Microfinance plays a big role in strengthening the condition of low-income people or groups of people who do not have access to basic banking services. It is also known as microcredit. They provide their clients with microfinance loans, payment systems, savings, and checking accounts, among other products and services. Let us know more about the microfinance services in detail.
What is Microfinance?
Microfinance is a sub-category of financial services especially aimed at improving the condition of poor population segments, especially socially weak and marginalised people. It provides microfinance and other services and products for people or groups of people who have no access to basic banking facilities.
Some of the key highlights of microfinance are given below.
- Microfinance is a financial institution aimed at providing banking services to weaker and marginalised sections of society who do not have access to financial services.
- People in need can take small business loans with microfinance financial services provided by banks.
- Along with loans, it provides services such as checking and savings accounts, microinsurance, payment systems and other services and products to poorer people or groups of people.
- They earn money by charging loans on the interest provided with specific repayment plans.
- It supports the economic growth of small groups and individuals by providing them with conventional banking services. It helps in addressing poverty alleviation and social progress.
- It spreads an important message by creating a world where poor and marginalized people and groups of people get access to a wide range of services and financial products.
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History of Microfinance Financial ServicesÂ
Microfinance services evolved gradually according to the needs of low-income people. These services have existed since the mid-eighteenth century. In the 1970s, Mohammad Yunus, an economist from Bangladesh, founded the Grameen Bank, which became the first major source of loans and other services for weaker people.
Grameen Bank inspired many institutions to provide similar services to support the weaker sections of society. In the 2000s, microfinance services started getting help from government and international organisations. Today, microfinance services have become a major sector of the financial institutions in our country, offering services to millions of people worldwide. According to various surveys, it is expected to be $488 billion by 2030.
How Does Microfinance Work?
Microfinance provides financial services to low-income people or groups who lack access to basic banking facilities. The goal of microfinance is to strengthen and alleviate poverty.Â
Microfinance institutions implement Microfinance services, which help provide the services to the targeted populations. They analyse the creditworthiness of the borrowers based on their 3Cs (Collateral, Capacity, and Character). As the lending amount is smaller, the interest rates are also lower, which helps promote flexible repayment schedules.Â
Most of the banks carry out the necessary assessment and verification by analyzing the CIBIL Score and other criteria to ensure that the borrower can repay the loan within the fixed schedule. They also provide various repayment plans for borrowers. They also provide training and support services to the borrowers and make them aware of the process.
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Benefits of Microfinance Institutions
Some of the benefits of microfinance services are given below.
- They provide financial services to people who do not have access to conventional banking systems. Microfinance provides services such as borrowing, depositing, and investing to borrowers.
- They help eliminate poverty alleviation by providing small loans to entrepreneurs to help them create employment opportunities and improve their living standards.
- They provide their borrowers with flexible loan repayment plans to help them regulate burdens and increase the chances of successful, timely repayment plans.
- With the help of many active microfinance Institutions in our country, poor communities do not have to depend on informal sources of borrowing that can exploit them or charge unfair interest rates and practices.
- The loans on microfinance services are collateral, and there are no requirements for deposit or security.
- Also, the margin for borrower contribution is NIL on these types of loans approved by microfinance.
- These microfinance institutions ensure that everyone has access to basic financial services and can become financially independent, which helps to promote entrepreneurship and startups in India.Â
Eligibility Criteria for Availing Loans from Microfinance ServicesÂ
Some of the eligibility criteria to get microfinance loans easily are mentioned below.
- Individuals have an annual household income of at least 3 lakh rupees.
- Only one person from a household can get a microfinance loan at a time.
- The borrower must not have any existing loan from other MFIs. Also, ensure the pending loan is within INR 1 lakh.
- The borrower must provide relevant documents and must have an active bank account.
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Documents Required for Microfinance Loans
Some of the required documents for verifying microfinance loans are mentioned below.
- Borrowers must provide a valid ID for identity, such as Passport/driver’s licence/voter ID/ PAN.Â
- Must provide proof of address details from any valid ID.
- Documents supporting proof of income must be provided.
- For salaried people, the latest 6-month salary is often asked with a Pay slip and one-year ITR.
- Borrowers without ITR are validated based on local inquiries, predefined information, annual family income, and other relevant documents.
- Last three-year ITR with CA Certified Computation of Income, balance sheet, and capital account statement is required for self-employed people.
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Microfinance FAQs
What is Microfinance?
Microfinance is a sub-category of financial services especially aimed at improving the condition of poor population segments, especially socially weak and marginalised people.
What are the major goals of microfinance services?
Microfinance provides low-interest loans to poor populations or socially weak people who otherwise do not have access to basic banking facilities. They make sure that these people do not get exploited by informal lenders.
How does microfinance work in India?
In India, microfinance is a part of banking services that provide small loan credit to low-income individuals or communities who do not have high collateral or a steady income source to get credit otherwise. It helps in making a means of employment and promotes financial independence.
What are the major benefits of microfinance services?
The major benefit of microfinance services in India is getting small funds without high collateral or security. People from weaker communities are the most important priority under this scheme.
