India's microfinance sector contracts 5% as portfolio shrinks to Rs 3.28 trillion

India's microfinance portfolio contracted 5 per cent year-on-year to reach Rs 3.28 trillion in September, signalling a challenging period for the sector that primarily serves low-income borrowers and small entrepreneurs.

Beyond the annual decline, the sector also faced sequential pressures. The portfolio contracted 1.4 per cent on a month-on-month basis, reflecting ongoing headwinds in the microfinance space. More concerning were the declines in active loan accounts and customer participation, which fell 6.5 per cent and 3.9 per cent respectively during the period.

The contraction in active loans and customer numbers suggests that microfinance institutions may be facing challenges in loan disbursement and customer retention. This trend could be attributed to factors such as heightened credit scrutiny, seasonal demand fluctuations, or macroeconomic pressures affecting borrower capacity.

The microfinance sector, which plays a crucial role in extending credit to underserved populations across India, has been under considerable pressure in recent quarters. The sector's ability to stabilise and resume growth will likely depend on improved economic conditions and continued policy support for financial inclusion initiatives.