Microcredit: The foundation for making dreams come true

Behind every dream that comes true, financial backing is inevitable, be it for the urban or the rural areas. While the digital revolution has simplified the world of transactions for us, it is still a long way to get them to benefit the core of India's villages and small businesses.

Typically, traditional banking and financial services in our country are accessible only to people with secured employment, credit history, and collateral. But the downside to this is that India is a country where a large percentage of the population is still reeling in poverty and must sustain an income as low as ₹2 per day. With such a plight accessing financial services such as loans and credit schemes to help get through daily life and improve the standard of living seems to be a far-fetched idea for many.

Despite having such low incomes people still do save, borrow, acquire credit, and make payments on their debts. Hence when people cannot access these financial services they often turn to family, friends, and private money lenders for help, who tend to charge exorbitant amounts of interest for their services.

Microfinance or microcredit is a financial service designed to help low-income groups access financial services which otherwise are inaccessible to them. The goal of microfinance is to ultimately give impoverished people an opportunity to become self-sufficient. This comes as a boon to people with no money as this will help them to plan their financial investments and their repayment capability which will lead to their dreams coming true.

Through microfinance one can secure the needed capital to turn around life and become successful.

Before we move further, it is important to understand the role of collaterals in any loan scenario.


While for some it might be self-explanatory, the term collateral is not clearly understood by many. Collateral is something that is pledged as security for repayment of a loan, to be forfeited in the event of a default. In simple words, any entity, person, or group lending capital to another, needs an assurance that the receiver is authentic, and will clear the loan responsibly. Until this happens, collateral helps them have a security deposit.

Collateral also helps in validating the background and evaluating the capacity of an individual to be able to repay the loan within a predefined, mutually agreed time.

This is also followed by the need to have a guarantor to ensure that if for some reason the recipient is unable to pay the loan, the guarantor becomes the default to ensure they pay it off.

However, unfortunately, most of the loan seekers from small urban areas do not have the pre-set collaterals accepted by most of the institutions and suffer the cost of being unaware, are also exploited and conveniently denied loans for their business setups. The absence of a guarantor creates further problems.

This is where we are trying to simplify it through Microfinance. We do not take any guarantees or need a guarantor or need any member to give any property /asset papers/collateral. Every woman in the group or centre stands as a guarantor to other group members.

Accountability is established within the group with this approach. This group is what is usually referred to as a Joint Liability Group (JLG).


A JLG can be looked like a group of individuals (five members) who want to apply for a loan but are unable to do so in an individual capacity, due to socio-economic constraints. They come together to hold each other accountable as a group while being able to work towards building their ventures independently or in a group. This concept was established in India in 2014 by the rural development agency, National Bank primarily for Agriculture and Rural Development to provide institutional credit to small farmers. (NABARD)


Unlike conventional banking institutions that are concerned about collateral that a borrower must cover their loans, microfinance is designed to help build successful entrepreneurs by providing them with needed capital in a capital-starved market for small businesses.

Microfinancing organizations provide a wide range of services including account checking and savings, capital loans to Start-Ups that need immediate cash flow to build their business and help educate their customers on financial literacy.


Much like the traditional financial institutions and money lenders, even micro-financiers do charge interest on the loans and have specific payment plans that enable the borrower to pay back at regular intervals. But since microfinance organizations do not consider collateral to cover their loans, a unique system has been designed to help keep the cash flow rotational.

Often since people do not require large sums of money and don’t have any security to get the loans, micro financiers pool many borrowers together as a buffer. This system of pooling borrowers helps to collect the debt back as it is paid in a group and there is peer pressure that helps ensure the repayment is done on time, as one person's inability inadvertently affects the whole group's credibility.

But on the other hand, if the loans are repaid on time this builds good credit history and helps them seek larger sums of money in the future. However, something interesting to note at this point is that communities that avail microfinance services are considered to be poor, but the default rate is very low and could also be negligible as compared to conventional banks and the repayment amount on microloans is on an average higher and have been reported to be close to 98%.