India's Microfinance Squeeze Deepens as Borrowers Fall 15%, Leaving Millions of Rural Women With Fewer Formal Options

India's microfinance industry, which provides small loans to millions of low-income households, most of them headed or run by women, is going through its most difficult period in years. Funding pressures, tighter regulation and the lingering effects of a wave of defaults are shrinking the sector, and industry leaders warn there may be no quick recovery.

According to data from Sa-Dhan, the self-regulatory organisation for the microfinance industry, the industry's total loan portfolio fell 7.6% year on year to ₹3.26 trillion at the end of June 2026. The number of borrowers fell 15% to 65.4 million, and the number of loan accounts dropped 19.7% to 100.6 million. A Business Standard report on October 18 described lenders as having to "grin and bear" the situation for some time.

The decline matters far beyond the balance sheets of lenders. Microfinance has been one of India's most important tools for financial inclusion, and its borrowers are overwhelmingly women, who use small loans to run tailoring units, small shops, dairy and poultry businesses and other micro-enterprises that support their families.

Fewer borrowers, bigger loans

While the number of borrowers has fallen, the average loan size has risen. The average ticket size increased 15% to ₹62,962, reflecting a shift towards larger loans to existing, creditworthy customers.

Part of that change stems from regulation. Guardrails in the sector now cap the number of lenders a microfinance borrower can have at three, a measure introduced to prevent over-indebtedness after many borrowers took loans from multiple lenders and struggled to repay. Wilfred Sigler, managing director of credit bureau Equifax India, said borrowers now want to meet all their funding needs within the three-lender limit, and lenders are phasing out the smallest loans of ₹25,000 to ₹50,000.

The result is that the smallest, newest and riskiest borrowers, often women seeking their first formal loan, are finding it harder to access credit.

Legacy defaults weigh on lenders

Asset quality remains a major concern. Loans overdue by more than 180 days rose 440 basis points to 17.4% of the portfolio. Industry officials say newer loans are performing better, but older defaulted loans remain on lenders' books.

The stress traces back to a period of rapid lending growth after the pandemic, when some borrowers took on more debt than they could manage. Repayment problems in several states led to rising defaults in 2024 and 2025, prompting lenders to tighten credit and regulators and industry bodies to impose stricter rules.

The pressure has been uneven across types of lenders. Banks' microfinance portfolios stood at ₹79,023 crore, a 29.8% share of the market. Small finance banks' portfolios fell 9.4% to ₹48,759 crore. Dedicated microfinance NBFCs grew 5.2% to ₹46,884 crore, suggesting specialised lenders are regaining some ground.

Funding dries up for smaller lenders

Small and mid-sized microfinance institutions say their biggest problem is access to funding. Manoj Kumar Nambiar, managing director of Arohan Financial Services, said funding to smaller MFIs has been subdued, as banks have become cautious about lending to the sector after the rise in defaults. He proposed solutions including funding through larger NBFCs, securitisation of loan portfolios and a credit guarantee scheme to restore banks' confidence.

Industry participants have also suggested that Mudra, which lends to MFIs and NBFCs at low rates, could serve as a dedicated refinance provider for specialised microfinance lenders.

Rethinking who qualifies

The definition of a microfinance borrower is also under debate. Currently, households with annual income of up to ₹3 lakh qualify for microfinance loans, a threshold set four years ago. Proposals range from raising it to ₹4 lakh to ₹5 lakh, reflecting inflation and rising incomes.

Jiji Mammen, executive director and chief executive of Sa-Dhan, argued that a single national income threshold may not suit all states, given wide differences in per capita income. He proposed linking the qualifying household income to each state's gross state domestic product.

Turning back to informal lenders

The most worrying sign is a shift back towards informal credit. A survey by Nabard found that the share of households relying solely on formal credit fell to 51.2% in March 2026 from a peak of 58.3% in November 2025, with more households turning to friends, family and other informal sources.

For women in particular, that retreat carries real costs. Informal lenders often charge much higher interest rates, offer no consumer protection and can use coercive collection practices. Formal microfinance, despite its problems, gave millions of women a credit history, a relationship with a regulated financial institution and, often, a voice in household financial decisions. The joint liability group model, in which small groups of women guarantee each other's loans, also built social networks and financial literacy.

Data could open new doors

Some lenders are trying to use new data to lend more safely. LVLN Murty, managing director and chief executive of Dvara KGFS, said his company combines credit bureau reports with account aggregator data, UPI transactions and utility payments to size loans according to borrowers' actual repayment capacity.

That approach reflects a wider shift in Indian lending. Ashok Hariharan, founder of identity verification company IDfy, said in a separate interview this week that credit history "won't decide a loan on its own anymore," as lenders increasingly use real-time data such as GST filings and bank transactions. For women micro-entrepreneurs who lack formal records, digital payment histories could help demonstrate creditworthiness.

Remittances offer a cushion

There is some support from other sources of household income. Remittances to India rose to $110.47 billion in FY26 from $87.55 billion, according to official data. The share coming from Gulf countries has fallen to 37.9% from 46.7% a decade ago. Remittances are a key source of income for many rural households, often managed by women whose husbands or sons work abroad.

What comes next

Industry leaders expect the funding squeeze to persist for some time, until asset quality improves and banks regain confidence. Policy measures such as a credit guarantee scheme, revisions to the income threshold and better use of digital data could help.

For India's financial inclusion story, the stakes are high. Millions of women built livelihoods with small loans over the past two decades. Ensuring they can continue to access fair, formal credit, without being pushed into debt they cannot repay, will be central to whether microfinance emerges from this downturn stronger and more sustainable.