Microfinance is a type of credit system where a lender agrees to provide a small amount of loan to a low-income entity or some self-help groups (SHG) or their beneficiaries to generate employment or in the pursuit of becoming self-reliant.
Previously, this segment was closed, and traditional banks didn’t cater to this segment of the market as it was not a viable option for them to reach out to these small-ticket customers. Here comes the role of smartphones and digital banking systems, which are now transforming the lending landscape of India.
In this blog, we will learn about the effective use of microfinance and how it’s an important aid to these segments so that the population can’t get exploited and can become resilient.
The Importance of Microfinance and Its Need in Lower Income Group
The lower strata of the economy are marginalized when they don’t have access to the traditional banking system, which is available in urban centers or Tier1 or Tier2 cities. In parts of rural India, getting access to a loan agency is quite tough. For that, one needs to visit the nearby cities, and there, one can also only get rejected.
Here comes the need for MFs as they allow an individual from the lower income group to get a loan and a smaller interest quotation and give flexible repayment terms, which will make a person financially independent.
How the Work of Microfinance Takes Place
The work of microfinance takes place in places where people need loans between as small as 10k to 50k and also on a frequent basis. The financial landscape of the lower-income strata begins to change when a person uses that fund to get employment or to start a business on a small scale.
Previously, providing these types of loans was not feasible by the institutional banks as it’s not cost-effective to reach that segment of the population which is far away from the city community and the income is quite low.
Now, with the advent of startups and modern banking infrastructure, it’s become a market that can be catered to thanks to the use of smartphones and digital technology, which uses technology to do stringent assessments. Through that, one can check the creditworthiness of the customers.
The assessment of this loan is fast and checks all the vital information through a standardized system, and if a person meets that criteria in that case, the person can easily get the loan from the lender.
Some of the Common Terms of Microfinance Loans
All microfinance loans have certain terms and conditions, and one needs to fulfill the eligibility criteria to get the loan and maintain a good repayment record to increase the loan amount incrementally.
For example, a person who has taken a loan of Rs 20k can increase the loan amount in the next term if they follow the proper repayment procedure. Through that, they can make a recurring way of payment and the lender gets comfortable with the borrower.
The Benefits of Microfinance Loan
There are certain benefits when it comes to the microfinance loans. It has some social and economic benefits, which help a person to empower themselves and help a section of the population to become independent and come out as self-resilient. A person can become a productive entity of the population and can become a member of the working society.
- Better Access to Funds
The first benefit that a person gets is better access to funds, and through the use of these funds, one can start their entrepreneurial journey or can use it for some major expenditure. It’s a choice for those individuals who are not eligible for traditional loans to take the leverage through the microfinance apps. A DSA partner app can help a person meet the eligibility criteria and help them to get funds.
- Economic Benefits in the Family
It’s also important for a person to provide economic benefits to the family and helps a person to break the cycle of poverty. With microfinance loans, one can send their kids to school or college and can help them get proper jobs to break the stigma of poverty.
- Helps to Build Creditworthiness
Taking loans in small amounts and repaying them helps a person to build a credit score. Through that, one can take bigger leverage and can aim for doing something big that helps a person to get a certain stream of income, which makes a person eligible for traditional loans.
These are some of the revealing ways through which microfinance works and helps a segment of the population to come out of poverty.
