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Microfinance is a term used to label the credit facility provided to unemployed or low-income individuals or groups who have no or limited access to financial services. A microfinance loan allows people to acquire small business loans easily without having to approach loan sharks or banks with stringent loan approval criteria.

What is a microfinance loan?

Also called microcredit, microfinance loans aimed to alleviate the poverty in India by providing easy access to small loans to low-income sections and individuals from rural areas. Microfinance loans in India are provided by banks, NBFCs, Microfinance Institutions (MFIs), rural banks, etc. The institutions which are involved in micro credit lending are called microfinance companies.

History of microfinance

The concept of microfinance was first introduced by Prof. Muhammad Yunus, a highly acclaimed Bangladesh economist. He provided small loans to help poor people start businesses through his Bangladesh-based Grameen Bank. He believed that with a little financial help poor people also could become entrepreneurs.

He even won a Nobel Prize for Peace in 2006 for his Grameen bank efforts in Bangladesh which the Nobel committee cited as “his efforts to create economic and social development from below”.

The history of microfinance in India started with SEWA Bank, a division of the Self-Employed Women’s Association (SEWA), in Gujarat in 1974.  Then it was spread to various parts of the country and picked up by many financial institutions.

Importance of microfinance

Microfinance loans allow people to avail collateral-free small business loans. This helps entrepreneurs avoid borrowing from informal money lenders who charge exorbitant interest rates. They can take loans as low as ₹20,000 for their business expenses. These loans require no security and have relaxed eligibility requirements.

Features of microfinance

Given below are the common features of microfinance loans disbursed in India:

  • Given to business owners and entrepreneurs in the low-income section of society.
  • Loans amounts availed are usually low. They usually range between ₹20,000 to ₹50,000 but can go higher depending on the institution.
  • No collateral is required.
  • Short loan repayment period.

Microfinance models in India

There are different types of microfinance loan models disbursed by financial institutions of India:

  • Grameen bank

As mentioned earlier, Grameen bank was an effort by Prof Yunus to provide microfinance for low-income groups. India has a large number of Grameen banks and are also called RRBs (Regional Rural Banks). Here are some of the famous Grameen banks established in India:

Regional Rural Bank Sponsor Bank
J&K Grameen Bank J&K Bank Ltd.
Karnataka Gramin Bank Canara Bank
Odisha Gramya Bank Indian Overseas Bank
Tamil Nadu Grama Bank Indian Bank
Kerala Gramin Bank Canara Bank
Punjab Gramin Bank Punjab National Bank
Maharashtra Gramin Bank Bank of Maharashtra
Meghalaya Rural Bank State Bank of India
  • Joint Liability Group

Joint Liability Group (JLG) is an informal group of 4 to 10 individuals who have come together to avail a bank loan either individually or through the group mechanism against a mutual guarantee.

NGOs, Farmers’ Cubs, Farmers Associations, Panchayat Raj Institutions (PRIs), Krishi Vikas Kendras (KVKs), State Agriculture Universities (SAUs), etc., can form JLGs. A joint liability guarantee is to be submitted by the group to avail a microfinance loan.

Business Loan
  • Self-help Group

A group of people coming together united with a common initiative is called a Self-help Group or SHG. One successful SHG initiative is Kudumbashree, the Kerala state’s Poverty Eradication Mission that was launched in 1998.

These are small all-women neighbourhood groups established in different areas (neighbourhoods) of a district. As a part of this initiative members of the SHG work together on a variety of issues like health, nutrition and agriculture. Each individual can collect income and seek microcredit while working under this scheme. These initiatives are promoting financial independence in backward areas.

  • Rural cooperative banks

Cooperatives are a voluntary association of individuals who come together to advance their economic interest. Cooperative banks provide loans to farmers, small businesses, startups, individuals, etc., at low interest rates. These banks are usually present in rural areas of India.

Sources of microfinance loans in India

The different types of institutions offering microfinance in India:

  • Cooperatives
  • Non-governmental organisations (NGOs)
  • MFIs
  • Credit unions
  • NBFCs
  • Commercial banks

Documents required for microfinance loan

You can easily apply for a microfinance loan online. You can visit your preferred financial institution and check for microfinance loan details and eligibility requirements for the loan product. Here are some of the common documents required for businesses availing microfinance loans:

  • Business PAN
  • Aadhaar card
  • Income Tax Returns of the years specified
  • Bank account statements
  • Partnership deed/AOA/MOA
  • Proof of office address
  • Audited financials of the years specified

The eligibility criteria for microfinance loans depends on the type of business loan you will be availing. The financial institutions are not very stringent when it comes to eligibility requirements for microfinance loans as these are low risk investments for these institutions. Websites of many financial institutions have a page where you can fill in requested information and check whether you are eligible for their loan product.

How to get microfinance loans in India?

You can avail a microfinance loan from any of the financial institutions in India with microcredit facility. Most institutions have this option including specialised microfinance bank loans schemes from MFIs. Here are some of the MFIs you can avail a microfinance loan from:

  • Bandhan Financial Services Pvt Ltd
  • ESAF Microfinance and Investments Pvt Ltd
  • Equitas Microfinance Pvt Ltd
  • Ujjivan Financial Services
  • Shri Kshetra Dharmasthala Rural Development Project
  • Asirvad Microfinance Pvt Ltd

You can also try visiting Tata nexarc’s Business Loans for collateral free business loans. You can get a get a loan offer in 5 minutes with interest rates that start at only 13% p.a.

Priyanka Babu

Priyanka is a seasoned content marketing professional with more than 6 years of experience crafting various forms of business and technology sector content. Her insightful writing tackles critical issues faced by small-scale manufacturing businesses. Priyanka’s clear and concise communication empowers businesses to make informed decisions and thrive in today’s dynamic business environment.