What do you mean by Microcredit in India?

Ashish M. Shaji

21 Dec, 2020

Microcredit has been explained as the provision of thrift, credit and other financial services and products to the deprived class of people in rural, semi-urban and urban areas for enabling them to raise their income levels and improve their standard of living. Microcredit Institutions are those, which provide these facilities. Reserve bank of India (RBI) encourages the commercial banks to expand the coverage of microfinance in India.

Microcredit is the extension of very small loans (microloans) to impoverished borrowers who typically lack collateral, steady employment, and a verifiable credit history. It is designed to support entrepreneurship and reduce poverty. Microcredit is part of microfinance, which provides a wider range of financial services, especially savings accounts, to the poor.

The Self Help Group (SHG) – Bank Linkage Programme

• Despite the vast expansion of the formal credit system in the country, the dependence of the rural poor on money lenders continues in many areas, especially for meeting emergent requirements. Such dependence is pronounced in the case of marginal farmers, landless laborers, petty traders and rural artisans belonging to socially and economically backward classes and tribes whose propensity to save are limited or too small to be mopped up by the banks. For various reasons, credit to these sections of the population has not been institutionalized.

• In order to minimize the dependence on money lenders, NABARD, APRACA, and ILO have carried out a study and brought out the concept of Self Help Groups (SHGs) and launched a pilot project supported by refinancing. Below are the criteria which would broadly be adopted by NABARD for selecting SHGs:

1. The Group should be in existence for at least 6 months.
2. The Group should have actively promoted the savings habit.
3. Groups could be formal (registered) or informal (unregistered).
4. Membership of the group could be between 10 to 20 persons.

• The advances given by the banks to the groups were treated as advances to “weaker sections” under the priority sector. NABARD has issued detailed operational guidelines to banks for implementation of the project. The banks were directed that they may consider lending to SHGs as part of their mainstream credit operations both at policy and implementation level and may include the linkage in their corporate strategy/plan, training curriculum of their officers and staff, etc.
• Banks may identify branches having the potential for linkage and provide necessary support services to such branches and include SHG lending within their Service Area Plan. Keeping in view the potential reliability, the Service Area Branches may fix their own program for lending to SHGs as in the case of other activities under the priority sector.

Microcredit Company in India

The following points are applicable to Micro-Credit Company in India:

• The SHGs registered or unregistered which is engaged in promoting savings habits among their members would be eligible to open savings bank accounts with banks irrespective whether they have availed credit facilities or not.
• As per operational guidelines of NABARD^[1], SHGs may be sanctioned savings linked loans by banks (varying from a saving to loan ratio of 1:1 to 1:4). Thus, loans may be given beyond the limit of 4 times of the savings and simple documentation as per the discretion of the bank, in case of matured SHGs.
• The defaults by a few members of SHGs and/or their family members to the financing bank should not ordinarily come in the way of financing SHGs by banks provided the SHG is not in default to it. The loan from a bank may not be utilized by the SHG for financing the defaulter members to the bank.
• Banks should evolve/initiate adequate steps to impart suitable training to the field level officials and sensitization of the controlling and other senior officials of the bank being a significant step in linking the Programmes and to organize exclusive short duration programs for the field level functionaries.
• Banks are required to monitor the progress of the project very closely considering the emerging potential of the SHGs and the relative non-familiarity of the bank branches with lending to SHGS. NABARD insists for the progress report in the prescribed format on a half-yearly basis i.e. as on 30th September and 31st March every year so as to reach within 30 days of the period it relates on an ongoing basis.

How is Micro-credit different from Micro-finance?

Microcredit involves small loan that is provided at low interest rate to people below poverty line whereas Micro finance refers to broad spectrum of financial services which is provided to low income group people.

In case of Micro credit there is only credit activities whereas in case of Micro finance credit activities as well as non credit activities both are included.

Conclusion

By providing microcredit, companies have been able to provide financial services or products to the deprived class of people in areas that are not well developed and enable them to raise their income levels and improve their standard of living. In case you need more information on Micro-credit Company, contact Enterslice.

Read our article: Role of MFIs in Rural and Small-Scale Sector