Microfinance can drive Macro Progress, says RBI Deputy Governor Swaminathan J – Tribune India

Microfinance as a Catalyst for Sustainable Development in India

Introduction: Aligning Microfinance with National and Global Goals

A report based on remarks by Reserve Bank of India (RBI) Deputy Governor Swaminathan J highlights the critical role of responsibly delivered microfinance in achieving broad-based economic progress. This sector is identified as a pivotal driver for India’s Viksit Bharat 2047 vision and is intrinsically linked to the United Nations’ Sustainable Development Goals (SDGs). The core principle is that micro-level financial access can generate macro-level progress, transforming borrowers into business owners and informal activities into measurable economic output. This directly supports key development objectives:

• SDG 1 (No Poverty): By providing access to capital, microfinance empowers individuals to create sustainable livelihoods.
• SDG 8 (Decent Work and Economic Growth): It fosters entrepreneurship and contributes to formal economic activity.

The Role of Digital Infrastructure in Advancing Financial Inclusion (SDG 9 & SDG 10)

The expansion of microfinance’s impact is significantly amplified by India’s digital public infrastructure. The synergy of Jan Dhan accounts, Aadhaar for verification, and the Unified Payments Interface (UPI) for instant payments has created robust “public rails.” This framework allows microfinance institutions to extend their services far beyond traditional physical branches, thereby enhancing financial inclusion. The national financial inclusion index, which rose from 43.4 in March 2017 to 67.0 in March 2025, evidences this progress. This advancement contributes to:

• SDG 9 (Industry, Innovation, and Infrastructure): Leveraging technology to build resilient and inclusive financial infrastructure.
• SDG 10 (Reduced Inequalities): Ensuring that marginalised and remote populations gain access to essential financial services.

Core Functions of Microfinance in Promoting Sustainable Economic Growth

The growing importance of the microfinance sector is attributed to four fundamental functions that align with sustainable development principles:

1. Bridging Gaps: It addresses information and collateral gaps that typically exclude the poor from formal credit, directly tackling inequalities (SDG 10).
2. Building Capacity: It helps build productive capacity at the grassroots level, fostering economic self-sufficiency and growth (SDG 8).
3. Driving Innovation: It serves as a platform for financial innovation tailored to the needs of low-income households (SDG 9).
4. Enhancing Connectivity: It connects previously excluded households to the formal financial system, creating a transaction history that can unlock access to larger credit over time.

Future Directives for a Sustainable and Resilient Microfinance Sector

To guide the sector’s next phase of development, five key strategic areas have been identified:

1. Household-Centric Credit: Shifting towards household-level credit decisions to ensure a holistic approach to financial well-being (SDG 1).
2. Responsible Technology: Utilising explainable AI in underwriting to overcome data limitations, while retaining human expert judgment to ensure fairness (SDG 9, SDG 16).
3. Diversified Financing: Transitioning from mono-product lending to comprehensive micro-enterprise financing to better support small business growth (SDG 8).
4. Climate Resilience: Integrating climate resilience into credit models to help vulnerable communities adapt to environmental challenges (SDG 13: Climate Action).
5. Ethical Data Practices: Ensuring responsible and secure data management to protect borrower information and build trust (SDG 16).

Regulatory Framework and Responsible Conduct (SDG 16)

The RBI’s 2022 microfinance framework was designed to expand inclusion by placing borrower welfare at its core. While the removal of pricing caps provides lenders with greater flexibility, it is accompanied by a higher expectation of responsible conduct. This regulatory approach promotes strong and just institutions, a cornerstone of SDG 16 (Peace, Justice, and Strong Institutions). Key expectations for lenders include:

• Responsible Pricing: Loan rates must be reasonable and reflect cost, risk, and efficiency, without exploiting the borrower’s circumstances.
• Transparency: Agreements must be transparent and explained clearly in local languages.
• Debt Prevention: Proactive measures to prevent over-indebtedness among borrowers.
• Ethical Collections: Collection practices must be responsible, with accountability remaining with the lender even when outsourced.
• Grievance Redressal: Establishment of strong and accessible mechanisms for resolving borrower complaints.
• Data Integrity: Accurate and timely reporting to credit bureaus.
• Operational Security: Robust operational and cybersecurity standards to protect the institution and its clients.

Ultimately, the long-term health of the microfinance sector depends on strong governance and incentives for responsible growth. High industry standards will ensure that regulatory intervention can remain minimal, allowing flexibility and accountability to coexist for sustainable impact.

1. Which SDGs are addressed or connected to the issues highlighted in the article?

The article on microfinance’s role in India’s economic progress addresses and connects to several Sustainable Development Goals (SDGs). The central theme of financial inclusion and its impact on livelihoods and economic growth directly aligns with the core principles of the SDGs.

• SDG 1: No Poverty

  The article directly connects microfinance to poverty alleviation by stating it “turns access into livelihoods.” By providing financial services to those who are otherwise excluded, microfinance enables individuals to start or grow small businesses, generate income, and move out of poverty. This aligns with the goal of eradicating poverty in all its forms.

• SDG 8: Decent Work and Economic Growth

  The article highlights that microfinance helps turn “borrowers into business owners, and informal activity into measurable economic output.” This supports the creation of decent jobs through entrepreneurship and the formalization of the economy, which are key components of sustainable and inclusive economic growth.

• SDG 10: Reduced Inequalities

  A primary focus of the article is financial inclusion. It emphasizes that microfinance’s purpose is to “connect excluded households to formal financial systems” and “bring the benefits of formal finance to those otherwise excluded.” This directly addresses the goal of reducing inequality by ensuring that vulnerable populations have access to economic resources.

• SDG 13: Climate Action

  The article explicitly mentions the need for “integrating climate resilience into credit models.” This shows a direct connection to climate action by suggesting that financial products for the poor should also help them adapt to and mitigate the impacts of climate change, thus building a more resilient economic foundation.

2. What specific targets under those SDGs can be identified based on the article’s content?

Based on the issues discussed, several specific SDG targets can be identified:

• Target 1.4 (under SDG 1)

  This target aims to ensure the poor and vulnerable have equal rights to economic resources and access to financial services, including microfinance. The entire article is centered on this concept, particularly the statement that microfinance “brings the benefits of formal finance to those otherwise excluded.”

• Target 8.3 (under SDG 8)

  This target focuses on promoting policies that support entrepreneurship and the growth of micro- and small enterprises. The article’s emphasis on transitioning “from mono-product lending to micro-enterprise financing” and turning “borrowers into business owners” directly supports this target.

• Target 8.10 (under SDG 8)

  This target aims to expand access to banking and financial services for all. The article discusses how public infrastructure like Jan Dhan, Aadhaar, and UPI allows microfinance to “travel far beyond traditional branch footprints,” thereby strengthening the capacity of financial institutions to reach more people.

• Target 10.2 (under SDG 10)

  This target is about promoting the social and economic inclusion of all. The article’s core message about the “growing importance of microfinance” in “connecting excluded households to formal financial systems” is a direct reflection of this target’s objective.

• Target 13.2 (under SDG 13)

  This target calls for integrating climate change measures into national policies and planning. The Deputy Governor’s suggestion of “integrating climate resilience into credit models” is a specific action at the sectoral level that aligns with this target, aiming to make financial systems and their beneficiaries more resilient to climate change.

3. Are there any indicators mentioned or implied in the article that can be used to measure progress towards the identified targets?

Yes, the article mentions and implies several indicators that can be used to measure progress:

• Financial Inclusion Index

  The article explicitly states that “the financial inclusion index has improved significantly, to 67.0 on March 31, 2025 from 43.4 on March 31, 2017.” This index is a direct, quantifiable indicator for measuring progress towards expanding access to financial services (relevant to Targets 1.4, 8.10, and 10.2).

• Number of Micro-enterprises Financed

  The suggestion to transition “to micro-enterprise financing” implies that the number of loans disbursed specifically for creating or growing micro-enterprises would be a key performance indicator. This would measure progress towards Target 8.3.

• Responsible Pricing and Transparency

  The article stresses that loan rates must be “reasonable” and that agreements must be “transparent and explained in local languages.” Indicators to measure this could include the average interest rates charged by microfinance institutions and the number of borrower complaints related to non-transparency, which would reflect the quality and responsibility of financial inclusion efforts.

• Adoption of Climate-Resilient Credit Models

  The call for “integrating climate resilience into credit models” implies an indicator: the number or percentage of microfinance institutions that have developed and implemented such models. This would measure progress towards integrating climate action into the financial sector (Target 13.2).

• Grievance Redressal Mechanisms

  The emphasis on “strong grievance redressal mechanisms” suggests that the efficiency and effectiveness of these systems, measured by the number of grievances filed and resolved, can serve as an indicator of responsible financial practices and borrower welfare.

4. Create a table with three columns titled ‘SDGs, Targets and Indicators” to present the findings from analyzing the article.

Source: tribuneindia.com