MFI Portfolio Contracts by 40% - Banks Lag Other Lenders

Microfinance Portfolio Shrinks 40% Year-on-Year in Q3 FY26​

Bank Portfolio Outstanding Declines Sharply​

A report released on Monday indicates a significant contraction in the microfinance sector. The outstanding portfolio of microfinance by banks decreased by 40 per cent year-on-year to ₹65,687 crore in the third quarter of FY26. This represents the sharpest decline across all lender categories, which include dedicated non-bank finance companies – microfinance institutions (MFIs) – and small finance banks. The report, a collaboration by Equifax and SIDBI, highlights the trends within the industry.

Factors Contributing to Portfolio Contraction​

Persistent stress in asset quality has prompted lenders to adopt tighter underwriting standards. These safeguards include restrictions on the number of loans and borrower leverage. Furthermore, liquidity constraints, particularly impacting smaller lenders, have resulted in lower disbursements.

Overall Industry Performance and Market Share Shifts​

The overall industry portfolio outstanding was down 22 per cent year-on-year and 7 per cent sequentially in December 2025. Banks experienced the largest contraction, followed by 25 per cent for small finance banks, 22 per cent for not-for-profit MFIs and others, 14 per cent for NBFC-MFIs, and 4 per cent for NBFCs. The market share of banks has fallen to 25 per cent in Q3FY26, a decrease from 35 per cent in the year-ago period. Conversely, the market share for NBFC-MFIs has risen to 44 per cent from 37 per cent.

New Sourcing and Disbursement Trends​

NBFC-MFIs now account for 44 per cent of new sourcing. However, private sector banks continued to curtail their exposure, registering a 26 per cent contraction in disbursals. Despite industry challenges over recent quarters, some experts believe the microfinance sector operates in cycles and anticipate a rebound in activity.

Fresh Disbursements and Loan Volumes​

Despite the overall portfolio contraction, fresh disbursements in the October-December 2025 quarter grew 6 per cent year-on-year to ₹63,348 crore. NBFC-MFIs saw an increase in the number of loans disbursed, reaching 48 lakh in Q3FY26, compared to 43 lakh in the same period the previous year. Banks, NBFCs, however, reported a decline in loan disbursements. Banks disbursed 27 lakh loans in Q3FY26, down from 42 lakh in Q3FY25, while NBFCs disbursed 12 lakh loans in Q3FY26, compared to 15 lakh in Q3FY25.

State-Wise Microfinance Exposure​

Bihar remains the largest microfinance state by portfolio size, representing 16 per cent of the industry's exposure. Uttar Pradesh recorded the lowest portfolio contraction among the top 10 states at 16 per cent year-on-year. Tamil Nadu reported the lowest incidence of non-payment among major states, with 3.09 per cent of loans unpaid for over 30 days. Karnataka experienced the highest portfolio shrinkage over the last year at 34 per cent.

Delinquency Improvements​

All top 10 states recorded meaningful improvements in delinquency compared to December 2024, despite the portfolio contraction.