Microfinance Institutions and Financial Inclusion
Institutional landscape
Microfinance is delivered by NBFC-MFIs, not-for-profit MFIs (societies, trusts, Section 8 companies), cooperatives and MACS, SHGs and their federations, banks with microfinance desks or business correspondents, and fintech lenders. Each form has different capital access, regulation and governance. NBFC-MFIs can raise equity and debt but must meet RBI's 75% asset test and conduct rules; not-for-profits face capital constraints but can work closely with communities.
Role in financial inclusion
Financial inclusion means access to and use of affordable financial services, not merely opening an account. Microfinance adds last-mile credit, doorstep collection, financial literacy and insurance to segments that banks cannot serve profitably through branches. It complements Jan Dhan accounts, Mudra loans, SHG-Bank Linkage and business-correspondent banking. The RBI's financial inclusion index tracks access, usage and quality.
Sustainability and mission drift
MFIs pursue a double bottom line. Social performance management tracks client poverty, women's participation, client protection and over-indebtedness. Mission drift occurs when an MFI shifts to larger, wealthier borrowers to cut costs, or prioritises growth over client welfare. Client protection principles such as transparency, fair pricing, privacy and grievance redressal are central.
Worked example
A block has 500 households. 400 have bank accounts (80% access), but only 120 use formal credit (24%). 200 borrow from moneylenders at 5% a month. An MFI lends to 100 households; 30 already had bank loans, so net new formal borrowers are 70. Formal credit usage rises to 190 households, or 38%. The inclusion gain is 14 percentage points, not the 20% gross disbursement figure. This shows why usage and net addition matter.
Traps
Do not equate financial inclusion with account opening. Do not describe MFIs as charities that do not expect repayment. Do not assume all clients are below the poverty line. Do not ignore mission drift when growth is funded by commercial equity.