Microfinance : An Incredibly Powerful Tool

Microfinance An Incredibly Powerful Tool

Microfinance is a concept that is assisting the poor to avail set out opportunities for economic development. By providing small-scale savings, credit, insurance, and other financial services to poor and low-income households, microfinance has completed the efforts of rural development, women’s empowerment, and wealth generation in India. Microfinance thus is a useful and valuable tool to empower the poor and help the economic development process. 

Microfinance has evolved as a result of the efforts of dedicated individuals and financial institutions to encourage self-employment, alleviate poverty, and provide social security. India has had the option to foster its own model of microfinance associations as reserve funds and acknowledge bunches known as the Self improvement Gathering (SHGs), which are bank-linked. These SHGs are fundamentally shaped and overseen by women and this has turned into an instrument, which has prompted women empowerment and social change. The majority of Indian microfinance institutions make an effort to offer savings and insurance services in addition to savings and credit groups.

One of the most significant methods for promoting financial inclusion is microfinance. By providing credit at the last mile, microfinance contributes significantly to inclusive growth and serves as a safety net for those at the bottom of the pyramid.

Repayment and Household Income Criteria:

In the past, an NBFC-MFI’s microfinance borrower was determined by the individual borrower’s annual household income, which was limited to a maximum of 1.25 lakh for rural areas and 2 lakh for urban and semi-urban areas. The threshold for household income has been standardized between rural and urban households to a single limit of 3 lakh in order to meet the expanding requirements of MFI borrowers and shifting demographics. In addition to increasing the amount of loans that are eligible, the new framework also aims to provide loans to households with lower incomes that are within their repayment capacity.

Features of microfinance

Collateral requirement: The fact that collateral is rarely required is the primary feature of microfinance’s lines of credit and loans. Numerous microfinancing establishments offer security free monetary administrations to organizations and people.

Economic status of borrowers:  In most cases, people with low incomes or small businesses are the borrowers in microfinance. The goal is to offer financial assistance to small business owners and people who do not have easy access to banking options.

Amount of loans:  In most cases, microfinance institutions offer loans and lines of credit in smaller amounts. The amount could vary based on things like the kind of business and where it is located.

Loan tenure: The individuals can repay the loan amount in smaller installments, microfinance loans typically have a short tenure. The borrowers reimburse how much the credit inside the time span that miniature supporting establishments choose.

Purpose: Individuals with low incomes and small businesses qualify for microfinance loans. Therefore, the primary objective of microfinance institutions is to generate revenue for businesses in underdeveloped regions of the nation.

Benefits of Microfinance

Microfinance can be of social and financial benefit to individuals and small businesses alike. They cultivate independence and long-term viability in their company’s financial operations. Entrepreneurs are encouraged and given the confidence to start a small business through microfinance. Additionally, it enables individuals to use their savings for essential goals like power installation or other necessities. Individuals and small businesses alike can realize their goals with the assistance of microfinance. Security, economic expansion, and business opportunities are all provided by microfinance. The following are some of the benefits of microfinance:

Provides accessibility: Major banks frequently deny loans to people with little or no assets. Loans from microfinance institutions are readily available for low-income small businesses. Numerous business people find it challenging to give ID or affirmation to the conventional banks for credits. Microfinance makes it simpler for them to get monetary help.

Offers better loan repayment: In order to repay loans, microfinance helps individuals and businesses become financially independent. Women entrepreneurs receive preferential loan repayment terms from numerous microfinance institutions. Furnishing more ladies with the advantages of microfinancing can straightforwardly help in ladies strengthening.

Provide education opportunities: In rural areas, farming provides income for many small families. They might find it hard to put a lot of money into their children’s education because of this. Additionally, these families may need men on the farm, so their children typically work alongside them. In situations like these, microfinance can assist families in concentrating on giving their children a better education.

Opens possibilities for future investments: Due to a lack of income, small businesses in rural areas occasionally compromise on their fundamental needs. This may have a direct impact on revenue and profits. These kinds of businesses benefit from microfinancing because it helps them meet their most fundamental needs, reduce financial obstacles, and move forward. The likelihood of future investments may also rise when all of a small business’s fundamental needs are met.

Creates job opportunities: Businesses frequently have the opportunity to generate employment through microfinancing. Organizations can recruit representatives for various work jobs. A microfinance-funded business can help the local economy grow and create employment opportunities.

Types of Microfinance


Microcredit is a section of the larger microfinance industry which aims to provide low-income individuals with credit, savings, insurance, and other possible financial services, including microcredit. In the context of microcredit, the term “micro” refers to the relatively insignificant sums that businesses borrow or save. Different interest rates may be requested by microcredit providers than by conventional loan providers.

The reason behind this may be due to the disparity between the costs of providing large loans in developed urban areas and those of providing smaller loans in rural areas. Microcredits may be needed for a small amount of money by low-income people in rural areas. A farmer might, for instance, need modest funds to purchase season-appropriate seeds. The microcredit institutions may be able to provide the farmer with small loans and credit lines in this instance.


When starting a business, many entrepreneurs or individuals may need a small loan. Individuals can obtain microloans, which are short-term loans in small amounts offered by microfinance institutions. Microloans are available to self-employed individuals, manufacturers, traders, or small retailers, women entrepreneurs, and those earning less than the federal poverty level.

Microloans can be useful for a variety of business-related tasks, such as starting a new small business, paying employees’ salaries, and maintaining cash flow. The primary goal of financing a microloan is to support new businesses and encourage socioeconomic growth.


Microinsurance is available to low-income individuals who work in the informal sector. Some national programs can meet local needs and fall under the umbrella of “microinsurance.” It is the practice by which insurance companies can break up traditional insurance contracts into smaller ones.

Microinsurance can be useful for one-time occurrences like a one-day trip or medical emergencies. Because it provides coverage, microinsurance is beneficial to individuals and businesses with few assets. A lot of microinsurance companies also cover business risks, like crop losses for an agricultural business.

Micro savings

Individuals and businesses can save money in smaller amounts or increments with micro savings accounts. It may be difficult to save money for many low-income people. They can avoid the challenges they face when saving with micro savings. The rates of interest on these kinds of savings accounts can fluctuate based on a variety of factors.

There are many advantages to microsavings, including no service fees, no minimum deposit requirements, and flexible withdrawal options. Mobile saving applications are used by many institutions to provide microsavings. The method of microsavings can be beneficial to both individuals and businesses attempting to establish a regular saving routine.


Microfinance institutions and entities must establish collection support committees to provide credit officers and first-line employees with logistical assistance. For clients to work on and improve their businesses, there needs to be a clear and comprehensive policy. One way to do this is to partner with the client in their activities in exchange for the loan they owe, or to restructure and reschedule the debt or project. Microfinance institutions and entities must form committees for clients who have not paid their loans and move them to portfolios managed by credit specialists who are specialized in scheduling loans.

Determining the internal needs of the institutions in order to enable them to provide restructuring services then helping the institutions train loan officers that are specialized in restructuring and managing late payments in each finance institution. Following up with donors to obtain technical and financial support for establishing a Loan Guarantee Fund. This guarantee should be given to the loan portfolios of microfinance institutions in the donor’s currency or in USD to safeguard at least half of the portfolios and protect them from the risk of their value falling due to a collapse in the local currency.

Frequently Asked Questions:

Q 1. When taking out a loan from a microfinance company, what do customers need to keep in mind?

Ans. The customer should keep in mind the following:

  1. a) At any point in the microfinance loan, it is pointless to keep any deposit, margin, collateral, or primary security with the lender.
  2. b) The borrower must receive a loan card from the lender that contains the following information in a language that the borrower understands:

Data which enough distinguishes the borrower

Simplified pricing fact sheet

The loan’s additional terms and conditions

Acknowledgments from the lender for each and every repayment, including the final discharge and any installments received; and information about the grievance redress system, such as the name and phone number of the lender’s nodal officer.

  1. c) Any non-credit product purchase is entirely voluntary. The fee structure must clearly state the pricing structure for these products.
  2. d) The lenders provide training at no cost.

Q 2. What are the costs associated with obtaining a microfinance loan for a customer?

Ans. The only charges that a customer is required to pay are those that are specifically mentioned in the lender’s fact sheet. In addition, the customer ought to be aware of the following:

Microfinance loans do not have a penalty for early repayment.

Any penalty for late payment can only be applied to the amount overdue, not the entire loan amount.

Any rate or other charge change must be communicated to the borrower in writing well in advance, and these changes only take effect in the future.

Q 3. How can a borrower find out the current interest rates charged on the microfinance loans?

Ans. The Reserve Bank of India (RBI) has mandated that lenders display the minimum, maximum and average interest rates charged on microfinance loans on their websites, as well as in the literature (information booklets and pamphlets) they distribute.

Q 4. Whether loans for consumption (such as for purchase of gadgets, ceremony expense etc.) without collateral would be treated as microfinance loans?

Ans. All loans without collateral to individuals or households with annual incomes of less than 3,000,000 rupees are considered as microfinance loans.