The low fault current contribution from inverter-interfaced distributed generators (IIDGs) and bidirectional flow of current in the power networks introduces protection challenges when islanded. The existing fault detection scheme based on the transient monitoring function (TMF) fails under such scenarios. A new decentralised machine learning (ML) based fault detection and classification scheme is proposed in this paper using terminal voltage information of IIDG (vo−abc). TMF of vo−abc, along with the zero sequence component of vo−abc, is utilised for training and testing of ensemble bagged trees ML algorithm. The proposed scheme is implemented inside each IIDG, and hence, it does not require communication. It is validated on a modified CIGRE test benchmark microgrid for all shunt faults at various locations with different loading, fault resistances, and inception angles. The accuracy of detection and classification of fault (DCF) during fault cases with unbalanced loads, noise, harmonic loads, and no-fault scenarios such as load and DG switching proves the effectiveness of the proposed method with varying scenarios. The performance of the proposed scheme is found to be superior when compared with the existing threshold based TMF and Hilbert–Huang transform (HHT) based techniques considering accuracy, dependability, security, and response time.