Question

Explain the role of micro-credit in meeting credit requirements of the poor.

Answer 1

Micro credit refers to credit and other financial services provided to people experiencing poverty through Self Help Groups (SHGs) and non-government organisations. The Self Help Groups play a crucial role in meeting the credit requirements of people experiencing poverty by inculcating saving habits among rural households. The individual savings of many farmers are pooled together to meet the financial needs of the needy members of the SHGs. The members of these groups have been linked with the banks. In other words, SHGs enable economically poor individuals to gain strength. Also, the financing done through SHGs reduces transaction costs for lenders and borrowers. The National Bank for Agricultural and Rural Development (NABARD) was crucial in providing credit at special concessional rates. Presently, more than seven lakh SHGs are operating across different rural areas. SHGs' programmes are becoming popular among small and marginal borrowers owing to their informal credit delivery mechanism and minimum legal formalities.

Answer 2

Micro-credit System helps in meeting credit requirements of poor in following ways:

1. Self Help Groups (SHGs): Self-help groups encourage rural households to practice small-scale saving. Small funds are mobilized and made available as credit to various members.
2. No mortgage: Members, unlike banks, make loans with no collateral. Banks require mortgages before giving loans, which impoverished people cannot pay. However, SHGs do not function like banks and do not give credit without security.
3. Moderate rate of interest: Banks impose high interest rates while making loans. However, SHGs offer a relatively low interest rate that poor people may afford.