Lack of funding puts small and mid-sized MFIs in a tough spot
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Banks, especially public sector ones (PSBs), have halted extending loans to below “A” rated micro-finance institutions (MFI) as stress in the sector continues to rise, sources say.
“Last year’s negative developments in the sector have led most banks to withdraw funding to MFIs. Most PSBs, which typically extend loans to MFIs, especially State Bank of India, have become bit cautious. Even DFIs like Nabard and SIDBI have tightened their funding criteria. Total fund flow from banking system to MFIs is almost 50 per cent less than last year,” an industry source said.
SBI has formed an internal guideline that restricts sanctioning loans to any MFI rated below “A” category. If the lender receives loan proposal from lower rated MFI, it has to be vetted by MD level official at the bank. A top official at a large MFI shared similar views, saying large PSBs which typically were the primary lenders to MFI companies of all sizes have become extremely risk averse on the front. Lack of funding puts small and mid-sized MFIs in a tough spot as bank loans are their primary and largest source of funding due to lack of access towards debt market. SBI did not respond to businessline queries till press time.
MFIs’ Q1FY26 snapshot
Large MFI player CreditAccess Grameen’s credit cost rose to ₹572 crore in Q1FY26 from ₹175 crore in Q1FY25, but it was lower than ₹583 crore in Q4FY25. Another MFI Satin Creditcare saw its credit cost rise by 29 per cent sequentially and 100 per cent on-year to ₹143 crore in Q1.
Fusion Finance’s net loss stood at ₹92.25 crore and the MFI has breached covenants on ₹3,567 crore in borrowings. It is seeking lender waivers to continue operations. Fusion Finance and Spandana Sphoorty also witnessed a change in CEO over the last few months.
Recovery in H2FY26
According to industry players, MFIs’ stress will likely normalise in H2FY26. “…The outlook for FY26 remains encouraging with favourable monsoon forecasts and strengthening rural sentiment…our strong business momentum and stabilising asset quality position us well to deliver robust profitability in the second half of FY’26 as guided…,” said Ganesh Narayanan, CEO at CA Grameen.
Jiji Mammen, CEO of Sa-Dhan, also said that Q1FY26 has shown better asset quality trends. “The PAR (portfolio at risk) value of Q1 across buckets is better than previous quarter, except for the 180-day plus bucket. Our data suggests since Q3FY25, there has been reduction in stress, it may not be very high, but a few basis points,” he said.
Pointers
1- Fusion Finance breached covenants on ₹3,567 crore in borrowings; seeking waiver from lenders to continue ops.
2- SBI formed internal guideline restricting loans to MFI rated below “A” category. Any loan proposal from low rated MFI must be vetted by the bank’s MD.
3- Funding to MFIs down 50 per cent, per industry estimates. MFIs expect stress to normalise in H2FY26.
Published on August 10, 2025
