Sandeep Soni

India’s microfinance industry, hailed as the backbone of India’s financial inclusion drive and a critical source of last-mile credit, continues to face sustained growth challenges. The latest data for the June 2025 quarter points to further moderation in business volumes and continuing pressure on asset quality in comparison to the year-ago period.

In a move that could reshape the contours of collaborative lending in India, the Reserve Bank of India has overhauled its co-lending framework, merging earlier expansions beyond priority sector lending (PSL) into a single, uniform rulebook and raising the bar on operational discipline and transparency. The Reserve Bank of India (Co-Lending Arrangements) Directions, 2025, released on August 6, will take effect from January 1, 2026.

Kotak Mahindra Bank expects credit costs in microfinance to remain at elevated levels for the next two quarters, even as its microfinance business has been profitable. The lender had flagged rising credit strains in the microfinance industry last year and has since pared its retail microfinance book. As of June quarter in the current fiscal, the bank’s retail microcredit had dropped by 43 per cent to Rs 5,882 crore from Rs 10,368 crore during the same period.