Micro Credit involves provisioning for thrift, credit of very small amount to the poor for enabling them to raise their income level and thereby improve living standards. In operational terms micro credit is referred to small loan upto Rs 50000 extended to the poor without any collateral for undertaking self employment.
Apart from the existing banking system network with a view to developing a supplementary credit delivery system that is cost effective and user friendly for both banks and the poor, micro credit initiatives such as Self Help Group and Micro Finance Institutions are encouraged. The informality in credit delivery and easy access system demonstrated by the fact SHGs and MFIs has enabled them to become fastest growing segment in reaching out to small borrowers.
There are three types of credit groups as intermediaries for Micro Credit viz.
- Self Help Group
- Joint Liability Group
- Partnership ModelSelf Help Group
Self Help Group (SHG)
A SHG is a group of about 10 to 20 people from a homogenous class who join together to address common issues. They involve voluntary thrift activities on a regular basis and use of the pooled resource to make interest bearing loans to the members of the group. In the course of this process, they imbibe the essentials of financial intermediation and also the basics of account keeping. The members also learn to handle resources of size, much beyond their individual capacities. They begin to appreciate the fact that the resources are limited and have a cost.
Once the group is stabilized and shows mature financial behavior, which generally takes upto six months, it is considered for linking to banks. Banks are encouraged to provide loans to SHGs in certain multiples of the accumulated savings of the SHGs. Loans are given without any collateral and at interest rates as decided by banks.
Banks find it comfortable to lend money to the groups as the members have already achieved some financial discipline through their thrift and internal lending activities. The groups decide the terms and conditions of loan to their own members. The peer pressure in the group ensures timely repayment and becomes social collateral for the bank loans.
Generally, the SHGs need self-help promoting institutions (SHPIs) to promote and nurture them. These SHPIs include various NGOs, banks, farmers’ clubs, government agencies, self-employed individuals and federations of SHGs. However, some SHGs have also been formed without any assistance from such SHPIs.
Joint Liability Group (JLG)
Joint Liability Group is an informal group comprising 4-10 individuals coming together for the purpose of availing bank loan with singly or against mutual guarantee. The JLG members are expected to engage in similar type of activities like crop production. Under this tenant farmers cultivating their land either as real users or share cropper and small farmers who does not have proper title of their land holding will be eligible for collateral free credit.
The new generation banks who came into existence with heavy reliance on technology but very limited branch network, have taken innovative steps as bulk lending to micro finance institutions using them as pass through Agencies to tap new market.
In this model the micro finance institutions evaluate and recommend and originate the loan. They also help in disbursal and subsequently tracks and collects loan. However the loans sit on the books of bank and not of the micro finance institutions and credit risk left to the bank. This model also overcomes the constraints of capitalization of MFI and double exposure that banks are exposed to.