Promoting Inclusive Growth through Microfinance – IFSCA Grade A 2023

Essay Writing – Descriptive English

The editorial is a commentary on an article titled “Move microloans to formal sector, be it banks or MFIs” that appeared in the Hindu BusinessLine on April 5, 2023. It examines the development of microfinance in India, its positive effects on women’s empowerment and poverty reduction, and the obstacles it may confront in the future.

Important for Essay Writing Topic : – Promoting Inclusive Growth through Microfinance

The importance of having access to financial resources, healthcare, a clean water source, and a righteous community has been emphasized in a 13th century Telugu quatrain. 

Today, microfinance has become a vital tool for achieving these essential needs, particularly in India’s vast rural areas. The Self Help Group Bank Linkage Programme (SHG-BLP) launched by MYRADA in 1989 and commissioned by Nabard, marked the beginning of the microfinance concept in India. 

The Reserve Bank of India’s (RBI) efforts to link informal groups with banks to provide micro-deposits and loans resulted in the actualization of SHG-BLP. 

The rural areas are the backbone of India’s economy and by facilitating financial inclusion, women empowerment, and digital inclusion, microfinance will play a significant role in India’s emergence as a superpower.

What is the State of Microfinance in India?

Microfinance: A Contributor to India’s Economic Growth

A recent study by the National Council of Applied Economic Research (NCAER) revealed that microfinance contributes 2% of India’s Gross Value Added (GVA) and generates around 130 lakh jobs. With the potential to reach all the 6.3 crore unincorporated and non-agricultural enterprises, microfinance has become a vital tool in promoting inclusive growth in the country.

Transitioning to Formal Sector

To ensure the future of microfinance, the Reserve Bank of India (RBI) defined microfinance as collateral-free loans given to households with annual incomes up to Rs. 3 lakh. Microfinance institutions can transition microloans to the formal sector, such as through banks or microfinance institutions.

Boosting Entrepreneurship

Microfinance Institutions (MFIs) provide small loans to people who do not have access to traditional banking services. MFIs can help boost entrepreneurship and small business development in India, which is crucial for economic growth and job creation.

Financial Inclusion

Microfinance can improve financial inclusion in India by providing access to credit and other financial services to those who have been excluded from the traditional banking system. This can help people save money, invest in education and healthcare, and start their own businesses.

Poverty Reduction

Microfinance can reduce poverty in India by providing small loans to poor people who do not have access to formal banking services. This can help them start income-generating activities and improve their standard of living.

Empowering Women

Microfinance can play a crucial role in empowering women in India, who often have limited access to financial resources and are disproportionately affected by poverty. By providing them with access to credit and other financial services, microfinance can help women become more economically independent and improve their social standing.

Supporting Rural Development

Microfinance can support rural development in India by providing small loans to farmers and other rural entrepreneurs. This can help improve agricultural productivity, create jobs, and support overall economic development in rural areas.

What are the Challenges with Microfinance in India?


One of the main challenges of microfinance in India is over-indebtedness. Borrowers are sometimes unable to repay multiple loans taken from different microfinance institutions, leading to default and impacting their creditworthiness. In some extreme cases, this has led to suicides.

High-Interest Rates:

Microfinance institutions in India charge high-interest rates due to the high cost of servicing small loans. This can create a debt trap for borrowers and make it difficult for them to repay the loan.

Lack of Financial Literacy:

Most microfinance borrowers in India are from rural areas and have low levels of financial literacy. This can make it difficult for them to understand the terms and conditions of the loan, leading to misunderstandings and disputes.

Infrastructure Challenges:

Microfinance institutions operate in remote and rural areas where infrastructure is often lacking. This can lead to difficulties in communication, transportation, and accessing financial services.

Political Interference:

Political interference in the functioning of microfinance institutions can impact their effectiveness and create an unfavorable environment for them to operate.

External Shocks:

Microfinance borrowers are often vulnerable to external shocks, such as natural disasters, economic downturns, and pandemics. These shocks can impact their ability to repay the loan, leading to default and financial stress.

Lack of Regulation:

While microfinance institutions are regulated by the Reserve Bank of India, there is a lack of regulation at the state level. This can lead to inconsistencies in the functioning of microfinance institutions across different states in India.

What Should be the Way Forward?

Strengthening the Regulatory Framework:

To ensure that the microfinance sector operates in a fair and transparent manner, the Reserve Bank of India (RBI) should continue to monitor and regulate it. The RBI should also consider introducing regulations that address the high-interest rates charged by Microfinance Institutions (MFIs).

Promoting Financial literacy:

To help microfinance borrowers make informed decisions about borrowing and repayment, there is a need to increase financial literacy. MFIs should conduct regular financial literacy programs to educate their clients about savings, credit, insurance, and investment.

Encouraging Innovation:

Innovation in product development, delivery mechanisms, and technology adoption can help in expanding access to financial services and lowering the cost of delivery. Therefore, the microfinance sector in India should encourage innovation. The use of technology such as mobile banking and digital lending platforms can be beneficial.

Promoting Partnerships:

The government, MFIs, and other stakeholders should work together to promote partnerships that can help in addressing the challenges faced by the sector. Partnerships between MFIs and banks can help in providing better financial services to microfinance clients.

Addressing the Issue of Over-Indebtedness:

Over-indebtedness is a major concern in the microfinance sector. To address this issue, there is a need to develop a credit information system that can track the borrowing history of microfinance clients and prevent them from borrowing beyond their capacity to repay.

Ensuring Social Impact:

Microfinance should be seen as a tool for poverty reduction and social empowerment. The sector should focus on delivering positive social impact by providing financial services to the poorest and most vulnerable sections of the population.