More than five million micro borrowers have been pushed out of formal finance as a continued funding squeeze in the microfinance sector has led to a sixth straight quarterly contraction in the portfolio, according to the 55th edition of Micrometer.
The sector’s overall portfolio shrank 16.8% year-on-year to ₹3.40 lakh crore as of September 2025, down from ₹4.08 lakh crore a year earlier, the latest report from the Microfinance Institutions Network (MFIN), the industry’s self-regulatory body, showed.
Impact of Funding Squeeze
“Continued funding squeeze has resulted in the sixth consecutive quarterly fall in microfinance portfolio to ₹3.39 lakh crore. This has resulted in nearly 50 lakh clients going out of formal finance,” Alok Misra, CEO and director, MFIN, said.
Microfinance loan disbursals declined 12% year-on-year to ₹59,974 crore in Q2 as lenders adopted a cautious stance and implemented MFIN guardrails, which limit the number of lenders per borrower and cap exposure to prevent overleveraging. As a result, loan accounts dropped to 117 million from 146 million a year earlier.
Sequentially, however, disbursals were higher than ₹56,677 crore in Q1. The average loan size rose to a multi-quarter high of ₹60,853, indicating lenders’ preference for higher-quality borrowers over volumes.
NBFC-MFIs continued to dominate the industry’s ₹3.39 lakh-crore gross loan portfolio with a 39.2% share, followed by banks (31.4%), small finance banks (17%), and NBFCs (12%). All these lender categories witnessed portfolios shrinking in the range of 9-19%
Portfolio Quality and Sector Dominance
However, portfolio quality trends improved in most buckets. PAR 31–60 days eased to 0.9% from 1.1% in June 2025, while PAR 61–90 days improved to 1% from 1.4%. However, stress deepened in the long tail, with PAR 180+ rising to 16.2%, compared to 13.6% in Q1 and 8.5% a year earlier.
NBFC-MFIs, which rely heavily on bank funding, saw their outstanding borrowings fall 14% year-on-year to ₹95,724 crore as of September. Banks accounted for 62.5% of total borrowings, followed by external commercial borrowings (12.8%), non-bank entities (11.3%), AIFIs (7.2%), and others (6.2%).
Misra said the funding crunch is “ironical” given that PAR 31–90 days has improved to 1.09% and 98% of clients are within the MFIN guardrails showcasing disciplined underwriting in the sector. “One thing the sector needs now is to ensure that financial inclusion gains built over decades do not wither away…”
