Microfinance institutions (MFIs) expect a 20% rise in assets under management (AUM) this fiscal, a sharp increase from the 4% growth recorded last year. This recovery is driven by a rebound in core lending and an aggressive shift toward secured products like gold loans and MSME financing.
What Happened
Microfinance institutions in India are poised for a significant rebound in the current fiscal year, with projections indicating a 20% growth in assets under management (AUM), which represents the total value of loans currently in the books. This is a sharp improvement compared to the modest 4% growth rate observed in the previous financial year. The improvement follows a period of subdued lending activity caused by funding constraints and concerns regarding borrower asset quality that impacted the sector over the last several quarters.
The Shift Toward Secured Lending
A key driver of this projected growth is a change in the product mix. MFIs are moving beyond their traditional model of providing only unsecured micro-loans. Companies are now diversifying rapidly into secured lending products, including gold loans, loans to small and medium enterprises (MSMEs), and loans against property.
Data indicates that the share of secured products in the total MFI portfolio has grown from 6% in fiscal 2025 to 14% currently, with further plans to reach 18% by the end of the year. This diversification is supported by Reserve Bank of India policy changes that have lowered qualifying asset requirements, allowing lenders more flexibility.
Borrower Quality and Loan Sizes
Lending practices have become more disciplined following the implementation of the industry-wide Guardrails framework in August 2024. This framework has helped improve the quality of disbursements.
The profile of the average borrower has also changed. Loans to 'seasoned' borrowers—those who have successfully completed at least one loan cycle—now account for approximately 66% of the total MFI portfolio, up from 53% two years ago. Additionally, the average loan size for these borrowers has increased by roughly 15%, reaching ₹59,000. Many institutions are also utilizing the Credit Guarantee Fund for Micro Units (CGFMU) scheme to manage potential credit losses and support growth.
What Could Pose Risks
Despite the positive growth outlook, the sector faces specific challenges that investors should consider. While diversification into new asset classes helps reduce dependence on unsecured loans, it requires lenders to develop strong underwriting skills for these different products. If lenders fail to assess these new borrowers correctly, it could lead to higher defaults.
Furthermore, the sector remains sensitive to external shocks. Localized socio-political disruptions can impact repayment behavior. Weather patterns, particularly the impact of monsoon conditions on rural incomes, also remain a critical risk factor, as many microfinance borrowers are based in rural or semi-urban areas and rely on agriculture-linked income.
What Investors Should Monitor
The ability of MFIs to successfully execute their diversification strategy while maintaining portfolio quality will be a key factor to watch. Monitoring asset quality metrics, such as the percentage of non-performing loans, and observing how different lenders manage their transition into secured lending will provide clarity on the sustainability of this 20% growth target.