Microcredit: Understand Meaning, Features, Example and more

Updated on: 29 June 2023

Published on: 28 June 2023

Microcredit: Understand Meaning, Features, Example and more

Microcredit for businesses provides financing options that empower them to function seamlessly. With adequate funding, businesses can ensure they have enough capital to sustain and execute operations stress-free. That’s not all, this funding can help aspiring entrepreneurs get started, and launch a business. 

As a financing tool, microcredit has many benefits, especially when used to meet unexpected business expenses. You get funding instantly and without any hassles whatsoever. However, you do need to meet a few terms and follow adequate protocols to get approved. 

Read on to learn the microcredit meaning, its examples, and its importance.

What is microcredit?

Microcredit refers to a business loan of a small amount and offers financial support to entrepreneurs in need of short-term funding. This funding is intended to aid low-income group individuals and enable them to pursue their entrepreneurial ambitions. 

With the assistance of micro credit, individuals can work on growing their existing small businesses or use it to start a new business. Financial backing provided by micro credit can encourage individuals to realise their entrepreneurial ideas. 

This welcome initiative boosts the country’s economy, reducing poverty and improving the lifestyle of people. Micro credit is offered by:

  • Commercial banks
  • Non-profit organisations (NGOs)
  • Government or public banks
  • Cooperative societies
  • Credit unions

Microcredit solutions are generally collateral-free, while some instruments may require collateral. Along with that, individuals looking into getting this facility get flexible repayment tenures and affordable interest rates. 

Features and examples of microcredit

Here are some attractive features offered by microcredit:

  1. Loans of a short tenure

Eligible borrowers can become debt-free sooner as microcredit facilities have a repayment period of 1-2 years.

  1. A low minimum sanction

Lenders offer micro-loans starting at ₹5,000. The average loan amount that most eligible borrowers apply for is usually around ₹30,000. This allows them to get small-ticket loans that do not strain their finances during repayment.

  1. Minimal or no collateral requirement

Individuals do not have to risk their personal assets as microloans are available without any need to provide security. This also helps make the loan approval process smoother and faster.

  1. Cost-efficient rate of interest

Since microloans are offered to boost a borrower’s income via entrepreneurship, they come at pocket-friendly interest rates. This makes repayment easier.

  1. Quick approvals

Organisations that offer microcredit are mindful of borrowers’ needs. They make the process seamless by approving loan applications faster. 

  1. Minimal paperwork requirement

Since microcredit facilities do not require collateral, borrowers only need to submit basic KYC and income-related documents. This speeds up the application process.

  1. Option of flexible loan repayment

Based on the financial institution, individuals can repay microcredit in a variety of convenient ways. They can choose between weekly, monthly or other structures like making a payment every 15 days.

Modern-day microcredit solutions are a key part of microfinance and have evolved to cater to the nuanced requirements of individuals and businesses. The government of India also introduced an initiative providing micro credit to those that needed it. 

Facilitated by the National Bank for Agriculture and Rural Development, the government’s microcredit program has helped many from economically weaker sections get access to financing solutions to either set up or expand their businesses. 

Leading financial institutions also offer such services, and have simplified access down to a few clicks. Digitisation has empowered this shift, enabling seamless access across the nation.  

Importance of microcredit

Microcredit provides numerous benefits to the borrowers, as well as the economy as a whole. Here are a few benefits of microcredit:

  • Helps in improving the country’s economy
  • Encourages entrepreneurship
  • Helps in the alleviation of poverty
  • Empowers the country’s economically weaker section
  • Encourages financial independence
  • Improves employment and entrepreneurship
  • Helps in improving the standard of living
  • Encourages utilisation and improvement of skills
  • Drives financial inclusion for the underserved

Whether you are an entrepreneur or a working-class citizen, there may be instances in life where you need external financial support. Microcredit provides this support, especially to those looking to run a business. 

Fibe, a leading lending platform, also offers to finance starting at just ₹5,000 for a range of needs for salaried and self-employed professionals. We make credit more inclusive as you do not need a credit score to get a loan. With Fibe, you can get instant personal loan through a convenient and straightforward digital application. 

Avail up to ₹5 lacs, get flexible repayment options and enjoy attractive interest rates with us. All you have to do is download our instant loan app or log in to our website and apply for the loan. 

FAQs on Microcredit

What is an example of microcredit?

An example of microcredit is a loan offered by Microfinance Institutions (MFIs) or other such entities to the economically weaker sections of the population. These can be business loans or startup loans, and the funds can help individuals explore entrepreneurial opportunities. 

What are the functions of microcredit?

The main function or objective of microcredit and its associated schemes is to provide small business loans to the financially weaker sections of the country. The funds can be used for setting up a new business or expanding an existing business. 

What is the difference between microcredit and microfinance?

Microfinance refers to initiatives and financial services for supporting financially weaker entrepreneurs. This also includes additional facilities and initiatives, including agricultural loans, government subsidiaries, larger business loans, savings accounts, and much more. Microcredit is a part of microfinance.  

What is microcredit as per the RBI?

The Reserve Bank of India, or RBI, monitors and regulates the financial institutions in India, which also includes those that offer microcredit. The Reserve Bank of India released a new notification regarding microcredit. According to this notification, microfinance loans will be provided collateral-free loans for Indian families with an annual income of ₹3 lacs.

Category : Finance

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