India’s Microfinance Sector Turns a Corner

India’s microfinance landscape is experiencing a notable revival, highlighted by a 3% sequential expansion in loan disbursements during the final quarter of FY26. This positive shift breaks a multi-quarter streak of restraint and marks the highest volume of credit distributed in two years, signaling a renewed appetite among lenders. Aggressive Growth from NBFCs: Non-Banking Financial Companies (NBFC-MFIs) are leading this resurgence. Driven by a higher risk tolerance, these specialized lenders are expanding both their funding volume and the absolute number of loans issued, effectively acting as the primary catalyst for the sector’s near-term recovery. Significant Drop in Delinquencies: Credit quality across the industry has improved dramatically, characterized by a sharp drop in short-term defaults. Notably, the 30-day delinquency rate plunged to 1.21% by March 2026—down from 2.49% a year prior—indicating that stricter underwriting standards are successfully keeping fresh portfolio stress at bay. Increase in Average Ticket Size: Bolstered by falling delinquency rates and greater confidence in borrower repayment capacity, institutions are increasingly comfortable approving larger amounts. The average loan size climbed steadily to ₹59,712 in FY26 (up from ₹50,893 in FY25), with high-value disbursements of ₹1 lakh or more surging to a 23% market share. Lingering Leverage Concerns: Despite the sweeping optimistic trends, historical or "vintage" bad loans over 180 days remain difficult to recover and continue to pose a minor challenge. Furthermore, while borrower over-leverage remains a watchpoint, the risk is mitigated by the fact that over 70% of micro-borrowers currently hold exposure to only a single lending institution.