Bank lending to joint liability groups (JLGs) contracted sharply in 2024–25, with disbursements declining 58%, reflecting the stress faced by the microfinance sector over the past year, according to the Trend and Progress report released by the Reserve Bank of India on Monday. JLGs which are informal credit groups catering to small borrowers, were among the worst hit as lenders turned cautious amid funding constraints and tighter underwriting norms.
Combination of rising credit risk, regulatory tightening, and weaker repayment capacity among micro and small enterprises has been the key reason for banks’ lending to small borrowers slowing. According to Q2 FY26 data, the microfinance loan book declined 16.8% year-on-year, marking the sixth consecutive quarter of degrowth.
Microfinance institutions cut back on disbursements
Small Finance Banks and microfinance institutions, which are the primary channels of credit for low-income and rural borrowers, have reported higher delinquency and non-performing assets, prompting them to cut back on disbursements. Banks were prioritising balance sheet protection and regulatory compliance, but this came at the cost of financial inclusion, leaving small borrowers with fewer options to access formal credit. The PSL loans were down 12% in FY25 from16.9% a year ago.
“The fall in funding and disbursements has had the unintended consequence of pushing nearly 65 lakh borrowers back towards informal sources of credit,” said Alok Misra, CEO and Director, Microfinance Industry Network (MFIN). However, he stated that, “Since the last year fiasco, the sector had been “severely tested” and is showing signs of a “steady and silent recovery.
Improvement in quality of new disbursements
Aided by regulatory guardrails and a strong focus on underwriting, the credit quality of new disbursements has improved and is close to pre-March 2024 levels. Nearly 98% of borrowers now remain within MFIN’s guardrails, underscoring disciplined lending practices across the industry.”
Despite the slowdown, microfinance continues to play a critical role in advancing financial inclusion by extending small-ticket credit and basic banking services to underserved and unbanked populations. The Self-Help Group–Bank Linkage Programme (SHG-BLP), continued to expand its outreach during the year. The number of SHGs accessing bank credit rose to 55.6 lakh in 2024–25 from 54.8 lakh a year earlier, although the overall value of loans disbursed moderated slightly due to lower credit flows in the southern region.
At end-March 2025, savings balances of SHGs with banks increased 9.7% year-on-year to Rs 70,000 crore while outstanding loans grew 17.2% to Rs 3 lakh crore, indicating sustained credit demand among rural and low-income households even as banking penetration remains uneven.
Looking ahead, Misra said improving liquidity conditions and continued discipline among lenders should help the sector stabilise and gradually rebuild momentum, even as it works to restore credit flows without compromising asset quality.