For nearly two years, India’s microfinance sector was stuck in reverse gear.
Loan books were shrinking. Borrowers were turning cautious. Lenders were worried about repayments. The industry, which serves millions of low-income households across the country, was battling one of its toughest phases in recent memory.
Now, there are signs that the tide may finally be turning.
Fresh data released by the Micro Finance Industry Network (MFIN) shows that India’s microfinance industry recorded its first quarter-on-quarter portfolio growth after seven consecutive quarters of contraction. The sector’s total outstanding loan portfolio stood at Rs 3.25 lakh crore at the end of March 2026.
The number itself is important. But what is more interesting is what lies beneath it.
People are borrowing again. And they are borrowing larger amounts.
The Return Of Confidence
During the January-March quarter, lenders disbursed Rs 77,524 crore worth of loans — the highest quarterly disbursement seen in the past seven quarters.
This suggests demand for credit is returning in rural and semi-urban India, where microfinance plays a critical role in funding small businesses, farming activities, household needs and income-generating ventures.
The average loan size has also climbed steadily.
Among MFIN-member NBFC-MFIs, the average loan amount disbursed during FY26 rose to Rs 59,553, nearly 18 per cent higher than the previous financial year.
In simple terms, borrowers are not only returning to the market, they are also taking larger loans than before. For an industry built around small-ticket lending, that is often a sign of improving confidence.
The Bad-Loan Problem Is Easing
Perhaps the biggest reason for optimism is the improvement in repayment behaviour. A year ago, the industry was grappling with rising stress as delinquency levels surged across several markets.
That pressure appears to be easing.
According to the MFIN report, Portfolio at Risk (PAR) for loans overdue between 31 and 180 days declined sharply to 2 per cent as of March 2026, compared with more than 6 per cent a year earlier.
In other words, fewer borrowers are falling behind on repayments. The improvement has been visible across lender categories, including NBFC-MFIs, banks, small finance banks and NBFCs.
MFIN Chief Executive Officer and Director Alok Misra said the industry is finally beginning to emerge from a difficult phase.
“We can now say that despite the tough two years, industry is turning the corner,” he said, pointing to the steady improvement in portfolio quality and the return of growth.
Bihar Remains India’s Microfinance Capital
The geography of India’s microfinance market offers another insight into where demand is strongest.
Bihar continues to be the largest microfinance market in the country, with outstanding loans worth nearly Rs 53,000 crore.
Uttar Pradesh follows closely behind, while Tamil Nadu ranks third. Together, Bihar, Uttar Pradesh and Tamil Nadu account for a significant share of India’s microfinance activity.
More broadly, eastern and northeastern states continue to dominate the sector, accounting for more than a third of the industry’s total portfolio.
The concentration highlights how microfinance remains deeply linked to regions where access to formal banking and traditional credit channels is relatively limited.
Fewer Borrowers, Bigger Loans
One trend stands out. The industry is serving fewer borrowers than it did a year ago. The number of active loan accounts across the sector fell to 10.1 crore from 13.3 crore a year earlier.
Among MFIN-member institutions, client numbers declined nearly 16 per cent year-on-year. Yet the overall value of loans has held up much better.
This means lenders are increasingly focusing on larger and potentially stronger borrowers while exercising greater caution after the recent stress period.
The result is a healthier portfolio, even if growth in customer numbers remains muted.
What Comes Next?
The recovery is still at an early stage.
Industry executives remain cautious about risks ranging from uneven monsoon patterns to global geopolitical tensions that could affect rural incomes.
At the same time, the extension of the government’s Credit Guarantee Scheme for Micro Finance Institutions (CGSMFI 2.0) is expected to provide additional support to the sector.
For now, though, the message from the latest numbers is clear: India’s microfinance industry may not have returned to full speed yet, but the worst appears to be over.
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