Though the Microcredit has a great scope in alleviating socio-economic problems, existing systems require reform in multiple areas to allow for long lasting benefits. Examine (200 Words)
Enrich the answer from other sources, if the question demands.
IAS Parliament 5 years
KEY POINTS
· Microcredit refers to the granting of very small loans to impoverished borrowers, with the aim of enabling the borrowers to use that capital to become self-employed and strengthen their businesses.
· Microcredit agreements frequently do not require any sort of collateral. An example of a microcredit institution is the Grameen Bank in Bangladesh, founded in 1976 by Mohammed Yunus.
· The Grameen Bank offers small loans to the impoverished without asking for collateral, and was the pioneering institution in the realm of microfinance.
Applications of microcredit
· Microcredit has been used mainly for entrepreneurs to begin production and attain self-sufficiency.
· Small microcredit loans can allow rural labourers –those who are employees, as opposed to entrepreneurs, who are employers– to migrate to urban areas to find work during the lean season, when there is no work to be found on farms.
· Microcredit can also be used to dampen the effects of shocks like floods by providing people with a form of insurance that both increases production before the shock and provides a safety net after.
Flaws in micro credit model
· The primary reason for the lackadaisical effects of microcredit is the stringent repayment schedule offered by most microcredit institutions.
· Since most borrowers to whom microcredit is given have little to no credit history as a result of their exclusion from traditional systems of credit.
· Institutions offering microcredit are unable to judge the risk associated with lending to certain borrowers, and cannot be sure what the risk of them defaulting will be.
· The effect of this is that borrowers are unable to use the loans on investments that will take some time to be fully realised, and instead are forced to use the loans they receive on short term investments that only boost production to an extent, and the overall growth of their incomes remains meager.
Reforms for the development of microcredit
· Adoption of the financial system development approach is the key to achieving sustainable results and to maximizing development impact.
· This approach emphasizes an enabling policy environment, financial infrastructure, and the development of financial intermediaries that are committed to achieving financial viability and sustainability within a reasonable period.
Thus, building the capacity of institutions with a commitment to reach the poor is vital.
· Financial institutions committed to provide microfinance services require considerable technical assistance for capacity building.
· Expansion of the outreach of savings services can have a potentially significant impact on both institutional sustainability and poverty reduction.
· Because microfinance is primarily targeted to the poor who are disadvantaged, social mobilization is necessary to introduce them to a formal or semiformal, market-oriented institutional environment.
Madhaba Chandra gharai 5 years
Check it
IAS Parliament 5 years
Try to include about flaws in micro credit model. Keep Writing.
Anu 5 years
Kindly review. Thank you.
IAS Parliament 5 years
Try to include about few flaws in micro credit model. Keep Writing.
Krish 5 years
Kindly review sir,Thank u
IAS Parliament 5 years
Good attempt. Try to add few points on flaws of micro credit model. Keep Writing.
Alok Dwivedi 5 years
Please review
Alok Dwivedi 5 years
IAS Parliament 5 years
Information about health, education is not needed. Try to explain about micro credit. Argue how it is helping to alleviate poverty, increasing income of household; few points on existing flaws; measures to overcome it. Keep Writing.
We will provide the model answer.
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