Microfinance institutions remain in pain even as green shoots appear

Microfinance portfolios fall for the sixth straight quarter despite improved asset quality, as credit access tightens

Microfinance institutions (MFIs) are in a spot of bother: A continuous shrinking of their loan book and liquidity support from lenders. The fallout: The sixth consecutive quarterly decline in their portfolio to ₹1.31 trillion as of September 2025, from ₹1.6 trillion in March 2024 with about half a million customers getting pushed out of the ambit of these entities, according to data provided by Microfinance Institutions 

Network (MFIN). 

The situation is similar for the microfinance sector level across banks and small finance banks (SFBs). 

“It is ironic as the portfolio-at-risk (31-90 days past due) has improved to 1.09 per cent and 98 per cent of clients are within the guardrails, showcasing disciplined underwriting in the sector,” laments Alok Misra, chief executive officer (CEO) and director, MFIN. 

According to Jiji Mammen, executive director and CEO of Sa-Dhan, MFIs are now in a much better position and many of the issues plaguing the sector in recent times have been addressed. “As a result, over-leverage and lending concerns have been corrected to a great extent and are no longer a major issue,” he says. His point: Lenders to MFIs should consider this aspect. 

As India Ratings and Research (Ind-Ra) sees it, the implementation of new MFI guardrails restricting borrowers to a maximum of three lenders has begun to reduce over-indebtedness risk. The share of MFI portfolios with exposure to more than four lenders declined to 10 per cent in June 2025 (from 19.2 per cent in June 2024), while accounts with more than three lenders fell to 24.8 per cent (34.7 per cent). This trend reflects a strong regulatory push towards borrower protection, aimed at improving portfolio quality and mitigating systemic risk in the sector, Ind-Ra said. 

CareEdge held that early signs of improvement are visible, whereby gross non-performing levels declined to 3.7 per cent in September 2025, down by 100 basis points from March 2025, aided by write-offs and cautious lending. “However, profitability remains under pressure due to elevated credit costs, interest reversals, and higher operating expenses,” it said. 

A senior risk-management executive with an MFI pointed out that besides doors being shut on genuine clients, some borrowers in joint liability groups who have the ability to repay are also holding back in honouring their commitments. This is due to fears that MFIs may not give a fresh loan after repayment. This raises the risk of an uptick in stressed loans, though it may not be substantial. 

The worst may not be over. With state elections next year — when political parties typically throw fiscal caution to the winds while promising freebies — MFIs fear their impact on credit discipline and have raised the issue of loan waivers with Mint Road and North Block. Assam, Kerala, Tamil Nadu and West Bengal go to polls in 2026. 

Again, it is not just MFIs, but banks — both universal and SFBs (which fund MFIs and also directly give microfinance loans) — which have turned cautious. They have turned away many eligible borrowers to protect their asset quality profile. So, the tally of people pushed out from the ambit of MFIs (and formal finance) may be bigger than the five million put by MFIN. 

Articulating the stand as a lender to NBFC-MFIs, C S Setty, chairman of State Bank of India, told Business Standard: “We have never shied away from lending to NBFCs. We are the 

largest lenders to NBFCs. And incidentally, the largest portfolio for single sector exposure is NBFCs. We have never denied credit to an MFI which 

is deserving.” 

Matters could improve if the Reserve Bank of India (RBI) were to give Section 8 companies, or not-for-profit entities, involved in microfinance access to credit information companies (CIC). Under the CIC (Regulation) Act (2005), only RBI-regulated entities are allowed to hook into credit bureaus — that is sharing data with and accessing it from them. 

MFIs not only feel there has been an improvement in the business, but hope of a change in approach given that a credit guarantee scheme (the demand is for ₹20,000 crore) for the sector is in the works. While the scheme may indeed be helpful, Misra is sceptical of it becoming operational in the near term, given the Finance Ministry’s preoccupation with the Budget-making exercise for FY27.