Microfinance as the name itself suggests is related to financial services. It has become a successful institution in India with the perspective of reducing poverty. It not only reduces poverty but also promotes financial inclusion. It is the result of modernization which helps those individuals who do not have access to traditional banking services. Credit, savings, and insurance are some of the things that are included in it. NBFC registered is one of the examples of such types of companies. For a better understanding of the functioning of microfinance companies, it’s important to have knowledge of the advantages and disadvantages of microfinance companies. In the current blog, things related to the advantages and disadvantages of microfinance companies will be discussed in detail.
What is a Microfinance Company?
One must know what exactly microfinance companies are to understand the advantages and disadvantages of microfinance companies. Most people are confused between microfinance companies and banking companies and take them as one. However, they are two different entities. Their work may seem similar on first look but it’s not like that. Their functioning is very different in many aspects. To take banking financial assistance is a little harder when it is compared with microfinance companies. Microfinance company works for the low-income group as well as an underprivileged section of the society. Their credit limit is between 50000/- to 150000/- for both the rural as well as urban areas.
The RBI, or Reserve Bank of India, supervises both banks and microfinance organizations, which is one connection between the two of them.They have to work as per the guidelines of the RBI. They cannot go beyond RBI when it comes to providing services. Before the final company registration, there are a number of formalities and documentation that need to be approved by RBI.
Key Principle of Microfinance Company
In the last few years the financial sector has had a broader customer base due to the increasing need for funds for different purposes in the market. It is comparatively easier for big customers to get loans. But the case is not the same for the low-income groups. NBFCs which are also a kind of microfinance institution provide loans to individuals who have low income. The main principles of a microfinance company are to provide comprehensive financial services, and a proper financial system to the low-income groups of society. It also includes the establishment of local financial institutions.
Advantages and Disadvantages of Microfinance Company
Any kind of entity you choose has its pros and cons. The same goes for microfinance companies. Below is the list of advantages and disadvantages of microfinance companies.
Pros of Microfinance Company
Out of the advantages and disadvantages of microfinance company, advantages which are also known as pros are given below:
Non Collateral Loan
Mostly the loans provided by the microfinance companies are collateral-free loans. Collateral-free loans mean loans without any security like property, gold, etc. Basically, there are two types of loans that are secured loans and unsecured loans. Microfinance companies provide unsecured loans. Such kinds of loans are known as collateral free loans or non-collateral loans. Collateral loans or secured loans are mostly provided by banking companies. They do not provide loans without security most of the time. Hence it is hectic to take loans from them.
Quick Loan Facility
As mentioned above the kind of loan provided by microfinance companies is easy and quick to get. In the time of urgency or emergency microfinance companies are more useful than banking companies. During the financial crisis, quick loans by the microfinance loan providers made the lives of people easy. Their assistance is mostly helpful in financial crisis types situations. Microfinance companies are able to provide quick loans because they have fewer formalities.
Comprehensive and Low Income Financial System
Companies that provide microfinance are aware that the impoverished demand a variety of financial services in addition to loans. There are a number of institutions that provide loans but low-income group financial assistance is something that makes microfinance companies unique and customer-friendly. People comprehend it easily as there are very few formalities involved here to get financial help.
Building Local Financial Institutions
The goal behind the establishment of microfinance is sustainable local financial institutions that attract domestic deposits, channel them into loans, and provide various other financial services. Government support is making them stronger. Having local financial institutions can solve the crisis of many common people.
Cons of Microfinance Company
Out of the advantages and disadvantages of microfinance company, disadvantages which are also known as cons are given below:
High-Interest Rates
The microfinance company faces a notable drawback in the form of high-interest rates. With rates that can reach as high as 30%, individuals with low incomes might encounter challenges or even impossibility in repaying the loans. Despite offering convenient and swift loan services, the elevated interest rates diminish the attractiveness of these offerings to potential clients. This situation occasionally leads to individuals being unable to fulfill their loan obligations, subsequently subjecting them to avoidable hardships.
Over Indebtedness
Microfinance can cause low-income people to become excessively indebted. Borrowers might take out several loans from several microfinance organizations, which could put them in a debt cycle and make it impossible for them to repay the debt. In this way, its objective of providing loans to low-income people and eradicating poverty fails devastatingly.
Harsh Repayment Method
Many low-income people who use microfinance services are uneducated in financial matters. They might take out loans they can’t afford since they don’t completely comprehend the terms and circumstances of the loan. In such a situation when people are unable to pay back the loan amount, microfinance companies use very harsh and sometimes unlawful methods to get the loan amount back. And in this way, people got harassed by them.
Conclusion
Microfinance companies are crucial for promoting financial inclusion and poverty reduction among low-income communities. The advantages and disadvantages of microfinance companies have been discussed in detail here in this blog. To harness the positives of microfinance while mitigating its negatives, responsible lending, financial education, and effective regulation are key. This approach can create a more balanced and beneficial impact on marginalized individuals and communities. All this is possible if one is fully aware of the advantages and disadvantages of a microfinance company.
