Thursday, 02 Apr, 2026
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The microfinance sector is showing early signs of stability, but the recovery is cautious rather than robust. February data suggest a tentative rebound after a sharp correction, with lenders wary of past excesses
India’s microfinance sector is showing early signs of stabilisation, but the rebound underway is defined more by restraint than resurgence. The latest data for February point to a tentative stabilisation after one of the sharpest corrections in recent years, even as lenders remain wary of repeating past excesses.
According to credit bureau Equifax India, the sector’s gross loan portfolio rose 2.5 per cent month-on-month to Rs 3.29 lakh crore in February. The increase comes after a prolonged contraction that saw the overall book shrink to Rs 3.21 lakh crore at the end of January—down nearly 28 per cent from its peak of Rs 4.43 lakh crore in March 2024. The modest uptick suggests that institutions have begun rebuilding their portfolios, albeit cautiously.
This is not a return to the high-velocity growth that defined the previous expansion cycle. Instead, lenders are recalibrating their approach. Incremental disbursements are increasingly being directed towards borrowers with established repayment histories, rather than first-time customers. The pivot marks a deliberate attempt to reduce risk following a bruising period of stress.
At the heart of the downturn was a breakdown in credit discipline. Over the past two years, multiple lenders chased growth at the lower end of the income spectrum, often extending loans to the same borrowers without adequate checks. The resulting overlap led to rising indebtedness among households with limited repayment capacity. As stress built up, delinquencies surged, forcing lenders to pull back sharply and triggering a steep contraction in the sector’s balance sheet.
There are early signs that this stress cycle may be easing. Data for February show a sequential improvement in asset quality. Loans overdue between 30 and 179 days declined by 52 basis points to 2.8 per cent, while those overdue beyond 180 days fell by 15 basis points to 16.8 per cent. Although these levels remain elevated, the direction of movement indicates that the worst phase of deterioration may have passed.
The response from industry leaders suggests that the lessons of the downturn are being internalised. Executives are emphasising the need to anchor future growth in tighter underwriting standards, improved income assessment and more robust use of technology. The focus is shifting towards refining credit filters and ensuring that loan sizes are aligned with borrowers’ repayment capacity, rather than chasing scale for its own sake.
This change in stance is also visible in lending patterns. Growth is being driven less by geographic expansion and more by deepening relationships with existing customers. At the same time, there is a tilt towards higher-value loans within the microfinance segment. The average ticket size touched a record Rs 61,253 in December, up 16 per cent year-on-year, indicating that lenders are gravitating towards relatively more stable borrowers.
Yet, the sector faces a structural challenge in rebuilding its borrower base. Data from CRIF High Mark indicate that roughly 21 million customers have exited the formal microfinance system over the past two years. Much of this attrition reflects lenders weeding out delinquent accounts, though some borrowers have also disengaged voluntarily. Re-engaging creditworthy customers with low leverage will be critical to restoring momentum.
Industry voices have underlined the importance of a calibrated recovery. There is growing recognition that future expansion must be closely linked to borrowers’ income generation capacity. Digitisation is emerging as a key tool—not only to streamline operations but also to strengthen risk monitoring and improve credit decision-making.
The broader takeaway from the recent cycle is stark. Rapid portfolio expansion, when not backed by robust underwriting, can quickly morph into systemic vulnerability. The earlier phase of growth masked underlying weaknesses, particularly the risks associated with multiple lending and borrower over-leverage. The correction has forced a reset.
For now, the February numbers offer cautious optimism. Portfolio growth has resumed, asset quality indicators are improving, and lenders appear more disciplined. But the sector remains significantly below its previous peak, and any recovery is likely to be gradual rather than swift.
The challenge ahead lies in striking a balance between inclusion and prudence. Microfinance continues to play a vital role in extending credit to low-income households, supporting both consumption and small-scale enterprise. However, the experience of the past two years has underscored that sustainability hinges on better data, tighter credit norms and a clearer alignment between loan size and repayment capacity.
A slower, more measured expansion may temper growth in the near term. But if sustained, it could help build a more resilient microfinance ecosystem—one that avoids the boom-and-bust cycles that have periodically unsettled the sector.
