While short-term challenges such as asset quality and liquidity concerns remain, recovery is expected in FY26 as 91% of loans support income-generating activities. | Photo credit: iStockphoto
According to Sa-Dhan, the stress pattern in the microfinance sector has started to decline, indicating that the worst is behind us and lending could pick up, provided adequate financing support is received by the microfinance institutions (MLIs).
The Self-Regulatory Organization (SRO) for Microfinance Institutions in its “Bharat Microfinance Report – 2025” noted that there could be a reversal in the decline in outstanding loans in the previous financial year 2024-25.
Loan volume in FY25 will decline due to the liquidity crisis
Credit information Corporate data on the microfinance sector as of end-March 2025 shows that the number of loan accounts fell 13 percent year-on-year to 13.99 crore. Further, there was a 14 percent year-on-year decline in outstanding loan to ₹3,81,225 crore. The loan amount disbursed fell 26 percent year-on-year to ₹ 2,84,130 crore in FY25.
According to the Sa-Dhan report, this overall decline in loan disbursement volume was mainly caused by the liquidity crisis, deteriorating asset quality, stricter regulatory measures and a cautious lending approach that emphasized risk management after a phase of rapid expansion and rising defaults.
Guardrails control over-indebtedness
Jiji Mammen, executive director and CEO of Sa-Dhan, said: “The most talked about issue contributing to the industry-wide stress is credit over-indebtedness, caused by increased borrower exposure and a larger number of lenders. Industry leaders and self-regulatory organizations had noticed this and came up with additional guardrails. The first set was launched in July Released in 2024 and the next set is scheduled for April 2025.
“These restrictions have led to controls on lending; these guardrails, together with the lending restrictions imposed on MFIs by lenders, were also the reasons for negative growth in the sector.”
However, due to the general situation over the past one to one and a half years, lenders have reduced their exposure to MFIs.
“This has further introduced a challenge in the form of liquidity stress. It is hoped that the lenders will come back with more funding for the MLIs, which will soon turn the situation around.
“The situation is expected to improve this financial year as 91% of loans are used for income generation,” Mammen said.
While the microfinance sector faces short-term headwinds, especially in terms of asset quality and operational efficiency, the long-term outlook remains positive, with a gradual recovery expected in the financial year 2025-26, according to the report.
The way forward involves a strong emphasis on risk management, technology adoption, diversification and compliance with evolving regulatory frameworks to ensure sustainable and inclusive growth.
The report underlined that while pressure on asset quality and profitability may persist for some time, stabilization is expected to occur in the second half of the year. Strict adherence to regulatory standards, codes of conduct and guardrails is important for the long-term stabilization of the microfinance sector.
.
Published on October 10, 2025
#Microfinance #sector #stress #easing #India #SaDhan #Report