India is one of the fastest developing countries in the world, yet unemployment and poverty run deeply all over the country. In addition, the Northeastern States of India is considered the most economically backward region of the country, which lack basic banking outreach with low investment prospect. Likewise, despite the rich natural resources and diverse socio-culture, Arunachal Pradesh has failed to grow on par with the other states of the country in terms of education, infrastructure, financial services, and other overall development. The present study attempts to analyze the challenges and issues of microfinance in Arunachal Pradesh and examine the existing scenario of microfinance in the state. The study focuses on the various problems faced by poor individuals and the authorities, which restrict the growth of the microfinance sector. The paper concludes that, despite the slow growth it is an undeniable fact that microfinance has been acknowledged as an effective measure to overcome poverty and attain balanced regional development. Further, the government can add a new dimension to the fight against underdevelopment in rural Arunachal Pradesh by implementing adequate measures to overcome several challenges.