Microfinance is a basis of financial services for entrepreneurs and small businesses deficient in contact with banking and associated services. The two key systems for the release of financial services to such customers include ‘relationship-based banking’ for individual entrepreneurs and small businesses along with ‘group-based models’ where several entrepreneurs come together to apply for loans and other services as a group.
Similar to banking operation traditions, microfinance entities are supposed to charge their lender’s interests on loans. In most cases the so-called interest rates are lower than those charged by normal banks, certain rivals of this concept accuse microfinance entities of creating gain by manipulating the poor people’s money. As per the World Bank estimates, more than 500 million people have improved their economic conditions via microfinance-related entities.
Recently the central government had introduced the Micro Units Development Refinance Agency(MUDRA) where the scheme aims to refinance collateral-free loans of up to Rs 10 lakh granted by lending entities to non-corporate small borrowers, for revenue growth actions in the non-farm sector. Currently, loans granted under this system have falls under three categories namely, Shishu loans for up to Rs 50,000, Kishor loans in a range between Rs 50,001 to Rs 5 lakhs and Tarun loans ranging from Rs 5 lakhs to 10 lakhs. As a way to make the MUDRA scheme popular, the government aims to set up a Rs 3000-crore Credit Guarantee Fund to back these loans.