Access to credit is one of the biggest challenges for low-income households and small entrepreneurs. Traditional banks often require collateral and strong credit history, making it difficult for rural and semi-urban borrowers to secure loans.
This is where Microfinance Loans step in – offering small-ticket loans to individuals, especially women, self-help groups (SHGs), and micro-entrepreneurs.
What Is a Microfinance Loan?
A microfinance loan is a small loan (usually ₹10,000 – ₹1,50,000) offered to low-income individuals who do not have access to traditional banking. These loans are generally unsecured and are provided by Microfinance Institutions (MFIs), NBFCs, and banks.
The purpose is to support income-generating activities such as:
Setting up a small business
Buying livestock or equipment
Funding self-employment projects
Meeting urgent financial needs
Features of Microfinance Loans
Loan Amount: Typically ₹10,000 – ₹1,50,000.
Tenure: 1 to 5 years.
Interest Rate: Regulated by RBI, usually lower than moneylenders.
Collateral: Not required.
Target Group: Low-income households, women entrepreneurs, SHGs.
Benefits of Microfinance Loans
Financial Inclusion: Provides credit access to underserved populations.
Women Empowerment: Many loans target women-led SHGs.
Small Repayments: Easy weekly/monthly repayment structure.
Improves Livelihoods: Supports self-employment and income generation.
Credit Building: Helps borrowers establish credit history.
Challenges in Microfinance
High interest compared to formal bank loans.
Over-indebtedness due to multiple borrowings.
Risk of default in case of crop failure or business loss.
Dependence on SHG/Joint Liability Group for repayment.
RBI Guidelines for Microfinance (2022 onwards)
No collateral required for microfinance loans.
Interest rates must be transparent and not exploitative.
Total loan repayment (EMI) must not exceed 50% of borrower’s household income.
Borrowers must receive loan documents in simple local language.
FAQs
Q1: Who can apply for a microfinance loan?
Low-income individuals, SHGs, and small entrepreneurs without collateral.
Q2: Is collateral required?
No, microfinance loans are unsecured.
Q3: Can microfinance loans be used for personal expenses?
Most loans are meant for income-generating activities, though some flexibility is allowed.
Q4: What is the typical interest rate?
Usually ranges between 10% – 22%, depending on the lender and RBI guidelines.
Q5: Which institutions provide microfinance loans?
NBFC-MFIs, cooperative banks, small finance banks, and SHGs.
Published on : 2nd September
Published by : SMITA
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