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Micro credit is the extension of very small loans (micro loans) to the unemployed, to poor entrepreneurs and to others living in poverty who are not considered bankable. These individuals lack collateral, steady employment and a verifiable credit history and therefore cannot meet even the most minimal qualifications to gain access to traditional credit. Micro credit is a part of microfinance, which is the provision of a wider range of financial services to the very poor and consists of the entire system of micro-credit and its associated schemes such as insurance and saving accounts.
Micro Credit is also defined as provision of thrift, credit and other financial services and products of very small amount to the poor in rural, semi-urban and urban areas for enabling them to raise their income levels and improve living standards. Micro Credit Institutions are those which provide these facilities.
Thus, micro credit is increasingly gaining credibility in the mainstream finance industry and many traditional large finance organizations are contemplating micro credit projects as a source of future growth. The United Nations declared 2005 the International Year of Micro credit.
Micro credit emphasizes on building the capacity of a micro entrepreneur, employment generation, building trust and providing help to the micro entrepreneur on initiation and during difficult times. Micro credit is a tool for socio-economic development.
Three C's of Credit:-
Character means how a person has handled past debt obligations: From credit history and personal background, honesty and reliability of the borrower to pay credit debts is determined.
Capacity means how much debt a borrower can comfortably handle. Income streams are analyzed and any legal obligations are looked into, which could interfere in repayment.
Capital means current available assets of the borrower, such as real estate , savings or investment that could be used to repay debt if income should be unavailable.
NEED FOR MICRO CREDIT
According to The World Bank figures (2001), about three billion people in the world, or half of its population, lives on less than two dollars a day. Poor people in developing countries are more often than not trapped in poverty because on one hand commercial banks do not lend them money as they are often neither in a position to offer collaterals nor are they considered
enough "creditworthy"; while on the other hand, local money-lenders, who are often their only source of credit, charge exorbitantly high interest rates, thereby depriving them of whatever little possible savings they can manage. In such a scenario, micro-credit comes as a blessing because micro-credit institutions lend small sums of money at a reasonable interest rate without any collateral to people who need it the most. This money is then used to set up or boost an independent entrepreneurial activity that can provide sufficient income for the borrower to easily repay the loan and generate enough profit for a better standard of living.
HISTORY OF MICRO CREDIT
The present use of the expression micro financing has it roots in the 1970s when organizations, such as Grameen Bank of Bangladesh with the microfinance pioneer Mohammad Yunus, where starting and shaping the modern industry of micro financing. Another pioneer in this sector is Akhtar Hameed Khan. At that time a new wave of microfinance initiatives introduced many new innovations into the sector. Many pioneering enterprises began experimenting with loaning to the underserved people. The main reason why microfinance is dated to the 1970s is that the programs could show that people can be relied on to repay their loans and that it's possible to provide financial services to poor people through market based enterprises without subsidy. ShoreBank was the first microfinance and community development bank founded 1974 in Chicago.
HOW DOES IT WORK?
Institutions offering micro-credit are usually non governmental organizations (NGOs), but can also be credit unions, specialized banks or even commercial banks. Lending methods may vary from country to country and institution to institution, but the general framework comprises a collateral-free lending model with reasonable rates of interest. "Reasonable" in this case may generally mean a little more than that charged by urban commercial banks because door-step transaction costs are higher (the bank comes to the villager, not the villager to the bank) but certainly not anywhere near that charged by local money-lenders. The loans are made out individually, but they are handed out to small groups of persons, known as "peer groups", and if one person fails to repay, the entire group is penalized. This "social collateral" frees the borrower from complicated legal procedures and at the same time ensures repayment, which indeed is very high, almost 95 per cent. The loan cycle rarely exceeds one year, so is much shorter than commercial bank loans, and repayment is usually done in a weekly or fortnightly cycle, so that the borrower is not burdened with large dues. The borrower utilizes this loan to set up or to boost already-existing independent small scale units, which could be something as simple as a roadside shop. In some cases, micro-credit is also given for housing purposes. Not burdened with high interest rates and due to the friendly repayment terms, almost all borrowers are able to repay their loans on time and at the same time prosper in their enterprise. Once a loan cycle is over, a person can take further loans.
BENEFITS OF MICRO-CREDIT
A. Reduction of Vulnerability
One of the most important benefits of micro credit programs is its ability to reduce vulnerability among the poor. This reduction occurs through a number of different channels.
Micro credit programs help borrowers to insure themselves against crises by building up household assets. Such assets can be sold if needed. They can also be used as security or proof of credit worthiness when dealing with businessmen or more traditional lending agencies. Finally, the diversification of assets can reduce the risks of catastrophic loss. For example, a family which relies on share-cropping could easily be bankrupted by a single crop loss, whereas a family with a diversified base of crops and livestock or handicraft income could survive until the next harvest. Other aspects of micro credit programs such as skills training and female empowerment also contribute to a family's ability to cope with crises by increasing the variety of responses a family can make to a challenging situation.
B. Increased Consumption
The increase in household consumption is another benefit of micro credit programs .Researchers have found that income smoothing, which is the result of lessened vulnerability, also leads to consumption smoothing. These are both important effects for people who typically live on the edge of a disaster. Even small increases in consumption and increased regularity in consumption can lead to better health and nutrition, and enhance the ability to make long range plans for the family.
C. Reduced Income Poverty
Income poverty is also reduced by micro credit programs. That is, borrowers actually tend to make more money over time. Once the cycle of poverty has been arrested and some stability provided, many borrowers go on to make profitable investments and even pull themselves out of poverty altogether.
The poor people, especially women in poor families, gain the most. Micro-credit facilitates greater wealth and asset creation, lifting poor people out of poverty to a higher standard of living and access to better health and education facilities. It has been noticed that women, in particular stand to gain a lot from micro-credit because it gives them an independent means of generating wealth and becoming self-reliant in a society that does not offer them much scope for entrepreneurship. And since it is the women who run the household, a higher standard of living for women ensures better governance and a healthier and more prosperous future for the children and for the nation as well.
CREDIT LENDING MODELS
The target community forms an 'association' through which microfinance activities (e.g. savings) are initiated. Associations are composed of youth, women, etc; can form around political /religious /cultural issues; can create support structures for micro enterprises and other work-based issues.
2. Bank Guarantees
Bank guarantee is used to obtain a loan from a commercial bank. Guarantee may be arranged externally or internally. Loans obtained may be given directly to an individual, or to a self-formed group.
3. Community Banking
Community banking model essentially treats the whole community as one unit, and establishes semi-formal or formal institutions through which microfinance is dispensed.
A co-operative is an autonomous association of persons united voluntarily to meet their common economic, social and cultural needs through a jointly-owned and democratically-controlled enterprise.
5. Credit Unions
A credit union is a democratic, self-help (not-for-profit) financial institution organized by members of a particular group, who save their money together & make loans to each other at reasonable interest rates.
6. Grameen model
The Grameen model emerged from The Grameen Bank. It adopts a methodology in which collective responsibility of the groups of bankers & villagers formed serves as collateral on the loan.
7. Group Model
The Group Model's basic philosophy is that shortcomings at the individual level are overcome by the collective responsibility and security afforded by the group formation for a number of purposes.
This is a straight forward credit lending model where micro loans are given directly to the borrower.
Intermediary model positions a 'go-between' organization between the lenders and borrowers. The intermediary generates credit awareness among borrowers for raising their 'credit worthiness'.
10. Non-Governmental Organizations
NGOs actively help in creating awareness on micro credit, developing resources & tools for communities to monitor progress & identify good practices & creating opportunities to learn about micro credit.
11. Peer Pressure
Peer pressure uses moral and other linkages between borrowers and project participants to ensure participation and repayment in micro credit programmes.
Rotating Savings and Credit Associations are a group of individuals who come together and make regular cyclical contributions to a common fund, which is given as lump sum to one member in each cycle.
13. Small Businesses
Micro credit has been provided to SMEs (Small and medium enterprises) directly, or as a part of a larger enterprise development program, along with other inputs.
14.VillageBanking Village banks are community-based credit & savings associations of low-income individuals. Initial loan may come from external source, but members themselves run the bank, choose members, elect officers, establish own by-laws, distribute loans, and collect payments and savings.
INDIA AND MICRO-CREDIT
Due to the sheer size of the population living in poverty, India is strategically significant in the global efforts to alleviate poverty and to achieve the Millennium Development Goal of halving the world's poverty by 2015. Microfinance has been present in India in one form or another since the 1970s and is now widely accepted as an effective poverty alleviation strategy. Over the last five years, the microfinance industry has achieved significant growth in part due to the participation of commercial banks. Despite this growth, the poverty situation in India continues to be challenging.
By the Numbers:-
Micro credit is quickly spreading in India, but the loans don't always lead to businesses; in some cases they are even used to pay off previous debts.
· 200,000 -- People getting loans in 1996.
· 17.5 million -- People getting loans in 2006.
· $4 million -- Value of loans granted in 1996.
· $1.3 billion -- Value of loans granted in 2006.
· $75 -- Size of average loan.
Figures for the year ending Mar. 31, 2006. Source: Micro-Credit Ratings International.
India is said to be the home of one third of the world's poor which officials estimate ranges from 26 to 50 percent of the total population and about 87 percent of the poorest households do not have access to credit. Coincidentally, the poor have proved to be an excellent credit risk. Over the past 2 1/2 decades, the Grameen Bank of Bangladesh has made more than $4 billion in loans averaging less than $200, and has a loan repayment rate greater than 98 percent.
INSTITUTIONS PROVIDING MICRO CREDIT
1. SELF HELP GROUP-
A Self-Help Group (SHG) is a registered or unregistered group of micro entrepreneurs having homogenous social and economic background, voluntarily coming together to
save small amounts regularly, to mutually agree to contribute to a common fund and to meet their emergency needs on mutual help basis.
A poor individual gains strength as a part of a group. Financing through SHGs reduces transaction costs for both lenders and borrowers. While lenders have to handle only a single SHG account instead of a large number of small-sized individual accounts, borrowers as part of a SHG cut down expenses on travel (to & from the branch and other places) for completing paper work and on the loss of workdays in canvassing for loans.
2. MICRO-CREDIT FOUNDATION OF INDIA
Micro credit Foundation of India (MFI) is a not-for-profit Section 25 Company in Tamil Nadu dedicated to promoting entrepreneurship and community level action in rural areas as a means to sustainable economic prosperity. Today MFI works primarily with women. Through its field staff, MFI helps them form Self Help Groups (SHGs), trains them in good financial practice, facilitates access to micro credit loans, equips them with business skills and facilitates access to new markets for their products.
3. MICRO-FINANCE DEVELOPMENT FUND
There is an urgent need for micro credit providers to shift from a minimalist approach - that is offering only financial intermediation - to an integrated approach to poverty alleviation taking a more holistic view of the client including provision of enterprise development services like marketing infrastructure, introduction of technology and design development. In this context, the setting up of the Rs.100 crore Micro Finance Development Fund marks an important step.
4. SELF EMPLOYED WOMEN'S ASSOCIATION BANK (SEWA)-
Women constitute a major proportion of the unorganized labor sector in India. These women are at a considerable disadvantage because they rarely own any assets, are often victims of exploitative labor practices, and lack of access to funds and loans. To solve this problem, a group of self-employed women in Gujarat came together in 1972 and registered themselves as a trade union, forming the Self-Employed Women's Association (SEWA). SEWA sees itself as a confluence of three movements: the labor movement, the women's movement and the co-operative movement. In 1974, the Mahila SEWA Co-operative Bank was formed and registered under the Reserve Bank of India and the Gujarat government. The bank provides credit and banking services to poor but economically active women who would otherwise be exploited by money-lenders. In 1978, SEWA Bank introduced door-step banking, with mobile vans traveling to areas with high customer concentration for cash collection. As of 2003, SEWA Bank had 29,595 members with a working capital of Rs. 84,90,95,000.
Bandhan is working towards the twin objective of poverty alleviation and women empowerment. It started as a Capacity Building Institution (CBI) in November 2000 under the leadership of Mr. C.S Ghosh. Bandhan opened its first microfinance branch at Bagnan in West
Bengal in July ,2002 and today it has 412 branches across 6 states of the country. The organization had recorded a growth rate of 611% in the year 2004-05. Till date, it has disbursed a total of Rs. 587 crores among almost 7 lakh poor women. The repayment rate is recorded at 99.99%. Bandhan has staff strength of more than 2130 employees.
MICRO-CREDIT AND THE WORLD
Micro credit is not only provided in poor countries, but also in one of the world's richest countries, the USA, where 37 million people (12.6%) live below the poverty line.In December 1998, the Year 2005 was recognized by the United Nations General Assembly as the International Year of Micro credit stating that the Year will be an important opportunity to give impetus to microfinance programmes throughout the world.
The five key objectives for the Year are designed to unite Member States, UN Agencies and Microfinance Partners in their shared interest to build sustainable and inclusive financial sectors and achieve the Millennium Development Goals (MDGs). The objectives are to:
1. Assess and promote the contribution of microfinance and micro credit to the MDGs;
2. Increase public awareness and understanding of microfinance and micro credit as vital parts of the development equation;
3. Promote inclusive financial sectors;
4. Support sustainable access to financial services, and
5. Encourage innovation and new partnerships by promoting and supporting strategic partnerships to build and expand the outreach and success of micro credit and microfinance.
The World Bank launched its own micro lending arm, the "Consultative Group to Assist the Poorest," (CGAP) with the goal of "systematically increasing resources in microfinance." World Bank President James Wolfensohn claimed CGAP would improve access to micro credit for "the globe's poorest citizens, particularly women."
CGAP is the leading independent resource for objective information, expert opinion, and innovative solutions for microfinance. It works with the financial industry, governments and investors to effectively expand access to financial services for poor people around the world. Their mission is to help alleviate poverty by advancing access to finance. GRAMEEN BANK
The Grameen Bank (1976, Professor Muhammad Yunus) is a microfinance organization and community development bank started in Bangladesh that makes small loans (known as micro credit or "grameen credit" to the impoverished without requiring collateral. This bank's system is based on the idea that the poor have skills that are under-utilized. A group-based credit approach is applied which utilizes the peer-pressure within the group to ensure that borrowers follow through and use caution in conducting their financial affairs with strict discipline, ensuring repayment eventually and allowing the borrowers to develop good credit standing. The bank also accepts deposits, provides other services, and runs several development-oriented businesses including fabric, telephone and energy companies. Another distinctive feature of the bank's credit program is that a significant majority of its borrowers are women.
As of August, 2008, it has 7.56 million borrowers, 97 percent of whom are women. With 2,529 branches, GB provides services in 82,994 villages, covering more than 99 percent of the total villages in Bangladesh. .
The micro credit movement has been described as a privatization of public safety-net programs. Enthusiasm for micro credit among government officials as an anti-poverty program can motivate cuts in public health, welfare, and education spending. It is argued that success of the micro credit model has been judged disproportionately from a lender's perspective (repayment rates, financial viability) and not from that of the borrowers. For example, the Grameen Bank's high repayment rate does not reflect the number of women who are repeat borrowers, and have become dependent on loans for household expenditures rather than capital investments. Studies of micro credit programs have found that women often act merely as collection agents for their husbands and sons, such that the men spend the money themselves while women are saddled with the credit risk. As a result, borrowers are kept out of waged work and pushed into the informal economy.
Many studies in recent years have shown that risks like sickness, natural disaster and over indebtedness are a critical dimension of poverty, and that very poor people rely heavily on informal savings to manage these risks. It might be expected that microfinance institutions would provide safe, flexible savings services to this population, but -- with notable exceptions like Grameen II -- they have been very slow to do so. Some experts argue that most micro credit institutions are overly dependent on external capital. A study of micro credit institutions in Bolivia in 2003 for example, found that they were very slow to deliver quality micro savings services because of easy access to cheaper forms of external capital. Global data tables from The Micro banking Bulletin show that savings represent a small source of funds for micro credit institutions in most developing nations. Bangladesh's Finance and Planning Minister, M. Saifur Rahman charges that some microfinance institutions use excessive interest rates.
There are those who say the programs often fail to reach the poorest of the poor, or lead to gender conflict, or charge interest rates that are too high. And its supporters acknowledge that micro credit is no panacea.
2010 has taken the world of micro finance for a roller coaster ride. The year saw SKS microfinance founder Mr.Vikram Akula being honored with the best entrepreneur award by Mrs.Sonia Gandhi. On July 28,2010 India's biggest microfinance company SKS microfinance was listed at the BSE.
Sadly the good part ends right here. This was followed by a very unceremonious dismissal of Mr Suresh Gurumani, the CEO of SKS. It is alleged that Mr.Akula was struggling with two cases back in US. Thus, he didn't want to take any chances with the listing process, which could have suffered if a person with judicial cases pending against him was involved. With the cases