Chapter 4 - Section 4.5 - SubSection 4.5.4Leverage / Debt – Equity Ratio

The Debt-Equity ratio measures the extent to which MFIs finance their assets through borrowed funds compared to shareholders’ equity. Since MFIs primarily operate by mobilising debt from banks, NBFCs, and capital markets, a higher ratio reflects greater reliance on external borrowings. While leveraging debt helps expand outreach and scale loan portfolios quickly, excessive dependence on debt increases financial risk and vulnerability to interest rate fluctuations. Regulators and lenders often prescribe prudent debt-equity thresholds to ensure stability. Figure 4.5.11 depicts the weighted-average Debt-Equity ratio across segments.

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Debt-Equity Ratio for All MLIs and Break–up of FY 2025-26 across MLI – Categories

4.5.4 Leverage / Debt – Equity Ratio

The Debt-Equity ratio measures the extent to which MFIs finance their assets through borrowed funds compared to shareholders’ equity. Since MFIs primarily operate by mobilising debt from banks, NBFCs, and capital markets, a higher ratio reflects greater reliance on external borrowings. While leveraging debt helps expand outreach and scale loan portfolios quickly, excessive dependence on debt increases financial risk and vulnerability to interest rate fluctuations. Regulators and lenders often prescribe prudent debt-equity thresholds to ensure stability. Figure 4.5.11 depicts the weighted-average Debt-Equity ratio across segments.

Figure 4.5.11: Debt-Equity Ratio for All MLIs and Break–up of FY 2025-26 across MLI – Categories
Figure 4.5.11

Conclusion

The analysis of the sector’s capital and funding structure highlights a significant strengthening of microfinance institutions’ financial base in FY 2026. While the sector predominantly relies on borrowings to support its lending operations, the year also witnessed quite a significant equity mobilisation, with ₹2,554 crore of fresh equity raised. This strengthened institutions’ capital position at a time when portfolio growth has moderated.

Funding remains highly concentrated among NBFC-MFIs and larger institutions, which continue to have greater access to debt and equity capital. The increase in the equity-to-asset position during FY 2026 reflects the combined effect of portfolio contraction and stronger equity mobilisation, indicating a more capitalised balance sheet.

Overall, funding trends suggest a shift toward greater capital resilience and financial consolidation, although access to stable, competitively priced funding remains more constrained for smaller and mid-sized institutions. Going forward, diversifying funding sources, expanding access to long-term capital, and prudent leverage management will be important to support sustainable portfolio growth while maintaining financial resilience.