Banks have demonstrated a strategic shift toward lending to microfinance institutions rather than individual borrowers during the April-June quarter, according to the latest MFIN Micrometer report. The microfinance portfolio outstanding of banks declined 28.5% year-on-year to ₹83,080 crore as of June 30, 2026, down from ₹1.16 lakh crore a year earlier. This decline was largely attributed to banks reclassifying microfinance loans as part of their retail portfolios. Despite this trend, banks accounted for 64.8% of the outstanding borrowings of NBFC-MFIs as of June 2026, making them the largest source of funding for the sector. The overall microfinance industry's total micro-credit portfolio stood at ₹3.29 lakh crore as of June 30, down 6.9% from a year earlier, with the number of active loan accounts declining to 9.9 crore from 12.5 crore during the same period.
NBFC-MFIs have emerged as the primary beneficiaries of this banking shift, with their portfolio growing 5.2% year-on-year to ₹1.46 lakh crore, accounting for 44.3% of the industry. They reported strong growth in disbursements, disbursing ₹29,820 crore in the first quarter, up 43.1% from the year-ago period. The sector witnessed a significant surge in funding availability, with NBFC-MFIs' fresh debt funding almost doubling to ₹21,407 crore during Q1 2026-27, with banks contributing 80.4% of this funding. However, the sector remains highly concentrated, with 12 large MFIs accounting for 93.8% of industry AUM, 95.7% of loan disbursements and 98.1% of debt funding during the quarter. The average outstanding loan per account rose 27.8% to ₹37,584 from ₹29,406 a year earlier, indicating a sharp increase in average ticket size even as the borrower base contracted.
The sector has shown significant improvement in asset quality metrics, with portfolio at risk in the 31-180 days bucket for NBFC-MFIs falling to 1.5% as of June 30, 2026, from 5.3% a year earlier. This improvement has coincided with the significant rise in funding availability. Geographically, Bihar remained the largest microfinance market with a portfolio of ₹53,163 crore, followed by Uttar Pradesh at ₹39,661 crore and Tamil Nadu at ₹38,718 crore. The top 10 states accounted for 83.3% of the industry's total portfolio. Despite the overall portfolio decline, NBFC-MFIs have maintained their position as the largest providers of micro-credit, with their portfolio growing while small finance banks' portfolio declined 6.1%.
According to the NCAER study, a typical microfinance borrower is a married woman educated up to secondary school with a household size of four, earning ₹3.1 lakh annually. The loan carries an average principal of ₹51,222 with a tenure of 23 months and an average interest rate of 23.9%. Key charges include interest, credit life insurance, and processing fees, with the average monthly instalment coming to ₹2,993. The borrower profile shows she is primarily located in rural India (67.5%), actively contributes to household income through petty trade or small business, and holds standard identity documents including PAN card, Aadhaar, and Voter ID for KYC compliance.
The study demonstrates a major structural shift toward formal, regulated finance at the bottom of the pyramid. In the previous NCAER study conducted in 2011, informal loans constituted 46% of all reported loans and 47% of total amount borrowed by households. However, in the current study, only 1% of individuals reported resorting to informal sources alongside formal loans. The weighted average annual interest rate across different lenders ranged between 24.1% and 30.3%, with effective interest rates averaging 33% for clients, compared favorably to the alternative of moneylenders charging 97% to 178% interest rates.
