Microfinance lenders eye diversification as sector recovers: Industry leaders

At the Business Standard BFSI Summit in Mumbai, microfinance industry leaders said collections were improving as lenders explored secured and individual loans to meet customers' changing needs

Microfinance lenders are looking to diversify beyond unsecured group loans by offering new products and retaining existing borrowers as the sector recovers from its recent crisis, industry leaders said at the Business Standard BFSI Summit in Mumbai on Monday. According to them, collections were improving with tighter lending standards, though gaps in borrower identification, local disruptions and weather-related risks remained concerns.

 

During a session titled Microfinance: Is diversification the way ahead?, moderated by Business Standard's Subrata Panda, Microfinance Institutions Network (MFIN) CEO Alok Misra said India's microfinance industry has undergone a significant consolidation phase, with its gross loan portfolio adjusting from a peak of ₹4.3 trillion down to around ₹3.75 trillion (as of March 2025), and further stabilizing down to approximately ₹3.25 trillion to ₹3.34 trillion by mid-2026. The figure reflects a reporting change, following the Reserve Bank of India’s (RBI's) direction to lenders to classify microfinance loans previously reported under retail lending back under microfinance.

 

 

“Despite the stress, portfolio quality has improved,” Misra said. Disbursements and credit quality were recovering, while liquidity remained manageable for large and medium-sized institutions, he said. Smaller lenders continued to face funding pressures, he added.

 

He also pointed to an increase in unique borrowers in August, the first rise after a prolonged decline. These were encouraging signs for the sector, he said.

 

CreditAccess Grameen MD & CEO Ganesh Narayanan said the recovery was becoming more visible. “I believe the sector has passed the bottom of the crisis experienced over the past two financial years,” he said, adding that tighter lending rules had helped restore balance.

 

Tighter lending standards after rapid expansion

 

Arohan Financial Services MD Manoj Nambiar said the sector’s outstanding credit had risen from around ₹2.5 trillion in March 2020 to about ₹4.5 trillion within two years. The industry has faced several crises, he said. From the Andhra Pradesh episode in 2010 to demonetisation in 2016 and the Covid-19 pandemic in 2020, each exposed weaknesses and forced lenders to change their practices, he said.

 

“The key questions were whether their credit-underwriting systems and their collection and recovery capabilities were ready for that growth,” Nambiar said.

 

He said borrower verification and multiple lending remained key challenges. Lending to customers who already have more than three lenders, outstanding debt above ₹1.5-2 lakh, or overdue loans with other lenders can increase the risk of defaults.

 

MFIN has introduced minimum lending standards for its members. These include limiting lending to borrowers with no more than three microfinance lenders and keeping their total debt across microfinance institutions within ₹2 lakh. Lenders have also been asked not to give fresh loans to customers whose portfolio delinquency has reached 60 days or more.

 

Misra said the share of borrowers with more than three lenders or outstanding loans exceeding ₹2 lakh had fallen from around 8-10 per cent in June 2024 to about 1.6-1.7 per cent.

 

However, he cautioned against blaming the crisis solely on borrowers taking on too much debt. Extreme heat, the general election period, state-level interventions, disruptions by non-state actors, liquidity pressures and negative publicity had all contributed to the stress.

 

Lenders look to retain established borrowers

 

Diversification has been on the industry’s agenda for years, but regulatory restrictions limited how much lenders could lend outside qualifying microfinance assets, Narayanan said. Greater regulatory flexibility and better credit-bureau data are now helping lenders assess customers’ credit histories and offer products suited to their changing needs.

 

Microfinance institutions often bring women into the formal credit system when they have little or no credit history. As their businesses grow and repayment records improve, many move to retail lenders. Narayanan said this created an opportunity for microfinance institutions to serve borrowers whose credit histories they already understand.

 

CreditAccess Grameen has a customer base of close to five million people. The company has lent them around ₹30,000 crore, while retail institutions have extended about ₹80,000 crore to the same customer base, he said.

 

According to the company’s data, customers with less than two years of microfinance experience had around 15 per cent overlap with retail credit. For those with six to eight years of experience, the overlap rose to around 75 per cent.

 

“The industry needs to evolve with them. Otherwise, it risks losing customers faster than it can acquire new ones,” Narayanan said.

 

Nambiar said customers who had completed five, six or seven loan cycles deserved a higher level of service.

 

The industry leaders highlighted that the regulatory framework has also created more room for secured lending. Under the 60:40 framework discussed at the summit, at least 60 per cent of assets must be qualifying microfinance assets, while the remaining portion can include cash and other assets.

 

Nambiar said that after accounting for cash holdings, lenders could use a substantial part of the remaining capacity to develop secured-lending businesses. Products include loans against property, vehicle loans and gold loans.

 

A secured portfolio could help lenders spread risk and improve their credit ratings, potentially lowering their cost of funds and supporting returns, he said.

 

Narayanan said the balance between microfinance and other lending should depend on customers’ needs rather than simply on lenders wanting to reduce portfolio risk. The split could change over time as household incomes rise and borrowers seek individual credit products.

 

Misra, however, said the RBI was unlikely to allow microfinance to account for only half or less of an institution’s assets in the near term.

 

Weather and local disruptions remain risks

 

The industry leaders said tighter lending standards could help reduce risks but would not eliminate the impact of weather events, local disruptions and broader economic shocks.

 

Nambiar said the first two quarters had not seen widespread stress, although some borrowers in central Maharashtra were seeking more time to repay. Floods had also affected parts of eastern India, including West Bengal, but the state remained one of Arohan’s stronger portfolios.

 

He cited Assam as an example of how relief measures and financial literacy could help borrowers manage disruptions. Of 100 customers eligible for a moratorium there, fewer than 50 opted for it. Of those who did, around 60-70 per cent continued to make monthly payments, he said. Customers understood that their repayment behaviour would be reflected in their credit-bureau records.

 

Nambiar also highlighted government-backed credit guarantees as a way to provide greater certainty in an otherwise unsecured business. He said microfinance could remain a viable business if lenders maintained disciplined underwriting and controlled credit costs.