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Role Of Micro-Loan In the Modern Financial Industry

Even if the procedure and terms of loan advances from banks and other financial institutions have been made more flexible in recent years, large segments of the population still lack the financial capacity to secure a traditional loan. Traditionally, a loan is accepted when the borrower submits collateral security so that if the borrower is unable to repay the loan with interest, the bank can seize the collateral security and use it to reclaim the money owed to the borrower.

But what about those who don’t have anything to put up as collateral for a bank to extend a loan to them? What about those who are unable to put anything up as security for a loan? This is how the concept of a micro-loan was born, allowing people to borrow money from banks without having to put up any collateral.

What is a micro-loan?

Unlike ordinary loans, which require the borrower to place something as collateral and pay a standard rate of interest set by the RBI, micro-loans do not require any collateral security and have somewhat higher interest rates than traditional bank loans. A micro-loan is a tiny loan that is generally used to fund entrepreneurial endeavours by underprivileged individuals and groups, particularly in poor or developing areas.

Micro-loans are a type of microfinance that also includes micro-savings and micro-insurance. Microfinance is a type of lending that provides small business owners and entrepreneurs in developing countries with loans, credit, insurance, access to savings accounts, and money transfers. Micro-finance benefits those who do not have access to standard financial resources like normal people, although the interest rates on micro-loans are slightly higher than normal loans.

Micro-loans are loans that are not issued by banks, credit unions, or other financial institutions. Micro-loans are typically given to the underdeveloped population of third-world or developing countries so that they can start a small business and start earning a living. Because these borrowers’ credit is poor and there is a considerable risk of loan default, micro-loans can have higher interest rates than traditional loans, making them appealing to some investors.

Role of micro-loan in the modern financing industry

Almost half of our country’s population still lacks access to a basic savings account. This is the same group of people that are considered financially disadvantaged and are unable to obtain a standard bank loan. People that are financially underserved have access to micro-loans, micro-savings, and micro-insurance through micro-finance.

If microfinance institutions failed to serve these people, they would turn to unofficial moneylenders, who charge much higher interest than any other financial institution, and there is a good chance that if they did not repay the borrowed money in a timely manner, these unofficial moneylenders would seize the borrower’s property or even threaten their lives.

In India, micro-loans are generally distributed through two routes to those in need: – 

  1. SHG- BANK LINKAGE PROGRAMMES (SBLP): – It was started in 1992 by NABARD. This programme allows a group of 10-15 economically disadvantaged women to contribute their own savings to the group on a monthly basis. These funds are used to give loans to members of the group. This concept has already been lauded for its contribution to women’s empowerment in our country.
  2. MICRO-FINANCE INSTITUTIONS: – Microfinance services are available from a variety of sources, including (a) Formal institutions, such as companies and rural banks; (b) Semi-formal institutions, such as non-governmental organizations; and (c) Informal sources, such as shops and small-scale lenders. 
Criticism 

Even though many people praise the notion of micro-loans for their success in combating poverty, some people argue that micro-loans and micro-finance make poverty worse. The fact that many borrowers utilize these loans to pay off current debts merely adds to the loop of borrowing money and increases their debt burden. Some people also feel that micro-loans have had no positive impact on gender relationships, that they do not reduce poverty, and that they promote welfare privatization.

When Abhijit Banerjee and others conducted the first review of micro-loans, the results were mixed; they discovered that there was no influence on household expenditure, education, health, or gender equality.

Conclusion 

Microloans are a type of microfinance that also includes microinsurance and micro-savings. Micro-loans have proven to be extremely effective in combating poverty not only in India but also in other developing countries. In 1983, Mohammad Yunus came up with the notion of a micro-loan to aid the people in his hamlet of Juba. Many countries, including India, still employ micro-loans to combat poverty. 

Many individuals still believe that micro-loans are nothing more than welfare privatization and that they do little to alleviate poverty or raise the living conditions of financially disadvantaged people. And it is for this reason that more people need to be taught about micro-loans so that negative stereotypes about them can be dispelled and more individuals who are financially disadvantaged can improve their living conditions.

By Pragati Sengar