Niemann-Pick type C is a storage disease caused by dysfunction of NPC proteins, which transport cholesterol from the lumen of lysosomes to the limiting membrane of that compartment. Using freeze fracture electron microscopy, we show here that the yeast NPC orthologs, Ncr1p and Npc2p, are essential for formation and expansion of raft-like domains in the vacuolar (lysosome) membrane, both in stationary phase and in acute nitrogen starvation. Moreover, the expanded raft-like domains engulf lipid droplets by a microautophagic mechanism. We also found that the multivesicular body pathway plays a crucial role in microautophagy in acute nitrogen starvation by delivering sterol to the vacuole. These data show that NPC proteins promote microautophagy in stationary phase and under nitrogen starvation conditions, likely by increasing sterol in the limiting membrane of the vacuole.