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Scope and Growth of Microfinance in India

Read about the concept of Microfinancing, the scope of microfinance in India, its main features streams.

The microfinance sector has seen promising growth in recent years, owing to the rapidly expanding Indian economy. The industry has played an essential role in providing formal credit to low-income households and various micro, small, and medium enterprises (MSMEs), increasing their contribution to India’s overall GDP. Further, the scope of microfinance in India will be massive in the coming years, despite incidents such as the Andhra Pradesh Microfinance Crisis (2010). The main features of microfinance, such as granting loans to low-income families and loans without any collateral, make it incredibly popular in our nation.

What Is Microfinance?

Microfinance is a type of financial service that provides loans, credit, insurance, access to savings accounts, and money transfers. The beneficiaries of these services are mostly small-scale or low-income businesses and entrepreneurs.

  • Those who do not have access to traditional financial resources benefit from microfinance.
  • Microloans typically have higher interest rates than traditional personal loans.

Why Is Microfinance Important?

  1. Financially underserved individuals can gain access to capital through microfinance.
  • Almost half of the individuals in our nation do not have a basic savings account.
  • On the other hand, this segment requires financial services to realise its goals, such as asset accumulation and risk management.
  • If microfinance institutions had denied loans to this fragment of society, these people would have had to borrow from acquaintances or family members. 
  • These people are also more likely to seek quick cash loans or payday advances with exorbitant interest rates.
  1. Microfinance assists low-income groups in making sound business investments, which aligns with the government’s vision of monetary inclusion in the country.

The Main Features of Microfinance in India

The following are some of the most important aspects of microfinance:

  • Borrowers are generally from humble backgrounds.
  • Microfinance loans are typically small in size, i.e., microloans.
  • The loan term is for a limited duration.
  • Microfinance loans do not necessitate the use of collateral.
  • These loans are typically repaid at higher frequencies.
  • Most microfinance loans are planned to yield income.

The Two Main Streams Of Microfinance In India 

In India, microfinance is primarily distributed through two channels:

  1. The SHG-Bank Linkage Microfinance Programme (SBLP)
  • The National Bank established this channel for Agriculture and Rural Development (NABARD) in 1992.
  • This model forms groups of 10-15 members, consisting of financially unstable females. They contribute their savings to the group regularly. These contributions are used to give loans to members of the group. 
  • Later on, SHGs are also offered bank loans, which can be used to fund income-generating activities.
  • This model has led to success in the past. It has also gained popularity in helping to empower women in entrepreneurship.
  • Once these self-sustaining groups have achieved stability, they can operate almost independently with minimal assistance from NABARD, SIDBI, and NGOs.
  1. Microfinance Institutions (MFIs) 
  • The primary business of these institutions is microfinance. 
  • These lend under the concept of a Joint Liability Group (JLG), an informal group of 5-10 members who seek loans together or separately.

The Microfinance Crisis in Andhra Pradesh

In 2010, customers were increasingly dissatisfied with the micro-financial services on offer due to minimal regulation and rapid sector growth. This culminated in the infamous microfinance crisis of Andhra Pradesh.  

  • Fifty-seven microcredit debtors committed suicide in the south-eastern state of Andhra Pradesh. 
  • This dramatic incident was caused by a drop in the stock value of a giant microfinance institution, namely SKS Microfinance Ltd.
  • Families blamed the debt collectors who claimed that life insurance would cover the debt.
  • The blame fell on MFIs, which failed to control aggressive growth as the market became saturated; on investors, who pushed for faster growth to make their investments pay off; and, most importantly, on the government, which created a banking sector unwilling to fulfil the needs of impoverished consumers.
  • Most importantly, the sector was not given proper guidance. For example, while some microfinance NGOs were permitted to go public and become commercial banks, they were not allowed to accept deposits.

An Overview Of The Scope Of Microfinance In India

The microfinance sector has multiple participants and mature microlending models despite all odds. India represents a huge opportunity for the microfinance sector, with a significant portion of its population falling into the low-income bracket.

  • The fact stands that government schemes and appointed financial institutions have improved access to microcredit for nearly 67 per cent of the Indian population residing in rural areas.
  • However, many MFIs are concentrated in a few geographic locations in the country. 
  • Just about 34% of districts in our country having microfinance contribute towards 80% of the nation’s portfolio. This suggests that there is a potential for the expansion of microfinance in various other parts of the country.
  • Furthermore, a sizable share of the Indian population still lacks access to credit from the formal sector and relies on informal channels such as moneylenders or relatives for fulfilling their financial needs. This highlights the importance of microlending in achieving economic inclusion and general industry growth.
  • However, to capitalise on this growth prospect, the sector must identify and assess emerging demands within the industry and address them through suitable initiatives for optimised growth.
  • Microcredits should be capable of shifting a borrower’s journey from an employment seeker to a job creator. As the sector evolves through improved regulation and investment flows, there will be a greater need to leverage funds to create a sustainable and profitable ecosystem for borrowers.


As per recent findings by the World Bank, the Indian population consists of nearly one-third of the planet’s poor. This means that almost 1/3rd survive on an equivalent of one dollar per day. The scope of microfinance in India is excellent due to the huge disparity between the rich and the poor. 

The scheme favours the poor and is a source of hope for the impoverished. However, certain drawbacks may cause despair for the borrowers, as witnessed in the Andhra Pradesh Microfinance Crisis. All loopholes must be addressed by MFIs and the government sector so that the growth of microfinance can be immense in the coming years.


Frequently Asked Questions

Get answers to the most common queries related to the Railway Examination Preparation.

Why are MFI interest rates higher than bank interest rates?

Ans. The interest rates charged by Microfinance Institutions (MFIs) are higher...Read full

What are some of the main features of microfinance?

Ans. The main features of microfinance are as follows: ...Read full

What are the two main streams of microfinance in India?

Ans. The two main streams of microfinance in India are the SBLP or SHG-Bank Li...Read full

The scope of microfinance in India is relatively poor in the coming years. Is this statement true or false?

Ans. The statement is false. India prese...Read full