What is Microcredit?

Updated: Monday, July 22, 2013, 11:42 [IST]

Microcredit is a financial service within the broader segment of microfinance that offers credit, fund transfers, insurance and savings. The service provides small loans to sections of the society that lack access to banking and other allied services.

The main beneficiaries of the service include poverty-ridden classes, small businesses, entrepreneurs that are though incapable of providing any collateral security, possess no evidence for steady employment and also lack a credit history that could be verified for credit purposes.

Microcredit being extended to weaker sections typically aims at alleviating poverty and narrow down the ever-widening gap between the rich and the poor. Further, microcredit is an effort in the direction of a more pervasive financial inclusion programme.In recent past, microfinance institutions extending microcredit have taken serious initiatives to empower the women class by assisting them in engaging in small ventures.

Generally, micro finance institutions (MFIs) in India extend microcredit by two mechanisms:

1. Group-Based Model: In this model, several groups or entrepreneurs together as a group apply for microfinance services.

2. Relationship-Based Model: Through, this model MFIs extend microfinance services to independent entrepreneurs or small businesses.

Guidelines to companies extending microcredit

The annual interest cap for extending microcredit is pegged at 10-12% that is over and above the cost of borrowing of lenders of microcredit. The limit for extending unsecured loans by RBI is further pegged at INR 50,000. The guidelines also suggests microcredit lenders not to provide loans to individuals who have already availed loan facility from elsewhere. leaving most charging 23-27%.

Outlook of Microcredit in the Indian context

The microcredit institutions have so far succeeded in attracting private investments. Institutions including International Finance Corporation are constantly infusing capital into the system for promoting lending activities to the poor classes. Loan books of microcredit companies is also registering an increase. Further, the outstanding loans of these institution lending credit is also decreasing.

However, the only point of concern is that microcredit companies should engage in vigilant lending andin no way promote reckless lending for their own interest. Further, with a more centralized regulatory framework, the sector is likely to grow at a remarkable rate and deeply penetrate the targeted population.

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