The transition of the microfinance sector in India from a socio-developmental model to a commercialized, for-profit framework has sparked a critical debate regarding its impact on balanced regional growth. This research paper investigates whether the commercialisation of microfinance exacerbates existing regional inequalities in India. By analyzing contemporary data across various lender types—including NBFC-MFIs, Small Finance Banks (SFBs), and Commercial Banks—this study evaluates the geographical distribution of credit and its correlation with state-wise economic development.

The findings indicate a significant "mission drift," where commercial interests lead microfinance providers to gravitate toward economically active and infrastructure-rich regions, particularly in Southern India, while underserved regions like the North and North-East continue to face a credit vacuum. The study further examines how risk profiles and operational costs influence lender behavior, leading to higher interest rates and stringent credit access in lagging states. Through an empirical lens, the paper argues that while commercialisation has enhanced financial sustainability and scale, it has inadvertently reinforced a regional divide. The research concludes with policy recommendations, emphasizing the need for targeted regulatory interventions to incentivize lenders to expand into credit-deficient zones, ensuring that the goal of universal financial inclusion is not compromised by the pursuit of commercial profitability.

Highlights

§  Importance of Research: To demonstrate how commercialisation of microfinance institutions contributes to regional disparities across Indian states.

§  Innovation: Identifies concentration of microfinance institutions in economically viable regions.

§  Application: Examines the role of MFIs and profit-driven models in shaping credit distribution.

§  Results: Highlights implications for financial inclusion and equitable development.

§  Future Perspective: Suggest policy measures to balance profitability with inclusive regional growth.