Overview of Microcredit
People in India face difficulty when they try to borrow money from regular banks. They often do not have a monthly income or any credit history.
This is where micro credit becomes valuable. It offers loans to those who do not qualify for bank loans, much like an instant personal loan. So, what is micro credit?
Micro credit supports people who want to earn but cannot start due to a lack of funds. It lets them borrow money without much paperwork. They use this amount for work like selling vegetables, manufacturing clothes, or running repair shops.
The importance of micro credit is growing in India. It supports local jobs and helps families become stable. Small steps can bring big change.
What Is Microcredit?
According to micro credit meaning, it gives small loans without asking for security or past credit. It helps people who cannot get bank loans. These loans often go to small business owners, workers, or local groups in rural or low-income areas. The aim is to help people earn better, improve daily life, and support small businesses with simple and fast funds.
The History Behind Microcredit
The idea of micro credit is not new. It was seen in Ireland in the 1700s, where small loans were given to people with a low income. But it became more known in South Asia after 1983, when Muhammad Yunus started the Grameen Bank in Bangladesh.
In the 1970s and 80s, he saw poor families struggling to run small businesses without money. Regular banks refused to help them. So, he began giving small loans without asking for papers or guarantees.
One known case was a group of women making bamboo stools. They earned only a few paise because they paid suppliers first. Yunus gave them a $27 loan to pay for materials directly. With that help, they earned more and repaid the money.
This showed that poor people can repay loans if they get the right help. His idea became the basis for micro credit lending across the world.
How does Microcredit work?
Micro credit helps people with no income proof or banking access. Lenders do not focus on papers. They check if a person can earn and repay. This is useful in areas where people trade goods instead of using money.
The Grameen Bank model made things easier. It offered different loan amounts and gave people a new way to borrow. In most cases, no contract is signed. Those who repay on time become trusted and can take bigger loans.
Some micro credit loans have interest and ask borrowers to save a little in a linked account. This money is given back when the loan is repaid fully.
Many times, people are grouped. If one person cannot repay, others help. This keeps everyone alert and involved. Groups often support each other and push for repayment.
If a person needs help, they can ask the loan officer or the group for support. On-time repayment builds credit. With better credit, bigger loans become possible.
Even though loans are small, repayment is strict. Rates are sometimes higher than normal loans. This is because micro lenders take more risk and give loans without asking for job proof or property. This type of micro credit often works like a small personal loan for those who cannot access traditional banking.
Key Activities Funded by Microcredit
Micro credit helps people start or grow work that brings income when other loan options are not available.
1. Cottage-based work from home like stitching, weaving or food items
2. Farming or seasonal jobs in fields and rural areas
3. Handmade crafts such as pottery
4. Tiny shops in towns & villages
List of Schemes of Microcredits
Some government-backed micro credit schemes support small borrowers across India through easy and low-documentation lending options.
1. Small Industries Development Bank of India
2. Stand-Up India Scheme
3. Pradhan Mantri Mudra Yojana
4. National Handicapped Finance & Development Corporation
5. National Urban Livelihoods Mission
6. Mahila Samridhi Yojana
7. Micro Units Development and Refinance Agency Ltd.
8. National Bank for Agriculture and Rural Development
9. National Scheduled Tribes Finance and Development Corporation
These micro credit loans are created to serve people from low-income backgrounds. They help build self-employment, promote small trade, and give easy credit access. Most of these schemes allow quick processing and do not require heavy paperwork. Some of them support group-based work. Always read and compare schemes before applying to make a wise decision. Read on and learn the advantages and disadvantages of micro credit and other details.
Types of Microcredit
Micro credit supports different needs and borrowers. These are the common types offered for various financial requirements.
1. Loans for Individuals:These loans are given to one person for personal or business needs.
2. Loans for Groups:It gets issuedto small groups who share repayment & support each other.
3. Loans for Farmers:Helps with seeds or seasonal farming expenses for cultivation.
4. Loans for Microenterprise:Support local shops or services to start or grow faster.
5. Loans for Consumer Microcredit: Funds used for urgent bills, health care, or daily costs.
Features of a Microcredit Program
Micro credit programs have simple structures. These features make borrowing easier for people with limited income or no formal credit history.
1. Available for people in small towns and rural places.
2. No need to give assets as security for most loans.
3. Low loan amounts to meet everyday business or personal needs.
4. Easy paperwork and a faster loan approval process.
5. Flexible payback time based on income type and regularity.
6. Often offered to groups of women for better repayment support.
7. It can help build a credit score if loans are repaid on time.
8. Supports borrowers with no formal jobs.
Pros of Microcredit
Micro credit can offer a financial solution to people who cannot get loans formally.
1. Better Access to Money -People use micro loans when banks reject them or ask for hard-to-get papers.
2. Promotes Self-Employment -Micro credit helps people begin small work or shops without needing big money or long-term loans.
3. Supports Women Empowerment -Women take loans to earn, care for their families, and become strong on their own.
4. Improves Local Economy -Small shops grow, give jobs, and keep local trade strong with help from micro credit.
5. Builds Financial Habits -Paying loans on time helps people understand how to handle money while growing a strong credit history.
Cons of Microcredit
While micro credit supports many, some problems can make it hard for borrowers to repay without stress.
1. High Interest Rates - Some lenders ask for more interest than banks.
2. Over-Borrowing Risks - Taking multiple loans at once can result in missed payments alongside growing financial troubles.
3. No Long-Term Impact - Micro credit might not always help people earn stable money or change their lifestyle.
4. Pressure To Repay -In group loans, if one person fails, others feel forced to cover the missed amount.
Learn: How to Read and Understand Your Credit Report?
Final Thoughts on Microcredit
Thus, micro credit has helped many people build small businesses and meet urgent needs without needing big bank loans. It gives hope to those with low income and no credit history. But it still needs stronger controls, fairer interest rates, and wider access. By improving these areas, more borrowers can benefit safely. Micro credit loans should support real growth, not just short-term relief. When managed properly, they can lead to steady income and lasting progress.
Frequently Asked Questions (FAQs)
Q.1. Who can apply for Microcredit?
People with low income, no credit history, or small businesses without access to banks can apply for micro credit. This includes home-based workers, farmers, artisans, shopkeepers, and women-led groups. These loans are mainly offered to help people start earning or grow small work activities in local areas.
Q.2. What is the interest rate on Microcredit loans?
The interest rate on micro credit loans usually ranges from 12%-36% annually. The rate depends on the lender as well as the type of loan. A few schemes offer lower interest rates for women or group-based loans. So, it is your responsibility to check the loan terms carefully before applying.
Q.3. What can Microcredit loans be used for?
Micro credit loans help fund small shops, farming work, home-based jobs, etc.. They can also be used for buying raw materials, tools, etc. Some people also use it for urgent needs like school fees, health care, or other reasons to continue working.
Q.4. Can Microcredit improve economic development?
Micro credit can support small businesses while helping families earn better income. It helps people become self-reliant & less dependent on others. Local markets grow as many earn more. So, it can support poverty reduction while improving living conditions in developing communities.
Q.5. What is an example of a Microcredit?
A woman who runs a small tailoring business borrows ₹20,000 through micro credit to purchase a sewing machine. The woman takes orders & finishes work faster. She earns more. So, she is able to repay the loan on time with a steady income. Such a small loan helps her grow her work without needing additional support from big banks.
Q.6. What is the limit of a Micro loan?
Most micro credit loans start from ₹10,000-₹2.5 lakh. The actual limit depends on the lender, the borrower’s income, repayment capacity, etc. A few government schemes offer smaller amounts to new borrowers. The loan amount usually grows with an excellent repayment history alongside credit behaviour.
