Microfinance

Story hook

It is 15 October 1992. In a small village outside Mysuru, NABARD — the National Bank for Agriculture and Rural Development — is piloting something it calls the SHG-Bank Linkage Programme. Twenty women, daily-wage workers and small farm labourers, sit in a borrowed schoolroom and each contributes ₹5 to a common pot. The branch manager of Karnataka Bank, sceptical at first, agrees to open a savings account in the group's name. There is no collateral. There is no formal credit history. The 20 women, who together earn perhaps ₹2,000 a month between them, have created India's first formally-recognised Self-Help Group (SHG).

Across the Bay of Bengal, in 1995, a young economist named Chandra Shekhar Ghosh in Kolkata had been watching the Bangladesh Grameen Bank model — Muhammad Yunus's joint-liability micro-loans to landless women. He set up Bandhan as a not-for-profit microfinance institution. By 2009, Bandhan had 38 lakh borrowers and was the world's largest MFI by client count. By 2014, it had crossed 66 lakh borrowers. In April 2014, the RBI awarded Bandhan a universal banking licence — the first NBFC-MFI to become a Scheduled Commercial Bank. On 23 August 2015, Bandhan Bank opened 501 branches on a single day.

By 2024, India had:

• 1.4 crore SHGs under the National Rural Livelihoods Mission (NRLM-DAY-NRLM), with 16+ crore women members.
• 84 NBFC-MFIs + Bandhan Bank + Small Finance Banks delivering ₹4+ lakh crore in microfinance loans.
• The largest microfinance ecosystem in the world by client count.

And yet, in October 2024, the RBI was sounding alarm bells: rural over-indebtedness was rising; ticket sizes had ballooned; the Andhra-style microfinance crisis of 2010 — which had wiped out half the MFI industry — was looming in pockets of Bihar, Jharkhand, Tamil Nadu.

How does a country lend, profitably and sustainably, to people who have no collateral? And what happens when the rope gets too tight?

Why this matters for UPSC

Microfinance + SHGs is a standard GS-III + GS-II topic — UPSC Prelims has tested SHGs (2017, 2020, 2023), NABARD (2018, 2021), MFI regulation (2014, 2022, 2024). Mains questions on SHG-Bank linkage + financial inclusion appear regularly. The 2010 Andhra crisis + 2022 RBI MFI overhaul + DAY-NRLM scale make this politically and economically salient.