Micro Credit is defined as provision of credit and other financial services and products of very small amount to the poor in rural, semi-urban and urban areas for enabling them to raise their income levels. Micro Credit Institutions (MCIs) are those which provide these facilities.
Banks are allowed to devise appropriate loan and savings products and the related terms and conditions including size of the loan, unit cost, unit size, maturity period, grace period, margins, etc. Such credit covers not only consumption and production loans for various farm and non- farm activities of the poor but also includes their other credit needs such as housing and shelter improvements.
Self-Help Groups (SHGs)
As stated earlier, despite the expansion of the banking sector, the rural poor--particularly the marginal farmers and landless labourers--depend to a very large degree on the moneylenders for credit. Several studies have shown that Self Help Savings and Credit Groups have the potential to bring together the banks and the rural poor. A Self-Help Group (SHG) is a registered or unregistered group of 15-20 people who voluntarily join together to save small amounts regularly. These pooled savings are used to make interest bearing loans to group members. In addition to inculcating the habit of thrift, SHG activity develops among its members the capacity to handle resources. When the group matures and stabilizes, it gets linked to the banks under a SHG-banks linkage program and banks start providing credit to SHGs. Note that banks provides credit to SHGs and not to individuals belonging to the SHG. It is the SHGs who pass on the loans to the individuals. Thus, the SHGs become responsible for repayment to the banks.
The group members use collective wisdom and peer pressure to ensure proper end-use of credit and timely repayment thereof. Peer pressure acts as an effective substitute for collaterals. Box 8.6 gives an indication of the financial inclusion through the self-help groups.