Recovery of microfinance sector unlikely before FY26, says Morgan Stanley

The Indian microfinance industry is likely to be confronted with muted loan growth for the coming quarters, with recovery only expected by 2Q – 3QFY26, according to a report from Morgan Stanley. | Photocredit: Adeel Halim

The stress takes place in the Indian microfinance industry, which is expected to see Gedempte Loan growth for a few quarters, up to 2Q-3QFY26 Before the recovery starts, a report from Morgan Stanley noted.

The report stated that the growth of assets management (AUM) for microfinance institutions (MFIs) has been delayed or even dropped in the past quarters. In 4QFY25, some settings have fallen double digits in quarterly growth.

It stated: “We see constant stress, muted loan growth for a few more quarters (up to 2Q-3QF26) before the recovery begins.”

Some companies emphasized the report and stated that Spandana Spears registered the sharpest decrease by 24 percent, followed by Asirvad MFI with a fall of 18 percent. Indusind Bank and Fusion MFI have fallen from 5 percent.

While Bandhan Bank reported a fall of 7 percent in 1qfy26. Even for lenders who have managed positive growth, such as IIFL Samasta and Muthoot Micro, the pace was much slower than before.

NPAs in Indian microfinance

The report also emphasized that the gross non-performing assets (GNPA) or gross stage 3 relationships have also deteriorated. The GNPA from Fusion MFI rose from 2.9 percent in 4QFY24 to 9.4 percent in 2QFY25 and 12.6 percent in 3QFY25. The credit costs remained increased, which reflects the higher costs for covering potential credit losses. Other lenders such as Muthoot Micro, Belstar MFI and Credag also installed high cumulative credit costs, indicating sustainable pressure on profitability.

Delinquencies have also been high. For loans that are between 31 and 180 days (par 31-180), NBFC-MFIS and banks reported comparable levels at the end of March 2025, at 7.1 percent and 6.6 percent respectively.

The report stated that NBFCs were lower at 3.8 percent and the total trend showed a steady increase due to FY25. The data suggested that the sector continues to struggle with problems with the quality of assets, weak growth momentum and high costs, with signs of recovery that was only expected after the next few quarters.

Published on August 14, 2025