Microfinance in India: Financialisation and Household Welfare – Economic Survey 2025-26 Analysis
Microfinance has been instrumental in bringing credit to India's underserved populations, particularly women in rural areas. The Economic Survey 2025-26 examines the microfinance sector's growth, its impact on household welfare, and emerging concerns that require attention. This article explores the role of microfinance in India's financial inclusion journey and the policy considerations surrounding its evolution.
Understanding Microfinance: Concept and Evolution
Microfinance refers to the provision of small-value financial services – primarily credit – to low-income individuals who lack access to traditional banking. In India, microfinance institutions (MFIs) typically lend to women through Self-Help Groups (SHGs) or Joint Liability Groups (JLGs). The loans are usually for income-generating activities, though they may also cover consumption, health, or education needs.
The Indian microfinance sector has grown significantly over the past two decades. What began as NGO-led initiatives has evolved into a formal industry with Non-Banking Financial Companies (NBFCs) playing a major role. Several MFIs have converted into Small Finance Banks, expanding their service offerings.
Growth Trajectory and Current Scale
The microfinance sector's loan portfolio has expanded substantially, serving crores of borrowers across the country. The Economic Survey 2025-26's discussion of financial inclusion encompasses this sector's contribution to credit access for underserved populations.
Key characteristics of the Indian microfinance market include:
Geographic Concentration: Historically, southern and eastern States have had higher microfinance penetration. Andhra Pradesh, Karnataka, Tamil Nadu, West Bengal, and Bihar have been leading markets.
Women-Centric: The vast majority (over 95 per cent) of microfinance borrowers are women. This is both an outcome of the SHG/JLG model and a conscious choice given evidence that women are more reliable borrowers and more likely to use funds for family welfare.
Rural Focus: Most microfinance lending serves rural and semi-urban areas where formal banking presence is limited.
Impact on Household Welfare
The Economic Survey 2025-26's reference to microfinance and household welfare draws on substantial research showing both positive impacts and areas of concern.
Positive Impacts:
Access to credit enables income-generating activities like livestock rearing, petty trading, and home-based production. Studies have shown improved household consumption, better nutrition, and increased spending on children's education among microfinance borrowers.
Women's empowerment is a documented outcome. Access to and control over financial resources improves women's decision-making power within households and their social standing in communities.
The discipline of regular loan repayments and group meetings has helped build financial management skills among borrowers.
Areas of Concern:
Over-indebtedness has emerged as a significant concern. When multiple lenders compete in the same geographic area, borrowers may take loans from several sources, accumulating debt beyond their repayment capacity.
Coercive collection practices by some lenders have been reported. The pressure to maintain high repayment rates can lead to practices that harm vulnerable borrowers experiencing genuine difficulties.
Interest rates, while lower than informal moneylenders, remain high relative to mainstream bank lending. Borrowers may not always understand the effective interest rate they are paying.
Regulatory Framework
RBI regulates NBFC-MFIs through specific guidelines covering interest rates, lending limits, and borrower protection. Key regulatory provisions include:
Qualifying Asset Criteria: At least 75 per cent of total assets must be qualifying assets (microfinance loans).
Income and Loan Limits: Borrower household income limits and loan amount ceilings are specified to ensure focus on the target population.
Interest Rate Guidelines: While interest rates were earlier capped, the current framework emphasizes fair practices and transparency rather than hard caps.
Harmonized Regulations: RBI has moved toward harmonizing microfinance regulations across entity types (NBFCs, Banks, SFBs) to ensure consistent consumer protection.
Self-Help Group Bank Linkage Programme
Alongside commercial microfinance, the SHG-Bank Linkage Programme (SBLP) promoted by NABARD remains a major channel for microfinance delivery. Under this model, SHGs formed at the village level develop internal thrift and lending practices before being linked to banks for larger loans.
The SHG model has been scaled through the National Rural Livelihoods Mission (NRLM), which provides training, capacity building, and linkage support. With over 80 lakh SHGs and crores of member households, this is one of the world's largest community finance programs.
Digital Transformation in Microfinance
Technology is reshaping microfinance operations. Digital tools are being used for:
Credit Assessment: Alternative data (mobile phone usage, bill payments) supplements traditional group-based credit assessment.
Loan Disbursement and Collection: Digital payments reduce cash handling and improve transparency.
Customer Service: Mobile apps and call centers provide borrowers easier access to account information and grievance redressal.
The challenge is ensuring that digital transformation benefits borrowers rather than just reducing costs for lenders. Digital financial literacy and protection against digital fraud become important.
Microfinance and the Informal Sector
Microfinance serves a population that largely works in the informal sector – agriculture, small trading, domestic work, construction labor. Understanding the cash flow patterns and risk profiles of these borrowers is essential for appropriate product design.
The Economic Survey's broader discussion of formalizing the informal economy is relevant here. As microfinance borrowers develop credit histories and digital payment trails, they can potentially graduate to mainstream financial services.
UPSC Relevance: Microfinance
Microfinance connects multiple UPSC topics:
- Economy: Financial inclusion, NBFCs, credit access
- Social Issues: Women's empowerment, rural development
- Governance: SHG programs, poverty alleviation schemes
Practice MCQs on Microfinance - Economic Survey 2025-26
Q1. The majority of microfinance borrowers in India are:
(a) Urban youth
(b) Women
(c) Large farmers
(d) Salaried employees
Answer: (b) Women (over 95%)
Q2. SHG-Bank Linkage Programme is promoted by:
(a) RBI
(b) SEBI
(c) NABARD
(d) SIDBI
Answer: (c) NABARD
Q3. NBFC-MFIs are regulated by:
(a) Ministry of Finance
(b) RBI
(c) State Governments
(d) SEBI
Answer: (b) RBI
Q4. Which of the following is a concern with microfinance highlighted in studies?
(a) Low loan amounts
(b) Over-indebtedness of borrowers
(c) Limited geographic coverage
(d) Excessive male participation
Answer: (b) Over-indebtedness of borrowers
Q5. The National Rural Livelihoods Mission supports:
(a) Large industries
(b) Self-Help Groups
(c) Foreign investors
(d) Urban housing
Answer: (b) Self-Help Groups
Conclusion
Microfinance remains a vital channel for bringing credit to India's underserved populations, as the Economic Survey 2025-26's discussion of financial inclusion indicates. The sector's contribution to women's empowerment and household welfare is well-documented. However, ensuring that growth does not come at the cost of borrower welfare requires continued regulatory vigilance, responsible lending practices, and financial literacy efforts. As the sector evolves with digital transformation and regulatory refinement, maintaining focus on its fundamental purpose – improving lives through appropriate financial access – will be essential.