What Are Microfinance Companies and How Do They Work?

A significant proportion of the Indian population doesn’t have access to authorised credit facilities. Lack of financial service providers in small towns, no stable income source, no collateral to offer, no credit history, etc. are all contributing factors. This is where microfinance companies come into play. When banks and other financial institutions don’t approve loans, a microfinance company might help.

What are Microfinance Companies?

Microfinance companies target individuals who don’t have access to traditional banking channels and lend very small loans (micro loans, hence the term, microfinance) to them. Most microfinance companies aim to elevate the economically weaker section of the society by enabling them to undertake economic activities, increase savings, and promote self-empowerment. 

In India, loans under Rs.1,00,000 are offered by microfinance companies. Apart from giving such individuals credit, microfinance companies also extend a number of facilities to them like saving accounts, fund transfers, microinsurance, etc. (Note that microinsurance is not limited to only microfinance companies).

Top 5 Microfinance Companies in India

In recent years, microfinance companies have gained significant popularity for their noteworthy contributions. Following are the leading microfinance companies in India:

1. Equitas Small Finance Bank: This pioneer institution is the first among the lot to be granted a banking license by RBI. Incorporated in 2016 to take financial services to reach the underprivileged section of our economy, Equitas Small Finance Bank has over 400 branches in India. 

• Loan offered: Rs.2,000 to Rs.35,000 
• Interest charged: 24% upto loans of Rs.25,000 and 23% on loans above Rs.25,000.
• Processing fees: 1.00% + GST on loans above 25%

2. ESAF Small Finance Bank: ESAF was established as an NGO in 1992 and received a banking license in 2017. Its services include Cash Credit facility, Mobile Phone Loans, Medical Insurance, Crop Insurance, Marksheet Loans, Small Business Loan, ATMs, Debit Cards, Safe Deposit Lockers, etc. 

• Loan offered: Rs.1,000 to Rs.1,00,000 
• Interest charged: 22-26%
• Processing fees: 1-2% + GST

3. Fusion Microfinance Private Limited: The company’s microfinance credit portfolio of over 1.3 billion as of February 2022 continues to scale exponentially. The company is an NBFC by Constitution and is known for its presence in rural and semi-urban regions. 

• Loan offered: Rs.3,000 to Rs.60,000 
• Interest charged: 21-21.5%
• Processing fees: 0-1% + GST

4. Annapurna Finance Private Limited: Founded in 2009, the NBFC has already served over 50,000 customers. Its objective is to empower women to a self-reliant lifestyle, and the NBFC extends zero collateral loans to women borrowers in rural areas. 

• Loan offered: Rs.1,500 to Rs.25,00,000
• Interest charged: 18-26%
• Processing fees: 1-2% + GST

5. BSS Microfinance Limited: The company currently serves as a commercial correspondent for Kotak Mahindra Bank. Currently available in Maharashtra, Karnataka, Tamil Nadu, and Madhya Pradesh, the company gives out loans to women from economically weaker sections of society. 

• Loan offered: Rs.8,000 to Rs.60,000
• Interest charged: 25%
• Processing fees: 1.00% + GST on loans above 25%

Note: the interest rates are subject to revisions; thus, visit the official website of the lender to know the prevailing rates.

Also Read: What Is A Loan Without Credit Check And What Are Its Benefits?

Benefits of Microfinance Companies

Here is a list of benefits of microfinance companies: 

• The income base of poor households improves as they use the funds offered by microfinance companies in their businesses. 

• Banks usually don’t advance loans to borrowers with no fixed income source or collateral to offer. However, microfinance companies provide such borrowers with a bouquet of financial services, including small loans. 
• Mostly unemployed women are the beneficiary of microfinance. Thus microfinance companies indirectly promote women empowerment in rural India. 
• Access to credit for the poor opens the door for new employment opportunities and makes the poor self-sufficient. 
• The economy receives a boost as a whole. As the income of the poor is improved, their consumption improves, and thus the same reflects GDP growth.

Also Read: Types Of Group Health Insurance Policy In India

How do Microfinance Companies in India Work?

A microfinance company in India works in the following manner: 

1. It assesses the eligibility criteria of the applicant with more emphasis on their income or educational qualification. This process also includes several rounds of interviews with the applicant.
2. The process starts with granting the applicant a small loan and the applicant ensuring that they repay the loan with interest on time.
3. Gradually over time, the microfinance institution gains confidence in the repayment capability of the applicant and increases the loan amount. This ensures that the customer acquisition cost for the microfinance company is almost zero and they continue to offer small ticket size loans to the borrowers.

Final Word

Microfinance is still a relatively new concept in India. Even though it’s early days for microfinance in India, the industry is already very competitive. Several banks with access to low-cost credit have established their microfinance branches and there are also NBFCs and private institutions engaged in the business. The reason behind so many participants in the microfinance space is the straightforward business model with huge scope as far as the target audience is concerned. For borrowers, it’s a welcome opportunity that bridges the gap between them and the banking channels and provides them easier access to sources of finance. 

If you are looking for hassle-free loans, check out the Navi app for 100% paperless loan approval. 

FAQs on Microfinance Companies