Microfinance
Microfinance is a very popular term in today’s financial market scenario. As the name suggests, microfinance refers to microcredit or micro-loan. Microfinance refers to a banking or financial service that is offered by banks or other financial institutions to individuals who belong to the low-income or underprivileged sections of the society. Microfinance can be in the form of loans, insurance, and savings deposits.
It is very helpful to small-sized enterprise owners as well as entrepreneurs with low capital. There are many people across the world, especially in India, who do not have access to proper financial assistance. They live in rural areas as well as in urban areas of India and do not have sufficient knowledge and access to take help from conventional sources of finance such as banks and investors.
Origin of Microfinance in India
Microfinance has been quite a popular and effective mode of financing in the Indian subcontinent. From an early period, people in India used to be involved in lending and credit operations through individual money lending, chit funds, and other indigenous financial institutions. All these modes practiced the system of microfinance very successfully.
The modern and systematic method of offering microfinance or microcredit to individuals started in the 1970s in India.
It chiefly originated when the Grameen Bank was started by Professor Mohammed Yunus in the year 1976 in Bangladesh. It was a pilot project of having a unique lending system where micro loans are offered to the disadvantaged sections of the society, especially the rural poor. This programme was launched to introduce the concept of financial services to the rural poor who never had access to any form of credit.
This iconic event led to the conversion of the project into an autonomous bank. This was done through a government legislation and it came to be known as Grameen Bank. The bank has assisted several poor people in both Bangladesh and India to be financially secure and to improve their financial conditions. This even resulted in the creation of a ‘Grameen model’ which is used by many financial institutions and banks to offer affordable loans to the poor.
There was also Self-Employed Women’s Association (SEWA) that was started by Ela Bhatt. This organisation was unique in its own way. It was an all-women’s bank. It is the first microfinance bank in the country. It was set up in Ahmedabad, Gujarat in the year 1972. It was set up to help women of low-income groups to earn the rights that they are entitled to. It works towards making women independent by offering them the right funds at the right time to help them be self-employed. The institution also offers first-class training to women to help them specialise in handicrafts and other forms of artistry.
India also saw the establishment of National Bank for Agriculture and Rural Development (NABARD) which is exclusively committed to offering inexpensive modes of credit and bank accounts to the people living in rural areas. These people are mainly engaged in agriculture and other artistry activities in the country. The bank observed many unique banking models in order to offer high-quality and affordable finan
Microfinancing is a great way to help poor
individuals to be financially independent. They can use these funds offered by banks at very low rates of interest to start their own small venture or to make their other dreams come true. Many of the underprivileged people in the nation do not have any idea about saving money or managing their finances. When they acquire microfinance from a reliable institution, they will get exposure to managing money on their own and also about utilising funds in a sensible manner.
Microfinance is also offered to people who are interested in purchasing equipment or vehicles of high value that are required for carrying out their business activities. These can be tractors for agriculture, machines for manufacturing textiles, trucks for transportation of the goods created by the small entrepreneurs, etc.
Definition of Microfinancing
Microfinancing is typically defined as the process of providing loans, credit, savings, and other necessary financial services and products to individuals who are extremely poor to get access to the regular sources of finance such as banks or other financial institutions.
Microfinance is provided to the underprivileged people with the belief that charity or philanthropy is not the solution to poverty.
How does Microfinance Work in India?
Both banks and non-banking financial corporations (NBFCs) offer microfinance in India. There are also microfinance institutions in the country that are exclusively dedicated to offering microfinance to people. Microfinance institutions aim at getting people out of poverty and improving poor people’s financial conditions. Microfinance institutions target poor people who are unemployed, who are or want to be entrepreneurs, and who are into farming.
Microfinance is usually procured by loan applicants through 3 modules and they include:
Through banks, non-banking financial corporations, and microfinance institutions.
By establishing good relations with banks or other financial institutions.
By getting together as a group with a common goal of obtaining finance to create and develop new small business ventures or to make a living.
List of Microfinance Institutions in India
In our country, there are a number of institutions that offer microfinance exclusively. We will take a look at only a few select microfinance institutions in the country:
Annapurna Microfinance Pvt Ltd
BSS Microfinance Pvt Ltd
Asirvad Microfinance Pvt Ltd
Disha Microfin Pvt Ltd
Fusion Microfinance Pvt Ltd
Arohan Financial Services Pvt Ltd
Cashpor Micro Credit
Grama Vidiyal Micro Finance Ltd
ESAF Microfinance and Investments Pvt Ltd
Equitas Microfinance Pvt Ltd
Madura Micro Finance Ltd
Satin Creditcare Network Ltd
S.M.I.L.E Microfinance Ltd
Grameen Financial Services Pvt Ltd
Janalakshmi Financial Services Pvt Ltd
SKS Microfinance Ltd
ASA International India Pvt Ltd
Sonata Finance Pvt Ltd
Shree Kshetra Dharmasthala Rural Development Project
RGVN (North East) Microfinance Limited
Swadhaar FinServe Pvt Ltd
Belstar Investment & Finance Pvt Ltd
Suryoday Micro Finance Pvt Ltd
SV Creditline Pvt Ltd
Future Financial Services Ltd
Ujjivan Financial Services Pvt Ltd
Utkarsh Micro Finance Pvt Ltd
Adhikar Microfinance Pvt Ltd
Uttrayan Financial Services Pvt Ltd
Chaitanya India Fin Credit Pvt Ltd
Indian Cooperative Network for Women Ltd
Growing Opportunity Finance (India) Pvt Ltd
M Power Micro Finance Pvt Ltd
Rashtriya Seva Samithi
IDF Financial Services Pvt Ltd
Mahasemam Trust
Pahal Financial Services Pvt Ltd
Humana People to People India
Sahara Utsarga Welfare Society
Margdarshak Financial Services Ltd
Saija Finance Pvt Ltd
Samhita Community Development Services
Vedika Credit Capital Ltd
Sahayog Microfinance Ltd
Shikhar Microfinance Pvt Ltd
YVU Financial Services Pvt Ltd
Sanghamitra Rural Financial Services
Village Financial Services Pvt Ltd
Sarala Women Welfare Society
The Need for Microfinance in India
When an individual belonging to an underprivileged section of the society borrows microfinance from a bank or an NBFC, he or she can make use of the funds for being financially independent. It can help the borrower to be involved in a variety of activities that he or she could not have done without the microfinancing.
Many poor adults in the country may not have had sufficient funds during the early stages of their lives to be educated. Hence, they tend to miss out on the various employment options that are offered to educated people. Therefore, many of them remain unemployed.
There is another category of poor adults who are not educated, but are involved in unskilled labour. Unskilled labour refers to working in the segment that requires limited skills and that offers low wages to the labourers. Unskilled labourers have limited qualification such as high school or diploma or no qualification. Unskilled labour can include construction work, domestic help, security work, laundry, etc.
There is also a category of individuals who live in rural areas and semi-urban areas who are dedicated to farming. They are agriculturists and many of them earn very low incomes. Many of these farmers do not earn enough money for the hard work they put in. They do not have adequate funds to buy a land for sowing crops. They have to rely on rich landlords for renting land and they are forced to pay the little money that they make, to the landlords.
There are also many people who are originally from rural India who move to urban areas for alternative sources of employment apart from agriculture. They get into fields such as cooking, construction, restaurants, housekeeping, etc. and earn low incomes.
Financial Struggles of the Poor People in India
All the above-mentioned low-income individuals struggle to meet even the basic necessities to lead a life. They have very limited funds to get access to food, clothing, shelter, and proper healthcare facilities. Many of them are unable to send their children to school even for basic education.
Many of these people also cannot open bank accounts or apply for traditional loan options as they generally do not meet the minimum eligibility criteria. Banks have specific eligibility criteria where loan applicants or prospective depositors need to meet minimum income, age, and employment requirements. They also need to furnish relevant documents as proofs of identity that are issued by the central government. Many of these underprivileged people may not have any identity proof, which is again due to lack of access or lack of knowledge regarding the importance of government-sanctioned documents. This is where microfinance comes into the picture.
Microcredit or microfinance is offered to people keeping in mind about these above-mentioned requirements for regular bank loans. You can acquire small or micro loans at economical interest rates. Microfinance institutions chiefly work to help people who cannot acquire loans from normal banks. Hence, they make sure that loans are provided to the applicants at very low rates. They ensure that microfinance loan expenses are very minimal.
The purpose of microfinance is to assist low-income people who have the enthusiasm to make their lives better. It provides the right amount of capital to low-income people to start a new small business activity or to finance their child’s education or to buy a small piece of land for carrying out agricultural operations. Microfinance not only supports an individual in starting something new to earn better, it also helps in sustaining their income to have a decent standard of living throughout their life.
Features of Microfinance
Microfinance is typically offered to anyone who does not have a stable source of income due to unemployment. It is also given to those who are involved in contract labour or who work part-time.
It is also given to anyone who does not have a proper credit history that can be verified. Lack of credit history will be mostly due to lack of access to acquire credit.
There are also some applicants who may have a poor credit history due to high debts. They may have entered into debt situations due to shortage of funds to repay. They may also have got into debt troubles due to scams planned by unregistered moneylenders who tend to take advantage of poor people since they do not have much financial knowledge.
Microfinance typically does not require loan applicants to submit any collateral while applying for the loan. These loans are usually unsecured in nature. Even if a microfinance institution does ask for a collateral, they are very reasonable. They understand the financial condition of the applicant.
Microfinance is also offered to people living below poverty line (BPL) since they do not have access to other forms of financing.
Microfinancing promotes simplified and small savings among poor people. It encourages them to build their funds step-by-step.
Microfinancing offers repeat loans to applicants. This helps borrowers repay their loan promptly as the repayment tenure is very short. Once the small loan is repaid on time, the applicants will receive their next loan. A repeat loan is always offered to someone who has already borrowed and shown their capability in repaying it on time.
Microfinance also intends to assist to individuals in securing good medical treatment when they have health issues.
Generally, microfinance institutions approach clients instead of waiting for clients to approach them. They want impoverished people to be aware that there are inexpensive forms of financing.
Microfinance institutions have easy and quick loan application processes.
The interest rate for microfinance is very low.
When a micro loan is offered, the lender does not ask the applicant for the purpose of lending. The loan can be utilised for any purpose.
Some microfinance options also come with micro insurance. Micro insurance is offered as it helps the borrower in protecting his or her credit extensively. The micro insurance facility is very reasonably priced.
Microfinance aims at developing financial sustainability among economically downtrodden people.
Microfinance helps in creating more and more jobs. It enables uneducated people to be involved in some source of employment instead of staying idle.
Microfinance institutions aim to eliminate interest rate ceilings as they believe that these ceilings can restrict poor people from securing finance.
Microfinance focuses on offering financial transparency by offering loans to individuals without any hidden costs or fees or charges.
Microfinance believes that poor people need a broad set of financial services apart from just loans. It also holds that these financial services should be simplified, easily accessible, economical, and flexible in nature. These services include cash transfer facilities, savings schemes with minimal or zero deposit, and micro insurance.
Microfinance for Farmers
There are exclusive microfinance loans that are provided to marginal farmers who need funds for enhancing their productivity of crops. This can be done when they invest in superior quality fertilisers, excellent farming tools, quality check processes, marketing of their crops, packaging of their output, transportation of their output, storage of their output in safe and hygienic warehouses, and proper sales techniques in order to secure the profits that they are entitled to after putting in so much effort for several months.
Many farmers in India do not have sufficient funds or knowledge to invest in these aspects of farming. Microfinance loans aim to guide farmers by providing them with accurate information and funds required to enhance their output.
Microfinance Options for Women
There are many households that have irresponsible male members who do not contribute towards saving money for the family. They tend to use money senselessly on things that are absolutely not required. Many of them spend money on alcohol, gambling, tobacco, etc. without keeping in mind about other expenditures. In such households, the female members are more responsible with money. They are very careful with the little money that they earn and spend it very judiciously. They make sure that the money is not within the reach of the men of the house.
Keeping this in mind, there are many banks, NBFCs, and microfinance institutions that extend microfinance exclusively to women in India. These women borrowers treat microfinance as their saviour and utilise the funds very sensibly.
These microfinance options for women also help in empowering women. There are many households where the men do not permit women to handle money. They expect women to only take care of domestic chores. However, the truth is that many women in several households have proved to be more financially responsible when compared to men. They do not waste money on unnecessary purposes.
Women also make sure that their children attend school sincerely without dropping out of school. When these women take microfinance for their various needs, they will ensure that the funds are utilised for a good purpose. They will ensure that their kids go to school, and this, in turn, will help brighten the future of the society.
One thing is for sure that women will repay their micro finance loans on time. Each installment of the loan will be paid promptly without any delay. This is a great relief for microfinance lenders. Microfinance loans can be repaid through equated monthly installments (EMIs) promptly. Moreover, women will make well-planned decisions for the household.
There are many self-help groups in Indian rural places that are made by women for women. Only women manage these groups and help each other in starting new low-cost business ventures such as handicraft ventures, horticultural ventures, artistry, pickle business ventures, paintings, trinket making activities, and many other business activities that they are good at doing. Since many of them are naturally talented at developing these creations at low costs, they can produce them on a large scale and sell them on various platforms and make profits gradually. The capital for these small business ventures can be generated from microfinance options. The borrower can repay the funds on a monthly basis through installments.
Most importantly, microfinance helps in job creation for women. In most regions of the country, women are forced to be unemployed and are not allowed to step out of their homes. They are restricted to the limits of their house. With the generation of microfinance, women are given an opportunity to showcase their entrepreneurial skills and management abilities. Microfinance also brings women together and encourages them to work as a team to achieve the ultimate goal of being independent. They do not have to rely on men for money or for other aspects. They also do not have to wait for the approval of the male member in the house.
Objectives and Goals of Microfinance
Microfinance primarily works towards making the disadvantaged population self-determined without having to depend on their relatives or friends for funds.
It aims to bring a financial change among the poor people with the help of a community-based approach.
It intends to organise and conduct simple training programmes for unemployed people so that they have some means of livelihood.
Microfinance also intends to assist disabled people who are economically underprivileged. It aims to help them find some source of employment or artistry so that they can fend for themselves.
Microfinance aims to help women of poor families. Institutions that offer microfinance believe that women are more responsible with money and hence, they have exclusive microfinance loan options specially designed for women borrowers.
Microfinance intends to bring gender equality by encouraging women to equally take part in household decision making, financial decision making, and also earn money independently by engaging in any form of employment.
It intends to enhance operations and activities at the grass root level.
Microfinance lays emphasis on optimum utilisation of local resources available in nearby areas and villages in order to minimise transportation costs for bringing resources, etc.
Microfinance aims to raise the wages of the underprivileged people so that their lives can be improved at least a little.
Microfinance aims at attaining socio-economic development at the most basic level of the society.
It serves as a great instrument to eradicate poverty.
It aims to offer loans, accounts, and other financial services to people without asking them for collaterals such as a mortgage or any immovable property or guarantors
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