The Vanishing Small Loans: Who will the Poor Turn To?

Where shall the poor go? Once, India’s small loans were the bridge that connected millions of rural and low-income citizens to the formal banking system. But now, that bridge seems to be collapsing. According to “Where Is My Interest Rate? Unlocking Banking For The People - Volume 1”, a study published in July 2024 by the All India Bank Officers’ Confederation (AIBOC) in collaboration with the Centre for Financial Accountability (CFA), the share of small loans has steadily fallen to negligible levels within the banking sector.

The decline, experts say, reflects not just changing lending patterns but a fundamental shift in the social character of public sector banks.

Trends in Small Credits
The data shows a drastic fall in the share of small loans in total bank credit. In the 1990s, loans below ₹25,000 formed a significant portion of total bank advances. By the 2010s, they accounted for less than one per cent. While large corporate loans have expanded rapidly, the growth of small credits has stagnated.

The report attributes this to a policy shift from “social banking” to profitability-driven lending, transforming the banking system from a vehicle of development into one dominated by commercial considerations.

Institutional Credit to Agriculture
The marginalisation of small loans is most visible in agriculture. Earlier, over 60% of agricultural credit comprised small loans of up to ₹25,000. Now, the bulk of agricultural lending goes to medium and large farmers or agribusinesses.

The Eastern and Northeastern states, where marginal and small farmers form the majority, remain particularly underserved. The Kisan Credit Card (KCC) scheme initially improved access to small farm loans but has become less accessible to marginal farmers over time.

Speaking to Kanal, Dr. R. Ramakumar, Professor at the Tata Institute of Social Sciences and a member of the Kerala State Planning Board, explained that this is not a random trend but a ‘policy-induced transformation’.

“The neoliberal economic policies of 1991 changed the character of banks towards a profit-oriented, commercial model. Banks began preferring large loans to big businesses over smaller credits to weaker sections. Thus, the social responsibility aspect of public sector banks has been compromised. This is, in fact, a consciously induced policy shift,” he said.

Ramakumar further elaborated that definitional changes in agricultural credit have also distorted the picture: “The definition of agricultural credit was altered to include indirect finance. As a result, large loans to agribusinesses now dominate the agri-loan portfolio. Many of these loans are disbursed from urban branches where there is little farming activity. Moreover, most of the disbursals occur between January and March — the end of the financial year — only to meet priority sector targets. These changes raise serious questions about whether agricultural credit is truly reaching the farmers who need it.”

Credit to Weaker Sections
The report shows a sharp decline in credit to weaker sections such as small farmers, Scheduled Castes, Scheduled Tribes, and artisans which are the mandated areas under priority sector lending. The share of loans to weaker sections has dropped from over 15% of net bank credit earlier to just 7–8% in recent years.

Microfinance institutions (MFIs) and non-banking finance companies (NBFCs) have partly filled this vacuum, but often at much higher interest rates, burdening poor borrowers further.

Regional and Class Disparities
The distribution of small credits mirrors deep inequalities across both regions and classes. Richer states capture a larger share of small credit disbursements, while poorer states face scarcity. Within rural areas, small and marginal farmers, landless labourers, and informal workers remain excluded from institutional lending, while larger farmers and agribusinesses dominate.

Thomas Franco, banking industry expert and former General Secretary of AIBOC, highlighted the magnitude of exclusion: “India’s population is around 146.3 crore, and only about 41 crore people have access to credit through banks, including Small Finance Banks. Even if 30% of the population is below 18, over 100 crore adults remain — yet only 40% have credit access. The rest are forced to rely on NBFCs, MFIs, or moneylenders.”

“This government has consciously supported large borrowers over ordinary people. The poor are compelled to borrow at exorbitant rates, putting their meagre assets including agricultural land, and even their lives at risk”, he told Kanal.

The report warns that the decline of small credits undermines financial inclusion, weakens livelihood security, and increases dependence on informal lenders. It also contradicts the stated objectives of social banking and priority sector policies, thereby widening both regional and class inequalities.