The Indian microfinance sector has experienced a significant decline in its loan portfolio, reaching its lowest point in four years at ₹3.40 lakh crore as of November 2024. This contraction is a result of lenders’ deliberate efforts to minimize asset quality risks, which has led to a decrease in overall loans despite increased disbursals. The sector’s decline, which began in April 2024, reflects the cautious approach of financial institutions operating in this segment.
Despite the downturn, there are signs of an emerging recovery. Some small finance banks, such as ESAF, Equitas, and Ujjivan, have reported sequential growth in their micro loan portfolios in the December quarter, breaking a period of stagnation. CreditAccess Grameen, the largest NBFC-MFI, also saw an increase in its gross loan portfolio. Additionally, Federal Bank’s managing director noted that slippages peaked in May and have declined monthly since then, indicating improving asset quality.
However, the sector still faces challenges, particularly among small and mid-sized NBFC-MFIs, which struggle with access to funding. Larger players, on the other hand, have more stable funding positions, enabling them to plan for disbursement increases in the next fiscal year. India Ratings & Research has upgraded the sector’s outlook to neutral from deteriorating, projecting a stable rating for FY27. The agency believes that the sector has largely navigated the significant headwinds faced in FY25-FY26, with borrower overleverage and asset quality concerns diminishing.
Looking ahead, the sector is expected to focus on individual and non-MFI loans, as well as scaling up credit-guarantee backed disbursements to bolster risk buffers. This sets the stage for a recovery year in FY27, with lenders expected to adopt more aggressive growth strategies. Overall, while the Indian microfinance sector is still facing challenges, there are indications of a potential turnaround, driven by improving asset quality and a more stable funding environment. A broad-based sector recovery is anticipated from March 2026, with larger players leading the way.