Microfinance Sector Recovery Gains Momentum, NBFC-MFI AUM Seen Growing Around 15% in FY27

CareEdge Ratings expects improving asset quality, lower credit costs and stronger lending discipline to support gradual recovery, while funding access remains uneven

The Indian microfinance sector is showing signs of recovery after a challenging period, with higher loan disbursements, improving asset quality and a return to sequential portfolio growth. According to CareEdge Ratings, industry assets under management (AUM) for NBFC-MFIs are expected to grow by around 15% in FY27, supported by better lending discipline and policy measures.

However, the rating agency noted that the recovery is likely to remain uneven, with larger NBFC-MFIs expected to benefit more due to stronger capital positions, diversified portfolios and better access to funding.

Industry Shows Signs of Recovery

Industry disbursements rose to nearly Rs 77,500 crore in Q4 FY26, the highest level recorded in the last eight quarters. Industry AUM also increased 3.3% sequentially, marking the first quarter of portfolio growth after seven consecutive quarters of decline.

According to CareEdge Ratings, recent industry guardrails and policy initiatives have improved lending discipline and reduced borrower overleveraging.

The share of borrowers with more than three lender relationships declined to approximately 5% in FY26, compared with 13% in FY24.

Asset Quality Improves

The agency stated that the clean-up of legacy stress has contributed to improving portfolio quality.

Collection performance for loans originated after the implementation of industry guardrails has strengthened:

• PAR 1–30 days declined to 0.5% in March 2026 from 1.4% in March 2025.
• PAR 31–90 days moderated to 0.8% from 2.8% during the same period.

According to CareEdge Ratings, moderating credit costs are expected to support a gradual improvement in profitability.

Larger NBFC-MFIs Better Positioned

The report noted that larger and well-capitalised NBFC-MFIs are better positioned to expand beyond traditional microfinance products.

The share of non-microfinance AUM stood at:

• 19% for large NBFC-MFIs in FY26
• 13% for medium-sized NBFC-MFIs
• 2% for small NBFC-MFIs

According to the agency, greater portfolio diversification could reduce concentration risk and improve earnings stability over time, although it may moderate portfolio yields and margins.

Funding Remains a Key Challenge

CareEdge Ratings identified funding access as a major differentiator across the sector.

In FY26:

• Small NBFC-MFIs raised borrowings equivalent to around 14% of opening AUM.
• Medium-sized NBFC-MFIs raised approximately 26%.
• Large NBFC-MFIs raised around 60%.

The agency stated that smaller institutions continue to face tighter liquidity conditions, higher borrowing costs and cautious lender appetite.

It also noted that while the Credit Guarantee Scheme for MFIs 2.0 is intended to improve funding access, adoption has remained modest based on its survey of rated NBFC-MFIs.

CareEdge Ratings FY27 Outlook

Figures in brackets represent FY26.

Outlook for FY27

CareEdge Ratings expects NBFC-MFI AUM to grow by around 15% in FY27.

The agency projects:

• Return on Total Assets (RoTA) to improve to approximately 2.4%, up from 0.5% in FY26.
• Credit cost to decline to around 3.5%, compared with 5.4% in FY26.

According to the report, the improvement is expected to be supported by stronger asset quality, business growth and lower credit costs.

The agency added that funding conditions, weather-related disruptions, rural income volatility and localised political developments will remain key factors to monitor.

Webinar Highlights

These trends were discussed during CareEdge Ratings' webinar titled "Microfinance: Out of the Woods? The Road Ahead."

The webinar covered:

• Industry recovery
• Borrower behaviour
• Impact of industry guardrails
• Portfolio diversification
• Funding trends
• Credit Guarantee Scheme
• Technology-led risk management
• Key sector risks
• FY27 outlook