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Tata Capital > Blog > Personal Use Loan > What Is Micro Credit

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What Is Micro Credit

What Is Micro Credit

Micro credit loans are small loans. Micro credit, or microfinance scheme, was introduced to benefit people without a steady source of income, credit history, or traditional financial resources. The micro credit system has a major role in developing financial inclusion in India. Through this scheme, microcredit lenders offer easy to formal credit for borrowers across semi-urban and rural sectors of the country. This article will discuss the key aspects of micro credit system and its relevance in the lending ecosystem.

What is Micro Credit?

Microcredit is a small loan provided to low-income individuals/groups or those who lack a steady source of income. Micro finance loans are given to help small entrepreneurs who otherwise do not have the financial means to kickstart their entrepreneurship journey. Such individuals normally belong to semi-urban and rural areas and include self-employed people, home-based entrepreneurs, artisans, agriculturists, etc.

So, what does microcredit mean? Micro credit is a type of finance specifically developed to help people from lower socio-economic backgrounds. Owing to their low-income status and lack of collateral, such people may find it difficult to apply for traditional loans like secured loans. Microfinance lenders offer microcredit products like savings accounts and loans. By availing micro credit loans, low-income individuals can work towards generating income for a sustainable livelihood.

What is Micro Credit History?

The origin of the micro credit concept can be traced to 1983 when economist Muhammad Yunus started the Grameen Bank in Bangladesh. He started the bank with the main intention of providing loans to people from lower socio-economic status to reduce the increasing wealth gap in Bangladesh.

In India, microcredit line of finance gained momentum during the 1990s and was officially introduced in 1994. Small Industries Development Bank of India (SIDBI) was one of the pioneer organisations that developed the microcredit scheme in India.

What is Microcredit Working Mechanism?

To understand what microcredits are, it is necessary to evaluate their functioning. Microcredit was developed with the notion that people from lower socio-economic backgrounds also dream of becoming entrepreneurs and self-sufficient individuals. However, they do not have access to traditional financial sources which could suit their needs.

Microfinance loans may not have any written contract. The scheme may charge interest. It may also include a contract for setting aside some part of income in a savings account as collateral. On repayment of the microfinance loan, the borrower can avail of the full amount in the savings account.

Additional Information on Micro Credit - What are Micro Credit-funded activities?

Common activities that are funded by microfinance schemes include those related to:

·         Cottage industry

·         Agriculture and farm work

·         Artisan activities

·         Small-scale entrepreneurship

What are Microcredit Scheme Features?

Microfinance loans offer various benefits to low-income individuals to make them financially secure and independent. Major features of the scheme include:

·         Available for low-income groups and individuals in rural and semi-urban areas of India

·         Microfinance loans can be used for self-employment and entrepreneurship activities

·         Collateral-free loans with easy affordability

·         Low-amount loans

·         Low and economical rate of interest

·         Not governed by traditional lenders, so quick access to funds

·         Minimal requirement of paperwork

·         Faster loan processing owing to quick turnaround time

·         Flexible repayment options based on the nature and duration of employment activity

·         Repeat loans available based on the scheme, repayment capability, and necessity

·         Helps socially and economically backward people improve income and livelihood

Types of Microcredit

Various types of microcredits offered in India are:

Micro Loans

Microloans are small collateral-free loans. They are provided to help borrowers understand how a loan process functions over time and prepare them to take bigger loans from traditional lenders.

Micro Savings

Micro savings accounts are offered to low-income individuals without needing to maintain the average minimum balance. Such accounts help people learn financial discipline while generating interest in their savings investments.

Micro Insurance

Micro-insurance plans have been introduced to provide insurance coverage to microloan borrowers at affordable premiums. The insurance plans offer underprivileged people protection from possible risks like accidents, disease, etc.

What is Micro Credit Operation Channel in India?

In India, microfinance is operated mainly by two channels: SHG - Bank Linkage Programme (SBLP) and Microfinance Institutions (MFIs).

SHG - Bank Linkage Programme (SBLP)

The National Bank for Agriculture and Rural Development (NABARD) launched the SBLP initiative in 1992. The model focuses on supporting women from economically backward classes in self-help groups of 10-15 members to become financially independent. Women in self-help groups contribute their savings within the groups. Later, the investment is used to offer loans for funding activities that help generate income for the members.

Microfinance Institutions (MFIs)

MFIs aim for joint liability for seeking loans. Under an MFI microfinance scheme, an informal group of 4-15 individuals can avail of a loan either individually or jointly.

Apart from these two channels, there are certain banks and social organisations like non-profit ones, that offer microloans to borrowers.

To Summarise

Micro credit is a key factor in the success of financial inclusion in India. The small loan scheme has helped eradicate poverty in India over the last few decades by helping lower-income and socially backward classes improve their income and standard of living. The vast Indian population largely exists in rural areas, where there is a lack of access to traditional banking services. However, people from low-income groups need financial services to meet their basic needs. Micro credit has helped bridge this gap. Through microfinance, even people from lower strata of society can access financial services to enhance income and self-sufficiency.

Tata Capital offers easy and attractive microfinance loan interest rates. Borrowers can avail of a quick loan up to Rs. 2 lakh with minimal documentation, flexible tenure, and EMI repayments. Tata Capital microfinance loans are customised to suit borrowers’ varying loan needs. For more details, visit Tata Capital.

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