Suganthi is a fashion designer, and dreams of starting her own boutique shop. She has completed a course in fashion design with high distinction. She applies for a 5 Lakh Personal Loan in a microfinance institution (MFI). The loan is sanctioned, and on this Diwali, her dream becomes true.
| Loan Amount | ₹100,000 |
| Interest rate | 8.5% |
| Tenure | 3 Years |
| Monthly EMIs | ₹ 3180 |
| Monthly Income (approximately) | ₹ 40,000 |
| Monthly Income (approximately) for 12 Months | ₹ 40,000*12 = ₹ 480,000 |
Since 2015, the Indian Government has supported young entrepreneurs through its Start-up India program. That’s why Suganthi’s dream became a reality. Do you want your business dream to become real? Read this blog to learn more about microfinance.
Introduction
The boundaries to own a business keep on expanding every year in India. This becomes real only when the financial institutions bankroll it. The low-income people with innovative ideas to start a business always lag due to inaccessible funds. That’s where microfinance embeds its financial support.
Microfinance has become a powerful financial tool for those who do not have access to traditional banks. It provides credit to low-income individuals, farmers, and other budding entrepreneurs. Microfinance provides credit to rural populations and empowers the rural economy.
Microfinance Loans – A Comprehensive Understanding
It is a small-scale credit facility provided to entities that have limited access to conventional banking. The main objective is to provide financial support to low-income people, small-scale business owners, and entrepreneurs. These people do not have any resources or assets to pledge as collateral.
Microfinance mitigates poverty and financial exclusion. Access to credit empowers low-income people to start their business and expand it drastically. All the financial products through microfinance institutions (MFIs) have minimal documentation and hassle-free processes. The Microfinance loan rises to 24.5% in 2023-2024.
Diversity in Microfinance
The demand for microfinance products is high. It becomes inevitable in rural areas of our country. It can be classified into three types:
- Microloans – It is a loan provided to start a small-scale business, agriculture, purchasing livestock, and other micro businesses. Those who have low incomes and lack access to conventional banking services can apply for microfinance. For example, farmers take microloans to purchase pesticides worth ₹5000 and machinery worth ₹ 2500.
- Micro Savings – Microfinance institutions encourage micro savings to build a safe financial net. These savings accounts do not require a minimum balance to maintain. Hence it becomes more accessible to low-income people. For example, the daily wager worker cannot maintain ₹5000-₹10,000 as the minimum bank balance.
- Micro Insurance – It is an insurance coverage for the people from low-income strata. The premiums for the insurance policies are low. It includes medical coverage, crop insurance, and protection from natural disasters. For example, a monthly premium of ₹ 800-₹ 1000 is more for daily wage workers.
Goals of Microfinance:
- Poverty Eradication: Microfinance aims to reduce poverty. Hence it focuses on providing loans to low-income people.
- Financial Accessibility: It provides financial support to those who have limited access to traditional banking.
- Small-Scale Business Support: Microfinance empowers budding entrepreneurs to start their businesses.
- Financial Support for Women: Microfinance supports women entrepreneurs. It aims to bankroll the money for their start-up business.
- Community Development: It focuses on the holistic development of a community by providing loans to low-income individuals. This brings benefits to the entire community.
How does it change life?
Many microfinance changes the lives of people from lower income strata. It enables them to start their own business. It provides employment opportunities and improves their lifestyle. The documentation process in microfinance is also minimal. Anyone with minimum literacy can understand how microfinance transitions a business.
For example:
Kumari has taken a loan amount of Rs. 100,000 from MFI to start her tailoring shop. The interest rate was 25% per annum. The repayment period was five years.
Let’s deconstruct how she could have paid in five years:
| Sewing Machines Cost | Rs. 30,000 (2 qts) |
| One Assistant Salary | Rs. 8000 per month |
| Shop Rent | Rs. 5000 per month |
| Average monthly income | Rs. 40,000 |
So after deducing the above-mentioned expenditures without income for the first month, the remaining amount is Rs. 57,000.
- The interest rate of 25% p.a. on Rs. 100,000 is Rs. 25,000.
- If the interest was deducted, the remaining amount would be Rs. 32,000, which was her actual income for the first month.
When you add the remaining amount and the first month’s income of her shop, it is Rs. 72,000.
- If the same calculation continued from the second month, her monthly income would be Rs. 27,000. (Subtraction of shop rent and salary).
- With this salary, she could have a careful budget to repay the loan in five years.
- So her yearly income could be Rs. 324,000 (12 months multiplied by monthly income).
Conclusion
Microfinance is a financial tool that can change the lives of low-income people’s life. The collateral-free loans by MFIs can empower an individual. It focuses on low-income people and motivates them to start their businesses. Many benefits in microfinance benefit aspiring entrepreneurs.