Microfinance refers to a financial service model that provides small loans, savings, and other basic financial products to individuals or groups who lack access to traditional banking systems. Its primary goal is to promote financial inclusion by supporting low-income households, small entrepreneurs, and self-employed individuals, particularly in rural and underbanked areas.

Through microfinance institutions (MFIs), borrowers can access microloans to start or expand small businesses, invest in education, or meet essential needs. These loans are generally unsecured and are often provided through group lending models, which reduce default risks and encourage collective responsibility. By enabling access to capital, microfinance helps improve livelihoods, foster entrepreneurship, and empower marginalized sections of societyóespecially women.

The concept gained global recognition through initiatives like the Grameen Bank in Bangladesh and has since evolved across India with regulatory oversight by the Reserve Bank of India (RBI). MFIs in India are now classified as Non-Banking Financial Companies (NBFC-MFIs) and must adhere to RBI guidelines on lending limits, interest rate caps, and borrower protection norms.

While microfinance offers significant benefits such as financial independence and poverty alleviation, it also poses certain risks. Over-indebtedness, high operational costs, and inadequate borrower education can lead to repayment challenges. Therefore, responsible lending practices and financial literacy programs are essential for ensuring the sectorís sustainability.

In summary, microfinance plays a crucial role in bridging the financial inclusion gap by extending credit access to underserved communities. With the right regulatory framework and ethical lending practices, it continues to be a key driver of inclusive economic growth in emerging markets like India.