Challenging the orthodoxy: Can we rethink finance for locally-led adaptation?

Posted on by Deepesh Singh

“… investments in adaptation and resilience-building around the world continue to fall far short of documented needs. It is also increasingly clear that although public finance for adaptation has increased, it will not suffice. Private sector investment is critical to closing the adaptation finance gap.” – The World Bank Group and the Global Facility for Disaster Reduction and Recovery (GFDRR) (2021).

The adaptation finance crisis

While countries worldwide have pledged to prioritize climate adaptation, the gaps between promises, delivery, and needs are alarming. Back in 2009, at the COP15 in Copenhagen, developed nations promised to set aside USD 100 billion each year by 2020 to help developing countries mitigate and adapt to climate change’s impact. At the COP29 in Baku, Azerbaijan, these promises were further escalated to USD 300 billion each year by 2035—but this depended on the involvement of private sector capital.

Yet, developed countries only contributed about USD 83.3 billion in 2023 toward climate finance for developing nations. Meanwhile, only USD 29–35 billion each year actually reached developing countries in 2022, with a meager 10–15% trickling down to local communities due to bureaucratic inefficiencies. Today, developing countries require USD 215–387 billion each year to adapt to escalating climate impacts—a figure that the Climate Policy Initiative estimates will balloon to USD 315–565 billion annually. Additionally, while public finance for climate adaptation has increased, private sector contributions remain extremely low—only about 3–5% of total adaptation finance.

The gap is not just financial but existential. If we are to close the gap, developed countries must honor and expand their commitments. They must use blended finance to crowd global and local private-sector funding.

Locally-led adaptation (LLA)

Locally-led adaptation (LLA) shifts agency from international donors and national governments to local communities, which enables them to define, design, and monitor adaptation actions. The approach recognizes that communities in regions, such as Sub-Saharan Africa and South Asia—where more than 60% of people rely on smallholder farming or informal enterprises—possess nuanced knowledge of hyper-local risks.

However, most traditional LLA approaches use a comprehensive, one-size-fits-all model, where local governments and communities design adaptation plans collaboratively. Yet, this comprehensive approach can gloss over the diverse financial capacities and structural needs of different actors—local governments, MSMEs, farmers, and vulnerable households.

While the global discourse acknowledges the importance of LLA, actual implementation remains hindered by structural inefficiencies, inadequate funding mechanisms, and top-down decision-making processes that marginalize local voices. As the IIED’s LIFE-AR notes, “The choice of delivery mechanism—local vs. higher-tier—depends on the stakeholder. MSMEs thrive with decentralized finance; infrastructure requires centralized coordination.”

We propose a differentiated model that tailors adaptation strategies to specific segments and enables complementary private-sector finance to support adaptation initiatives. The model draws on existing work under the ADB’s Country Risk and Policy Platform (CRPP) and UNCDF Local Climate Adaptive Living Facility (LOCAL) programs in Gambia, Ghana, and Uganda.

Strengths and gaps in the comprehensive model

The comprehensive LLA model has played a crucial role to shift adaptation decision-making to the local level through pioneering frameworks, such as the UNCDF’s LoCAL and IIED’s LIFE-AR initiative. These frameworks emphasize inclusivity and decentralized governance to ensure community voices shape adaptation investments.

However, the comprehensive approach typically fails to recognize that local government officials often struggle to identify, still less meaningfully engage with, very poor, climate-vulnerable communities. Furthermore, the extent to which local governments can effectively raise funds and reach the most climate-vulnerable populations varies significantly. Two major factors that underlie this are the capacity of local government officials and the size, structure, and mandate of local governments, many of which are prohibited from raising funds.

A segmented model for LLA

A more effective LLA model could be to recognize the very different types of stakeholders involved, as the IIED has clearly identified. This approach requires us to segment adaptation responses based on three key groups:

1) Local government—driving large-scale infrastructure

Local governments responsible for large-scale adaptation infrastructure, such as flood barriers, irrigation systems, and resilient transport networks, require long-term financing mechanisms alongside public sector oversight to implement these projects. This positions local governments as ideal recipients of institutional funding from sources, such as the Green Climate Fund (GCF) and development banks.

Governments can also tap into capital markets by issuing municipal bonds, an underutilized tool in most developing countries. A successful example of this approach is Cape Town, South Africa. In 2017 the municipality floated a USD 83 million 10-year green municipal bond that was four-times oversubscribed. The bond is funding climate-resilience projects such as water-capture and storage infrastructure, alternative treatment plants, and new flood-defence works. This demonstrates how public financing tools can align with decentralized adaptation planning to ensure sustainable infrastructure development.

Case study: Kenya’s County Green Investment Facility

Based on its work on the County Climate Change Fund (CCCF) Mechanism, FSD Kenya commissioned the county green finance assessment, which provided the first analysis of the green assets and potential at the county level. This work demonstrated the vast potential for projects that can be developed to enhance climate resilience and provide opportunities for green finance. However, county governments require support to package these projects and ensure they manage risks effectively at the global, macroeconomic, national, and local levels.

Collaboration is required to bridge this gap and channel green finance to communities through a pipeline of investable projects that align with investor expectations and address potential concerns. In response, FSD Kenya established the County Green Investment Facility to support 10 county governments to access finance for community-driven green development initiatives.

2) MSMEs and farmers—unlocking financial services for adaptation

Micro, small, and medium enterprises (MSMEs) and agriculture employ around 70% of workers in low-income countries. MSMEs are critical economic players in local adaptation but often lack tailored financial products. Through credit, insurance, and other financial services, MSMEs and farmers can invest in climate-smart technologies, such as drought-resistant crops, renewable energy solutions, raised homesteads, and solar water pumps. Credit also enables them to build business continuity strategies to withstand climate shocks and generate local employment opportunities, thus strengthening community resilience.

Despite this, many adaptation finance models do not fully engage the private sector or use it to complement their work. Only 2% of total global climate finance reaches MSMEs. Unlike local governments, inclusive financial service providers (IFSPs) that lend to MSMEs often lack access to large-scale public funding, particularly for climate-vulnerable MSMEs. However, they could mobilize private capital, mainly if supported by blended finance mechanisms, such as partial loan guarantees, credit lines, and climate insurance.

The UNCDF’s LoCAL program pioneered performance-based grants to support community-led initiatives. Yet, it initially overlooked private-sector financing mechanisms that could help MSMEs scale their adaptation efforts. However, new models are emerging to bridge this gap. The UNCDF and SNV’s GrEEn Project in Ghana has demonstrated how blended finance can de-risk private investment in climate-resilient MSMEs. The initiative offered first-loss guarantees and co-financing incentives to mobilize private bank loans for 1,200 MSMEs, with 40% securing follow-on investments.

The CGAP and MSC note that IFSPs provide an excellent channel to deliver financial services to climate-vulnerable MSMEs and farmers. However, few IFSPs currently offer products tailored to climate resilience and adaptation. MSC has developed an LLA toolkit focused explicitly on this segment to help IFSPs better understand and respond to the needs of MSMEs.

Case study: BRAC’s climate-smart microloans

These loans are designed to help smallholder farmers and women-led MSMEs in Bangladesh build resilience against climate shocks through accessible financial products. These include floating garden loans, which enable hydroponic farming on water hyacinth rafts in flood-prone areas, crop loans for saline-tolerant seeds, such as the “BINA dhan-11” rice, and livestock insurance-linked loans that provide drought-resistant animals paired with insurance coverage.

These loans have interest rates of 10–15%, which is significantly lower than informal lenders, and flexible repayment schedules aligned with agricultural harvest cycles. The loans typically range from USD 100 to USD 500 and have reached 500,000+ households since 2008. The program has boosted crop yields by 30% for farmers who adopted saline-tolerant varieties and increased incomes for those using floating gardens in flood-prone haor wetlands. BRAC mitigates risks of defaults due to climate disasters by incorporating post-disaster grace periods. It also offers emergency loans and bundles insurance with loans to ensure financial sustainability and empower vulnerable communities to adapt sustainably.

3) Vulnerable community members—accessing social protection mechanisms

The poorest and most climate-exposed populations—subsistence farmers, informal laborers, and disaster-affected communities—often lack access to credit or the ability to repay loans. Instead, they require grant-based support to build resilience to climate impacts and recover from them.

These populations benefit more from loss and damage compensation for climate-related disasters, social security grants to support basic needs and recovery, and community-based adaptation funds that provide small-scale assistance for localized challenges.

Case study: KALIA

The Government of Odisha’s KALIA program (2018) supports climate adaptation indirectly through financial assistance. It provides INR 5,000–10,000 (USD 57-115) per year for agricultural inputs, INR 12,500 (USD 144) for livelihood diversification, risk mitigation tools worth INR 200,000 (USD 2,300) in the form of life and accident insurance, and INR 50,000 (USD 575) in interest-free loans to farmers. This support enables investments in drought-resistant seeds, non-farm livelihoods, such as poultry and fisheries, and adaptive technologies, such as drip irrigation.

These measures enhance resilience against climate shocks, such as cyclones, floods, and droughts. They supplement Odisha’s Climate Change Action Plan (2021–2030) and the central government’s National Innovation on Climate Resilient Agriculture (NICRA). For details, see the KALIA Guidelines.

A multi-tiered approach to local level adaptation: The role of private finance

The ongoing evolution from a comprehensive approach to a segmented LLA model improves efficiency, equity, and scalability in climate finance. This approach tailors interventions to the distinct needs and financial capacities of three key groups—local governments, MSMEs, and vulnerable communities—to unlock more targeted investment opportunities.

Unlike comprehensive approaches, which often struggle to attract large-scale financing, a differentiated model can ensure that private capital, public funds, and grants are directed to the actors best positioned to use them effectively.

This evolution of locally-led adaptation aligns with the Paris Agreement’s core principle of leaving no one behind while harnessing private sector investment to fill the adaptation finance gap.

Fueling change: The multiple impacts of increasing liquefied petroleum gas usage in rural India

Posted on by Deepesh Singh

Amid the serene locale of Balaghat — a small city in Madhya Pradesh, India — lives Sunita, a 45-year-old homemaker. Like many local residents, she used to cook food over a chulha, a traditional earthen stove fueled by firewood, coal, and dung cakes. The crackling flames were her constant companion, but they brought more than warmth to her kitchen. Acquiring fuel for the fire was an ongoing burden for the household, and a steady stream of smoke and searing heat accompanied the flames, which left Sunita coughing and her eyes stinging — a harsh reality that extended to her children, too.

Then, in 2018, a glimmer of hope emerged in the form of free access to a clean gas cookstove and a refillable cylinder of liquefied petroleum gas (LPG) under the Indian government’s Pradhan Mantri Ujjwala Yojana (PMUY) program. With LPG, Sunita initially found respite from the smoke-filled haze while reclaiming precious time for herself and her family. However, these improvements were short-lived, as the logistical challenges of LPG refills soon became apparent, adding both financial strain and inconvenience to her household.

Firstly, the program only provided the initial LPG cylinder free of charge, and the increasing cost of LPG refills added to the financial burden for her husband, who works as a smallholder farmer—especially during non-business seasons. Secondly, her village was located 25 km from the gas agency—outside of the catchment area where it made frequent deliveries—which led to delays of more than five days in receiving delivery of refilled cylinders. When this happened, Sunita had to rely on her husband to visit the agency for a refill, which took up almost half his day. As a result, their household was unable to obtain regular LPG refills and relied mostly on the biomass fuel they had used prior to the program.

The barriers to LPG adoption among rural households in India

As MSC has explored the barriers that hinder LPG cylinders’ adoption among individuals like Sunita, we’ve gained insights into the intricate challenges of rural households. MSC’s extensive research has unearthed three key factors that impede the regular refilling of LPG among rural communities:

  1. Accessibility challenges: The remoteness of rural areas poses logistical hurdles, which make direct home deliveries impractical for LPG distributors without incentives. As a result, customers must retrieve cylinders from agencies, incurring extra costs, spending valuable time, and facing considerable inconvenience.
  2. Financial challenges: The irregular income patterns prevalent in rural settings make it difficult for households to afford the recurring expense of LPG. This is particularly the case for those engaged in agriculture and wage labor. This financial instability often compels a shift toward cheaper biomass or solid fuels as substitutes.
  3. Cultural conditioning: Deep-rooted cultural and taste preferences for cooking over traditional chulhas contribute to the resistance to LPG adoption. Many households perceive biomass as abundant and cost-free, which undermines the perceived desirability of switching to LPG. Moreover, a prevalent lack of awareness of safety practices around LPG further reinforces the reluctance among rural customers.

MSC has tackled these challenges in LPG access through a program, facilitated by Bharat Petroleum Corporation Limited, that leverages the hundreds of thousands of self-help groups (SHGs) in operation across Madhya Pradesh, which reach 4 million rural households. A Self-Help Group is a village-based group of 10-20 individuals (women in this case) who contribute small regular savings to create a fund. Members borrow from this fund when needed, and SHGs with good financial discipline are linked to banks for credit, which they then on-lend to their members. Recognizing that this extensive SHG ecosystem could help significantly boost the uptake of LPG cooking, we worked with the Madhya Pradesh State Rural Livelihood Mission and the Ministry of Petroleum and Natural Gas to develop a need-based microloan product that has enabled SHG members to afford LPG cylinders regularly.

Scaling up a successful pilot program to boost LPG access

We initially offered this loan product through a limited pilot program that reached 100 SHG members. Then, after those loans were repaid successfully, we worked with our partners to scale up the program in Madhya Pradesh, giving the program and the loans a formal name: the Ujjwala Sakhi initiative and the Ujjwala loan product.

Ujjwala Sakhis are all women entrepreneurs and members of SHGs: We decided to exclusively work with women due to their central role in household chores, and in the culturally rooted barriers to LPG adoption, which often require a trusted, community-based approach to overcome. The SHG network provided a great platform to leverage this community model. As change agents, Ujjwala Sakhis play a pivotal role in addressing barriers related to accessibility and cultural norms around LPG usage. These women educate households about the benefits of LPG, facilitate the refilling process, and provide support to overcome traditional cooking preferences. In addition to these roles, Ujjwala Sakhis also help community members access the Ujjwala loan product. They assist SHG members in applying for the loan, ensuring that they understand the loan terms, and guiding them through the process of securing timely and affordable credit.

Throughout our efforts to scale this intervention, MSC developed three primary initiatives to address challenges related to LPG refilling:

  • Offering Ujjwala loans: These are small-ticket loans available to the SHG members. The loan amount covers the LPG refill cost, as paid to the distributor that provides the gas. The customer can repay the loan to the SHG over the course of three months.
  • Organizing awareness campaigns: Ujjwala Sakhis and LPG marketing companies organize awareness camps to overcome cultural barriers to regular gas refills, and to educate communities about safety practices they should follow when using LPG. These campaigns help to overcome community members’ fear of using LPG and related accessories, while highlighting the health risks of smoke from biomass stoves.
  • Appointing Ujjwala Sakhis to improve accessibility: Ujjwala Sakhis are SHG members, recruited as agents to facilitate last-mile delivery of LPG refills and LPG gas accessories. Ujjwala Sakhis keep up to seven LPG cylinders at their location (the maximum allowed, according to safe storage regulations), which makes them easily accessible to villagers. Customers can call or visit the Sakhi at any time to buy an LPG refill. As a result, they no longer have to spend time and money traveling to a distant agency to obtain a refill. Ujjwala Sakhis purchase these LPG cylinders at a discounted price from the distributor and sell them to customers at the market price. Usually, the difference between the market price and the discounted price constitutes the Ujjwala Sakhi’s incentive or commission for each LPG refill sale. In addition, they receive commissions for conducting campaigns to educate their community members on the benefits and usage of LPG refills, as well as for selling LPG accessories. Through this model, women entrepreneurs not only earn income but also gain recognition and respect within their communities, contributing to their economic and social empowerment.

MSC has been spearheading the Ujjwala Sakhi intervention across 28 districts in Madhya Pradesh in partnership with LPG marketing companies and the Madhya Pradesh State Rural Livelihood Mission. Approximately 1,000 women from SHGs in Madhya Pradesh have been enlisted as Ujjwala Sakhis. These individuals undergo training and orientation programs on an ongoing basis. After selection, they can start operations after signing a Memorandum of Understanding with the local gas agency in their respective areas.

Positive impacts across LPG promotion, women’s empowerment, health, livelihoods, and climate

Ujjwala Sakhis play a crucial role in promoting the use of cleaner fuel in India’s rural regions. As of September 2024, their efforts have facilitated more than 449,351 LPG refills in Madhya Pradesh within the program’s 35 months of operation. Thanks to the Ujjwala loans made accessible through the SHGs, LPG has become more affordable for rural customers, with more than 12,000 loans disbursed in the state by September 2024.

The Ujjwala Sakhi intervention primarily addresses the challenges of low or no uptake of LPG refills among rural communities. Yet it also has far-reaching impacts across multiple additional dimensions:

  • Women’s empowerment: It has strengthened women’s agency and alleviated drudgery for rural women.
  • Health promotion: It has prevented illnesses caused by harmful emissions from solid fuels.
  • Livelihood enhancement: It has created sustainable and market-linked income sources for women in SHGs.
  • Climate action: It has promoted the use of cleaner energy, which has reduced indoor air pollution and carbon emissions and mitigated deforestation.
  • Social value addition: It has enhanced the effectiveness of the Pradhan Mantri Ujjwala Yojana.

Impact in numbers:

Today, with the support of the Ujjwala program and Ujjwala Sakhis, Sunita now cooks with an LPG stove, her kitchen liberated from the threat of pollution from burning solid fuels, her family’s health protected, and her aspirations kindled with newfound opportunities. With the time they save from not needing to gather and cook with biomass, Sunita and women like her are able to focus on income-generating activities, education, or other personal goals, enabling them to enhance their economic independence and overall well-being.

To bring these benefits to more households, MSC is scaling the Ujjwala Sakhi initiative nationally, aiming to impact over 100,000 women in the next three years. Building on our efforts in Madhya Pradesh, we will lead the nationwide rollout with support from key stakeholders. The initiative offers substantial economic benefits and significant environmental impact, providing access to clean cooking fuel and livelihood opportunities, and promoting environmental stewardship. We also plan to explore carbon credit opportunities to sustain and incentivize these outcomes in the near future.

This blog was first published on the NextBillion platform on 9th April 2025.

Advancing climate adaptation planning

Posted on by Deepesh Singh

India’s particularly vulnerable tribal groups (PVTGs) face severe climate risks, which range from erratic rainfall to depleting ecosystems. They threaten their forest-based livelihoods and health. MSC engaged directly with people from the Juang, Korwa, and Sahariya communities across three Indian states to understand their challenges and identify actionable adaptation strategies. Our findings show that traditional coping mechanisms are no longer sufficient, and community-driven adaptation plans must be paired with support from local governments, CSOs, and financial institutions for long-term resilience.

Read the full report to explore insights and solutions.

Enabling an Open-Source AI Ecosystem as a Building Block for Public AI

Posted on by Saumya Dixit

As artificial intelligence rapidly reshapes our world, ensuring its development is fair, transparent, and inclusive is more important than ever.

This policy brief advocates for investments in open-source AI as a public good. It presents a roadmap for the G7 to build a competitive and responsible AI ecosystem through four key policy recommendations: expansion of open access to data, support for sustainable governance, policy alignment across nations, and local capacity building.

Read on to know how the G7 can shape a more open, fair, and future-ready AI ecosystem.

To fight climate change, India must tap into its indigenous roots

Posted on by Saumya Dixit

India’s tribal communities, long reliant on traditional knowledge, are struggling as climate change outpaces their ability to adapt. Erratic rains, shrinking forests and soil loss threaten not just livelihoods but entire ways of life. Locally-led adaptation offers a way forward by placing communities at the centre of climate action. Grassroots efforts — like Nagaland’s Zabo system and Gujarat’s Bhungroo method — show promise. Scaling such models through programmes like PM JANMAN could strengthen climate resilience, if grounded in community voices.

The Bhil community in the Narmada district of Gujarat used to pray for rain as their village endured long dry spells for months. Yet these days, they pray for the rain not to come all at once. When the skies do open, they flood their fields, only to give way to prolonged dry spells that leave behind cracked soil and a failed harvest. What changed was not just the weather but how little help they had to deal with it. This story is similar to other tribal communities, the context may change from rainfall to excessive heat or droughts.

The lives and cultures of tribal communities across India are tied inextricably to nature. Today, people from these communities are increasingly fighting an uphill battle with climate change’s devastating impacts. When forests shrink, soil erodes, and rainfall patterns go haywire, they do not just lose crops and wage labour, they lose sacred rituals, ancestral knowledge, and the very landscapes that have shaped their identities for centuries.

For generations, these communities relied on traditional wisdom to adapt to shifts in climatic patterns, but the scale and speed of today’s climate shifts outpace those adaptation methods. Reading the skies to predict climate events is failing as weather becomes increasingly unpredictable. Shifting cultivation cycles no longer match erratic weather patterns and the soil depletes faster than it regenerates.

Rainwater harvesting, once reliable, fails amid prolonged droughts. Meanwhile, seasonal migration for work, which was once a temporary fix, is becoming permanent displacement for these people at the margins. Their valiant attempts to diversify livelihoods through craftwork, small-scale trade, or agroforestry have uncertain returns due to a shrinking resource base and the volatile nature of markets.

This is where locally-led adaptation (LLA) matters—not as a policy buzzword but as a lived reality. LLA flips the usual development paradigm. Instead of experts designing solutions in conference rooms, it puts communities at the center because they understand their land better than any outsider ever could. And then let the stakeholders pick the right strategy, including financial support.

Globally, this approach is gaining ground. In Vietnam, CARE restored mangroves by establishing community-based mangrove management boards that coordinated planning and planting activities at the community level. In the USA, the Bureau of Indian Affairs (BIA) funds tribal governments to develop climate adaptation plans rooted in Indigenous knowledge and priorities. In Australia, Aboriginal ranger groups combine ancient fire management practices with modern science to manage their lands with fire.

We need not look far. In Nagaland, the Chakhesang tribe restored soil fertility, sustained water availability, and tripled crop yields through the adoption of the Zabo system. Zabo is a century-old indigenous integrated farming method that combines water harvesting, forestry, animal husbandry, and agriculture.

There are a few other experiments led by non-tribal communities that bear some important lessons for mainstreaming LLA for climate action. One such noteworthy example is from Gujarat, where women used the Bhungroo water management system to combat seasonal waterlogging and severe droughts. This system stores floodwater underground and releases it during dry periods. To maximise farm productivity, they planted climate-resilient crops and applied modern irrigation techniques. On the social side, this intervention enabled female farmers to lead adaptation efforts and gain economic independence.

In another effort, the Government of Uttar Pradesh has developed action plans for 43 ‘Climate Smart’ Gram Panchayats (GPs), identified through a multi-criteria assessment in highly vulnerable districts. To take this to the national level, Niti Aayog is running an ongoing program with Vasudha Foundation.

Similarly, KILA (Kerala Institute of Local Administration) has supported local governments in Kerala to develop and implement Local Action Plans on Climate Change (LAPCCs)- which are blueprints for communities to tackle climate change challenges and transition towards sustainable and resilient futures.

These examples worked because they respected indigenous knowledge and practices and gave locals the tools, voice, and flexibility to adapt that knowledge to new threats. Replicating such success stories is not easy, but the moment is ripe. The Government of India’s INR 24,000 crore PM JANMAN program is a great opportunity to scale this approach. The program focuses on the socioeconomic development of 75 particularly vulnerable tribal groups (PVTG) across the country.

What makes efforts like JANMAN, Climate-smart GPs, LAPCC and other examples illustrated here different is that they signal a shift from doing things for local communities to doing things with them. While some of them work directly with the community, others work through the local institutions like GPs.

And the early signs are promising: The program adopts inclusive decision-making, community-driven planning, local capacity-building, flexibility and learning. However, the test lies in its execution. If these programs can integrate the locally led adaptation approaches, using local institutions like GPs as levers, it could transform the resilience of the local communities to climate change.

The blog was first published on Firstpost on 22nd April, 2025

Wings to Aspirations

Posted on by Saumya Dixit

Ten years on, MUDRA Yojana has sparked a quiet revolution—fueling small dreams with big impact, empowering women, uplifting villages, and proving that access to credit can rewrite India’s entrepreneurial story

While loan disbursement figures are impressive, MUDRA’s real success lies in its inclusivity

Almost 68 per cent of loan accounts belong to women, and about 51 per cent of the borrowers are from scheduled castes, scheduled tribes, and other backward classes

On a quiet morning in Manikpur village, Bihar, Ruby Devi watched as local dairy farmers lined up outside her milk collection centre. Not long ago, these farmers had to sell milk at Rs 40 per litre through intermediaries. However, that changed when Ruby secured a loan worth Rs 1.5 lakh through the Pradhan Mantri Mudra Yojana (PMMY). With the funds, she set up a collection centre that allowed farmers to sell their milk directly for Rs 55 per litre, which boosted their income by 30 per cent.

The MUDRA loan did not just fund Ruby’s business— it gave her the power to set the terms of trade in her village and improved the lives of 30 families there. Over the past decade, the PMMY has enabled thousands of microentrepreneurs like Ruby to overcome financial barriers and build sustainable businesses.

As the PMMY marks a decade since its launch on April 8, 2015, assessing its impact on India’s economic empowerment becomes imperative. The scheme, designed to “fund the unfunded,” has disbursed collateral-free loans to micro and small enterprises to address a critical gap in financial inclusion. PMMY has undeniably expanded opportunities for small businesses with more than 51.67 crore loan accounts till January 24, 2025 and a growing preference for higher loan amounts. But has it done enough to propel India’s microentrepreneurs forward?

Micro and small enterprises (MSMEs) are often hailed as India’s “growth engine,” as these encompass 6.33 crore enterprises, contribute nearly 30 per cent to the GDP, and employ millions. Yet, the biggest hurdle for these enterprises has been access to finance. High processing costs, complex documentation, and a lack of collateral have historically locked out small entrepreneurs from the formal banking system.

PMMY sought to change this. It established the Micro Units Development and Refinance Agency (MUDRA) to facilitate lending through banks and non-banking financial institutions. Through MUDRA, the government created a structured pathway for microentrepreneurs to access capital.

The scheme’s three-tiered loan structure—Shishu (up to INR 50,000), Kishore (INR 50,001 to INR 5 lakh), and Tarun (INR 5 lakh to INR 10 lakh)—ensured that businesses at different growth stages could secure funding. Recognising the evolving needs of entrepreneurs, the government introduced a new category, Tarun Plus, in 2024 to offer loans up to INR 20 lakh.

While loan disbursement figures are impressive, MUDRA’s real success lies in its inclusivity. Almost 68 per cent of loan accounts belong to women, and about 51 per cent of the borrowers are from scheduled castes, scheduled tribes, and other backward classes. This is social empowerment in action.

Moreover, MUDRA loans have played a crucial role in job creation. A Ministry of Labour and Employment survey estimated that PMMY generated 1.12 crore net additional jobs between 2015 and 2018. The scheme has also facilitated digital financial inclusion through the MUDRA Card, a debit card linked to loan accounts that allows borrowers to manage working capital efficiently.

Despite its successes, PMMY is not without challenges. Northeast India, for instance, accounts for only 4 per cent of total loan accounts, which indicates a need for greater outreach in underserved regions. Many potential borrowers remain unaware of the scheme or struggle with cumbersome application processes.

While the loans’ collateral-free nature makes them accessible, it also raises concerns about credit risk. However, improved monitoring has helped reduce non-performing assets (NPAs). Public sector banks’ NPA in the MUDRA category declined to 3.4 per cent in fiscal 2023-24 from 4.77 per cent in FY 2020-21. Similarly, private sector banks’ NPA dropped to 0.95 per cent during the same period.

For PMMY to fulfill its potential, the government must simplify documentation, expand digital loan processing, and enhance financial literacy to promote responsible borrowing and timely repayment. Reducing state-imposed costs, such as stamp duties and rent agreement charges, will further ease the financial burden on small businesses. Additionally, using digital tools for early detection of financial distress can prevent defaults and ensure long-term sustainability.

As India strives for “Viksit Bharat” by 2047, financial inclusion will remain key to fostering an entrepreneurial and self-reliant economy. MUDRA has shown that a small loan can make a big difference. However, it must go beyond disbursing credit to ensure India’s smallest entrepreneurs thrive and prosper.

The blog was first published on Pressreader on 8th April, 2025