Case Study | 31 December 2025
How a Mid-Sized Indian Microfinance Institution Partnered with Research Nester to Overcome Rising Loan Defaults and Restore Market Credibility
Posted by : Akshay Pardeshi
A well-established microfinance institution (MFI) in India found itself in deep financial distress after a surge in non-performing assets (NPAs) caused by inadequate credit risk assessment and post-disbursement monitoring failures. The problem not only impacted profitability but also threatened its operational stability and hampered its reputation in the lending community. Aiming a long-term turnaround strategy, the company partnered with Research Nester to identify targeted, data-driven solutions for regaining financial health, improving borrower quality, and rebuilding stakeholder confidence.
An overview:
- The MFI was founded in 2010 to grant microloans to underserved communities, particularly women entrepreneurs and rural households.
- Over the years, it expanded to 12 states in India, disbursing loans to over 2 million clients and gaining a reputation for community-centric lending.
- However, from late 2019 onwards, repayment rates began to decrease, and by mid-2021, NPAs had risen to alarming levels, crossing 12%.
- Poor borrower vetting, absence of strong credit scoring models, and a lack of real-time repayment monitoring exacerbated the default crisis.
- The leadership turned to Research Nester for an integrated research-backed strategy to address loan defaults, restore profitability, and reinforce market trust.
The Story
The institution’s journey began in 2010, when the microfinance industry in India was still developing under the guidelines of the Reserve Bank of India (RBI). At that time, financial exclusion was a huge challenge for millions in rural and semi-urban regions. The MFI targeted to bridge this gap by offering small loans, often between INR 10,000 to INR 50,000, to individuals, self-help groups, and small vendors who lacked access to formal credit systems.
For nearly a decade, the company succeeded. By 2018, it had built a network of over 800 branch offices and mobilized field officers to provide doorstep financial services. Its repayment rates consistently remained above 98%, and its loan book went from INR 1,200 crore in 2015 to INR 3,500 crore in 2019.
However, the dynamics of the financial sector began to evolve. Rising competition from fintech-based lenders, coupled with political interference in certain states where loan waivers were announced, created repayment culture issues. When the COVID-19 pandemic hit in 2020, the financial shock to low-income borrowers further worsened recovery rates.
By early 2021, the company faced a dangerous combination of rising defaults, reduced fresh disbursements, and a deteriorating credit profile. Thus, an internal audit revealed that:
Borrower assessments often relied on outdated manual verification processes.
Field agents were overloaded with targets, resulting in weak post-disbursement follow-ups.
No advanced analytics system was in place to identify potential defaults in real-time.
By mid-2021, the gross NPA ratio went up from under 3% in 2018 to over 12%. This not only resulted in a cash crunch but also weakened relationships with investors and partner banks. The leadership felt that without a structured idea, the MFI risked losing its foothold in the market.
Thus, in August 2021, the institution reached out to Research Nester for comprehensive guidance, covering risk assessment, technology adoption, operational restructuring, and customer trust rebuilding.
Our Solution:
Research Nester’s analysts started by performing an in-depth study of the MFI’s lending portfolio, repayment patterns, operational work patterns, and market positioning. The goal was to find gaps in credit risk management, operational efficiency, and borrower engagement.
The customized solution was delivered in three phases as mentioned below:
1. Risk Assessment & Predictive Analytics Implementation
- Developed a Credit Risk Scoring Model using alternative data such as utility bill payments, mobile recharge history, and transaction patterns to analyze borrower reliability.
- Combined predictive analytics tools capable of pointing out high-risk loans within 30 days of disbursement, allowing proactive intervention.
2. Operational Optimization and Monitoring
- Invented real-time loan assessing dashboards to enable branch managers and field officers to monitor repayment activity routinely.
- Redefined operations by decreasing per-agent loan load, enabling more personalized borrower engagement.
- Developed geo-tagged borrower visit records for continuous follow-up and on-ground accountability.
3. Customer Trust & Relationship Rebuilding
- Introduced a Financial Literacy Program for borrowers for better budgeting and repayment schedules.
- Launched a Borrower Grievance Redressal Cell with a 48-hour time for complaint resolution.
- Used SMS and mobile app-based reminders to help borrowers track their due dates and repayment schedules.
In addition, Research Nester advised the MFI to:
- Partner with digital payment providers for faster and more secure collections.
- Establish a Credit Support Fund to provide temporary relief to borrowers impacted by unforeseen crises, thereby preventing them from falling into default cycles.
- Conduct quarterly portfolio stress-testing to detect market or borrower segments at higher risk.
Results
The transformation was gradual but decisive. When the partnership was initiated in August 2021, the MFI’s lending portfolio was about INR 3,100 crore, but its gross NPAs stood at over INR 370 crore. Liquidity crunch had delayed new disbursements to under INR 200 crore per quarter.
However, by adopting Research Nester’s solutions, the following results were achieved, as listed below:
The gross NPA ratio dropped from 12% in mid-2021 to 6.8% by the end of 2022, and further down to 4.5% by Q2 2023.
- Loan recovery rates rose from 86% in early 2021 to more than 95% by late 2022.
- Average borrower acquisition costs reduced by 15% due to better targeting and reduced defaults.
- The lending value became INR 3,900 crore by mid-2023, reclaiming the MFI’s pre-crisis growth.
- Investor trust got better, allowing the MFI to grab an INR 500 crore funding line from a leading private bank at favorable terms.
- Beyond financial metrics, borrower satisfaction also improved significantly. Post-intervention surveys presented that:
- 82% of borrowers appreciated the financial literacy workshops.
76% people reported high confidence in the institution’s transparency and grievance handling systems. - Nearly 40% of repeat borrowers surged their loan value, highlighting rebuilt confidence in the MFI.
Today, the institution continues to follow the same research-driven structure, combining rigorous credit assessment with personalized borrower engagement. It is now viewed as a resilient, technology-enabled lender capable of navigating market shocks while maintaining a strong social impact.
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