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.
SIMPLIFYING THE WORLD OF COLLATERAL
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).
WHAT IS A 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)
UNDERSTANDING MICROCREDIT FINANCE
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.
HOW DOES MICROFINANCING WORK?
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%.
MICROFINANCE: THE BENEFITS
- Access to rural people: Microfinance is very beneficial to those communities that traditional banking services do not penetrate. In remote rural areas where banks do not want to take on more liabilities, microfinance comes as a relief to the common man who is already pressed for cash. Through microfinance, a larger percentage of the population benefits and can fulfil their dreams and aspirations. It is estimated by the World Bank that 500 million people have directly or indirectly benefited from microfinance-related operations.
Building the overall economy: Microfinance has been very crucial in building a strong rural economy in our country and has helped so many people with the skill and passion to establish small businesses to realize their dreams.
The microfinance sector contributed about 2% of India’s gross value added (GVA), the productivity metric for the economy, while the overall contribution of the entire financial sector is about 5.5%, according to a study by the National Council of Applied Economic Research (NCAER).
- Improving Financial Literacy: Another major benefit of microfinance and microfinance institutions is that they have helped build financial literacy in rural areas where literacy and understanding are low. Bharat Financial Inclusion Ltd. (BFIL) has been one of the major institutions at the forefront of providing microfinance services to people.
- True Women Empowerment: Microfinance has also benefitted women, who have always been marginalized and access to finances has been a great struggle. It has provided women with an avenue to become independent and build their own lives without having to turn to the man of the household for every need. Hence microfinance has been viewed as a tool to empower women and in turn communities. There is a lot more social bonding and community development that can be achieved through microfinance.
Microfinance is a great tool to empower any cash-starved and capital-deficit economy to empower those sections of the society who aspire to build something of their own. The ones who even have the skill but do not have the necessary funding to back their ideas and dreams, for the ones who are forced to leave their villages and come afar just to make sure they have saved enough to start something they really wanted to.
We believe that making them financially independent will in turn not just positively impact the economy but also, directly, and indirectly, impact the lives of people and communities. At BFIL, we believe that Microfinancing is the right tool for socio-economic upliftment in a developing country like India.
Therefore, we offer loans for varied businesses, be it small vegetable shops, tailoring shops, eco-friendly initiatives, dairy-related setups, and more. At BFIL, it is more than just having built a robust system over the past years of work. For us, value addition and trust have been pivotal in helping many Indians build a meaningful life for themselves.