Microfinance Loans: Types, Key Features & Advantages | 5paisa (2024)

What Is Microfinance Loan in India?

Microfinance loans help people who can't use regular banks like small business owners and low income families by giving them money to start or grow their businesses. In India these loans have helped around 64 million borrowers. These loans give people money they need to improve their lives and communities helping them build a better future for themselves and their families. However interest rates on microloans are usually higher than those on regular personal loans.

Types of Microfinance Loans in India

In India, many people without access to formal banking services turn to microfinance loans which are provided through Self Help Groups or SHGs and Joint Liability Groups JLGs. Here are some common types of microfinance loans and their purposes.

1. Income Generation Loans: These loans support small businesses or microenterprises. Loan amount depends on the borrower's repayment ability and needs.

2. Mid Term Loans: After repaying income generation loans for 25 weeks borrowers may qualify for mid term loans which are usually the remaining amount of the income generation loan. Repayment terms are agreed upon between borrower and microfinance institution or MFI.

3. Emergency Loans: These interest free loans are available year round for unexpected expenses like medical emergencies or funerals.

4. Individual Loans: Provided to borrowers with collateral and a guarantor these loans are given outside the group lending process. A thorough evaluation of borrower’s business and cash flow is conducted before disbursem*nt.

5. Education Loans: It help borrowers cover their children's educational expenses.

6. Consumer Product Loans: These loans allow borrowers to buy products like cookstoves, mobile phones and solar lights to improve their quality of life.

7. Dairy Cattle Loans: These loans help individuals purchase new cattle or enhance their dairy farming practices to increase income.

8. Agriculture Loans: These loans assist farmers in buying essential resources like seeds, fertilizers and livestock to improve crop quality and yield.

Key Features of Microfinance Loan

Microfinance has several key features.

• Borrowers are usually from low income backgrounds.
• Loans are small known as microloans.
• Loan terms are short.
• No collateral is needed.
• Repayments are made frequently.
• Main purpose of these loans is to generate income.

Advantages of Microfinance Loan in India

Small Loan Amounts

Microfinance loans are a lifeline for those excluded from traditional banking. They offer small sums usually between ₹8,000 and ₹60,000 to people who are often overlooked by banks. These loans cater to specific financial needs of low income individuals and families. They can be used to kickstart small businesses, purchase essential items or handle unexpected expenses all of which can improve their financial well being.

But the benefits don't stop there. Repaying these small loans also helps borrowers establish a credit history. This is crucial because it opens doors to bigger loans and other financial services down the road. In essence, microfinance isn't just about providing money it's about empowering individuals to build a better future for themselves and their families.

Affordable Interest Rates

Traditional lending models can be tough for people with low income or poor credit. They often face high interest rates and fees making it hard to pay back loans and keeping them trapped in debt. On the flip side microfinance institutions usually have a different approach. Many operate as non profits or have a social mission. They offer loans with lower interest rates which makes repayment more manageable and breaks the cycle of debt. This not only helps borrowers but also promotes financial inclusion and fights poverty in communities that are often overlooked by traditional lenders. Some microfinance institutions go beyond just lending money. They provide financial education and training to help borrowers improve their money management skills and become more financially literate.

No Collateral

Microfinance loans are good because you don't need to put up any valuable stuff like your house or equipment as a guarantee to get one. This is really helpful for people with low incomes who might not own much valuable stuff to begin with.

Easy Access to Credit

Microfinance loans are like small loans given to people who don't have access to regular banks, especially those with low incomes. These loans are easier to get because the process to apply is made simple and convenient. Microfinance institutions may come to your home to help you apply or they might use things like mobile banking to make it easier. This helps people who live far from banks or don't know much about banking to still get loans.

Documents Required to Apply for Microfinance Loan in India

When applying for a microfinance loan you will need to provide several documents to be considered for approval:

Passport Sized Photographs: Submit two recent passport sized photographs of borrower which should not be older than six months.

Proof of Identity: Both applicant and co applicant if applicable must provide proof of identity. Acceptable documents include a PAN card or Form 60.

Proof of Address: Proof of address is required for both applicant and coapplicant. Acceptable documents include an Aadhaar card, driving license, passport, voter’s ID, utility bills, lease agreement, trade license or ration card.

Proof of Income: Provide proof of income for the past six months. This can be demonstrated through bank statements, Form 16, payslips, income tax or GST returns and financial statements.

Security Cheque: For Growing Enterprise Loans a post dated cheque for loan amount of ₹1 lakh is required as security.

Proof of House Ownership: If applying for Solidarity Group Loans proof of house ownership is necessary.

Ensure that all required documentation is provided accurately and completely to expedite the loan approval process and enhance the likelihood of loan approval.

Conclusion

Microfinance loans help poor people by giving them small amounts of money to start businesses. This helps them become self sufficient and escape poverty. But it's important to make sure they don't borrow too much or they could end up in more trouble. Overall, these loans are a good thing for helping people and communities grow.