Datanomics: Microfinance stress abates as NBFCs lead asset-quality recovery

India's microfinance sector is recovering as defaults fall, loan sizes rise, and government guarantees extend to boost cheaper credit to small borrowers

The Centre recently extended the Credit Guarantee Scheme for Microfinance Institutions-2.0 until August 31, 2026, and raised the loan guarantee cap for microfinance institutions (MFIs) in the category of large non-banking financial companies (NBFCs). The move aims to lower lending risk and push cheaper credit to small borrowers. The sector is showing signs of recovery. Loans overdue by more than 30 days after delinquency fell to 2.3 per cent in the financial year 2025-26 (FY26), down from 6.6 per cent a year earlier, with the NBFC category leading the recovery.

 

Six years ago, nearly three-quarters, or 75 per cent, of all disbursements were loans under ₹50,000. By FY26, that share shrunk to just 27 per cent, while the ₹50,000-80,000 band rose to 42 per cent, reflecting a tilt towards big ticket sizes, which were earlier considered risky. Bihar remains the largest microfinance market, with its share rising from 11.6 per cent in FY21 to 16.4 per cent in FY26. Together with Uttar Pradesh, Tamil Nadu, West Bengal, and Karnataka, they account for over half the outstanding credit.