Industry players said that apart from regulatory changes, the socio-political environment in several states has been a key factor behind diversification. Microfinance lenders operate extensively in states such as West Bengal, Tamil Nadu, Bihar, Assam, and Karnataka among others, where state governments introduced legislations to regulate MFIs and to check coercive collection practises.
Large players such as CreditAccess Grameen, Satin Creditcare Network, Spandana Sphoorty Financial and Arohan Financial Services have gradually expanded into adjacent lending segments over the past few years.
The diversification trend is likely to accelerate as the microfinance sector matures, HP Singh, managing director of Satin CreditCare Network, had said in the investor call of the third quarter of financial year 2026 (Q3FY26).
“Growth in MFI AUM is expected to be around 10-15 per cent, whereas subsidiaries (Satin Housing Finance and Satin Finserv) have grown 40-50 per cent and will continue to grow at the same numbers. We want to have a very cautious growth. We are growing our subsidiaries pretty strongly. So for us, I think, at 10-15 per cent growth in the micro finance space is probably very cautious and very good.”
A senior executive at a leading NBFC-MFI said, during election periods, political statements around loan waivers, or borrower protection can affect collections and weaken repayment discipline among borrowers. “Microfinance operations are closely linked to the local political environment. Any rhetoric around borrower relief, or regulation can have a direct impact on repayment behavior,” he said.
Recently, the Bihar government passed a legislation on microfinance institutions (MFIs) aimed at tightening oversight of microfinance lenders, and protecting borrowers from coercive recovery practices. Previously, Karnataka and Tamil Nadu had also passed legislation along similar lines.
Additionally, the microfinance sector is facing stress due to borrower over-indebtedness, and regional disruptions. Since microfinance loans are typically unsecured and concentrated among similar borrower groups, lenders face higher risks as repayment trends weaken, experts said.
“As we operate into unsecured segments we have to charge a higher rate of interest, as that is how this model operates. But continuous hiccups in forms of legislations, climate issues (floods etc) have led MFIs to render structurally lower growth and lower profitability,” said a senior executive at another leading NBFC-MFI.
As a result, firms have begun actively reducing the share of microfinance loans in their overall portfolios. These NBFCs are expanding secured loan segments such as MSME lending, gold loans, loans against property, affordable housing finance, and vehicle financing, said industry players.
While microfinance will remain the core business for most NBFC-MFIs, the share of such loans in total portfolios is gradually declining, they added.
“We had indicated in our medium-term goal, the growth rate of microfinance would be lingering in the early teens and the rest of the growth will come from retail. We are also seeing that retail is actually outperforming our guidance a little bit. It's possible that retail will have a little more share than what we anticipated in the growth trajectory,” said Ganesh Narayanan, chief executive officer (CEO) & MD, CreditAccess Grameen, in the investor call for Q3FY26.
Diversification into secured and semi-secured segments is expected to improve balance-sheet stability, expand customer relationships and reduce vulnerability to political or economic disruptions in the microfinance sector, said industry experts.
 "NBFC-MFIs diversify beyond microfinance into LAP and housing loans")