NBFC-MFI Sector Outlook 2025–26: Growth and Stress Persist

CareEdge Ratings projects modest recovery for MFIs amid credit cost pressures and high operational challenges.

CareEdge Ratings’ latest analysis highlights that NBFC-MFIs in India are likely to see subdued growth, tight liquidity, and elevated credit costs through FY2026, with gradual improvement expected in FY2027.

According to CareEdge Ratings’ latest report, the microfinance industry continues to navigate a challenging landscape, with NBFC-MFIs’ assets under management (AUM) declining by 19% year-on-year to ₹1.4 lakh crore as of June 30, 2025. Persistent structural constraints—including borrower overleveraging, high attrition rates, and stringent MFIN Guardrails 2.0—have dampened growth and heightened operational strain.

CareEdge Ratings anticipates only moderate growth of about 4% in FY2026, with improvement expected in the latter half of the fiscal year. Despite some stabilization in portfolio quality, overall sector stress remains elevated, with gross non-performing assets (GNPA) projected to decline from 5.4% in FY2025 to 3.6% in FY2026 due to continued write-offs.

Asset Quality and Profitability Remain Under Pressure

The report indicates that credit costs for MFIs surged to 9.2% (annualized) in Q1 FY2026, a sharp increase from 2.6% in FY2024, reflecting significant provisioning and write-offs. Although stress levels have marginally eased, CareEdge expects credit costs to remain elevated through FY2026 before improving to 3.5% by FY2027.

High attrition rates—exceeding 70% among field officers—have led to increased operating expenses, while profitability remains subdued. MFIs reported a return on total assets (RoTA) of -2.5% in Q1 FY2026, with gradual recovery anticipated only in FY2027.

Liquidity and Funding Challenges Intensify

Larger MFIs continue to secure funding comfortably, but smaller and mid-sized institutions face liquidity pressures as banks have become selective amid high sectoral stress. As of June 2025, banks accounted for 63% of MFI funding, followed by NBFCs and external commercial borrowings (ECBs).

The sector’s average 3-month liquidity coverage ratio (LCR) stood at 0.7x, signaling a tight liquidity position, especially for smaller lenders. Breaches of financial covenants further expose MFIs to the risk of accelerated debt recall by lenders.

Expert Outlook

“The fundamental model of microfinance has weakened post-pandemic,” said Jatin Arora, Assistant Director at CareEdge Ratings. “However, the introduction of stricter guardrails is expected to restore credit discipline.”

Priyesh Ruparelia, Director at CareEdge Ratings, added, “Quality lending must take precedence over volume. These measures, though restrictive initially, will strengthen the system in the long term.”

Sanjay Agarwal, Senior Director at CareEdge Ratings, emphasized, “Reforms must focus on borrower assessment, standardizing recovery practices, and rebuilding trust to ensure stability and confidence in the sector.”

CareEdge maintains a Negative outlook for the NBFC-MFI segment, citing subdued earnings, liquidity challenges, and asset-quality stress expected to persist through FY2026.