Biz growth, drop in delinquencies help micro lenders turn the corner

India's microfinance sector recorded its first sequential portfolio expansion in seven quarters, while asset quality improved and disbursements reached a seven-quarter high

India's microfinance sector could emerge from a prolonged downturn, as loan portfolio expanded for the first time in seven quarters and asset quality improving to pre-March 2024 levels, according to the latest quarterly report by Microfinance Institutions Network (MFIN).

 

The industry's gross loan portfolio grew more than 3 per cent sequentially during the January-March quarter of financial year 2026 (FY26) to ₹3.25 trillion, ending a seven-quarter stretch of contraction. At the same time, Portfolio at Risk (PAR) for 31-180 days declined sharply to 2 per cent from 6.3 per cent a year ago. Quarterly disbursements rose to ₹77,524 crore, the highest level in the last seven quarters.

 

Credit quality improved significantly during the quarter. PAR for 31-90 days declined to 0.8 per cent as of March-end, while PAR for 91-180 days stood at 1.2 per cent.

 

"We can now say that despite the tough two years, industry is turning the corner as evidenced by uptick in portfolio and continued improvement in Portfolio at Risk – PAR 31-180 declining to 2.0 per cent as of March 2026 compared to 6.3 per cent a year ago," said Alok Misra, chief executive officer and director of MFIN.

 

He attributed part of the recovery to industry-wide efforts under MFIN's guardrails framework, and welcomed the government's decision to extend the Credit Guarantee Scheme for Micro Finance Institutions (CGSMFI) 2.0 until August.

 

"A significant policy development which will further strengthen this recovery is the CGSMFI 2.0 scheme of Government of India. Recent extension of the scheme till August 2026 will allow sufficient time for utilisation," Misra said. He also called on banks to increase their support to the sector.

 

The report showed that NBFC-MFIs continued to dominate the sector, accounting for 44.2 per cent of the industry's outstanding portfolio, followed by banks with a 32.7 per cent share. Small finance banks and other non-banking financial companies (NBFCs) made up the remainder.

 

Despite the improving operational metrics, funding conditions remained challenging, particularly for smaller microfinance institutions. According to MFIN, all-India financial institutions largely stayed away from smaller players during the year, leaving banks, NBFCs and external commercial borrowings as the primary funding sources.

 

On a year-on-year basis, outstanding portfolios declined across lender categories. Banks recorded the sharpest decline at 30 per cent, while NBFC-MFIs reported a relatively modest decline of 2.7 per cent.

 

Regionally, the eastern region remained the largest microfinance market, accounting for 36.6 per cent of the industry's portfolio. Bihar, Uttar Pradesh and Tamil Nadu were the three largest states by portfolio size, while the top 10 states together accounted for nearly 80 per cent of the total portfolio.

 

While the recovery appears to be gaining traction, Misra cautioned that risks remain. "While these positive factors augur well for the sector in 2026-27, MFIN has also advised the players to keep in consideration the likely impact of lesser than average monsoon prediction and West Asia conflict, as these may affect rural livelihoods," he said.