Micro Loans

Small businesses make up for a large percentage of the economy coming into the Indian government. However, start-ups like these often struggle to meet their financial requirements which are needed to run their businesses, creating undue hold ups in sustenance. In such situations, micro loans are very helpful in providing small financial aid to small businesses, including start-ups, micro enterprises/entrepreneurs, self-employed professionals and other individuals who have low capital requirements.

What are Micro Loans?

Micro loans are short-term loans which comprise of smaller loan amounts which are extended to lower income entities including micro-enterprises/entrepreneurs, low income group families, start-ups, small businesses and basically anyone who is falling short of financial aid to run their businesses and have little to almost no access to this aid.

Basically, it is how insurance, credit, money transfers and access to savings accounts are made available for such business owners, more so in the underdeveloped part of the nation. Usually, the recipients of such loans are mainly those who are unable to avail traditional loans such as business and personal loans.

The government of India is helping Reserve Bank of India (RBI) in reaching out to the under banked as well as unbanked people to help then with funding by partnering with micro finance companies (MFCs) and private limited companies. While the primary objective of these short-term loans is to offer financial aid to such companies, it also aims in the smooth functioning of socio-economic development, promoting start-ups, reinforce self-help groups and also encouraging female entrepreneurs to become more independent.

Key Objectives of Micro Finance Loans

The key objectives of micro loans are stated below;

  1. Promoting socio-economic development 
  2. Promoting start-ups 
  3. Reinforcing self-help groups 
  4. Encouraging female entrepreneurs to be more independent 
  5. Offering financial aid to start-ups to operate successfully

Who Avails Micro Finance Loans

The following types of entities, mainly engage in availing micro loans;

  1. Unemployed people 
  2. Female entrepreneurs 
  3. Sole proprietorship
  4. Small scale retailers 
  5. Small scale traders 
  6. Small scale manufacturers 
  7. Consultants 
  8. Start-ups
  9. Self-employed people 
  10. Minimum wage workers/labourers
  11. Minorities 
  12. Low income group 
  13. Unbanked or under banked people

Micro Loans: Features

Stated below are the key features of micro loans;

  1. They are eligible to give a loan amount ranging from Rs. 50,000 – Rs. 1,50,000 to people from urban and rural areas 
  2. They offer financial aid to low-income groups through relaxed provisions 
  3. They encourage small businesses and start-ups to function successfully 
  4. They have higher interest rates as compared to traditional loans 
  5. They are short-term loans 
  6. The loans that are availed microfinance are of small amounts 
  7. Income generation is the main purpose of such loans 
  8. Borrowers of micro loans usually hail from low income backgrounds

Micro Loans: Advantages

The following mentioned benefits can help determine if you wish to apply for a microloan;

  1. Despite the loan amounts being small, you can still get up to Rs. 45 lakhs with micro loans, provided you meet the eligibility criteria
  2. There is a flexible payment tenor with micro loans which you can pay back within 84 months. This can be selected by you as per your convenience, as long as it is within the stipulated 84 months deadline
  3. Acquiring a micro loan involves very little paperwork and a quick online application process
  4. Micro loans offer prompt disbursal of funds once the application has been approved
  5. Requires minimal documentation work 
  6. Urgent fund requirements are met due to the quick disbursal of loan amount, offering extreme convenience to those in need, even during unanticipated financial requirements 
  7. In addition to funding small entities and entrepreneurs, micro loans can also provide housing loans, working capital loans and business loans 
  8. There is a flexi loan facility offered in which you can withdraw the money as and when you require from the approved limit. In such a situation, you will only be liable to pay interest on the actual amount borrowed and not the entire sanctioned amount
  9. Payments can be done in easy monthly instalments (EMI’s)
  10. Micro loans are collateral-free loans which makes the paperwork less cumbersome and hassle-free, not to mention the reduced stress of holding any assets against capital borrowed
  11. Micro finance loans promote self-sufficiency and also provide a sustainable profit in the long run

Micro Loans: Disadvantages

While we have gone over the advantages and features of micro loans, it is also imperative to take note of the disadvantages, however few they might be. 

  1. Harsh repayment criteria: Micro finance companies have the authority to impose harsh repayment options in the absence of legitimate working compliances and protocols. This can cause a state of financial crisis and added debt so one must be careful to not get manipulated by unethical repayment practices. 
  2. Higher Interest Rates: Micro finance companies, despite working in compliance with RBI, do not offer low-interest rates on repayment. Since they do not follow the same trends as traditional bank loans in which accumulation of funds can be cumbersome for them, the operating cost becomes high and the borrower has to pay higher interest rates. However, this is a small price to pay, considering the numerous advantages of micro loans. 
  3. Small Loan Amounts: Micro loans, as the name suggest, offer micro loan amounts, apt for smaller and low income businesses, entities and entrepreneurs. Due to no collateral being held against the amounts, they are unable to disburse higher amounts.

Types of Micro Finance Options

There are mainly three types of micro finance loans which are:

S.No. 

Types of Micro Loans 

Description 

1. 

Micro Loans 

Micro finance loans are important as they are offered to borrowers with no collateral against the loan amount. The idea behind such loans is that its recipients overcome small loans and then be able to avail traditional bank loans for further financial aid. 

2. 

Micro Savings 

Micro savings accounts facilitate business owners to operate savings accounts without the requirement of a minimum balance. Such accounts help account holders in maintaining financial discipline and also entice them to save for the future. 

3. 

Micro Insurance 

Micro insurance is a type of insurance coverage offered to receivers of micro loans. These plans have comparatively low premium rates than traditional insurance plans. 

While the above mentioned three types of micro finance options are the most common and beneficial, some micro finance companies also offer another type of financing options called Micro LAP (loans against property). This is offered to individuals as well as small and medium businesses at very competitive rates.

Eligibility Criteria for Micro Loans

Now, availing micro loans is an easy process which is hassle-free. However, you would need to match the eligibility criteria for the same to facilitate a smooth process. The eligibility criteria for micro loans is;

  1. The age of the borrower should be between 24 years and 70 years (note that at the maturity of the loan, age should be 70 years)
  2. The business on which the loan is being taken for should be functional for a minimum of three years 
  3. Your credit score should be a minimum of 685 to be able to avail a micro loan 
  4. You should not have taken a similar loan from another micro finance company

Documents Required to Avail a Micro Loan

The following documents are required when applying for a micro loan;

  1. Identify proof – Know Your Customer (KYC) documents such as PAN card, Aadhar card, driver’s license, voter’s ID, etc. 
  2. Proof of Income – Income tax return copies of minimum 1 year validity, 6 months recent bank statements, profit and loss statement of the recent most two years and an audit balance sheet. 
  3. Proof of Address – Electricity bill, trade licence, telephone bill, passport and/or lease agreement.
  4. Proof of Business Ownership – Business registration certificates, tax records, partnership as well as private limited company deeds as well as any other ID or Address proof documents as required by the financing company.

Interest Rates and Fees for Micro Loans

Interest rates and fees for micro loans vary from company to company. Usually, an average of 17% is expected as an interest rate where as a processing charge of around 2% of the approved loan value is levied. Taxes as always, are over and above any specific payments. In case of a penalty, a 2% charge per month will be levied approximately.

Institutions that Offer Micro Loans

Micro finance loans are provided by the following mentioned sources;

  1. Formal institutions such as cooperative banks and rural banks 
  2. Informal sources such as small-scale lenders and shopkeepers
  3. Semiformal establishments such as non-government organisations (NGO’s)
  4. Commercial banks
  5. Credit Unions 
  6. Sectors of government banks 
  7. Cooperatives 

Microfinance loans are a great business model for people who wish to work for the well-being of the underprivileged strata of India’s society. It is also an amazing financial aid for anyone who is struggling to make ends meet for running their businesses successfully. While it is aimed at the low income groups, such loans are also available for small-scale businesses outside this group, provided they frame their projections accurately. To make things even better for borrowers, the registration process and application has been made quite easy, with the least amount of paper work and a selected few documents to submit. Go through the several micro financing companies to decide which one works best for your needs.

Micro Loans FAQs:

1. Why do micro loans come with higher interest rates?

Most micro financing companies do not have a large stack of cash to lend such as traditional banks do. They have to accumulate finance from several sources, making their process tedious. The operational costs are also higher for such companies, considering most of the borrowers are from rural areas. This is the reason, the interest rates are higher in comparison.

2. In case I have a loan amount sanctioned but only use a fraction of that money, do I still need to pay interest for the whole amount?

With the option of flexi pay, you will only be required to repay interest on the amount you have borrowed and not the entire approved loan amount.

3. How can I apply for a micro loan?

It is a simple process in which you need to simply visit the official website of the selected microfinance company and then fill in the loan application online. Along with this, submit all the required documents and then submit the form completely. Once this application has been duly examined, you shall be contacted by the relevant executive of the selected company, after which he/she will help you with further formalities. Usually, within 24 hours of all the documents verification, funds are disbursed.

4. If I am not from a low income background but am in need for funds to run my start-up, can I still be eligible to avail a micro loan?

Yes. If you meet the eligibility criteria and show adequate proof of your shortage in funds of business, you can also apply for a micro loan.

5. In what instalments, should I choose the EMI method pa payment, can I repay the loan amount?

You have the option of selecting from weekly, bi-weekly or monthly instalments when repaying micro loans for women and micro-entrepreneurs while most microfinance equate payments to monthly instalments.

6. In case I am not tech savvy and require the process of loan application to be done offline, is it possible? If so, how?

Most of the microfinance companies are popular and have branches scattered around prominent cities within the country. You can visit the branch, speak to a customer care executive and apply for your micro loan offline as well. The only issue in this is that you have to deal with a lot more paperwork and possibly a few visits to the branch. Alternatively, you can even hire someone such as a finance advisor or accountant to apply for you online.

7. In case I have already availed one loan from one micro finance company, can I still apply for one more from another company?

No. In case you already have applied and successfully received finance from one micro finance company, you are then not considered eligible to apply for another micro loan.

8. Do I need to submit any photographs with my application?

Yes. You will be asked to submit two passport sized photos. Companies might differ from their requirements so ensure you check the website for an exact confirmation.

9. What is the meaning of micro credit?

Micro credit refers to the process of offering small loans to institutions, entities and entrepreneurs of small scale businesses who do not have the means to give any sort of collateral against their loans. This works very well for such business owners who require funds to run their businesses without worrying about heavy debts.

10. Is it a good idea to opt for a micro loan?

This is completely dependent on factors such as the requirement of funds, type of business, sex of borrower, capacity of paying interest, and many more. If you are someone who is running a small business and need a quick but small loan amount, this is a great offer for you. Ideally, if you can, apply for a traditional bank loan so you can enjoy lesser interest rates as well as higher loan amounts. Micro loans are specifically good for people from low economic backgrounds who need immediate funding for their companies.