Microfinance in India: Stress Signals and the Path to Resilience

Introduction

Microfinance has long been central to India’s financial inclusion story. But recent data shows the sector is going through a sharp correction. Disbursements are down, delinquencies are rising, and lenders are pulling back. For MFIs, this is a period to reset strategies rather than chase growth.

State of the Sector: The Numbers That Matter

• Loan disbursements fell 26% YoY, to ₹56,677 crore in Q1 FY26, across 1.01 crore accounts.

• The broader microfinance universe (all lender types) saw sharp contractions: NBFC-MFIs (-18% YoY), Banks (-15.8%), SFBs (-23.2%), and NBFCs (-1.3%).

• Portfolio at Risk (PAR 31–180 days) more than doubled to 5.7% in June 2025, from 2.7% a year earlier. Long-tail stress is evident in rising >180-day buckets.

• The average loan ticket size rose 14.6% YoY, to ₹56,018 per account, as lenders focused on fewer, larger loans.

• Within the NBFC-MFI segment, asset under management (AUM) stood at ₹1.3 lakh crore (June 2025), down 16.4% compared to June 2024.

• Client outreach shrank: NBFC-MFI borrowers fell to 3.8 crore, 16.5% lower than June 2024

Unpacking the Underlying Pressures

The decline is not only about numbers. Several structural issues are driving the correction.

1. A “Flight to Quality”

MFIs are focusing on borrowers with stronger repayment history. This has pushed up average ticket sizes while cutting overall client volumes. The move reduces near-term risk but may create hidden stress if larger loans begin to slip.

2. Borrower Overleveraging

Low-income households face repayment pressure from multiple loans. Income shocks - from poor harvests, high rural inflation, and weak wage growth - have made matters worse. When one loan defaults, others follow.

3. Capital and Liquidity Squeeze

Debt funding for NBFC-MFIs dropped by 35.7% in FY25, as banks scaled back wholesale credit. Equity capital also fell by 1.8%, but sector leverage (debt-to-equity ratio) improved. With tighter funding, lenders are forced to slow disbursements and focus on collections.

4. Regulatory and Institutional Guardrails

Self-Regulatory Organizations (SROs) and the RBI have nudged MFIs toward better underwriting, more borrower checks, and tighter controls on multiple lending. This has slowed growth but may help clean up risks.

5. Regional Divergence

Top states such as Tamil Nadu, Bihar, and Karnataka are under greater stress, with rising delinquencies. The share of East & North East and Central markets of the Gross Loan Portfolio (GLP) increased while that of the South reduced, highlighting a divergence. Markets like West Bengal show stability.

This is not the first time microfinance has faced a deep correction. In 2010, the crisis centered around Andhra Pradesh, where heavy borrower overlap between MFIs and state-supported SHGs led to a localized collapse. The sector eventually recovered through stronger regulations and borrower checks. The difference this time is that stress is more dispersed - across multiple states and lender types - making it a national rather than regional reset. The industry’s resilience will depend on how quickly these reforms translate into consistent, nationwide stability.

What This Means for Lenders

Recent industry commentary suggests that the worst may be behind. While the cleanup is still ongoing, early indicators such as improved short-term repayment behavior and cautious re-entry into lending point toward gradual stabilization. Lenders across banks and NBFC-MFIs now describe their outlook as one of guarded optimism rather than distress. Those that balance caution and innovation will emerge stronger.

(A) Short-Term: Cleanse, Buffer, and Triangulate

• Portfolio pruning: Identify and exit severely stressed accounts. Off-load exposures that are unlikely to recover to prevent contagion.

• Provisioning and buffers: Strengthen capital reserves. A conservative approach will give room to absorb higher delinquencies.

• Collection discipline: Build early-warning systems. Use borrower-level analytics to flag stress at 30–60 days before it escalates.

• Liquidity cushions: Secure alternate lines of funding. Maintaining liquidity buffers ensures stability in the face of uneven inflows.

  
  

(B) Medium-Term: Smarter Origination and Analytics

• Segment-level scoring: Apply alternate data like agri indexes, weather, and mobility patterns. These indicators can give a better picture of repayment capacity.

• Dynamic pricing: Adjust loan pricing based on borrower risk and regional volatility. This makes lending sustainable even in stressed areas.

• Borrower overlap tracking: Monitor how many lenders a borrower is already exposed to. Reducing over-indebtedness helps lower systemic risk.

• Resilience products: Bundle micro-insurance, income smoothing, or savings with credit. This reduces vulnerability to shocks.

(C) Strategic Shifts: Diversify Safely

• Adjacent credit verticals: Expand into MSME microcredit or livelihood loans that tie directly to income generation.

• Co-lending and guarantees: Use partnerships to share risk. This allows scaling without over-exposure.

• Fintech partnerships: Leverage digital players for origination, data, or collections. Technology can lower costs and improve reach.

• Geographic hedging: Spread exposure across stable and volatile regions. This balances growth with portfolio safety.

  
  

OneFin’s Role

In times of stress, technology platforms act as stabilizers. They help lenders monitor, manage and mitigate risk. The mature OneFin ecosystem is pioneering in this regard:

• Adaptive credit workflows: Configurable pipelines allow lenders to switch between growth and conservative mode as conditions change.

• Delinquency monitoring: Real-time dashboards highlight shifts in 30/60/90-day buckets and borrower overlaps (using bureau data like CRIF Highmark) 

• Co-lending management: Built-in infrastructure for handling risk-sharing agreements with banks or other lenders.

• Scalable integrations: Plug-and-play APIs reduce time and cost in expanding operations.

These capabilities help lenders stay agile, protect portfolios, and prepare for the next growth cycle.

Conclusion

FY25 was a reset year for microfinance. Disbursements fell, portfolios shrank, and risks grew. But the slowdown is also an opportunity to rebuild on stronger foundations.

Microfinance has always run in cycles of excess and correction, but history shows that the sector adapts and rebounds. OneFin believes this phase, too, will give rise to a more robust, data-driven ecosystem that continues to empower rural borrowers, especially women, for whom MFIs remain the most accessible path to formal credit.

For lenders, the path forward lies in discipline, sharper analytics, and diversified risk. OneFin is positioned to help institutions balance risk and opportunity. By supporting resilient credit practices and scalable operations, the platform helps turn a period of stress into a springboard for the next cycle of inclusion-led growth. To know more, schedule a Demo.