How to start a microfinance business

how to start a microfinance business

Sinha might sound like a braggart but experts say it's possible. It was estimated that microfinance as a sector would reach the $2 billion mark by 2009 but it has achieved $4 billion already. In 2002 the share of MFIs in the total small credit market in India was only around 25%. But later with many young professionals entering the scene the same is now pegged at 50%. Large MFIs like ASAGV, SKS, Basix and Cashpor have been constantly upgrading their services and reach in the sector and not limiting themselves only to microcredit.

And helping MFIs in this aspect are dedicated private equity (PE) and venture capital (VC) funds that invest in such businesses. According to Intellecash there are at least 38 funds/individuals/NGOs supporting the MFI sector. But the biggest constraint is that a majority of the funds support only companies registered as NBFCs because they are run only for profit and hence guarantee better returns.

"It is not a rosy dream all through and the challenges are too many. There are many days when you will be utterly frustrated at things but there is a remedy: whenever you are in such a state, go to the field and listen to a poor woman's story. it truly is inspirational to hear how you can change her life," says Rao.


Micro finance institutions provide credit to poor people for starting a business or for goods consumption. Many MFIs also offer services like accepting small savings (of Rs 10 or Rs 25) and insurance services.


On an average MFIs charge interest of 30% annually. This could be considered very high but many poor people have been borrowing from private money lenders who not only lack transparency but are known to charge well over 100% annually.


There are around 1,000 MFIs in India but there's still plenty of demand for micro finance as the number of poor people who need such services is huge.


Contrary to what many believe, bad loans or bad debts in micro credit are a rarity. Only 2% of the total loan disbursed turn bad.


Starting an MFI is not as complicated as other businesses in the financial sector. MFIs are traditionally floated by credit societies and trusts for disbursing credit amongst those they serve. Individuals or groups of people can also incorporate a not-for-profit company under the Companies Act, 1956. The third category is for-profit companies that have to be registered as Non-Banking Finance Companies (NBFCs) with the RBI and require bigger paid-up capital.


Category: Payday loans

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