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In a country as diverse as India, millions of people, especially in rural areas, have historically been excluded from formal banking systems.
Microfinance has emerged as a vital tool to bridge this gap, offering accessible financial services that promote entrepreneurship and self-reliance.
At THOUSIF Inc. – INDIA, we recognize the profound role microfinance plays in fostering inclusive growth and empowering underserved communities.
Understanding Microfinance In India
Microfinance refers to the provision of financial services, such as small loans (microcredit), savings accounts, insurance, and financial literacy training, to low-income individuals and groups who lack access to traditional banking.
In India, the dominant model is the Self-Help Group (SHG) approach, promoted by the National Bank for Agriculture and Rural Development (NABARD).
Under this system, groups of 10-20 individuals, predominantly women, come together to save regularly.
These savings form the basis for internal lending, and after demonstrating financial discipline, groups become eligible for larger bank loans without collateral.
As of 2025-2026, India’s microfinance sector manages a loan portfolio exceeding ₹3.5 lakh crore, serving tens of millions of clients through SHGs and specialized Microfinance Institutions (MFIs).
This makes India one of the global leaders in microfinance outreach.
The Evolution Of Microfinance In India
India’s microfinance journey is distinctly homegrown.
The SHG-Bank Linkage Programme, launched by NABARD in 1992, marked a turning point.
What began as a pilot project has grown into the world’s largest microfinance initiative, connecting millions of SHGs to the formal banking system.
Leading MFIs such as CreditAccess Grameen, Spandana Sphoorty, and Bandhan Financial Services complement the SHG model by providing direct credit while maintaining a strong focus on women borrowers.
This dual structure, government-backed SHGs and regulated private MFIs, has created a robust ecosystem.
Fact
More than 90% of microfinance clients in India are women, and the SHG programme has facilitated banking access for over 100 million households.
How Microfinance Operates In India
The process is structured yet straightforward:
- Individuals form SHGs and contribute regular savings.
- After 6-12 months of consistent saving and internal lending, the group qualifies for bank linkage loans, often multiples of their accumulated savings.
- Funds are used for income-generating activities such as agriculture, animal husbandry, micro-enterprises, or small retail businesses.
- Repayments are managed collectively, fostering accountability and high repayment rates.
Two primary models dominate the sector:
| Aspect | SHG-Bank Linkage Programme | MFI Direct Lending |
|---|---|---|
| Primary Focus | Savings-led approach | Credit-led with group guarantees |
| Interest Rates | Generally lower (bank rates) | Moderately higher (operational costs) |
| Geographic Reach | Deep penetration in rural areas | Rural and semi-urban coverage |
| Additional Services | Financial literacy, community development | Insurance, training, digital tools |
| Client Base | Predominantly women in groups | High proportion of women borrowers |
Both models prioritize responsible lending and client protection.
The Transformative Impact
Microfinance has delivered measurable benefits across economic and social dimensions:
- Economic Empowerment: Clients gain the capital needed to start or expand small businesses, thereby increasing household income and asset ownership.
- Women’s Advancement: By channeling resources to women, microfinance enhances their decision-making authority, improves family welfare, and promotes gender equality.
- Poverty Alleviation: Access to credit and savings helps families manage risks, invest in education and health, and build resilience against economic shocks.
- Community Development: SHGs often evolve into platforms for addressing broader issues such as sanitation, education, and healthcare awareness.
Research consistently demonstrates that women borrowers reinvest a significant portion of their earnings into family nutrition, children’s education, and community improvement.
Challenges And Future Outlook
The sector has faced periodic challenges, including concerns over multiple lending and repayment stress in certain regions.
Following a cautious contraction in 2025, lenders have strengthened risk management, credit assessment processes, and regulatory compliance.
Looking ahead to 2026 and beyond, the integration of digital technologies, mobile banking, digital KYC, and real-time credit bureaus is expected to enhance efficiency, reduce costs, and expand reach while maintaining responsible practices.
Conclusion
Microfinance in India represents a powerful model of financial inclusion that has transformed millions of lives by providing dignified access to capital and opportunity.
Rooted in community trust and women’s leadership, it continues to play a pivotal role in the nation’s journey toward inclusive economic growth.
At THOUSIF Inc. – INDIA, we are committed to highlighting innovative solutions that drive progress.
We invite you to explore our other articles on financial inclusion, entrepreneurship, and sustainable development.
If you have experiences or insights about microfinance, we would be delighted to hear from you.
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