Select & View Tables

Chapter 1.7Microfinance and Viksit Bharat: The Case for the Next Decade

India’s ambition to become a developed economy by 2047 ultimately depends on whether households build productive assets, stable incomes, financial resilience and market access. With 67.24 million microfinance clients and around 171 million households reached through SHGs, largely women, microfinance has a critical role in this transformation.

Read More

Indian Microfinance: Resilience, Responsibility & Inclusion Ramesh Srivatsava Arunachalam

1.7 Microfinance and Viksit Bharat: The Case for the Next Decade

India’s ambition to become a developed economy by 2047 ultimately depends on whether households build productive assets, stable incomes, financial resilience and market access. With 67.24 million microfinance clients and around 171 million households reached through SHGs, largely women, microfinance has a critical role in this transformation.

The sector’s next measure of success should move beyond outreach to credit-to-income conversion—the sustainable income generated by each additional rupee of credit. With 91% of loans supporting income-generating activities and the Lakhpati Didi initiative placing household income at the centre of policy, the focus must now shift from access to measurable outcomes. Four priorities are critical: integrate SHG borrowing into credit bureaus; assess repayment capacity rather than past repayment alone; strengthen savings, insurance and pension coverage; and expand market access, because credit enables production but income ultimately depends on markets. The goal is to make microfinance an instrument of sustained household income and productive capacity.

Table 1.7: A sequenced agenda for the sector

Horizon Action Principal implementer Expected effect
Immediate (0–12 months) Bring SHG borrowing into credit information reporting NABARD, credit information companies, Reserve Bank Household obligation visible across both architectures for the first time
Immediate (0–12 months) Publish a borrower effective-inflation indicator from client expenditure data Sa-Dhan, member institutions One to two quarters of lead time on collection stress
Short (1–2 years) Add buffer depth and income-source correlation to appraisal Member institutions, with Sa-Dhan common formats Underwriting shifts from repayment record to repayment capacity
Short (1–2 years) Make the funding gradient by institution size an explicit policy variable Department of Financial Services, SIDBI, NABARD, banks Credit reaches the geographies smaller institutions serve
Medium (2–4 years) Attach credit products to market-access infrastructure including SHE Marts Ministry of Rural Development, state missions, institutions Credit converts into realised income rather than turnover
Medium (2–4 years) Bring insurance, savings and pension coverage to credit-level scale Institutions, IRDAI, PFRDA, Sa-Dhan Shocks absorbed by buffers rather than by portfolios
Long (4–10 years) Report credit-to-income conversion as a headline sector metric Sa-Dhan, with NABARD and member institutions The sector measured on income created, not credit extended
Long (4–10 years) Develop climate-contingent products for covariate risk Institutions, reinsurers, NABARD, Sa-Dhan The one risk group lending cannot diversify becomes insurable

One further thing is required of the sector, and it is not a policy measure. Indian microfinance has a habit of understating its own case. It reaches more low-income households than any other formal financial institution in the country. It reaches them overwhelmingly through women, and has done so for three decades. Roughly nine in ten of its loans finance income-generating activity. It operates in 35 States and Union Territories and in nearly 780 districts. It has built, in the self-help group federations, a community institutional infrastructure with few equivalents anywhere in the world. And it has just demonstrated that it can identify a build-up of household leverage, act on it collectively, absorb the cost, and return to growth on a cleaner base within roughly eight quarters. That is not a delivery channel. It is household financial infrastructure. The obligation that comes with the claim is to measure what it produces rather than what it disburses.

Conclusion

Across the nine channels, the four-year cycle reflects one mechanism operating in opposite directions. From FY2022-23 to FY2024-25, food inflation and uneven rural incomes squeezed household surpluses, weakened repayment, tightened lender funding and reduced credit access. In FY2025-26, these pressures reversed: better harvests, food disinflation, stronger employment and remittances, monetary easing and credit guarantees supported household incomes, funding and portfolio quality. The sector navigated the cycle well, but favourable external conditions also played a significant role.

The March 2026 position should therefore be seen as a starting point, not an endpoint. Inflation has begun rising again, the 2026 monsoon is below normal in high-borrower-density districts, and the guarantee facility has expired. While household balance sheets remain stronger, the next phase calls for closer measurement and borrower-level monitoring. Institutions that understand household cash flows, underwrite repayment capacity and measure the income generated by credit will be best placed to withstand the next cycle.