In India, over 60 million low-income individuals rely on microfinance for their financial needs, including craftspeople, street vendors, seasonal farm workers, women‘s self-help groups, home-based tailors, small livestock owners, and micro-entrepreneurs. Recently, the Reserve Bank of India (RBI) introduced the “Three-Lender Rule,” effective from April 1, 2025, to address the issue of many borrowers taking out multiple loans, which often leads to overwhelming debt. This rule is implemented due to the sector‘s non-performing loan (NPA) ratio reached 13.2% at the end of December 2024. While the rule aims to protect from unfair lending practices, it may also push people in urgent situations to seek help from unregulated moneylenders who charge very high interest rates, leaving many caught between the need for protection and limited access to funds.
Understanding the Three-Lender Rule
The Three-Lender Rule has been created to address issues related to people borrowing from multiple sources and becoming overwhelmed with debt, especially among microfinance clients. Current data shows that about 4.5 million microborrowers, or nearly 5.3% of the total 84 million microfinance borrowers, took loans from more than three lenders as of December last year. The reason behind the new rule for the restriction of the number of lenders is the non-performing asset amount, which exceeded ₹50000 crore at the end of December 2024. This was about 13.2% of the total gross loan portfolio of ₹3.92 Lakh Crore under the microfinance category. This rule aims to help prevent borrowers from taking on too much debt and reduce the chances of them being unable to repay their loans.
Here’s how it will work:
The three-lender rule is designed to protect borrowers from falling into a cycle of debt and to promote responsible borrowing practices.
Limit on Borrowers: The rule limits the number of lenders a borrower can have to three. This means that if someone is already borrowing from three different lenders, they cannot take out any more loans.
Credit Checks: Before giving out loans, microfinance institutions (MFIs) are required to check with credit bureaus. This helps them see if a borrower is already in debt with other lenders.
Declining Applications: If a borrower is found to be indebted to three lenders, the MFIs must decline their loan application. This is to ensure that borrowers do not accumulate excessive debt.
How It Will Protect Borrowers from the Debt Trap
This regulation is mainly about protecting borrowers, and it is implemented with the thinking that it will do a good job in several ways: Currently, as of Dec 24, the NPA ratio in microfinance is 13.2% on a total gross portfolio of ₹3.92 lakh crore.
Stopping Too Much Debt: Studies show that borrowing too much can trap people in debt. By limiting how many lenders a borrower can have, this rule helps keep debt levels manageable.
Easier to Manage Payments: When someone has many loans, it can be hard to remember when payments are due and how much to pay. Fewer loans mean it’s easier for borrowers, especially those who may not understand finances well, to manage their money.
Promoting Responsible Lending: The rule requires microfinance institutions (MFIs) to carefully check if borrowers can really afford to repay loans. This leads to better lending practices overall.
As Maya, a vegetable vendor from a rural area, explains, "Before this rule, I had loans from six different companies. I couldn‘t keep track of my payments and ended up borrowing more just to pay off old loans. Now, with only three loans, I can actually see a way to become debt-free."
Finding the Balance: Potential Improvements
Rather than abandoning the rule entirely or maintaining its rigid application, several modifications could help strike a better balance.
Differentiated Approach Based on Borrower Profiles: Creating different lending limits for various borrower segments based on income stability, financial literacy, and business maturity could provide better-tailored protection.
Focus on Total Debt Burden Rather Than Number of Lenders: A policy that caps the total debt-to-income ratio might be more effective than limiting the number of lenders, allowing responsible borrowers to maintain diverse credit relationships while still preventing excessive debt.
Complementary Financial Education: Coupling the lending limit with mandatory financial literacy programs could empower borrowers to make better borrowing decisions regardless of how many lenders they engage with.
Emergency Loan Exemptions: Creating special provisions for emergency borrowing situations could help prevent desperate borrowers from turning to predatory lenders during crises.
The Three-Lender Rule highlights the perpetual challenge in financial inclusion: how to protect vulnerable borrowers without restricting the very services that enable their economic advancement. As the microfinance industry continues to evolve, regulations must balance protective guardrails with the flexibility needed for financial services to truly serve diverse borrower needs.
The goal should be creating a microfinance ecosystem where borrowers have access to sufficient credit while maintaining their financial health—not just limiting loans for the sake of limitation. By adopting a more nuanced approach to lending regulation, policymakers can better support the complex financial journeys of microfinance clients, ultimately advancing the core mission of financial inclusion.