Microfinance is simply the range of financial services, including loans, savings, and insurance. These services are extended to small business owners and poor entrepreneurs who have no collateral & marginal money and wouldn’t otherwise qualify for a bank loan from the regularized banks, with their stringent processes.
Most often, these microloans are given to those who are working in different trades, including farmers, agriculturists, fishing, carpentry, and transportation, etc.
The amount of loan is small (or micro), of up to Rs.50,000 in rural areas and Rs.1,25,000 in urban areas. Hence the name of Micro Finance.
The majority of their clients are based in villages and remote areas, where access to formal banking is non-existent. Microfinance companies are entitled to take only the reasonable rates of interest, as recommended by the central government and RBI. Also, plenty of facilities are offered by them to the borrowers regarding repayment.
At least 70% of the total amount of loans, extended by these financing institutions must be about “generation of income”. They have been a great supporter of rural development.