**Microfinance Sector Brief: Market Correction & Regulatory Reset** **January 30, 2026** **Capital Dynamics & Market Contraction** The historical influx of private equity and venture capital, which previously fueled aggressive expansion in the microfinance sector, has given way to a severe liquidity squeeze. As of **September 30, 2025**, the industry gross loan portfolio (GLP) contracted to **₹3.39 lakh crore**, reflecting a sharp **16.8%** year-on-year decline. The funding environment has shifted from abundance to caution, with equity capital for pure-play firms dropping and debt funding from banks tightening significantly. **Asset Quality & Stress Indicators** The "recurring stress" highlighted in earlier economic assessments has materialized into critical asset quality challenges. Gross Non-Performing Assets (NPAs) surged into **double digits** by late 2025, with some estimates pegging stress levels near **16%**. Delinquencies in the **90+ days past due** bucket effectively doubled over the last fiscal year. Consequently, active borrower counts have fallen, with NBFC-MFIs alone seeing a client base reduction of approximately **20.4%**, as lenders prioritize collection over new disbursements. **Regulatory Guardrails Against Over-Indebtedness** To curb the systemic risks of over-lending, regulatory bodies and industry associations have enforced stricter "guardrails" effective **January 2026**. * **Lender Cap:** Borrowers are now restricted to a maximum of **3** micro-lenders (down from 4). * **Debt Ceiling:** Total indebtedness is capped at **₹2 lakh** per borrower. * **Income Assessment:** Mandatory board-approved policies for precise household income verification are now in full effect to prevent leverage beyond **50%** of household income. **Strategic Outlook & Government Intervention** The sector is currently undergoing a painful consolidation phase. While the government recently announced an **₹8,000 crore** credit guarantee scheme to stabilize cash flows, this falls short of the industry's requested **₹20,000 crore** liquidity support. The focus has decisively shifted from rapid VC-fueled growth to portfolio quality, with larger institutions gaining market share while smaller players face existential viability crises. Regional concentration remains high, with **East and North-East India** continuing to hold the largest portfolio share despite rising delinquency rates.