India’s microfinance sector is showing early signs of a growth revival, with both disbursements and assets under management (AUM) beginning to recover after a prolonged period of contraction, according to CareEdge Ratings.
Industry AUM rose 3.3% sequentially to around ₹3.25 lakh crore in Q4 FY26, marking the first increase after seven consecutive quarters of decline. Quarterly disbursements also rose to nearly ₹77,500 crore, the highest level in eight quarters.
The recovery moderated in Q1 FY27, with industry AUM increasing marginally to ₹3.27 lakh crore as of June 30, 2026. Disbursements stood at around ₹61,000 crore, up from ₹56,700 crore in Q1 FY26.
NBFC-MFIs lead recovery
NBFC-Microfinance Institutions (NBFC-MFIs) are emerging as the key drivers of the recovery. Their AUM increased to around ₹1.44 lakh crore as of March 31, 2026, growing faster than the overall industry during Q4 FY26. AUM rose further to ₹1.46 lakh crore by June 30, 2026.
Their market share increased to around 44% in June 2026 from 39% in March 2024, largely at the expense of banks.
CareEdge Ratings expects larger and well-capitalised MFIs to lead sector growth, given their stronger access to funding, capital position and risk-management capabilities.
Asset quality strengthens
Asset quality has improved significantly following the clean-up of stress in the pre-guardrail portfolio and lower delinquencies in loans originated after the introduction of tighter industry guardrails.
Portfolio at Risk (PAR) of 1-30 days declined to 0.5% in June 2026 from 1.4% in March 2025, while PAR 31-90 days fell to 0.7% from 2.8% over the same period.
The post-guardrail portfolio is also reporting healthier collections, with X-bucket collection efficiency exceeding 99.5%.
Profitability is showing a corresponding improvement. Return on Average Total Assets (RoTA) turned positive at 0.5% in FY26, compared with a negative 1.2% in FY25. The improvement was supported by a decline in credit cost to 5.4% of Average Total Assets from 8.7%.
CareEdge Ratings expects RoTA to rise to around 2.4% in FY27, supported by further moderation in credit costs.
Tighter lending practices reduce borrower leverage
The sector is entering FY27 with a stronger operating environment, supported by tighter underwriting, product diversification and technology-enabled credit controls.
MFIN Guardrails 1.0 and 2.0 have strengthened lending discipline by reducing the maximum number of microfinance lenders per borrower from four to three and capping aggregate microfinance indebtedness at ₹2 lakh.
The framework also includes unsecured retail loans while assessing borrower leverage and restricts fresh lending to borrowers with existing loans where outstanding dues have been overdue by more than 60 days.
The impact is visible in borrower-level data. The proportion of borrowers with four or more lender relationships declined to around 4% in June 2026 from 13% in March 2024, while borrowers with two or fewer lender relationships increased to about 81%.
The unique borrower base declined from 7.8 crore to 6.4 crore between March 2024 and March 2026, while average disbursement size increased from ₹48,300 to ₹61,500.
Product diversification gains momentum
NBFC-MFIs are also gradually diversifying into individual lending and non-microfinance segments, reducing their dependence on traditional Joint Liability Group (JLG) lending.
The relaxation of the qualifying-asset requirement from 75% to 60% has provided greater flexibility to expand into adjacent retail-lending segments.
The shift is more pronounced among larger MFIs. As of March 2026, non-microfinance products accounted for around 19% of AUM for large MFIs, compared with 13% for medium-sized institutions and just 2% for small MFIs.
Technology strengthens credit controls
Greater use of borrower-level data, credit-bureau information, analytics and early-warning systems is helping lenders assess indebtedness and repayment behaviour more effectively.
Daily reporting of data to credit bureaus under MFIN Guardrails 2.0 is expected to further strengthen credit assessment and monitoring. However, data quality, cybersecurity and privacy controls will remain critical as technology adoption increases.
Funding remains skewed towards large MFIs
Despite improving funding conditions, access to capital remains uneven. Large MFIs accounted for around 98% of incremental borrowings raised in FY26, while medium and small institutions continued to face tighter access and higher funding costs.
Some MFIs may also require sizeable equity infusions to support future growth after incurring losses over the past two years. A sustained improvement in profitability and asset quality will therefore be crucial to attracting equity investors.
“The microfinance sector is entering FY27 on a stronger footing, with asset quality improving through the clean-up of stressed portfolios, lower borrower leverage and tighter lending practices,” said CareEdge Ratings Assistant Director Ravi Nayak.
According to CareEdge Ratings, the recovery is being supported not only by the resolution of legacy stress but also by healthier loan originations following the introduction of industry guardrails. With credit costs expected to moderate further, profitability is expected to strengthen in FY27.