Microfinance Must Prioritise Savings and Insurance Over Credit: CEA
Chief Economic Adviser V Anantha Nageswaran warns microfinance institutions to prioritise savings and insurance over credit to prevent recurring crises.
India's microfinance sector is at a critical crossroads where the traditional focus on lending must shift toward building long-term financial resilience. Chief Economic Adviser (CEA) V Anantha Nageswaran has issued a stern warning that to avoid recurring industry crises, institutions must prioritise savings and insurance products over the mere provision of credit.
Speaking at the 21st Annual National Conference of Sa-Dhan in New Delhi, Nageswaran highlighted that the current trajectory of the industry has inadvertently reversed the essential order of financial stability. Instead of building a foundation of savings, the sector has become heavily weighted toward borrowing, leading to systemic vulnerabilities.
The Danger of Over-Lending and Mis-selling
The CEA pointed out that the microfinance landscape has been plagued by frequent bouts of excessive lending and the mis-selling of financial products. These practices have directly contributed to repeated crises within the industry, often leaving low-income households in deeper distress rather than helping them escape poverty.
"I think even within the microfinance institutional space in this country, I know that there have been in the past microfinance institutions which are, using their connections with the families at the rural level, addressed livelihood issues other than simply providing credit," Nageswaran noted, suggesting that a more holistic approach is both possible and necessary.
The Double-Edged Sword of AI and Digital Lending
As the industry undergoes a digital transformation, Nageswaran raised concerns regarding the rapid integration of technology. While digital tools offer efficiency, they also introduce new layers of risk:
- Excessive Lending: Digital platforms may accelerate the pace of credit disbursement, making it easier for borrowers to fall into debt traps.
- Systemic Exclusion: The use of Artificial Intelligence (AI) filters and algorithms could lead to the unintended exclusion of certain customer segments from essential financial services.
He emphasised that with the rise of AI and digital selling, microfinance institutions carry an even greater responsibility to ensure that technology does not facilitate over-lending or create barriers for the very people they aim to serve.
Focusing on Livelihood and Entrepreneurship
A central theme of the CEA's address was the distinction between simply providing jobs and fostering sustainable livelihoods. He argued that financial inclusion should be a tool for entrepreneurship rather than just a mechanism for debt.
"It is about livelihood which includes both jobs and entrepreneurship. So rather than speak about jobs, I should have mentioned it's important to focus on livelihood creation which includes micro, nano entrepreneurship, etc," he explained. He maintained that entrepreneurs are the ultimate drivers of employment, whether they operate on a small or large scale.
Challenges for MSMEs and the Path Ahead
While noting that MSME credit growth has outpaced overall banking credit growth in the post-pandemic era—a trend expected to continue into 2026—Nageswaran did not ignore the hurdles remaining for small businesses. He flagged the issue of delayed payments to smaller enterprises as a persistent concern that hampers growth despite better credit availability.
To ensure India's economic growth reaches the lowest-income households, the CEA suggested a multi-pronged approach:
- Simplifying complex compliance requirements for small businesses.
- Strengthening local administrative capacities.
- Removing regulatory obstacles to support grassroots entrepreneurship.