Experts, however, expecting a recovery in the next financial year.
The decline, which began in April 2024 from the peak of Rs 3.43 lakh crore, continued since the extent of loan rundown offset higher disbursal at the sectoral level, said chief executives of two large NBCF-MFIs.
To be sure, a few microfinance lenders grew their portfolio in the December quarter, reversing the falling trend at the entity level. However, the sectoral portfolio level may see a reversal only from March 2026, experts said.
Small NBFC-MFIs-without strong funding back-up-are still facing headwinds.
“Funding access remains a hurdle for small and mid-sized players, whereas large players’ reasonable funding positions support expected disbursement growth in FY27,” India Ratings & Research wrote in a note.
Equifax said November portfolio size reduced from Rs 3.42 lakh crore as of September 30, 2025.
Another credit information company Crif High Mark reported the September-end print at Rs 3.46 lakh crore.
The difference in the data is primarily due to variations in the number of reported micro-lenders and the treatment of hanging accounts, which refers to an active account for which lenders have not updated the latest information to the credit bureaus, according to Sa-Dhan September quarter report.
Small finance banks like ESAF, Equitas, and Ujjivan reported sequential growth in their respective micro loan asset portfolios in the December quarter, after a long gap. CreditAccess Grameen, India’s largest NBFC-MFI, also showed a sequential rise in gross loan portfolio.
“There are early signs of recovery in microfinance, and we have started thinking of growing the book, albeit cautiously,” Federal Bank managing director KVS Manian said last week. “The month of May saw the peak of slippages, after that we have seen a decline in slippages every month.”
India Ratings & Research has revised the outlook on the microfinance sector to neutral from deteriorating, while maintaining a stable rating outlook for FY27. The rating company said the sector has largely overcome the headwinds of FY25-FY26, with borrower-level overleverage and asset-quality stress decreasing.
“We see FY27 as a recovery year following the stress in FY25-FY26,” said Karan Gupta, head and director financial institutions at the rating company. “A shift toward individual and non-MFI loans will further mitigate the risk. Also, players are expected to scale up credit-guarantee backed disbursements to strengthen credit risk buffers.”