The future of growth lies with small borrowers in small towns

India’s economic narrative has long been dominated by metropolitan centres — Bengaluru’s tech campuses, Hyderabad’s new projects, Pune’s IT prowess, Mumbai’s financial hubs, or Delhi’s corporate corridors. These cities drove growth through concentration of capital, talent, and infrastructure, yet the model seems to have reached saturation. The next growth story is not coming from the metros but the small villages where Bharat thrives.

Small But Impactful

Nearly 65 per cent of India’s population lives in small towns and rural areas, yet they contribute only 45 per cent to GDP, showing massive untapped potential. Credit growth in tier-2 and tier-3 cities rose 14-17 per cent year on year in FY24 versus 9 per cent in metros (RBI). Micro and small enterprises now generate over 30 per cent of manufacturing output and 40 per cent of exports. Studies show that for every INR 1 lakh in microcredit there is the creation of 1.5-2 local jobs. With digital penetration at 75 per cent and UPI transactions exceeding INR 19 lakh crore monthly, small borrowers in smaller towns are driving the next wave of inclusive economic expansion.

There is also growing evidence that rising costs and competitive intensity are compressing returns in the metros. And on the other side of the demography? Well, there are themes that indicate a resurgence in small towns.

A recent BCG report highlights that 50 per cent of online shoppers were located in small cities, a number anticipated to reach 60 per cent by 2030. In smaller towns and semi-urban centres, rising aspirations, improving connectivity, and untapped entrepreneurial energy are creating fertile ground for expansion.

The next wave of sustainable growth will emerge not from further densification of metros but from distributing capital and opportunity across India’s smaller towns, where small borrowers represent the engine of tomorrow’s economy. Small borrowers in these contexts are not marginal actors; they are the economic backbone of local communities.

Capitalising the Unbanked

In a country with a population exceeding 1.4 billion, the RBI’s latest Financial Inclusion Index highlights that barely 64.1 per cent have access to essential financial services. This means that two-fifths of the country do not have access to essential services. And if that is the case, how does the system enable the person at the last mile — or the town or the district? Contemporary data also points out why there is a need for new-age start-ups and fintechs to plug the gaps. In addition to vast segments that are unbanked, more recent microfinance data indicates a decrease in gross loan portfolio. The data shows that banks and financial institutions are pulling back on loans below INR 50,000. Overall disbursements have reduced by nearly 16 per cent in FY25. On the positive side, there is a trend of a rising share of loans above INR 1 lakh.

Why Microfinance?

The unbanked and unfinanced include vast segments such as provision-store owners, neighbourhood essential-service providers, tailors, repair-shop operators, dairy farmers supplying cooperatives, and transport operators connecting villages to towns. These entrepreneurs possess market knowledge, customer relationships, and operational skills. What they lack is access to affordable, timely credit.

Microfinance has served this segment partially, but gaps remain — particularly in the ticket sizes between microloans and small-business lending. Digital adoption is rising rapidly in tier-2 and tier-3 towns. But as formal credit availability lags behind, it constrains businesses that could otherwise scale, hire, and contribute to local prosperity. When credit reaches these borrowers, multiplier effects follow. Credit acts as a catalyst, setting off chain reactions that strengthen entire ecosystems. Each transaction generates income and tax revenue.

Microfinance studies have repeatedly documented how access to credit correlates with entrepreneurship rates, employment growth, and poverty reduction. The mechanism is straightforward — capital deployed productively generates returns that circulate through local economies. The lending landscape serving these borrowers is evolving rapidly. Digital platforms have dramatically reduced the cost of origination and servicing. Where physical bank branches struggle to justify operations in smaller towns, mobile-first lenders operate efficiently at scale. Peer-to-peer lending models connect urban capital with rural borrowers, bypassing intermediaries. Banks themselves are adopting new underwriting approaches, using transaction data, GST returns, and utility payments to assess creditworthiness without requiring extensive documentation. Real-time risk scoring enables faster approvals and more flexible terms.

Technology is dissolving the information asymmetries and operational inefficiencies that once made small-town lending unattractive. Lenders discovering these markets report strong asset quality and borrower loyalty, challenging outdated perceptions about rural credit risk.

This shift towards inclusive credit distribution generates both social and financial value. Economically, it stabilises growth by reducing dependence on a few concentrated sectors and geographies. When credit flows to diverse borrowers across multiple regions, systemic risk decreases. Empowering small borrowers in small towns is not charity but a strategic investment in India’s most sustainable growth corridor.

In the words of RBI Deputy Governor Rabi Shankar, there is a silver lining — India’s fintech sector. The sector, with 13,500 companies, has had an adoption rate of 87 per cent, surpassing the global average of 64 per cent. Smart fintechs have a large role to play in ensuring capital flows into India’s new markets to drive the next phase of economic expansion.

The author is Co-founder and Co-CEO of Moneyboxx Finance Limited; views are personal