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

Question

Accepted Answer

The institutional structure of rural banking today consists of a set of multi-agency institutions, namely, commercial banks, Regional Rural Banks (RRBs), co-operatives and land development banks. Recently, Self-Help Groups (SHGs) have emerged to fill the gap in the formal credit system. Such credit provisions are generally referred to as micro-credit programmes. Micro-credit has played an important role in meeting the credit requirements of the poor in the following ways:

1. The formal credit system has not been able to dispense adequate credit at cheaper rates to the rural poor. Micro-credit thus fills the gap in the formal credit system.

2. The formal credit delivery mechanism has not been fully integrated into the overall rural social and community development. Hence, poor people in rural areas are hesitant in approaching formal credit institutions, while they can freely approach SHGs which have become a part of the community.

3. Poor rural households are left out of the credit network as they do not have any kind of collateral required by formal credit institutions. Micro-credit institutions do not require such collateral.

4. Micro-credit programmes promote thrift in small proportions through a minimum contribution from each member. From the pooled money, credit is given to the needy members, to be repaid in small instalments at reasonable interest rates.

5. SHGs have helped in the empowerment of women through the provision of self-employment opportunities with the help of micro-credit. However, micro-credit borrowings are mainly confined to consumption purposes, and only a very small proportion goes into productive purposes.