Is India’s Microfinance Sector Set to Surpass Rs 10 Lakh Crore in 5-6 Years?

Mumbai, July 21 (NationPress) The microfinance sector in India is set to achieve a remarkable growth trajectory, with an anticipated 15 percent CAGR in its gross loan portfolio (GLP), exceeding Rs 10 trillion (Rs 10 lakh crore) over the next five to six years, according to a report released on Monday.

This analysis by Avendus Capital underscores a resilient transformation occurring within one of India’s most vital channels for financial inclusion.

Despite enduring several economic downturns, the microfinance sector has demonstrated remarkable resilience and is now entering a structural growth phase.

“We expect the sector to revert to its historical cross-cyclical return on equity (RoE) levels, ranging from 15-20 percent in the upcoming five to six years. This evolution is fueled by enhanced credit discipline, operational reconfiguration by leading firms, and more robust regulatory supervision,” the report stated.

The sector is uncovering diverse geographic opportunities, as deeper penetration into rural markets opens new avenues for financial inclusion. Moreover, increased engagement with new-to-credit (NTC) customers is expanding the borrower base.

The rapid implementation of AI-driven technologies is significantly boosting operational efficiency and facilitating more intelligent, data-informed lending choices.

“The microfinance sector has exhibited considerable resilience in recent times, with the duration of downturns becoming shorter. This advancement is a direct consequence of intentional regulatory initiatives, such as MFIN guardrails and the CGFMU scheme, which aim to mitigate borrower over-leverage and enhance asset quality,” stated Anshul Agarwal, Managing Director and Head of Financial Institutions Group Investment Banking at Avendus Capital.

Emerging signs are already apparent, indicating enhanced borrower discipline and improved fundamentals ahead. Collectively, these factors are nurturing a foundation for renewed investor confidence and sustainable sector health, Agarwal noted.

The report highlights that there are vast opportunities available, as the current asset under management (AUM) penetration stands at only 35 percent across 16 states, showcasing ample room for growth. The ongoing demand for credit in informal markets presents an attractive chance for microfinance institutions (MFIs) to broaden their outreach and further advance financial inclusion.

“As the sector's fundamentals undergo a reset through both regulatory and institutional measures, we foresee a re-evaluation of sector valuations, with multiples expected to rise substantially from the current 1.0x levels in the medium term. This presents an ideal opportunity for investors to engage and partake in the sector’s forthcoming growth cycle,” remarked Snigdha Khemka, Director of Financial Institutions Group Investment Banking at Avendus Capital.