India's Microfinance Portfolio Contracts to Four-Year Low of ₹3.40 Lakh Crore

India's microfinance sector experienced further contraction, with the total portfolio declining to ₹3.40 lakh crore as of November-end, according to the latest data from credit bureau Equifax. This marks the lowest level in four years, reflecting the risk-averse approach adopted by lenders amid persistent asset quality challenges.

Portfolio Decline Continues

The sectoral contraction began in April 2024 from its peak level, with the downward trend persisting as loan rundowns exceeded new disbursements. The November portfolio size decreased from ₹3.42 lakh crore recorded as of September 30, 2024, according to Equifax data.

The variation in reported figures stems from differences in the number of micro-lenders covered and treatment of hanging accounts, which refer to active accounts where lenders have not updated recent information to credit bureaus, according to Sa-Dhan's September quarter report.

Individual Lender Performance

Despite the overall sectoral decline, several institutions demonstrated positive momentum in the December quarter. Small finance banks including ESAF, Equitas, and Ujjivan reported sequential growth in their micro loan portfolios after an extended period of contraction. CreditAccess Grameen, India's largest NBFC-MFI, also recorded a sequential increase in its gross loan portfolio.

Federal Bank's managing director KVS Manian indicated early recovery signs, stating: "There are early signs of recovery in microfinance, and we have started thinking of growing the book, albeit cautiously. The month of May saw the peak of slippages, after that we have seen a decline in slippages every month."

Funding Challenges Persist

Smaller players continue to face significant headwinds, particularly regarding funding access. India Ratings & Research noted that "funding access remains a hurdle for small and mid-sized players, whereas large players' reasonable funding positions support expected disbursement growth in FY27."

The rating agency has revised its outlook on the microfinance sector to neutral from deteriorating while maintaining a stable rating outlook for FY27. According to Karan Gupta, head and director of financial institutions at India Ratings & Research, the sector has largely overcome FY25-FY26 headwinds, with borrower-level overleverage and asset-quality stress showing improvement.

Recovery Expectations

Experts anticipate sectoral recovery beginning in the next financial year, though the portfolio level reversal may only materialize from March 2026. The rating agency expects FY27 to serve as a recovery year following the stress period of FY25-FY26.

The anticipated shift toward individual lending and non-MFI loans is expected to further mitigate risks, while players are likely to increase credit-guarantee backed disbursements to strengthen credit risk buffers.