By providing credit to borrowers and small business owners at the bottom of the economic pyramid, the microfinance sector plays a vital role in promoting inclusive growth in our country. By offering loans and credit access to nearly 64 million borrowers, who until then had limited or no access to formal financial services, the microfinance industry has made a significant contribution in creating opportunities for low-income families and households. Furthermore, according to Microfinance Institutions Network’s (MFIN) report, the microfinance industry boasted a total loan portfolio which was worth Rs. 1,90,684 crores in the first quarter of FY 2019-20, with a 42.9 percent growth over the corresponding period the previous year.
The same report also stated that the total number of microfinance loan accounts, in the first quarter of FY 2019-20 stood at 9.27 crores, as compared to 6.68 crores during the same period the previous year. This growth can be attributed to better regulatory reforms, government initiatives and the adaptation and implementation of UPI-based payments. The microfinance industry has significantly contributed to the creation of jobs and enabling small businesses thrive, by providing loans to families that had no previous access to traditional financial services.
Through microfinance loans, individuals and households that are financially underserved can invest in their businesses, and have access to financial products and services, thus furthering the government’s vision of achieving financial inclusion. Some of the key features of microfinance loans include:
The borrowers of microfinance loans generally come from low-income background (below poverty line), with little or no access to traditional financial services
The loans offered to the borrowers are usually small amounts, i.e., micro loans
The tenure of microfinance loans are short, and are typically from 12-24 months
The microfinance loans do not require any type of security or collateral by the borrower
Loans are repaid at a higher frequency, usually on a weekly, bi-weekly or monthly basis
Most microfinance loans serve as means for income generation
In the Indian market, most of the microfinance institutions disburse loans either through Self-Help Group (SHG) model, or the Joint Liability Group (JLG) model. Furthermore, some of the types of microfinance loans include:
Income Generation Loans: Income generation loans are typically given to joint liability groups, and provide them with the capital to start or grow their small businesses or micro enterprises.
Mid-Term Loans: Mid term loans are made accessible after 25 weeks of repaying the income generation loan. Furthermore, an individual is eligible for a mid-term loan if they do not take the maximum amount of the income generation loan, as the remaining amount is usually disbursed as the mid-term loan.
Emergency Loans: Emergency loans are interest-free, and are available to the individuals throughout the year. Emergency loan amount is typically lesser than income generation loan amount, and the repayment terms differ from one borrower to the other, and is agreed upon by the MFI and the borrower. These loans are disbursed to meet expenses such as hospital admissions and treatments, funerals etc.
Individual Loans: Individual loans are given to clients whose needs are specific, and require collateral and a guarantor. These loans are provided outside of the group lending process, and the loan amount is usually higher than that of income generating loans. Furthermore, a rigorous assessment of the individual’s business and the cash flow is conducted before the disbursement of individual loans.
Education Loans: Education loans are provided to clients to ensure that the educational requirements of their children are met.
Consumer Product Loans: Consumer product loans are provided to individuals to improve their quality of lives, by offering them access to products such as cook stoves, mobile phones and solar lights or lanterns.
Dairy Cattle Loans: Dairy cattle loans enable individuals to purchase new cattle, or improve dairy farming activities, thereby increasing their income level.
Agriculture Loans: Agriculture loans help farmers and other individuals in purchasing seeds, fertilizers, livestock and other equipment, thus improving the crop quality and yield.
To be eligible for microfinance, the income limit for a rural household is Rs. 1.25 lakhs, while the income limit for urban and semi-urban households is Rs. 2 lakhs.
While the documentation required for microfinance loans differ from one lender to the other, the following documents are generally required while applying for a loan.
Filled and updated application form
PAN card, passport copy, ration card
Proof of office address
Passport-size photographs of the applicants and co-applicants
Certified copies of MOA/Partnership deed/AOA
Audited financials of the last two years
ITR of partners and/or directors for the previous two years
Bank account statements for the previous six months
Proforma invoice for the equipment that is being financed
Professional qualification certificates for CAs, lawyers, architects and doctors
The microfinance industry has witnessed promising growth over the past year, on the back of burgeoning Indian economy. The microfinance sector has been crucial in improving the overall GDP of the country, by offering loans to marginalized low-income households, along with the micro, small and medium enterprises (MSMEs). The sector continues to play a pivotal role in driving the growth of the unbanked and underbanked population, and is expected to maintain the upward growth trajectory in the near future.
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