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Chapter 4 - Section 4.3 - SubSection 4.3.1.iiiTrends of Operating Cost and Finance Cost

The combined movement of finance cost and operating cost provides a useful perspective on the microfinance sector’s evolving cost structure and sustainability. Finance cost declined substantially from the higher levels observed during 2016–19, when it ranged between 13.0% and 15.0%, to around 10.6–10.9% during 2021–23. Finance cost then increased to 11.5% in 2025 before moderating marginally to 10.9% in 2026 — a moderation that tracks closely with the RBI’s own rate actions, which cut the repo rate by 25 basis points in December 2025 and held it at 5.25% in February 2026 on the back of a softer inflation outlook. That the sector’s own cost of funds eased only marginally despite this policy support suggests transmission remains incomplete, and that funding pressures continue to matter more for some institutions than the headline number implies.

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4.3.1.iii Trends of Operating Cost and Finance Cost

The combined movement of finance cost and operating cost provides a useful perspective on the microfinance sector’s evolving cost structure and sustainability. Finance cost declined substantially from the higher levels observed during 2016–19, when it ranged between 13.0% and 15.0%, to around 10.6–10.9% during 2021–23. Finance cost then increased to 11.5% in 2025 before moderating marginally to 10.9% in 2026 — a moderation that tracks closely with the RBI’s own rate actions, which cut the repo rate by 25 basis points in December 2025 and held it at 5.25% in February 2026 on the back of a softer inflation outlook7. That the sector’s own cost of funds eased only marginally despite this policy support suggests transmission remains incomplete, and that funding pressures continue to matter more for some institutions than the headline number implies.

Operating cost followed a different trajectory. It declined sharply from around 10% in 2017–18 to 6.4% in 2021, remaining broadly contained through 2024. However, it increased to 7.09% in 2025 and further to 8.47% in 2026 — even as the broader economy grew by an estimated 7.4% and inflation stayed low, underlining that this is a cost story written inside the sector rather than one imposed from outside it. This recent rise is particularly significant when viewed alongside the workforce trends discussed earlier. Staff strength declined in 2026, but the client-to-staff ratio also fell sharply to 210, suggesting that institutions are deploying greater staff intensity per client. Higher expenditure on collection of dues, compliance, risk management, borrower engagement and portfolio monitoring may also be contributing to the increase in operating costs.

Taken together, finance and operating costs amounted to approximately 19.4% in 2026, compared with around 18.6% in 2025 and 17.8% in 2024. Thus, despite lower finance costs, rising operating costs have pushed the overall cost burden upward — and they have done so even as the RBI’s own easing cycle was working in the sector’s favour on the funding side, which means the net increase in the all-in cost ratio is, if anything, an understatement of how much operating costs alone have risen. This has important implications for the sector: with portfolio growth moderating and credit-quality pressures persisting, institutions may have less scope to absorb rising costs without affecting margins. At the same time, the higher operating intensity may support better underwriting, collections and borrower protection.

The key challenge for the sector is therefore not simply cost reduction, but achieving productivity-led efficiency, leveraging technology and scale to contain costs while preserving adequate investment in frontline staff, risk management and responsible lending. This is also the space in which the RBI’s principles-based pricing framework for microfinance loans8 operates: institutions set interest rates through a board-approved policy rather than a prescribed cap, which means cost discipline, and not regulation alone, is what will ultimately determine how much of the current cost pressure gets passed on to borrowers. The substantially lower cost ratios among the largest institutions further indicate the potential benefits of scale and funding diversification, while smaller and mid-sized institutions may face greater pressure to improve operational efficiency and access more competitive funding.

7 Reserve Bank of India, Monetary Policy Committee statements, December 2025 and February 2026 (repo rate held at 5.25% in February 2026 following a 25-bps cut in December 2025). See “India Holds Rates, Revises Up FY25/26 GDP Forecasts,” Trading Economics, 6 February 2026. https://tradingeconomics.com/india/interest-rate/news/523674
8 Reserve Bank of India, Master Direction – Reserve Bank of India (Regulatory Framework for Microfinance Loans) Directions, 2022 (effective 1 April 2022, as updated), which requires regulated entities to price microfinance loans under a board-approved policy rather than a prescribed interest-rate cap. https://rbidocs.rbi.org.in/rdocs/notification/PDFs/89MDCD45D92E34D84C2695DF6977E4298BFF.PDFnews/523674