Small loans make big news as Indian microfinance makes strategic shift

As India’s microfinance landscape changes, the focus seems to be clearly shifting towards sustainable lending practices, with an emphasis on maintaining portfolio stability. The industry’s recalibration is suggesting a cautious approach as lenders navigate the complexities of financial viability amidst a challenging economic environment, The Times of India reported on August 18.The microfinance industry in India, once celebrated for its role in financial inclusion, is experiencing a significant contraction, ToI’s report (by Mayur Shetty) said. Recent data shows a marked reduction in the gross loan portfolio (GLP), which has decreased to Rs 3.59 lakh crore at the end of June 2025, down from Rs 4.33 lakh crore a year prior. This represents a staggering year-on-year decline of 17% and a quarter-on-quarter drop of 5.8%.

Small-ticket lending is making big news because banks and financial institutions are pulling back on such loans, i.e. loans below Rs 50,000. Concerns over defaults in this segment are prompting a strategic shift towards larger loans, typically exceeding Rs 1 lakh.

This change is evident in the statistics, which reveal that the share of loans above Rs 1 lakh has increased from 4.6% to 8.3% of the total portfolio.

Notably, these larger loans are predominantly extended to borrowers with solid repayment histories, with four out of five recipients having a repayment track record of over two years.

The volume of active loans has also fallen sharply, declining from 159 million last year to 132 million as of June 2025. Disbursements have taken a hit as well, with lenders advancing Rs 57,127 crore in the first quarter of FY26. This marks a significant reduction of 28.2% compared to the same quarter last year and 20% from the previous quarter.The ongoing moderation in lending reflects a conscious decision by the industry to focus on risk management and liquidity preservation rather than aggressive growth.Regulatory measures are influencing this trend, as limits on the number of lender relationships have led to a preference for larger loans. This reduces the fragmentation of borrowing across multiple lenders, encouraging a more stable lending environment.The drop in loans below Rs 50,000 is particularly pronounced, with their share plummeting from 56.2% to 47.1%.

The decline in GLP is not uniform across the country. All states, with the exception of West Bengal, have reported double-digit declines. Odisha, Tamil Nadu, and Karnataka have been hit hardest, experiencing reductions of 24.7%, 23.5%, and 22.9% respectively.

Non-bank microfinance institutions (NBFC-MFIs) continue to dominate the sector, although their portfolios have also contracted, shrinking by 6.1% quarter-on-quarter and 18.7% year-on-year.