Microfinance institutions (MFIs) with significant exposure to Karnataka and Maharashtra are being advised to exercise caution in loan sanctions to avoid any fresh slippages, as the state governments have declared droughts across large parts of the two states, India’s fourth- and fifth-largest microfinance markets.
The Maharashtra government last week declared drought in 265 of the state’s 358 talukas, covering nearly 74% of the state. Karnataka is also facing a worsening drought, with 177 taluks officially declared drought-affected. The prolonged rainfall deficit has affected crops, water availability, livestock and the rural economy.
“Maharashtra is an important microfinance market, with around 45.9 lakh unique borrowers and ₹24,087 crore in loan amount outstanding as of June 2026, placing it among the top five states nationally by loan amount outstanding,” Alok Misra, CEO & Director, Micro Finance Industry Network (MFIN), one of the self-regulatory organisations (SROs) for the microfinance industry, said.
When drought is declared, the State Level Bankers’ Committee decides on the relief measures in accordance with the Reserve Bank of India’s guidelines. These typically cover agricultural loans.
“While microfinance loans are not for agriculture/crop cultivation, considering the linkages to other related livelihoods, MFIN is keeping a close watch on the situation,” Misra added.
“It is going to be a little bit challenging, but right now not much has issues cropped up,” said Jiji Mammen, executive director and chief executive of Sa-Dhan, a microfinance SRO. “We have already given some advisories to our member institutions to keep a watch on the situation and take careful decisions so it doesn’t get into any kind of stress.”
Mammen, however, said most microfinance borrowers were not entirely dependent on agriculture, having diversified into dairy, livestock and small businesses such as shops.
Karnataka had a gross loan portfolio (GLP) of ₹28,989 crore as of June 2026, while Maharashtra’s stood at ₹24,087 crore. Together, the two states accounted for over 16% of the industry’s ₹3.28-lakh-crore outstanding portfolio.
Microfinance institutions and NBFCs with significant portfolio concentration in Maharashtra, Karnataka and the northeastern states could see an increase in delinquencies, said K Ravichandran, chief credit rating officer at ICRA. However, the impact would need to be assessed on a case-by-case basis, he added.
ICRA on Wednesday upgraded its outlook for the microfinance sector to stable from negative in its Credit Quality Trends and Rating Performance for H1FY2027, citing a decline in delinquencies, improving asset quality, lower credit costs and a pickup in disbursements.
The rating agency said multiple guardrails introduced by the two SROs had helped curb borrower overleveraging, while disbursements and AUM growth were recovering. These include a ₹2-lakh cap on total borrower indebtedness, including unsecured retail loans, and a maximum of three microfinance lenders per borrower.
The industry’s 90-plus days-past-due ratio fell to 3.3% in June 2026 from 4.7% in FY25, aided by write-offs, asset reconstruction company (ARC) sales, improved collections and lower slippages. Credit costs are projected to decline from a peak of 7.1% in FY25 to 2.4–2.8% in FY27.
However, ICRA cautioned that 67% of microfinance borrowers depend on agriculture and allied activities, leaving collections and asset quality vulnerable to a deterioration in farm cash flows.