Microfinance in India: Empowering Small Businesses and Entrepreneurship

Microfinance has emerged as a powerful tool in the fight against poverty and economic inequality in India., Microfinance institutions (MFIs) play a crucial role in empowering small-scale entrepreneurs by providing financial services to those who are traditionally excluded from the formal banking system. India's MFIs experienced remarkable growth in total loan profit of more than 2,176% from Rs. 17,264 crore (US$ 1.9 billion) in March 2012 to Rs. 3,93,000 crore (US$ 45.2 billion) by November 2024.

Micro, Small, and Medium-sized Enterprises (MSMEs) constitute an important aspect of Gross Domestic Product (GDP) expansion through meaningful contributions to manufacturing, services, exports, employment opportunities, particularly in rural and semi-urban localities. They also nurture innovation and help cultivate enterprising spirit. Such diversification promotes more equitable distribution of incomes and stabilizes broad-based economic advancement. Nevertheless, periodic evaluation remains prudent to reinforce achievements and address persisting barriers with sensitive, sustainable remedies.

Source: Press Information Bureau

The MSME sector in India has shown remarkable resilience, contributing 29.7% to the GDP in FY18, 27.3% during the COVID-19 pandemic in FY21, reaching 30.1% in FY23.

Understanding microfinance and its evolution

Microfinance refers to the provision of small-scale financial services, including loans, savings, and insurance, to individuals and small businesses that lack access to traditional banking services. In India, microfinance is often delivered through Self Help Groups (SHGs), which are associations of people with similar socio-economic backgrounds. These groups help members access loans, build savings, and develop entrepreneurial skills.

Microfinance was initially introduced in India through the efforts of both the government and various non-governmental organisations (NGOs). The primary objectives were to alleviate poverty and promote financial inclusion. Since February 2004, the Self-Help Group-Bank linkage programme has effectively facilitated the flow of resources and credit to underprivileged communities, establishing a highly successful model.

Top micro finance institutions in India

Source: Company filings

Role of microfinance in empowering small businesses

• Workforce development and economic empowerment: In the case of India or other developing countries, MSMEs play a significant role in providing jobs and promoting economic growth for businesses, which are a potential source for creating more employment opportunities in towns as well as villages. As of July 2004, India's MSME sector alone had created more than 20.5 million jobs, mainly in manufacturing focused cities and isolated communities that could never support setting up factories. In addition, MSMEs account for over 40% of India’s output. As a result, substantial amount of foreign exchange reserves are drawn in, mile after mile, as its products are exported to markets worldwide. Microfinance has played a critical role, giving MSMEs the capital needed for expansion and employment, generating new job opportunities, especially in less developed regions.
• Establishing creditworthiness: Microfinance serves as the premier lending and credit platform for MSMEs seeking small business capital. Both small and medium-sized businesses along with low-income individuals have minimal capital needs that falls below the underwriting thresholds of traditional banks. Larger banking institutions require collateral and established credit history for SME applicants to qualify for loans. But microfinance institutions solves these issues by providing tailored loans without mandatory collateral requirements based on each borrower's unique circumstances and repayment ability.
• Contribution to business development: Micro-financing institutions are essential in supporting the growth of MSMEs since they provide custom-tailored loans for emerging small business owners. This financial backing enables the MSMEs to develop their business activities, increase their labour force, and purchase new equipment. This in turn helps MSMEs facilitate economic growth through increased employment opportunities and productivity. In India, the contribution of MSMEs is significant in rural areas since they provide jobs and help alleviate poverty. By supporting MSMEs, micro finance institutions not only foster business growth but also strengthens the economy and competitiveness of the nation.
• Women entrepreneurs: Women owned MSMEs are mainly funded by micro-finance institutions. Loans availed by women in India grew by 19% in FY23, outpacing the overall loan growth of 17%. Extending micro credit to women entrepreneurs in MSMEs has increased their economic power, thereby fostering empowerment. Through inclusiveness and by providing a way for women entrepreneurs to realise their business ambitions, 2.20 crore women-owned MSMEs have been registered by Udyam Registration Portal (URP) and Udyam Assist Platform (UAP).

Government schemes

The Pradhan Mantri MUDRA Yojana (PMMY)

It was launched in 2015 to provide small businesses access to capital through three categories of collateral-free loans.

PMMY loan sanctions: Annual trends in the number of loans and sanctioned amounts (2016–2025)

Note: *- Estimate

Other government schemes

Summing up

Microfinance has undeniably transformed India by empowering business owners and encouraging entrepreneurial spirit. Addressing vital issues, such as restricted finances, intense repayment demands, and gender or cultural hindrances, micro-lenders and administration projects are making significant strides. These efforts are propelling economic advancement and social empowerment. Moving forward, consistent innovative spirit and strategy support will be pivotal in maximising microfinance's effect on small companies and general financial prosperity.