Banking- Micro Credit

Micro-Credit: In spite of the phenomenal outreach of formal credit institutions, the rural
poor still depend upon the informal sources of credit. Two major causes for this are the large
number of small borrowers with small and frequent needs. Also the ability of these borrowers to
provide collateral is very limited. Besides, the long and cumbersome bank procedures and their
risk perception have also been limiting factors. Micro-credit has emerged as the most suitable
and practical alternative to conventional banking in reaching the hitherto untapped poor
population.
Micro-credit or micro-finance means providing very poor families with very small loans to help
them engage in productive activities or grow their tiny businesses. Over time, the concept of
micro-credit been broadened to include a whole range of financial and non-financial services like
credit, equity and institution building support, savings, insurance etc. Micro-finance institution is
an organization that provides financial services to people with limited income who have
difficulty in accessing the formal banking sector. The objective of micro finance is to provide
appropriate financial services to significant numbers of low-income, economically active people
in order to finance micro-enterprises and non-farm income generating activities including agroallied
activities and ultimately improve their condition as well as that of local economies.’
As per RBI micro-finance is the provision of thrift, 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, and improve their living standard. Micro-credit institutions are those
that provide these facilities. The micro-finance approach has emerged as an important
development in banking for channelizing credit for poverty alleviation directly and effectively.
The micro-credit extended by banks to individual borrowers directly or through any agency is
regarded as a part of banks priority sector loans.

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