What are Microfinance Instructions in India, and How Do They Work?

India is a country with 70% of its population living in villages. The population living in villages belongs to the lower economic strata of the country.

These people do not have access to big financing institutions and banks for their money needs and face huge issues in their livelihood. For such people, Microfinance Institutions are like pillars that provide the necessary support.

What is Microfinance?

Microfinance institutions are non-profit organizations that provide financial help to lower economic strata people by giving them loans and insurance. The microfinance institution deals with services like micro-loans, micro-savings, and micro insurance.

Micro Loans or small loans refer to loans of less than one lakh rupees. Earlier, India was not a great market for microfinance companies, but the table has turned. India has developed in the last decade and has 102 million people choosing microfinancing services.

Microfinance companies charge lower interest rates on the loans they give compared to banks and other large financial institutions. Hence, many small business owners and people with money needed approach these companies to finance their loans.

What are the services under Microfinance in India?

Microfinance in India majorly includes the following types of services,

1. Micro Loans:

  • Microloans are provided to the borrowers by the Microfinance institutions without any collateral.
  • The aim of providing micro-loans to prospective borrowers is to make them surpass the smaller loan criteria and make them eligible for traditional bank loans.
  • It is a system that helps build financial discipline and financial literacy for the borrowers to build a strong financial portfolio to be accepted by the banks and larger financing institutions.
  • In Micro Loans, the borrower is not forced to pledge their asset as a security for loan repayment.
  • Hence, it makes the whole process smooth which is why the overall loan repayment rate is better than conventional loans.

2. Micro Savings:

  • Micro Savings Accounts allow small business owners to open and operate savings accounts without any minimum balance policy.
  • The above policy acts as an incentive for them to make an investment and learn financial discipline.
  • In this way, the borrowers can use these funds to invest in their businesses to earn higher returns.

3. Micro Insurance:

  • Micro Insurance Plans by the Microfinance companies ensure to offer insurance coverage to borrow micro-loans at lower premiums.
  • It is a measure to ensure that the economically lower strata people can be financially protected against unforeseen circumstances like accidents, chronic diseases, etc.
  • The best part of the Micro Insurance Plan is that it covers all the risk possibilities that underprivileged people can face in the future.

What are some of the striking features of Microfinance in India?

Microfinance in India has seen drastic growth in the last two decades. The striking features that made way for the promising growth of Microfinance services in India are,

  • Eliminating the need for collateral was a great incentive for people to choose Microfinance services for their financial needs.
  • Banks and larger financial institutions cater to the upper middle class and rich people due to security issues. But, Microfinancing solely focuses on the needy without any greed for security.
  • Most banks do not offer loans below one lakh. On the contrary, microfinance services cater to people who want loans of less than one lakh.
  • Microfinance services provide short, low tenure, unlike banks.
  • It also serves as a great economic tool to uplift the lower economic strata of the country.

What are the types of loans offered under Microfinance?

The different types of loans offered under Microfinance in India are,

  • They offer loans for small business owners to start the business.
  • They offer loans for small business owners to expand their business.
  • They offer loans for women to increase their income generation.
  • They offer loans for medical emergencies.
  • They offer loans for a home extension.

What are the different Microfinance Institutions in India?

Microfinance institutions in India can be categorized into four prominent groups; they are:

Self Help Group (SHG

  • Self-help groups are formed by a group of people belonging to similar socioeconomic backgrounds.
  • It usually consists of a group of small business owners who share a fund mutually for their business needs for a specific period.
  • Usually, the interest rates are cheaper in this group, and there is no need for collateral. The debt collection is mutually handled within the group.
  • Today, many banks partner with such SHGs to improve financial penetration in rural India.

Joint Liability Group (JLG)

  • A Joint Liability Group is a group of four to ten people who avail of loans with a mutual guarantee.
  • The loans in this group are provided majorly for agricultural purposes.
  • The JLG group usually includes- Farmers, Rural Workers, etc.
  • Since it’s a mutual guarantee group, every member is responsible for the timely repayment of the loan.
  • There is no financial supervision required for the JLG group.

Grameen Model Bank

  • In India, the structure of Grameen Model Bank is served by the Regional Rural Banks (RRBs).
  • It is a great initiative to induce financial penetration into the deeper parts of India.
  • It aims to grow the rural economy of India and change it from start to end.

Rural Cooperatives

  • Rural Cooperatives were formed at the time of Independence in India.
  • It is a type of fund through which the financial needs of rural India are met.
  • Through Rural Cooperatives, numerous financial services were offered to rural people.

Financial Literacy is a must in every country. India being a developing country, has faced many issues in incorporating financial literacy due to many taboos and illiteracy.

With great initiatives like Microfinancing, financial penetration into Rural India is increasing. Today, people in rural India are becoming financially dependent and attaining financial literacy.

The loans, savings, and insurance services from Microfinance institutions are helping people build their businesses and grow financially stronger. It is teaching lower strata people to build a great financial portfolio to avail of loans and other services from the traditional banks.

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