Banks have cut their direct micro-lending exposure by 28.5% as of June 2026, shifting capital to NBFC-MFIs instead. Funding to these institutions jumped 91.4% in the first quarter of FY27. This move suggests a preference for larger loan sizes and reduced operational risk, though it may tighten credit access for smaller, grassroots borrowers across the country.
Indian banks are fundamentally changing how they reach the grassroots borrower. Instead of dealing directly with millions of individual micro-loans, many major lenders are stepping back, preferring to lend wholesale to Non-Banking Financial Company Microfinance Institutions (NBFC-MFIs). As of June 30, 2026, the direct microfinance portfolio of these banks fell by 28.5% year-on-year to ₹83,080 crore, a stark change from the ₹1.16 lakh crore recorded just twelve months earlier.
This shift is largely driven by a desire to reduce operational headaches. Managing thousands of small, individual accounts requires significant physical presence, collection infrastructure, and monitoring. By shifting the bulk of this business to NBFC-MFIs, banks can reduce their own operational costs and rely on these specialized institutions to handle the last-mile delivery of credit. Many banks are also reclassifying these assets into their broader retail loan books, which often carry different regulatory or risk profiles.
The Rise of the Wholesale Conduit
While banks are retreating from direct engagement, they are not leaving the microfinance sector. Instead, they have become the primary financial backbone for NBFC-MFIs. In the first quarter of fiscal year 2026-27, these institutions secured ₹21,407 crore in fresh debt from banks—a 91.4% surge compared to the same period in the previous year. Today, banks provide nearly 65% of the total outstanding borrowings for the entire NBFC-MFI sector.
This change has reshaped the borrower landscape. The total number of active loan accounts in the industry has fallen to 9.9 crore from 12.5 crore a year ago. However, the average loan size per account has increased by 27.8% to ₹37,584. This indicates that financial institutions are now prioritizing larger, higher-value loans rather than mass-market, small-ticket distribution. For the borrower, this could mean that credit is becoming more concentrated among those who can manage slightly larger debts, potentially leaving smaller, more vulnerable households with fewer options.
Risks and Market Concentration
This new model brings specific risks for the financial ecosystem. The industry remains highly concentrated, with just 12 major players commanding over 98% of the total debt funding. This concentration creates a systemic risk; if any of these large intermediaries face liquidity stress or operational trouble, it could have an outsized impact on the flow of credit to the ground level. Additionally, regional disparities remain, with states like Bihar, Uttar Pradesh, and Tamil Nadu holding significant exposure.
Investors should monitor future regulatory updates from the Reserve Bank of India (RBI). Changes in interest rate norms or guidelines on revolving credit could directly impact the margins of these NBFC-MFIs. Furthermore, if lenders continue to tighten underwriting standards to reduce risk, the pace of credit growth in the rural economy may slow, which is a metric to watch in upcoming quarterly results.