MUMBAI: The microfinance sector is likely to remain under stress beyond FY26 as lenders continue to grapple with asset quality concerns and shrinking profit margins, according to Sa-Dhan, the self-regulatory organisation for microfinance institutions.
In its latest assessment, Sa-Dhan said that while the sector has shown resilience in expanding outreach and maintaining credit flow to low-income borrowers, challenges linked to borrower repayment capacity, rising operational costs and funding constraints could weigh on performance in the near term.
“Although the pressure on asset quality and profitability may continue for some more time, it is expected that stabilisation will happen in the latter half of the year,” the association said. It noted that the pace of recovery will depend largely on adequate funding support from banks and other financial institutions.
Microfinance lenders, especially smaller NBFC-MFIs, have been facing higher funding costs amid tighter liquidity conditions and elevated interest rates. At the same time, competition from larger players and banks expanding into the micro-lending space has compressed margins.
Sa-Dhan observed that even as the gross loan portfolio of the industry continues to grow at a healthy pace, delinquencies in certain geographies remain a concern.
The organisation called for continued policy support and a stable funding environment to ensure that credit to the bottom-of-the-pyramid borrowers is not disrupted.
According to industry data, the microfinance sector has been on a recovery path since the pandemic, but uneven income revival in rural areas and climate-related disruptions have added to repayment stress in some pockets.
Sa-Dhan said it expects the overall health of the sector to improve gradually, provided funding pipelines remain steady and risk management practices are strengthened.
