Micro Loans - Meaning, Types and Benefits

Understand Everything About Micro Loans

Micro Loans, or microcredit, are small loans banks offer to support low-income individuals in achieving self-reliance. These loans address issues like poverty, limited opportunities for women and vulnerable groups and improving living standards.

According to the Economic Times, the microfinance sector has shown resilience, with a 10% year-on-year growth in lenders' portfolios by December 2021. Microloans remain popular for those in need, driving financial inclusion and stability while empowering individuals to build better futures.

Their impact continues to grow, fostering economic development across the country.

What are the Advantages of Microloans

Microloans offer a range of benefits for individuals and the community:

• Empowerment: Provides access to capital for individuals and small businesses who may not qualify for traditional loans, fostering financial independence.
• Poverty Reduction: Helps individuals and families overcome financial hardship and improve their living standards.
• Economic Growth: Stimulates local economies by supporting small businesses and entrepreneurship.
• Job Creation: Enables the creation of new jobs and self-employment opportunities.
• Financial Inclusion: Extends financial services to underserved communities and promotes financial literacy.
• Social Impact: Contributes to community development and social upliftment by empowering marginalised groups.

Microloans play a crucial role in driving economic growth and reducing poverty by providing access to credit and fostering entrepreneurship among underserved communities.

Purpose & Objectives of Availing Microloans

A Micro Loan scheme can be used for several purposes, especially supporting small businesses and entrepreneurs.

• Starting a New Business: If you plan to launch your venture, a Micro Loan can help turn your ideas into reality. These loans are popular among low-income individuals aspiring to become entrepreneurs.
• Managing Daily Business Expenses: Struggling with day-to-day operational costs? A Micro Loan can provide the working capital to ease financial pressures.
• Paying Employee Salaries: Use a Micro Loan to ensure timely payment of employee wages and sustain your workforce without disruptions.

Who Can Apply for Micro Loans?

Micro Loans in India are accessible to a wide range of borrowers, including:

• Startups: Ideal for small business startups needing initial funding.
• Traders, Retailers, and Manufacturers: To support inventory or operational costs.
• Sole Proprietors and Consultants: For expanding or stabilising their businesses.
• Women Entrepreneurs and Minorities: Empowering underrepresented groups to achieve financial independence.
• Self-Employed and Unemployed Individuals: For those seeking funds to establish livelihoods.
• Minimum Wage Workers: To manage urgent financial needs or small-scale ventures.

Micro Loans foster financial inclusion and economic growth across diverse sectors.

Eligibility and Documentation for Microloans

Micro Loan Eligibility

To qualify for a Micro Loan, the eligibility requirements are simple and inclusive:

• Income-Generating Capacity: The borrower's ability to generate income is a key criterion for loan approval.
• Age Requirement: Applicants must be between 20 and 60 years of age.
• Women Borrowers: The special focus is lending Micro Loans to women and promoting financial empowerment.

These criteria ensure accessibility and financial inclusion for diverse groups.

Documents Required for Micro Credit

To apply for a Micro Loan at LTF, the following documents are necessary:

• Identity Proof: Aadhaar card, voter ID card, ration card or MGNREGA card.
• Income Proof: No formal income proof is required; the borrower's income-generating capacity is assessed instead.

Microloans are an ideal solution for low-income individuals looking to manage rising costs, start or sustain businesses and build a secure future for themselves and their families.

How to Apply for Microloans?

Applying for a Microloan is simple. Follow these steps:

• Research and Choose the Right Lender: Explore lenders offering Microloans and compare their terms, interest rates and eligibility criteria.
• Gather Required Documentation: Collect essential documents like identity proof (Aadhaar, voter ID), income proof, and, if applicable, a business plan.
• Submit the Application: Complete the application process online or offline as per the lender's process.
• Track Application Status: Monitor your application to ensure timely approval and disbursement.

These steps ensure a hassle-free application experience.

Frequently Asked Questions

1. What is the meaning of Micro Loan?

A Microloan is a small loan offered by financial institutions to low-income individuals or small businesses. It is designed to provide financial support for starting or expanding businesses, managing daily expenses, or meeting urgent financial needs.

2. How do Microloans work?

Microloans are disbursed based on the borrower's income-generating capacity, often without requiring collateral. Borrowers repay the loan in small installments over an agreed tenure, making it a flexible and accessible financial solution for low-income individuals.

3. What is a Micro Loan also known as?

A Micro Loan is also referred to as microcredit. This term emphasizes the loan's small size and its purpose of empowering underprivileged individuals or businesses through financial assistance.

4. What is the limit of Micro Loans?

The limit of a Micro Loan varies by lender but typically ranges from ₹ 10,000 to ₹ 1,00,000. Some institutions may offer higher amounts based on the borrower's profile and income potential.

5. Is a Micro Loan a personal loan?

No, a Micro Loan differs from a personal loan. While personal loans are unsecured and cater to broader needs, Microloans are small, often secured, and designed specifically for low-income borrowers or small businesses.

6. Can self-employed individuals apply for a Micro Loan?

Yes, self-employed individuals can apply for Microloans. These loans are ideal for small-scale entrepreneurs, consultants, or tradespeople who need financial assistance to start or sustain their businesses.