Default clouds hover over microfinance as industry flags weak monsoon

The spectre of fresh credit risk looms over India's ₹3.31-lakh-crore microfinance sector, with the industry warning that a potentially weak monsoon and the ongoing West Asia conflict could hurt rural livelihoods.

The Microfinance Industry Network (MFIN) has flagged these concerns even as it highlighted the sectoral revival and improvement in asset quality in its latest report covering industry data till March.

"While these positive factors augur well for the sector in 2026-27, MFIN has also advised the players to keep in consideration the likely impact of a lesser-than-average monsoon prediction and West Asia conflict, as these may affect rural livelihoods," Alok Misra, chief executive officer at the industry association, said on Friday.

The India Meteorological Department (IMD) has said that the country is most likely to see below-normal rainfall between June and September due to the onset of El Nino conditions over the equatorial Pacific Ocean.

El Nino, a natural climate pattern associated with warmer-than-normal sea surface temperatures, has historically been linked with weaker monsoon rainfall for India.

The Reserve Bank of India, too, raised concerns over higher inflation due to low average rainfall and supply chain disruptions due to geopolitical conflicts.

The microfinance market, meanwhile, turned the corner with the fourth quarter showing ₹77,524 crore in loan disbursement, the highest in the past eight quarters. The sector's asset quality stress also subsided with the share of the portfolio that remained unpaid for 31 to 180 days being at 2%, as of end-March, compared with 6.3% a year ago.

Misra expects the credit guarantee scheme for microfinance companies to strengthen this recovery. The ₹20,000-crore scheme, announced on March 20, is aimed at improving bank fund flow for non-banking financial company-micro finance institutions and consequent rise in on-lending to the bottom of the pyramid customer segment.

The government has extended the scheme's deadline to August 31 from June 30, following reports that it has not seen traction.

"Recent extension of the scheme till August 2026 will allow sufficient time for utilisation," Misra said, adding that the sector has done its part by way of improved performance metrics riding on lending guardrails. "It is time for banks to come forward and actively support the cause of financial inclusion," he urged.