Background <p>The crowding-out effect of Out-of-Pocket (OOP) healthcare expenditure is crucial in microcredit recipient households as it diverts essential funds for critical expenditures such as food, education, clothing and footwear, and transportation. Eventually, it hampers the intended impact of microcredit support. The study aims to examine the crowding-out effect of out-of-pocket health expenditures among marginal people and women entrepreneurs’ microcredit recipient households during the COVID-19 pandemic.</p> Methods <p>This study uses cross-sectional data from a quasi-experimental research project on the efficacy of fiscal stimulus packages disbursed during the COVID-19 pandemic. The data was collected from July–August 2023. Using survey data from 751 microcredit entrepreneurs who are beneficiaries of 8 different organizations, the study analyzed the crowding-out effect of OOP healthcare expenditures and outstanding loans across 3 income groups.</p> Results <p>The study findings revealed that OOP health expenses have significantly crowded out household non-food consumption expenditures overall. The impact is greatest among high-income households. OOP health expenses also have a significant impact on durable consumption expenses for high-income households. In addition, outstanding loans are found to be higher due to OOP health expenses in middle- and high-income groups.</p> Conclusions <p>This study underscores the financial vulnerability caused by high OOP health expenses among the microcredit recipient households. This financial burden undermines the intended benefits of microcredit and thus requires integrated health and financial policies. Policy recommendations in this regard include strengthening public health services, introducing health insurance for microcredit recipients, implementing targeted subsidy programs, leveraging technology, and promoting financial literacy.</p>