What is Microfinance? Meaning, Features & Importance for Small Borrowers

Microfinance provides small loans and financial services to low-income individuals or groups who lack access to traditional banking. It's especially important in rural India, where borrowers need tiny loans to grow small businesses or meet urgent needs. Because let’s be honest, big dreams often come in small wallets, like ‘chutki bhar sindoor’.

For example, Meena is a vegetable seller in rural Madhya Pradesh. She always wanted a small push to expand her stall, like from a basket to a proper cart. She didn’t have salary slips or credit history, and banks couldn’t offer loans on the terms she wanted. So, she went for microfinance.

Here are the details for her finances in the journey:
 

She repaid her loan, doubled her income and even started saving for her daughter’s school. ‘Aur aurat ko kya chahiye?’ What you are feeling right now is just a small glimpse of what microfinance can do. 

Let’s explore more about microfinance, its key features, and how it empowers small borrowers like Meena.

What is Microfinance?

 Do you know, India’s microfinance sector had an outstanding portfolio of ₹ 3.75 lakh crore? By March 2025, there were around 79 million borrowers by and nearly 99% of them were women.

Microfinance is like a helping hand, not too big, but just enough to help someone kick-start or grow their small business. They can buy a sewing machine, stock up a tiny kirana store, or even pay for their kid’s school fees. 

This is banking for the unbanked!

What Makes Microfinance Special?

Since microfinancing is different from our traditional banks, they have some key features that make it really cool. We have mentioned some in the table given below.
 

So instead of struggling alone, a vegetable vendor or tailor can now borrow ₹10,000. With this money, they can build their business, repay slowly, and grow step by step. At the end, it’s all about access, dignity, and independence. 

What Does Microfinance Actually Offer?

When people hear “microfinance”, they mostly think of small loans, but it’s more than that! There are different products that are offered. We have discussed them in the table below.
 

For the daily wagers, there is a whole set of mini banking services that help them as per their economic conditions. Banking is a necessity, not a luxury, and it must be accessible to all.

Read More – Tamil Nadu Sees 23.5% Decline in Microfinance Loan Portfolio by June-End

Here, we have mentioned some Micro-insurance schemes that will help you.
 

Over 78 crore farmer applications were enrolled in PMFBY between 2016 and June 2025. The claims worth ₹1.83 lakh crore were disbursed to 22.67 crore farmers

How Do These Services Reach You?

Microfinance reaches people through various delivery methods. We have discussed the two popularly known methods:

1. Microfinance Institutions (MFIs)

These are special companies that give out loans and other services to people in villages and small towns. They often send agents directly to you.

2. Group Lending 

People form small groups (usually 5–10 members). If one person takes a loan, others support them. If they default, the group is responsible. This builds trust, responsibility, and teamwork. There are two kinds of groups:

1. Self-Help Groups (SHGs): Small groups (usually women) save together and give loans to each other from the pooled money.

For example, Tribal SHGs in Odisha (Sakti) 

Kamala received ₹5,000 from her SHG to start vegetable vending. Within two years, she ran a grocery store and saved ₹50,000.
 

2. Joint Liability Groups (JLGs): A group of borrowers takes loans individually but shares the responsibility of repayment as a team.

For example, SKS Microfinance / Bharat Financial Inclusion (Andhra Pradesh) 

A group of 5 rural women took individual loans. If one didn’t repay, others had to cover it. Still, they repaid over 99% on time.

Why Microfinance Matters for Small Borrowers?

Microfinance gives people a chance to grow, earn, and live better. It touches certain sections that are so crucial yet not in the limelight. Here, we have discussed some. 

1. It Brings Banking to the Doorstep

Most poor families don’t have access to regular banks, either because of too much paperwork, no steady income, or no collateral. Microfinance brings simple banking services like small loans, savings, and insurance right to their village or town.

2. Encourages Small Businesses

A loan of even ₹10,000 can help someone start a small business, like buying a sewing machine, opening a tea stall, or selling vegetables. That one loan can turn into regular income for the family.

3. Empowers Women

Most microfinance loans in India are given to women. Why? Because women tend to reinvest in their family’s needs, education, food, and health. Plus, earning money gives them confidence and a say in household decisions.

4. Helps Fight Poverty

When people get a way to earn money, they start saving, their kids go to school, and their quality of life improves. Over time, microfinance helps families move out of poverty and into financial stability.

5. High Repayment = Trust

Believe it or not, the repayment rate in microfinance is 95% or higher. That means borrowers take these small loans seriously and repay them on time. It shows they’re responsible and ready for bigger opportunities.

Here’s how Microfinances helped people In Real Life:

Also Read  - What is Mudra Loan? Types, Eligibility & How to Apply Online

Ranu Kalita, Assam

With just ₹30,000 from a microfinance loan, Ranu built her weaving business. She bought yarn in bulk, increasing production and enhancing her family’s income. She now mentors other women in her community.

Suraiya Begum & Anjali Singh, West Bengal

Suraiya expanded her garment work, while Anjali used her ₹30,000 loan to start a grocery store. They both now support their families confidently.

Conclusion

‘Seedhi baat, No bakwas’, no two situations are similar and so shouldn’t be the solutions. Microfinance is for those who either fall short of achieving a traditional bank loan or just can’t afford the EMIs.  But that doesn’t mean their dreams should stay small.

Microfinances can help fund a sewing machine or start a dairy business. It empowers individuals to grow income, build credit, and break cycles of poverty. Trust us, if thousands can do what they want, you can too!  

Frequently Asked Questions

1. Can microfinance improve someone's credit score?

Yes. Timely repayment of microfinance loans gets reported to credit bureaus. This helps in building or improving a borrower’s credit score over time.

2. What happens if someone defaults on a microfinance loan?

In most cases, they face peer pressure (in group lending), follow-up by the lender, and may lose future borrowing eligibility from any MFI.

3. Are there digital platforms for microfinance in India?

Yes, platforms like JanaKisan, Aye Finance, and Svatantra use tech to offer faster microloans and improve access in remote areas.

4. How is microfinance different from SHG-bank linkage?

SHG linkage connects self-help groups to banks, while microfinance is usually provided by NBFC-MFIs or NGOs directly to individuals or groups.

5. Is collateral required for microfinance loans?

No. Microfinance loans are usually unsecured, meaning borrowers don't need to pledge assets. Repayment trust is built through group systems.

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LoansJagat Team

We are a team of writers, editors, and proofreaders with 15+ years of experience in the finance field. We are your personal finance gurus! But, we will explain everything in simplified language. Our aim is to make personal and business finance easier for you. While we help you upgrade your financial knowledge, why don't you read some of our blogs?