What is a Microfinance Group Loans? Benefits, Eligibility & Interest Rates

Understanding the Concept of Microfinance Group Loans

Microfinance drives financial inclusion by providing small loans to underserved communities. A microfinance group loan enables individuals in a group to access credit collectively, ensuring shared responsibility. These group loan microfinance solutions support low-income borrowers in funding businesses, education, and essential needs, fostering economic growth.

What is a Microfinance Group Loans?

Group Micro Loan is designed for the upliftment of the less fortunate, especially those who are unemployed or low-income. They do not fulfill the general eligibility criteria for any kind of personal or commercial loan otherwise. Group Loan Microfinance allows people from similar walks of life and aspirations to easily avail of collateral-free small loans.

Microfinancing is gaining popularity in developing nations as a means of leveling the playing field. Certain occupations, such as farming and associated operations and home-run businesses like tiffin services and baking, are the major beneficiaries of the Group Loan Microfinance scheme.

L&T Financial Services is a leading microfinance lender with more than 12 years of history helping downtrodden women earn a sustainable living and lead a life of dignity. Our network of well-trained, dedicated professionals strives hard to serve needy borrowers, considering that their audience may not be adept at common banking jargon.

Benefits of Microfinance Group Loan

• Financial Inclusion: Provides access to credit for underserved communities, promoting economic empowerment.
• Shared Responsibility: Group lending ensures accountability and reduces default risks.
• Flexible Terms: Tailored microfinance loan details offer easy repayment schedules and manageable loan amounts.
• Affordable Rates: Competitive microfinance interest rates make borrowing cost-effective for low-income individuals.
• Support for Entrepreneurship: Funds from these loans enable small businesses to grow and thrive.
• No Collateral Required: Most microfinance group loan schemes do not demand security, making them accessible to all.
• Skill Development: Often accompanied by training programs, helping borrowers manage finances better.

Importance of Group Loan Microfinance in the Indian Economic System

According to the World Bank, despite 80% of Indians holding a bank account, India ranks below sub-Saharan Africa in the rate of financial inclusion. Around 190 million Indian adults don’t have a bank account, and 38% of accounts are inactive. It is safe to say that almost half of the Indian population still does not have access to easy finance.

In such a scenario, they are prone to falling for Ponzi schemes or unsecured loans from friends and family if they aspire to uplift their income source. Group loan microfinance has sprung up as a lucrative option for the majority of the Indian population to borrow small, collateral-free, term loans.

Group Loan Microfinance for Women

Women are breaking many societal and economic barriers to establish their mettle at par with their male counterparts. According to a Google and Bain and Company report, women-led enterprises constitute only 20% of total Indian entrepreneurship. Unfortunately, many of these companies have women leaders only in paper to avail government economic reforms. Additionally, women from sub-economic or rural backgrounds are missing out on these benefits.

Also known as Mahila Group Loan, these group loan microfinance empower a small group of women involved in the same economic activity to obtain a loan to scale their operations. These term loans are easy to obtain and are targeted to serve rural or semi-urban women residing in the remotest parts of India.

Group loans are given based on the Joint Liability group concept, wherein the members of a group who avail the loan guarantee that in case of nonpayment by a particular member, the rest of the members will contribute and ensure that the payment is made as and when due.

Eligibility Criteria for Microfinance Group Loan

• Group Composition: An informal group of 4–10 women from similar economic activities, such as tailoring, cooking, or handicrafts.
• Age Limit: All members should be between 20 and 60 years old.
• Income Criteria: The household income of each member should be less than ₹ 3,00,000 per annum.
• Economic Activity: Members must be engaged in income-generating activities supported by microfinance schemes.
• Credit History: Applicants should not have defaulted on previous loans or exceeded the microfinance loan limit.
• Geographical Coverage: Groups must reside in areas where the lender operates and offers competitive microfinance interest rates.

Group Loan Microfinance Interest Rates

Group Loan Microfinance interest rates vary from lender to lender. The minimum interest rate is 18%, while the maximum interest rate is 26%, with an average of 24%. In some cases, interest rates also vary according to the loan size. For example, a loan amount less than ₹ 25,000 attracts 24% interest. Any amount greater than that causes 23% interest.

How to Apply for a Microfinance Group Loan

Follow these steps to form a group and apply for a microfinance group loan:

1.Form a Group

• Gather 4–10 individuals from a similar economic background, preferably engaged in related activities like handicrafts, sewing, or agriculture.
• Ensure all members meet the eligibility criteria, including age and income limits.

2.Choose a Microfinance Institution (MFI)

• Research MFIs offering microfinance schemes in your area.
• Compare microfinance interest rates and terms to select the best lender.

3.Conduct a Group Meeting

• Discuss the loan purpose, repayment strategy, and responsibilities among group members.
• Assign a group leader to represent and coordinate with the MFI.

4.Submit Group Details

• Provide a list of members, their economic activities, and proof of residence to the selected MFI.

5.Attend Training Sessions

• Many MFIs conduct financial literacy and loan management training for groups before loan approval.

6.Complete the Application Process

• Fill out the loan application form with required microfinance loan details, including loan amount and purpose.
• Submit identity proofs, income proofs, and other necessary documents for verification.

7.Loan Approval and Disbursement

• Upon successful verification, the MFI approves the loan.
• The funds are disbursed either to the group leader or directly to individual members, as per the agreement.

How to Avail Group Loan Microfinance for Women

Indian women can avail of a group loan microfinance in two ways:

SHG-Bank Linkage Programme (SBLP)

This is one of the oldest models of loan disbursement to low-income group women to upgrade their earning potential. This lending facility was initiated by National Bank for Agriculture and Rural Development (NABARD) in 1992 to provide better earning opportunities to women with limited means.

Under the SBLP, a group of about 10-15 women working on similar economic activity, deposit a convenient amount from their savings at predefined intervals. Initially, loans are disbursed from the savings to those members who need them based on priority. Once these groups earn credibility, they can avail of group loan microfinance from participating banks.

Microfinance Institutions (MFIs)

Microfinance institutions provide specially tailored loans to individuals or groups with less credit exposure. They may be from rural or semi-urban locations without access to proper banking facilities. MFIs are known to lend small ticket size, term loans without any collateral to promote economic sustainability amongst such people.

MFIs can be formal institutions like rural banks and cooperatives or semiformal ones like non-banking financial cooperations (NBFCs). NBFCs are emerging as preferred financial assistance counters owing to their customer-centric services and widespread professional network.

L&T Finance (LTF) is a renowned group loan microfinance lender working for the upliftment of less-fortunate women since 2008. During our 14 years of operations, we have served hundreds of thousands of women in achieving financial independence through our hassle-free microloans.

Conclusion

Group loan microfinance creates an equal opportunity for small business owners, farmers, associated occupations, and women to scale their income despite low or no access to easy finance. As a group loan, microfinance institutions provide small collateral free loans to a group of people pursuing similar economic activities. These term loans are easy to avail of and come with additional benefits like low processing charges. L&T Finance is one of the foremost microfinance lenders working to improve women’s economic status in India. We aim to fulfill the government’s initiative of financial inclusion of all Indians while taking pride in our social responsibility.

Frequently Asked Questions

1. What is the repayment period for microfinance group loans?

The repayment period for a microfinance group loan typically ranges from 12 to 36 months, depending on the loan amount and the terms set by the microfinance institution. Flexible repayment schedules are often provided to align with the group’s earning patterns.

2. Is collateral required for such loans?

No, group loan microfinance schemes usually do not require collateral. The group’s collective responsibility is a substitute for security, ensuring accountability and minimizing the risk of default.

3. What happens if a group member defaults?

In a microfinance group loan, the group is responsible for repayment. If a member defaults, other group members are expected to cover the shortfall to maintain the group’s creditworthiness and avoid penalties.

4. Are these loans available in urban areas?

Yes, group loan microfinance programs are available in both rural and urban areas. Many microfinance institutions have expanded their reach to cater to urban low-income groups and entrepreneurs needing financial support.