Microfinance Meaning - Types, Benefits, History and How It Works

Microfinance History

In India, the story of microfinance started in 1974 when SEWA (Self-Employed Women's Association) was established in Gujarat to promote microfinance. Mrs. Ela Bhatt started this urban cooperative bank offering financial services to women employed in Gujarat’s unorganised sectors. After that, many banks began offering financing options to those looking to establish or grow businesses in rural areas. Kudumbashree, Kerala State’s Poverty Education Mission, was one of the most crucial initiatives in this direction in 1998. It is a female-owned community organisation that empowers women in Indian rural and urban areas. These neighbourhood groups work best to promote financial independence in remote and rural areas.

Realising the insufficiency of the existing policies to cater to inferior people’s needs, the Indian government took steps to reduce their financial dependence on unorganised sectors. After the success of Grameen Bank, the National Bank for Agriculture and Rural Development (NABARD) recommended several alternative procedures and policies, including the introduction of microfinance in various banking sectors. With an understanding of microfinance meaning, these are small-size, short-duration loans available without security and lengthy application procedures.

Types of Microfinance

After understanding what is microfinance, let’s look at its types:

• Micro Loans: These are unsecured loans that SME owners from underdeveloped sections of India usually borrow. The main objective of microfinance is to bring a business under the ambit of conventional bank finance and eventually improve its reach.

• Micro Savings: These are accounts that entrepreneurs can open and manage without any minimum balance. Account holders can benefit from interest and diligence with these micro-savings accounts.

• Micro Insurance: Microfinance borrowers can access insurance policies at lower premiums than traditional insurance plans. These plans cushion SME owners against unanticipated circumstances.

Some microfinance providers also need borrowers to take up cash-flow management and bookkeeping training and lessons.
Read Also: Everything you need to learn about microcredit

Benefits of Microfinance

There are innumerable benefits of microfinance for the borrowers. Most importantly, it provides economic resilience, helping individuals and business owners work effectively and alleviate poverty. Business owners can use these loans to run and expand their businesses and accumulate capital for future needs. Since those looking for smaller loans do not attract the interest of most lenders, small loan sanctions from microfinance are great steps to gain financial independence.

Female borrowers get better interest rates on these loans due to their higher sense of responsibility, loyalty, and honesty. Unemployed and disabled people and those who do not qualify for conventional loans can receive these loan products from MFIs. Microfinance breaks the cycle of financial crunch in a family or business and makes more money available, helping them meet their basic needs and improve their well-being. When entrepreneurs borrow microfinance, they create more employment opportunities in the economy and help the nation develop faster.

Importance of Microfinance

Access to microfinance without any collateral requirement helps people obtain loans without pledging any asset as security. Realising the importance of microfinance, eligible applicants can enjoy the benefits with hassle-free procedures and minimal paperwork, enabling them to gain self-dependence quickly. In urgent financial requirements, these funding options are excellent ways to overcome the challenges.

These loans help meet financial requirements and promote self-reliance and entrepreneurship. Eventually, it helps the nation develop and add value to the economy by supporting the SME sector and reducing unemployment. When borrowers use these loans to fulfil their goals, they qualify for traditional loans for their future requirements. These loans allow individuals to borrow money without putting their assets at risk or exhausting their savings. Using a Business Loan or Personal Loan EMI calculator, they can choose a loan tenure with budget-friendly EMIs and handle repayment without stressing their finances.

How Does Microfinancing Work?

Individuals, groups, and businesses who do not qualify for conventional loans often borrow microfinance to fulfil their financial needs. These are smaller amount loans with lower interest rates, flexible repayment terms, and no collateral requirements. Today, many financial institutions sanction instant Personal Loans after determining the applicant’s creditworthiness and repayment capacity. Checking the CIBIL score is one of the most trustable ways of determining the risk in sanctioning a loan application.

Conclusion

Microfinance is a type of financial service that low-income groups and individuals ineligible for conventional financing options can obtain to satisfy their needs. Apart from lending smaller amounts to borrowers with easy eligibility conditions, many financial institutions also offer micro-savings accounts to benefit the account holders. The goal is to make impoverished people financially self-sufficient. Apart from SME loans, borrowers can also obtain instant Personal Loans to fulfil their personal needs like education, home renovation, medical emergency, vacation, or wedding.

Frequently Asked Questions

1. What is MFI's full form?

MFI stands for Micro Finance Institution, a lending institution that offers small financial services to people who do not qualify for conventional loans.

2. Which is the 1st MFI in India?

SEWA (Self-Employed Women’s Association) Bank was established in 1974 as the first microfinance institution in India.

3. What are the objectives of microfinance?

The primary objective of microfinance is to financially support individuals who do not qualify for conventional loans in India.

4. What is an example of a microfinance?

Geeta wants to renovate her house but lacks proof of regular income. As a result, she does not qualify for a conventional loan. In that case, she may apply for microfinance with easier eligibility criteria.

5. What is the difference between MFI and NBFC?

Compared to NBFCs or Non-Banking Financial Companies, MFI or Micro Finance Institutions operate at a smaller level and sanction smaller loans to unqualified loan seekers.