Article

Micro Loans
November 27 , 2012

Micro loans are very small business loans meant for people from poor households. Micro loans are provided by micro finance institutions that network among poor entrepreneurs through various self-help groups.

Micro loans are given to the poor to help them set up and run micro enterprises. The borrowers are mostly rural women who engage in simple businesses like making pickle, papad, bangles, small toys, others who engage in tailoring, diary activities, and cattle rearing to those who run grocery stores.

Poor entrepreneurs have unique shortcomings- they lack regular income, have no assets to provide as security and often have no credit history or even bank accounts. Hence they are not lent to by traditional lenders like banks and NBFCs. These entrepreneurs are forced to borrow from private money lenders, some of who charge exorbitant rates as high as 200%.

Interest rate on micro loans is high compared to loans from traditional lenders. It is almost double the rates charged by banks on similar category of loans. Microfinance institutions (MFIs) incur high costs in making micro loans available to borrowers. Many of them borrow from banks and work through a network of field members to service loans. Since many MFIs are not non-profit NGOs they would also like to include a profit margin in the cost. Above all micro loans are very risky assets. For these reasons interest on micro loans are very high.

The fact that borrowers have been able to repay micro loans despite high interest rates point to affordability of micro loans for poor borrowers who in turn expect very high returns from their business ventures. Micro loans and micro finance in general is being viewed by policy makers and RBI as important means to achieve financial inclusion and alleviate poverty.

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