Microfinance Sector in India: A Report on Its Role, Challenges, and Contribution to Sustainable Development Goals

Introduction and Current Status

The microfinance sector in India serves as a critical instrument for advancing financial inclusion and achieving key Sustainable Development Goals (SDGs). By providing small, collateral-free loans, Microfinance Institutions (MFIs) are extending formal credit to underserved populations, thereby directly contributing to poverty alleviation and economic empowerment. As of March 2025, the sector’s performance metrics indicate a significant scale of operation, though considerable potential for growth remains.

• Gross Loan Portfolio: Exceeded Rs 3.75 lakh crore.
• Borrower Base: An estimated 79 million individuals.
• Market Penetration: Approximately 35% of the potential market has been reached.
• Lives Impacted: Over 300 million lives have been positively affected through household and community-level impact.
• Employment Generation: An estimated 120 million employment opportunities have been created, directly supporting SDG 8 (Decent Work and Economic Growth).

Despite these achievements, India’s Financial Inclusion Index stood at 62% in Fiscal Year 2024, with 31% of credit in rural households still sourced from informal lenders. This highlights the ongoing need to strengthen the microfinance sector to fully realize its potential as a pillar of sustainable development.

Contribution to Sustainable Development Goals (SDGs)

The microfinance sector is intrinsically linked to the advancement of several SDGs. Its operational model is designed to address systemic issues of poverty, inequality, and economic exclusion.

SDG 1: No Poverty & SDG 10: Reduced Inequalities

By providing access to capital for the most economically vulnerable segments, MFIs directly tackle the root causes of poverty. This financial access enables households to generate income, build assets, and mitigate economic shocks, contributing to the reduction of both absolute poverty and broader economic inequality.

SDG 5: Gender Equality

A defining characteristic of the Indian microfinance sector is its focus on female borrowers, who constitute a striking 99% of the client base. This targeted approach is a powerful driver for SDG 5, fostering women’s economic independence, enhancing their decision-making power within households and communities, and promoting gender equality.

SDG 8: Decent Work and Economic Growth

The sector is a significant engine for grassroots economic activity and job creation. By financing micro-enterprises, it supports local economies and provides livelihoods for millions, aligning perfectly with the objectives of sustainable economic growth and productive employment for all.

Sectoral Challenges and Threats to Sustainability

Despite its resilience in the face of past disruptions, the microfinance sector is currently confronting a confluence of challenges that threaten its stability and its capacity to contribute to the SDGs. A rise in delinquencies since late FY2023-24 has seen Non-Performing Assets (NPAs) surpass the 5% mark, a significant deviation from historical repayment rates of over 99%.

Operational and Governance Issues

• Data Integrity: Challenges with Know Your Customer (KYC) authenticity and inconsistent, delayed updates to credit bureau data undermine responsible lending.
• Lending Practices: Incidents of over-borrowing by clients and irresponsible over-lending by institutions are increasing risk within the system.
• Human Resources: High employee attrition rates impact service quality and institutional knowledge.
• Corporate Governance: Lapses in governance and oversight threaten the long-term sustainability and ethical operation of institutions, which is critical for achieving SDG 16 (Peace, Justice and Strong Institutions).

External and Systemic Pressures

• Economic Factors: Inflation and wage stagnation put financial pressure on low-income households, affecting their repayment capacity.
• Climate Vulnerability: Climate shocks pose a direct threat to the livelihoods of borrowers, particularly in agriculture, impacting their ability to repay loans and hindering progress on SDG 13 (Climate Action).
• Financial Vandalism: Populist campaigns promising loan waivers disrupt the credit culture and encourage widespread defaults, destabilizing the sector.

Strategic Recommendations for a Sustainable Microfinance Ecosystem

To overcome these challenges and position the microfinance sector as a central pillar of India’s development, a multi-stakeholder approach focused on strengthening institutional frameworks and protecting borrowers is required. The following ten actions are recommended:

1. Reliable and Authenticated KYC: Mandate the use of Aadhaar-based e-KYC or C-KYC for all regulated financial entities to create a unified and secure identification system, forming the foundation of responsible lending.
2. Real-Time Credit Bureau Reporting: Require daily credit bureau updates from all lenders to enable real-time risk assessment and prevent multiple simultaneous borrowings by a single individual.
3. Sustainable and Transparent Pricing: Foster a pricing environment that allows for risk-based differentiation and ensures MFIs can attract the long-term equity capital (estimated at over $4 billion) needed for expansion and sustainability.
4. Legal Protection Against Financial Vandalism: Enact an Anti-Financial Vandalism (AFV) Bill to deter the disruption of legitimate repayment cycles, complementing the proposed Ban on Unlawful Lending Activities (BULA) Bill to strengthen the rule of law in line with SDG 16.
5. Climate Risk Protection for Borrowers: Develop and deploy a climate-linked borrower protection product to cover interest costs during repayment deferrals caused by natural disasters, building resilience in support of SDG 13.
6. Workforce Development with Accountability: Establish a national certification program for financial inclusion professionals and a sector-wide employee bureau to track misconduct, enhancing human capital and accountability. This directly supports SDG 8.
7. Strengthening Corporate Governance: Mandate robust governance practices for MFI boards concerning growth strategies, provisioning, pricing, and executive compensation to ensure long-term, sustainable, and ethical operations.
8. Reforming Collections and Recovery Frameworks: Transition towards digital, cashless collections and utilize formal mechanisms like Lok Adalats to instill repayment discipline while establishing a program to address genuinely distressed borrowers.
9. Empowered and Accountable Self-Regulatory Organizations (SROs): Empower RBI-recognized SROs to enforce stricter operational norms, including caps on lenders per borrower and overall indebtedness, to safeguard the financial health of both borrowers and institutions.
10. Financial Literacy as a National Mission: Implement a structured, national financial education program targeting low-income households, fostering a culture of responsible borrowing and contributing to the goals of SDG 1 (No Poverty) and SDG 10 (Reduced Inequalities) through empowerment.

Conclusion: The Path Forward

Unlocking the full potential of the microfinance sector requires a concerted effort involving policy advocacy, digital innovation, and robust public-private partnerships, as envisioned in SDG 17 (Partnerships for the Goals). By implementing these strategic actions, India can fortify this vital sector, ensuring it continues to be a powerful driver of inclusive growth and a cornerstone in the nation’s journey toward achieving the Sustainable Development Goals.

SDGs Addressed in the Article

• SDG 1: No Poverty
• SDG 5: Gender Equality
• SDG 8: Decent Work and Economic Growth
• SDG 10: Reduced Inequalities
• SDG 13: Climate Action
• SDG 16: Peace, Justice and Strong Institutions

Specific SDG Targets Identified

1. SDG 1: No Poverty

   • Target 1.4: By 2030, ensure that all men and women, in particular the poor and the vulnerable, have equal rights to economic resources, as well as access to basic services… and financial services, including microfinance.
   • Explanation: The article directly addresses this target by focusing on microfinance as a tool for “grassroots economic development.” It highlights how microfinance institutions (MFIs) provide “small, collateral-free loans to underserved communities,” thereby expanding access to financial services for the poor and vulnerable who are typically excluded from “traditional banking.” The text mentions that microfinance touches over “300 million lives,” directly contributing to poverty alleviation.

2. SDG 5: Gender Equality

   • Target 5.a: Undertake reforms to give women equal rights to economic resources, as well as access to… financial services.
   • Explanation: The article strongly connects microfinance to gender equality by stating that a “striking 99% of these borrowers are women.” This focus on female clients is explicitly linked to “fostering women’s empowerment and economic independence,” which is the core objective of Target 5.a.

3. SDG 8: Decent Work and Economic Growth

   • Target 8.3: Promote development-oriented policies that support productive activities, decent job creation, entrepreneurship… and encourage the formalization and growth of micro-, small- and medium-sized enterprises, including through access to financial services.
   • Target 8.10: Strengthen the capacity of domestic financial institutions to encourage and expand access to banking, insurance and financial services for all.
   • Explanation: The article supports Target 8.3 by noting that the microfinance sector’s impact translates to “employment opportunities created for an estimated 120 million people.” It also calls for workforce development through a “national program for certified financial inclusion professionals.” Target 8.10 is addressed through the entire theme of the article, which discusses strengthening the microfinance sector—a key part of the domestic financial system—to expand its reach and provide “formal credit” to a wider population.

4. SDG 10: Reduced Inequalities

   • Target 10.2: By 2030, empower and promote the social, economic and political inclusion of all, irrespective of… economic or other status.
   • Explanation: The article’s central theme is promoting financial inclusion to reduce economic inequality. It describes microfinance as a way to bring “formal credit within reach for millions who remain beyond the purview of traditional banking.” It also notes that informal credit is “particularly high among the most economically vulnerable segments,” and the goal of microfinance is to serve these populations, thereby promoting their economic inclusion as per Target 10.2.

5. SDG 13: Climate Action

   • Target 13.1: Strengthen resilience and adaptive capacity to climate-related hazards and natural disasters in all countries.
   • Explanation: The article explicitly identifies climate change as a threat to borrowers. It states that “as climate shocks intensify, the livelihoods of microfinance borrowers… are increasingly vulnerable.” To address this, it recommends creating a “climate-linked borrower protection product” to help borrowers withstand the financial impact of natural disasters, which directly aligns with strengthening resilience and adaptive capacity.

6. SDG 16: Peace, Justice and Strong Institutions

   • Target 16.6: Develop effective, accountable and transparent institutions at all levels.
   • Explanation: A significant portion of the article is dedicated to strengthening the institutional framework of the microfinance sector. Recommendations such as ensuring “Reliable and Authenticated KYC,” mandating “Real-Time Credit Bureau Reporting,” “Strengthening Corporate Governance,” and empowering “Accountable SROs” are all measures aimed at making MFIs more effective, accountable, and transparent, which is the essence of Target 16.6. The call for legal protections like the BULA and AFV bills also contributes to building stronger institutional and legal frameworks.

Indicators for Measuring Progress

1. Indicators for Financial Inclusion and Economic Impact (SDGs 1, 8, 10)

   • Gross loan portfolio of the microfinance sector: Mentioned as having crossed “Rs 3.75 lakh crore.”
   • Number of microfinance borrowers: Stated as “79 million borrowers.”
   • Financial Inclusion Index: The article cites “RBI’s Financial Inclusion Index remains at just 62%.”
   • Reliance on informal credit: Noted that “about 31% of the total credit outstanding loans in rural households are sourced from informal lenders.”
   • Number of employment opportunities created: The article provides an estimate of “120 million people.”

2. Indicators for Gender Equality (SDG 5)

   • Proportion of female borrowers: The article provides a clear indicator: “A striking 99% of these borrowers are women.”

3. Indicators for Institutional Strength and Stability (SDG 16)

   • Non-Performing Assets (NPAs) rate: Mentioned as having “crossed the 5% mark.”
   • Repayment rates: The sector’s historic performance is cited as “99%+ repayment rates.”
   • Frequency of credit bureau reporting: The article implies this is an indicator by recommending a shift to “daily credit bureau updates.”

Summary Table of SDGs, Targets, and Indicators

Source: m.economictimes.com