Banks report highest contraction in MFI portfolios among all lenders in Q3FY26

Banks' microfinance portfolio outstanding contracted by 40% year-on-year to ₹65,687 crore in third quarter of FY26, according to a report released on Monday (March 16, 2026).

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% year-on-year and 7% sequentially in December, 2025.

The largest contraction has been seen by banks, followed by 25% for small finance banks, 22% by not for profit MFIs and others, 14% and 4% by NBFC-MFIs and NBFCs, respectively.

The market share of banks has slipped to 25% in Q3FY26 from 35% in the year-ago period, while the same for NBFC-MFIs has risen to 44% from 37%.

The report said that NBFC-MFIs now account for 44% of new sourcing. However, private sector banks continued to curtail their exposure, registering a 26% 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% year-on-year to ₹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.