MFIs to seek higher household income threshold for microfinance borrowers

To widen borrower eligibility, the microfinance industry wants the household income threshold increased to Rs 300,000 per annum to adjust for inflation in the past five years since it was last hiked.

Micro-finance institutions (MFIs) are likely to approach the Reserve Bank of India to bat for a hike in the qualifying threshold for household income from Rs 300,000 per annum to Rs 450,000. The current threshold was fixed five years ago, and the industry wants this adjusted for inflation to widen the scope of eligible borrowers.

 

Jiji Mammen, executive director and chief executive officer of Sa-Dhan, the self-regulatory organisation (SRO) for MFIs, confirmed that the issue of a review in the qualifying threshold may be taken up, but added that it may also be necessary to consider it on a geographical basis given that in many areas, households may be earning more than the current threshold, but still need MFI loans.

 

“We may have entered an early phase of recovery following an extended period of correction. Better-funding support, higher disbursements, and improved asset quality across early delinquency buckets, strengthening borrower discipline, and improving institutional profitability collectively point towards improving sector fundamentals,” he said.

 

Another key issue that may feature in the talks with the banking regulator is that of the merchant discount rate (MDR) on MFIs when customers repay loans via the Unified Payments Interface (UPI). Starting October 15, 2026, a 0.4 per cent MDR is to be levied on person-to-merchant UPI transactions above ₹2,000.

 

According to Sa-dhan’s Quarterly Microfinance Report for Q1FY27, the overall MFI portfolio contracted by 7.6 per cent year-on-year (Y-o-Y) to ₹3.26 trillion as of June 2026. The average ticket size for fresh originations during this period rose 15 per cent to ₹62,962; the average outstanding per borrower was up 8.7 per cent to ₹49,825, while loan outstanding per account rose 15 per cent to ₹32,403.

 

That said, MFI funding for Q1FY27 totalled ₹17,706 crore, heavily skewed toward very large (66 per cent) and large (26 per cent) entities, while smaller entities continued to get a lower share of funding, with a less than two per cent share in the total funding received. Funding was anchored by private banks (₹9,940 crore or 56 per cent), with the remainder split across other sources (₹2,539 crore), state-run banks (₹1,583 crore), non-banking financial companies (₹1,061 crore), debt markets (₹1,842 crore), and specialised institutions (₹421 crore). The Credit Guarantee Scheme for Microfinance Institutions 2.0 operated during this period and gave a push to funding availability in the sector.

 

Early and mid-stage delinquencies in the 30-89 days-past due (dpd) improved by 160 basis points (bps) Y-o-Y to 0.8 per cent, while those in the 90–179 dpd segment improved by 260 bps Y-o-Y to 1.1 per cent. However, accumulation in legacy defaults in the 180-dpd deteriorated by 440 bps to 17.4 per cent, indicating that while new originations are performing significantly better, older defaulted loans remain uncollected on balance sheets, requiring formal resolution or write-offs.

 

"The reduction in the microfinance customer numbers presents a good opportunity for lenders to grow given the positive developments on KYC and a quality 360-degree credit bureau data," noted Manoj Kumar Nambiar, managing director (MD) of Arohan Financial Services, and chairperson of the Governing Board of Trustees at Association of Microfinance Institutions, West Bengal.

 

According to Equifax India MD Wilfred Sigler, “The microfinance industry seems to be going through an important phase of recalibration, where growth is increasingly being balanced with the quality and sustainability of the portfolio.” The decline in delinquency, coupled with the continued shift towards higher ticket sizes, indicates that lenders are becoming more selective in how they deploy capital and assess borrower capacity, he pointed out.

 

“While the contraction in portfolio outstanding reflects a cautious credit environment, the resilience in disbursement value suggests that demand remains present," Sigler said. "Going forward, data-driven underwriting, responsible borrower-level exposure and continued focus on portfolio quality will be critical to supporting sustainable growth in the sector.”

 

The latest National Bank for Agriculture and Rural Development's (Nabard's) rural economic survey flags a drop in the share of households relying only on formal sources of credit to 51.2 per cent in March 2026 from a peak of 58.3 per cent in November 2025. This is partly attributed to stress in the sector. Over this period, there has been greater dependence on informal sources, primarily friends and family. Taken together — a flight to safety, anecdotal carpet-bombing of the same set of customers, and banks' reluctance to lend to smaller MFIs — this may accentuate the drop in the share of households relying only on formal sources, as highlighted in the Nabard survey.