Assam Cabinet's approval to provide an incentive to micro borrowers who are regularly paying, and overdue amounts of stressed borrowers have cleared the decks for providing relief to several lakhs of women borrowers in the state. The decision is expected to be implemented after the necessary amount is earmarked in the state budget for the current year. Besides financial implications, the decision will also have a long-term impact on credit inflow to low-income households in the state. The State government will provide Rs 25,000 to every regular borrower who has been paying regularly as an incentive to continue maintaining good credit discipline. Incentivizing the regular client of microfinance institutions is aimed at keeping the focus on the credit and repayment discipline. However, how far such a move will inspire defaulting borrowers as well as defaulting lenders to improve their credit and lending discipline will be known only after the decision is implemented. The financial burden for the state government could be around Rs 5000-6000 crore for paying incentive to regular clients. In respect of defaulting borrowers with Non-performing Assets, the state government will also pay the amount which is overdue to make them regular with institutions and their credit bureau records. The State government claims that Rs 12,500 crore of microfinance loans include loans amounting to Rs 4,000 crore given to many borrowers by lenders in violation of Reserve Bank of India norms. The State government has insisted that the microfinance lenders will have to waive such loans and the government would pay the loans that become overdue after loan waiver. Micro Finance Institution Network has hailed the State government decision as "a commendable step to provide relief to borrowers in stressed times. "Not only have measures been taken to incentivise the regular clients, but the Government has thoughtfully addressed the overdue/NPA clients as well, to make them regular. The Government's focus on maintaining credit discipline is evident through incentivising microfinance clients to maintain good repayment records," says the industry body. The Assam Assembly unanimously passed the Assam Micro Finance Institutions (Regulation of Money lending) Bill, 2020 for regulating money lending activities of the MFIs after an oversupply of loans in violation of Reserve Bank of India (RBI) guidelines led to rising defaults. Assam has around 26 lakh women borrowers who have availed credits from Non-Banking Finance Corporation and Microfinance Institutions. As no security deposit/ margin/collateral is required to be kept by the borrower with the NBFC-MFI, it gives them easy access to credit as they cannot avail of bank loan which requires collaterals. Such easy access to collateral-free credit also prevents them from being exploited by local moneylenders. However, the oversupply of loans triggered the crisis as most of the borrowers belonging to low-income households could not repay after being adversely affected by pandemic shocks in the economic sectors. Exorbitant interest rates and coercive recovery by some lenders made the life of many borrowers miserable and demand for a halt to microfinance lending and waiving of the loans in the state gained ground. A blanket waiving of the defaulting loan will not only affect the credit scores of the borrowers but will also discourage advancing microfinance credit to needy households. When online classes have become the only mode of education for the past one year after the schools were shut due to the COVID-19 pandemic, buying a smartphone has become a necessity, not a luxury. Many borrowers have spent the loan in buying a smartphone or other digital device which has become indispensable for attending online classes by their children. Thus, the utility of microcredits availed by many borrowers turned out to be loan for household consumption and not for income generation. Loss of livelihood due to a pandemic, inability to get remunerative prices for agricultural produce left many borrowers without any money in hand to repay the loans. MFIN states that traditionally, Assam has been one of the best states on portfolio quality and was the third-best state as of September 2019. The crisis started due to multiple lending and non-payment followed by COVID-19 lockdown and moratorium on loan repayment. The State government will have to ensure that borrowers stay protected from the greedy lenders and they take only that amount as a loan which they can repay. This will require imparting financial literacy to borrowers so that they first think of utilizing the credit for regular income generation to be regular in repaying the loan and interest due. Regular repayment will instil confidence among the borrowers to gradually expand their income-generating activities to avail of the bigger loan. The challenge before the State government is to make defaulting borrowers realize that microfinance is a useful banking service extended to unemployed and low-income households to avail of collateral-free credits when it is difficult for them to get loans from banks without any mortgage or collateral.