Regulatory Tightening Amid Rising Risks Slows Indian Microfinance Growth 

Stricter regulations and underwriting standards are curbing growth in the Indian microfinance sector as lenders reduce exposure to overleveraged borrowers. The CRIF High Mark data for Oct-Dec shows a 35% year-on-year decline in loan origination value and a 42% drop in volume, reflecting increased caution from lenders.

S&P Global Ratings’ last week report said that while microfinance plays a crucial role in financial inclusion, recent measures to curb risk and limit over-leverage are necessary. The removal of lending rate caps in 2022 led to a credit boom, which has since moderated following the Microfinance Institutions Network's introduction of borrower limits in August 2024. Further tightening is scheduled for April 2025, which is expected to stabilise asset quality in the sector.

The CRIF data highlights a shift towards higher-ticket loans, with those exceeding ₹50,000 experiencing growth. This adjustment reflects an industry-wide focus on portfolio quality rather than volume expansion. Total disbursements declined to ₹634.40 billion in October-December, from ₹974.0 billion a year ago, with a sequential decline from ₹699.3 billion in July-September. Additionally, the total microfinance portfolio stood at ₹3.91 trillion in December 2024, a 4% year-on-year contraction.

The number of active loans also declined to 146 million in December 2024 from 157 million in December 2023, indicating reduced supply in response to asset quality concerns. 

The sector continues to prioritise collections and risk mitigation. The performance of early bucket loans (0–90 days past due) improved between September and December 2024, but stress remains in mid-to-longer-term overdue segments. The portfolio at risk for 1–30-day delinquent loans improved by 30 basis points during October-December to 1.8%, whereas the 31–180-day portfolio at risk deteriorated by 210 basis points to 6.4% . The 180+ days portfolio at risk worsened by 120 basis points to 3.7%.

S&P Global Ratings projects that the non-performing loan ratio will peak by March 2026, reflecting the impact of risk adjustments and revised lending policies. While regulatory measures may slow loan disbursement in the short term, they are expected to reduce systemic risks and enhance long-term sector stability.