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Microfinance Institutions (MFIs) play a pivotal role in promoting financial inclusion, particularly among marginalized and low-income populations in India. They provide access to small loans, savings, insurance, and other financial services to individuals who are traditionally excluded from the formal banking sector. This access is crucial for women, as they are often the primary beneficiaries of microfinance programs and are central to household financial management. Women’s participation in microfinance can enhance their agency, improve family welfare, and promote gender equality. However, despite their benefits, MFIs operate in a sector that is highly vulnerable to risks of over-indebtedness, exploitation, and financial mismanagement, which makes regulation essential to safeguard both borrowers and the stability of the financial system. The need to regulate MFIs in India arises primarily from concerns related to borrower protection. Many MFI clients are low-income women with limited financial literacy. While microcredit can empower them economically, it also exposes them to risks of over-borrowing and repayment pressures, particularly if lending practices are aggressive or opaque. Cases of coercive recovery methods have been reported in some regions, where clients face undue pressure from MFI staff, leading to distress and, in extreme cases, social crises. By establishing regulatory frameworks, the government can ensure that MFIs adhere to ethical lending practices, transparent interest rates, and responsible recovery methods. Regulation can protect women borrowers from exploitation, ensuring that microfinance truly serves as a tool for empowerment rather than a source of debt trap. Financial stability is another crucial reason for regulating MFIs. The rapid growth of the microfinance sector in India has been accompanied by concerns about systemic risk. MFIs mobilize funds from both borrowers _____ _____ __________ ____ ________ _____ ____.
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