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What is Microfinance Loan

The microcredit facility enables low-income individuals and groups, generally lacking access to financial services, to apply for loans. 

 

Microfinance allows access to credit in consistency with ethical lending practices. This credit scheme aims to provide financial support to individuals and SHGs to kickstart a new enterprise, self-employed business, and other income-generating activities.


There are two approaches for extending microfinance services in India, including:

  • Bank-led approach called Self-help Group – Bank Linkage Programme (SHG-BLP)

  • Micro Finance Institution (MFI) led approach

Features of Microfinance Loans

Here are some of the main characteristics of the microcredit or microfinance loans:

  • Access to Formal Credit: It ensures easier access to formal sources of credit to low-income individuals and groups

  • Loan Amount: Microfinance institutions offer loans in smaller amounts, enabling low-income borrowers to repay them hassle free

  • Economic Rates: These loans generally have low-interest rates and ensure quick access due to quick processing

  • No Collateral Requirement: MFIs and banks provide these loans without collateral for easy affordability

  • Flexible Repayment: These loans also offer flexible repayment tenure based on the nature of the occupational activity

  • Repeat Loans: You can get an add-on or repeat loan from the same lender based on your repayment ability

Types of Microfinance Loans

Here are the types of microfinance loan facilities you can avail of:

  • Individual Loans:

Individuals can avail of this microcredit facility for their business and personal requirements

  • Group-based Loans:

Banks and MFIs offer these loans to SHGs where members serve as guarantors for each other’s loan requests

  • Agricultural Loans:

These loans specifically cater to the needs of small businesses involved in agricultural activities, such as dairying, livestock rearing, fisheries, etc. 

  • Micro-enterprise Development Loan:

These loans are provided for the growth and development of micro-businesses

  • Consumer Microloans:

These are very small loans provided to households for emergencies and household consumption

 
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Eligibility & Documents Required

While microcredit has varied eligibility and document requirements based on the scheme you choose, here are some of the basic requirements for these loans:

  • The age of the applicant must be between 18 and 58 years, and they need to be from the low-income segment

  • The minimum annual household income should be less than 3 Lakhs

  • The business must be involved in an income-generating activity

 

The following are some of the documents you will need to furnish when availing of a microfinance loan:

  • Valid KYC: Voter ID, Aadhaar card, MNREGA card, ration card, or PAN card

  • Proof of Income: Form 16, Income Tax Returns (ITR), Family Income certificate, CIC Reports, or Balance Sheet 

  • Bank Account Statements

Key Benefits of Microfinance Loans in India

The following are some of the positives associated with microfinance loans in India:

  • Poverty Alleviation: These loans seek to provide financial support to start income-generating activities for low-income groups

  • Financial Inclusion: Since accessing credit is challenging for these segments, microfinance loans have played a huge role in the inclusion of this financially excluded population

  • Entrepreneurial Development: It aims to promote entrepreneurial ventures among economically backward people in rural and urban areas

  • Community Development: Through group lending, microfinance enhances community-led growth at grassroots levels 

  • Women Empowerment: To help them become financially independent, banks and MFIs provide these loans to women SHGs 

FAQs on Microfinance

How do microfinance loans benefit women?

Microfinance services provide preference to women-led SHGs involved in income-generating activities. This facility makes it easier for these women to access credit and build toward financial independence. 

How can I apply for a microfinance loan?

You can apply for a microfinance loan with Micro Finance Institutions (MFIs) or certain banks offering this facility. 

Why are the interest rates from MFIs higher than loan interest rates from banks?

There are several reasons for higher interest rates on microfinance loans from MFIs. These include higher operational costs in rural areas, higher risk of default, and higher processing costs of smaller loans.

How do microfinance loans help financially vulnerable groups in building credit history?

Microcredit allows people from low-income groups with no credit history to opt for loans. They can increase their credit score gradually by exhibiting a good repayment history.

What is the interest rate & charges for microfinance loan?

You can get a microfinance loan at interest rates starting from about 15.5% p.a. The processing fee charged on these loans usually ranges from 0% to 1%.

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