A single borrower who has already secured a loan is more valuable than two potential borrowers who have not yet secured a loan for microfinance lenders.
In a strategic move aimed at mitigating high delinquency rates, the microfinance sector in India has shifted its focus towards larger, risk-assessed loans to repeat, reliable borrowers. This shift, as reported on August 14, 2025, comes in response to a challenging environment created by previous periods of aggressive lending to overleveraged and potentially riskier new customers.
According to recent data, the gross loan portfolio (GLP) of microfinance lenders declined 17% year-on-year to ₹3,59,200 crore as at June-end 2025. The average ticket size of microfinance loans in Q1 FY26 increased by 4.1% quarter-on-quarter and 14.9% year-on-year, reaching ₹56,100. This shift towards larger loans is primarily due to lenders moving away from small-ticket loans below Rs 50,000, which have shown higher default risks. Instead, they prefer larger loans, typically above Rs 1 lakh, that are extended mostly to borrowers with solid repayment histories, i.e., existing customers with more than two years of good repayment track records.
This strategic shift reflects a focus on risk management and portfolio stability over aggressive growth. Institutions are prioritising lending to more creditworthy clients rather than acquiring many new borrowers with unknown risk profiles. Muthoot Microfin, for instance, has seen a shift in the mix of existing borrowers to new borrowers, with the former now making up 62% of their client base, compared to 50% each previously.
However, elevated delinquencies persist in the microfinance segment. The portfolio at risk (PAR) for over 180 days rose to 12.4% in June 2025, indicating persistent stress in late-stage delinquencies. Factors contributing to these elevated delinquencies include overleveraging of borrowers, legacy loans with repayment issues, shrinking borrower bases, and macro-economic factors affecting repayment capacity.
Overleveraging of borrowers, where many microfinance borrowers previously accessed loans from multiple lenders, leading to excessive debt burdens, is a significant concern. Approximately 25% of the portfolio linked to borrowers with more than three lenders is in the PAR 31-180 days bucket, indicating late repayments and rising delinquencies. Additionally, older loans with poor repayment history continue to pressure asset quality, sustaining elevated slippage and default levels.
The microfinance market has contracted by 17% year-on-year, and the number of active loan accounts and live customers has fallen significantly. This contraction can strain financial institutions' ability to diversify and manage risk effectively. Some microfinance segments are facing challenges due to borrowers' income instability, lower financial literacy, and tougher economic conditions impacting repayment capacity.
Despite these challenges, the microfinance sector remains optimistic about its future. By focusing on risk management and portfolio stability, institutions aim to create a more sustainable growth trajectory for the sector. This cautious industry posture will likely continue as institutions navigate lingering stress from legacy delinquencies and over-indebted borrowers.
Key numbers for context:
| Aspect | Detail | |---------------------------------|-----------------------------------| | Increase in large ticket loans | Share of loans > Rs 1 lakh rose from 4.6% to 8.3% of total portfolio[1] | | Portfolio contraction | Gross loan portfolio down 17% YoY to Rs 3.59 lakh crore[1] | | Elevated delinquency (PAR > 90 days) | 15.54% as of June 2025, with gross NPAs of Rs 55,820 crore[2] | | Borrower base | Active loan accounts fell from 159.3 million to 132 million[2] |
- In response to high delinquency rates, the microfinance sector in India has switched its attention to larger, risk-assessed loans for repeat, reliable borrowers, as reported on August 14, 2025.
- The strategic shift towards larger loans has led to a decline in the gross loan portfolio (GLP) of microfinance lenders, with the value decreasing by 17% year-on-year to ₹3,59,200 crore as at June-end 2025.
- Institutions are prioritizing lending to more creditworthy clients, moving away from small-ticket loans with higher default risks, and instead, prefer larger loans, typically above Rs 1 lakh, which are extended to borrowers with solid repayment histories.
- Despite this strategic shift, elevated delinquencies persist in the microfinance segment, with the portfolio at risk (PAR) for over 180 days rising to 12.4% in June 2025, indicating persistent stress in late-stage delinquencies.
- Overleveraging of borrowers, where many microfinance borrowers have loans from multiple lenders, is a significant concern, as approximately 25% of the portfolio linked to borrowers with more than three lenders is in the PAR 31-180 days bucket, indicating late repayments and rising delinquencies.
