Small scale businesses, unemployed persons, and lower-income groups often do not have the privilege to indulge in traditional banking services. Therefore, the development of microfinance products and services released the people from the clutches of poverty. Microfinance is small amounts in terms of loans and credits offered to poverty-stricken individuals to raise their living standards and ensure their financial independence.
India, along with other developing countries, witnessed a rise in the microfinancing sector. The majority of borrowers reside in rural areas and have no or limited access to resources. These itsy-bitsy amounts break the chains of poverty, offering the freedom to raise the standards of living. Small businesses gain confidence with access to capital and mark their strong presence in the market.
What is Microfinance?
Micro finance in India offers monetary aids to the unprivileged section making them independent. Many times, small loans come with no collateral. Thus, the interest rates are soaring as the risk of dodging the repayment is higher. Microfinance expands to the small saving schemes and accounts with zero balance, loans, credits, and even insurance. The business is either underdeveloped or non-profitable to get any financial help from big institutions. Even micro insurance lays off interest rates and premium instalments.
Types of Microfinance
Majorly, the SME finance umbrella covers the products with less capital.
● Agricultural Loans – As the name suggests, credit offered to farmers for purchasing fertilizers, and other tools and machinery to reap a good harvest on their lands.
● Group Loans – Small businesses or groups of individuals who act as guarantors for each other can access small credits for their enterprise.
● Insurance – To make good the loss during emergencies or mishaps, even a small insurance policy can relieve the business. These are usually tiny and lesser instalments.
● Individual Business Loans – Tiny amounts to provide a concrete ground for minute organizations, struggling to survive in the market.
● Money transfers – Microfinance is a safe and convenient way to transfer funds. It saves plenty of time and reduces stress, thus focusing on business development and the economy as a whole.
● Zero balance savings accounts – There is no need to run errands in times of emergencies when you can access your saving account hassle-free. Ensuring financial liberty and meeting everyday finances is simple with microfinance.
Importance of Microfinance
Microfinance in India builds capital. It also expands the financial capabilities for small enterprises or low-income individuals. Additionally, it also acts as a resort for those who get rejected by conventional financial institutions. The benefits include:
● Offers creditability – Borrowers are often poor people or women entrepreneurs. They find it tough to get through the formalities of conventional financial services. The loans get rejected due to the lack of documentation, assets, or collateral. Microfinance does not require collateral and is easily accessible without much processing and formalities.
● Minimal defaults – Since the amount of loan is small, and the repayment tenure is short, the chances of defaulting are less. The small credit amounts intend to empower businesses and individuals financially.
● Flourishing education and health sectors – Labours benefit from microfinance and are more likely to educate their children and provide them with health facilities.
● Building blocks to development – Little credit to small business also makes a big difference to their sustainability in the market. These businesses then expand to generate employment opportunities and contribute to a better economy.
● End to Poverty – Low-income groups achieve financial independence through microfinance products and services. These low-lying businesses and people can pull their families out of the current living situations and end the cycle of poverty.
Wrapping things up
Some argue that microfinance is making the individuals lethargic and dependent on loans. The individuals depend on credit for their basic needs than making efforts towards a better life. It can also mean more debts and defaults if the amount is not used correctly. Microfinance has evolved with time. Initially, it was restricted to small entrepreneurs. The transactions were based on the goodwill and relationship with the formal financial organizations, or a group of businesses coming together to take advantage of the loan facility.
