India’s microfinance sector is grappling with a severe funding crisis and persistent pressure on asset quality that could hamper profitability beyond 2026, according to a stark new report from the industry’s self-regulatory body, Sa-Dhan. The “Bharat Microfinance Report 2025,” released Friday, reveals that a sharp pullback in bank lending has contributed to a 17% contraction of the overall market, posing a significant threat to the financial stability of smaller lenders.
The most pressing issue identified is a growing reluctance from banks to extend credit to microfinance institutions (MFIs). Sa-Dhan’s executive director called this apprehension the “major challenge for the sector at present,” warning that without adequate capital, non-banking financial company-MFIs (NBFC-MFIs) could face further distress. This funding squeeze is already evident in the numbers, with debt funding for these lenders plummeting by 20% year-on-year to just Rs 12,781 crore in the first quarter of the fiscal year. The overall microfinance market shrank to Rs 3.59 lakh crore as of June 2025.
The report points to mixed signals in asset quality that may be fueling this caution from banks. While early-stage delinquencies (loans overdue by 31-90 days) have shown improvement, falling to 2.4% in June 2025 from 3.1% in December 2024, according to data from Crif High Mark, stress in more severe categories has escalated dramatically. The portfolio at risk for over 180 days, including write-offs, more than doubled to 12.4% in June 2025, a significant jump from 5.2% just one year prior.
Despite these headwinds, Sa-Dhan suggests the worst may be over, noting that overall stress patterns have begun to decline. The report expresses cautious optimism for a “reversal in the decline of the loan outstanding” seen in the previous fiscal year, but hinges any recovery squarely on the condition that “adequate funding support is received.”
To navigate the challenging environment, Sa-Dhan has urged MFIs to urgently diversify their funding streams, including raising capital directly from the market. The report outlines a long-term growth strategy centered on improving collection efficiency, tightening risk controls, and leaning into digital transformation. “The long-term growth of the microfinance industry is expected to hinge on improved customer underwriting, digital adoption, policy interventions, and a renewed focus on responsible lending and improved collection practices,” the report concluded.
