What Are Microloans How Do They Work

Microloans are temporary loans, typically with a lower amount of loan, that can be utilized by micro-businesses, self-employed people, and small-scale business owners with minimal capital requirements. They are a form of micro or small-scale loan offered to small-scale entrepreneurs and low-income families who need access to lenders or financial institutions.

With the assistance of The Government of India, RBI has initiated several initiatives to connect those who are not banked and unbanked, as well as groups, to the official credit system. This government in India is aiming to offer them the kind of financial assistance they require together with private limited corporations and micro-finance Companies(MFIs). The most sought-after micro-lenders, after MFIs and private limited firms, are non-governmental organizations.

Objective of Microloans

Its primary goal is to promote socioeconomic growth for unbanked or under-banked entrepreneurs and their families. It also hopes to increase the number of Self-Help Groups (SHGs) as well as help in the economic development of the nation. It will help for women entrepreneurs throughout the country. Microloans also referred to as microfinance, are offered by the National Bank for Agricultural and Rural Development (NABARD), which is sponsored and supported by the Government of India.

Who can get microloans?

Microloans are typically accessed through:

  • Retailers
  • Self-employed individuals
  • Traders
  • Sole proprietorships
  • Startups
  • Manufacturers
  • Women entrepreneurs
  • Consultants
  • Individuals in unemployment
  • Workers with minimum wages
  • Minorities, etc.

What is the point of microloans?

Individuals having difficulty getting traditional bank loans usually choose microloans or micro-financing. Microloans were curated to suit various businesses, such as:

  • The first step in launching the next business venture
  • Managing the flow of cash in your daily life
  • Meeting working capital requirement
  • Consolidation of debt
  • Managing day-to-day expenses
  • Paying employees’ salaries and other employees, etc.

How do I apply for microloans?

Borrowers may go to the official website of the MFI (Micro Finance Institution) they prefer, complete an application for a loan, and send along the required documents for microloans. An MFI representative will contact you once they have reviewed your loan request and go through the loan formalities with you. After completing all the documentation and formalities, the loan amount will be deposited into your bank account.

Anyone needing money could seek commercial loans from both public and private banks or NBFCs. Banks and NBFCs’ interest rates are typically lower than Microfinancing Institutions. Generally, borrowers with poor credit scores or without a credit history can apply in the microloan category.

What are the required documents to be submitted for Microloans?

The documentation required to obtain microloans differs between lenders, and below are the types of documents that generally are required:

  • Documentation of office address
  • Photos of passport-size applicants and their co-applicants
  • PAN card, a copy of the Passport Ration card
  • New application form
  • Certified copies of the AOA/MOA/Partnership agreement
  • Repayment history (credit report)
  • Audited financials for the last two years
  • Statements from banks for the last six months
  • Proforma invoice for the equipment that will be financing
  • To be used by lawyers, CAs, physicians, architects, and lawyers. Professional qualifications documents

Wrapping Up

In India, the majority of people need a savings account that is basic. However, people do require financial assistance at some point in their lives for various reasons, such as education, housing, business, or security.

Microloans allow access to money for those who are not banked or underbanked. If microfinance institutions were not providing loans to the disadvantaged segment, those individuals would be left with no alternative than borrowing money from family or friends or falling victim to non-traditional money lenders. They may opt for cash loans that are quick or payday advances, which have high-interest rates, are high too.

Microloans and microfinance help these groups to make wise investments in their requirements, and thus it is in line with the vision of government financial inclusion throughout the country.

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