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Microfinanceहिंदी में पढ़ें

What is microfinance in India? A plain guide for families

6 min read
Village women sitting in a circle in a field, holding a meeting

Short answer: Under RBI rules, a microfinance loan is any loan without collateral (nothing like gold or land is pledged as security) given to a household with yearly income up to ₹3,00,000. It does not matter who gives it: a bank, small finance bank or NBFC. You usually repay weekly or monthly, and the loan often comes through a group. RBI also caps a household’s total loan repayments, including other loans, at 50% of its monthly income. That figure is the upper limit the rules allow. It is not a safe amount to spend on debt.

The situation

Sunita runs a small tailoring business from home in a village near Patna. Her husband does daily-wage work. A loan officer visits the women’s group in their lane and offers each member ₹40,000, repaid fortnightly (every two weeks). Sunita wants a second sewing machine. Her neighbour already has two such loans.

So before saying yes, the family needs some answers. Who is lending? Who has to repay, how often, and how much in total? And what happens if one member can’t pay?

Key words to know

  • Lender: the bank or NBFC that actually gives the money. An NBFC (non-bank finance company) is a company registered with RBI that lends but is not a bank. An NBFC-MFI is an NBFC that works mainly in microfinance, but banks and other NBFCs give these loans too.
  • Household: RBI counts the income of the household (husband, wife and their unmarried children), not just the person who borrows.
  • JLG (joint liability group): a small group where members may have to pay for each other if someone misses a payment. It depends on the contract.
  • SHG (self-help group): a group, often of women, that saves money together and may take a bank loan as a group.

What RBI rules say

  • Income limit: the loan counts as microfinance if household income is up to ₹3 lakh a year.
  • No collateral: the lender must not ask for property or valuables as security.
  • Repayment cap: a household’s monthly payments on all loans, microfinance and others, should not go above 50% of monthly household income. The lender must check household income before lending.
  • Pricing: the lender must have a board-approved pricing policy, show its lowest, highest and average interest rates in its offices and on its website, and show the full cost in a Key Facts Statement (KFS), a short sheet with the rate, fees and total you repay.
  • Fair conduct: RBI does not accept calls to late borrowers before 9 am or after 6 pm, or other harsh behaviour.
  • Prepayment: you can repay early with no penalty.

The industry also has its own rules (MFIN guardrails, since April 2025). They limit a borrower to 3 microfinance lenders and ₹2 lakh of total microfinance debt. These come from the industry, not from RBI, and not every lender follows them.

The 50% cap is a limit, not advice

Take a household earning ₹20,000 a month. The rules would allow up to ₹10,000 in loan repayments. That leaves only ₹10,000 for food, rent, school, medicines and everything else. Most families are safer paying a much smaller share, and even more so if income changes with the seasons.

Weekly, fortnightly, monthly: compare carefully

Say a loan of ₹40,000 is repaid as ₹1,000 a week. It sounds small. But some months have five weeks, so you pay ₹4,000–5,000 a month. Over 52 weeks you pay ₹52,000 in total. That means the loan costs you ₹12,000, before any fees or insurance.

Illustrative example only (a made-up case to show the idea). Always check the actual schedule and the APR in the KFS. The APR (annual percentage rate) is the full yearly cost of the loan, with interest and fees together.

Ask for the total amount you will repay. Then compare it with the cash you actually get in hand after deductions (money the lender keeps back for fees or insurance).

Questions to ask before you agree

  1. What’s the lender’s legal name, and is it registered with RBI?
  2. Is this a group loan? Do I have to pay if another member doesn’t?
  3. How much will I get in hand, after fees and insurance?
  4. How much is each payment, how often, and how many payments are there?
  5. What’s the APR, and the total amount I’ll repay?
  6. Do I have to buy any insurance or product with the loan?
  7. What happens if I miss a payment?
  8. Who do I complain to? Ask for the contact of the grievance officer (the person at the lender who handles complaints).

Signs to slow down

  • The household already pays several loans, or the new loan will pay off an old one.
  • The loan officer says “everyone is taking it” or “the offer ends today”.
  • Someone asks you to sign blank forms, or the KFS isn’t in a language you understand.
  • The repayments depend on money you are not sure of, like the next harvest or a job you hope to get.

What to check today

  1. List every loan the household has, with the weekly or monthly payment for each. Include group loans, gold loans and money owed to shops or relatives.
  2. Add up the payments. Compare the total with the income you can count on in a weak month.
  3. Check the lender on the RBI list (see How to check a lender or loan app).

Try it with your own numbers

→ Can I afford it? (household mode): enter household income, all family loan payments and basic costs. Weekly payments are shown as weekly, with a monthly figure next to them.

Sources and review

Try it with your numbers
Can I afford it? (household)
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Educational information, not financial advice. Found an error? Tell us → · Corrections log

Frequently asked questions

What is the income limit for a microfinance loan in India?

A loan counts as microfinance if your household earns up to ₹3,00,000 a year. RBI looks at the whole household: husband, wife and their unmarried children. The loan must also have no collateral (nothing like gold or land pledged as security). It does not matter who lends. The same rules apply to a bank, a small finance bank or an NBFC.

How much of our income can go on loan repayments?

RBI caps a household's total loan repayments at 50% of monthly household income, counting all loans, not only microfinance. That is the upper limit, not a safe amount. A family earning ₹20,000 a month could pay ₹10,000 under the rules. Only ₹10,000 would then be left for food, rent and school. Most families are safer with a much smaller share. Test your own numbers in Can I afford it?.

Can a microfinance lender ask for gold or land as security?

No. A microfinance loan has no collateral, so the lender must not ask for property or valuables as security. If someone wants your gold or land papers for a "microfinance" loan, ask them to explain in writing. A gold loan is a different product with its own rules. Read Gold loans before you pledge jewellery.

Is there a penalty if I repay a microfinance loan early?

No. Under RBI rules you can repay a microfinance loan early with no penalty. Ask the lender for the exact amount that closes the loan, and get a receipt. Check that no charge appears that is missing from your KFS (Key Facts Statement, the short sheet with the rate, fees and total you repay).

Why does a small weekly payment cost more than it looks?

Because the weeks add up. In our made-up example, a ₹40,000 loan repaid at ₹1,000 a week for 52 weeks means ₹52,000 in total. So the loan costs ₹12,000 before fees or insurance, and a five-week month takes ₹5,000. Ask for the total you will repay and the APR (the full yearly cost, with interest and fees). Then put offers side by side in the microfinance comparator.

Is an NBFC-MFI the only kind of microfinance lender?

No. An NBFC-MFI is a non-bank finance company that works mainly in microfinance. Banks, small finance banks and other NBFCs give microfinance loans too, under the same RBI rules. Whoever offers the loan, ask for the lender's legal name and check that it is registered with RBI. How to check a lender shows the steps.