Microfinance Shakeup: Banks See Sharp Portfolio Contraction

Banks' engagement with microfinance took a significant hit in the third quarter of FY26, with portfolios shrinking by 40% according to a report published on Monday. This contraction is the most severe compared to other lenders like non-bank finance companies-MFIs and small finance banks, the report by Equifax and SIDBI reveals.

The decline is attributed to stress in asset quality, leading to tighter underwriting standards and liquidity issues, particularly for smaller lenders. Consequently, there has been a pronounced drop in disbursements. The report highlights an overall 22% year-on-year decrease in the industry’s portfolio with banks experiencing the largest share decline, down to 25% from 35% a year ago, whereas NBFC-MFIs increased to 44% from 37%.

Despite the downturn, there is a notable growth in fresh disbursements, as the number of loans by NBFC-MFIs rose to 48 lakh in Q3FY26 from 43 lakh previously. However, states like Karnataka saw substantial portfolio shrinkages, with better delinquency records observed across major states, pointing towards a potential cyclical recovery ahead for the microfinance sector.