The microfinance sector is demonstrating early signs of recovery after experiencing a 17% year-on-year contraction in total portfolio outstanding between March 2025 and March 2026, with the portfolio outstanding (POS) declining to ₹2,77,053 crore as at March-end 2026 from ₹3,35,060 crore in the previous year. According to the latest 'Micropulse' report by SIDBI and Equifax, the sector's portfolio grew 3% quarter-on-quarter in the January-March 2026 period, marking a reversal of four consecutive quarters of decline and representing one of the strongest recovery phases for the sector after a prolonged slowdown. This recovery follows the post-COVID expansion phase from FY 2021-24, with the sector witnessing stress and portfolio consolidation before showing visible green shoots of recovery. As of March 31, 2026, the industry's outstanding portfolio stood at ₹2.77 trillion, encompassing 7.6 crore active loans, with disbursements during the January-March quarter of FY26 totalling ₹78,938 crore. However, recent developments show potential challenges ahead, with risks such as potential inflationary pressures or reduction in discretionary household cash flows likely to affect repayment behaviour of microfinance borrowers, according to a Crisil report.
The microfinance sector is undergoing a fundamental shift in lending behavior, with lenders increasingly focusing on borrowers with established credit histories rather than new-to-credit customers. As reported by SIDBI and Equifax, the share of new-to-credit borrowers declined sharply to 20% in March 2026 from 33% three years ago, reflecting tighter risk filters implemented after two years of asset quality stress. According to Equifax Credit Information Services interim managing director Subhankar Mishra, "Over the last few quarters, the microfinance sector has gone through a phase of correction and cautious lending." This strategic pivot is evident in the share of loans above ₹75,000 rising to 41% from 26% a year earlier, while the average ticket size increased to ₹62,945 during the quarter, indicating a growing focus on borrowers with stronger repayment capacity and established credit histories. The shift comes as about 23 million small borrowers exited the formal banking system, with the number of unique microfinance borrowers standing at 63 million at the end of March against 87 million two years earlier.
The sector's operational metrics showed significant improvement during Q4 FY26. As reported by SIDBI and Equifax, disbursements rebounded strongly to ₹78,938 crore during January-March 2026, marking the highest level recorded since the January-March 2023 quarter and signaling sustained return to growth mode. The average ticket size increased to ₹62,945 during the quarter, reflecting a growing focus on borrowers with stronger repayment capacity. The sector currently serves about 5.5 crore unique live borrowers through 7.6 crore active loans, with the number of accounts declining 21% year-on-year to 4.20 crore from 5.31 crore, while disbursements fell about 7% to ₹2.50 lakh crore from ₹2.70 lakh crore in FY25. Notably, the share of loans above ₹75,000 rose to 41% in January-March 2026 from 26% a year earlier, while loans below ₹50,000 continued to decline, indicating a structural shift toward higher-value lending. Borrower leverage trends also continued to improve, with the average share of borrowers associated with four or more lenders declining for the top five states—Bihar, Tamil Nadu, Uttar Pradesh, Karnataka and West Bengal.
Credit quality metrics showed dramatic improvement during the quarter, with 30-plus days past due (DPD) delinquency falling sharply to 2.35% in March 2026 from 6.64% in March 2025, representing a significant improvement from the previous year's contraction. According to the report, delinquency levels improved across lender categories and geographies, with NBFCs continuing to report the lowest delinquency rates among lender segments. The report's vintage analysis showed that loans originated during January-March 2025 and July-September 2025 are performing better than earlier cohorts, indicating improvements in underwriting standards and borrower selection. The declining NTC share from 33% in 2023 to 20% in 2026, combined with rising ETC share at 80%, reflects a transition from credit expansion to credit deepening in India's credit landscape.
States such as Karnataka, Tamil Nadu and Bihar have introduced legislations for tighter oversight on unregulated microfinance lending practices, including enhanced borrower protection norms, restrictions on recovery practices and stricter compliance guidelines. According to a Crisil report, Karnataka saw a moderation in collections, with efficiency declining 5-6 per cent immediately following the implementation of the state's microfinance ordinance in February 2025. However, Tamil Nadu and Bihar did not exhibit any material impact on collections as lenders were able to incorporate learnings from the Karnataka experience and adapt their operational approaches accordingly. The collections of microfinance securitised pools has improved sharply after the implementation of guardrails on new loan originations, with pools originated thereafter reporting a 60% reduction in overdue build-up at 1.6% ten months after securitisation, compared to 3.7% for pools originated during the stress period of fiscal 2025. The most significant feature of the guardrails has been their limiting of MFI exposure to over-leveraged borrowers, with a calibrated pickup in disbursements alongside prudent underwriting contributing to improved portfolio performance.
