Micro credit loans are small loans. Micro credit, or microfinance scheme, was introduced to benefit people without a steady source of income, credit history, or traditional financial resources. The micro credit system has a major role in developing financial inclusion in India. Through this scheme, microcredit lenders offer easy to formal credit for borrowers across semi-urban and rural sectors of the country. This article will discuss the key aspects of micro credit system and its relevance in the lending ecosystem.
What is Micro Credit?
Microcredit is a small loan given to people who don’t have a regular income or access to banks. It is mainly meant for those living in rural or semi-urban areas who want to start a small business but don’t have the money to do so. These could be farmers, shopkeepers, tailors, artisans, or women running home-based businesses.
Many of these people cannot get loans from regular banks because they don’t have a steady job, a credit history, or assets to offer as security. That’s where microcredit comes in. It gives them a chance to borrow a small amount and use it to earn a living.
Microcredit is usually provided by microfinance institutions, NGOs, or community groups. In many
cases, loans are given to a group of people who support each other in repaying the money.
The goal of microcredit is not just to give money but to help people stand on their own feet.
With these small loans, borrowers can buy tools, raw materials, or goods to sell and slowly build a stable source of income. Over time, it helps improve their quality of life and supports the growth of local businesses.
History of Micro Credit
The origin of the micro credit concept can be traced to 1983 when economist Muhammad Yunus started the Grameen Bank in Bangladesh. He started the bank with the main intention of providing loans to people from lower socio-economic status to reduce the increasing wealth gap in Bangladesh.
In India, microcredit line of finance gained momentum during the 1990s and was officially introduced in 1994. Small Industries Development Bank of India (SIDBI) was one of the pioneer organisations that developed the microcredit scheme in India.
How Micro Credit Works
Microcredit is based on the idea that people from low-income backgrounds also want to become self-reliant and start small businesses. However, they often cannot get help from regular banks because they lack a stable income, credit history, or collateral. Microcredit fills this gap by offering small loans through microfinance institutions, NGOs, or local groups.
These loans are designed to be simple and accessible. In many cases, there is no need for a formal written contract. The borrower might be charged a small interest. Some schemes may also require the borrower to regularly deposit a small part of their income into a savings account. This amount acts as a form of security. Once the loan is fully repaid, the borrower can withdraw the full savings amount.
Additional Information on Micro Credit – What are Micro Credit-funded activities?
Microcredit is mainly used to support small, income-generating activities. These include setting up cottage industries, buying seeds or equipment for farming, carrying out artisan work like pottery or weaving, or starting a small shop or service business.
Through these loans, individuals can build a steady income, support their families, and gradually become financially independent.
Features of Micro Credit
Microfinance loans offer various benefits to low-income individuals to make them financially secure and independent. Major features of the scheme include:
- Available for low-income groups and individuals in rural and semi-urban areas of India
- Microfinance loans can be used for self-employment and entrepreneurship activities
- Collateral-free loans with easy affordability
- Low-amount loans
- Low and economical rate of interest
- Not governed by traditional lenders, so quick access to funds
- Minimal requirement of paperwork
- Faster loan processing owing to quick turnaround time
- Flexible repayment options based on the nature and duration of employment activity
- Repeat loans available based on the scheme, repayment capability, and necessity
- Helps socially and economically backward people improve income and livelihood
What are the Benefits of Micro Credits?
Microcredit offers several benefits, especially for those without access to traditional financial services:
- It provides financial access to individuals who are usually excluded from conventional banking systems.
- It helps reduce poverty by enabling people to earn an income and improve their standard of living.
- It empowers women by offering them financial support to become independent and contribute to their households.
- It promotes entrepreneurship by helping individuals start or grow small businesses at the local level.
- It supports community development by strengthening local economies and encouraging long-term progress.
Types of Microcredit
Various types of microcredits offered in India are:
Micro Loans – These are small loans given without any collateral. They help borrowers understand the loan process and build a credit history. Over time, this prepares them to apply for larger loans from banks or other formal lenders.
Micro Savings – Micro savings accounts are designed for people with low income and do not require maintaining a minimum balance. These accounts encourage regular saving habits and help individuals earn interest on their deposits.
Micro Insurance – Micro insurance provides coverage to microloan borrowers at low premium rates. It protects individuals and families from financial risks due to accidents, illness, or other emergencies, offering security during uncertain times.
What is Micro Credit Operation Channel in India?
In India, microfinance is operated mainly by two channels: SHG – Bank Linkage Programme (SBLP) and Microfinance Institutions (MFIs).
SHG – Bank Linkage Programme (SBLP)
The National Bank for Agriculture and Rural Development (NABARD) launched the SBLP initiative in 1992. The model focuses on supporting women from economically backward classes in self-help groups of 10-15 members to become financially independent. Women in self-help groups contribute their savings within the groups. Later, the investment is used to offer loans for funding activities that help generate income for the members.
Microfinance Institutions (MFIs)
MFIs aim for joint liability for seeking loans. Under an MFI microfinance scheme, an informal group of 4-15 individuals can avail of a loan either individually or jointly.
Apart from these two channels, there are certain banks and social organisations like non-profit ones, that offer microloans to borrowers.
List of Schemes of Micro Credits
India has several microcredit schemes that support individuals in starting or expanding small businesses. Some of the key initiatives include:
- National Urban Livelihoods Mission (NULM)
- Mahila Samridhi Yojana
- Stand-Up India Scheme
- National Handicapped Finance and Development Corporation (NHFDC)
- Micro Units Development and Refinance Agency Ltd. (MUDRA)
- Small Industries Development Bank of India (SIDBI)
- National Bank for Agriculture and Rural Development (NABARD)
- National Scheduled Tribes Finance and Development Corporation (NSTFDC)
- Pradhan Mantri Mudra Yojana (PMMY)
These schemes aim to improve financial access, especially for marginalized and underprivileged communities.
Conclusion
Micro credit is a key factor in the success of financial inclusion in India. The small loan scheme has helped eradicate poverty in India over the last few decades by helping lower-income and socially backward classes improve their income and standard of living.
The vast Indian population largely exists in rural areas, where there is a lack of access to traditional banking services. However, people from low-income groups need financial services to meet their basic needs. Micro credit has helped bridge this gap. Through microfinance, even people from lower strata of society can access financial services to enhance income and self-sufficiency.
Tata Capital offers easy and attractive microfinance loan interest rates. Borrowers can avail of a quick loan up to Rs. 2 lakh with minimal documentation, flexible tenure, and EMI repayments. Tata Capital microfinance loans are customised to suit borrowers’ varying loan needs. For more details, visit Tata Capital.
FAQs
Microcredit usually supports small-scale work like farming, handicrafts, cottage industries, and local businesses. It helps people start or grow income-generating activities at a grassroots level.
Grameen Bank in Bangladesh is a well-known example. It gives small loans to low-income individuals, especially women, to help them start or grow small businesses.
Micro loans are offered to people with an annual household income of up to Rs 3 lakh. These loans are small and do not need any collateral.
Microcredit is meant for low-income individuals like small business owners, farmers, and women entrepreneurs who cannot access regular bank loans or financial services.
Not always. While it helps many, some borrowers face issues like high interest rates, debt pressure, or limited impact due to social or financial challenges.
25 April 2025
7 mins read
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