MFI AUM growth to accelerate to 20% this fiscal, driven by recovery in microfinance and diversification: Crisil

Assets under management (AUM) of microfinance institutions (MFIs) are expected to grow 20% this fiscal, a sharp acceleration from 4% growth recorded last fiscal, supported by a recovery in microfinance lending and rapid expansion into non-microfinance segments, according to a report by Crisil. 

The growth will be led by two key business segments—traditional microfinance and non-microfinance lending. While the core microfinance portfolio is projected to grow 13% as the sector gradually recovers from last year’s slowdown, stronger momentum is expected from non-microfinance businesses such as gold loans, loans to micro, small and medium enterprises (MSMEs), loans against property, and individual loans. 

The sector has historically catered to underserved borrowers, resulting in sustained credit demand. However, lending activity remained subdued for several quarters until the third quarter of last fiscal due to asset-quality concerns and constrained access to funding. 

According to Crisil, growth began recovering from the fourth quarter as these pressures eased, and the improvement is expected to continue through the current fiscal. 

MFIs have also resumed expanding their core microfinance portfolios, supported by healthier performance of recent loan originations. 

Malvika Bhotika, Director, Crisil Ratings, said microfinance disbursements have gradually strengthened after institutions aligned with the Guardrails framework introduced in August 2024. “After aligning with the Guardrail dispensation, microfinance disbursements have seen a gradual uptick over recent quarters, supported by tighter control over portfolio quality. This is also reflected in the performance of originations after the dispensation began in August 2024. Accounting for nearly 80% of MFI AUM, the portfolio at risk over 90 days remains low at below 1% for this book,” she said. 

MFIs are also becoming more selective in lending practices and increasingly favouring seasoned borrowers with stronger repayment records. 

As of March 2026, nearly 66% of MFI AUM comprised loans extended to borrowers in their second cycle or beyond, up from 53% two years ago. At the same time, the average ticket size of such loans increased around 15% to approximately ₹59,000 compared with last fiscal. 

To strengthen portfolio quality further, many MFIs are increasingly covering incremental disbursements under the Credit Guarantee Fund for Micro Units (CGFMU) scheme. Crisil said this strategy helps limit credit losses while improving lender confidence and supporting better funding access. 

At the same time, the agency cautioned that the microfinance business continues to remain vulnerable to localised socio-political disruptions, weather-linked income shocks and volatility in borrower repayment behaviour, all of which can impact credit costs. To reduce dependence on unsecured microfinance lending, institutions are accelerating diversification into secured lending categories. 

Prashant Mane, Associate Director, Crisil Ratings, said MFIs are increasingly building portfolios around secured products. “MFIs are increasingly focusing on secured offerings including gold loans, secured MSME loans and loans against property, apart from individual loans. In the last one year alone, the share of such loans in overall AUM rose to 14% from 6% over fiscals 2025 and 2026. We expect this to increase further to around 18% by the end of this fiscal,” he said. 

Policy support has also aided this transition. In June 2025, the Reserve Bank of India reduced the requirement for qualifying assets as a proportion of total assets (net of intangible assets) to 60% from 75%, giving MFIs greater operational flexibility to diversify into adjacent lending segments and cross-sell products. 

Crisil, however, noted that the success of diversification will depend on MFIs’ ability to develop underwriting expertise across newer asset classes. Potential weather risks, including the possible emergence of El Niño conditions that may affect monsoon patterns and rural incomes, will remain key factors to monitor during the year.