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

Microfinance Shows Early Recovery Signs as Legacy Defaults Persist

Theindiapostdaily.com – Microfinance shows early recovery signs in India after a difficult period marked by repayment stress, tighter lending and concerns over excessive household debt. Outstanding microfinance credit stood at ₹3.34 trillion at the end of March 2026, down 11% from a year earlier. However, lending increased 4% in the January–March quarter, indicating that new disbursements had started to exceed repayments.

The sector ended FY26 with a smaller loan book, but the final quarter pointed to a possible stabilisation. Lenders have spent the past two years strengthening collections, reviewing borrower repayment capacity and limiting loans to households already carrying multiple debts.

“FY2025–26 can be characterised as a period of consolidation and recalibration, with lenders focusing on strengthening portfolio quality, controlling borrower indebtedness, improving collections and restoring sustainable credit growth,” said Jiji Mammen, executive director and chief executive officer of Sa-Dhan.

Loan accounts fall across major markets

The reduction in lending was visible in both loan values and borrower accounts. Microfinance loan accounts declined to 10.40 crore by March 2026, compared with 13.18 crore a year earlier, a fall of 21%.

The contraction extended across 33 states and Union territories. Karnataka recorded a 28% decline in loan accounts, followed by West Bengal at 24%, Tamil Nadu at 23%, Bihar at 22% and Uttar Pradesh at 17%.

For lenders, the more cautious approach reflects a greater focus on whether households can manage their existing financial obligations before taking on another loan. In collateral-free microfinance lending, careful underwriting and consistent collections are important to preserving long-term credit access.

Newer loans show better repayment trends

Microfinance shows early recovery signs most clearly in loans with shorter overdue periods. Portfolio at risk for loans overdue between 30 and 179 days fell to 2.34% in March 2026 from 6.63% a year earlier. For loans overdue between 90 and 179 days, the ratio declined to 1.45% from 3.92%.

Microfinance loans are generally considered at risk after a payment is missed for 30 days because they are unsecured. The improvement in these categories suggests that repayment behaviour among active borrowers has strengthened.

Yet the sector continues to face a sizeable burden from older stressed loans. The share of loans overdue for at least 180 days rose to 17.04% in March 2026, compared with 10.67% in March 2025. This ageing pool of defaults remains a challenge even as the current loan book improves.

Tighter borrowing limits aim to reduce debt stress

Industry guardrails now limit borrowers to a maximum of three micro-lenders and cap total household indebtedness at ₹2 lakh. These measures are intended to curb multiple borrowing and reduce the risk of borrowers taking on debt beyond their ability to repay.

By March 2026, 92.6% of unique active borrowers were linked to no more than two lenders, up from 90.5% a year earlier. The proportion connected to five or more lenders dropped sharply to 0.1% from 1.6%.

The trend suggests that tighter lending discipline is reducing the most severe cases of multiple borrowing. Maintaining that discipline while resolving legacy bad loans will be central to a sustained microfinance recovery.

Microfinance Recovery: Frequently Asked Questions

What do the latest microfinance figures show?

They show a mixed picture. The overall microfinance loan book and number of accounts declined during FY26, but lending rose in the final quarter and repayment performance improved for newer loans with shorter overdue periods.

Why are legacy bad loans still a concern?

Loans overdue for 180 days or more increased as a share of the portfolio. These older defaults can weigh on lenders’ financial health and require continued collection, recovery and portfolio-management efforts.

How do the new borrowing limits affect customers?

Borrowers can have loans from up to three micro-lenders, while total household indebtedness is capped at ₹2 lakh. The limits are designed to help prevent households from accumulating unsustainable debt across several lenders.