ordinance covered all kinds of lenders, but after industry stakeholders met the state’s chief minister and senior officials, the final Bill excluded regulated entities. While it did initially increase recovery issues and delinquencies, things are stabilising now.
In Tamil Nadu, we are engaging with all stakeholders—from RBI and Nabard officials to senior state government executives. We don’t foresee a Karnataka-like situation here, as the Bill clearly states it doesn’t apply to regulated entities. However, our concern is with the inclusion of all types of lenders under the “coercive” clause. That term is subjective and could be misused in implementation. Ideally, regulated entities and MFIs should be explicitly excluded from that clause. Otherwise, even regular field collections could be seen as coercive, creating hesitation among staff and affecting operations.