Over the past decade, India has made great strides in financial inclusion. Millions of people have entered the formal financial system. Bank accounts have grown, digital payments have become part of everyday life, and access to basic financial services has improved across regions.

But inclusion at the surface does not always translate into access when it matters most. If you spend time in rural and semi-urban markets, a different picture emerges. People may have accounts, but when a need arises, access to timely and reliable credit is still uncertain.

The next phase of financial inclusion will be defined by this gap. It is no longer about onboarding people into the system. It is about whether the system shows up for them when they need it.

The nature of credit demand in rural India

In rural India, credit is closely tied to everyday economic life. It is not only about expansion or long-term investment. It is about continuity. A small loan can determine whether a household is able to keep a business running, manage an unexpected expense, or take advantage of a seasonal opportunity. Income patterns are often uneven, and financial buffers are limited. In such a context, the timing and reliability of credit become just as important as the amount.

This is where traditional lending systems often struggle. Smaller ticket sizes, limited documentation, and variable cash flows make traditional underwriting difficult. As a result, many borrowers remain outside the effective reach of mainstream banking, even if they are technically part of the system.

Microfinance institutions have continued to play a critical role in bridging this gap. Their strength lies not only in the segments they serve, but in the way they operate. Lending at the last mile requires more than capital. It requires presence, familiarity with local conditions, and an understanding of how households earn and spend. It also requires a degree of trust that is built over repeated interactions.

Even as banks and fintechs expand, the reality is that rural credit still depends heavily on an assisted model. Digital solutions are important and will continue to grow, but they are most effective when layered onto a system that already understands the borrower. This is why microfinance remains relevant. It addresses a need that is structural, not temporary.

The sector has also gone through a phase of correction. Over the past year and a half, nearly 17 million borrowers have moved out of the microfinance system. This contraction reflects a combination of over-leveraging in certain pockets, broader economic pressures, and a more cautious stance from lenders.

The response from the industry has been measured. There has been a stronger focus on borrower discipline, limits on exposure, and improvements in underwriting practices. Portfolio quality has begun to stabilise, and there is greater alignment across stakeholders on responsible lending. At the same time, this period has highlighted how quickly access can shrink when confidence weakens. For borrowers at the margins, even a temporary tightening of credit can have lasting effects.

The role of liquidity in sustaining access

Access to rural credit is closely linked to the flow of capital into the institutions that serve this segment. When lenders become risk averse, the impact is not evenly distributed. Larger institutions are often able to maintain funding relationships. Smaller, regionally focused NBFC-MFIs tend to face tighter constraints. These are also the institutions that operate deeper in rural markets. When their access to capital is affected, the consequences are felt directly at the last mile.

In this context, the government’s credit guarantee support becomes important. It helps address the underlying concern of risk by providing a layer of protection to lenders. More importantly, it signals confidence in the sector at a time when it is needed. While the size of the support may not fully match the scale of the industry, its intent is significant. It creates the conditions for capital to start flowing more consistently again.

Credit as a driver of local economic activity

Rural credit has an impact that extends beyond individual borrowers. When credit flows, it sets off a chain of economic activity within communities. Small businesses are able to operate more smoothly, agricultural cycles are supported, and local trade becomes more active. Consumption patterns improve because households have greater financial flexibility.

This multiplier effect is what makes rural credit so important. It connects financial inclusion to real economic participation.

The next phase of financial inclusion will require a shift in focus. Expanding access to accounts and digital tools will remain important, but they are only part of the solution. What matters equally is the availability of credit that is timely, appropriately structured, and sustainably delivered. This will depend on the strength of institutions that serve the last mile, the stability of their funding, and a regulatory environment that supports responsible growth.

There is also a need to recognise that rural markets are not uniform. Solutions must be adapted to local realities rather than standardised across regions.

For many borrowers, financial inclusion is experienced in very practical terms. It is the ability to respond to an opportunity, manage a disruption, or build something gradually over time. Access to credit plays a central role in that journey. Without it, inclusion remains incomplete.

As India moves into the next phase of its financial development, strengthening rural credit access will be critical. It is not only about expanding the system, but about making it work more effectively for those who depend on it the most.

The writer is CEO, Muthoot Microfin

Published on April 27, 2026