Microfinance is an important part of the financial sector. It helps individuals, small businesses, self-employed people, and low-income households access financial services when traditional banking may not be easily available.
However, the microfinance sector uses many financial, regulatory, and business terms that can be difficult to understand. Terms such as microfinance loans, NBFC-MFI, interest rate, credit bureau, group lending, AIF, and financial inclusion are commonly used in this sector.
This glossary explains important microfinance terms in simple words. It can help entrepreneurs, borrowers, investors, and businesses understand the basic language used in the microfinance industry.
Note: Regulatory requirements can change. Businesses should check the latest requirements of the relevant regulator before starting a regulated financial activity.
What Is Microfinance?
Microfinance means providing financial services to people and small businesses that may have limited access to traditional banking services.
These services can include:
Small-value loans
Savings-related services
Insurance
Payment services
Credit facilities
Financial education
In India, microfinance activities can be carried out by different types of regulated entities, depending on the nature of the activity and applicable regulations.
The Reserve Bank of India's regulatory framework includes NBFC-MFIs, which are non-deposit-taking NBFCs with at least 75% of their total assets deployed towards microfinance loans.
Complete Microfinance Glossary
1. Microfinance
Microfinance refers to financial services designed for individuals, households, and small businesses that may have limited access to conventional financial institutions.
Microfinance is generally associated with small-ticket financial services and financial inclusion.
2. Microfinance Institution (MFI)
A Microfinance Institution (MFI) is an organisation that provides microfinance services.
An MFI may provide loans or other financial services to eligible customers, depending on its legal structure and regulatory permissions.
3. NBFC-MFI
NBFC-MFI means a Non-Banking Financial Company – Micro Finance Institution.
It is a specific category of NBFC regulated by the Reserve Bank of India. RBI's regulatory framework specifies that an NBFC-MFI is a non-deposit-taking NBFC with at least 75% of its total assets deployed toward microfinance loans.
Businesses planning to operate as an NBFC-MFI need to understand the applicable RBI registration and compliance requirements.
4. Microfinance Loan
A microfinance loan is a small-value loan provided to eligible borrowers for purposes covered under the applicable regulatory framework.
Such loans can support activities such as small businesses, self-employment, household needs, or other permitted purposes.
5. Borrower
A borrower is a person or entity that receives money from a lender with an obligation to repay it according to agreed terms.
For example, a small business owner taking a microfinance loan is a borrower.
6. Lender
A lender is an individual or organisation that provides money to a borrower.
In the microfinance sector, the lender may be an MFI, NBFC, bank, or another legally permitted financial institution.
7. Financial Inclusion
Financial inclusion means making useful and affordable financial services available to people who may have limited access to formal financial institutions.
Microfinance can contribute to financial inclusion by making formal credit and other financial services more accessible.
8. Group Lending
Group lending is a lending model where several borrowers form a group and obtain loans under a structured arrangement.
Group-based lending has historically been used by microfinance institutions to reach customers in communities where individual lending may be difficult.
9. Joint Liability Group (JLG)
A Joint Liability Group, or JLG, is a group of borrowers who may share responsibility for repayment under the applicable lending arrangement.
JLGs are commonly associated with small borrowers and microfinance lending.
10. Self-Help Group (SHG)
A Self-Help Group (SHG) is a small voluntary group, often formed by people from similar communities or economic backgrounds.
SHGs can save money collectively and may access formal credit through financial institutions.
11. Credit History
A credit history is a record of a borrower's past borrowing and repayment behaviour.
Lenders may use credit information when evaluating a person's eligibility for credit.
12. Credit Score
A credit score is a numerical representation of a person's credit behaviour based on information available to a credit information company.
A credit score is one factor that may be considered during credit assessment.
13. Credit Information Company
A Credit Information Company (CIC) collects and maintains credit-related information and provides credit reports or scores according to applicable regulations.
Credit information can help lenders assess a borrower's repayment history.
14. Loan Repayment
Loan repayment means returning borrowed money to the lender according to the agreed repayment schedule.
Depending on the loan structure, repayment may happen weekly, monthly, or according to another agreed schedule.
15. Principal Amount
The principal amount is the original amount of money borrowed.
For example, if a borrower receives ₹50,000 as a loan, ₹50,000 is the principal amount.
16. Interest
Interest is the amount charged by a lender for providing credit.
The applicable interest rate and method of calculation should be clearly communicated to the borrower according to the applicable regulatory and contractual requirements.
17. Interest Rate
The interest rate represents the cost of borrowing.
It may be expressed as an annual percentage or according to another permitted method, depending on the product and applicable rules.
18. Annual Percentage Rate (APR)
Annual Percentage Rate (APR) represents the annualised cost of credit and can help borrowers understand the overall cost of borrowing.
Borrowers should review the applicable interest, fees, and other charges rather than looking at only one component of the loan cost.
19. Loan Tenure
Loan tenure means the period over which a borrower is expected to repay the loan.
For example, a loan with a tenure of 12 months generally requires repayment over one year.
20. EMI
EMI stands for Equated Monthly Instalment.
It is a fixed or structured monthly repayment amount used for many types of loans. The exact repayment structure can differ depending on the loan agreement.
21. Default
A default occurs when a borrower does not meet the repayment obligations according to the applicable loan terms.
Repeated or prolonged repayment problems can affect the borrower's credit history.
22. Delinquency
Delinquency refers to a situation where a scheduled payment has not been made on time.
Lenders monitor delinquency to understand repayment performance and credit risk.
23. Non-Performing Asset (NPA)
A Non-Performing Asset (NPA) is a loan or advance that is classified as non-performing according to the applicable regulatory norms.
NPAs are important indicators of asset quality for financial institutions.
24. Credit Risk
Credit risk is the risk that a borrower may not repay a loan according to the agreed terms.
Microfinance institutions use credit assessment, monitoring, collection systems, and other risk-management measures to manage this risk.
25. Operational Risk
Operational risk refers to the possibility of loss resulting from problems in internal processes, people, systems, or external events.
For a microfinance business, operational risks may include technology failures, documentation problems, process errors, or fraud.
26. KYC
KYC means Know Your Customer.
It involves verifying customer identity and other required information before providing financial services.
KYC is an important part of regulatory compliance in financial services.
27. AML
AML means Anti-Money Laundering.
AML controls are designed to prevent financial systems from being misused for money laundering and related illegal activities.
28. Customer Due Diligence (CDD)
Customer Due Diligence means carrying out appropriate checks on customers before and during a financial relationship.
CDD can include verifying identity, understanding the customer relationship, and applying other required checks.
29. Financial Literacy
Financial literacy means having the knowledge and skills required to understand and manage financial matters.
For microfinance customers, financial literacy can help them understand loan costs, repayment obligations, savings, and responsible borrowing.
30. Responsible Lending
Responsible lending means providing credit in a way that considers the borrower's ability to repay and follows applicable regulatory and customer-protection requirements.
It is important because excessive or unsuitable borrowing can create financial stress for customers.
Important Business and Registration Terms Related to Microfinance
The microfinance sector is connected with several other financial and investment activities. Businesses planning to enter this sector should understand the difference between them.
31. Microfinance Company Registration
Microfinance Company Registration refers to the legal and regulatory process required for establishing and operating a business involved in microfinance activities.
The exact route depends on the proposed business model, legal structure, and regulatory framework.
For example, an entity seeking to operate as an NBFC-MFI needs to consider RBI requirements applicable to that category. RBI's current regulatory handbook identifies NBFC-MFI as a non-deposit-taking NBFC subject to specific asset-deployment requirements.
Therefore, entrepreneurs should identify the proposed activity and applicable regulator before starting operations.
32. Housing Finance Company Registration
A Housing Finance Company (HFC) is a financial company whose principal business relates to housing finance.
Housing Finance Company Registration involves meeting the applicable regulatory and legal requirements for carrying out housing finance activities.
A business should not assume that ordinary company incorporation alone permits it to conduct regulated housing finance activities. The proposed business model and applicable regulatory requirements should be examined before commencing operations.
33. Insurance Broker License
An Insurance Broker License is a regulatory authorization required for an eligible entity to operate as an insurance broker under the applicable insurance regulatory framework.
Insurance broking is different from microfinance. A business interested in offering insurance-related intermediary services should examine the applicable requirements of the insurance regulator.
Microfinance businesses may also explore insurance-related products or partnerships, but they should clearly distinguish lending activities from regulated insurance distribution activities.
34. AIF Registration
AIF Registration refers to registration of an Alternative Investment Fund with SEBI under the applicable AIF regulatory framework.
SEBI defines an AIF as a privately pooled investment vehicle established or incorporated in India for collecting funds from investors and investing according to a defined investment policy.
AIFs are broadly classified into:
Category I AIF
Category II AIF
Category III AIF
SEBI's current framework continues to regulate AIFs, and SEBI published an updated AIF Master Circular in June 2026.
AIF registration should not be confused with Microfinance Company Registration. They are different regulatory activities with different purposes and requirements.
Microfinance vs Other Financial Activities
Understanding the difference between various financial activities is important before starting a business.
Term
Basic Meaning
Main Regulatory Area
Microfinance
Small-value financial services
RBI and applicable framework
NBFC-MFI
Specific NBFC category focused on microfinance
RBI
Housing Finance Company
Company primarily engaged in housing finance
RBI
Insurance Broker
Intermediary for insurance business
Insurance regulator
AIF
Privately pooled investment vehicle
SEBI
Bank
Deposit-taking and other permitted banking activities
RBI
The regulatory treatment depends on the actual activities of the entity, its structure, and applicable laws.
Why Understanding Microfinance Terms Matters
Understanding these terms can help different stakeholders.
For Entrepreneurs
Entrepreneurs can better identify the regulatory category applicable to their proposed financial business.
For Borrowers
Borrowers can understand basic concepts such as interest, principal, repayment, credit history, and default.
For Investors
Investors can better understand the difference between lending businesses, NBFCs, and investment vehicles such as AIFs.
For Professionals
Legal, finance, compliance, and accounting professionals can use the glossary as a quick reference when discussing financial-sector businesses.
How Corpbiz Can Help
Starting a business in the financial sector involves more than company incorporation. Depending on the business model, entrepreneurs may need to consider regulatory registrations, documentation, policies, compliance requirements, and ongoing reporting.
Corpbiz assists businesses with various legal, financial, and regulatory compliance requirements. Businesses exploring Microfinance Company Registration, Housing Finance Company Registration, Insurance Broker License, or AIF Registration should first identify the exact activity and applicable regulator.
Our professional team can help businesses understand the applicable process and documentation requirements before proceeding.
Frequently Asked Questions
1. What is microfinance in simple words?
Microfinance means providing financial services, especially small-value credit, to people and small businesses that may have limited access to traditional financial services.
2. What is an MFI?
MFI stands for Microfinance Institution. It is an organisation that provides microfinance services under the applicable legal and regulatory framework.
3. What is an NBFC-MFI?
An NBFC-MFI is a specific category of non-deposit-taking NBFC that meets the regulatory requirements for microfinance activities. RBI specifies that at least 75% of its total assets should be deployed towards microfinance loans.
4. Is Microfinance Company Registration the same as NBFC registration?
Not necessarily. The applicable registration and regulatory requirements depend on the entity's structure and proposed activities. A business planning microfinance operations should determine the appropriate regulatory category before starting the activity.
5. What is Housing Finance Company Registration?
Housing Finance Company Registration refers to the applicable legal and regulatory process for an entity intending to conduct housing finance activities.
6. What is an Insurance Broker License?
An Insurance Broker License is regulatory authorization for an eligible entity to operate as an insurance broker. Insurance broking is a regulated activity and is separate from microfinance lending.
7. What is AIF Registration?
AIF Registration is the process through which an eligible Alternative Investment Fund obtains registration under SEBI's applicable AIF framework. SEBI recognises Category I, Category II, and Category III AIFs.
8. Can a microfinance company also operate as an AIF?
AIF activity and microfinance lending are governed by different regulatory frameworks. Whether an entity can undertake multiple activities depends on its structure, permissions, applicable regulations, and business model. Professional regulatory advice should be obtained before combining activities.
9. What is financial inclusion?
Financial inclusion means making appropriate and affordable financial services available to people who may have limited access to formal financial institutions.
10. Why is KYC important in microfinance?
KYC helps financial institutions verify customer identity and meet applicable regulatory requirements. It is an important part of compliance in financial services.
Conclusion
Microfinance has its own terminology covering loans, borrowers, credit risk, repayment, KYC, financial inclusion, and regulatory compliance. Understanding these terms makes it easier to understand how the microfinance sector works.
For businesses, it is equally important to distinguish Microfinance Company Registration from activities such as Housing Finance Company Registration, Insurance Broker License, and AIF Registration. Each activity can have a different regulatory framework and compliance requirement.
If you are planning to start a financial-services business, identifying the correct legal and regulatory structure at the beginning can help you plan the business more effectively.
Author Profile
Atul Shukla
Legal & Compliance Professional | Corpbiz Advisors
Atul Shukla writes on business registrations, financial-sector regulations, legal compliance, taxation, and regulatory developments. His content focuses on explaining complex legal and compliance topics in simple language for Indian businesses and entrepreneurs.
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