Microfinance institutions (MFIs) serve as vital conduits for financial inclusion among low-income populations, particularly in emerging economies like India, where they extend credit, savings, and insurance to millions excluded from formal banking. Microfinance institutions (MFIs) play a crucial role in promoting financial inclusion, particularly for low-income borrowers in emerging economies like India. This study examines the antecedents of borrower self-sufficiency—such as access to credit, social capital, loan monitoring, income diversification, regulatory compliance, and digital financial services adoption—and their impact on MFI sustainability, measured by financial indicators like return on assets (ROA), loan loss rate, and portfolio at risk. The long-term viability of these institutions increasingly depends on fostering borrower self-sufficiency, defined as the capacity of clients to generate sustainable livelihoods, repay loans without external aid, and transition out of dependency cycles. This study delves into the antecedents of borrower self-sufficiency such as financial literacy, access to training, entrepreneurial skills, and group lending dynamics and rigorously examines their cascading impact on key MFI sustainability metrics, including operational self-sufficiency (OSS) and financial self-sufficiency (FSS). Employing a mixed-methods framework with primary data from 400 borrowers across 10 MFIs in Tamil Nadu, structural equation modeling (SEM) uncovers robust relationships: financial literacy emerges as the strongest predictor with a standardized beta of 0.42 (p < 0.01), correlating with a 25% reduction in default rates and an 18% uplift in OSS. Training programs and entrepreneurial skills follow closely, while group dynamics reinforce repayment discipline through social collateral (beta = 0.22, p < 0.05). A novel contribution is the development of a “borrower self-sufficiency index,” integrating income stability, repayment autonomy, and skill proficiency, which offers MFIs a practical diagnostic tool absent in prior literature. These findings not only bridge theoretical gaps by linking micro-level borrower behaviours to macro-institutional outcomes but also provide actionable policy recommendations for regulators and practitioners aiming to scale sustainable microfinance amid digital disruptions and regulatory scrutiny.