Gold Loans, MSME Financing and Loans Against Property Expected to Fuel Sector Recovery After Modest FY26 Growth
India's Microfinance Institutions (MFIs) are expected to witness a strong revival in business during FY27, with Assets Under Management (AUM) projected to grow by 20%, according to a report released by CRISIL Ratings. The forecast marks a significant improvement from the modest 4% AUM growth recorded in FY26, signalling renewed momentum in the country's microfinance and retail lending ecosystem.
The report indicates that the recovery will be driven not only by the gradual revival of traditional microfinance lending but also by rapid expansion in non-microfinance loan segments such as gold loans, MSME financing, loans against property (LAP) and individual retail loans.
Industry experts believe the diversified lending strategy adopted by many MFIs is helping them reduce dependence on conventional group-based microfinance while creating new growth opportunities across urban and rural markets.
Sector Set for Stronger Growth in FY27
According to CRISIL Ratings, the slowdown witnessed during FY26 appears to be easing as lending activity gains momentum.
After a year marked by cautious disbursements, higher credit costs and moderation in borrower demand, microfinance institutions are expected to return to a healthier growth trajectory supported by improving economic conditions and stronger credit demand.
The projected 20% increase in AUM reflects growing confidence among lenders and borrowers alike.
Traditional Microfinance Business Showing Recovery
The report estimates that the core microfinance portfolio will expand by approximately 13% during FY27.
The improvement is expected to be driven by:
- Better rural economic activity
- Improved repayment behaviour
- Stabilisation in asset quality
- Increased credit demand from self-employed borrowers
- Greater confidence among lenders
Although growth in the traditional microfinance segment is expected to recover gradually, it is unlikely to be the primary contributor to overall AUM expansion.
Non-Microfinance Loans Become Key Growth Engine
CRISIL expects diversified lending products to account for a significant share of incremental business during FY27.
The fastest-growing segments are expected to include:
- Gold Loans: Rising gold prices and quick loan disbursement continue to drive demand.
- MSME Loans: Increased borrowing by small businesses for expansion and working capital.
- Loans Against Property (LAP): Growing demand for secured financing among entrepreneurs and professionals.
- Individual Retail Loans: Higher consumption and personal financing requirements are supporting this segment.
The expansion of these products allows MFIs to serve a broader customer base while improving business resilience.
Diversification Strengthens Business Model
Over the past few years, several microfinance institutions have evolved into diversified retail lenders.
By expanding beyond group-based microcredit, they are able to:
- Reduce concentration risk
- Increase customer retention
- Improve cross-selling opportunities
- Enhance profitability
- Strengthen long-term business sustainability
Industry analysts believe this diversification is making the sector less vulnerable to cyclical fluctuations affecting rural lending.
Financial Inclusion Remains Core Objective
Despite increasing diversification, microfinance institutions continue to play a crucial role in expanding financial inclusion across India.
Their primary customer base includes:
- Women entrepreneurs
- Rural households
- Small traders
- Self-employed professionals
- Agricultural workers
- Micro and small enterprises
Access to formal credit enables these borrowers to invest in income-generating activities, improve livelihoods and reduce dependence on informal lending channels.
Government initiatives promoting entrepreneurship, digital financial services and rural development have further supported the sector's expansion.
Asset Quality Expected to Improve
CRISIL expects asset quality across the sector to improve gradually during FY27 as lenders continue to strengthen underwriting standards and collection mechanisms.
Key factors supporting asset quality include:
- Improved borrower repayment discipline
- Enhanced credit assessment processes
- Digital monitoring of loan portfolios
- Better portfolio diversification
- Recovery in local economic activity
Stable asset quality will remain essential for sustaining profitability and attracting long-term investment into the sector.
Challenges Continue to Exist
While the outlook remains positive, CRISIL noted that the sector continues to face several risks, including:
- Inflation affecting household cash flows
- Interest rate volatility
- Regional weather-related disruptions
- Regulatory changes
- Competitive lending environment
- Borrower over-leveraging in certain regions
Microfinance institutions are therefore expected to maintain disciplined lending practices while pursuing growth opportunities.
Implications for Investors
The projected acceleration in AUM growth is expected to benefit listed NBFC-MFIs, Small Finance Banks, and diversified financial institutions with significant exposure to rural and retail lending.
Improving loan growth combined with stabilising credit costs could support stronger earnings performance over the coming quarters.
Investors will continue to monitor disbursement trends, collection efficiency, net interest margins and regulatory developments to assess the sector's long-term growth potential.
Outlook
CRISIL Ratings' projection of 20% AUM growth in FY27 highlights the improving outlook for India's microfinance industry after a subdued performance in the previous financial year. The sector's transformation from traditional microcredit providers into diversified retail lenders is expected to drive sustainable long-term growth while expanding financial access for millions of borrowers.
As India's economy continues to recover and financial inclusion initiatives gather pace, microfinance institutions are well positioned to play a larger role in supporting rural entrepreneurship, small business financing and inclusive economic development. Their ability to balance growth with prudent risk management will remain a key factor shaping the sector's future performance.