After seven straight quarters of decline and spreading considerable stress, microfinance loans have increased for the first time during the January-March 2026 quarter.

The development is significant as banks can use these high-yielding loans as an important tool to protect their net interest margins (NIM) at a time when they have to counter funding pressure with deposit growth lagging behind credit offtake.

There are three figures in the Reserve Bank of India’s latest Financial Stability Report (FSR) which indicate a positive turn and could restart microfinance lending with more prudent observations but less constraint after bad loans bruised the sector.

The microfinance borrowers are less leveraged than they were in the previous several quarters. The share of borrowers with loans from three or more lenders fell to 9.7% in March 2026 from around 12% a year ago and a peak of 16% in the June 2023 quarter, RBI data showed.

The second change is that the asset quality has showed continued improvement as the share of 31-180 days past due (DPD) declined for the fifth successive quarter on the back of lending safeguards adopted by the sector.

According to the report, the 31-180 DPD of banks stood at 2.5% in the March 2026 quarter, which is the highest among all lenders involved in microfinance lending. This was followed by 2% by overall as well as small finance banks, 1.9% of NBFC-MFI and 1.6% of NBFCs.   

Thirdly, the number of microfinance loan borrowers has continued to shrink while lending activity has started picking up. As per the RBI report, the borrower base has contracted by 22.7 lakh in the latest quarter. Consolidation in the microfinance sector’s customer base is a healthy sign as lenders tend to closely monitor their loan exposures in a challenging repayment environment.  

“NBFCs continue to play a critical role in financing MSMEs (micro, small and medium enterprises) and microfinance enterprises, supporting financial inclusion and employment,” the report said.

Although NBFCs' credit growth to MSMEs moderated slightly, it remains robust with improving asset quality. Meanwhile, combined NBFC and NBFC-MFI credit to the microfinance sector, accounting for 56.7% of total credit, expanded by 5.9% in H2FY26,” it added.

Asset quality strengthened, with the share of 31-180 DPD declining to 1.8% in March 2026 from 4.4% in September 2025. 

Credit costs of NBFC-MFIs eased due to lower provisioning and write-offs, though still elevated relative to 4.4% recorded in September 2023, the RBI report said.