Microfinance portfolio drops 17% in Q2; 5 million borrowers exit credit

India's microfinance sector saw its sixth straight quarterly decline in gross loan portfolio in Q2 FY26, with sustained funding squeeze pushing nearly 5 million borrowers out of formal credit systems

Microfinance lenders had a gross loan portfolio (GLP) of Rs 3.39 trillion in the second quarter of the financial year (Q2 FY26), dropping 17 per cent from the previous year, said a report.

 

The funding squeeze has led to the sixth consecutive quarterly fall in GLP and almost 5 million borrowers exiting formal credit. Microfinance lenders had a GLP of Rs 4.08 trillion in Q2 FY25, according to the report by the Microfinance Industry Network (MFIN).

 

Sequentially, GLP was down almost 4 per cent from Rs 3.53 trillion in Q1 FY26.

 

NBFC-MFIs are the largest lenders in microfinance, having a share of 39.2 per cent. They are followed by banks at 31.4 per cent share, small finance banks and non-banking financial companies comprise the remaining share.

 

“Continued funding squeeze has resulted in the sixth consecutive quarter fall in the microfinance portfolio to Rs 3.39 trillion,” said Alok Misra, chief executive officer and director of MFIN.

 

“This has resulted in nearly 5 million clients going out of formal finance. It is ironic as portfolio at risk (31-90 days) has improved to 1.09 per cent and 98 per cent of clients are within MFIN guardrails, showcasing disciplined underwriting in the sector. One thing the sector needs to ensure is that the financial inclusion gains built over decades does not wither away is liquidity,” he said.

 

NBFC-MFIs had outstanding borrowings of Rs 95,724 crore as on September 30, 2025. Banks contributed 62.5 per cent of the borrowings, followed by 12.8 per cent from external commercial banks and 11.3 per cent came from non-bank entities. A further 7.2 per cent and 6.2 per cent came from other sources.

 

The overall portfolio at risk (PAR) 31–180 days in Q2 FY26 improved to 4.1 per cent from 4.2 per cent in the same time last year.

 

According to the PAR bucket details, the 31–60 days PAR was down to 0.9 per cent from 1.1 per cent in Q1 FY26 and from 1.3 per cent in Q2 FY25. The 61–90 days PAR was down to 1 per cent from 1.4 per cent in Q1 FY26 and 1.2 per cent in Q2 FY25.

 

The 91–180 days PAR was up at 2.8 per cent from 1.9 per cent in the July–September quarter of FY25 (Q2 FY25) and down from 3.2 per cent in the April–June quarter of FY25 (Q1 FY25).

 

Meanwhile, the PAR >180 days was up at 16.2 per cent from 13.6 per cent in Q1 FY26 and 8.5 per cent in Q2 FY25.

 

The microfinance industry disbursed Rs 59,974 crore in loans in Q2 FY26, down 12.30 per cent from Rs 68,387 crore in Q2 FY25.