A micro-credit is a small loan given to poor people to encourage self-employment projects that can generate income and raise their standard of living. The entire system of micro-credit and its associated schemes such as insurance and saving accounts is known as micro-finance.

According to World Bank figures (2001), about three billion people in the world, or half its population, live on less than two dollars a day. Poor people in developing countries are more often than not trapped in poverty because on the one hand commercial banks will not lend them money as they are often neither in a position to offer collaterals nor are they considered “creditworthy” enough; while on the other, local money-lenders, who are often their only source of credit, charge exorbitantly high interest rates, thereby depleting them of whatever little possible savings they can manage. In such a scenario, micro-credit comes as a blessing because micro-credit institutions lend small sums of money at a reasonable interest rate without any collateral to people who need it the most. This money is then used to set up or boost an independent entrepreneurial activity that can provide a sufficient income for the borrower to easily repay the loan and generate enough profit for a better standard of living.

Institutions offering micro-credit are usually non governmental organisations (NGOs), but can also be credit unions, specialised banks or even commercial banks. Lending methods may vary from country to country and institution to institution, but the general framework comprises a collateral-free lending model with reasonable rates of interest. “Reasonable” in this case may generally mean a little more than that charged by urban commercial banks because door-step transaction costs are higher (the bank comes to the villager, not the villager to the bank) but certainly not anywhere near that charged by local money-lenders. Although the loans are made out individually, they are handed out to small groups of persons, known as “peer groups”, and if one person fails to repay, the entire group is penalised. This “social collateral” frees the borrower from complicated legal procedures and at the same time ensures repayment, which indeed is very high, almost 95 per cent. The loan cycle is also much shorter than commercial bank loans, rarely exceeding one year, and repayment is usually done in a weekly or fortnightly cycle, so that the borrower is not burdened with large dues.
The borrower utilises this loan to set up or to boost already-existing independent small scale units, which could be something as simple as a roadside shop. In some cases, micro-credit is also given for housing purposes. Not burdened with high interest rates and due to the friendly repayment terms, almost all borrowers are able to repay their loans on time and at the same time prosper in their enterprise. Once a loan cycle is over, a person can take further loans.

The poor people, especially women in poor families, gain the most. Micro-credit facilitates greater wealth and asset creation, lifting poor people out of poverty to a higher standard of living and access to better health and education facilities. It has been noticed that women in particular stand to gain a lot from micro-finance because it gives them an independent means of generating wealth and becoming self-reliant in a society that does not offer them much scope for entrepreneurship. And since it is women who run the household, a higher standard of living for women ensures better governance and a healthier and more prosperous future for the children and a better future for the nation.

Micro-credit as a banking concept is not new as it has been around in various forms for centuries. Even what the village money-lender practices is a form of micro-credit, although the exceptionally high rates of interest can ultimately do the borrowers more harm than good, trapping them into a continuous cycle of debt. It was in the 1970s, however, that micro-credit as an organised form of financial assistance for lower income people gained ground in developing countries.
The Grameen (rural) Bank project, launched in Bangladesh by Muhammed Yunus, a professor of rural economics at the Chittagong University, in 1976, is a frontrunner of the micro-credit movement. Starting with a few villages around Chittagong, the project targeted the poor and unemployed people, especially women, of the region and attempted to establish a suitable model for credit delivery and banking services for them, thereby enabling them to come out of the money-lenders’ clutches and create adequate opportunities for self-employment and self-reliance through credit injection and higher savings. The project was a big success and soon spread first to Tangail and then to other districts of Bangladesh with support from the central bank and nationalised commercial banks. In 1983, the project was transformed into an independent bank by a national legislation. Today, 90 per cent of its shares are held by the borrowers themselves i.e. the poor people, and the remaining 10 per cent by the government.
A Grameen Bank branch typically covers an area comprising 15 to 22 villages. The manager and other members of the staff visit the nearby villages to identify possible borrowers and explain the purpose and methodology of the project to them. Initially, groups of five borrowers are formed, out of whom only two are given a small loan with which they can start their own micro-enterprises such as buying a rickshaw, livestock or machine. Once, over a period of six weeks or so, the borrowers start repaying, the other members of the group become eligible for loans. This “peer group pressure” generally ensures that the group conforms to the terms and conditions and not surprisingly, repayment rates on loans are a high 95 per cent, exceptions being generally due to unforeseen emergencies. The interest rate on all loans is 16 per cent.
As of February 2005, Grameen Bank has 4,208,808 members, an overwhelming majority of whom are women. It has 1,393 branches across the country, covering 50,023 villages. Since its inception, it has disbursed US $ 4,692.69 million in loans, of which US $ 4,217.38 has been repaid.

Women constitute a major proportion of the unorganised labour sector in India. These women are at a considerable disadvantage because they rarely own any assets, are often victims of exploitative labour practices, and lack of access to funds and loans. To solve this problem, a group of self-employed women in Gujarat came together in 1972 and registered themselves as a trade union, forming the Self-Employed Women’s Association (SEWA). SEWA sees itself as a confluence of three movements: the labour movement, the women’s movement and the co-operative movement.
In 1974, the Mahila SEWA Co-operative Bank was formed and registered under the Reserve Bank of India and the Gujarat government. The bank provides credit and banking services to poor but economically active women who would otherwise be exploited by money-lenders.
In 1978, SEWA Bank introduced door-step banking, with mobile vans traveling to areas with high customer concentration for cash collection. As of 2003, SEWA Bank had 29,595 members with a working capital of Rs 84,90,95,000.

The Virtual Library on Micro-credit Extensive information, data, case studies etc on micro-credit and micro-finance

Grameen Bank One of India’s premier rural microfinance institutions

SEWA BANK Credit services for poor but economically active women

State Bank of India One of India’s largest commercial banks

Centre for Youth and Social Development (CYSD) An NGO working for the development of t he deprived and marginalised in Orissa

Small Industries Development Bank India’s principal financial institution for the development of small industries

National Bank for Agriculture and Rural Development (NABARD) “Promoting sustainable and equitable agriculture and rural development through effective credit support, related services, institution building and innovative initiatives”

Citibank India One of the world’s leading private sector banks that deals with microfinance

Sa-dhan An association of community development finance institutions