Legal Guide

How Does a Small Businessman Avail a MicroLoan in India?

by Mansi Gehrana · 3 min read

Microloans

Introduction

  • Microloans for the needy and the poor were first developed in the 1970s by banking institutions like the Grameen Bank of Bangladesh, led by Muhammad Yunus, who is frequently referred to as the pioneer. 
  • Microloans in India began with the creation of NABARD, which was modeled after Bangladesh’s micro-financing reforms. Additionally, in Gujarat in 1974, SEWA (Self-Employed Women’s Association) introduced micro-financing for the advancement of rural and female communities.

What are MicroLoan Companies?

As their name implies, microloan organizations are financial institutions that offer loans to low-income individuals and families. Since small companies are unable to acquire bank loans due to the lengthy application process, these companies were established to streamline the credit system for them.

As a result, it is often referred to as a micro-benefit, micro-credit organization. They provide microloans to a variety of small enterprises and people that lack access to or eligibility for traditional banking channels. The major goal of microloan organizations is to eradicate poverty in the nation, and they do this by facilitating simple loan applications with minimal red tape.

When you wish to launch a financing company across India without RBI clearance and capital restrictions, registration of microloan companies is the best choice. Microloans and social objects can be used to launch micro-businesses, which will aid the poor in reducing their level of destitution. These businesses are not required to obtain an RBI license. Unsecured loans, including personal loans, group loans, loans for households, etc., are provided through microloan companies at interest rates set by RBI regulations.

What are the features of MicroLoan Companies?

There are some features associated with microloan companies that give them an upper edge over other types of finance companies. Some of its features are- 

  • No authorization from the RBI is needed. 
  • Five crores of minimum capital are not required. Minimum Standards can offer a small business an unsecured loan of Rs. 50,000. 
  • Can provide loans for homes up to Rs. 1.25 lakhs. 
  • Companies that operate as Micro Finance must adhere to RBI regulations on interest rates and processing fees. 
  • It is a legitimate financing company, and if the loan amount is not repaid, you may file a lawsuit against the defaulter. 
  • Engaged in microfinance activities, granting a loan to any poor individual for a maximum of Rs. 50,000 for a business venture and Rs. 1,25,000 to cover the purchase of a home in order to help him improve his standard of living. 

So, these features make microloan companies unique in themselves. 

What are the eligibility criteria for availing of MicroLoans?

Nowadays, obtaining a microloan is a simple and hassle-free process. However, in order to ensure a smooth process, you must meet the requirements for eligibility. The following are the requirements for microloans:

  • The borrower must be between the ages of 24 and 70. (note that at the maturity of the loan, the age should be 70 years)
  • The company for which the loan is being requested must have been in operation for at least three years.
  • You must have a credit score of at least 685 to be eligible for a microloan.
  • You shouldn’t have gotten a loan like that from another microfinance institution.

What are the necessary documents for availing of MicroLoans?

When applying for a microloan, the following papers are necessary:

  • Identification documentation– such as a PAN card, an Aadhar card, a driver’s license, a voter ID, etc.
  • Proof of income- includes copies of income tax returns that are at least one- year- old, six-month-old bank statements, profit and loss statements from the past two years, and an audit balance sheet.
  • Address Proof- Electricity bills, trade licenses, phone bills, passports, and/or lease agreements can be used as proof of address.
  • Business Ownership Proof- Business registration certificates, tax records, partnership and private limited company deeds, as well as any other ID or address proof documents requested by the financing company, serve as proof of business ownership.

What are the advantages of MicroLoan Companies?

  • No RBI Approval is necessary– Microfinance companies covered by Section 8 are not required to obtain an RBI license.
  • Unemployed Loans– Companies that offer microloans have the distinct advantage of offering unsecured loans, such as personal loans, group loans, etc. 
  • No restrictions on the area– Microloan companies don’t have geographic or jurisdictional limitations, just like Nidhi Company. Simply said, microfinance businesses can be run all over India. 
  • Promotion of Socio-Economic Growth– Microloan institutions support socioeconomic development by lending to those in need. 
  • Attractive interest rates– Microloan company can provide a loan at an alluring interest rate of up to 26% p.a. on declining value.

What are the disadvantages of MicroLoan Companies?

While we have discussed the benefits and characteristics of microloans, it is equally important to consider the drawbacks, no matter how minor they may be.

  • Punitive repayment requirements: In the absence of valid working compliances and protocols, microloan organizations have the right to apply harsh repayment options. One must be careful to avoid being duped by unethical repayment tactics because this could lead to a financial disaster and increased debt.
  • Higher Interest Rates: Microloan organizations do not provide cheap interest rates on repayment even though they operate in accordance with RBI regulations. They don’t follow the same patterns as conventional bank loans, which can make it difficult to accumulate capital. Therefore their operational costs are high, and their interest rates are greater. Nevertheless, given all the benefits of microloans, this is a tiny price to pay.
  • Low-Amount Loans: As their name implies, microloans provide modest loan amounts that are suitable for smaller and low-income organizations, institutions, and entrepreneurs. They are unable to distribute larger amounts because no collateral is being held against the amounts.

Conclusion

For a developing nation like India, the fundamental benefit of microloans is their capacity to promote the advancement of both the individual and the country as a whole. In the long term, it creates opportunities for thousands of other people, which is usually in the form of company registration, thereby expanding the Indian economy. It allows a person with financial help to build his or her journey of being a job supplier from a job seeker. Before availing the finances, always take legal consultation for securing the business from any type of difficulty. Consult business lawyer for any advice.

Microloans enable unorganized industries and enterprises to develop without having to wait years for a loan based on their economic conditions. 

With the help of microloans, a small businessman may think of starting his own small company. Initially, it was not possible because banks were reluctant to provide it. But with the help of microloans, it has become possible.

Mansi Gehrana

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Mansi Gehrana

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