Reform lending to low-income households

India has built a powerful last-mile credit engine, yet four shocks in 15 years — the Andhra Pradesh crisis (2010), demonetisation (2016), Covid (2020) and a slowdown since early 2024 — have repeatedly forced abrupt lending cuts and household distress. The solution is clear: Move from stop-start cycles to reliable and continuous access to formal credit for low-income households. To get there, there is a case for three changes: Harmonise the bank-shadow bank partnership architecture (and sharpen priority sector lending or PSL), diversify liabilities of non-banking financial companies (NBFCs) beyond banks, and replace blunt borrower caps with credible income assessment.

- BINDU ANANTH & SAMIR SHAH

Active microfinance loan accounts fell to 133 million in FY25 from 149 million in FY24. Evidence from the Andhra crackdown (Breza and Kinnan, 2018) documented 11-15 per cent declines in rural consumption and income when access to microcredit was cut off. The policy task is to expand access steadily while minimising collateral damage to livelihoods.

Harmonise partnership rules and supervise risk: India’s credit architecture now spans universal banks, small finance banks (SFBs), NBFCs and fintechs, linked through direct assignments (DA), co-lending, lending service provider, and business correspondent arrangements. The directions right but anomalies remain. Universal banks and NBFCs can co-lend, SFBs cannot. Income from DA assignments can be recognised upfront unlike in other formats. Default guarantees are permitted in co-lending but not for direct origination. Some NBFC types must follow income-based targeting while others do not. These inconsistencies constrain capacity and create arbitrage.