What is micro finance?

It is quite common for banks and financial institutions to not lend money to low income earning individuals. The main reason for not lending out money to them is concerned with the failure of such borrowers to not offer any collateral. Banks are not confident of their repayment capacity.

The solution to this issue is Microfinance. Microfinance offers financial aid to individuals who are not able to get access to loans from various banks. Micro finance institutions offer financial services like loans, insurance, savings, money transfers etc to the low-income group of the society. Micro finance provides structured loans to small business owners to start their own business. Majority of Microfinance loans are offered to woman, unemployed and people with disabilities

Microfinance sector serves as a medium through which the Government can achieve its goal of financial inclusion in the country.
There are basically three types of microfinance products:
These loans are provided to customer without any collaterals.
Micro savings:
Entrepreneurs can use micro saving account with no minimal balance. This encourages to inculcate the habit of savings among rural people.
Micro insurance:
Micro insurance is a coverage given to micro loan borrowers This insurance given to microloan borrowers with low premium.

Why avail micro finance loans?

  • Microfinance facility is given to people from low-income backgrounds
  • Microfinance loans are usually of small amounts
  • There are also microfinance facilities in urban areas for shopkeepers, street vendors, and other small-scale businesses
  • Loans are provided for a short period
  • Microfinance loans do not need any collateral
The different types of institutions offering micro loans are as follows:
  • Commercial Banks
  • PSU Banks
  • Credit Unions
  • Non-governmental Organisation (NGO)

Please note that the interest rates charged for microfinance loans are high as compared to traditional bank loans. Interest rates vary depending on the loan purpose and borrower history.

Drawbacks of microfinance:

Microfinance has been a boon to the underdeveloped regions in India helping many to grow their businesses, improve living conditions and decrease unemployment. However, many borrowers simply use these loans to pay off their existing debt or fund their necessities. The borrowers are not generating income to pay back loans. Adding to that the people in rural areas of India don’t have basic literacy, so imparting in them the knowledge of finance is very challenging.

Amazing facts:

  • Woman are major borrows of microfinance around the world
  • Indian microfinance industry has been growing at a very fast rate as compared to other developing nations like Bangladesh, Vietnam and Peru.
  • Microfinance loans have the highest repayment rate.
  • Tamil Nadu is one of the biggest markets for microfinance in India