Microloans, or microfinance, are a type of loan provided to low-income individuals who typically lack access to traditional banking services. They allow economically excluded households to build assets, start small enterprises, and achieve greater income security, without requiring the collateral a conventional bank loan would demand.

India's microfinance sector is now one of the largest in the world. As of 2025, the market is valued at roughly USD 7.3 billion, and industry estimates project it will grow to around USD 17.7 billion by 2034 — a compound annual growth rate of nearly 10%. That expansion has been driven by rising financial inclusion efforts, government-backed credit schemes, growing rural and semi-urban credit demand, and the rapid spread of digital lending platforms and AI-based credit assessment tools.

To understand where microfinance stands today, it helps to revisit where it started. Even before COVID-19, the Indian economy was under strain, weakened by the 2016 demonetization of ₹500 and ₹1,000 notes and the rollout of the Goods and Services Tax (GST). Those shocks hit urban demand hardest, while rural demand held up for a time, partly sustained by seasonal migrant labour: farmers would travel to cities for extra income during the gap between sowing and harvesting, sending money back to their villages.

That resilience broke down during the first COVID-19 wave, when a three-month nationwide lockdown crippled the economy — GDP growth fell to -14.2% according to a FICCI economic outlook report at the time — and triggered a mass exodus of migrant labourers back to their home villages. Unemployment spiked to roughly 8.2% in urban India and 6.5% in rural India by mid-2021, per CMIE data. It was in that environment that the original version of this article was written, and that the RBI leaned harder into microfinance and Self-Help Groups (SHGs) as tools of rural financial inclusion.

The RBI's approach to microfinance has shifted substantially since 2021. It has widened the definition of a "microfinance loan" to cover any collateral-free loan to a household earning up to ₹3 lakh a year — up from the earlier ₹1.2 lakh (rural) and ₹2 lakh (urban) thresholds — which meaningfully expands the pool of eligible borrowers. It has also removed the hard interest-rate ceiling in favour of a principle-based framework: lenders must now set a board-approved pricing policy, publish a standardised, simplified cost disclosure (a Key Fact Statement) to every borrower, and cap total household loan repayments at 50% of household income to guard against over-indebtedness.

More recently, in August 2026, the RBI proposed a further harmonisation — common interest-rate directions covering banks and NBFCs alike, due to take effect from April 2027 — requiring every regulated lender to explicitly disclose an all-in Annual Percentage Rate (APR) for microfinance and small-value loans. The stated goal is the same one RBI officials have voiced since the post-2022 reforms: making the true cost of a loan transparent and comparable, so that competition — rather than a hard price cap — brings rates down over time.

Alongside formal microfinance institutions, India's Self-Help Group (SHG) network — built under the Deendayal Antyodaya Yojana-National Rural Livelihoods Mission (DAY-NRLM) — has become one of the largest grassroots financial-inclusion systems anywhere in the world. As of late 2025, over 10 crore (100 million) women had been mobilised into roughly 91 lakh (9.1 million) SHGs. Collectively, these groups have drawn in more than ₹12 lakh crore in institutional bank credit since the scheme began in 2013-14, supported by a growing cadre of "Bank Sakhis" — women trained as community-level banking correspondents who help SHGs apply for and manage loans.

The government has layered newer schemes on top of this base, including Lakhpati Didi, which aims to help SHG women reach at least ₹1 lakh in annual household income, and SHE-MART, announced in the 2026-27 Union Budget, which is intended to give women-run SHG federations their own community-owned retail outlets. Because SHGs are collateral-free and peer-monitored, they remain popular in rural India even where residents are wary of the paperwork associated with formal banks — though this is also precisely the gap microfinance institutions and business correspondents are designed to close.

Five years on from the pandemic low point, the picture is less about emergency rescue and more about consolidation and quality. The near-term priorities look different from 2021's: continuing to expand financial literacy so borrowers understand APR-based pricing rather than headline rates; sustaining the credit-guarantee support that helped the sector through its FY25–26 stress period; ensuring digital lending platforms are held to the same disclosure and fair-practice standards as traditional MFIs; and closing the remaining gap between states like Bihar and Odisha, where SHG networks are mature, and states like Uttar Pradesh and Madhya Pradesh, where a large poor population is still underserved.

It's a shift worth naming directly: the original version of this piece was written for a crisis. The sector it now describes is, by most available data, in a recovery-and-reform phase rather than a crisis phase — a change worth reflecting in how this kind of content gets pitched to readers in 2026.