The microfinance sector’s loan portfolio contracted by 14 percent year-on-year to Rs 3.81 lakh crore at the end of the March quarter, with asset quality remaining a significant challenge, according to a report by credit information company Crif High Mark.While loans unpaid for up to 30 days showed some quarter-on-quarter improvement—falling to 1.4 percent in March from 1.8 percent in December—delinquencies in other categories continue to rise, signalling ongoing difficulties in recovery, PTI reported.The past year has been tough for the microfinance industry, which primarily serves borrowers at the bottom of the pyramid with smaller, livelihood-focused loans. Over-leverage and multiple lending relationships among borrowers have been identified as key factors behind deteriorating asset quality.To combat this, the industry has implemented several measures, including capping a borrower’s lender relationships to four since 2024, aiming to stabilize credit health.Regionally, portfolio contractions were most pronounced in Tamil Nadu and Karnataka, where the threat of ordinances caused lenders to reduce exposure, leading to a 7 percent decline quarter-on-quarter in gross lending. In contrast, West Bengal recorded a 1.5 percent increase.The number of active loans also fell to 14 crore at the end of March from 14.6 crore in December and 16.1 crore a year earlier. New disbursements between January and March stood at 1.33 crore, down sharply from 2.40 crore in the same period last year, though slightly higher than the 1.2 crore disbursed in the previous quarter.The report notes that the industry is now favouring higher-value loans, with the portfolio for loans above Rs 1 lakh growing 38.5 percent year-on-year, while loans below Rs 30,000 dropped by 36 percent.Despite current challenges, Crif High Mark sees the sector moving toward long-term sustainability. “While current indicators suggest cautious lending and persistent stress in parts of the portfolio, improvement in early-stage performance and a gradual move towards higher-quality credit segments are encouraging trends,” the report said.“Lenders are making conscious choices that favour resilience, stability and long-term impact… as institutions recalibrate and regulatory frameworks evolve, we are confident that the sector is laying the groundwork for stronger and more inclusive growth,” said Ramkumar Gunasekaran, director and head of sales at Crif High Mark.