Micro-credit refers to small, collateral-free loans given to low-income individuals and groups to support entrepreneurship and income generation. Instead of tangible assets, these loans depend on mutual trust within communities.
Definition and Key Features
- Micro-credit encompasses micro-loans, micro-savings and micro-insurance offered to the poor by microfinance institutions (MFIs).
- Loan amounts less than Rs 50,000. Short repayment periods of few months or 1-2 years.
- Targets low-income borrowers often excluded by formal banking – street vendors, small farmers etc.
- Group-based lending the most common model. Borrowers organize into groups and peer pressure ensures repayment discipline.
Micro-Credit Versus Micro-Finance
- Micro-finance is the overarching term encompassing all financial services for the poor including deposits, loans, payments, remittances and insurance.
- Micro-credit refers specifically to provision of these small, non-collateralized loans that are often the first financial service needed by marginal groups with irregular incomes.
Objectives and Expected Outcomes
The core premise of micro-credit is enabling access to capital for those conventionally considered “non-bankable”. Key objectives and outcomes include:
- Income Smoothing: Loans bridge cash-flow gaps for the poor and provide capital to invest in tiny businesses. This leads to greater income stability.
- Poverty Alleviation: Micro-credit enables micro-enterprise and self-employment. Successful initiatives bring families above the poverty line.
- Financial Inclusion: Extends formal credit access to the most economically vulnerable sections of society. First step on the ladder towards broader financial services.
- Women Empowerment: Majority of microfinance beneficiaries tend to be women organized into self-help groups (SHGs) giving them greater confidence, skills and say over household finances.
Micro-Credit Versus Payday Loans
There is often confusion between micro-credit and payday loans in developed economies. However, the two have different objectives and mechanisms:
- Payday lenders charge very high interest rates over short durations often trapping low-income families in debt cycles. They thrive due to inadequate financial access and literacy.
- Micro-credit aims to uplift communities sustainably through entrepreneurship. Interest rates still higher than commercial banking but group peer pressure ensures proper use and repayment discipline.
For micro-credit programs to succeed, they need close ties to communities they intend to serve. Payday lenders lack this intimate linkage by design.
Key Statistics on Micro-Credit Globally and in India
| Indicator | Global Estimates | India Estimates |
| No of Unique Borrowers | 140 million | 50 million |
| % Female Borrowers | 85% | Over 75% in SHGs |
| Total Loan Portfolio Outstanding | $124 billion | $25 billion |
| Average Loan Balance Per Borrower | $700 | $500 |
| Repayment Rate | 95%+ | Over 90% |
Micro-credit has become an effective mechanism for financial access and income smoothing for the marginalized globally including in India. Female participation is high as they often invest loans in small businesses and consumption needs for the family. Healthy repayment rates make such lending sustainable.
The Indian Micro-Finance Sector
India is recognized as a pioneer in using group lending and mutual guarantees to make formal credit accessible for the poor. Key aspects include:
Types of Providers
- Self-Help Groups (SHGs): Savings and credit groups of 15-20 women members in villages. Manage pooled savings corpus and inter-lend to members. Also access bank loans.
- Non-Banking Financial Companies (NBFCs): Private regulated entities providing microfinance services. Employ field officers for client outreach and collection.
- Non-Profit Micro Finance Institutions (MFIs): Registered societies and trusts engaged in financial inclusion. Survive on grants, donations and margins from lending activities. More flexible than NBFCs.
- Commercial Banks: Lead bank schemes mandate priority sector lending including micro-credit through branches and business correspondents.
Regulations and Industry Bodies
- RBI regulations on microfinance loans for NBFC-MFIs and Banks
- Industry associations MFIN and Sa-Dhan enforce customer protection codes and grievance redressal
Progress and Road Ahead
- Microfinance penetration still around 25% of potential demand
- Pan-India presence but higher potential in underserved states
- Increased use of fintech for cost effectiveness and convenience
- Allowing deposit mobilization could accelerate financial inclusion
By providing a gateway to the formal financial system, micro-credit empowers the vulnerable sections of society to shape their own destiny. India’s micro-finance movement has inspired similar efforts globally.