Banks’ reclassification of microfinance loans as retail credit has weighed on overall loan growth in the microfinance sector, according to the Microfinance Industry Network (MFIN), one of the sector’s self-regulatory bodies.
According to its 58th edition of Micrometer, the gross loan portfolio (GLP) of the microfinance industry grew 1.1% sequentially to ₹3.29 lakh crore in the first quarter of FY27. On a year-on-year basis, however, the sector’s GLP declined 7% from ₹3.53 lakh crore in the June 2025 quarter.
“While the GLP has inched up, the increase would have been much higher but for the shifting of loans from microfinance bureau to retail bureaus,” MFIN said.
As per RBI guidelines, all unsecured loans extended to households with an annual income of up to ₹3 lakh are classified as microfinance loans. MFIN said it has taken up the issue with the central bank.
The self-regulatory body has also sought a review of the income threshold for microfinance households. “Since the last revision in 2022, household incomes, wages and the general price level have increased materially, reducing the real value of the existing ₹3 lakh threshold,” MFIN said.
After seven consecutive quarters of contraction, the sector’s GLP had posted a sequential growth of 3% to ₹3.25 lakh crore in Q4FY26. “The industry has sustained the growth momentum seen in the last quarter, marking a turnaround after seven consecutive quarters of slowdown,” said Alok Misra, CEO and director, MFIN.
The industry disbursed ₹61,718 crore during the first quarter of FY27, marking an 8.9% year-on-year increase.
In terms of portfolio share, NBFC-MFIs accounted for 44.3% of the total industry portfolio, followed by banks at 25.3%.
The number of active loan accounts in the microfinance sector also declined sharply to 99 million in June 2026 from 125 million a year earlier.
Portfolio quality, meanwhile, improved further, with portfolio-at-risk (PAR) of 31-180 days falling to 1.6% as of June 30, 2026, from 5.6% at the end of Q1FY26.
The improvement in asset quality follows a series of guardrails introduced by industry bodies MFIN and Sa-Dhan, including a cap of ₹2 lakh on total outstanding debt per borrower and a reduction in the maximum number of lenders per borrower to three from four.
According to Misra, consolidation of existing borrowers with higher tickets along with the guardrails contributed to the significant improvement in portfolio quality.
He also added that portfolio health has benefited from a better-than-anticipated monsoon. ‘Other than Rajasthan, none of the top 10 states has seen a deterioration in the monsoon outlook since June, with several large microfinance markets experiencing normal or near-normal rainfall,” he said.