Microfinance Sector Shrinks But Improves Asset Quality Amid Lending Shift

The microfinance sector in India continued to shrink in the second quarter of FY26, with its gross loan portfolio falling to Rs 34.56 lakh crore. This marks a 3.8% decline from the previous quarter and a substantial 16.5% drop year-on-year. This contraction reflects the industry's strategic move towards risk-based lending and tighter controls, influenced by the Reserve Bank of India's (RBI) 2022 framework.

Key Observations: * Loan Portfolio & Customer Base: Both the number of active loans and the customer base decreased by 6.3% and 6.1% respectively. Lenders are prioritizing portfolio quality and regulatory compliance, slowing down new borrower acquisition. * Disbursements & Ticket Sizes: Despite fewer loans, the total value of disbursements increased by 6.5% quarter-on-quarter to Rs 60,900 crore. This growth is attributed to a rise in average ticket sizes, which grew by 8.7% quarterly and 21.3% annually, reaching Rs 60,900. * Lending Patterns: The Rs 50,000-Rs 80,000 loan category has become dominant, making up 40% of total loans. Loans exceeding Rs 1 lakh have more than doubled their share to 15%, driven by banks and Non-Banking Financial Company-Microfinance Institutions (NBFC-MFIs). Conversely, smaller loans (Rs 30,000-Rs 50,000) saw their share decline significantly. * Asset Quality: Early-stage delinquencies improved, with loans overdue by up to 180 days falling to 5.99%. However, late-stage stress, including write-offs (180-day-plus bucket), remained high at 15.3%, partly due to legacy issues. Recent loan originations show better quality with lower delinquency. * Borrower Consolidation: Borrowers are consolidating their credit with fewer lenders; those with up to three lenders increased to 91.2%. Most borrowers (68.5%) have credit up to Rs 1 lakh, with only 2.3% exceeding Rs 2 lakh, the regulatory limit.

Impact This news significantly impacts the microfinance sector by highlighting a period of consolidation and strategic shift. Investors in financial services companies, particularly NBFC-MFIs and small finance banks, should note the evolving lending landscape. The improved asset quality is a positive sign, but the overall contraction may signal slower growth for some players. The shift towards larger loans could benefit entities better equipped to handle higher ticket sizes. Impact Rating: 7/10

Difficult Terms: * Microfinance industry: The sector that provides financial services, like small loans, to low-income individuals and small businesses who typically lack access to traditional banking services. * Gross loan portfolio (GLP): The total amount of money lent out by a financial institution before any deductions for provisions or write-offs. * Asset quality: A measure of the credit risk associated with a lender's loan portfolio, indicating how likely borrowers are to repay their loans. * Risk-based lending: A lending strategy where loan terms, interest rates, and approval decisions are based on the perceived risk of a borrower defaulting. * RBI: Reserve Bank of India, the central bank of India responsible for monetary policy and regulating the country's banking and financial system. * CRIF High Mark: A credit information company that provides credit reports and scores to lenders. * NBFC-MFIs: Non-Banking Financial Company-Microfinance Institutions. These are NBFCs that specialize in providing microfinance services. * Small finance banks: A type of niche bank in India intended for providing financial inclusion to segments of the population such as small businesses, marginal farmers, and unorganized sector entities. * Disbursements: The act of paying out money, typically a loan, to borrowers. * Average ticket size: The average amount of money lent in a single loan transaction. * Origination patterns: The characteristics and trends of how new loans are initiated and structured. * Delinquencies: The failure of a borrower to make scheduled payments on a loan. * Loan vintages: Loans that are originated or issued during a specific period. * Collection efficiency: A measure of how effectively a lender collects payments from its borrowers, often expressed as a ratio. * Borrower exposure: The total amount of money a borrower owes to one or more lenders. * Regulatory guardrail: A rule or limit set by regulators to prevent excessive risk-taking by financial institutions or borrowers.