Key Takeaways
- Microfinance loan book plunges 17% to ₹3.39 trillion in Q2
- 5 million borrowers pushed out of formal credit system
- Sixth consecutive quarter of decline despite improved risk metrics
India’s microfinance sector has recorded a sharp 17% decline in loan disbursals during the second quarter, with the portfolio shrinking to ₹3.39 trillion from ₹4.08 trillion a year earlier. This marks the sixth straight quarter of contraction as banks and lenders continue to restrict funding to the troubled sector.
Massive Borrower Exclusion
The steep decline has forced approximately 50 lakh (5 million) borrowers out of the formal financial system, according to data from the Micro-Finance Industry Network (MFIN). The industry body represents banks, MFIs, small finance banks and non-banking financial companies in the microfinance space.
Alok Misra, CEO of MFIN, highlighted the paradox: “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.”
From Rapid Growth to Contraction
The sector’s current struggles contrast sharply with its previous performance. Before the current crisis, microfinance had been growing at an impressive 48% annually for five consecutive years. The problems began when borrowers started overleveraging and subsequently defaulted on repayments.
Despite the challenges, significant growth potential remains. Gayathri Parthasarathy, KPMG India’s national head for financial services, noted that microfinance penetration currently stands at just 25% of the addressable market.
Misra emphasized the urgent need for liquidity, stating: “One thing the sector needs now to ensure that financial inclusion gains built over decades do not wither away is liquidity.”
Regulatory Concerns and Banking Losses
The microlending sector has been battling multiple challenges for several quarters. Regulators have identified problematic industry practices including multiple loans to the same borrower by different lenders and charging excessively high interest rates to boost profits.
Despite the RBI reducing risk weights on bank credit to NBFCs and the microfinance sector from 125% to 100%, banks remain cautious due to high delinquency rates. The impact isn’t limited to standalone microfinance institutions – even major private sector banks including Kotak Mahindra Bank, IndusInd Bank and RBL Bank have reported significant losses in their MFI portfolios over multiple quarters.
Market Share Distribution
Among the various players in the microfinance ecosystem, MFIs maintain the largest share at 39.2% of total outstanding microloans. Banks follow with 31.4%, while small finance banks and non-banking financial companies account for the remainder.
As of September 2025, microfinance operations extend across 718 districts in 36 states and Union territories, demonstrating the sector’s extensive reach despite current challenges.
