Microfinance Sector Sees First Loan Growth In Two Years Despite Shaking Off Over 22 Lakh Borrowers

Microfinance loans in India have registered growth for the first time after seven straight quarters of decline. The Reserve Bank of India (RBI) stated in its latest Financial Stability Report that lending activity has started picking up, even though the number of individual borrowers continued to contract during the January to March 2026 quarter.

Divergent Trends in Credit and Customer Base

The central bank has reported that the borrower base shrank by 22.7 lakh individuals in the latest quarter. This contraction indicates that the sector is experiencing a phase of consolidation in its customer base while overall lending amounts increase.

The report highlighted that the credit extended to the microfinance sector by non-banking financial companies (NBFCs) and microfinance institutions (NBFC-MFIs) grew by 5.9 per cent during the second half of the 2026 fiscal year (H2FY26). These two entities combined account for 56.7 per cent of the total credit within the microfinance sector.

Improved Asset Quality and Risk Management

The RBI pointed out that asset quality has shown steady improvement. The share of loans categorised as 31 to 180 days past due (DPD) fell for the fifth successive quarter. Industry analysts state that this recovery reflects better risk management after the microfinance sector adopted new regulatory guardrails.

A breakdown of the 31-180 DPD data showed that traditional banks recorded the highest stress level among all microfinance lenders at 2.5 per cent. Small finance banks (SFBs) and the overall industry average both stood at 2.0 per cent. NBFC-MFIs recorded 1.9 per cent, while standard NBFCs registered the lowest stress at 1.6 per cent.

NBFCs Key To Microfinance And MSME Lending

The RBI has noted that NBFCs continue to play an important role in extending credit to microfinance borrowers and micro, small and medium enterprises (MSMEs), supporting financial inclusion and employment generation.

While credit growth to MSMEs through NBFCs moderated slightly during the second half of FY26, asset quality improved. At the same time, combined lending by NBFCs and NBFC-MFIs to the microfinance sector expanded by 5.9 per cent during the second half of FY26.

According to the report, NBFCs and NBFC-MFIs together accounted for 56.7 per cent of the total credit extended to the microfinance sector, underlining their continued importance in meeting the financing needs of low-income households and small businesses.