Relevance: GS-2 (Vulnerable Groups, Governance), GS-3 (Inclusive Growth)
Source: The Wire, RBI Reports, NRLM Data, Parliamentary Committee Observations

The Issue: A Growing Microfinance Crisis

Reports from West Bengal reveal women disappearing from homes, families buried under multiple microfinance loans, and coercive recovery practices. What appears local is actually symptomatic of a national-level structural crisis in India’s microfinance sector.

Microfinance, originally intended as a tool of poverty reduction and women’s empowerment, is now—without safeguards—creating debt traps, social stress, and ethical concerns.

Microfinance in India

Microfinance in India provides small, collateral-free loans and basic financial services to low-income households excluded from formal banking. As of 2024, the sector serves 6.6 crore borrowers with a loan portfolio of about ₹3.5 lakh crore.

It operates mainly through NBFC-MFIs, Self-Help Groups (SHGs), cooperatives, and Small Finance Banks.

Key institutions involved include RBI (regulation), NABARD (SHG–Bank linkage & rural credit), SIDBI (refinance to MFIs), and NRLM (women-led SHG promotion).
Microfinance is a major tool for financial inclusion, women’s empowerment, and livelihood support in rural India.

Women at the Centre: Empowerment Turning into Exposure

Women constitute 96–98% of microfinance borrowers in India (Sa-Dhan, 2023). They anchor:

• 8+ crore Self Help Group (SHG) women under DAY-NRLM
• Household budgeting and informal labour
• High repayment discipline (historically >95%)

However, this very centrality has made women most vulnerable to:

• Debt stacking: Many borrowers in Bengal, Bihar, Assam and Telangana hold 4–8 simultaneous loans
• Harassment: Public shaming, threats, forced group meetings
• Livelihood shocks: Cyclone Amphan (2020), Assam floods, inflation shocks, reduced rural incomes
• SHG stress: Defaults create rifts, social stigma, and fractured solidarity
  

Example: Andhra Pradesh (2010) witnessed 30+ suicides linked to coercive recoveries — and the current patterns in parts of Bengal resemble that crisis.

Systemic, Ethical & Governance Failures in Indian Microfinance 

This section merges structural, ethical, and governance issues.

1. Over-Indebtedness (Systemic Failure)

• RBI’s 2022 review showed 40% borrowers above safe repayment limits.
• MFIs aggressively issue repeat loans; digital lenders multiply exposure.
• No unified household-level credit cap enforcement.

2. Weak Regulation & Fragmented Oversight (Governance Failure)

• NBFC-MFIs, banks, cooperatives, and digital lenders follow different norms.
• Credit bureaus poorly integrated for small loans, leading to blind lending.
• District administration often unaware of repayment stress until crisis escalates.

3. Recovery Practices & Ethical Concerns (Ethical Failure)

• Group-pressure tactics violate dignity and privacy of women.
• Public humiliation, social boycott, and intimidation violate RBI’s Fair Practices Code.
• Women bear the burden of loans often taken for husband’s migration, health, or consumption needs.

4. Livelihood Volatility (Economic Failure)

Crop loss, climate shocks, job scarcity, and rising prices reduce repayment ability — forcing women to borrow more just to repay old loans, creating a debt spiral.

What Should India Do? A Unified Reform Pathway

Goal: Move from debt-led inclusion to dignity-led empowerment.

One-Line Wrap

Microfinance must evolve from pushing debt to strengthening women’s dignity, resilience, and real economic freedom.

UPSC Mains Question

“Microfinance was meant to empower women, but rising distress and over-indebtedness show deeper structural flaws. Analyse.”