Micro Finanance

Micro Finanance

The term ‘micro-finance’ frequently appears in newspapers. Micro-finance includes

1. small loans
2. small deposits
3. money transfer
4. payment services
Select the correct answer using the codes given below.
a) 1, 2 and 3 only
b) 1 ,3 and 4 only
c) 2 ,3 and 4 only
d) 1 ,2, 3 and 4

Answer & Explanation

  1. d) 1, 2, 3 and 4.

Microfinance, also known as microcredit, is a financial service that offers loans, savings, payment services and insurance to entrepreneurs and small business owners who don’t have access to traditional sources of capital, like banks or investors. The goal of microfinancing is to provide individuals with money to invest in themselves or their business.

Both banks and non-banking financial corporations (NBFCs) offer microfinance in India. There are also microfinance institutions in the country that are exclusively dedicated to offering microfinance to people.

Microfinance institutions aim at getting people out of poverty and improving poor people’s financial conditions. Microfinance institutions target poor people who are unemployed, who are or want to be entrepreneurs, and who are into farming.

Microfinance is usually procured by loan applicants through 3 modules and they include:

  • Through banks, non-banking financial corporations, and microfinance institutions.
  • By establishing good relations with banks or other financial institutions.
  • By getting together as a group with a common goal of obtaining finance to create and develop new small business ventures or to make a living.

Need for Microfinance in India

When an individual belonging to an underprivileged section of the society borrows microfinance from a bank or an NBFC, he or she can make use of the funds for being financially independent. It can help the borrower to be involved in a variety of activities that he or she could not have done without the microfinancing.

Many poor adults in the country may not have had sufficient funds during the early stages of their lives to be educated. Hence, they tend to miss out on the various employment options that are offered to educated people. Therefore, many of them remain unemployed.

There is another category of poor adults who are not educated, but are involved in unskilled labour. Unskilled labour refers to working in the segment that requires limited skills and that offers low wages to the labourers. Unskilled labourers have limited qualification such as high school or diploma or no qualification. Unskilled labour can include construction work, domestic help, security work, laundry, etc.

There is also a category of individuals who live in rural areas and semi-urban areas who are dedicated to farming. They are agriculturists and many of them earn very low incomes. Many of these farmers do not earn enough money for the hard work they put in. They do not have adequate funds to buy a land for sowing crops. They have to rely on rich landlords for renting land and they are forced to pay the little money that they make, to the landlords.

There are also many people who are originally from rural India who move to urban areas for alternative sources of employment apart from agriculture. They get into fields such as cooking, construction, restaurants, housekeeping, etc. and earn low incomes.

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