India's Microfinance Sector Poised For Steady Growth, Credit Discipline And Portfolio Quality

Mumbai: The micro-finance sector (MFI) in India is projected to grow by 12–15 per cent in FY26 under a conservative scenario, returning to FY24 levels, a report showed on Monday.

The MFI sector has consistently demonstrated resilience, having recovered from past disruptions such as demonetisation and the COVID-19 pandemic.

In a more favourable environment, particularly if rural incomes recover on the back of a normal monsoon, growth could be a tad better, said MP Financial Advisory Services LLP (MPFASL) in its report.

“The microfinance sector is at a pivotal point, balancing sustainable growth with responsible lending. The MFIN guardrails are a timely step to curb over-indebtedness and strengthen asset quality, though they may create short-term operational and financial strain, especially for smaller MFIs,” said Mahendra Patil, Founder and Managing Partner, MP Financial Advisory Services LLP.

India’s microfinance sector has become a cornerstone of financial inclusion, enabling credit access for underserved populations, especially women, small farmers, and micro-entrepreneurs in rural and semi- urban areas.

With a robust CAGR of 28 per cent from FY14 to FY24, the sector now serves over 7.9 crore unique borrowers across 92 per cent of the country’s districts, demonstrating its deep and widespread outreach.

Looking ahead, the outlook for FY26 remains cautiously optimistic, the report added.

“A balanced approach, combining policy support, innovative credit assessment, and strategic partnerships, will be essential to sustain outreach while reinforcing the sector’s foundation,” said Patil.

In addition to this, the emergence of fintechs and non-NBFC-MFIs offering a wide array of credit options made access to funds easier, further contributing to multiple lending.

While growth could slow temporarily due to rising competition as the sector recalibrates to the recent MFIN guardrails amid rising delinquency levels, the reforms are likely to enhance credit discipline, portfolio quality, and long-term sector resilience.

However, the key challenge will be ensuring that such structural reforms do not dilute the broader goal of financial inclusion. As of March 2024, about 37 per cent of India’s rural population is covered by the MFI industry.

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