What Is Microfinance? How Does it Work

Published on: 23 May 2023

Modified on: 24 May 2023

Financial services are an efficient way to help meet your personal goals. But how do these solutions impact the economy on a larger scale? By facilitating cash flow and liquidity in the market. But when most of the population cannot access these services, growth gets stunted. 

One reason for the financial exclusion is the stringent eligibility requirements set by institutions. Due to these, individuals in the low-income group are often left out. However, microfinance serves as a viable solution, promoting financial inclusion.

But what is microfinance? Read on to know all about it, its importance, benefits and more.

What is microfinance?

Microfinance in India and across the globe refers to the financial services made accessible to those who cannot access them through traditional institutions. Microfinance was traditionally made available through microfinance institutions (MFIs).

Microfinance companies in India operate similarly to banks, NBFCs and financial institutions that offer services on a larger scale. The difference, however, lies in the fact that MFIs offer services catered to meet the requirements and financial capability of the low-income group.

A key eligibility requirement to avail of microfinance services is the income limit, which is set at ₹3 lacs by the RBI. This is important because companies and institutions offering services to a larger group often have high-income requirements, thus making them inaccessible to the low-income group. 

Given how it benefits individuals and the country as a whole, there has been a tremendous rise in the number of people borrowing from microfinance institutions in India. Realising the need that a microfinance company caters to, banks and NBFCs have started offering basic financial services to the underserved too. 

Types of microfinances

A microfinance company is often differentiated based on the service it offers. Listed below are the basic financial services offered through microfinance:

• Microloans 

A collateral-free credit option that enables borrowers to boost their financial situation by granting access to credit, which in turn helps improve their credit history. This also gives them a chance to avail of larger services from traditional institutions that require a good credit history.

• Microinsurance

Through this, the group can get access to insurance coverage that protects them against unexpected expenses at a lower premium.

• Microsavings

By eliminating the minimum balance requirement, such services encourage the group to invest at their convenience and earn returns on it, ultimately inculcating financial discipline.

Benefits of microfinance

Here are some of the top benefits of microfinance that the underserved enjoy:

• Immediate access to funding that is often not available through traditional institutions
• Offers opportunities for employment by allowing small business owners to grow
• Gives the group a chance to become self-sufficient and meet their goals
• Reduces financial stress and makes better opportunities accessible

Microfinance in India is growing rapidly due to the emerging MFIs and financial institutions, which now offer financial services inclusively. Among the many banks, NBFCs, and financial institutions promoting financially inclusive growth is Fibe. 

Through Fibe, you can get Instant Personal Loan ranging from anywhere between ₹5,000 to ₹5 lacs, affordably. With easy-to-meet eligibility criteria, Fibe aims to make loans accessible even to those who are new to credit.

Download the Fibe instant loan app or log in to our website to apply digitally and get quick access to funds.

FAQs on microfinance

How to apply for microfinance in India?

To avail of microfinance, you need to visit the microfinance institution (MFI) of your choice. Talk to a representative about the service you want, fill out the necessary form, and submit the required documents. Every financial institution, including MFIs, has different processes and requirements. As such, it is crucial that you check these factors before applying.

What documents do I need to submit to avail of a microfinance loan?

The documents you need to submit to get a microfinance loan depend on the institution you borrow from. Generally, institutions require you to submit your ID proof, address proof, and income proof with a completely filled application form.

How do I know if I am eligible for a microfinance loan?

An important eligibility criterion for microfinance loans is your income, and the RBI has set the income threshold at ₹3 lacs. In addition to this, microfinance institutions may have other eligibility criteria. Therefore, you need to check the eligibility criteria set by the particular institution to know if you qualify for the loan.

What are the benefits of microfinance?

A few of the top benefits of microfinance include immediate access to funds, financing solutions for those excluded from traditional institutions, and better financial growth on a personal and market level.

What is the difference between a bank and a microfinance institution?

A key difference between a bank and a microfinance companies in India is that the latter provides services to people in the low-income group, whereas a bank offers services to people belonging to all income groups.