Microfinance institutions have urged the RBI to lift the household income eligibility cap for borrowers from Rs 3 lakh to Rs 4.5 lakh, citing inflation. While the industry is pivoting toward larger loan sizes to improve asset quality, long-term legacy defaults and upcoming UPI transaction costs remain key challenges for smaller lenders.
Microfinance institutions (MFIs) are in discussions with the Reserve Bank of India (RBI) to increase the annual household income limit for borrower eligibility from Rs 3 lakh to Rs 4.5 lakh. Industry representatives argue that the current cap, which has remained fixed for five years, no longer aligns with the economic reality of their client base due to persistent inflation. This change, if implemented, would allow MFIs to expand their credit reach to a broader set of households.
This proposal comes at a time when the microfinance sector is navigating a period of adjustment. Financial data from the first quarter of fiscal year 2027 shows that the total portfolio size of the industry contracted by 7.6 percent year-on-year to Rs 3.26 trillion. Despite this shrinkage, lenders are strategy-shifting toward higher-value loans to sustain revenue, with the average ticket size for new originations increasing by 15 percent.
Asset quality metrics present a mixed performance for investors. On the positive side, early-stage delinquencies—loans overdue by 30 to 89 days—have improved, dropping by 1.6 percent to 0.8 percent. However, older, legacy defaults continue to put pressure on balance sheets, with the 180-days-past-due segment rising by 4.4 percent to 17.4 percent, indicating that older bad loans remain a significant burden for the sector.
Funding for the sector is increasingly concentrated at the top. During the first quarter, 92 percent of the Rs 17,706 crore disbursed went to large and very large institutions, while smaller players continue to face difficulties in accessing capital. Private banks remain the dominant source of funding, accounting for 56 percent of the total support.
Looking ahead, the sector also faces operational challenges from the upcoming implementation of a 0.4 percent merchant discount rate (MDR) on UPI transactions exceeding Rs 2,000, effective October 2026. Industry experts suggest this could increase repayment friction for borrowers who rely on digital channels. The key monitorables for investors will be the RBI's final decision on the income threshold, the ability of smaller lenders to diversify their funding sources, and the sector's management of the new UPI transaction costs.