India's microfinance sector likely to see growth in FY26-28E on stabilisation, selective customer additions: JM Financial

The report stated that the microfinance sector has reached an inflection point, transitioning from a period of rapid balance sheet contraction and stress recognition to one of stabilisation and gradual recovery.

"We believe the microfinance sector is at an inflection point. The industry has moved from a phase of rapid balance sheet contraction and stress recognition to one of stabilisation with gradual recovery. Growth over FY26-28E is likely to be driven primarily by higher-ticket sizes, selective customer additions and incremental contribution from non-MFI portfolios," the report said.

It added that valuations across the sector currently appear reasonable when compared to the medium-term potential for return normalisation.

The report highlighted that lenders with lower exposure to multi-lender borrowers, strong credit cost control, diversified portfolios, and robust capital positions are better placed to benefit from the recovery phase.

The report also noted that lenders with visible recovery in return on assets (RoA) and sustainable growth in assets under management (AUM) are likely to perform better. However, it cautioned that some players may continue to face challenges if their profitability normalisation is delayed despite growth ambitions.

According to JM Financial, asset quality in the microfinance sector has likely bottomed out, while disbursement momentum has started recovering. It added that NBFC-MFIs are relatively well-positioned in the current cycle, supported by improving sector conditions.

However, the report highlighted that risks related to borrower leverage and stress in lower-ticket loans still persist. Despite these challenges, the sector appears to be transitioning towards a more stable and disciplined growth phase.

The report also pointed out that the industry gross loan portfolio declined 7 per cent quarter-on-quarter in the third quarter of FY26, reflecting continued borrower consolidation and lender-led de-risking efforts. This contraction was largely driven by banks, which reduced their exposure aggressively.

In contrast, NBFC-MFIs showed relative portfolio stability during the period, while small finance banks (SFBs) and NBFCs reported only modest sequential declines.

This trend indicates a structural repositioning within the lending ecosystem, with banks recalibrating their exposure and specialised microfinance lenders gradually regaining market share. (ANI)