Top Microfinance Company in India

While the Indian population boasts cultural diversity, a diversity that does not make it to the "good list" is income inequality in the masses. Only the country's top 10 per cent accounts for more than half of the national income! Just because the poor spend most of their lives experiencing a lack of funds does not mean they need to get used to this status. Whether it's for daily operational requirements or funds necessary for their businesses, low-income groups need the availability of funds that do not end up with them in the infamous debt traps and inability to meet their minimum requirements. This is where microfinance steps in as a solution to these problems.

Micro Financing in India

Microfinance is a way to ensure that low-income groups get access to a different source of finance structured entirely for them. Microfinance includes banking facilities, small loans, and insurance provided to low-income individuals in the rural and interior parts of India. As the risk on these loans is considerably higher, the interest rates on microfinance loans are higher than traditional personal loans. Micro savings do not require the maintenance of minimum balances in the savings accounts, and Microinsurance ensures minimum coverage for the policyholders to pay a small premium. Traditional institutional credit is mired by miles of red tape and a highly contaminated credit culture. Microfinance is a boon for these small borrowers who escape rapacious moneylenders' vicious cycle of high-interest rates.

Low-income families also escape the debt trap, from high-interest loans being passed on from father to son. In a country where more than half the population does not have a savings account, microfinance is a boon for all small savers.

Sources of Microfinance

Microfinance is a bridge which connects mainstream finance to the backward communities of micro-entrepreneurs, farmers, and other people engaged in low-income professions. The following enterprises provide microfinance services.

• Rural branches of nationalised banks
• Cooperative banks
• Credit Unions
• NGOs
• Individual moneylenders
• Specialised microfinance institutions

Important players in this industry segment and the companies who finance them

This sector has also witnessed the entry of some large private sector banks, including ICICI Bank, Axis Bank and Reliance money, and smaller players. The larger banks act as a conduit of finance to the smaller players. Term Loans provided by these institutions can be repaid every month, quarter or semi-annually. The total repayment period cannot exceed three years, and cash credit loans must be renewed annually. In addition, the large banks partner with several microfinance institutions. Microfinance institutions are intermediaries between these larger financial institutions and smaller borrowers. Some of these banks also provide value-added services like cash management services, salary accounts etc. 

Some of the important players are:

• Arohan Financial Services Pvt Ltd
  
• BSS Microfinance Pvt Ltd
  
• Cashpor Micro Credit
  
• Equitas Microfinance Pvt Ltd
  
• Asirvad Microfinance Pvt Ltd
  
  
   
• Bandhan Financial Services Pvt Ltd
  
   
• Disha Microfin Pvt Ltd
  
   
• Annapurna Microfinance Pvt Ltd
  
   
• ESAF Microfinance and Investments Pvt Ltd
  
   
• Fusion Microfinance Pvt Ltd
  

Microfinance Industry: Interest Rates, Penetration and Amount

Interest rates charged by some microfinance institutions have also been as high at 18% p.a. Interest rates have been pegged high to avoid defaults. Microfinance may also result in an interest-debt trap situation for borrowers.

Microfinance penetration

There is much higher microfinance penetration in the Southern states of India. On the other hand, the middle and western parts of India have medium penetration, and the Northern states have a lower penetration rate. 

Range of microfinance loans

Microfinance borrowings traditionally hovered between ₹20,000 to ₹30,000. This minimum amount has been ratcheting up due to the inflationary pressures in the economy, rising as high as ₹30,000 to ₹40,000. Microfinance is also a rapidly growing industry registering an annual growth rate of 44% YOY per a CRIF High Mark report. According to a Sa-Dhan report, the microfinance market was approximately ₹2.5 lakh crores. The market share in the microfinance market was distributed as follows:

Key Features of a microfinance Loan

Some of the features of microfinance loans that distinguish them from standard loans are as follows:

• Small minimum loan amounts
• Short tenure
• Generally, borrowers belong to the low-income category. 
• High frequency of repayments
• The primary purpose is to facilitate livelihoods like farming and small business loans for micro-enterprises.
• Higher rate of interest compared to bank interest. Interest rates also vary according to the purpose and tenure of the loan.

Documents needed for Microfinance Loans

This is a standard set of documents required by most microfinancing institutions:

• Updated KYC documents: This includes a whole gamut of Pan Card, Aadhaar Card, ration card, voter’s card, ration card etc.
• An updated application form
• If a small business owner applies for a microloan, then proof of address of office premises.
• Certificates of incorporation such as the Memorandum, Articles of Association, Partnership deed etc.
• Audited financial statements
• If other loans have been taken, then record such repayments.
• Income tax returns
• Bank statements for the previous six months
• If specific equipment or machinery is financed, then proforma invoice documents.

The Bottom Line 

Microfinance might aim at achieving financial parity among the masses of the country, it does so by providing just one-half of the foundation of financial stability. While access to borrowed funds might alleviate short-term necessities, better income opportunities are necessary to improve the bigger picture. Without a stable income source, microfinance exposes the lower-income groups to the threat of debt traps. Microfinance cannot micromanage its user from making poor financial decisions.

Though there are specific detriments to how microfinance works, it cannot be denied that it can be used to ensure financial inclusion and poverty alleviation. World Bank estimates that microfinance institutions have benefited more than 500 million people. Microfinance institutions avoiding NPAs and ensuring that the funds are used for productive purposes rather than debt relief is a way to ensure the success of this sector; it is an evolving industry. With a more excellent education, training and monitoring of the microloan use by borrowers, Microfinance may pave the way to achieving its noble objective of financial inclusion.