MFIs see funding fall over 50% in FY25 to Rs 58K crore, seek support line

The industry's fund crunch comes over lenders' fears of asset quality, repayment, and over-leverage, which ties in to the Reserve Bank of India's push for responsible lending

Microfinance institutions (MFIs) saw their funding crash by more than half in the financial year ended March 2025, declining to Rs 58,109 crore, which works out to a fall of 55.40 per cent year-on-year (Y-o-Y).

 

MFIs typically receive funding lines from banks, non-banking financial institutions, Small Industries Development Bank of India, and the National Bank for Agriculture and Rural Development; they also raise funds through bonds.

 

“Confidence levels of lenders to MFIs have gone down in recent times over fears on asset quality, and concerns of over-leverage and relatively poor collections," an industry official said.

 

MFIs are now seeking a support line akin to the Rs 7,500 crore Credit Guarantee Scheme announced for them during the Covid-19 pandemic.

 

The industry’s gross loan book fell to Rs 3.59 lakh crore in June 2025, down 5.8 per cent quarter-on-quarter and 17 per cent Y-o-Y, in sync with the Reserve bank of India’s (RBI)’s push for responsible lending, alongside guardrails from self-regulatory organisations (SROs) to curb overleveraging.

 

In June this year, Crisil Ratings noted that collections - recoveries from borrowers - have stabilised at 98-99 per cent, along with some reduction in fresh slippages. But around 14 per cent of assets under management (AUM) as on June 30, 2025, remains extended to borrowers transacting with more than three microfinance lenders. While this is a reduction from 23 per cent of AUM as of December 31, 2024, the portfolio remains vulnerable to slippages, especially after the Guardrail 2.0 regime limited fresh loans from more lenders to such borrowers.

 

Furthermore, the impact of ordinances in Karnataka and Tamil Nadu on MFIs will be key to how portfolio quality evolves in the states. The Karnataka Micro Loan and Small Loan (Prevention of Coercive Actions) Ordinance (2025) in February affected collections. The ordinance had excluded RBI-regulated entities in the microfinance business - be they MFIs or banks - but confusion continued within the state administration and customers regarding its scope. The Tamil Nadu Money Lending Entities (Prevention of Coercive Actions) Bill (2025) passed in April to protect vulnerable groups from aggressive tactics used by money-lending firms has also affected MFIs' field collections.