India’s microfinance sector has entered a phase of strategic contraction, with the gross loan portfolio (GLP) falling to Rs 3.59 lakh crore as of June 2025, marking a 5.8% quarter-on-quarter and 17% year-on-year decline. This recalibration reflects a deliberate shift by lenders toward responsible credit practices, reduced borrower overleveraging, and improved portfolio quality—amid persistent stress in late-stage delinquencies.
Key Developments at a Glance
Gross loan portfolio declined to Rs 3.59 lakh crore in June 2025 from Rs 4.43 lakh crore in March 2024.
Active loan accounts fell to 13.2 crore from 15.93 crore a year ago.
Live customer base dropped to 8 crore from 8.66 crore.
Disbursements in Q1 FY26 fell 28.2% year-on-year to Rs 57,127 crore.
Loans above Rs 1 lakh rose to 8.3% of portfolio, up from 4.6% a year ago.
Portfolio Contraction: A Strategic Retreat
The sector’s GLP peaked at Rs 4.43 lakh crore in March 2024 before entering a sustained decline. This contraction is not merely cyclical—it reflects a conscious pivot by lenders toward quality over quantity.
Lenders are curbing exposure to high-risk borrowers and tightening underwriting norms.
Borrowers with four or more lender associations dropped to 10% in June 2025, from 19.2% a year earlier.
Around 60% of loans issued in the past year were to existing customers with strong repayment histories.
Disbursement Trends: Caution Over Expansion
Loan originations have slowed sharply, with both value and volume declining across lender categories.
Disbursal volume in Q1 FY26 fell 37.5% year-on-year to 101.9 lakh loans.
NBFC-MFIs and banks, which together accounted for 75% of disbursal value, saw steep declines:
NBFC-MFIs: –21.3% QoQ, –23.1% YoY
Banks: –26.9% QoQ, –33.6% YoY
NBFCs showed relative resilience with only a 2.1% QoQ drop.
Portfolio Quality: Green Shoots Amid Stress
While early-stage delinquencies have improved, late-stage stress remains elevated.
PAR 31–90 (days past due) improved to 2.4% in June 2025 from 3.1% in December 2024.
PAR 1–180 dropped to 7.06%, down from 8.2% in December 2024.
However, PAR 180+ (including write-offs) surged to 12.4%, up from 5.3% a year ago.
Loans with vintage over 24 months now account for 80% of the Rs 1 lakh+ ticket size segment.
Sectoral Implications: Liquidity, Discipline, and Resilience
Liquidity Challenges
Bank funding to NBFC-MFIs has slowed, constraining disbursal capacity.
Liquidity remains a key determinant of recovery and future growth.
Operational Discipline
Improved field-level collection efficiency and borrower screening are stabilizing repayment behavior.
Self-regulatory guardrails adopted by lenders are curbing overlending and enhancing transparency.
Borrower Resilience
Despite contraction, the sector continues to reflect the resilience of its customer base.
Responsible lending is fostering long-term sustainability over short-term expansion.
Outlook: Stabilization Over Acceleration
The microfinance industry is undergoing a structural reset. While growth has slowed, the sector is showing signs of stabilization through disciplined lending and improved portfolio hygiene. The next few quarters will be critical in determining whether these green shoots translate into sustained recovery.
Analysts expect cautious growth in H2 FY26, contingent on liquidity support and rural demand revival.
Regulatory clarity and continued emphasis on borrower protection will shape the sector’s trajectory.
Source: Economic Times, Financial Express
