Microcredit

Also called: Microfinance, Micro-credit, Micro-credit programmes · Topic: Rural Credit, Microfinance and Financial Inclusion · NCERT: Class 10, Ch 3 "Money and Credit"; Class 11, Ch 5 "Rural Development"

Meaning

Microcredit (also called microfinance) means small loans, usually without collateral, given to poor people for self-employment and household needs. These loans reach borrowers through three channels: self-help groups (SHGs), joint liability groups (JLGs) and microfinance institutions (MFIs). Collateral is an asset, such as land or gold, that a borrower pledges and loses if they do not repay.

In India, the RBI's legal definition of a microfinance loan is a "collateral-free loan given to a household having annual household income up to ₹3,00,000" (Master Direction, 14 March 2022, effective 1 April 2022) [4].

Why it matters:

• Poor households, especially women, own little they can pledge. So banks would not lend to them, and they borrowed from moneylenders at very high interest.
• Microcredit replaces physical collateral with social collateral: the group guarantees the loan and uses peer pressure to make sure it is repaid.
• This brings asset-less women into formal credit.

Explanation

1. How it works: social collateral in place of physical collateral

• The problem. Bank nationalisation in 1969 (the start of "social banking") took bank branches into villages. Even so, the poor still depended on moneylenders.
• Banks ask for collateral.
• The rural poor have little to pledge.

• So they borrowed at very high interest and fell into debt traps.

• The fix is group liability. The group, not the single borrower, answers for the loan.

• If one member does not repay, the others follow it up.
• This peer pressure takes the place of collateral.

• So banks can lend to poor women without asking for security.

• Proof that it works. Grameen Bank of Bangladesh was founded by Muhammad Yunus. It began as a project in 1976 and became a bank in 1983.

• It showed that poor women are "reliable borrowers" who can run small income-generating activities.
• Yunus and Grameen Bank shared the 2006 Nobel Peace Prize.
• By 2018 it had over 9 million members in about 81,600 villages.

2. The three delivery channels

• SHG (self-help group). A small group of rural poor people, mostly women, from one neighbourhood.
• Size: 15-20 members (NCERT Class 10). The DAY-NRLM norm is 10-20.
• Special groups can have as few as 5 members. These include persons with disabilities and groups in remote tribal areas (RBI DAY-NRLM circular, 2018) [5].
• Members save first, then lend to each other. Later the group borrows from a bank in the group's own name.

• The group decides the purpose, amount, interest rate and repayment schedule. The bank or NGO does not.

• JLG (joint liability group). An informal group of 4-10 borrowers, introduced by NABARD in 2006.

• Each member takes an individual loan, and all members guarantee each other's repayment.

• Members do not save together first.

• MFI (microfinance institution). A lender that gives microfinance loans. One example is an NBFC-MFI (a non-bank finance company that specialises in microfinance).

• Under RBI rules, an NBFC-MFI must hold at least 60% of its total assets (net of intangibles) as microfinance loans [4].

	SHG	JLG	Grameen
Size	10-20	4-10	Small groups
Savings first?	Yes	No	Yes
Loan to	The group	Individuals, mutually guaranteed	Individuals in groups
Collateral substitute	Group liability	Joint liability	Peer pressure

3. The SHG route, step by step (RBI DAY-NRLM Master Circular, 2018)

• Thrift (the habit of saving small sums regularly). Each member saves ₹25 to ₹100 or more, depending on what they can afford.
• Internal lending ("inter-loaning"). Members take small loans from the pooled savings. The group charges less interest than a moneylender.
• Eligibility for a bank loan. The SHG must have been active for at least 6 months according to its account books [5]. NCERT describes bank linkage after "a year or two" of regular saving.
• "Panchasutra" (five rules the group must follow) [5]:
• meet regularly;
• save regularly;
• lend internally among members;
• repay on time;

• keep proper accounts.

• No collateral and no margin on loans up to ₹10 lakh to SHGs [5]. Margin is the part of a loan the borrower must pay from their own money.

• Banks may not place a lien (a legal hold that stops withdrawal) on the SHG's savings account when they give a loan [5].
• Loan doses (a cash credit limit that grows as the group proves itself) [5]:
• Year 1: 6 × corpus or ₹1 lakh, whichever is higher.
• Year 2: 8 × corpus or ₹2 lakh, whichever is higher.
• Year 3 onwards: at least ₹3-5 lakh, based on the group's micro-credit plan.

• Worked example: an SHG's corpus (savings plus funds received) is ₹20,000. In Year 1, 6 × ₹20,000 = ₹1.2 lakh. This is more than ₹1 lakh, so the limit is ₹1.2 lakh.

• Interest subvention (the government pays part of the interest for the borrower) [5]:

• Women SHGs in 250 identified districts borrow up to ₹3 lakh at 7% a year.
• SHGs that repay on time get an extra 3% subvention, so they effectively pay 4%.
• Banks are paid the gap between their lending rate and 7%, capped at 5.5% [5].

• Worked example: on a ₹3 lakh loan, interest at 7% is ₹21,000 a year. At 4% it is ₹12,000. Prompt repayment saves ₹9,000.

• What the loans pay for: releasing mortgaged land, working capital (money for daily inputs such as seeds, fertilisers, bamboo and cloth), housing materials, and assets such as a sewing machine, handloom or cattle.

4. What makes it go wrong, and the safeguards

• Loans spent on consumption. NCERT Class 11 notes that "borrowings are mainly confined to consumption purposes". The money often does not build income.
• Over-indebtedness. One household borrows from several lenders (SHG, JLG, MFI) at the same time.
• Its repayments grow bigger than its income.

• It then borrows again to repay old loans.

• Coercive recovery. Lenders use pressure and harassment to collect. This triggered the 2010 Andhra Pradesh crisis [6].

• The safeguard is a household repayment cap [4]:
• A household's total monthly loan repayments (microfinance and other loans) must not exceed 50% of monthly household income.

• Worked example: a household earns ₹20,000 a month. All its EMIs (equated monthly instalments) together can be at most ₹10,000. If it already pays ₹8,000, a new lender can add only ₹2,000 of EMI.

• Uneven spread. SHG bank linkage is strongest in the southern states. Many groups stay at small loans and never grow into enterprises.

In India

• The path from pilot to national mission:
• 1992: NABARD's SHG-Bank Linkage Programme (SHG-BLP), a pilot with 500 groups.
• 1999: Swarnajayanti Gram Swarozgar Yojana (SGSY), a self-employment scheme built on SHGs.
• 2011: National Rural Livelihoods Mission (NRLM), "Aajeevika".

• 2016: renamed Deendayal Antyodaya Yojana-NRLM (DAY-NRLM).

• Scale:

• Latest official figure (2025): 10.05 crore rural households in 90.90 lakh SHGs under DAY-NRLM [3].
• NCERT Class 11 (May 2019) gives about 6 crore women in 54 lakh SHGs.

• At that time, each SHG got a ₹10-15,000 revolving fund (seed money the group lends again and again) and ₹2.5 lakh from the Community Investment Support Fund.

• Lakhpati Didi is an SHG member whose annual household income is ₹1 lakh or more.

• The target is 3 crore Lakhpati Didis.

• 1.48 crore had been reached by June 2025 [2].

• Kudumbashree (Kerala) is a women-oriented poverty-reduction programme.

• It began in 1995 as a thrift and credit society and mobilised ₹1 crore in savings.

• It is acclaimed as "the largest informal bank in Asia".

• Regulation after the crisis:

• 2010: aggressive MFI lending in Andhra Pradesh led to over-indebtedness and coercive recovery. The state then restricted MFIs.
• Malegam Committee: an RBI Board sub-committee that reported in January 2011. It recommended a separate NBFC-MFI category, a margin cap and an interest-rate cap on individual loans, and transparent interest charges [6].

• RBI accepted this framework in the Monetary Policy Statement 2011-12 and issued NBFC-MFI directions in December 2011 [6].

• RBI framework (2022, updated July 2025) [4]:

• It applies to all lenders: commercial banks, cooperative banks and NBFCs, including MFIs.
• A household means husband, wife and their unmarried children.
• The 50% repayment cap described above applies.
• The old interest-rate cap is replaced by a board-approved pricing policy. Each lender's board sets its interest rate from cost of funds, risk premium and margin, plus a ceiling on charges.
• There is no prepayment penalty. A late-payment penalty applies only to the overdue amount.
• Other NBFCs may hold microfinance loans of at most 25% of total assets.
• Recovery conduct: no threatening or abusive language, no calls outside 9 a.m.-6 p.m., no harassing relatives, and no publishing borrowers' names.

Don't confuse with

• Moneylender credit. Both give small, quick loans to the poor. But moneylender credit is informal and very costly, and it traps people in debt. Microcredit is formal credit that uses group liability instead of collateral.
• JLG vs SHG. A JLG (4-10 members, NABARD 2006) gives individual loans, and members do not save first. An SHG (10-20 members) saves first, and the bank lends to the group.
• ₹3 lakh vs ₹10 lakh. ₹3 lakh is the annual household income ceiling for a borrower to qualify for a microfinance loan (RBI, 2022) [4]. ₹10 lakh is the loan size up to which SHGs need no collateral and no margin (RBI DAY-NRLM circular, 2018) [5].
• Grameen model vs SHG model. Grameen gives individual loans to members organised in groups. The Indian SHG takes a single loan in the group's name and decides for itself how to use it.

Prelims Hooks

• The RBI microfinance loan is a collateral-free loan to a household with annual income up to ₹3 lakh (Master Direction, 2022) [4]. Trap: the limit is per household (husband, wife and unmarried children), not per individual.
• The 50% cap covers all of a household's monthly loan repayments, not only microfinance loans. It applies to banks, cooperative banks and all NBFCs, not only MFIs [4].
• Group sizes: SHG 15-20 (NCERT Class 10) vs 10-20 (DAY-NRLM), and special groups can have 5 [5]. JLG has 4-10 members and does not save first.
• Sequence: SHG-BLP (NABARD, 1992, 500 groups) → SGSY (1999) → NRLM "Aajeevika" (2011) → DAY-NRLM (2016).
• Malegam Committee (January 2011) followed the 2010 Andhra Pradesh crisis and created the NBFC-MFI category [6]. NBFC-MFI: at least 60% of assets in microfinance loans. Other NBFCs: at most 25% [4].
• Women SHGs borrow up to ₹3 lakh at 7%, falling to 4% with prompt repayment [5]. Lakhpati Didi is an SHG member with annual household income of at least ₹1 lakh, with a target of 3 crore [2]. Grameen Bank: Yunus, Bangladesh, a bank from 1983, Nobel Peace Prize 2006.

Mains Points

• Social collateral as a tool for inclusion and empowerment (GS-III inclusive growth; GS-I/II women's issues).
• Group liability lets banks lend to women who own no assets.
• This moves them from moneylenders to formal credit.

• Regular meetings also build women's agency. SHGs are "building blocks of organisation of the rural poor", and their meetings discuss health, nutrition and domestic violence.

• Credit growth vs over-indebtedness.

• Easy lending from many sources caused the 2010 AP crisis [6].
• Before 2022, the main tool was an interest-rate cap on MFIs only (2011) [6].
• Since 2022, a household-level 50% repayment cap covers all lenders, together with board-set pricing and rules on recovery conduct [4].

• This is a good example of regulation that protects borrowers without choking the supply of credit.

• Consumption vs livelihoods.

• NCERT notes that microcredit often pays for consumption.
• DAY-NRLM's Lakhpati Didi drive tries to turn credit into steady income: 1.48 crore achieved against a 3 crore target by June 2025 [2][3].
• The missing links are markets, skills and value chains.
• Savings-first models (SHG) build discipline. Credit-first models (JLG/MFI) grow faster but carry more risk.

Related concepts

• Self-help group
• Thrift
• Group liability
• Joint Liability Group

Read more

• Self-help groups, micro-credit and the Grameen model