Question

Explain the role of microcredit in meeting credit requirements of the poor.

Answer 1

Microcredit refers to the provision of small loans and financial services to poor households through Self Help Groups (SHGs) and NGOs. Microcredit plays an important role in meeting the credit needs of the poor by encouraging saving habits and pooling small individual savings. SHGs provide loans to needy members without any collateral, making credit easily accessible to people who are normally denied loans by banks. SHGs also link poor households with banks, helping them obtain larger loans at low interest rates. Microcredit reduces dependence on moneylenders and enables poor families to start small income-generating activities, thereby improving their livelihood and reducing poverty.

Answer 2

The microcredit system helps in meeting the credit requirements of the poor in the 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.