A Microfinance Loan is a form of lending typically utilised by those sections of the Indian society who have not had any access to formal banking services in the past.
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 worth Rs. 1,90,684 crores in the first quarter of FY 2019-20, with a 42.9 percent growth over the previous year's corresponding period.
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 bank loans include:
The borrowers of microfinance loans generally come from a low-income background (below the poverty line), with little or no access to traditional financial services.
The loans offered to the borrowers are usually small amounts, i.e., microloans.
The tenure of microfinance loans is short and is typically from 12-24 months.
Microfinance loans do not require any 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.
Documentation required for microfinance loans differs from one lender to another; 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 the 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 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 soon.
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A Microfinance Loan is a form of lending that is typically utilised by those sections of the Indian society who have not had any kind of access to formal banking services in the past. Typically, an individual takes up a MFI Loan if they have to start or expand their business or need to take care of personal emergencies, amongst other things.
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A Microfinance Loan system functions like any other form of lending options out there. However, in the case of Microfinance Loans, the amount disbursed to the borrower are relatively small and are meant to meet the requirements of the people who belong to Economically underprivileged backgrounds.
Microfinance loans have been divided into subtypes, based on the kinds of needs they cater to. The forms of MFI Loans that are currently granted by Indian lending institutions are the likes of Income Generation Loans, Mid-Term Loans, Emergency Loans, Individual Loans, Education Loans, Consumer Product Loans, Dairy Cattle Loans and Agriculture Loans.
Microfinance Loans attract interest rates starting from 10.5% p.a. Depending upon the kind of Microfinance Loan a borrower wants to go for, the interest rates for the same can go up to 22% p.a.
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