The forecast points to easing credit stress for small finance banks (SFBs). Their gross non-performing asset ratio stood at 4.4% in March 2025, while Crisil expects 3.8% for March 2026. The projected further decline suggests a gradual improvement rather than an immediate end to repayment problems.

Microfinance is central to the recovery. It represents 30% of SFB lending but contributed disproportionately to bad loans after borrowers accumulated more debt than they could service. Banks have responded by writing off older troubled accounts and tightening checks before approving fresh credit.

MFIN’s Guardrails 2.0 also aims to curb excessive borrowing. The framework bars lending to customers with payments overdue beyond 60 days from January 1, 2025. A restriction on the number of lenders serving an individual borrower was also set for April 2025.

Meanwhile, lending outside microfinance has expanded to 70% of advances, against 50% in 2022. This includes vehicle loans and borrowing backed by property. Gross bad loan ratios in these segments have remained around 2.2–2.4%, helping contain overall stress.

Early repayment-stress indicators are improving too: SMA I and II accounts declined from 3.4% a year earlier to 2.4% in March 2026. However, newer portfolios such as MSME loans still need monitoring as they mature. Rainfall and rural earnings remain important to customers’ repayment capacity.