Micro Finance - Definition, Features & Significance

"Microfinance is a banking service provided to low-income individuals who have no other means of gaining financial services. Check out the blog to know more."

Micro Finance Loans

4 mins read

Published: 29 November 2022

Updated: 14 May 2024

Some people are trapped in poverty and can not afford funding to cover their expenses. So to help these people Microfinance is specially designed so that unemployed or low-income individuals may get the funding too. These people don't have any financial resources or enough income to do business with traditional financial institutions.

Microfinance loans allow individuals to take on reasonable small business loans safely.

Despite being excluded from banking services, however, people who live on as little as 150-200 Rs. a day do attempt to save, borrow, or acquire credit or insurance, and they also make payments on their debt. Thus, many poor people typically look to family, friends, and even those lenders who ask them for high interest rates.

The Reserve Bank of India along with the government of India has expanded its approach towards the people that cannot have the facility of loans because of their financial situation. The government with the partnership of microfinance companies and private limited companies is providing funds to people. As per the records, NGOs are considered the top lenders of microloans. While microfinance companies are the second largest microloan lenders.

Loan Terms of Microfinance

Similar to banking operation traditions, microfinance entities also charge interest on loans. In most cases, the interest rates are lower than those charged by normal banks. As per the World Bank's estimated data, the economic conditions of more than 500 million people have improved via microfinance-related entities.

Features of Microfinance Loan

  • Individuals with low income can avail this loan.
  • This is a collateral-free loan irrespective of end use and mode of application/ processing/ disbursal.
  • There is Nil borrower’s contribution
  • Provide a loan tenure of up to 36 months
  • Quick disbursement of the loan
  • No processing fees Up to Rs.50,000/-
  • Low rate of interest
  • Maximum limit up to Rs. 2 lakhs
  • There is no penalty on the prepayment of the loan.

History of Microfinance

The term microfinance was used back in the early 1800s when the Gramin Bank of Bangladesh was developing, this bank was founded by the microfinance pioneer Muhammad Yunus. Along with the foundation of Microfinance Muhammad Yunus established the concept of Microfinance. Since, in developing countries, most people still depend on farming or basic food trade for their livelihood, therefore, the smallholders of any occupation such as agriculture, or small trades are supported by this microfinance.

Microfinance in India

The main reason not to provide loans by the banks to poor people is lack of security and high operating charges. These two limitations led to the introduction of microfinance in India as an alternative solution to provide financial support to poor people which aims to create a feeling of equality among all the people. 

One of the first modern-day microfinance institutions of the country “SEWA Cooperative Bank” Ahmedabad, Gujarat was initiated by Ela Bhatt in 1974. The National Bank for Agriculture and Rural Development NABARD provides financial services to people who do not have bank accounts, especially women. Later on, this came up with a different concept and model, which is now known as Self-help Groups (SHGs). The Self Help Group-Bank program has 7.9 million SHGs savings accounts and it also involves the participation of regional rural banks (RRBs), commercial banks, and cooperative banks in its operations.

Who Avails Microloans?

Microloans are usually availed by people who are financially unstable and have low chances of approval for loans from banks. People who are running small businesses, or enterprises, unemployed people, sole proprietors, and women entrepreneurs who are in need of fast cash to fulfill their needs.

Microloan Providers in India

There are many banks and small financial institutions that deal in microloans and provide loans at lower interest rates to the borrowers. Here is the list of banks and financial institutions that provide microloans. My Mudra has a strategic partnership with borrowers committing a hassle-free loan to you.

  • Bandhan Bank
  • Muthoot Finance
  • Fullerton
  • Annapurna small finance
  • Equitas Small Finance

Significance of Microfinance:

  • Scarcity Mitigation
  • Women Empowerment
  • Economic Growth 
  • Social Wellbeing
  • Giving Employment

Goals of Microfinance Institutions:

Microfinance institutions have gained popularity in recent years and helped reduce poverty in the country by providing financial support. Most Microfinance Institutions are running with great track records, the major goals of microfinance institutions are the following:

  • Microfinance institutions aim to transform themselves into a financial institution that helps in the development of communities that are sustainable.

  • Aim to offer support to the lower sections of the society which are financially weak. But the special focus goes on women, as now women are also coming up with many business ideas and showing interest in them.

  • To help reduce poverty at a faster rate.

  • Giving self-employment opportunities for the underprivileged.

  • Empowering village people by training them in simple skills so that they are capable of setting up their businesses on their own.

Bottom Line:

Micro-loan as the name suggests is the type of loan that is taken for a shorter tenure than other available loans. Micro-loan can be availed by any salaried employee, small business owner, or entrepreneur with a low capital requirement. This type of online business loan is usually offered to small enterprise owners or families with low incomes whose access to financial or lending institutions is difficult.

Also read: Top Four Benefits Of Business Loans

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