New Delhi: Banks’ microfinance portfolio outstanding fell sharply by 40 per cent year-on-year to ₹65,687 crore in the third quarter of FY26, according to a report released on Monday by Equifax in collaboration with SIDBI. This marks the steepest contraction among all microfinance lenders, including NBFC-MFIs, small finance banks, and non-bank finance companies.
Asset Quality Pressure Leads to Tighter Lending Standards
The report highlighted that persistent stress in asset quality prompted banks to tighten underwriting norms. Measures such as loan guardrails, limiting the number of loans and leverage per borrower, were adopted to mitigate risk. Additionally, liquidity constraints, especially among smaller lenders, contributed to lower disbursements during the quarter.
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Industry-Wide Portfolio Contraction
The overall microfinance industry portfolio declined 22 per cent year-on-year and 7 per cent sequentially in December 2025. The contraction across different lender types was as follows:
- Banks: 40% decline (largest contraction)
- Small Finance Banks: 25% decline
- Not-for-Profit MFIs and others: 22% decline
- NBFC-MFIs: 14% decline
- NBFCs: 4% decline
The market share of banks in the microfinance sector slipped to 25% in Q3 FY26 from 35% in the year-ago period, while NBFC-MFIs’ share rose to 44% from 37%.
NBFC-MFIs Gain Ground in New Loan Sourcing
Despite the overall contraction, NBFC-MFIs accounted for 44% of new loan sourcing in Q3 FY26. The number of loans disbursed by NBFC-MFIs rose to 48 lakh, up from 43 lakh a year ago. In contrast, banks disbursed 27 lakh loans, down from 42 lakh, and NBFCs disbursed 12 lakh loans, down from 15 lakh.
Fresh disbursements across the industry grew 6% year-on-year to ₹63,348 crore in the October–December 2025 quarter, indicating that microfinance activity is gradually picking up despite portfolio shrinkage.
State-Wise Portfolio Trends
On the state level, Bihar continues to be the largest microfinance market, accounting for 16% of the industry’s exposure.
- Uttar Pradesh recorded the lowest portfolio contraction among the top 10 states at 16% year-on-year.
- Tamil Nadu reported the lowest delinquency, with only 3.09% of loans unpaid for over 30 days.
- Karnataka, which proposed new MFI regulations last year, saw the highest portfolio shrinkage at 34% year-on-year.
Despite the contraction, all top 10 states reported meaningful improvements in delinquency compared to December 2024, reflecting enhanced recovery efforts and better portfolio management.
Industry Outlook
Experts note that the microfinance industry has faced challenges for several quarters, but it remains cyclical in nature, and activity is expected to rebound gradually. While banks and private lenders continue to tighten exposure, NBFC-MFIs are emerging as key drivers of growth in the sector, supported by strong disbursement numbers and rising market share.
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