Indian microfinance lenders significantly increased disbursements for loans above ₹1 lakh, which grew nearly 90% in the first quarter of FY27. This shift reflects a sector-wide strategy to prioritize asset quality over smaller, higher-risk loans. With Portfolio at Risk levels improving to 2.3%, investors are monitoring whether this change can sustain long-term stability amid regional credit risks.
Indian microfinance institutions are fundamentally changing their lending strategy by favoring larger loan ticket sizes to improve portfolio safety. During the quarter ended June 2026, disbursements for loans exceeding ₹1 lakh jumped by 89.8% compared to the same period last year. This sharp increase indicates that lenders are actively moving away from smaller loan categories, which are often considered riskier.
The decline in smaller loans supports this shift. Loans under ₹30,000 fell by 35%, while those in the ₹30,000 to ₹50,000 range dropped by 20%. This change in strategy appears to be a direct response to past industry challenges, where excessive lending to single borrowers led to significant defaults. By focusing on larger loans, often issued to existing borrowers with proven repayment histories, lenders are aiming to build a more secure foundation for their portfolios.
Financial data reflects this pivot's impact on asset quality. The Portfolio at Risk (PAR), which tracks loans that are unpaid between 1 and 180 days, improved to 2.3% in June 2026. This is a notable decrease from 2.6% in the previous quarter and a significant improvement from the 7.1% reported in June of the previous year. This suggests that the quality of the loan book is strengthening, although some of this improvement is also linked to the industry writing off older, bad debts.
Despite the positive trend in asset quality, the sector faces ongoing challenges. While overall disbursements reached ₹61,100 crore in the quarter, the industry saw a 20% decline compared to the previous quarter due to seasonal factors. Additionally, regional stress remains a concern. Areas prone to extreme weather, such as floods, continue to affect borrower repayment capacity. Smaller, less capitalized microfinance firms are also finding it harder to secure funding from banks, leading to a consolidation trend where larger non-bank microfinance companies have grown their market share to 44%.
For investors, the key to monitoring this sector will be observing how these lenders maintain growth while staying within regulatory guardrails. As the industry shifts toward larger ticket sizes, the ability to assess borrower capacity accurately becomes more important than ever. The success of this strategy will depend on whether companies can manage credit risks in specific geographic pockets while avoiding the pitfalls of over-leveraging their client base.