NBFC-MFIs' bad loans seen falling to 3.6% by March 2026: CareEdge

The decline in bad loans will be driven by write-offs and tighter lending norms, though credit costs are expected to remain elevated in FY26, says CareEdge Ratings

The gross non-performing assets (NPAs) of non-banking financial companies (NBFCs) working as microfinance institutions (MFIs) is expected to decline to 3.6 per cent by March 2026, from 5.4 per cent a year ago, largely on account of incremental writeoffs, according to rating agency CareEdge.

 

While the microfinance sector remains a critical component of financial inclusion, it has faced headwinds that are impacting its growth, asset quality, and profitability. In terms of asset quality, overall stress for MFIs is expected at 30 per cent of its March 2024 loan book by the end of FY26.

 

In a statement, CareEdge Ratings said it expected the credit costs to remain elevated in FY26 as well, although it should be lower than the credit cost witnessed by MFIs in FY25. The rising stress on the book made NBFC-MFIs to tighten lending standards and go slow on loan disbursals.

 

 

Their assets under management (AUM) declined by 19 per cent year-on-year (Y-o-Y) to ₹1.4 trillion by the end of June 2025. This downturn was due to multiple structural issues, including borrower overleveraging and the implementation of MFIN guardrails, which require further tightening of lending norms, in turn increasing rejection rates and slowing disbursements.

 

The growth for MFIs is expected to remain moderate at 4 per cent Y-o-Y for the current financial year ending March 2026, said CareEdge Ratings.

 

As for raising resources, while MFIs did not raise any substantial capital in FY25, their gearing declined to 3.2 times as of March 31, from 3.6 times as on March 31, 2024, despite the losses because of a higher decline in their scale and borrowings. During Q1FY26, capital raised by some of the MFIs has helped them reduce the gearing further, it added.