PM Svanidhi: How A Small Loan Scheme Sparked Big Financial Inclusion

When Covid-19 struck and cities went into lockdown, India’s street vendors were among the hardest hit. With no daily sales, many had to dip into meagre savings, mortgage belongings, or even sell their carts and small assets just to survive.

When restrictions eased, they faced a cruel paradox: demand for their goods returned, but they had no working capital to buy stock or restart. Bouncing back was especially difficult because most had no banking relationships and nothing to offer as collateral.

This is the classic space where credit matters. A timely loan can help a vendor recover, but if the shortage persists, it can harden into a poverty trap, where today’s lack of capital locks in tomorrow’s poverty. In such traps, even hardworking and entrepreneurial families cannot grow because the very absence of resources today prevents them from seizing opportunities tomorrow.

Recognising this, the government launched the PM Svanidhi scheme in mid-2020. The scheme was designed not as charity but as an enabling push. It offered collateral-free working capital loans of ₹10,000, with the promise of larger loans of ₹20,000 and ₹50,000 for those who repaid on time.

To make repayment attractive, the government added a 7 percent interest subsidy and cashback incentives for digital payments. Close to 70 lakh vendors have benefited, as banks and municipalities were instructed to identify borrowers through a census and extend loans even without collateral or formal documentation. In short, Svanidhi provided immediate liquidity to restart livelihoods while building a foundation for vendors to join the formal financial system.

Our 2023 study found that most vendors used these loans for working capital, such as buying stock, repairing carts, or meeting daily needs, which helped them grow earnings significantly. Yet very few managed to secure loans outside Svanidhi.

A more recent working paper, using bank data, shows the programme is now meeting its larger goal. About 40 percent of borrowers accessed formal loans at competitive rates soon after completing their first cycle, with loan sizes typically three to four times larger than the original ₹10,000. Vendors are also beginning to make bigger fixed investments in carts, storage, or equipment, moving beyond survival toward genuine expansion. This progression from subsistence credit to investment credit is exactly what financial inclusion should aim to achieve.

What explains this success? The answer lies in design. Some may ask what makes Svanidhi special, given its modest size of less than 0.1 percent of the Union Budget. Yet the programme stands out because it is a textbook case of how interventions should be structured.

First, it targeted a clear market failure: profitable businesses excluded from credit because of lack of information and weak enforceability.

Third, there were no unconditional freebies. Subsidies were tied to good behaviour, such as prompt repayment and digital adoption, which generate positive spillovers for society. On-time repayment builds lender trust and reduces risk for the entire banking system. Digital payments create transaction records that lenders can use to evaluate creditworthiness.

The nudge away from cash has not only modernised business practices but also made credit more accessible for borrowers who previously had no documented financial history. By rewarding behaviours that benefit both borrowers and the wider economy, the programme ensured that public money was well spent.

Equally notable was the timing. Svanidhi was rolled out when vendors needed it most, in the immediate aftermath of Covid, when savings were depleted and businesses at risk of collapse. The government mobilised its entire machinery, from municipalities to banks, to identify and reach beneficiaries quickly.

Importantly, loans were extended even to migrants who may not vote in the cities where they work. That choice underlined that the programme’s intent was genuine support, not electoral gain.

Building on this foundation, the government has launched Svanidhi 2, designed to cover those left out in the first round. It raises credit limits, simplifies processes, adds elements of skill development, and seeks to bring more street vendors into the fold of formal finance.

This continuity matters. Financial inclusion is not a one-off event but a journey. Svanidhi 2 ensures that the momentum created during Covid is not lost and that those who missed the first opportunity are not permanently left behind. By linking credit expansion with capacity building, it also moves the programme beyond survival finance toward sustainable growth for street vendors.

The design of PM Svanidhi should serve as a template for future government interventions. Whether it is a flagship initiative like Vande Bharat trains, the Udan connectivity scheme, or a welfare programme, interventions must begin with a clear recognition of market failure and address it directly.

Policymakers must avoid perverse incentives, and subsidies must reward behaviours that benefit both borrowers and society. Above all, interventions must be implemented quickly, without getting stuck in red tape. That is how taxpayer money can be used optimally, while moving India closer to the vision of Viksit Bharat.