Whalesbook
While India's microfinance sector has shown progress in overall asset quality, with delinquency rates reaching a record low of 2.3% by March 2026, a significant segment of borrowers remains under strain. This situation arises because approximately 1.5 million individuals have taken loans from four or more microfinance lenders.
These borrowers collectively owe about ₹15,800 crore, with average outstanding loans exceeding ₹1 lakh – more than double the typical microfinance customer's balance. Industry guardrails implemented since mid-2024 now restrict lenders to a maximum of three microfinance institutions per borrower. This has significantly tightened access to new credit for these individuals, amplifying their existing repayment burdens.
While the sector's overall 30-day overdue rate fell to a record low of 2.3% by March 2026, and NBFC-MFIs saw their portfolio at risk (PAR) for 1-180 days improve to 3.9% by December 2025, distress persists among multi-borrowers. Approximately 10% of the ₹15,800 crore portfolio owed by these borrowers has been overdue for more than 30 to 180 days. The share of borrowers with loans from over three lenders has fallen to an estimated 17% of NBFC-MFI borrowers by March 2025, with some reports indicating this number reached 2.8 million borrowers by September 2025. However, late-stage delinquencies (PAR 180+) continue to rise in certain pockets, signalling ongoing challenges in regularizing long-overdue accounts.
NBFC-Microfinance Institutions (NBFC-MFIs) hold the largest market share, accounting for about 42.1% of the total portfolio as of December 2025. The sector is shifting its focus from aggressive volume-driven growth to 'lending smarter' and enhancing balance sheet stability. Concentration risks remain, with key states like Bihar, Tamil Nadu, and Uttar Pradesh representing a significant portion of the total portfolio, which could magnify the impact of localized stress. For context, the broader NBFC sector, where major players like Bajaj Finance trade at a Price-to-Earnings ratio of around 31.52, operates with higher valuations than the quality-focused microfinance segment.
The Indian microfinance sector has experienced past crises, notably the Andhra Pradesh situation in 2010, which was driven by aggressive lending and over-borrowing, leading to widespread defaults. Earlier models relying on subsidized credit also faced issues due to weak repayment cultures. Current guardrails, introduced by self-regulatory organizations (SROs) and MFIN, aim to prevent recurrence by limiting borrowers' credit exposure and the number of lenders. The Reserve Bank of India (RBI) has also raised household income limits to ₹1.25 lakh for rural and ₹2 lakh for urban/semi-urban borrowers, potentially broadening access for eligible individuals.
Analysts remain cautious. CARE Ratings holds a negative outlook for the sector's asset quality and earnings in FY2026, while ICRA notes persistent asset quality challenges. Credit costs for NBFC-MFIs have risen sharply. Although write-offs have improved reported portfolio quality, underlying risks remain visible. The inherent nature of microfinance lending to low-income populations with volatile cash flows and limited financial literacy presents ongoing structural risks.
Industry observers anticipate a phase of 'measured growth' for the microfinance sector, emphasizing asset quality and financial stability over rapid expansion. Analysts project earnings recovery and moderate Compound Annual Growth Rate (CAGR) for Assets Under Management (AUM) over FY2026-28. Projections indicate the market could grow at a CAGR of approximately 9.77% to reach USD 17.7 billion by 2034, contingent on continued adaptation to evolving regulations and economic conditions.