Micro Loans in India

What is the issue?

Non-banking financial groups have gained attention for providing easy and hassle-free micro loans online, with the aid of technology.

What is micro-financing?

Microfinance refers to the provision of basic financial services for low-income but economically active people.
The idea is to offer loans that are easy to procure and require minimum documentation.
Micro loans or micro financing is seen as an important tool in uplifting the weaker sections of the society.

How did micro-financing evolve?

The concept of micro-finance came into existence way back in the 1970s.
In the 1970s, Muhammad Yunus, professor of economics, began to hand out small loans in his home country Bangladesh.
He founded the Grameen Bank in 1983 which today is active in over 70,000 villages in Bangladesh.
Taking inspiration from the micro-financing reforms in Bangladesh, NABARD was developed in India.
[NABARD - National Bank for Agriculture and Rural Development]
Additionally, micro-financing was also developed for rural and women development through SEWA (Self-Employed Women’s Association) in Gujarat, back in 1974.

Several other associations then grew to provide micro-loans.
What began as a micro-credit system, slowly altered into a ‘financial system’ mechanism.
It soon enabled everyone from rural to urban population to gain access to the micro-loans system in India.
It was not just limited to banking entities and NGOs but further expanded to non-banking financial entities.

What is the current scenario?

Given the pandemic situation, there are uncertainties to economic growth in India.
So, banks shy away from providing loans to the economically backward sections, owing to higher risks.
But non-banking financial groups continue to provide easy and hassle-free micro loans through an automated process.

How does it work?

It is done with the help of the application of Machine Learning in the loan procurement and disbursal process.
The companies can easily access and analyse the borrower’s vast digital footprint.
This helps them to evaluate the loan repayment capacity of an individual.
The technological term for this form of data is ‘alternative data.’
It is faster to process, unlike the traditional credit score.
High internet penetration and smartphone availability have also made people aware about the easy process of micro loan procurement.
In terms of customer support, ‘bots’ have been specifically designed to answer all the queries of the borrowers with a single click.
With this rapid development and digitisation, there has been a prominent growth in micro loans acquired by the common people.
Micro loan helps the unorganised sectors/businesses grow with easy access to credit.
Besides helping in individuals' growth, micro-finance contribute to the escalation in the growth metrics of the economy as a whole.

Source: BusinessLine