It's time to lend a hand

The microfinance industry is in a bind as funding declines and fears of defaults swirl amid stricter regulatory scrutiny, reports Raghu Mohan

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Sometime towards the end of this month, microfinance institutions (MFIs) hope to get a funding lifeline: The number being bandied about is around %6,000 crore, though the demand is much higher.

The business is not doing well, to put it mildly. Funding fell to %58,109 crore in FY25, a decline of 55.40 per cent year-on-year (Y-0-Y). Confidence levels of lenders (to MFIs) headed south on fears about asset quality, over-leverage and relatively poor collections. The industry’s gross loan book shrank to 3.59 trillion in June 2025, down 5.8 per cent quarter-on-quarter and 17 per cent on an annual basis, even as the Reserve Bank of India (RBI) pushed for responsible lending, and guardrails to curb overleveraging kicked in.

The worst may not be over. With state election season around the corner — when political parties typically throw fiscal caution to the winds while promising freebies — MFIs that fear its impact on credit discipline have raised the issue of loan waivers with the RBI and North Block. Bihar, Assam, Kerala, Tamil Nadu and West Bengal — they go to polls between the second half of 2025 and early 2026 — account for 42 per cent of the microfinance portfolio with 3.2 million unique borrowers, discounting those with multiple loan accounts. Crisil has said the Bihar portfolio, which accounts for 15 per cent of MFIs assets, “remains under watch as well given the state goes to polls in the third quarter of the current fiscal. In the past, sociopolitical issues have impacted collections during polls in some states.”