Chapter 2 Section 2.7Way Forward for the Microfinance Sector

The microfinance sector enters FY 2026-27 from a position of considerably improved credit discipline, with early but credible signs of a demand-led growth recovery.

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2.7 Way Forward for the Microfinance Sector

During FY 2025–26, the microfinance sector navigated a deliberate structural recalibration, transitioning from rapid volume expansion to risk-disciplined, high-quality underwriting. The loan portfolio stabilised around ₹3.34 lakh crore, while the loan accounts rationalised significantly due to strict adherence to SRO-mandated lender caps (restricting exposure to a maximum of 3 lenders per household) and enhanced credit bureau checks. Disbursements pivoted toward higher Average Ticket Sizes (~₹59,473) for carefully assessed borrowers, driving a sharp turnaround in asset quality: sector-wide PAR 30–179 DPD eased dramatically from 6.6% to 2.3%, demonstrating robust recovery in post-2024 vintage loans.

Thus, a year of stress, de-growth and underperformance of the portfolio has come to an end, with signs of revival, improved health and better asset quality. The revival of the sector is also due to the stricter guardrails enforced by the SROs, in addition to the self-discipline practised by the sectoral leaders. The funding needs were also addressed to some extent through CGSMFI 2.0. This has given a platform for the MLIs to perform better and build the sector in 2026-27.

In FY 2026–27, responsible lending and portfolio quality should remain the sector’s foremost priorities. The micro-lenders should strengthen household-level credit assessment, bureau-based indebtedness checks, cash-flow underwriting, early-warning systems and geo-segmented portfolio monitoring, while ensuring that repayment obligations remain aligned with household income and repayment capacity. Growth should be calibrated to local economic conditions rather than driven solely by disbursement targets. Greater use of consent-based digital data, alternative cash-flow indicators and risk-based pricing can improve underwriting, but technology must complement and not replace field-level assessment and borrower engagement.

Risk management practices are likely to continue evolving toward more granular portfolio monitoring, building on vintage-analysis techniques alongside climate-risk overlay models, rather than reliance on aggregate delinquency metrics alone. As erratic monsoons, unseasonal heatwaves, and extreme weather events increasingly disrupt rural livelihoods, geographical vulnerability has become directly tied to credit risk. Micro-lenders that combine credit-bureau leverage data with spatially disaggregated climate-vulnerability indices, such as identifying early-warning signals within specific origination cohorts and over-leveraged borrower segments, will stand to manage the next phase of growth with a materially lower risk of repeating the FY 2024–25 stress cycle.

In summary, the microfinance sector enters FY 2026-27 from a position of considerably improved credit discipline than a year earlier, with early but credible signs of a demand-led growth recovery. The sustainability of this recovery will depend on lenders, the regulator, and credit bureaus collectively maintaining the underwriting and leverage discipline established during the FY 2024-25 correction, even as competitive and growth pressures re-emerge with the return of disbursement momentum.