The sharp decline in the third quarter of this financial year resulted from a bulk reclassification of micro loans as retail loans by one of the private sector banks with significant microfinance exposure, said three people aware of the matter.
The gross loan portfolio stood at ₹3.42 lakh crore at the end of September last year. At the end of November, it was ₹3.40 lakh crore.
Besides, the cumulative loan disbursement is yet to offset the size of loan rundown, said industry executives. The strategy of acceleration in writing off bad loans was another reason behind the yearly decline of loan portfolio at the aggregate level, even as some large non-banking financial company-micro finance institutions (NBFC-MFIs) showed higher loan disbursement and annual growth in the portfolio after the end of the third quarter.
“At the sectoral level, the book run-down, including loan write-offs is still higher than total loan disbursement, which is the reason behind the contraction in the overall microfinance market,” Sanjay Garyali, managing director at Fusion Finance, told ET.
Bandhan Bank, for instance, sold bad loans worth ₹3,212 crore to asset reconstruction companies. Of those, micro loans accounted for ₹2,800 crore.
AgenciesMicrofin market sees 16% YoY drop in Q3; Loan reclassification as retail hits numbers
The microfinance market peaked at ₹4.43 lakh crore in the quarter to March 2024. Thereafter, there has been a steady fall every quarter as lenders across the spectrum slowed lending to the bottom of the pyramid borrower segment which was largely overleveraged and witnessing a surge in defaults. The industry experienced a year-on-year contraction in disbursement in 2025, with volume declining 34% and value decreasing 24%, according to an Equifax report.
The number of active loans declined 9% quarter-on-quarter and 23% year-on-year to 107.4 million, the data showed.
The lenders are also shifting their focus on providing gold jewellery-backed loans instead of collateral-free loans to the same customer segment, leading to the fall in micro loan disbursement year-on-year, said Subhankar Mishra, head of strategy at Equifax India.
The December quarter, however, saw a modest increase in disbursements to Rs 61,000 crore from Rs 56,535 crore in the preceding quarter, signalling business normalisation, as per industry level data collated by Crif High Mark data. The gross loan portfolio declined to Rs 3.21 lakh crore at the end of December from Rs 3.46 lakh crore three months prior, said people aware of the matter. Crif High Mark did not respond to ET’s queries seeking details.
Small finance banks such as ESAF, Equitas, Jana and Ujjivan reported quarter-on-quarter growth in their respective micro loan asset portfolios at the end of December.
CreditAccess Grameen, India’s largest NBFC-MFI, also reported a quarter-on-quarter increase in gross loan portfolio. The signs of business normalisation led to recovery of share prices for several microfinance lenders over the past few weeks.
Bandhan Bank shares surged 17% in the past one month to Rs 168.25 apiece on BSE. Shares of Fusion Finance jumped 17.4% to Rs 194 each, while Satin Creditcare Network saw a 5% increase in share price to Rs 155.10 each during this period.
Spandana Sphoorty Financial, which cut net loss to Rs 93 crore in the December quarter from Rs 249 crore in the preceding three-month period, saw a 9% increase in share prices in a month to Rs 264.5 apiece.
At the end of 2025, NBFC-MFIs controlled 40.9% of the market, followed by private banks (25.6%), small finance banks (16.9%) and other NBFCs (14%). The balance 2.6% was with notfor-profit entities.