The microfinance sector in India saw a decline in its gross loan portfolio, dropping by 3.5% year-on-year (Y-o-Y) to ₹3.85 trillion in the third quarter of the financial year 2025 (Q3FY25). This decline was primarily due to reduced funding availability and stricter credit underwriting norms, according to the latest data from the Microfinance Institutions Network (MFIN).
Rising Loan Defaults Raise Concerns
One of the key concerns highlighted in the report was the increase in loans at risk. The portfolio at risk (PAR), which refers to loans overdue for 30-180 days, rose sharply to 6.4% in Q3FY25 compared to 2% in Q3FY24. This indicates growing repayment stress among borrowers.
Industry Facing Challenges, But Outlook Positive
Alok Misra, Chief Executive & Director at MFIN, acknowledged the challenges faced by the microfinance sector, citing limited liquidity and strict credit underwriting norms as major factors affecting loan disbursement. However, he expressed optimism that the situation would improve in the next quarter (Q4FY25) as liquidity conditions and credit quality stabilize.
MFIN is a self-regulatory organization recognized by the Reserve Bank of India (RBI) and represents non-banking finance companies functioning as microfinance institutions (NBFC-MFIs), small finance banks, and other NBFCs.
Declining Loan Disbursements and Portfolio Reduction
On a quarter-on-quarter (Q-o-Q) basis, the total loan portfolio also declined from ₹4.08 trillion in Q2FY25 to ₹3.85 trillion in Q3FY25. A segment-wise breakdown showed:
- NBFC-MFIs’ loan portfolios declined by 3.8% Y-o-Y
- Banks’ microfinance loans dropped by 5.5% Y-o-Y
- Small finance banks (SFBs) witnessed the sharpest decline at 11.0% Y-o-Y
- NBFCs were the only exception, reporting a 22.2% Y-o-Y growth in microfinance lending
Furthermore, the total loan amount disbursed fell by 20% Y-o-Y to ₹62,817 crore in Q3FY25 from ₹78,584 crore in Q3FY24. The number of new loans disbursed also dropped significantly, registering a 29.02% decline compared to last year.
Regional Trends and Growing Loan Size
Geographically, the East, Northeast, and Southern regions accounted for 63% of the total microfinance portfolio. Despite the overall decline in loans disbursed, the average loan size increased to ₹53,350 in December 2024, compared to ₹47,374 in the previous year and ₹50,487 in September 2024.
The total number of microfinance loan accounts fell from 146 million in Q3FY24 to 139 million in Q3FY25, indicating a slowdown in new borrowing.
Looking Ahead
While the microfinance sector is facing challenges due to tight liquidity and increased credit risks, industry experts expect stability in the coming quarters as funding conditions ease and borrowers regain financial stability. The next quarter will be crucial in determining whether the sector can recover from the slowdown and regain growth momentum.
