The Centre for Advanced Financial Research and Learning (CAFRAL), set up by the Reserve Bank of India in 2011, has emerged as an important policy research and capacity-building institution for the financial sector. Over the years, it has made valuable contributions in areas such as board governance, risk culture, compliance and internal audit. Its programmes for independent directors of banks are widely regarded as among the best in aligning boards with regulatory expectations.

Last week, CAFRAL devoted a one-day seminar to Financial Inclusion (FI). The discussions covered the entire spectrum of issues connected with inclusion. Yet, the subject deserves far more sustained attention, as it presents India with perhaps the greatest opportunity to reshape its development strategy.

Although poverty has declined significantly during this century, the challenge remains formidable. According to NITI Aayog's Multidimensional Poverty Index (MPI), nearly one in six Indians continues to be poor. Unlike earlier poverty estimates, the MPI goes beyond income and includes several dimensions of deprivation. The Tendulkar Committee had estimated poverty at about 21 per cent in 2011-12, while the Rangarajan Committee placed it at around 30 per cent based primarily on household income. Whatever the methodology, the conclusion is unmistakable—poverty remains India's biggest developmental challenge.

The central objective of financial inclusion is to address poverty through inclusionary banking, higher incomes and sustainable livelihoods. Unless India succeeds in ensuring minimum standards of living for all, the aspiration of becoming a middle-income, let alone a developed economy, will remain elusive.

Why should FI receive such priority? Because economic exclusion is not merely a social issue; it is a potential source of instability. Large sections of poor households, both rural and urban, remain unable to improve their incomes or build productive assets. Discontent arising from exclusion may remain dormant for years but can surface suddenly, as witnessed in several youth agitations across the country. It can topple the socio-political applecart and be disruptive to growth.

Inclusive growth is therefore not simply a welfare/social objective; it is essential for sustainable economic development. FI should not be seen as an “obligation”. Without it even the well-off live in a state of instability. Development is indivisible, and equity is a necessary condition for achieving high-income status. Even today, India's per capita GDP places it in the lower quartile among nations.

How then should financial inclusion evolve to lift nearly 25 crore Indians out of poverty?

Two macro indicators provide an important perspective. The first is RBI's Financial Inclusion Index, which measures access, usage and quality of financial services. The index has improved steadily, rising from 67 in 2025 to around 70 in 2026. Built on nearly 90 parameters—including bank accounts, insurance, pension coverage and digital transactions—it provides a useful macro picture of financial inclusion.

The second indicator is far more revealing: the household debt-to-assets ratio. At barely 3.2-3.5 per cent, India's ratio is among the lowest in the world—roughly half that of China and substantially below those of Germany, Japan, the United Kingdom and the United States. Household debt as a percentage of GDP tells a similar story. India's ratio is around 40-45 per cent, compared with about 60 per cent in China and over 90 per cent in several advanced economies.

The usual argument that such comparisons are invalid because these are developed countries does not entirely hold. One can equally argue that widespread access to household credit was itself an important instrument in their development journey. The next major leap in financial inclusion, therefore, must come through comprehensive credit saturation.

However, this cannot be achieved through conventional EMI-based lending. Even under schemes such as PM SVANidhi, a loan of ₹10,000 requires monthly repayment almost immediately after disbursement. The implicit assumption is that the borrower can consistently generate monthly surpluses sufficient to service the instalments. For most micro-enterprises and livelihood activities, this assumption is unrealistic. Which activity can generate the equivalent of loan plus interest in just one year?

More importantly, EMI-based lending potentially converts temporary illiquidity into permanent default. A medical emergency, school expenses or a family obligation can easily disrupt cash flows for a few months. Yet, current prudential norms leave very little flexibility for lenders to restructure/rephase such small loans without adverse regulatory consequences. In effect, a short-term liquidity problem is transformed into insolvency by our current system. This is not sound credit design.

Therefore, three reforms are required to change the landscape.

First, all livelihood loans up to about ₹2 lakh should be structured as revolving credit facilities, similar to the conventional cash credit system. At present even for a loan of ₹10,000 banks stipulate a monthly instalment of ₹880 (PM Svanidhi as an example). Which type of activity will generate incremental margin aggregating to principal and interest within one year ? It is an illogical assumption.

Borrowers should instead be encouraged to operate through regular credits and debits under an OD/CC, with annual renewal and enhancement based on transaction history. Such a design would support livelihoods, provide flexibility and substantially reduce debt distress. It will benefit lenders too in stress management.

Second, all existing micro-credit schemes, irrespective of their names or sponsoring agencies, should be integrated under a single umbrella of “Livelihood Credit”. The purpose of each loan can continue to be identified through markers in the Core Banking System for interest subvention, reporting and policy evaluation. This would simplify monitoring and eliminate the present maze of overlapping schemes, with so many acronyms.

Third, India needs an omnibus credit guarantee mechanism covering all livelihood loans, including agricultural credit. Production loans under the Kisan Credit Card, for instance, remain outside any comprehensive guarantee framework now. As a result, governments frequently resort to loan waivers, weakening credit discipline and disrupting fresh lending. A guarantee corpus of around ₹2,000 crore—with contributions from all major lenders—could support incremental integrated livelihood lending of nearly ₹25,000 crore.

Finally, if banks and NABARD jointly establish a structure or mechanism for mentoring, financial advisory and credit counselling services under one umbrella at the panchayat level through mobile banking units (which can probably execute the current fixed location BC services also), financial inclusion can move beyond banking access to genuine economic empowerment.

India has made remarkable progress in expanding access to finance. The next frontier is not more bank accounts, but better-designed credit that enables households to build assets, create livelihoods and permanently escape poverty. That, ultimately, will be the defining milestone on the road to Viksit Bharat—an India where no citizen remains economically excluded.