What is Microcredit?
Microcredit refers to small size loans that are collateral free and are lent to low income households to meet their working capital needs. Typically, the loan size varies from Rs. 5000 to Rs. 15000. These loans are usually utilised for income generation activities. The borrower then repays the loans according to a preset repayment plan. For more details, you can read our About Microcredit page.
How can Microcredit make a difference?
Microcredit provides the much needed financial stability that is needed in many low income households in Indian villages, semi urban and urban areas. It gives them the opportunity to access finance at reasonable rates of interest and provides a healthy and sustainable alternative to the local money lender.
An example : Pampa Bai and her husband Dhanua run a grocery shop in their locality. Pampa Bai ensures smooth operations and maintains records meticulously. She realizes they can earn better if they offered new items for sale, but they lack the spare funds required for such an expansion. So she has applied to Rang De for a loan. The couple hope to earn an additional Rs. 900 each month after putting the loan to use.
Like Pampa, there are tens of thousands of people across India who want to make a beginning towards financial independence. And microcredit provides the means to achieve this independence.
How does traditional microfinance work?
Traditionally microfinance institutions borrow capital from the banks at a fixed rate of interest of 5.5% to 8.3% (or 10% - 12% diminishing rate of interest) and the MFI (microfinance institution) then adds the cost of servicing the loan before disbursing the loan to the borrower. Thus the interest paid by the borrower of microcredit ranges from 13.5% - 20% fixed rate of interest (or 24% - 36% diminishing rate of interest) depending on the cost incurred by the MFI for servicing the loan.
What is an MFI?
An MFI is a Microfinance Institution. Most MFIs are non governmental organisations registered as trusts or societies. Microfinance is the provision of financial services to low-income clients or solidarity lending groups including consumers and the self-employed, who traditionally lack access to banking and related services. More broadly, it is a movement whose object is "a world in which as many poor and near-poor households as possible have permanent access to an appropriate range of high quality financial services, including not just credit but also savings, insurance, and fund transfers." Those who promote microfinance generally believe that such access will help poor people out of poverty.