Microfinance
Microfinance in India delivers small collateral-free loans, savings, and insurance products to low-income households — particularly women in rural and semi-urban areas — through joint liability group (JLG) or self-help group (SHG) methodologies, regulated under RBI's harmonised microfinance framework issued in 2022.
India was home to one of the world's largest microfinance sectors, serving over 60 million borrowers as of the mid-2020s with a combined outstanding loan portfolio exceeding Rs 4 lakh crore. The sector grew from the pioneering work of NABARD in the 1980s and 1990s, which promoted the SHG-bank linkage model, and from the commercial microfinance institutions (MFIs) that emerged from the late 1990s onward, modelling themselves after Grameen Bank methodology and serving lower-income households through JLG credit.
The joint liability group was the signature lending structure of commercial MFIs. Typically comprising five to ten women members who knew each other personally, the JLG was formed with each member jointly liable for the repayment of every other member's loan. This peer mechanism reduced the MFI's credit risk without requiring physical collateral — a critical advantage in serving households that held no mortgage-able assets. The group met regularly, often weekly, for loan repayment collection, a process that maintained borrower engagement, peer accountability, and financial discipline.
RBI's regulatory framework for microfinance underwent a major harmonisation in 2022 through the revised microfinance framework, which set a single definition — a household with annual income not exceeding Rs 3 lakh in rural areas and Rs 3.5 lakh in urban and semi-urban areas — applicable to all regulated lenders including banks, SFBs (Small Finance Banks), NBFCs, and NBFC-MFIs. The framework abolished the distinction between NBFC-MFI-specific rules and other lender rules, creating a level playing field and requiring all lenders to assess the total debt burden of the borrowing household before lending, capped at 50 percent of household income.
Pricing was deregulated in the 2022 framework — unlike the earlier period when NBFC-MFIs had specific interest rate caps — and the NBFC-MFI was permitted to set rates transparently under a cost-plus model disclosed to borrowers. In practice, effective rates ranged from 20 to 26 percent per annum, reflecting the high operational cost of last-mile delivery, field agent salaries, branch infrastructure, and the cost of small-ticket disbursals.
The sector had experienced two major crises: the Andhra Pradesh microfinance crisis of 2010, triggered by multiple lending, over-indebtedness, and political intervention, and the COVID-19 stress of 2020–21, when collections collapsed during lockdowns. Both events prompted significant regulatory and operational reforms. The credit bureau integration — all MFI loans reported to credit bureaus from 2011 onward — addressed the multiple lending problem. The 2022 household debt cap and income assessment norms addressed over-indebtedness. The geographic concentration risk of large MFIs in specific states remained a structural vulnerability recognised by both RBI and rating agencies.