The asset quality of microfinance institutions (MFIs) is expected to have witnessed improvement in FY26, with NPAs likely to have declined, according to the report by CareEdge Advisory.
“The asset quality of MFIs is expected to have witnessed improvement in FY26, with NPAs likely to have declined. This improvement is likely to have been largely driven by accelerated write-offs. In FY27, NPAs may see a marginal increase, as institutions normalise their write-off policies,” the report said.
The microfinance sector has been undergoing a corrective phase following rapid post-pandemic growth that led to borrower overleveraging, asset quality pressures and elevated credit costs, prompting lenders to tighten underwriting standards and prioritise portfolio quality, the report outlined.
“While the near-term outlook remains cautious as institutions stabilise asset quality and borrower leverage levels, the ongoing correction is expected to strengthen underwriting discipline and support sustainable long-term growth,” it said.
As per the report, the microfinance industry’s gross loan portfolio (GLP) is projected to recover and expand over the medium term. Accordingly, the MFIs’ GLP is projected to recover and grow at a CAGR of 14 per cent during FY26-FY30, supported by improving operating conditions, increasing formal credit penetration and sustained demand for financial inclusion.
Going forward, microfinance demand is expected to increase to Rs 11 lakh crore, while supply is projected to increase to Rs 5.5 lakh crore, accounting for 50 per cent of total demand, the report said, highlighting a continuing demand-supply gap in the sector.The report said regulatory and economic tailwinds are expected to support sectoral growth.
“Regulatory measures undertaken by the RBI, improving rural economic activity and collection efficiencies, and continued policy focus on financial inclusion are likely to support credit demand over the medium term,” it added.