Microfinance as a Development Strategy for Rural India: A Case Study of Uttar Pradesh

Abstract

The Indian microfinance (MF) sector, delivered via SHGs, JLGs and MFIs has evolved into a key policy tool for rural development in India by providing access to savings, credit and other financial services to excluded households from formal banking. Microfinance, this article argues, is a strategy that some consider viable for development in selected settings (with the state of UP taking refuge among those who do) and it employs the evidence from Uttar Pradesh (UP); a large predominantly agrarian state with high levels of poverty, seasonal incomes and limited access to formal finance where group-based models and microcredit are particularly pertinent. Leveraging secondary data from formal bank linkages, national rural livelihood mission (NRLM) dashboards and publications of NABARD and MFIN, the analysis assessed outreach, credit linkage and portfolio trends as well as pathways through which microfinance impacts on livelihoods: consumption smoothing; risk buffering; asset formation; women’s agency and local enterprise development. We present evidence on the ability of such an institution to scale-up, with SHG-bank linkage expanding from ₹58,070.68 crore in 2020–21 to ₹2,09,285.87 crore in 2023–24 and improvement in portfolio quality (NPAs decreasing to ~2.05 percent in 2023–24). Uttar Pradesh has an enormous SHG base (more than 12 lakhs of SHGs are under NRLM eGov system), however, saving linkage to complete bank loan mapping is required to ensure enhanced absorption of credit, enterprise support and risk mitigation. The paper finds that it is credit coupled with capacity building, market ties, producer organisations and social protection that maximises microfinance impact in rural development; and when a policy focus on page volume gives way to one on income pathway and resilience outcomes.