Microfinance Sector Sees Portfolio Contraction, Loan Size Growth, and Policy Measures to Support Lending

India's microfinance sector is experiencing a 22% year-on-year contraction in portfolio outstanding as banks report a 40% decline, the sharpest among lenders, amid asset quality stress and tighter underwriting. Meanwhile, average loan sizes have increased, with lenders favoring higher-value loans to reliable borrowers. The finance ministry plans to cap lending rates to microfinance institutions under a credit guarantee scheme to ease funding challenges. Additionally, a parliamentary panel recommends expanding bank-NBFC co-lending to bridge the MSME credit gap and reduce borrowing costs.