According to The Economic Times, approximately 21 million small borrowers have exited the formal financial system over the past two years as lenders at the bottom of the pyramid stopped giving fresh loans to delinquent customers after the severe microfinance crisis. This represents about a quarter of the 87 million microfinance customers at the peak level seen at the end of March 2024. The number of unique microfinance borrowers across lenders fell to 66 million at the end of December 2025, as reported by credit bureau data from Crif High Mark. The exit from institutional credit is calculated on a net basis since lenders have also added new customers in the past two years, with the gross dropout number being more significant, according to people with knowledge of the matter.
A significant portion of those who dropped out have returned to private moneylenders to meet their cash needs, according to industry estimates reported by The Economic Times. About 20-25% could possibly be borrowing from informal sources, said people familiar with the matter. This trend reflects the squeeze in the country's microfinance market, which stood at ₹3.22 lakh crore after the third quarter of this financial year, falling steadily from the peak of ₹3.43 lakh crore seen seven quarters ago. The customers facing the risk of getting eliminated from the microfinance universe are those with unpaid dues for more than 180 days, as lenders tend to write off loans after this period, according to a senior executive of a non-banking financial company-microfinance institution.
The stoppage of institutional lending to delinquent customers is the primary reason behind the sharp fall in customer base, but it also reflects re-classification of micro loans as retail loans by a private sector lender, as reported by The Economic Times. Under lending guardrails suggested by self-regulator Microfinance Industry Network, no lender is supposed to give loans to delinquent borrowers who have outstanding loan of more than ₹3,000 and unpaid loans for more than 60 days. Overleveraging was at heart of the two-year long microfinance stress from which the market is slowly getting back on track.
Despite the customer base decline, the sector showed signs of recovery with a 6% year-on-year increase in loan disbursements during the October-December 2025 period to ₹63,348 crore, as reported by The Economic Times. Borrower leverage also turned stable, with the share of single-lender borrowers increasing to 73% in December 2025 from 72% three months earlier, suggesting improved credit discipline. The market contraction reflects tighter underwriting, moderated expansion strategies and the introduction of stricter guardrails to restrict the number of loans and leverage at borrower level, according to a microfinance report published jointly by Equifax and Small Industries Development Bank of India.
The market contraction reflects tighter underwriting, moderated expansion strategies and the introduction of stricter guardrails to restrict the number of loans and leverage at borrower level, according to a microfinance report published jointly by Equifax and Small Industries Development Bank of India, as reported by The Economic Times. Another credit information company, Equifax India, pegged the borrower count at 68 million and said that 13 million customers out of the total count have unpaid dues which have not been serviced for more than 180 days. The trend coincides with lenders giving bigger loans to borrowers with a good track record, indicating a shift toward more cautious lending practices in the post-crisis environment.