Microfinance

Banking

Microfinance provides small loans, savings, and financial services to low-income individuals without access to traditional banking. In India, microfinance institutions (MFIs) and Small Finance Banks serve rural borrowers with loans from Rs 5,000 to Rs 1 lakh.

In detail

NABARD and RBI regulate microfinance. Key models:nSHG (Self Help Group): groups of 10-20 women pool savings and access bank creditnJLG (Joint Liability Group): 4-10 members share loan liabilitynnInterest rates: 18-24% (higher than bank loans but serves unbankable population). Top Indian MFIs: Bandhan Bank (started as MFI), SKS (now Bharat Financial), Spandana.nnFor investors: Microfinance-focused small finance banks and NBFCs offer higher FD rates (7.5-9%) reflecting their higher-yield lending.

Real-life example

🇮🇳 India example

Sunita (rural Tamil Nadu, no credit history) takes Rs 20,000 JLG loan at 21% through a MFI to buy a sewing machine. Earns Rs 8,000/month income. Repays in 12 months. Next cycle: Rs 40,000 loan to expand. She is now unbankable-to-banked -- her credit history qualifies her for a small finance bank account.

Frequently asked questions

Can urban individuals invest in microfinance products? ▼

Indirectly: buy FDs of small finance banks (higher rates, DICGC insured up to Rs 5L), or invest in Bharat Bond ETF or MFI-focused NBFCs. Direct P2P lending platforms also let individuals lend to micro-borrowers.