Financial inclusion cannot be measured by the number of loans disbursed; it cannot be measured only by opening bank accounts or simply through digitisation; it cannot be served with the idea of “efficiency”; it cannot be brought about through shrinking branches and rising correspondents replacing employees.
One of the primary claims in the recent years have been the supposed milestones that India has crossed when it comes to financial inclusion. The National Strategy for Financial Inclusion (NSFI) 2025–30 by the Reserve Bank of India in fact projects a celebratory narrative of progress, citing improvements in the Financial Inclusion Index and greater usage of financial services in recent years. But whether the banks have been truly serving the people or has their conduct in recent years actually yielded true inclusion are questions that need interrogation. The claims ought to be tested on a ground that seems to be simmering with dissent, an ominous cost of living crisis, youth frustration and a policy prescription that is apathetic towards the perils and precarity of the lives of ordinary Indians. Have banks aided the people in these uncertain times? Or, have they abetted their adversities?
Who will care about the depositor’s interest?
The latest Basic Statistical Return data released by the Reserve Bank of India points to a significant shift in the nature of bank deposits. Between March 2022 and March 2026, the share of low-cost savings deposits fell from 34.6 per cent to 28.7 per cent, while the share of higher-interest term deposits rose from 55.2 per cent to 61.6 per cent. This trend is concerning because savings accounts have traditionally provided banks with a stable and inexpensive source of funds while allowing depositors easy access to their money. But as banks kept squeezing the interest rate of depositors after deregulation bringing it down to as low as 2.5 per cent today. In the last 10 years, the Consumer Price inflation averaged 5.5 per cent. Hence, the net return for most of the depositors could be just 1 per cent or less. What this has translated into is a massive loss for the ordinary depositors which in more ways than one in fact disincentivises particularly low and middle income families from entering the formal banking channels.
Without depositor’s funds, banks will cease to exist. More than 60 per cent of the deposits in the banks are from the household sector and 95 per cent of the depositors are Individuals. Hence, the banks have a primary responsibility towards the depositors. They should not only keep the deposit safe but also provide a reasonable return through interest. As the controller of the monetary system, the Reserve Bank of India has the responsibility to ensure a reasonable return to the depositors; as it is their money that powers economic growth through loans given to different sectors.
In this instance depositors have eventually started shifting more and more towards term deposits which are more expensive for banks to service or to mutual funds which is taking a toll on the savings deposit available in banks. The shift also comes against the backdrop of a persistent gap between credit growth and deposit growth that former RBI Governor Shaktikanta Das had flagged. With loans growing faster than deposits, banks are already facing funding pressures. This can have a detrimental effect on the health of the banking system.
Is credit going where it is due?
The government’s idea of financial inclusion has increasingly relied on shrinking bank branches and the expansion of precarious Banking Correspondents (BCs), even as rural credit has declined. The Financial Inclusion Strategy document itself acknowledges serious flaws in the Banking Correspondent model. It underlines concerns around non-dedicated outlets, limited services, poor oversight, weak remuneration, low participation of women, and high inactivity. On the demand side, irregular incomes, lack of nearby branches, and absence of collateral exclude many borrowers. Yet the proposed path forward merely doubles down on BCs, instead of recognising the necessity of expanding well-staffed public sector bank branches for genuine financial inclusion.
This vacuum has been filled by Non Banking Financial Companies, Micro Finance Institutions, and fintech loan apps that function as modern moneylenders, charging high interest rates and employing harsh recovery practices. Strikingly, nearly 85 per cent of loans below ₹50,000 are now provided by NBFCs. The RBI’s February 2026 draft amendments on conduct in recovery of loans and engagement of recovery agents by banks and NBFCs comes amid persistent concerns about aggressive and coercive recovery practices, particularly in the NBFC and digital-lending ecosystem. However, considering the scale of operation of NBFCs, their proliferation and over-reliance on outsourcing, effective regulation will be difficult. More so, considering the fact that the RBI relies on the industry themselves (the Self Regulatory Organization) to monitor the NBFC landscape and direct oversight is missing.
The Economic Survey observes that in terms of sectoral deployment of non-food credit, among the categories of agriculture and allied activities, industry, services and personal loans, the highest year on year growth has been observed in personal loans, with an increase of 12.8 per cent in November 2025. This is in line with the Financial Stability Report household debt in India stood at 41.3 per cent of GDP as of end-March 2025, marking a sustained rise compared to its five-year average of 38.3 per cent. While this is alarming enough, the nature of credits is cause for further concern. Among the major categories of household borrowings, non-housing retail loans, largely taken for consumption purposes, continue to dominate. These loans accounted for 55.3 per cent of total household borrowing from financial institutions as of September 2025, surpassing housing loans as well as agricultural and business-related borrowings.
It is rather disturbing that loans are available at a far more affordable range to corporates today than to ordinary citizens. Loans with less than 8 per cent interest rate are much more accessible to the private corporate sector than the household sector today. Again, loans with interest rates above 11 per cent are disproportionately high among the household sector while low for the corporate sector. This shows a full reversal of the idea of social banking wherein it is the ordinary Indians whose deposits are leading to cheaper loans for the big corporates while neither does the depositor get fair rates for their deposits nor can they access affordable loans.
So, what we are looking at is a credit landscape where people suffering from stagnating wages, increasing fuel prices, higher cost of living, precarious employment and privatised essential services are being pushed towards more and more predatory lending by NBFCs, loan apps and MFIs and are largely taking loans for meeting their day to day expenses, medical emergencies, or to pay back earlier loans.
Microfinance has not yielded inclusion
The Economic Survey this year admitted to something that has so far been ignored in official discourse. It was an admission that was not in its main text, but was tucked away in a box. As such it was more like a confession box about the state of microfinance in India.
Government policies and the overtures of the RBI’s have been in favour of a discourse around “financial inclusion” when it comes to the NBFCs and MFIs. But, the message was unmistakable in the Economic Survey this time: the sector is showing signs of deep stress, particularly in the form of over-indebtedness and distress borrowing among the rural poor. This concern in fact echoes warnings long raised by civil society organisations about the transformation of microfinance into a profit and target driven industry, where private NBFCs often charge usurious interest rates and deploy harsh recovery practices.
Microfinance caters overwhelmingly to the most vulnerable sections of society. As of March 2025, 95 per cent of microfinance borrowers were women and 80 per cent were from rural areas. The sector’s institutional structure is diverse: NBFC-MFIs hold the largest share of outstanding loans at 39 per cent, followed by banks (32 per cent), small finance banks (16 per cent), NBFCs (12 per cent) and others (1 per cent). Far from the celebratory pitch around the sector, the Survey this time underlined a reversal in growth in FY25, with loan outstanding declining by 14 per cent year-on-year, driven largely by credit overexposure.
This slowdown is not an isolated event but part of a recurring cycle of stress marked by excessive lending, multiple borrowing and rising non-performing assets.
Microfinance was originally conceived as a tool to help low-income households manage risk, stabilise incomes and gradually build assets. The emphasis was on steady improvement in household security rather than rapid expansion. Over time, however, the sector became increasingly linked to capital markets and commercial investors. As investor expectations grew, the priorities of many institutions shifted toward expanding loan portfolios and delivering higher returns.
One of the most telling consequences of this shift is the reliance on misleading “impact” indicators. Metrics such as the number of borrowers, the size of loan portfolios, the proportion of women borrowers or geographic outreach are often presented as evidence of success. While these numbers demonstrate scale, they reveal little about whether borrowers are actually better off. Worse, they can incentivise repeated lending, loan top-ups and deeper indebtedness even when households lack repayment capacity. Rapid credit expansion without careful assessment can weaken household finances and push families into stress. In fact, even NABARD had in recent times have shared its concern that the removal interest rates caps by the RBI for NBFCs, has led to pockets of indebtedness.
AI: The new frontier in the battle for inclusion
There is an AI headrush today in the name of “efficiency” that needs to be analysed from the prism of inclusion. The RBI has already come forth with a “Framework for Responsible and Ethical Enablement of Artificial Intelligence” which has been questioned by the trade unions for its opacity and top down approach without deliberation with the workers.
Rupam Roy of the All India Bank Officer’s Confederation in fact says: In an era where AI implementation is often driven by competitive pressures and efficiency mandates, we underline that technology should serve human needs rather than the reverse. The debate over AI in banking extends far beyond technical specifications or regulatory frameworks. It encompasses questions of economic justice, democratic participation in technological decision-making, and the kind of society we wish to create through our technological choices. Our call for “dialogue first, deployment next” may slow the pace of AI adoption, but it offers the promise of more sustainable, equitable, and ultimately successful technological transformation.
What is deeply disconcerting is AI’s potential to exacerbate existing inequalities in banking access. AI systems, if improperly designed or implemented, could systematically exclude vulnerable populations including rural communities, linguistic minorities, and economically disadvantaged groups. In a country like India, where multiple layers of inequality and social vulnerability already shape access to finance, AI-driven decisions could exacerbate exclusion if left unchecked. The risks are not just technical such as data breaches from sharing sensitive loan portfolios with AI systems but also ethical, where corrupted datasets or hidden algorithmic biases produce discriminatory outcomes. Without strong guardrails, banks could hide behind the “invisible hand” of AI to justify lending practices that ignore fairness or social responsibility, shifting the blame to machines while deepening structural inequities. This concern is particularly relevant in the Indian context, where banking inclusion has been a cornerstone of financial policy for decades.
Financial inclusion cannot be measured by the number of loans disbursed; it cannot be measured only by opening bank accounts or simply through digitisation; it cannot be served with the idea of “efficiency”; it cannot be brought about through shrinking branches and rising correspondents replacing employees.
This chapter is excerpted from PROMISES & REALITY 2026: Citizen’s Review of Year 2 of the NDA-III Government.
