New Delhi [India]: The worst is over for India's microfinance sector, with stress levels posed to ease over the next two quarters, said Axis Securities in its latest report.
Microfinance companies are hopeful that growth will return to normal from the second half of the financial year (FY) 2026. However, the report added that the first half of FY26 is likely to remain tough, with higher loan defaults and slower business expansion.
The report says that key factors such as the ongoing impact of the Karnataka ordinance and the possible effects of a similar law in Tamil Nadu will be worth watching, which could affect lending operations.
On the brighter side, secured lending such as home and diversified loans is expected to benefit from favourable conditions, helping those lenders grow at a strong pace of 24 per cent year on year between FY25 and FY27.
The vehicle financiers are expected to benefit from the improved infrastructure spending, better rural incomes and improving capacity utilisation of fleet, enabling vehicle financiers to deliver a robust 19 per cent CAGR growth over FY25-27.
Furthermore, the report added that despite fresh delinquency accretion peaking out, micro-financiers will continue to see elevated slippages and accelerated write-offs in the first half of fiscal 2026.
"Credit costs will continue to remain elevated for micro-financiers for the coming couple of quarters. For other financiers, we could expect asset quality improvement," the report added.
The Axis Securities report expects recovery in both microfinance and credit from H2FY26.
"we expect gradual normalisation in credit costs, thereby supporting earnings. Navigating the headwinds effectively, we expect NBFCs under our coverage to deliver an earnings growth of 23 per cent CAGR over FY25-27E, with improving credit costs being a key improvement driver," the report added.
As per Industry data the business of Micro Finance Institutions (MFIs) industry has risen from Rs17,264 crores in March'12 to Rs3.93 lakh crores as of November 2024.
The microfinance industry operates in over 723 districts, including 111 aspirational districts across 28 states and 8 Union Territories. It also caters to the financial needs of almost 8 crore borrowers. MFIs contribute 2.03 per cent of the gross value added to GDP and support 1.3 crore jobs.
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