Banks report highest contraction in MFI portfolios in Q3 of FY26

Banks’ microfinance portfolio outstanding contracted by 40 per cent year-on-year to INR 65,687 crore in third quarter of FY26, according to a report released on Monday.The fall is the sharpest among all categories of lenders, which also includes dedicated non-bank finance companies-MFIs (microfinance institutions) and small finance banks, according to the report by a credit information company.

Persistent stress in asset quality led to tightening of underwriting standards like adoption of guardrails to restrict number of loans and leverage at a borrower level, as per the report by Equifax and SIDBI.

Liquidity constraints particularly in smaller lenders also led to lower disbursements, the report said. The overall industry portfolio outstanding was down 22 per cent year-on-year and 7 per cent sequentially in December, 2025.The largest contraction has been seen by banks, followed by 25 per cent for small finance banks, 22 per cent by not for profit MFIs and others, 14 per cent and 4 per cent by NBFC-MFIs and NBFCs, respectively.

The market share of banks has slipped to 25 per cent in Q3FY26 from 35 per cent in the year-ago period, while the same for NBFC-MFIs has risen to 44 per cent from 37 per cent. The report said that NBFC-MFIs now account for 44 per cent of new sourcing.  However, private sector banks continued to curtail their exposure, registering a 26 per cent contraction in disbursals.

It can be noted that the MFI industry has been grappling with challenges for the last few quarters, but some experts have been opining that the industry is cyclical and activity will come back.The CIC’s report said even as the overall outstanding portfolio has contracted, fresh disbursements in the October-December 2025 quarter grew 6 per cent year-on-year to INR 63,348 crore.

The number of loans disbursed by the NBFC-MFIs has increased to 48 lakh in Q3FY26, from 43 lakh in a year-ago period.However, the rest of the players saw a decline in number of loans disbursed, with banks disbursing 27 lakh loans in Q3FY26, from 42 lakh in a year-ago period, NBFCs disbursing 12 lakh loans in Q3FY26, from 15 lakh in Q3FY25, report added.

On the states’ exposure front, the report further stated that Bihar continues to remain the largest microfinance state by portfolio size, accounting for 16 per cent of the industry’s exposure.Uttar Pradesh recorded the lowest portfolio contraction among the top 10 states at 16 per cent year-on-year, while Tamil Nadu reported the lowest incidence of non-payment among major states with 3.09 per cent of the loans being unpaid for over 30 days.

Karnataka, which had proposed a law to regulate the MFI sector last year, saw the highest shrinkage in portfolio over the last year at 34 per cent.  Notwithstanding the portfolio contraction, all top 10 states recorded meaningful improvements in delinquency compared to December 2024, report said.