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Microfinance finds its way out of the debt trap

By Sohail Khan 18 August 2026, 12:41 am

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Business News›Industry›Banking/Finance›India’s microfinance overhang is finally easing as debt-stressed borrowers fall

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India’s microfinance overhang is finally easing as debt-stressed borrowers fall

Synopsis

The number of microfinance borrowers with multiple loans has significantly decreased. These borrowers still hold substantial outstanding loans, posing a higher credit risk. Portfolio at risk for these stretched borrowers is higher than others. The microfinance market saw a record peak in loans outstanding recently. Stricter underwriting practices are helping the sector recover from past challenges.

Kolkata: The number of microfinance borrowers with loans taken from four or more lenders has reduced to 1.35 million at the end of June, representing about 2% of the total borrower base of 66 million, data from Crif High Mark showed.

The number of such overextended borrowers has shrunk to less than a third from the peak about two years ago, although they still have ₹14,711 crore of outstanding loans between them at the end of June, carrying a higher credit risk.

Also Read: Rural India contributes 80% of microfinance book, highest since 2011 as NBFCs shift focus

The portfolio at risk — loans not serviced for more than 30 days and up to 180 days — for these stretched borrowers stood at 7.4-7.9% at the end of first quarter. That compares with 1.9% for borrowers associated with one or two lenders, and 4.1% for borrowers taking loans from three lenders, CRIF data showed. The portfolio at risk was much higher across categories a year prior.

Fewer Borrowers Taking Loans from Multiple Microfin Firms

At the end of March 30, 2024, when the size of the microfinance market hit a record peak of ₹4.43 lakh crore, about 5.6 million borrowers, or nearly 6.4% of the then borrower base of 87 million, had loans from more than four lenders.

Sectoral leaders, however, expect these borrowers to either repay fully or settle the account since that is the only way they come back to the institutional credit system.

Defaulters lose eligibility to get fresh loans unless they clear their dues.

Nearly 21 million borrowers in the bottom of the pyramid segment have gone out of the formal credit system over the past two years either due to default or in normal course while lenders tightened their underwriting standards.

The ₹14,711 crore pool mentioned earlier reflects 4.4% of the sector's total loan outstanding of ₹3.33 lakh crore as of June 30, 2026. Borrowers with more than four lenders had ₹35,712 crore outstanding loans a year prior, representing 10% of the total market size that time.

The overleveraged borrowers and the subsequent large scale default were at the heart of the sector's asset quality crisis which haunted lenders over the last two years. The sector is slowly coming out of the woods with stronger and stricter underwriting practices.

Also Read: As banks shrink microfinance books, bigger MFIs prepare to grab the gap

"The Indian microfinance sector is witnessing recovery after navigating one of its most challenging periods in recent years," CareEdge Ratings said in a note issued earlier in the month. "Industry guardrails and recent policy initiatives have improved lending discipline and moderated borrower overleveraging… With the industry having cleaned up most of the legacy stress, credit costs are expected to moderate, supporting a gradual recovery in profitability," it said.

The rating company however flagged an uneven pace of recovery as smaller micro lenders continue to face tighter liquidity, higher borrowing costs and cautious lender appetite while well-capitalised and bigger non-banking financial company-microfinance institutions (NBFC-MFI) have better access to funding.

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