A Complete Guide to Microfinance in India

Meaning of Microfinance:

Microfinance refers to the provision of basic financial services such as small loans, savings accounts, and insurance for low-income people who are economically active. It is a type of banking service provided to underprivileged and low-income households who otherwise would have no access to financial services. It lets micro-entrepreneurs and groups take on reasonable small business loans (microcredits) securely and ethically. Apart from the financial support, it also extends its support towards training, health services, networking, savings account, peer support, women empowerment, etc.

Microfinance typically covers these three important aspects:

1. Micro Loans:

These loans are offered to the borrowers without any collateral. The main key objective of providing micro loans is to make the borrowers outgrow smaller loans and make them ready for conventional bank loans. Hence, the borrower is not bound to pledge their asset as a security for repayment of the loan. This results in a soothing and non-stressful life, making the overall loan repayment rate better than conventional loans.

2. Micro Savings:

Micro Savings Accounts let the entrepreneurs open and operate savings accounts without any average minimum balance requirement. This helps the entrepreneurs form an interest in investment and learn financial discipline. Since the borrowers do not have to keep the minimum balance in the savings account, these funds are further invested in their business, ensuring they make higher returns.

3. Micro Insurance:

Micro Insurance Plans offer insurance coverage to the borrowers of micro loans at affordable premiums. It ensures that the poor people are financially protected against any mishap in the future, such as accidents, chronic diseases, etc. It covers all the possible risks that underprivileged people across the globe might have to face.

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Origin of Microfinance:

Although there has been much awareness about microfinance in recent years, the idea of microfinance is not new. In the 70s, economics professor Muhammad Yunus began to hand out small loans to his motherland - Bangladesh. In 1983, he founded the Grameen Bank, which is currently active in over 70,000 villages in Bangladesh. The bank currently employs 25,000 individuals and has 7.4M borrowers, out of which 97% are women. Today, Muhammad Yunus's concept is employed in 60 developing countries. He was awarded the Nobel Peace Prize in 2006.

The Importance of Microfinance:

Low-income individuals are generally cut off from the conventional financial market as they have no collateral and adequate income to avail of a loan, save money, and secure their families with insurance. Women are still not considered credit-worthy by financial institutions. The only option that most low-income individuals have is lending money from local moneylenders, who charge extortionate interest rates that make the loan challenging or even impossible to repay. The utmost importance of microfinance in India is that it provides access to capital to micro-entrepreneurs. Microfinance offers the borrowers security, economic growth, and the opportunity to prove themselves.

Here are a few Features of Microfinance:

1. The borrowers do not need to provide collateral:

The main feature of micro loans under microfinance is that it does not require any collateral. The borrowers can avail of a micro loan without providing any security to the financial institution.

2. It is offered to low-income individuals:

As we already discussed, the purpose of microfinance is to uplift needy and low-income individuals who contribute to the economy. It is an opportunity for needy people to escape poverty. Therefore, microfinance is generally offered to people from rural and underdeveloped areas, small businessmen, and needy women.

3. It offers small amount loans:

Since the Micro loans are offered without any collateral, and the borrowers are generally low-income people, the loan amount is usually very small. In India, the financial institutions typically offer micro-credit or micro loan amounting to Rs 20,000 to 30,000.

4. It has a short loan tenure:

As the loan amount is very small, the loan tenure offered for microcredit is also short. Although they do not provide any collateral to the financial institution, they have to repay the loan within the prescribed time period given by the financial institution.

5. The purpose is to uplift the poor people:

Microfinance is an economic tool for financial inclusion in the country that focuses on the poor section of the society to let them put their ideas into reality and generate income opportunities for them. It also ensures that low-income individuals outgrow small loans and become a part of conventional bank loans.

The types of loans offered under Microfinance are given below:

• Loans for small entrepreneurs to start the business

• Loans for small entrepreneurs to expand their business

• Loans for women to increase their income generation

• Loans for medical emergencies

• Loans for home extension

Microfinance Channels:

Microfinance in India is operated through two channels; SHG - Bank Linkage Programme (SBLP) and Microfinance Institutions (MFIs).

1. SHG - Bank Linkage Programme (SBLP):

Self-help groups - Bank Linkage Programme (SBLP) was initiated by the National Bank for Agriculture and Rural Development, popularly known as NABARD, in 1992. The SBLP model motivates women from financially backward classes to unite together to form Self-help groups of 10-15 members. These women contribute their individual savings to their groups, which at later stages offer loans for funding income-generating activities for the members. These SHGs also offer bank loans at later stages.

This model has been a success in the past several years and has gained a lot of popularity for contributing to women's empowerment in the country. After reaching stability, these groups function independently with minimal support from NABARD, Small Industries Development Bank of India (SIDBI), and NGOs.

2. Microfinance Institutions (MFIs):

Microfinance Institutions have been gaining popularity in recent years and are considered as an effective tool to uplift underdeveloped areas and low-income individuals. They generally run on the concept of joint liability, i.e. an informal group of 4-15 individuals who seek loans either jointly or individually. These loans are typically taken for agricultural or associated activities.

Microfinance Companies In India:

Here are some of the microfinance companies that offer micro credits or Micro Loans:

Equitas Microfinance Pvt. Ltd.

ESAF Microfinance and Investments Pvt. Ltd.

Bandhan Financial Services Pvt. Ltd..

Fusion Microfinance Pvt. Ltd.

Annapurna Microfinance Pvt. Ltd.

BSS Microfinance Pvt. Ltd..

Arohan Financial Banks

Asirvad Microfinance Pvt. Ltd.

Here are the lenders that offer Microfinance Loans To Microfinance Institutions:

ICICI Bank

Reliance Money

State Bank of India

Axis Bank

To Conclude:

Financial institutions play a key role in the economic development of the country, that's why they are an integral part of the economy. Although the financial institutions and financial inclusion tools in India are very strong, we as a country still lack in the implications and operations of the same. Microfinance has been playing a major role in lifting up poverty and improving the economic status of underprivileged people in society. Many public and private sector banks have been lending money to microfinance institutions, which work for women's empowerment and alleviation of poverty.

Warm Regards,
Ketki Jadhav
Content Writer