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Tata Capital > Blog > Loan for Business > What Are Microfinance Loans: Meaning, Types & How To Apply

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What Are Microfinance Loans: Meaning, Types & How To Apply

What Are Microfinance Loans: Meaning, Types & How To Apply

Microfinance has emerged as a powerful tool for financial inclusion and enhancing credit access in India. It provides financial services to low-income individuals and communities who lack access to traditional banking services. One of the most significant aspects of microfinance in India is micro loans, which are small-sized loans offered to the underprivileged to support their livelihoods and small business ventures. Let’s explore what micro lending is, the different types available, their benefits and how you can apply for these loans in India.

What are Microfinance Loans?

Micro Loans, as the name suggests, are small-scale credit facilities provided to small business owners in India. These are provided to those business people who otherwise do not have access to conventional credit facilities. The aim here is to provide them with necessary resources in the form of micro business loans to start their new business, generate a livelihood and boost their savings. These loans are generally of small amounts and the repayment terms are designed to be flexible and affordable for the borrowers.

Different Types of Microfinance

Microfinance facilities can be divided into the following different categories:

Micro Loans

Micro loans are the primary type of microfinance loans. These loans are typically provided to individuals or small entrepreneurs who lack access to traditional banking services due to low income or lack of collateral. The loan amounts are relatively small and are used for various purposes, including starting or growing small businesses, purchasing livestock, funding agricultural activities or meeting urgent financial needs. Micro loans often come with lower interest rates and longer repayment periods than traditional bank loans. One can simply apply for a micro loan online.

Micro Savings

Microfinance institutions also encourage and facilitate micro savings among their clients. These savings products are designed to help individuals build a safety net and develop a habit of saving regularly. Micro savings accounts usually have zero to minimal opening balance requirements and attract interest to motivate people to save more. This financial discipline not only helps individuals manage their expenses but also makes them eligible for larger loans in the future.

Micro Insurance

Micro insurance is another essential aspect of microfinance that provides insurance coverage to vulnerable sections of society. These insurance products are tailored to meet the specific needs of low-income individuals and protect them from various risks, such as health emergencies, crop failures, accidents and natural disasters. Micro insurance ensures that the poor do not fall further into poverty when faced with unforeseen circumstances.

Benefits of Microfinance

Micro lending has several advantages that contribute to the economic development of underprivileged communities. These include:

Financial Inclusion: Microfinance provides access to financial services for those who find it difficult to access credit through the formal banking sector. This is significant for promoting financial inclusion and economic participation.

Poverty Alleviation: By providing capital for income-generating activities, microfinance helps in poverty reduction and the upliftment of these businesses.

Women Empowerment: Microfinance has been instrumental in empowering women by offering them financial independence and decision-making power within households and businesses.

Entrepreneurship Promotion: Micro loans support the growth of small businesses and entrepreneurship, fostering economic growth and job creation at the grassroots level.

Social Development: Microfinance plays a crucial role in addressing social issues like education, healthcare and sanitation by enabling people to afford essential services.

How Microfinance Works in India?

There are two modes through which micro lending operates in India. These are:

SHG Bank Linkage Programme for Microfinance

One of the most successful models of microfinance in India is the Self-Help Group (SHG) Bank Linkage Programme. Under this model, women from the same socioeconomic background come together to form self-help groups. These groups pool their savings, which are then linked to mainstream banks. The banks provide loans to the SHGs, and the groups, in turn, lend the money to their members based on their needs. This programme has been highly effective in reaching the rural poor and empowering women.

Microfinance Institutions

Apart from the SHG Bank Linkage Programme, there are various Microfinance Institutions (MFIs) in India that provide microfinance services. MFIs are specialised financial institutions that offer a range of microfinance products ranging from micro business loans, micro savings and micro insurance. They cater to both rural and urban populations and operate with a mission to alleviate poverty and foster financial inclusion.

How to Apply for Microfinance Loans in India?

Applying for microfinance loans in India typically involves the following steps:

Research: Identify the MFI or SHG operating in your area and research the types of loans they offer, their eligibility criteria, interest rates and repayment terms.

Documentation: Gather the necessary documents, such as identity proof, address proof, income details and any other documents required by the microfinance institution.

Application: Fill out the loan application form provided by the institution and submit it along with the required documents.

Credit Assessment: The institution will conduct a credit assessment to evaluate your repayment capacity and creditworthiness.

Loan Disbursement: If your loan application is approved, the funds will be disbursed to you as per the agreed terms.

Repayment: Make regular repayments as agreed with the institution to maintain a good credit record and be eligible for future loans.

Summing Up

Microfinance facilities such as micro loans, savings and insurance have proven to be a lifeline for the underprivileged in India, enabling them to improve their lives, build sustainable businesses and contribute to the nation's economic growth. Through various micro lending models such as the SHG Bank Linkage Programme and Microfinance Institutions, lakhs of people have gained access to financial services and opportunities for socio-economic development.

With the changing financial landscape, financial institutions like TATA Capital are also actively working towards increasing credit access. You can apply for different financing facilities such as business loans and personal loans to meet your financing needs. As microfinance continues to evolve and expand, it will play an increasingly significant role in addressing poverty and promoting financial inclusion in the country.

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