What Is Micro Credit?

Micro credit, or microcredit financing, refers to the provision of small loans to individuals or groups who typically lack access to traditional lending services. These loans, often referred to as microloans, are designed to support entrepreneurship, provide relief from a poor financial background, and promote financial inclusion among marginalised communities. Micro credit plays a vital role in helping people, especially women, start or expand small businesses.

In this article, we’ll further explore the micro credit meaning and significance, and understand how it works.

What Is Micro Credit History?

The modern concept of micro credit gained prominence in the 1980s when Professor Muhammad Yunus, an economist from Bangladesh, founded Grameen Bank. His aim was to provide small loans to individuals excluded from traditional lending systems due to their lower socio-economic status and lack of collateral. This approach quickly gained international recognition, leading to the establishment of numerous microfinance institutions around the world. The microcredit movement was driven by the goal of supporting low-income individuals, improving their livelihoods, and contributing to their communities.

Microfinance started becoming popular in India in the 1990s before being introduced officially in 1994. Small Industries Development Bank of India (SIDBI) was one of the organisations that spearheaded the development of microloan programs in the country.

What Is the Microcredit Working Mechanism?

Microcredit operates on a simple yet effective working mechanism. Microfinance Institutions (MFIs) provide small loans to individuals or groups, often without the need for collateral. The repayment structure is designed to be flexible, with borrowers making regular payments over time.

Microcredit loans are typically used for income-generating activities, such as starting or expanding a small business. The interest rates are generally affordable, making microcredit financing accessible to low-income individuals. In many cases, borrowers form small groups where each member is responsible for ensuring that others repay the loan. If one person fails to pay, the whole group may be affected, so there’s a sense of shared responsibility.

What Are Micro Credit-Funded Activities?

Micro credit-funded activities often include small-scale businesses such as handicrafts, agriculture, retail, and food production. These ventures help boost local economies, create jobs, and support sustainable livelihoods in underserved communities.

What Are Microcredit Scheme Features?

The most prominent features of micro lending schemes include:

• Small Loan Amounts: Microcredit loans are generally small, tailored to meet the needs of low-income individuals and entrepreneurs.
• Flexible Repayment Options: Borrowers enjoy flexible repayment schedules, allowing them to repay in manageable instalments.
• No Collateral Needed: Most microcredit schemes do not require collateral, making them accessible to those without assets.
• Supports Self-Employment: These loans encourage self-employment and small business ventures.
• Minimal Paperwork: Microcredit ensures minimal paperwork and quick loan processing.
• Repeat Loans: Borrowers may be eligible for repeat loans based on their repayment history and necessity.
• Enhances Financial Stability: Microcredit aims to improve the financial stability and livelihoods of economically disadvantaged communities.

Types of Microcredit

The different types of microfinance lending available are:

• Individual Lending: Loans provided to individuals for personal or business purposes.
• Group Lending: Loans are given to a group where members guarantee each other's repayments.
• Rural Microcredit: Focuses on lending to rural communities engaged in agriculture and related activities.
• Urban Microcredit: Targets small businesses in urban areas, such as street vendors and small shops.

What Is a Micro Credit Operation Channel in India?

In India, micro credit is primarily delivered through various microfinance institutions (MFIs), non-governmental organisations (NGOs), and Self-Help Groups (SHGs). The operation channel involves identifying potential borrowers, assessing their needs, and disbursing small loans without requiring collateral.

The Indian government and the Reserve Bank of India (RBI) also play crucial roles in regulating and supporting microcredit operations. Microfinance institutions in India focus on providing financial services to underserved populations in both rural and urban areas. Microcredit financing has become an integral part of financial inclusion efforts, with a significant emphasis on supporting women and promoting entrepreneurship.

Conclusion

By providing small loans to those who have limited access to traditional lending services, microcredit financing supports economic growth and financial inclusion.

SMFG India Credit supports this initiative by offering small personal loans without requiring any collateral. With simple eligibility criteria, swift loan processing, and quick disbursal times of just 30 minutes* within approval, our solutions are designed to provide fast relief in times of need. The interest rates start at only 13%* per annum and the repayment tenures go up to 5 years* for easier repayment. Apply online today or contact us for more details.