What are Microloans, and How Do They Work?

What are Microloans?

Microloans in India or worldwide is a type of short-term loan. A microloan is a small loan amount that small business owners, self-employed individuals, micro-enterprises, or startups can avail themselves of. Any entity with a low capital requirement can avail of microloans in India and worldwide. Microloans are a micro-finance type of small finance offered to low-income group families or small-scale entrepreneurs. These entities almost have no access to lending institutions or financial help. These can be personal micro-loans, micro-loans for small business startups, etc. 

The Government of India and the Reserve Bank of India have launched many initiatives to connect the under-banked or unbanked groups or individuals to the credit’s formal system. In partnership with Micro Finance Companies (MFIs) and private limited companies, the Government of India plans to provide these entities with the required funding. 

NGOs are the most popular micro lenders after private limited companies and MFIs.  

Microloan investing is the process of providing these microloans to receive interest on the principal amount and earn profit. 

Who Can Avail of Microloans? 

The following can take Microloans in India: 

  • Startups (micro-loans for small business startups)
  • Traders
  • Retailers
  • Sole Proprietorships
  • Consultants 
  • Manufacturers
  • Minimum Wage Workers
  • Women Entrepreneurs (microloans for women)
  • Minorities
  • Self-employed Individuals
  • Unemployed Individuals, etc. 


The main objective of providing microloans in India is to encourage the development of families and entrepreneurs that are under-banked or unbanked. It promotes Self-Help Groups (SHGs) and contributes to the economic development of our country. Microloans for women help women entrepreneurs across the country and support them financially. 

Microloans in India are also called microfinance. The Government of India supports and sponsors microfinance for the National Bank for Agricultural and Rural Development (NABARD). 


The people or entities that find it difficult to avail of bank loans from traditional banks often choose microfinancing or microloans in India. Microloans in India were started for diverse business-related activities like the following: 

  1. To create a new business venture
  2. To maintain the cash flow every day
  3. To meet the requirement of working capital
  4. For consolidation of debt
  5. To manage day-to-day expenses
  6. To pay salaries to staff, and much more

Microloan Application

People who want to avail of microloans in India (or borrowers) can go to the official Micro-Finance Institution (MFI) website of their liking and fill out the application for a loan. You must submit the relevant documents before the loan amount can be given to you. A Micro-Finance Institution (MFI) representative will get in touch with you once they review your loan application. The next step involves running through the formalities with the representative and you. 

Once the formalities and documents are fulfilled and verified, your loan amount will be disbursed or given to you in your bank account. If a person requires funds, they can apply for business loans from NBFCs, and public or private banks. The interest rates of Microfinancing Institutions are generally higher than what NBFCs and banks offer. People or borrowers with no credit history or a low credit score typically apply for microloans in India. 

Required Documents

It will depend on each lender which documents they ask for. However, the following are generally the documents that every lender might ask you for getting microloans in India: 

  • Address Proof
  • Up-to-date Application Form
  • Passport-size pictures of co-applicants and applicants
  • Ration Card
  • Passport Copy
  • PAN Card
  • Credit Report 
  • Certified MOA/Partnership Deed/AOA copies
  • Professional qualification certificates for doctors, lawyers, architects, and CAs. 
  • Previous 6 months’ bank account statements
  • Last 2 years’ audited financials

Microloan Examples

The following are microloan examples of places where you can get a microloan. 

  • Bandhan Bank
  • BSS Microfinance
  • Equitas Small Finance Bank


Many people do not possess a savings account in India. However, people require finances at various points of their lives for multiple reasons such as protection, business, education, or housing. Microloans are a means to provide access to individuals for funds. If these institutions were not lending money to the underbanked or unbanked, the people would have no option but to borrow from a family member, friends, or informal money lenders.  In such a scenario, high-interest rates could be a significant factor that would cause concern. Microfinance or microloans helps the people of these groups to invest wisely. The Government wants financial inclusion in India, and microloans in India are a step toward achieving that vision. 

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