Everything you need to learn about microcredit

Microcredit is a small loan offered to people with no credit history, collateral, or stable source of income. It intends to support entrepreneurs who need help to acquire the funding required to launch a new business.

Because of its emphasis on assisting those from less privileged backgrounds, it is also more prevalent in developing nations. Typically, the recipients of these loans are either literate or have not studied much, making it harder for them to fill out the paperwork required for traditional loans.

Microcredit is an integral part of microfinance. It is a branch of finance that provides tailored financial services, such as loans and savings accounts, to help people from lower socioeconomic backgrounds.

According to reports, the Bangladeshi Grameen Bank is where it all started in 1983, with Muhammad Yunus, an economist, as the inspiration. The importance of microcredit has been acknowledged by experts and has recently been employed as a strategy to narrow the worsening income disparity.

Also Read: How to Improve Your Credit Score
 

History of Microcredit

Even though the word microcredit has gained prominence in the Indian sub-continent region after 1983, as a concept it has been there for a long time. In Ireland, lending to those from lower socioeconomic backgrounds dates back to the 1700s.

However, between the 1970s and the 1980s, a new perspective on the provision of microcredit emerged, and Muhammad Yunus played a significant role in its development. To shape his vision, he decided to launch Grameen Bank in 1983. As a result, Grameen Bank was able to get money and develop a microcredit model.

In Bangladesh, a group of women who produced bamboo stools paved the way for one of the first cases of microcredit. However, due to the suppliers' repayment, the women only made a tiny profit of $0.02 on each stool. Muhammad Yunus believed that women could escape poverty if given access to a line of credit to make supplier payments. After receiving a $27 business loan, the women could maintain their business and repay debt.
 

How does microcredit operate?

The cornerstone of microcredit was the idea to offer financial assistance to people with an entrepreneurial mindset residing in underdeveloped nations where access to traditional financial services is not easy. Furthermore, individuals who use microcredit services often operate on a barter system, in which one commodity or service is exchanged for another in place of money, and vice versa.

However, the Grameen Bank model changed this notion. It offered loans of various amounts and created the foundation of the modern notion of microcredit. There may be no written agreements stipulating payback terms for microcredit loans. Those who repay their micro loans build credit and are eligible for loans of larger amounts.

Furthermore, interest may be charged to microcredit loans, and some loans may have a clause requiring borrowers to save a part of their earnings in a savings account as collateral. The entire balance of the savings account is available upon loan repayment.

Microlenders usually combine borrowers as a buffer because many applicants lack the means to provide collateral. As a result, recipients settle their bills collectively after getting loans. In addition, as everyone's participation is essential to the program's success, this induces peer pressure that may aid in securing repayment.

For instance, if you have problems using your money to launch a business, you can ask the loan officer or other group members for assistance. In addition, repaying loans helps you establish a positive credit history, which enables you to apply for larger loans.

Even though you as a borrower usually fall under the low-income category, repayment amounts for microloans are higher than that for conventional business finances.
 

What are the activities supported by microcredit?

Microcredit programs often fund the following enterprises:

• Cottage industry
• Farming and agricultural work
• Craftsmanship-related activities
• Small-scale business enterprise

 

What are the characteristics of a microcredit programme?

To help low-income people become independent and financially secure, microfinance loans offer a variety of advantages. Key elements of the plan include:

• Accessible to low-income individuals and groups in rural and semi-urban locations
• Microfinance loans can be utilised for entrepreneurial and self-employment ventures
• Collateral-free loans with low-interest rates
• Quick access to funds because of the absence of regulation from traditional lenders
• Less paperwork 
• Quick turnaround times lead to faster loan processing
• Flexible alternatives for repayment based on the type and length of employment activity
• Recurrent loans are possible based on the plan, ability to repay, and necessity

Also Read: Can You Get a Personal Loan with A Low Credit Score

Drawbacks of Microcredit

Micro loans have drawn criticism for their potential for abuse. For instance, microcredit was implemented in some of the most impoverished regions in South Africa to encourage residents to pursue self-employment. Unfortunately, in a few cases, the fund was expended through consumption spending instead of establishing or promoting any business or employment activity.

Furthermore, even with the small loans made available through microcredit, borrowers could have a debt load they cannot pay off. The issue is that the borrowers may not have a reliable source of income or intend to use microcredit to establish an income source to repay the loan. As a result, some borrowers have resorted to selling off personal belongings and looking for new loans to pay off their prior microcredit.
 

In summary

Microcredit is a minimal loan provided to persons without a reliable source of income, collateral, or any credit history. In developing nations, the progress of financial inclusion is mainly dependent on microcredit. With its assistance to lower-income and socially disadvantaged classes, the small loan programme has contributed to the recent success in lifting people out of poverty.

On the other hand, if you are planning to set up a business and searching for an easy credit option, then opting for a business loan from Hero FinCorp can help you realise those dreams.
 

FAQs

1. How old should I be to get business finance from Hero FinCorp?
   You should be at least 21 years to secure a business loan from Hero FinCorp.

1. What is the maximum repayment tenure of a business loan from Hero FinCorp?
   The maximum tenure of a business loan from Hero FinCorp is 3 years.

1. What is the maximum loan amount I can borrow as a business loan?
   You can borrow up to Rs 25 lakh for your business.

1. What is the business vintage required to get a business loan from Hero FinCorp?
   Your business should be an SME that has been in business for at least 5 years to secure business finance from Hero FinCorp.