Microfinance is the provision of appropriate, affordable, and transparent financial products to low-income and vulnerable groups by regulated institutional players.
Historical Evolution
| Year/Initiative | Milestone |
|---|---|
| SHG-Bank Linkage Programme (1992) | Launched by NABARD as pilot; became world’s largest microfinance programme |
| RBI Vision Document (2015) | Universal access to basic financial services; technology-enabled delivery |
| NSFI 2019-2024 | National Strategy for Financial Inclusion; measures Access, Usage, Quality |
| RBI Regulatory Framework (2011) | Post Expert Committee; small collateral-free loans; borrower protection |
| Revised Framework (March 2022) | Comprehensive overhaul — see below |
RBI Revised Regulatory Framework (March 2022) — Key Parameters
| Parameter | Limit |
|---|---|
| Microfinance borrower definition | Annual household income ≤ ₹3 lakh |
| Margin cap | 12% |
| Maximum interest rate | 26% p.a. (reducing balance) |
| Processing fee cap | 1% of loan amount |
| Total loan repayment | ≤ 50% of household income |
| Maximum NBFC-MFIs per borrower | 2 |
| Net Owned Funds | ₹5 crore (₹2 crore for NER) |
| Minimum CAR | 15% |
| Tier-II capital cap | 100% of Tier-I |
Microfinance Sector Performance (2023-24)
| Indicator | Figure |
|---|---|
| Districts covered | 730 across 28 States and 8 UTs |
| Loan accounts growth | 6.1% |
| Gross Loan Portfolio growth | 16.2% |
| Average loan size | ₹46,636 (up from ₹41,369 in 2022-23) |
| GNPA ratio | Declined from 10.31% to 8.72% |
| Lowest GNPA | NBFC-MFIs |
| Concerns | SFBs and Non-Financial Entities have higher NPAs |
Risk Weight Rationalisation (February 2025)
- November 2023: RBI raised consumer credit risk weight to 125% — microfinance initially affected
- February 2025: Microfinance loans excluded from the increase; risk weight reduced to 100%
- Signal: RBI recognises microfinance as distinct from consumer credit
Government and Institutional Initiatives
- PMJDY: Near-universal bank account coverage (Jan Dhan accounts)
- Banking Correspondents (BCs): Last-mile credit delivery in unbanked areas
- Small Finance Banks (SFBs): Dedicated to financial inclusion
- PSL for NBFC on-lending: Bank loans to NBFCs for microfinance classified as priority sector
Key Challenges
- Over-indebtedness and multiple borrowing by same household
- High operating costs in remote/rural areas
- Inadequate financial literacy among borrowers
- Regional concentration risk (some states over-served, others under-served)
- Weak grievance redressal mechanisms at ground level
UPSC Angle
- GS3: Financial inclusion, poverty alleviation, RBI regulation, NABARD, SHG model
- GS2: Government schemes (PMJDY), regulatory governance
- Interview: “Is microfinance a tool for empowerment or a debt trap for the poor? How can regulation balance access with protection?”
Sources: NextIAS Yojana January 2026, EduRev Yojana January 2026 Part 2