Reimagining Microfinance’s Journey: Old roots, new routes

Microfinance has long played a crucial role in expanding financial access for those excluded from traditional banking.

By Neha Juneja

Microfinance is one of the most powerful movements for and by women, driving immense economic and social transformation. It has empowered millions of women entrepreneurs, enabling financial independence and fostering community growth. In India, microfinance has not only uplifted underserved populations but also led to the creation of multiple billion-pound banks and lending institutions, underscoring its deep impact on the financial ecosystem.

Microfinance has long played a crucial role in expanding financial access for those excluded from traditional banking, particularly in rural and low-income areas. However, the sector is at a turning point. The rise of digital financial services, shifting borrower expectations, and regulatory changes are reshaping the landscape. While microfinance continues to be a driver of entrepreneurship and economic resilience, it must evolve to remain effective in today’s market.

For decades, the Joint Liability Group (JLG) model has been the backbone of microfinance, allowing borrowers to access credit collectively without collateral. While this model has worked well in the past, its relevance is now under strain. Many borrowers take loans from multiple sources, making repayment discipline harder to enforce. The peer-accountability mechanism, once central to JLGs, has weakened, and a one-size-fits-all approach no longer aligns with borrower needs. A new model that leverages technology for risk assessment and personalised lending solutions is needed to ensure microfinance remains viable.

The profile of microfinance borrowers has also changed. Women entrepreneurs in rural India, once entirely outside the formal banking system, now have access to bank accounts, mobile wallets, and digital payment platforms. Smartphone ownership has surged, allowing borrowers to interact with financial institutions without relying on physical meetings. However, their ability to participate in group meetings has diminished due to growing economic responsibilities, and income differences within borrower groups have widened. These changes make the traditional group-lending model less effective, necessitating a shift towards more individualised, flexible credit solutions.

Another pressing challenge is the need to reduce dependence on human resources through technology, as has been the norm in most industries. Loan officers have historically played a key role in loan distribution and recovery, but relying on them as the primary touchpoint is increasingly inefficient. Microfinance institutions must integrate digital tools such as mobile applications, automated credit assessments, and Aadhaar-based verifications to streamline processes and reduce in-person interactions while maintaining efficiency. By leveraging technology, MFIs can scale operations without being constrained by workforce limitations.

Regulatory adjustments are also shaping the sector. Authorities are tightening lending norms to prevent over-indebtedness, but there is a fine balance to be maintained. Overregulation could hinder financial inclusion, whereas flexible yet responsible policies can enable innovation and sustainable growth. The key lies in frameworks that safeguard borrowers without stifling the sector’s ability to adapt to new realities.

Strategic collaborations are emerging as an essential pathway for microfinance transformation. Partnerships between MFIs, traditional banks, and fintech companies are helping to bridge the gap between financial institutions and underserved communities. While MFIs bring deep-rooted local networks, banks provide capital strength, and fintech firms contribute technological advancements. Together, these partnerships can deliver efficient and scalable financial solutions tailored to evolving borrower needs.

Since the Reserve Bank of India (RBI) began regulating the microfinance sector in 2011, the industry has seen remarkable expansion. The gross loan portfolio has surged from approximately ₹17,000 crore in 2012 to over ₹3.93 lakh crore by 2024, reflecting a massive 2,176% increase. Microfinance institutions now serve nearly 8 crore borrowers across 723 districts, including 111 aspirational districts, contributing approximately 2.03% to India’s Gross Value Added (GVA) and supporting 1.3 crore jobs.

Microfinance remains an essential pillar of economic development, but its traditional playbook needs an overhaul. A shift towards digital integration, better risk management, and customised credit products will define its future. The demand for microfinance is still strong, but its delivery must adapt to an increasingly digital and dynamic financial landscape.

(Neha Juneja, Co Founder & CEO of IndiaP2P.)

Views are personal, and do not represent the stance of this publication.