MUMBAI: Incremental loan disbursals by microfinance companies have declined by 17% to Rs 3.39 trillion in the second quarter, down from Rs 4.08 trillion in the same period a year ago, as banks and other lenders have curtailed funds to the troubled sector. This is the sixth consecutive quarter where the portfolio has declined.
The steep decline has resulted in nearly 50 lakh borrowers going out of formal finance, according to the quarterly data released by the Micro-Finance Industry Network (MFIN), an industry body of banks, MFIs, small finance banks and non-banks providing microfinance. MFIN is also the RBI-recognized self-regulatory organization of the industry.
“Continued funding squeeze has resulted in the sixth consecutive quarter fall in microfinance portfolio to Rs 3.39 trillion. This has resulted in nearly 50 lakh borrowers going out of formal finance. It is ironic as portfolio at risk (31-90 days) has improved to 1.09% and 98% of clients are within the MFIN guardrails showcasing disciplined underwriting in the sector,” said MIFN chief executive Alok Misra.
The microfinance sector had been growing at 48% annually for five years before problems arose as borrowers began to overleverage and then defaulted on repayments. There is still room for growth given that microfinance penetration is only 25% of the addressable market, KPMG India national head for financial services Gayathri Parthasarathy said in the report.
“One thing the sector needs now to ensure that financial inclusion gains built over decades do not wither away is liquidity,” added Misra.
The microlending universe has been facing multiple headwinds for the past several quarters, and the regulator has blamed industry practices, including multiple loans to the same borrower by different lenders and charging usurious interest rates with a view to expand profits as among the problems. Faced with high delinquencies, banks have become highly selective in lending to MFIs despite the RBI reducing risk weights on bank credit to NBFCs and microfinance sector to 100% from 125%.
It's not just standalone players who are hit. Even large private sector banks like Kotak Mahindra Bank, Indusind Bank and RBL Bank have been booking deep losses in their MFI books for the past many quarters.
Of the total microloans outstanding, MFIs contribute 39.2%, making them the largest in the sector, followed by banks at 31.4%, while small finance banks and non-banks make up the remaining.
As of September 2025, microfinance operations are spread across 718 districts across 36 states and Union territories.