There is seen to be a wide gap between the values of the rich and the underprivileged. Government efforts to bridge the economic class divisions to provide the required financial services to meet the needs of the economically Marginalised people and the start-ups. To bridge the gap, the government provides microfinancing services to the poor to satisfy their financial goals.
Microfinance is a banking service made available to women, the unemployed, persons from disadvantaged backgrounds, and organisations that would not otherwise have access to financial services. They look for microfinance services to meet their personal or small business needs because the bulk of them lack the financial means and money to do business with regular financial institutions. In a nutshell, microfinance is banking for the underprivileged, most of whom are women.
Through the use of microfinance, individuals can obtain realistic, ethical, and inexpensive small business loans. Microfinanciers set specific repayment schedules and charge interest on loans, just like traditional lenders. The World Bank estimates that over 500 million people have benefited from microfinance-related ventures.
Microfinancing helps the poor to set financial goals and take the required action to achieve that.
Characteristics of Microfinance
Microfinance typically is classified into three Types
● Microlending
● Micro-Savings
● Micro-Insurance
Microlending: Microlending is a form of microfinance in which small loans are given to self-employed people, women company owners, sole proprietorships, small merchants, traders, and manufacturers, consultants, start-up companies, unemployed people, people making minimum wage, people from minority groups, etc.
These small business owners may not have access to traditional financial products or financial institutions; therefore, they choose to use these tiny loans to cover their financial obligations. These smaller corporate units can profit from microloans if they are unable to receive standard loans because they lack credit lines, have a bad credit rating, or require a smaller loan than what the traditional route offers its customers. Instead, these tiny enterprises employ unorthodox loan service channels to meet their financial demands.
Micro-Savings: As the name suggests, Micro savings pays emphasis on savings and encourages people to save money through the efforts of savings organisations and financial services. Well, both the traditional savings accounts and micro-savings accounts are included. The good thing about savings is that one does not need the minimum document requirement, nor does one have the penalty in withdrawing the money the way a traditional bank account does.
Micro Savings started with the basic premise that all people should have an access to the financial system, by creating an initiative: Pradhan Mantri Jan-Dhan Yojana (PMJDY)”. The Scheme aims to ensure that the excluded sections, such as weaker sections and low-income groups, have access to a variety of financial services, such as the availability of a basic savings bank account, access to need-based credit, remittances facility, insurance, and pension. Only with the efficient application of technology is this deep penetration at an affordable price conceivable.
The bulk of the underprivileged population in India lacks access to formal banking. The idea of financial inclusion aims to address this by stating that providing basic banking with zero or very low balance requirements will make such accounts accessible to vast parts of the population. However, opening a bank account in the name of every family member or adult may not be sufficient if these accounts and the financial services made accessible to them are not utilised by the account holders.
Micro-Insurance: Microfinance is a kind of microfinance that provides low-income families with insurance coverage tailored to their needs. Low-income households and individuals with little savings can get coverage via microinsurance products. It’s designed primarily for lower-value assets and for illness, injury, and death benefits.
In rural India, the current insurance markets are either none-xistent or useless. because the coverage value is lower than what insurance policies generally cover. Microinsurance options are generally made to compensate for illness, injury, or death as well as protect lower-value possessions or assets.
The four primary delivery methods for microinsurance are the provider-driven approach, the full-service model, the community-based model, and the partner-agent model
The two main major categories of microinsurance are as follows
● General Insurance
● Life Insurance
General Insurance: General Insurance plan will cover health insurance, individual accidents, and assets like animals, huts, etc. Groups and individuals can both use this product.
Health Insurance: A life microinsurance plan can be an endowment or a term plan. It has an accident benefit or not, and it can be purchased on an individual or group basis. These initiatives might be linked to health insurance.