The stress in the microfinance sector may be easing, with lenders ranging from large microfinance institutions to universal banks and small finance banks reporting an uptick in fresh loan disbursements and lower slippages during the latest quarter.
CreditAccess Grameen, the country’s largest microfinance NBFC, on Tuesday reported a 13.4% year-on-year increase in loan disbursements to ₹5,767 crore, while its gross loan portfolio expanded 8% to ₹26,566 crore at the end of the third quarter.
The lender also returned to profitability, posting a net profit of ₹252.09 crore compared with a net loss of ₹99.52 crore a year earlier, aided by lower bad loan provisions.
“We have witnessed normalisation in the asset quality trends across operating geographies enabling us to re-focus on growth with confidence,” Ganesh Narayanan, MD & CEO of CreditAccess Grameen, said.
The lender’s PAR 15+ accretion—loans overdue by more than 15 days—declined sharply to 18 basis points in December 2025 from 47 basis points in September 2025, with January 2026 showing similar trends. “This improvement is broad-based, with Karnataka witnessing a notable recovery as asset quality reverted to historical levels,” he added.
Declining Slippage Trends
“May saw the peak in slippages (in microfinance). Since then, we are seeing month-on-month decline in slippages. Clearly the MFI space is improving,” KVS Manian, MD & CEO of Federal Bank, told FE during the bank’s third-quarter earnings briefing.
Federal Bank’s MFI advances edged up to ₹4,064 crore from ₹4,023 crore in the previous quarter. Executive Director Harsh Dugar said there has been a movement from higher overdue buckets to lower ones. “There has been some degree of increase in the recoveries in the NPA book of the MFIs. We believe there’s an improvement over there,” he said.
The pickup in fresh disbursements comes after a prolonged funding squeeze and tighter lending norms shrank the microfinance loan book, pushing over five million micro-borrowers out of formal finance. The MFI industry’s portfolio contracted for the sixth straight quarter to ₹3.40 lakh crore, registering a 17% year-on-year decline as of September 2025.
Improved Collection Efficiency
Several small finance banks, which have a high concentration of microfinance loans, also reported sequential growth in disbursements and improving asset quality. Equitas Small Finance Bank saw a 52% jump in microfinance loans to ₹5,159 crore during the December 2025 quarter.
Its overall collection efficiency improved to 98.99% in the third quarter from 98.56% in Q2 FY26. The share of MFI loans in the 1–90 days past due category fell sharply to 2.77% from 5.39% in September and 8.45% in April 2025. CreditAccess Grameen also reported an improvement in collection efficiency to 95.5% in the third quarter from 94.5% in September 2025.
K Paul Thomas, MD & CEO of ESAF Small Finance Bank, attributed the improvement in collections to the guardrails implemented by self-regulatory organisations Sa-Dhan and the MicroFinance Institutions Network.
“Things are clearly improving on the ground. The two guardrails implemented by the industry have worked well, and almost all entities, including banks, small finance banks, and microfinance institutions, are seeing better collections,” he said.
ESAF, for instance, is looking to improvise its microfinance borrower profile with more mature products. “We are also offering other products such as micro enterprise loans and trade loans to the same segment, as borrowers are graduating to the next level,” Thomas said.