Banks' microfinance share falls as NBFC-MFIs drive sector recovery: MFIN

Banks' microfinance portfolio fell 28.5 per cent year-on-year as loan reclassification weighed on reported numbers, while NBFC-MFIs expanded their portfolio

Banks’ share in India’s microfinance portfolio has fallen sharply as lenders shift loans from the microfinance category to retail portfolios, while NBFC-MFIs are driving a recovery in the sector, according to Micrometer, a report by the Microfinance Institutions Network (MFIN).

 

Banks’ microfinance portfolio fell 28.5 per cent year-on-year to Rs 83,080 crore as of June 30, 2026, taking their share of the overall microfinance portfolio to around 25 per cent. A year earlier, banks accounted for about 33 per cent of the industry’s portfolio. MFIN said the decline was “accentuated by reclassification of MFI loans as retail loans”.

 In contrast, NBFC-MFIs increased their portfolio by 5.2 per cent to Rs 1.46 trillion during the same period, raising their share of the microfinance universe to 44 per cent from around 39 per cent a year earlier. Small finance banks’ portfolio declined 6.1 per cent, while NBFCs recorded 2.7 per cent growth.

  

The overall microfinance portfolio, however, remained lower year-on-year at Rs 3.29 trillion as of June 30, compared with Rs 3.53 trillion a year earlier. The contraction in the industry portfolio therefore reflects, in part, the movement of loans out of the reported microfinance category rather than a broad-based decline in fresh lending.

 

“The industry has sustained the growth momentum seen in the last quarter, marking a turnaround after seven consecutive quarters of slowdown. Growth has been driven primarily by NBFC-MFIs and higher loan sizes, reflecting a degree of consolidation around existing borrowers,” MFIN CEO and Director Alok Misra said.

 

Misra said the reported growth in the gross loan portfolio (GLP) would have been stronger but for the reclassification of loans.

 

“While the GLP has inched up, the increase would have been much higher but for the shifting of loans from microfinance bureau to retail bureaus,” he said. “As the regulation is clear that all unsecured loans extended to households below annual household income of 3 lakh are microfinance, the issue has been taken up with the RBI.”

 NBFC-MFIs disbursed Rs 29,820 crore during the first quarter of 2026-27, 43.1 per cent higher than a year earlier. The number of loans disbursed rose 25.4 per cent to 48.3 lakh, while the average loan size increased 14.1 per cent to Rs 61,774.

 

The recovery is also accompanied by a consolidation in the borrower base. NBFC-MFI clients declined 11.3 per cent year-on-year to 3.1 crore, while loan accounts fell 10.5 per cent. At the same time, average loan outstanding per account increased 27.8 per cent to Rs 37,584. MFIN said its client numbers are not unique and include overlaps between lenders.

 

The improvement in portfolio quality has been another key feature of the turnaround. NBFC-MFIs’ portfolio at risk (PAR) of 31-180 days fell to 1.5 per cent as of June 30 from 5.3 per cent a year earlier. For banks, the ratio declined to 1.8 per cent from 5.4 per cent, while small finance banks saw it fall to 1.5 per cent from 6.3 per cent.

 

“Along with the guardrails, this has contributed to the significant improvement in portfolio quality, as a larger share of lending is going to borrowers with an established credit history in the formal system,” Misra said.

 

Funding to NBFC-MFIs has also strengthened significantly. They received Rs 21,407 crore in debt funding during the first quarter, up 91.4 per cent year-on-year. Banks provided 80.4 per cent of the fresh funding. Outstanding borrowings stood at Rs 1.05 trillion as of June-end, with banks accounting for 64.8 per cent.

 

Misra attributed part of the improvement in portfolio quality to favourable monsoon conditions. “Portfolio health has also benefited from a better-than-anticipated monsoon,” he said, adding that barring Rajasthan, none of the top 10 states had seen a deterioration in the monsoon outlook since June.

 

“This has supported local economic activity and, at present, a slowdown in demand does not appear to be a concern,” Misra said.

 

He also called for a review of the Rs 3 lakh annual household income threshold for classification as a microfinance borrower, saying incomes, wages and prices had risen materially since the threshold was last revised in 2022.