Growth Dynamics of Microfinance Institutions in India

Abstract

The mainstreaming of microfinance in India as a means of financial inclusion and poverty alleviation is a harmful and mostly unacknowledged obstacle to the complete financial inclusion of low-income and rural residents of India in the conventional banking system. We examine how microfinance institutions in India have grown over the last 10 years, as evidenced by changes in asset quality, loan disbursement, and savings mobilization. According to the study, which uses reference year data from NABARD reports, microfinance outreach is expanding rapidly. Savings have nearly doubled, and loan disbursements have climbed from ?24.01 lakhs crore in 2013–14 to ?145.20 lakhs crore in 2022–23, at a compound annual growth rate of more than 21%. Thanks to legislative support and digital innovation, the industry demonstrated resilience during COVID-19. The sector\'s maturity is further demonstrated by the decline in non-performing assets and the growing influence of Self Help Groups (SHGs). The findings further highlight the significance of MFIs for inclusive growth in the face of sustainability and regional inequality issues.

Introduction

Microfinance is a key strategy for promoting financial inclusion and poverty alleviation among low-income and marginalized populations in India, especially in rural areas where access to formal banking is limited. Traditionally excluded due to lack of collateral, erratic incomes, and geographic and social barriers, many poor households relied on exploitative informal lenders. Microfinance bridges this gap by offering small, often collateral-free loans and financial services, primarily targeting women, empowering them economically and socially.

India’s microfinance movement gained momentum inspired by the Grameen Bank model of Bangladesh. NABARD’s Self-Help Group (SHG)–Bank Linkage Programme, launched in 1992, institutionalized microfinance by linking women’s savings groups with banks, fostering both financial access and women’s empowerment. The 1990s also saw the rise of Microfinance Institutions (MFIs), regulated by RBI, with prominent players like Bandhan and Ujjivan shaping the market.

Despite rapid growth, the sector faced crises, notably in Andhra Pradesh in 2010, exposing risks from over-indebtedness and aggressive lending. This led to stronger regulatory oversight emphasizing interest rate caps, transparency, and customer protection. Recent years have witnessed a digital transformation with initiatives like PMJDY, Aadhaar-enabled payments, and mobile banking driving expanded reach and operational efficiency.

Importance of MFIs:
MFIs provide crucial financial services to underserved populations, enabling income generation, savings, investment, and resilience against economic shocks. They foster social cohesion through group lending models (SHGs, JLGs) and promote women’s empowerment by increasing their financial decision-making power. Besides credit, many MFIs offer training in entrepreneurship and financial literacy to improve credit use and reduce defaults.

Rationale for Studying Growth Dynamics:
Understanding the growth patterns of MFIs is essential because the sector has evolved dramatically over three decades, from small NGO efforts to a regulated industry with large-scale outreach. Examining growth trends reveals insights into sustainability, regional disparities (with southern states leading), and challenges like NPAs and over-indebtedness. The digital revolution presents new opportunities and challenges, making it important to study how technology influences growth and social impact.

Recent Trends:
Data shows consistent upward trends in SHG savings and bank loans disbursed over the past decade, with significant growth even during the COVID-19 pandemic, aided by digital microfinance efforts. Loan disbursements grew more than fivefold from ?24.01 lakh crore in 2013-14 to ?145.20 lakh crore in 2022-23, reflecting deepening penetration and post-pandemic recovery.

Research & Literature:
Studies highlight the sector’s positive trajectory but also ongoing challenges such as regulatory issues, high operational costs, technological barriers, and rising NPAs. Recommendations focus on leveraging technology, stronger policies, risk management, and innovative lending models to sustain growth and maximize social impact.

Conclusion

The MFI sector in India has seen a tremendous expansion over the last ten years, with the size of savings mobilisation increasing almost six times from ?9.89 lakh crore to ?58.89 lakh crore at an impressive compound annual growth rate (CAGR) of 21.92%. The sector’s resilience was evident in the COVID-19 period, when savings grew strongly in 2020-21 with a dramatic rise in precautionary behaviour, as well as the successful digital financial inclusion programs. Amid double-digit growth in both savings and loans at the industry level, this evidence underlines the importance of the microfinance industry for India\'s financial inclusion mandate and its ability to reinvent itself during economic downturns. The loan disbursement data of the microfinance sector reflects the phenomenal pace and resilience as they have grown over six times from ?24.01 lakh crore in 2013-14 to ?145.20 lakh crore in 2022-23, recording a CAGR of 22.13%. This journey is a testament to the critical role played by the microfinance sector within India’s financial world – it has always been the sector leading the credit bandwagon for the underserved masses, and has been growing efficiently amidst the tsunami of economic disruptions unheard of in the history of the nation. The micro finance space shows a marked improvement in asset quality, and the NPA ratio has come down from 6.83 per cent in 2013-14 to 2.79 per cent in 2022-23, or a reduction of over four percentage points. With the NPA ratio reaching 2.79% by 2022-23, it shows how the banking system has evolved to a mature one, and the asset quality is in healthy shape, and that policy interventions vis-à-vis the lending practices in the industry have had an impact.

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Copyright

Copyright © 2025 Dama Maheswari, Dr. K. V. Ramana Murthy, Dr. C. V. Kannaji Rao. This is an open access article distributed under the Creative Commons Attribution License, which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited.