India’s microfinance overhang is finally easing as debt-stressed borrowers fall

India's microfinance sector is showing signs of recovery as borrowers burdened with multiple loans find their way back to a more stable financial footing. As of June 2026, the number of microfinance borrowers who have taken loans from four or more lenders has dropped to 1.35 million, accounting for approximately 2% of the total 66 million borrower base, according to data from Crif High Mark.

This is a significant decrease from the peak of nearly 5.6 million such borrowers, or 6.4% of the borrower base, in March 2024, when the microfinance market peaked at ₹4.43 lakh crore.

The outstanding loans from these overleveraged borrowers have also reduced to ₹14,711 crore, down from ₹35,712 crore a year earlier, representing 4.4% of the sector's total loan outstanding. Despite this reduction, these borrowers still carry a higher credit risk, with a portfolio at risk comprising loans not serviced for over 30 to 180 days standing at 7.4-7.9% of the total portfolio, compared to 1.9% for borrowers associated with one or two lenders and 4.1% for those taking loans from three lenders.

Sector leaders believe that these borrowers are expected to either fully repay their debts or settle the accounts, as this is the only way they can regain eligibility for fresh institutional credit. However, nearly 21 million borrowers in the bottom of the pyramid segment have left the formal credit system over the past two years due to default or normal course, as lenders have tightened their underwriting standards.

This turnaround in the microfinance sector is attributed to stronger and stricter underwriting practices and the implementation of industry guardrails and policy initiatives that have improved lending discipline and moderated borrower overleveraging. As a result, credit costs are expected to moderate, supporting a gradual recovery in profitability.