Microfinance lending is increasingly shifting toward larger-ticket loans.
NEW DELHI: India’s microfinance sector grew its outstanding portfolio by 3% quarter-on-quarter in January-March 2026, ending four consecutive quarters of contraction according to the SIDBI-Equifax Microfinance Pulse Report published on June 17. Industry-wide 30-plus days past due delinquencies fell from 6.64% in March 2025 to 2.35% a year later. The numbers read like a recovery. They are something more complicated.
The portfolio is shrinking at the bottom even as it recovers in aggregate. That distinction matters enormously for 17.75 crore households that depend on microfinance as their primary formal credit channel.
The Upmarket Drift in Numbers
The clearest evidence of structural change is in loan size distribution. In July-September 2024, loans below ₹50,000 accounted for 35% of all disbursements. By January-March 2026, that share had collapsed to 15%. Meanwhile, Loans above ₹75,000 expanded from 23% to 41% of all disbursements over the same period.
The industry-wide average ticket size rose from ₹52,789 in January-March 2025 to ₹62,945 by January-March 2026, a 19.2% increase in a single year. Against the FY22 baseline of ₹38,167, the sector has effectively shifted into a different credit bracket altogether.
Borrower composition tells the same story. Existing-to-credit repeat borrowers now account for 80% of all microfinance originations, up from 67% three years ago. First-time borrowers have been reduced to 20% of originations. Lenders are deepening relationships with a shrinking, safer pool rather than expanding credit access to new households.
Why Lenders Are Retreating
The rationale is not without merit. The 2024-25 credit cycle produced severe over-indebtedness, particularly in Bihar, Odisha and Uttar Pradesh where aggressive expansion created borrower saturation. Bihar alone, which holds 16% of India’s total microfinance portfolio recorded 30-plus DPD rates of 7.2% in FY25, well above the national average.
In response, self-regulatory organisations introduced structural guardrails. Sa-Dhan’s Sankalp 2.0 and MFIN’s Guardrails 2.0, both effective from June 2025, capped household microfinance lenders at three institutions, capped total household indebtedness at ₹2,00,000 including all unsecured retail liabilities and required lenders to verify that total monthly repayment obligations do not exceed 50% of household income. Disbursing fresh credit to any borrower with an active default above ₹3,000 beyond 60 days was prohibited outright. These guardrails increased loan rejection rates sharply.
The Regulatory Push Upmarket
On June 6, 2025, the RBI reduced the qualifying asset threshold for NBFC-MFIs from 75% to 60% of total assets. Previously, to maintain their specialised regulatory status, these institutions had to keep at least three-quarters of their books in collateral-free microfinance loans to households earning under ₹3,00,000 annually. The revised threshold allows up to 40% of the balance sheet in non-qualifying assets up from 25%.
The consequence is structural. NBFC-MFIs, which now hold 46% of sector portfolio outstanding compared to 35% in September 2022, are actively diversifying into secured MSME lending, gold loans and affordable housing finance. The contraction in small-ticket originations is not merely defensive risk management. It is a deliberate portfolio reallocation enabled by the regulator.
Specialized NBFCs, operating with higher borrowing costs and automated credit models, now report an average ticket size of ₹82,377 per loan, nearly double the sector’s historical baseline.
Where the Displaced Borrowers Go
The displaced sub-₹50,000 borrower has limited alternatives and none are straightforward. The Self-Help Group Bank Linkage Programme remains the primary public buffer. DAY-NRLM cumulative disbursements to women SHGs reached ₹11,10,945 crore through August 2025, with a credit portfolio of ₹3.04 lakh crore and an NPA rate of just 1.76%. The SHG model is structurally sound. It is also slow, requiring a minimum six months of savings behaviour before credit linkage. That acts as an entry barrier that cannot substitute for the on-demand liquidity previously available through commercial MFIs.
Even the government’s Pradhan Mantri Mudra Yojana is moving in the same direction. The Shishu tier, covering loans up to ₹50,000 has seen its share of total PMMY accounts fall from 93% in FY16 to 51.7% in FY25. In value terms, Shishu loans represent just 19% of total PMMY disbursements. Women, who hold approximately 68% of cumulative Mudra accounts are disproportionately concentrated in this shrinking tier.
Fintech lenders serving sub-prime borrowers charge annual percentage rates of 18% to 36%, substantially above regulated microfinance pricing of 21.5% to 26%. Rural women without smartphones or reliable internet connectivity cannot access these platforms in any case.
In Bihar, ground-level feedback from NGO networks indicates that women excluded from formal credit are returning to local moneylenders for agricultural input costs and household emergencies. This is precisely the cycle that institutionalised microfinance was designed to break.
The Structural Question
The sector’s defenders argue this phase is temporary and necessary. Cleaner books, tighter underwriting and diversified balance sheets will ultimately support a more sustainable expansion. The delinquency improvement is real. The vintage analysis of loan cohorts originated in early FY25 shows materially lower default build-up than older cohorts, confirming that borrower selection is working.
The discomfort lies in what “working” means in this context. A sector founded on the premise of serving the unbanked is recovering by serving fewer of them. Whether that is prudence restoring the foundation for future inclusion or a permanent upmarket migration dressed in the language of risk management, is a question the next two years of disbursement data will answer.
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