The Indian microfinance sector has turned a corner, showing growth in the January-March period after a prolonged period of contraction. According to latest reports, the sector's total outstanding portfolio contracted 10% year-on-year to ₹3.38 lakh crore in the March 2026 quarter, while simultaneously recording a record low 30-day overdue rate of 2.3%. This contrasting performance reflects a sector-wide pivot from aggressive growth to prioritizing financial stability, with lenders moving away from volume-driven expansion toward stringent balance sheet management. The 30-day overdue rate of 2.3% represents the lowest level recorded in the past five quarters, marking a significant improvement in credit quality metrics across the industry, with the sector now showing 5.3% growth after 11 quarters of contraction.
Loan disbursements experienced a sharp decline in the January-March 2026 quarter, with total disbursements falling 21% by volume and 7% by value compared to the previous year. However, the latest data shows microfinance industry disbursed loans worth ₹66,681 crore during July-September 2021 quarter, registering a robust Y-o-Y growth of 96% by value and 94% by volume from the corresponding quarter during July-September 2020. Despite this decline, the number of active loans remained strong at 10.42 crore, showing ongoing borrower engagement. NBFC-MFIs led this strategic shift, accounting for 47% of total disbursements while demonstrating better asset quality. This careful approach by lenders to manage risk and boost credit quality indicates a deliberate move away from rapid expansion toward sustainable growth strategies, with the sector focusing on quality rather than quantity in its lending practices.
Private sector banks significantly expanded their microfinance presence during the quarter, with their cumulative portfolio growing by 8.8% to ₹89,548 crore, raising their market share to 26% from 25.6%. Other NBFCs, led by L&T Finance, expanded their portfolio to ₹46,158 crore from ₹45,141 crore. In contrast, small finance banks reduced their cumulative microfinance exposure to ₹50,725 crore at the end of March, from ₹54,234 crore three months ago, as they sought to increase their secured loan portfolio to mitigate credit risk from unsecured business. This strategic shift by small finance banks reflects their focus on risk management while other segments continue to grow their microfinance portfolios, with the credit information company noting that the small finance banking segment continued to reduce their cumulative microfinance business exposure during this quarter.
Women borrowers have seen a significant transformation in credit access, with credit penetration among women rising 5-fold to ₹76 lakh crore between 2017 and 2025, representing 26% of all credit. Business loans for women have grown substantially, indicating a shift towards income-generating activities. Digital sourcing is playing a key role in improving access for new-to-credit women borrowers, with the fairer sex increasingly occupying the rank and file of recovery agents as the industry attempts to restore its past glory. This digital adoption and focus on women empowerment through microfinance represents a fundamental shift in how the sector approaches lending and customer engagement, with improved collection efficiencies and an easing funding environment signaling a stronger future for the industry.
Despite current challenges, the microfinance sector maintains optimistic long-term prospects with forecasts projecting the market could reach USD 17.7 billion by 2034, growing at an average annual rate (CAGR) of 9.77%. However, industry watchers expect a period of 'measured growth,' where lenders will balance expansion with asset quality, moving from volume-driven growth to a stronger focus on portfolio quality and long-term resilience. The core strategy is shifting toward 'lending better' rather than 'lending more,' according to the Economic Survey 2026. While specific price-to-earnings (P/E) ratios for the microfinance industry are not widely published, the broader Indian NBFC sector presents varied valuations, with leading NBFCs trading at P/E ratios of about 31.52 for Bajaj Finance and 22.89 for Shriram Finance. Experts anticipate a return to normal growth by the end of the first quarter of FY27, marking an inflection point for the industry.
