Microfinancing is gaining popularity across the globe due to its affinity towards the rural areas and people from moderate-income groups. The availability of such loans has also led to the growth of SME units in rural areas. Interestingly, microfinancing also helps business owners from other strata of society. It becomes imperative to know about the prerequisites before applying for such loans.
Here are a few things to note before applying for a microfinance loan:
Microfinance is for individuals without banking facility:
Microfinance institutions (MFIs) adapt their services to cater to rural populations and offer financial credit. MFIs also typically have an explicit social objective of helping these individuals to get rid of poverty. Microfinance exists worldwide, but because of the underprivileged population and lower penetration of traditional banks, it focuses primarily on the developing world.
Microfinance is more than business loans:
Most microfinance is presented as SME finance loans, where an entrepreneur asks for a loan capital sum to start or grow a profitable business. However, microfinance also comes in other variants. For instance, micro-savings serve as a haven for disadvantaged people to retain their cash earnings and potentially gain interest on their savings. Other offerings with SME loans may be explicitly designed for housing (in a format like a conventional mortgage, albeit on a much smaller scale) or paying school fees for children.
Microfinance empowers the community:
SME finance encourages the rural community to build homegrown solutions to fix poverty. In this way, microfinance eliminates the overdependence on aid that plagues many well-intended initiatives in the developing world and provides the borrowers with the dignity of dealing with poverty on their own instead of being dependent on outsiders’ assistance. Hence, microfinance is often socially empowering by facilitating financial independence in rural sectors.
Critical features of microfinance loans:
- Borrowers of such types of loans typically come from low-income groups
- The tenure of a loan is short
- No collateral is required
- Typically these loans are charged at higher frequencies
- Revenue generation is the aim of most microfinance loans
Institutions offering microfinance
- Cooperative banks
- Government bank sectors
- Commercial banks
- Credit unions
Although the documentation required to receive a microfinance loan varies among lenders, the documents that are typically required:
- Application form duly filled
- PAN card, passport copy or ration card
- Proof of address of the office
- Applicants’ and co-applicants’ passport-size photos
- Certified copies of AOA/MOA/Partnership deed
- Track Repayment Record
- Audited financials for the preceding two years
- ITR of partners/directors for the previous two years
- Declarations of bank account for the past six months
- Invoice of Proforma to the facilities to be funded
- Technical training certificates for attorneys, CAs, architects, and physicians
Microfinance loans are appreciated by many due to its potential in combating poverty and empowering underprivileged sections of the society. An individual must make the best use of such loans to generate a sustainable income for self & community, working towards the country’s economic development in the process.