Microfinance refers to the provision of small loans, savings, microinsurance, and funds transfer services to low-income individuals and small businesses who lack access to traditional banking services. It aims to help the poor generate income and lift themselves out of poverty by financing small entrepreneurial activities. Common microfinance providers include credit unions, commercial banks, NGOs, cooperatives, and specialized microfinance institutions. In India, microfinance has grown significantly since the 1970s with the emergence of self-help groups that are financed by banks and other organizations to provide credit to their members. Microfinance plays an important role in empowering women, generating employment, promoting financial inclusion, and driving overall economic development.

1. MICRO FINANCE
BY-
P. SAI PRATHYUSHA
1ST
M.COM
BUSINESS FINANCE

2. NABARD has defined micro finance as “provision of thrift, credit and other financial services and
productsof very small amountsto the poor in rural, semi urbanand urban providedto customersto
meettheirfinancial needs;withonlyqualificationthattransactionsvalue is small and customersare
poor.”
Micro finance is the provision of financial services to low income clientsor solidarity lending groups
including consumers and the self- employed, who traditionally lack access to banking and related
services.Itisnotjustaboutgivingmicrocreditpoor,ratheritisaneconomicdevelopmenttool whose
objective is to assist poor to work their way out of poverty. It covers a wide range of services like
credit,savings,insurance remittance andalsonon- financialserviceslike trainingandcounsellingetc.
Micro finance Institutions (MFIs) are financial companies that provide small loans to people who do
nothave accesstobankingfacilities.The definitionsof “smallloans”variesbetweencountries.InIndia,
all loans that are below Rs 1 lakh can be considered as micro loans.
Varioustypesof institutionsoffermicrofinance:creditunions,commercial banks,NGOs,cooperatives
and sectorsof governmentbanks.The emergence of “for- profit”MFIsisgrowing.InIndia,these ‘for-
profit’ MFIs are referred to as Non- Banking Financial companies (NBFC).
Introduction:
Microfinance is universally recognised as a just and sustainable solution in alleviating the universal
widespreadpovertybyfinancingthe poorpeopleforcarryingoutviable andproductive activitiesand
projectstherebygeneratingeconomicsurplusandhence encouragingsmall savingsforinvestments.
The poor people need minimum financial services. They need to open savings bank account in the
bank to keep and multiplytheir savings by carrying out productive activities and getting small loans
from banks to purchase the assets and increase the level of their activities. In order to cover the life
and activitiesrisk,theyrequiremicroinsurance facilities.Theyalsorequirefundsdepositandtransfer
facilities at their nearby faces. In order to improve the quality and earning, they need some basic
training facilities. The provision of these minimal financial services is covered in micro finance.
Thus, microfinance referstothe movementinthe entireworldwhere inlowincomehouseholdshave
some access to the basic affordable financial services from banks or financial institutions to finance
their productive economic activities, create assets, generate income after meeting expenses to save
some net surplus and also to protect their life and activities against hazards and risks.
According to the international labour organisation, “Micro finance is an economic development
approach that involves providing financial services through institutions to low income clients”
Micro finance has beendefinedbythe national microfinance taskforce,1999 inIndiaas ‘‘Provisionof
thrift,creditandotherfinancialservicesandproductsforverysmallamountstothe poorinrural,semi
urban andurban areas forenablingthemtoraise theirincome levelsandimprovelivingstandards.’’
The poor people do not have access to capital which is required to start and grow their economic
activities.Microfinance isthe provisionof basicfinancial serviceslikesmall loans,small savingsfunds
transfer and micro insurance. With these services, some non- financial services like business and
activitytrainingis required.Bycarrying out some economicactivities,theycanearn income and can
affordfood,cleanwater,propershelter,educationfortheirchildren and necessary health services.
Micro finance helps in breaking poverty cycle.

3. Initiation of Micro credit:
The moneylenders,whousedtoprovide small amountsof loantothe poor and the needypeopleof
Indiaand aroundthe world,are the oldestinformal andunorganisedfromthe microcredit.The
interestrate chargedbythemis so highthatthe poorpeople remainintheirclutchesandface
viciouscycle of poverty. Furthertheyprovideloanattheirownstipulatedterms.Gradually,rotating
savingsandcreditassociations(ROSCAs)basedoninformal understandingsamongfriendsand
relativesemerged,where ininterestandcostsare comparativelylow butthe social costsandother
obligationsare considerable.These associationspool the savingsof friends,relatives,nearrelatives
and neighboursinasystematicwayandextendcredittothe poorand needyfamilies.InIndia
ROSCAsexistinthe formof commercial chitfunds.
The cooperativesemergedasgrouptype institutionswithformal constitutionandlegal statusto
some extent,whichpooledthe rural poorsavingsandprovidedlow amountof credittothe needy
people.
In 1971, Bangladeshwonitswar forindependence butthere were huge floodsinthe country
resultingintofamine,killinglarge numberof people.MuhammadYunus(1976) startedlendingsmall
amountto the poor people inthe nearbyvillageJobrain Bangladeshbyopeningbankbranchthere
to cater needsof the poor.In the year1978, a small group of youngpeople joinedtofightagainst
rural povertybycreatinga newanddynamicorganisation,whichservednearlysix millionvillagers
by the year2008 in Bangladesh.Thisgroupisnow knownasAssociationforSocial Advancement
(ASA),targetspoorestvillagersparticularlywomentostartself employmentvocationsin
Bangladesh.ASA isexpandingfinancial marketsbycreatingself employmentopportunitiesand
bringingchange.ASA isprovidingsmall loans,poolingsmall savingsprovidingmicroinsurancesand
otherfinancial servicestothe poorand low communities.Ithasemergedasglobal microfinance
institutioncreatinglargerimpact.
MuhammadYunus (2006), Nobel Prize Winner,introducedthe of microfinance inBangladeshinthe
formof GrameenBank.In India.NABARDinitiatedthe conceptof microfinance asperthisideaand
establishedlinkbetweenSelf HelpGroup(SHGs),NonGovernmentOrganizations(NGOs) andBanks.
The SHGs are formedand nurturedbyNGOs.On attainingmaturitythe SHGsget creditfrombanks
and extendtomembers.By2006 inIndiamore than 22 lakhSHGs were financedbyCommercial
Banks,RRBs and Cooperative Banks.The microfinance movementhasmultipliedandlarge number
of SHGs,NGOs, Microfinance Institutions(MFIs),andNonBankingFinancial Companies(NBFCs) has
emergedtoprovide microfinance tothe poorandneedyrural people.Thusthe microfinance has
emergedasa movementand establishedanindustry.

4. The Microcreditis the provisionof small loanstothe poorpeople atlow interestrate forgeneral
purpose andproductive activitieslike agriculture andalliedactivities,artisansandhandicraft,small
businessandself employmentactivitiesinrural,semi urbanandurbanarea.The loansextendedby
the Banks to the Self HelpGroups(SHG) for onwardlendingtomembersconstitute the microcredit.
Micro finance:
Micro Finance referstothe provisionof affordablefinancial servicessuchassmall loans,small
savings,microinsurance andfundstransferfacilitiesextendedtosociallyandeconomicallypoorand
disadvantagedsegmentsof the societytoenablethemtoincrease theirincome levelsandimprove
standardof living.The mainaimof microfinance istoprovide small loanstopoorpeople particularly
livingbelow povertyline,whoare notable toraise loanfor productive purposesfromothersources
and to improve theirstandardof livingbyincreasingtheirearningandsaving coveringassociated
risks.
The Important Features of Micro finance are:
1. Microfinance is a tool for the empowerment of poor women;
2. Loans under microfinance programmes are very small;
3. Microfinance targets the poor rural and urban households;
4. Credit under microfinance follows thrift i.e. mobilize savings and lend the same;

5. 5. Low transaction cost due to group lendings;
6. Transparencies in operation;
7. Short repayment period;
8. Simple procedure for reviewing, processing and approving loan applications and
delivery credit;
9. Chances of misutilization are rare and there is assured repayment;
10. Peer pressure act as the collateral security required for loans;
11. Need based loan disbursement;
12. Prompt repayment; and
13. There is no ceiling from the RBI in respect of minimum and maximum amounts.
TOP 10 Micro finance companies in India are as follows:
• Annapurna Microfinance Pvt Ltd.
• Arohan Financial Services Pvt Ltd.
• Asirvad Microfinance Pvt Ltd.
• Bandhan Financial Services Pvt Ltd.
• BSS Microfinance Pvt Ltd.
• Cashpor Micro Credit.
• Disha Microfin Pvt Ltd.
• Equitas Microfinance Pvt Ltd.
The term microcredit refers to a small size loan. to be repaid within a short period of time, used
mostly low-income households and micro entrepreneurs for the purpose of income generation
and enterprise development. The mobilization of such credit is restricted to external sources
such as banks and moneylenders.
Microfinance on the hand, provides a greater menu of options whereby the small loan can be
garnered not just from the external sources but also through self- mobilization. by way Of
saving and sale Of assets. Also. in case Of microcredit. due to the definite obligation to repay the
loan. a physical collateral may be needed. However. the biggest flexibility in the case Of
microfinance is the lack Of any physical collateral, even in case of loan from the bank. The
options available with microfinance, therefore, are much broader and flexible than the ones
available with microcredit.
Table-I brings out the distinct variations between microcredit and microfinance with
respect to their loan characteristics.
Difference between Microfinance and Microcredit:
S. No Characteristics of Loan Micro Finance Micro Credit
1. Size of Loan Small Small
2. Repaymentperiod Short Short
3. Sourcesof Mobilization Both external andInternal External
4. Repayment Obligationif source external Definite obligationtorepay
5. Collateral Notneeded May or maynot be needed
6. Purpose of use Flexible,consumptionincome
generation
Mostlyfixed, limitedscope
for deviation.
7. Scope of Operation Mostlygroup loanstrickling
downto individuals
Usuallyindividual loans,
throughgroup loansmightbe
given.

6. Microfinance is needed for the economic growth and transformation of the nation. Microfinance
is needed to eradicate poverty and record development of the nation. Microfinance is needed to
meet the life cycle needs, emergency needs and investment needs of the people. Microfinance is
needed for economic and social up liftment of the people, Microfinance is needed for women
empowerment through development.
Role of Microfinance:
1. Microfinance provides finance to the poor people for carrying out their economic
activities and helps them to meet the basic needs of life.
2. Microfinance helps the poor people to increase their income, savings and standard of
living.
3. Microfinance provides employment to the poor people by providing self employment
opportunities in various sectors and activities.
4. Microfinance protects the poor people against the risks by providing life insurance and
assets Insurance.
5. Microfinance helps in alleviating poverty by providing affordable financial services.
6. Microfinance helps in increasing economic growth and development in the country
7. Microfinance promotes gender equity by supporting women empowerment and their
economic participation and hence improving well being of the poor households.
8. Microfinance provides improvements in household economic welfare and enterprise
stability and growth.
9. Micro finance helps in increasing savings, investments and developments.
10. Micro finance provides employment opportunities to unemployed people and full
employment to the under employed people.