Financial Inclusion and Microfinance
Economic growth of a country is meaningful only when every person—rich or poor, urban or rural—can take part in it and benefit from it. In India, a large section of the population traditionally had no access to formal banking or financial services. They depended on moneylenders who charged high interest, which kept them trapped in poverty.
To solve this, the government and institutions introduced two important concepts:
- Financial Inclusion – Bringing everyone into the formal financial system (bank accounts, savings, credit, insurance, digital payments).
- Microfinance – Providing small loans and financial services to poor households, especially women, to help them start small businesses and improve their lives.
Together, these two are considered pillars of inclusive growth in India.
What is Financial Inclusion?
Financial inclusion means making financial services like savings, credit, insurance, remittances, and digital banking available to all individuals and businesses at an affordable cost, especially to weaker sections and low-income groups.
Key Features
- Universal Access – Everyone should have a bank account.
- Affordable Services – Banking at low or no cost.
- Digital Empowerment – Access through mobile phones, ATMs, UPI, etc.
- Financial Literacy – People should know how to use financial products.
👉 In simple words: Financial inclusion means no one is left out of the banking system.
Why Financial Inclusion is Important
- Reduces Poverty – Poor people get access to savings, credit, and insurance.
- Prevents Exploitation – Reduces dependence on moneylenders.
- Supports Growth – Encourages entrepreneurship and self-employment.
- Empowers Women – Women get direct access to financial resources.
- Promotes Digital India – Cashless payments, direct transfers.
- Improves Government Welfare Delivery – Subsidies and benefits directly into bank accounts (DBT).
Financial Inclusion in India: A Snapshot
| Indicator | Status in India |
|---|---|
| Bank Accounts Opened under Jan Dhan (2014–23) | Over 50 crore |
| Rural Bank Branches | ~55,000+ |
| ATM Network | ~2.5 lakh+ |
| Mobile Wallet & UPI Transactions (2023) | Over 1000 crore/month |
| Insurance Coverage | Still less than 30% of population |
| Female Jan Dhan Account Holders | ~55% |
👉 India has made big progress in financial inclusion, especially after Pradhan Mantri Jan Dhan Yojana (PMJDY), but gaps remain.
Key Government Initiatives for Financial Inclusion
- Pradhan Mantri Jan Dhan Yojana (2014)
- Zero-balance bank accounts for poor.
- Free RuPay debit cards, overdraft facility, accidental insurance.
- Direct Benefit Transfer (DBT)
- Government subsidies (LPG, pensions, scholarships) directly into accounts.
- Digital India Mission
- UPI, BHIM app, Aadhaar-enabled payments.
- PM Mudra Yojana (2015)
- Loans to micro and small entrepreneurs.
- Financial Literacy Centres (FLCs)
- To spread awareness of banking services.
- PM Suraksha Bima Yojana / PM Jeevan Jyoti Bima Yojana
- Low-cost insurance for poor families.
- Atal Pension Yojana
- Pension scheme for unorganised workers.
Challenges in Financial Inclusion
- Low Financial Literacy – Many account holders don’t know how to use banking services.
- Dormant Accounts – Nearly 20–25% of Jan Dhan accounts are inactive.
- Digital Divide – Many rural areas lack internet/mobile access.
- Banking Infrastructure – Some villages still lack bank branches/ATMs.
- Trust Factor – Poor people still trust local moneylenders more than banks.
What is Microfinance?
Microfinance is the supply of small loans (microcredit), savings, insurance, and financial services to poor households who are excluded from the formal banking system.
👉 It is usually targeted at women, self-help groups (SHGs), and small entrepreneurs.
Example:
A woman in a village borrows ₹20,000 from a microfinance institution to buy a sewing machine. She starts stitching clothes, earns income, and repays the loan in small weekly installments. This is microfinance in action.
Features of Microfinance
- Small Loans – Typically ₹10,000–₹50,000.
- Group Lending Model – Loans given through Self-Help Groups (SHGs).
- Collateral-free – No property/money needed as security.
- Women-centric – Majority of loans to women (as they repay better).
- Regular Repayments – Weekly/Monthly small payments.
Importance of Microfinance
- Empowers Poor Households – Helps start small businesses.
- Promotes Women Empowerment – Women become financially independent.
- Reduces Poverty – Creates additional income sources.
- Encourages Savings – Even small savings habits improve financial security.
- Supports Inclusive Growth – Extends banking to the unbanked.
Microfinance in India: A Snapshot
| Indicator | Data (2022–23) |
|---|---|
| Total Microfinance Loan Portfolio | ~₹3.5 lakh crore |
| Active Microfinance Borrowers | ~6 crore |
| Share of Women Borrowers | ~85% |
| Average Loan Size | ₹30,000–₹40,000 |
| SHGs Linked to Banks | ~1.2 crore groups |
👉 Women-led SHGs have become the backbone of rural microfinance in India.
Key Microfinance Models in India
- Self-Help Group (SHG) – Bank Linkage Model
- SHGs (10–20 women) pool savings, get loans from banks.
- Promoted by NABARD and government.
- Microfinance Institutions (MFIs)
- Non-banking institutions provide small loans at slightly higher interest.
- Eg: SKS Microfinance, Bandhan.
- Joint Liability Groups (JLGs)
- Small groups (4–10 members) take loans jointly, share responsibility of repayment.
Government Schemes Supporting Microfinance
- National Rural Livelihood Mission (NRLM) – Promotes SHGs, skill training, micro-enterprises.
- Deen Dayal Antyodaya Yojana – Financial support to urban poor through SHGs.
- Women Empowerment Schemes – NABARD and state governments promote women SHGs.
- Mudra Yojana – Provides microcredit up to ₹10 lakh to small entrepreneurs.
Challenges in Microfinance
- Over-Indebtedness – Some borrowers take loans from multiple MFIs and struggle to repay.
- High Interest Rates – Though lower than moneylenders, rates (18–22%) are still high.
- Loan Misuse – Some loans used for consumption (festivals, marriages) instead of business.
- Repayment Pressure – Weekly repayment schedule sometimes creates stress.
- Lack of Financial Literacy – Many borrowers don’t understand interest and repayment terms.
Data Table: Financial Inclusion vs Microfinance
| Aspect | Financial Inclusion | Microfinance |
|---|---|---|
| Meaning | Universal access to financial services | Small loans and services for poor |
| Target Group | Entire population | Poor, especially women & SHGs |
| Institutions | Banks, RBI, Govt schemes | MFIs, SHGs, NGOs |
| Focus | Savings, insurance, pensions, credit, digital payments | Microcredit, small savings, group lending |
| Example | Jan Dhan Yojana account | SHG loan for small business |
Link with Inclusive Growth
Both financial inclusion and microfinance are directly linked to inclusive growth because:
- They give poor households access to banking.
- Women gain decision-making power.
- Small businesses and rural entrepreneurs get funding.
- Government benefits (subsidies, pensions) reach the right people.
- Rural areas become part of India’s growth story.
Way Forward
- Strengthen Digital Financial Literacy – Teach rural households about UPI, online banking.
- Expand Microfinance Coverage – More SHGs and MFIs in remote villages.
- Lower Interest Rates – MFIs should reduce rates through technology efficiency.
- Promote Women Entrepreneurship – Encourage women-led businesses with microcredit.
- Ensure Responsible Lending – Prevent multiple loans to same borrower.
- Public–Private Partnerships – Banks, MFIs, and fintech companies should work together.
- Stronger Regulation – RBI should monitor MFIs to protect poor borrowers.
Conclusion
Financial inclusion and microfinance are powerful tools to fight poverty, unemployment, and inequality in India. They connect the poor to banks, give them affordable loans, and empower them to start businesses and improve their lives.
India has made remarkable progress through Jan Dhan Yojana, DBT, UPI, SHG-Bank Linkages, and MUDRA loans. Yet, challenges like financial illiteracy, high interest rates, and over-indebtedness remain.
If implemented properly, financial inclusion and microfinance can make India’s economic growth truly inclusive, ensuring that no one is left behind in the journey of development.
👉 In simple words: When every household has a bank account, access to credit, and the power to improve their life, only then can India achieve real development.
