Bengaluru, 2026: As India’s microfinance sector reaches a crucial inflection point, Karnataka has emerged as a symbol of resilience. Research reports from Equifax India and India Ratings affirm the state’s robust microfinance portfolio of ₹23,743 crore. This validation comes alongside Budget 2025’s doubling of credit guarantee limits to ₹10 crore and evolving Q3 FY26 results, collectively signaling a clear transition from crisis to cautious optimism. The research organizations presented detailed insights into Karnataka’s microfinance landscape and the FY27 outlook for microfinance institutions.
THE TURNAROUND STORY: FROM STRESS TO STABILITY
India Ratings’ landmark decision to upgrade the microfinance sector outlook from “deteriorating” to “neutral” marks a watershed moment. The agency projects credit costs declining sharply from 9.5% in FY25 to 4.0% by FY27, while profitability (PAT-to-AUM) is expected to improve dramatically from a negative 0.4% to a positive 2.7%—a remarkable swing of 310 basis points.
Karnataka’s performance strongly supports this optimism. Equifax data shows the state’s 30+ delinquency improving to 5.60% in November 2025. Belagavi leads the portfolio with ₹1,788 crore, followed by Mysuru (₹1,707 crore) and Bengaluru Urban (₹1,536 crore).
Mr. N. Venkatesh, Chairman of the Association of Karnataka Microfinance Institutions (AKMI), stated during the presentation:
“While the intent of the new February 2025 regulations was clear and necessary, our member institutions rose to the occasion with decisive action and firm commitment to inclusive finance. We responded swiftly by calibrating loan book growth, provisioning prudently, and realigning field operations. At every step, we remained committed to the millions who depend on us for their first—and often only—opportunity for financial empowerment. Our collective efforts helped counter misinformation and re-establish the strong foundation of our microfinance sector, and we look forward to a vibrant 2026.”
DRAMATIC DELEVERAGING AND BUDGET CATALYST
One of the most compelling indicators of recovery is the sector’s dramatic deleveraging. The proportion of borrowers with four or more lenders declined sharply from 19.2% in June 2024 to just 8.8% in September 2025—a reduction of 54%. Stage 2 loans also moderated, easing to 2.7% in Q2 FY26 from a peak of 3.7%.
Union Budget 2025–26’s focus on MSMEs provides critical momentum. The doubling of credit guarantee limits is expected to unlock ₹1.5 lakh crore in additional credit over the next five years. Sa-Dhan’s recommendations, including the creation of a Special Fund for small MFIs, gained traction during discussions with the Department of Financial Services Secretary, Mr. M. Nagaraju.
BEYOND CREDIT: EMPOWERMENT THROUGH FINANCIAL LITERACY
The sector has sustained a strong emphasis on credit-plus initiatives that go beyond lending. Financial literacy programs have been strengthened, with a renewed focus on customer protection and responsible borrowing. AKMI has introduced innovative outreach methods, including street plays for awareness, upskilling initiatives, and robust grievance redressal mechanisms in collaboration with MFIN and Sa-Dhan.
Mr. Ganesh Narayanan, MD & CEO of CreditAccess Grameen Limited (CAGL), emphasized:
“A hybrid model that combines IT-enabled systems with personal engagement—both before and after loan disbursement—is essential. The quality of an MFI should be evaluated based on the inherent strengths of its operating model to ensure repayments and effective loan utilization.”
This approach has delivered tangible results, with the sector achieving an 83% graduation rate of borrowers into retail credit, reinforcing microfinance’s role as a gateway to mainstream finance.
WOMEN ENTREPRENEURSHIP DRIVING INCLUSIVE GROWTH
With women accounting for 99% of the sector’s 8.67 crore active borrowers, microfinance continues to serve as a powerful instrument for empowering women entrepreneurs in rural and backward regions. Strategic industry partnerships focused on credit linkages, market access, and capacity building demonstrate the potential to raise average incomes by 30%.
Mr. Jiji Mammen, Executive Director & CEO of Sa-Dhan, presented compelling evidence of microfinance’s role in expanding employment through increased disbursals, fostering entrepreneurship across rural and semi-urban areas. This job creation impact highlights the sector’s contribution of 2–3% to India’s Gross Value Added (GVA).
Q3 FY26 TRENDS AND DIGITAL TRANSFORMATION
Recent quarterly results indicate a phase of measured stabilization. IndusInd Bank’s calibrated approach—reducing MFI exposure from 13–14% to 9% while sustaining a collection efficiency of 95.5%—reflects cautious optimism. Industry-wide credit costs, which peaked at 13.5% in Q3 FY25, are now moderating as tighter guardrails, including the ₹2 lakh borrower debt cap and the three-lender limit, improve asset quality.
Digital adoption is further enhancing operational efficiency. The Reserve Bank of India’s decision to lower the qualifying asset threshold to 60% allows MFIs to diversify portfolios toward secured products, supporting sustainable and quality-focused growth.
FY27 PROJECTIONS: KARNATAKA LEADS THE CHARGE WITH NEW POLICY SUPPORT
India Ratings projects sector AUM growth rebounding to 12% in FY27, with pre-provisioning operating profit improving by 190 basis points year-on-year. For Karnataka, this translates into a potential portfolio expansion to ₹26,600–27,000 crore by the end of FY27.
This positive outlook is now further strengthened by a decisive policy intervention. As of January 29, the Government of India has approved a fresh ₹8,000 crore credit guarantee facility for microfinance institutions. This targeted measure aims to ease funding pressures, particularly for small and mid-sized MFIs, and serves as a powerful national catalyst supporting the growth trajectory of states such as Karnataka.
With microfinance penetration currently at 30% of the addressable market and a national portfolio of ₹3 lakh crore, significant growth potential remains. The convergence of Karnataka’s proven resilience, regulatory prudence, ongoing deleveraging, and enhanced budgetary support positions the microfinance sector to fully reclaim its role as a key engine of inclusive economic growth—with Karnataka leading the way.
In recognition of the visionaries who shaped the sector, the Association of Karnataka Microfinance Institutions honored three pioneers for their lifetime contributions: Shri Samit Ghosh, who redefined urban microfinance through Ujjivan; Shri Uday Kumar Hebbar, the strategic force behind CreditAccess Grameen; and Padmashri Aloysius Prakash Fernandes, the grassroots architect of MYRADA and Sangamithra.