India's Microfinance Sector Contracts Amid Shift to Larger Loans and Lending Reforms

India's microfinance sector saw a 22% year-on-year contraction in portfolio outstanding to around Rs 2.7 lakh crore by December 2025, with banks experiencing the sharpest 40% decline. Lenders have tightened underwriting standards and adopted guardrails limiting loans to delinquent borrowers, leading to a drop of about 21 million small borrowers from formal credit. Meanwhile, average loan sizes rose to a record Rs 61,253, driven by higher-value lending to existing, reliable customers. The government plans a credit guarantee scheme to encourage bank lending to smaller MFIs amid ongoing asset quality stress.