Micro Finance
Finances are essential for the development of the economy for different purposes, type of customers and every range of finance requirement. Micro Lending or Micro Finance is an industry where people or entities require finances for comparatively low amount. From a space of unregulated and exploitive lenders existing within the neighbour or same community, Micro Lending helps the borrowers to take loan from bodies regulated by government and bypassing the exploitation and whimsical decisions of unregulated lenders.
Who require Micro Finances?
The requirement or necessity of Micro Finances differs for each individual. With the intent to improve the market presence or for investment in the trade, one may avail the Micro Finance services whereas individuals could have multiple personal or professional engagement, for which small scale finances become necessary for them. Mainly the entities looking for Micro Finances are small scale traders like vegetable vendors, fishermen, etc., and mainly women who are slightly above the below poverty line who require money in order to fulfil various family and social requirements. MSMEs also form a part of customer base of Micro Finance providers who require small finances either to recover or boost their business activities.
Who provide Micro Lending services?
There are institutions called as Micro Finance Institutions (MFIs) which provide finances to various entities seeking small scale financial assistance. Various banks in India are also associated with one or few of MFIs or have their own subsidiaries of MFIs in order to provide financial service to every range of customer or are themselves MFIs. These Micro Lending institutions have to abide by the regulatory framework laid down by Reserve Bank of India (RBI).
What are the advantages of Micro Finances?
The most impressive advantage of opting for Micro Finance is the collateral free loans. People who are economically backward and are below poverty line can approach banks or MFIs without any collateral and can choose from various options of financial loans depending on their requirement and repayment capacity. Micro Finances are also at the perusal of traders or vendors who want to upscale their trade and require only a small amount of money to borrow. With limited paper work, these loans are also disbursed in a shorter period of time making it easy for people who require money immediately.
What are the disadvantages of micro lending?
While the Micro Finances may attract some, the related disadvantage is that the interest is generally high and repayment criteria is also to be strictly followed over a small amount of money lent. However, such conditions seem justified considering the nuances of no collateral, risk management and survival in the industry for these financial institutions.
What has been the growth of Micro Lending in India?
Micro Finances in India started with the Self Help Group Bank formed under NABARD (National Bank for Agriculture and Rural Development) in 1992. The industry as of today has increased multiple times and the awareness has also spread among people who are in need of such finances. Various NBFC-MFIs have been instituted in India since 1992 and the Reserve Bank of India (RBI) regulates the services of MFIs in order to maintain procedure and healthy competition in the economy. RBI has also recently increased the cap limit of MFIs for lending money to the borrower keeping growth of the industry also in its vision.
In five years, India has encountered a rapid growth of Micro Finance industry at the Compound Annual Growth Rate (CAGR) of 48 percent and the valuation has reached 1.87 Lakh Crore Rupees in 2019 from 26 Thousand Crore Rupees in 2015. The customer base has increased from 180 lakhs to 440 lakhs during the same time. Out of all the players in Micro Finance industry, the growth of NBFC-MFIs has increased drastically and currently holds almost 32% of the overall Micro Finance industry portfolio. This significant growth over a short period of time has also triggered various mergers and amalgamations within various MFIs and financial institutions which in turn boosts the lending power and customer base for MFIs. As the customer base increases, the account holders in these MFIs also ameliorates and, in addition, credit availed by MSMEs also increased from 9.3 lakh crore in 2015 to 29.5 lakh crore in 2019.
In comparison with MFIs in 2018 and 2019, the country has also seen increase of MFIs from 160 to 192 and states like Bihar, Maharashtra, Uttar Pradesh and Orrisa has the greatest number of MFIs. This rise is also due to various institutions being set up in rural areas and approaching people who are living in secluded and under developed regions.
What is the future of Micro Finances in India?
Micro Finances are important not only to address the small scale finance requirement within the economy but also to bridge the gap between large scale lending and small scale lending. Micro Finances continue to uplift the small traders or individuals under financial constraint and provide them monetary assistance and another opportunity which they can use for their personal or business benefit. While there is a huge improvement in the credit opportunities in North-East region of the country, there is are significant opportunities for southern and south-east region of the country for these MFIs. Government, on the other hand, is regularly taking initiatives to support and engage with MFIs in India. Numerous steps have been taken by government such as formation of India Micro Finance Equity Fund to support small MFIs, Pradhan Mantri MUDRA Yojana was implemented in 2025 for proper flow of credit to non-corporate small business sector, etc.
Should you opt for Micro Financing or not?
If you qualify the minimum requirements and other conditions for availing this finance assistance, Micro Financing is the best possible solution to go for when dealing with small scale financial problem. People are also becoming more cognisant of opting Micro Insurances which are further promoted by insurance-tech companies with their business models. These insurances help in case of any losses, trade fallouts, governmental restrictions, etc. Emergence of Fintech lenders has made the procedure easier and faster. Digitally advancing of financial services and repayment monitoring has helped the laymen to choose between competitive interest rates and financial models.
