MFIs recalibrate growth strategy, expand non-microfinance portfolios

Large microfinance institutions are diversifying into retail and MSME lending as regulatory changes and recent sector stress reshape growth strategies

Large micro-finance institutions (MFIs) are recalibrating their growth strategies by diversifying into non-microfinance portfolios, backed by regulatory relaxations and lessons from the recent credit cycle stress, according to industry experts.

 

"MFIs are increasingly looking to diversify beyond traditional micro-finance lending due to a combination of favourable regulatory changes and recent stress in the micro-finance sector. Earlier, regulations required around 75 per cent of an MFI's assets to remain in micro-finance, but the relaxation of these norms now gives institutions greater flexibility to offer other loan products to their existing borrower base”, said A M Karthik, senior vice president and co-group head, financial sector ratings, Icra. 

 

The recent over-leveraging concerns and crisis in the micro-finance sector also pushed lenders to reduce concentration risk and diversify their portfolios, he added.

 

Jinay Gala, director, India Ratings and Research added that MFIs are not exiting the joint lending group (JLG) business but they are gradually increasing exposure to non-JLG business against the backdrop of the recent microfinance crisis. Excessive concentration in unsecured group loans led to asset quality stress, funding constraints, and liquidity challenges, especially for smaller NBFC-MFIs. 

 

“The recent RBI regulations allowing up to 40 per cent of the loan book to be non-MFI, encourage lenders to diversify into individual and secured lending products to manage cyclicality and reduce concentration risk,” Gala said. 

 

Non-banking finance company Satin Creditcare is targeting group assets under management (AUM) of ₹32,000 crore by 2030, with non-MFI businesses contributing 30 per cent, up from the current 17 per cent share.

 

"We set out several years ago to build not just a microfinance company, but a diversified rural financial services platform. Today, 17 per cent of our consolidated AUM comes from non-MFI businesses. Our target is 30 per cent by 2030," said H P Singh, chairman and managing director (MD), Satin Creditcare Network, on an analyst call.

 

MFI lender CreditAccess Grameen expects overall AUM growth of 20-25 per cent in 2026-27 (FY27).  Around 6-8 per cent of borrowers in the segment could graduate to the retail segment while the core group loan book may grow at 10-12 per cent.

 

"It's not that the MFI as a segment will grow at a slower pace. Overall, we will see that despite 6-8 per cent customers moving out of MFI into retail, MFI will grow at 10-12 per cent. For the former category, we will take at least 2x to 3x exposure compared to MFI. That gives us the balance 10-12 per cent growth… where, overall, we fit it in 20-25 per cent range," said Nilesh Dalvi, chief financial officer, CreditAccess Grameen, on the post-earnings analysts’ call.

 

Fusion Finance, meanwhile, is scaling its secured micro, small and medium enterprises (MSME) portfolio from a monthly run-rate of ₹45 crore-47 crore. It expects the segment to account for 15 per cent of its ₹10,000 crore AUM target by FY27.

 

"While MFI has kind of stabilised, now, we are working towards stronger profitability. There is a lot of work that we need to do on the MSME (front)," said Sanjay Garyali, managing director and CEO, Fusion Finance.

 

Self-regulatory organisations (SROs) and the Reserve Bank of India (RBI) have tightened lending norms in response to stress seen by the MFI sector on account of over-leveraging and asset quality deterioration.  These include a three-lender cap and a ₹2 lakh household debt ceiling — to weed out high-risk overlapping accounts. As conditions stabilise, lenders are pivoting toward non-MFI and individual lending.