The self-regulatory organisation (SRO) of the microfinance industry, Sa-Dhan, will meet in Mumbai on April 10 to review the guardrails introduced to curb borrower overleveraging, Paul Thomas, chairman of Sa-Dhan, and managing director and CEO of ESAF Small Finance Bank, said.
“The guardrails we implemented have delivered results. Now that conditions are improving, we will assess whether some recalibration or leniency is warranted. All member CEOs will meet to take a re-look at the framework,” Thomas said. “We have already commissioned a study by Grand Thorton to understand the impact of these guardrails and will suggest the way forward.”
The self-regulatory body has over 230 members.
Backdrop of the review
The review comes on the back of improving asset quality trends and reduced borrower stress, prompting a reassessment of the tighter norms imposed over the past year. According to the Economic Survey 2025–26, the sector stress has since moderated, with risky assets declining sequentially between the first and third quarters of the current fiscal, along with improvements in loan disbursements and solvency ratios.
As per the recent Financial Stability Report (FSR), stressed assets (31-180 days past due) was down to 4.6% in September, from 6.2% in March. However, the RBI cautioned that while consolidation is underway, pockets of stress persist and a close monitoring is warranted.
The guardrails which have been in effect from June 1, included capping total household exposure at Rs 2 lakh, mandating credit bureau checks before lending, and restricting lending to borrowers with over Rs 3,000 in outstanding dues across loans. It tightened the framework further by capping the number of lenders per borrower at three, introducing stricter eligibility norms for top-up loans, and tightening delinquency thresholds.
According to the norms, borrowers are eligible for a top-up loan only after repaying 50% of the previous loan or completing 12 months since disbursement.
Delinquency threshold for restricting fresh lending
The delinquency threshold for restricting fresh lending was reduced to 60 days from 90 days earlier, with a road map to bring it down to 30 days. Borrowers with defaults exceeding Rs 3,000 across loans are not eligible for fresh credit.
The Reserve Bank of India in June reduced the minimum qualifying assets requirement for NBFC-microfinance institutions (MFIs) to 60% from 75%, enabling lenders to better manage portfolio risks.
While these guardrails benefited lenders from the sustainability perspective, it temporarily disrupted growth trends by constraining expansion and limiting credit access in certain geographies.
The credit to the microfinance sector declined for the sixth consecutive quarter, witnessing a 9.3% fall in the first half of FY26, with the total active borrowers in the sector decreasing by 7.8 million. Bank credit to the sector, which forms 47.7% of total credit outstanding, contracted by 10.6% during the same period, as per the FSR.