Microfinance shows signs of early recovery, but older bad loans weigh on sector

New Delhi: India’s microfinance sector ended financial year 2026 (FY26) with loan portfolio down 11% to ₹3.34 trillion, though a 4% sequential increase in the January-March quarter marked the first signs of a turnaround after a long period of stress, according to the Bharat Microfinance Report 2026, released by Sa-Dhan on Thursday.

Sa-Dhan is a Self Regulatory Organization (SRO) for microfinance institutions appointed by the RBI.

However, the report cautioned that the recovery remains tentative. While strains on the current loan portfolio have eased sharply, old stressed assets continue to weigh on the sector, with the share of loans overdue 180 days or more rising to 17.04% in March 2026 from 10.67% a year earlier.

The report said the number of loan accounts fell 21% to 10.40 million at the end of March 2026 from 13.18 million a year earlier. The reduction in loan accounts, along with an 11% drop in outstanding loans, reflects a cautious approach by microlenders after two years of high credit stress, concerns about household debt and borrowers taking out loans from multiple lenders.

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“FY2025-26 can be characterized as a period of consolidation and recalibration as lenders focus on strengthening portfolio quality, controlling borrower delinquency, improving debt collection and resuming sustainable credit growth. The third set of watchdogs from industry leaders and SROs, issued in April 2026, has strengthened credit discipline,” said Managing Director Ji, the sector’s chief executive and chief financial officer, expected to further improve the outlook in current year. (CEO), Sa-Dhan.

At the same time, the report said that the rise in outstanding loans in the January-March quarter suggests that new loans have begun to outpace repayments, marking the start of a new phase of growth.

Improving asset quality

Asset quality has also shown a sharp improvement in the current book. The portfolio at risk (PAR) 30-179 days past due fell to 2.34% in March 2026 from 6.63% a year earlier, while the PAR 90-179 days was 1.45%, down from 3.92%.

In microfinance, a loan is usually considered risky after 30 days of missed payment due to lack of physical collateral.

However, the improvement does not represent a complete resolution of stress in the sector, the report said. PAR 180 days and above increased to 17.04% from 10.67%, indicating an aging pool of older NPLs, even as repayment performance on the current book improved.

“Portfolio dynamics between March 2026 and March 2025 reveal a clear structural split,” the report said, describing a rapid recovery in active repayment alongside a build-up of older non-performing loans.

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The report also points to a significant reduction in multiple borrowing at the borrower level. Restrictions limiting borrowers to a maximum of three microlenders and limiting total household indebtedness to ₹2 lakh resulted in 92.6% of unique active borrowers being linked to two or fewer lenders in March 2026, compared to 90.5% a year earlier.

More significantly, the share of borrowers with five or more lenders fell to 0.1% from 1.6%, suggesting that tighter credit controls have substantially reduced high-risk multiple loans.

The adjustment was broad based. Loan accounts fell in 33 states and Union Territories, with some of the biggest microfinance markets seeing particularly steep declines. Karnataka saw a decline of 28%, followed by West Bengal at 24%, Tamil Nadu at 23%, Bihar at 22% and Uttar Pradesh at 17%.

A more cautious assessment

The assessment of the next stage in the report is more cautious. It said the improvement during FY26 was supported by better harvests, food disinflation, stronger employment and remittances, monetary easing and credit guarantees. These factors have helped to improve household incomes, financing conditions and portfolio quality.

But some of these favorable conditions cannot be assumed to last, the report warned. Inflation picked up again, the 2026 monsoon was below normal in high-borrower-density districts, and the guarantee facility expired.

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Climate variability has emerged as a particularly important medium-term risk because its impact can be simultaneous across borrowers in a district, unlike conventional credit risk, which is generally dispersed among individual borrowers. By August 12, 2026, cumulative declines were 12% below the long-term average, with the eastern and northeastern regions – where borrower density is high – facing significantly larger deficits than the national figure.

The report also highlights the uneven financial performance of microlenders. Operating expenses were 8.47% in 2026 versus 7.09% in 2025. Larger institutions demonstrated stronger ability to absorb costs and generate revenue, while several smaller and mid-sized institutions remained under pressure on profitability, return on assets and return on equity.