Though the near-term outlook seems challenging, given overleveraging, increased regional concentration, and evolving regulatory guidelines, analysts believe industry players are in the middle of their balance sheet clean-up to restore stability and foster sustainable growth.
"In financial year 2024-25 (FY25), most MFIs adopted a conservative approach, absorbing significant Expected Credit Loss (ECL) to proactively clean-up their balance sheets. In the March quarter alone (Q4FY25), the ECL amount stood at ₹2,500 crore for listed players," Avendus said in a sector report.
While this pressure is expected to continue in the first half of the current financial year (FY26) due to cautious disbursement strategies, the long-term outlook remains "fundamentally strong".
The microfinance industry in India, as per Avendus, is supported by regulatory tailwinds such as MFIN guardrails, the Reserve Bank of India’s revised norms for qualifying assets, and Credit Guarantee Fund for Micro Units (CGFMU) scheme.
MFI industry growth outlook in India
Avendus expects MFI industry's gross loan portfolio (GLP) to grow at a compounded annual growth rate (CAGR) of over 15 per cent over the next five-to-six years, reaching ₹10 trillion.
"As the industry navigates through the transitional phase, we expect it to return to its historical cross-cyclical return on equity (RoE) of 20 per cent during this period," it said.
MFI stocks to invest
Avendus believes this is the most opportune time for investors to "get their skin in the game" and participate in the next structural upcycle.
MFI stocks in India list
Bandhan Bank, Spandana Sphoorty Financial, ESAF Small Finance Bank, Equitas Small Finance Bank, CreditAccess Grameen, Fusion Microfinance, Satin CreditCare, and Ujjivan Small Finance Bank are some of the key players in the microfinance industry in India.
Reasons why Avendus is bullish on MFI industry: Key trend analysis
1) Resilience through cycles
Analysts at Avendus believe the downcycles in the micro-finance industry is becoming shorter as against the periods of upcycles. Cross-cyclical RoEs, it said, ranges from 15-20 per cent.
2) MFIN guardrails improving risk discipline
Avendus’ assessment shows that strict industry-wide norms, as laid down by the RBI, is curbing overleveraging and addressing asset quality deterioration.
Notably, the central bank has introduced two guardrails so far. One in July, 2024 and the other in November, 2024. These guidelines limited MFI lenders per borrowers to less/equal to three (to avoid overleveraging), capped indebtedness (MF loans) per borrower at ₹0.2 million, directed bank Boards to closely monitor interest rates of member entities.
3) Industry players redesigning operating models
MFI players have, according to Avendus, made strategic operational adjustments to reduce risk and bolster resilience in a challenging environment. Various steps taken by MFI players include improving underwriting discipline, introducing calibrated pricing model, focusing on product as well as geographical diversification, and tight collection norms.
4) Signs of stabilisation
With MFI players’ focus on improving credit discipline and cleaning balance sheets, portfolio exposure with more than three lenders has decreased from 20 per cent, at the end of March 2024, to 12 per cent, at the end of March 2025, indicating consolidation and adherence to MFIN guardrails.
Further, borrowers’ with credit exposure of ₹0.2 million decreased from 8 per cent to 3 per cent during the period. Collection efficiency, too, is at a one-year high of 97.8 per cent, while percentage of PAR 90+ loan accounts in the total loan pool, has declined from 2.1 per cent (Q2FY25) to 1.4 per cent (Q4FY25).
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