Microfinance Sector Sees Growth

After 11 quarters of contraction and significant write-offs, India's microfinance sector has returned to growth. Equifax India data shows the gross loan portfolio expanded 5.3% to ₹3.39 lakh crore by March-end. This rebound marks a potential turning point, with the sector's assets recovering from a peak of ₹4.43 lakh crore in March 2024 after hitting a three-year low in December 2025. Delinquencies also improved, with the 30-day-plus rate falling to 2.3%, its lowest in five quarters. However, the recovery isn't uniform, as different lender groups are making distinct strategic choices.

Uneven Recovery: Banks and NBFCs Lead, SFBs Lag

The growth has been led mainly by Non-Banking Financial Company-Microfinance Institutions (NBFC-MFIs) and private banks. NBFC-MFIs grew their microfinance business by 7.7% quarterly to hold a 42% market share. Private banks grew even faster at 8.8%, taking a 26% share. Conversely, Small Finance Banks (SFBs) are actively cutting back on microfinance. Their total microfinance portfolio fell to ₹50,725 crore by March-end from ₹54,234 crore the previous quarter. SFBs are now shifting to higher-yield secured loans, like vehicle and housing finance, to better manage credit risk and boost profits. This indicates they are rethinking their risk and return strategy, moving away from unsecured micro-loans.

Underlying Strengths and Sector Risks

Even with this growth, the microfinance sector faces a complex situation. The stress from FY2025 caused credit costs to rise sharply, leading to losses for NBFC-MFIs. While asset quality is improving, borrowers' incomes still appear vulnerable. A Nabard survey showed fewer rural households expecting income growth in early 2026, despite resilient rural consumption. The sector has a history of weathering tough times, with past crises highlighting risks like over-lending and borrowers taking on too much debt. The Reserve Bank of India's (RBI) new rule requiring NBFC-MFIs to have 60% of assets as qualifying assets might affect their ability to serve the poorest clients. Competition from unregulated lending apps and fintech companies is also putting pressure on traditional MFIs.

Deeper Risks and Challenges

SFBs pulling back from microfinance signals underlying risks. Their move to secured lending reflects an industry-wide push to reduce risk due to concerns about asset quality and shrinking profits in unsecured lending. Borrowers with multiple loans still present repayment risks, especially with competition from fintech lenders that may not follow the same rules. New rules limit borrower exposure, but local regulations, like the Bihar Micro Finance Institutions Bill in 2026, could still create challenges. The sector's recovery also relies on stable borrower incomes, which have shown mixed signs. For example, while RBL Bank reported strong profit growth recently, some analysts are wary of margin pressure and credit costs. Its P/E ratio of around 27x is also seen as high compared to similar banks and its estimated value.

Outlook: Cautious Growth Ahead

Experts expect a period of 'measured growth' for microfinance, focusing on balancing expansion with careful risk management. Projections show the sector could reach USD 17.7 billion by 2034, supported by digital tools and financial inclusion efforts. The focus is shifting to 'lending smarter,' not just 'lending more.' The current strategic shifts, like SFBs diversifying their portfolios, show the industry is changing. Continued recovery will depend on responsible lending, managing borrower debt, and adapting to economic changes and new regulations.