The microfinance sector in eastern India is going through one of its roughest patches in a decade, and the reasons are more complex than the usual “borrowers aren’t paying” narrative that gets trotted out every time there’s stress in the sector.

I’ve been reviewing portfolio quality data from six MFIs operating in West Bengal, Bihar, and Jharkhand, and the deterioration over the past eight months is significant. We’re seeing 90+ day past due ratios climbing from the typical 2-3% range to 7-9% in some districts. That’s not catastrophic yet, but the trend is unmistakable.

The Ground Reality

Field officers I’ve spoken with point to a combination of factors that hit simultaneously. The first is weather-related. This year’s monsoon pattern was erratic in Bihar and northern West Bengal. Too much rain in August caused flooding in low-lying areas, then an extended dry spell in September hurt standing crops. For borrowers whose primary income is agricultural, this directly impacts repayment capacity.

But here’s the thing: microfinance has weathered bad monsoons before. What’s different this time is the debt load borrowers are carrying. The pandemic period saw multiple MFIs and digital lenders all expanding into the same geographies. A borrower who had one loan from one MFI in 2022 now has three or four from different sources.

Credit bureau checks show the problem clearly. In a sample of 200 delinquent accounts from one mid-sized MFI’s Bihar portfolio, 73% had borrowings from three or more lenders. The average total debt burden was Rs 1.2 lakhs, up from around Rs 60,000 two years ago. These are borrowers with household incomes of Rs 15,000-25,000 per month. The math doesn’t work.

The Collection Pressure Cooker

What happens when multiple lenders are chasing the same borrower? Collection practices get aggressive. I’ve reviewed internal memos from two MFIs that explicitly acknowledge their field staff are engaging in practices that violate RBI guidelines on fair practices.

One memo discussed “social pressure tactics” where collectors would sit outside a borrower’s home for hours, making the family uncomfortable in front of neighbours. Another detailed how group liability was being used not just for peer pressure within the official borrowing group, but extended to family members who weren’t part of the loan agreement.

These practices backfire. They might get short-term recoveries, but they destroy the trust that microfinance relationships are supposed to be built on. Borrowers start avoiding field officers entirely. Group meetings fall apart. The social capital that made microfinance work in the first place erodes.

Political Interference Isn’t Helping

West Bengal has seen increased political rhetoric around farm loan waivers and microfinance debt relief. While no major waiver scheme has been announced, the constant talk creates moral hazard. Borrowers hear politicians promising relief and decide to wait rather than struggle to make payments.

This happened in Andhra Pradesh in 2010 and the microfinance sector there still hasn’t fully recovered. Eastern states seem to be flirting with similar dynamics. Local politicians see microfinance debt as an easy target because borrowers are voters and MFIs aren’t.

The industry associations are trying to engage with state governments to head this off, but they’re fighting an uphill battle. It’s much easier to vilify lenders than to address the underlying issues of low incomes and economic volatility that make borrowing necessary in the first place.

The Regulator’s Dilemma

RBI is aware of what’s happening but their options are limited. They can’t force borrowers to repay, and politically-motivated loan waivers fall under state government jurisdiction. What they can do is tighten regulations on MFIs themselves.

There’s talk of new guidelines around total debt-to-income ratios for microfinance borrowers and restrictions on how many active loans one borrower can have. The industry is pushing back, arguing this will reduce financial inclusion. They’re not wrong, but they also don’t have great answers for how to prevent over-indebtedness in the current environment.

Some MFIs are implementing their own internal limits, refusing to lend to borrowers who already have more than two active microfinance loans. That’s prudent, but it also means turning away customers who desperately need credit. The ones who get rejected don’t just go home; they go to unregulated informal lenders with worse terms.

What’s Working

Not all MFIs in the east are struggling equally. The ones doing relatively better share some common characteristics. They’ve maintained longer-term relationships with borrowers, often 5+ years. They didn’t expand too aggressively during the post-pandemic boom. Their field officers actually know their customers rather than just processing applications.

One small MFI in rural Bihar showed me their portfolio. Their PAR-30 is under 3%, well below the regional average. Their secret? They never lend more than Rs 25,000 for a first loan, regardless of what the customer asks for or what bureau data suggests they could service. They slowly build up exposure over multiple lending cycles. It’s old-fashioned and it limits growth, but it works.

They also invest heavily in financial literacy programs. Not the token one-hour sessions that most MFIs do to check a compliance box, but ongoing education about budgeting, savings, and debt management. Does it cut into profitability? Yes. Does it create stickier, more reliable borrowers? Also yes.

The Path Forward

The eastern microfinance sector needs a reset. That means some painful adjustments: slower growth, tighter underwriting, higher interest rates to compensate for increased risk, and probably some consolidation as weaker players exit.

It also means having honest conversations about what microfinance can and can’t do. It’s not a poverty alleviation tool. It’s a financial service. Borrowers need income opportunities, not just access to credit. Without the economic foundation to support debt servicing, even the best-intentioned lending will fail.

The MFIs that understand this and adjust their models accordingly will survive. The ones still chasing growth at any cost are setting themselves up for a very difficult 2026.