Microfinance sector must prioritise savings, insurance over credit to avoid recurring crises: CEA Nageswaran

India's microfinance sector must prioritise savings and insurance over credit to prevent recurring crises, Chief Economic Adviser V Anantha Nageswaran said, warning that excessive lending and mis-selling have contributed to repeated problems in the industry.

India's microfinance sector must prioritise savings and insurance over credit to prevent recurring crises, Chief Economic Adviser V Anantha Nageswaran said, warning that excessive lending and mis-selling have contributed to repeated problems in the industry. Speaking at Sa-Dhan's 21st Annual National Conference in New Delhi, Nageswaran said microfinance institutions need to move beyond lending and focus on building sustainable livelihoods and financial security for low-income households.

"I think even within the microfinance institutional space in this country, I know that there have been in the past microfinance institutions which have, using their connections with the families at the rural level, addressed livelihood issues other than simply providing credit," he said. Nageswaran argued that the sector's approach to financial services needed correction, with savings and insurance taking precedence over borrowing.

He said the sector had reversed this order, adding, "There are frequent bouts of over-lending and mis-selling, which should be avoided." He linked these practices to recurring crises in the microfinance industry, which has faced challenges arising from borrower stress and lending practices.

The Chief Economic Adviser also cautioned that the growing use of artificial intelligence and digital lending could create additional risks for borrowers, particularly through excessive lending and the exclusion of certain customers. "Now with the AI technology and digital selling, there is even more responsibility to ensure avoiding over lending and or systematic exclusion because of AI filters etc," he said.

Emphasising the role of microfinance in creating sustainable incomes, Nageswaran said financial inclusion should support entrepreneurship rather than focus only on providing loans. "Yes, 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 said.

He added that entrepreneurship remained central to employment generation and that removing regulatory obstacles would help small businesses expand. "Ultimately it is the entrepreneurs who create jobs. So for job creation entrepreneurship whether it is small scale or large scale that is the prerequisite," he said.

On the broader financing environment, Nageswaran said MSME credit growth had outpaced overall banking credit growth in the post-pandemic period, with the trend continuing in 2026. However, he flagged delayed payments to smaller businesses as a continuing concern despite improvements in credit availability.

He said simplifying compliance requirements, strengthening local administrative capacity and supporting grassroots entrepreneurship would be important for generating sustainable livelihoods and ensuring that India's economic growth reaches lower-income households. (ANI)