India’s Microfinance Sector Emerging As Key Driver Of Financial Inclusion: Report

The report stated that over the last two decades, the sector has experienced multiple structural and cyclical disruptions, yet has consistently demonstrated resilience and the ability to rebound

Pressure is expected to persist in the first half of FY 2026, driven by cautious disbursement strategies and elevated default levels

Source : ABPLIVE AI

The Microfinance industry of India is playing a significant role in driving financial inclusion by empowering underserved segments across India, said a report by Avendus Capital.

The report stated that over the last two decades, the sector has experienced multiple structural and cyclical disruptions, yet has consistently demonstrated resilience and the ability to rebound.

Over the last few financial years, the credit growth rate of microfinance institutions has been staggering, at approximately 18 per cent, according to an estimate from SIDBI's Microfinance Pulse report. This is higher than the average credit growth of the banking sector.

A microfinance organisation is a credit provider, much like a bank. Nonetheless, the loans are not as large as those offered by conventional banks. We refer to these little loans as microcredit. An MFI's clients are frequently microentrepreneurs who require financial assistance to start their businesses.

The report further added that in the financial year 2025, most MFIs have adopted a conservative stance, absorbing significant ECL (Rs 25 billion in the fourth quarter by listed MFIs alone) to proactively clean up their balance sheets.

Pressure is expected to persist in the first half of FY 2026, driven by cautious disbursement strategies and elevated default levels.

However, according to the report, the long-term outlook of the industry is strong. The industry is supported by strong regulatory tailwinds such as MFIN guardrails, RBI's revised norm on qualifying assets and the CGFMU scheme.

"These are not only anchoring future growth on a more stable footing but also collectively fostering rationalised credit costs," the report added.

"Over the next 5-6 years, we expect the industry to be driven by four secular themes: tapping India's diverse geographic potential, deeper rural market penetration, rising engagement with new-to-credit (NTC) customers, and accelerated digital adoption. These levers coupled with huge unmet demand are expected to propel gross loan portfolio (GLP) to grow at a 15 per cent plus CAGR, reaching Rs 10 tn over the next 5-6 years," the report added.

It further added that as the industry navigates this transitional phase, the groundwork laid is expected to yield resilient and profitable operations in the upcoming cycle.

"We believe the industry will return to its historical cross-cycle RpEs of 20 per cent over the next 5-6 years," the report added.

(This report has been published as part of the auto-generated syndicate wire feed. Apart from the headline, no editing has been done in the copy by ABP Live.)