Present and Potential Contribution of Microfinance to India’s Economy

Financial inclusion, or empowerment of all citizens with access to financial resources through formal financial institutions and systems, has been advocated by many as an effective vehicle for economic development and poverty alleviation. Microfinance has emerged as a major instrument of meeting the needs of lower income households by linking them to the financial resources to meet both productive and critical needs on credit.  One of the important sets of institutions engaged in the microfinance sector comprises the Non-banking Finance Companies (NBFC-MFIs). Their clientele, the households who borrow from this group of institutions now exceed three crore across the country, while as a whole the sector serves around six crore households. The present study by NCAER has provided an assessment of the impact of microfinance on the macro economy, focusing on the activities of NBFC-MFIs. This focus provides a better understanding of the channels of the impact of microfinance on jobs and income.  The impact on GDP and jobs has been extrapolated to the entire microfinance sector to arrive at a broader assessment of the sector as a whole.  The study has highlighted the interdependency of the overall economic growth and the development of microfinance.