Motilal Oswal sees gradual recovery in microfinance sector, upgrades Fusion Finance

The microfinance (MFI) sector is showing signs of a gradual recovery, according to brokerage firm Motilal Oswal, although the pace of improvement in the first quarter of FY26 is slower than earlier expected.The stress in the sector had built up over the past year, driven by overleveraging and state-specific challenges, particularly in Karnataka and Tamil Nadu, which delayed the overall recovery.

Seasonal disruptions caused by floods have also impacted states like Punjab and Jharkhand. Analysts at Motilal Oswal expect the situation to be temporary and contained within two to three weeks. In Assam, concerns persist over high-ticket loans, as some customers face difficulties in repaying their loans.

Despite these challenges, the brokerage expects the MFI industry to grow in the second half of FY26. The sector has degrown by nearly 19% compared with March 2024, bringing total loans down to around ₹3.5 lakh crores. Analysts believe the worst of the MFI cycle is behind, paving the way for gradual improvement.Credit costs remain elevated due to legacy stress, but some relief is anticipated in the fourth quarter of FY26 or in FY27.

On the stock front, Motilal Oswal has upgraded Fusion Finance to a buy rating, citing attractive valuations. Creditaccess Grameen has retained its buy rating as its recovery is expected to outpace the overall industry. Spandana Sphoorthy has been downgraded to neutral due to slow recovery and lack of near-term catalysts.