MFI, NBFC landscape remains challenging amid rising overdues, higher write-offs and slowing growth

The MFI and NBFC landscape remains challenging, “with rising overdues, higher write-offs and slower growth under Guardrail 2.0. Q1FY26 reflected clear stress: Loan portfolios declined 17% YoY, disbursements dropped 28%, and unique borrowers fell 8%.

Asset quality showed only technical improvement, with GNPA easing to 4.9% in June 2025 from 5.4% in March due to aggressive write-offs,” says Mahendra Patil, Founder and Managing Partner at MP Financial Advisory Services in an exclusive interaction with Bizz Buzz

How do you view the current landscape of the MFI and NBFC sector in India?

The Microfinance Institutions (MFI) and Non-Banking Finance Company (NBFC) landscape remains challenging, with rising overdues, higher write-offs and slower growth under Guardrail 2.0. Q1FY26 reflected clear stress: loan portfolios declined 17% YoY, disbursements dropped 28%, and unique borrowers fell 8%.

Asset quality showed only technical improvement, with GNPA easing to 4.9% in June 2025 from 5.4% in March due to aggressive write-offs. Liquidity pressures have intensified as some MFIs face repayment issues and lenders tighten funding norms, limiting fresh borrowings. Consequently, growth for FY26 is expected to remain modest at around 4%, with recovery hinging on better collections and improved cash flows.

What key trends are shaping the growth trajectory of NBFCs and MFIs today?

Key trends shaping NBFC and MFI growth include a decisive shift toward higher-ticket microfinance loans, reflected in a 15% YoY and 4% QoQ rise in average ticket sizes as of June 2025. This indicates a move toward slightly larger, better-profiled borrowers and improved unit economics.

Another major structural trend is the emerging co-lending framework, which allows government-owned NBFCs to partner with private lenders to channel low-cost capital.

If even 10% of their balance sheets flow through this route, India could unlock Rs3.5–4 lakh crore of fresh annual credit for MSMEs, households, and green-energy segments, significantly widening credit access.

How are regulatory developments influencing the competitiveness and sustainability of these institutions?

Regulatory developments are increasingly shaping the competitiveness and long-term sustainability of NBFCs and MFIs. RBI’s recognition of Finance Industry Development Council (FIDC) as the sector’s Self-Regulatory Organisation marks a major step toward stronger governance, standardised practices and improved market discipline.

Simultaneously, the reduction of the qualifying-asset threshold from 75% to 60% gives NBFC-MFIs greater flexibility to diversify beyond traditional JLG loans, helping reduce concentration risk and stabilise earnings.

At the industry level, liquidity concerns remain prominent, with proposals such as a Rs20,000-crore government-backed guarantee fund aimed at strengthening funding flows and enhancing banks’ confidence in lending to MFIs, particularly during stress periods.

What is your perspective on the recent sovereign rating actions taken by global rating agencies?

S&P’s upgrade of India to BBB is a welcome acknowledgement of the country’s strong macroeconomic foundations, but it still falls short of capturing India’s true credit strength. India has sustained 6–7% growth for a decade, far above most BBB peers, supported by a consumption-driven economy and favourable demographics.

External resilience remains a standout, with forex reserves above $650 bn and NIIP improving to –9.4% from –16% in 2016. Banking stability has strengthened sharply, with GNPAs falling to 2.3%. These fundamentals place India closer to higher-rated sovereigns, indicating that current ratings continue to undervalue its structural resilience.

Do you think India’s current ratings accurately reflect its macroeconomic strength and fiscal discipline?

India’s BBB rating does not fully reflect its macroeconomic strength, fiscal consolidation, or structural buffers. Debt sustainability is supported by a favourable growth–interest differential (nominal GDP ~10–11% vs. interest cost ~6–7%) and a predominantly domestic debt profile (>90% rupee-denominated), sharply reducing refinancing and currency risk.

Fiscal quality has improved, with capex rising from ~12% to ~23% of the Union Budget and revenue deficits narrowing. Banking sector health has transformed, with GNPAs dropping from 9.6% in 2018 to ~2.3% in 2024, backed by >75% PCR and strong capital buffers. Alongside rising external resilience and policy credibility, these indicators suggest India merits a stronger rating than BBB.

Where do you see India positioned among emerging markets in terms of growth potential and market performance?

India stands among the strongest emerging markets, supported by sustained 6–7% growth, a young demographic profile, and a demand-driven economy that insulates it from external shocks. Its external sector metrics are exceptional for an EM sovereign - forex reserves above $650–695 bn (strong enough to cover 11 months of merchandise exports), low external debt (19% of GDP), and a steadily improving NIIP (–9.4% in 2024). India’s inclusion in JP Morgan and Bloomberg global bond indices further elevates its market standing by attracting stable portfolio flows and enhancing liquidity.

Combined with stable bond yields, robust FDI inflows ($ 436 bn since 2015), and a resilient financial system, India ranks at the top tier of emerging markets in growth potential and market performance.

What is your outlook for India’s GDP growth over the next 12–18 months?

India’s GDP growth outlook for the next 12–18 months remains strong at 6.4–6.8% for FY26, supported by resilient domestic demand, sustained public capex, and a steady revival in private investment. Despite global tariff actions and geopolitical uncertainties, India’s growth momentum is underpinned by rising domestic consumption, strong services exports, and supply-side reforms such as PLI schemes, logistics improvements, and digital infrastructure.

Fiscal and monetary measures such as income-tax cuts, interest-rate reductions, and GST rationalisation have further boosted disposable incomes and business sentiment, prompting the RBI to revise growth to 6.8%. While FY26 is well-supported, FY27 will hinge on monsoon conditions and evolving global risks.

How would you evaluate the government’s fiscal deficit management in the current economic context?

India’s fiscal deficit management remains credible and well-anchored despite global uncertainties. As of September 2025, the FY26 deficit stands at Rs5.73 trillion, 36.5% of the full-year target, higher than 29% last year, reflecting front-loaded capex aimed at sustaining growth.

However, this has been offset by stronger revenues, with GST collections touching Rs10.38 lakh crore so far this fiscal, signalling continued formalisation and resilient consumption. The record Rs2.69-lakh-crore RBI dividend has further strengthened fiscal buffers.

With recent GST rationalisation expected to lift consumption and tax buoyancy, these revenue tailwinds support fiscal consolidation even as the government maintains elevated, growth-driving capital expenditure.

What do the RBI’s recent policy actions signal about its stance on growth, inflation, and liquidity?

RBI’s recent policy actions indicate a calibrated but clearly growth-supportive stance. By keeping the repo rate unchanged at 5.5% with a neutral tone, the RBI is balancing financial stability with the need to sustain economic momentum.

The upward revision of FY26 GDP growth to 6.8% reflects confidence in resilient domestic demand, rising investments, supportive monsoon trends, GST 2.0 benefits, and improving credit flows. At the same time, the downward revision of CPI inflation to 2.6%, driven by a prolonged correction in food prices, signals easing price pressures.

Liquidity conditions are being gradually eased through the phased CRR reduction from 4% to 3%, reinforcing RBI’s intent to support credit expansion and overall growth.

How do these RBI measures impact credit flow and the lending environment for NBFCs and MFIs?

RBI’s phased reduction of the CRR from 4% to 3% will inject nearly Rs2.5 lakh crore into the banking system, improving systemic liquidity and creating headroom for credit expansion. However, the transmission to NBFCs and MFIs remains muted due to sectoral stress and elevated overdues in the microfinance segment.

Bank lending to NBFCs grew only 2.6% in the first four months of FY26, sharply lower than 12.7% in the same period last year, reflecting lenders’ cautious stance.

The share of NBFCs in total bank credit has also declined to 8.5%. Thus, while liquidity has improved, risk aversion continues to temper actual credit flow to NBFCs and MFIs.