MFI credit cost to moderate to 4-4.5% in FY26, 3-3.5% in FY27: ICRA

ICRA expects MFI credit cost to fall after surging in FY25, easing to 4-4.5% in FY26 and 3-3.5% in FY27, with AUM growth seen resuming at 8-12% as RBI relaxes norms

After a surge in FY25, the credit cost of microfinance institutions (MFIs) is expected to moderate from 7.2 per cent in Q1FY26 to 4-4.5 per cent in FY26 and further to 3-3.5 per cent in FY27. 

 

Credit costs — money set aside for stressed loans — had shot up to 6.9 per cent in FY25 from 2.3 per cent in FY24. This is due to an increase in provisions and write-offs of bad loans, according to rating agency Icra.

 

Icra in its report on 22 non-banking financial companies acting as MFIs (NBFC-MFI) said the elevated credit costs due to asset quality pressures, adversely impacted earnings, with NBFC-MFIs reporting losses in Fy25. The credit costs further escalated in the quarter ended June 2025 (Q1FY26).

 

Referring to profitability of NBFC-MFIs, Icra said the downward revision in lending rates amid regulatory concerns and rising funding costs, compressed net interest margins (NIMs) in FY25.

 

The sector is facing challenges stemming from borrower overleveraging, socio-political disruptions and operational challenges, which are largely related to employee attrition, it added.

 

Lenders remain cautious in extending credit to the sector, owing to the ongoing asset quality concerns and regulatory actions.

 

Further, the increase in borrower rejection rates resulted in subdued disbursements.

 

The assets under management of NBFC-MFIs had shrunk by 12 per cent year-on-year (Y-o-Y) in FY25 and 17 per cent Y-o-Y in Q1 FY26 amid operational challenges and asset quality concerns. The AUM had expanded by 36 per cent in FY23 and 27 per cent in FY24.

 

The Reserve Bank of India (RBI) has relaxed the qualifying asset criteria. NBFC-MFIs are now required to maintain qualifying assets of a minimum 60 per cent of the total assets over the earlier requirement of 75 per cent.

 

This is expected to improve their loan diversity, augment credit risk profile, and enable them to meet other credit requirements of their end borrowers. The NBFC-MFIs’ AUM growth will resume in FY26 and reach 8-12 per cent, Icra added.