Microcredit has multiple advantages but its effectiveness as a financial tool has come under question in recent times. Discuss in the context of India.

Microcredit refers to small amount of credit given to small entrepreneurs and other poorer sections to help them become self employed or start a small business. It is a helpful tool for especially the vulnerable ones but recently the huge NPAs caused due to microcredit in India has brought to surface the debate on microfinancing.

Reasons for effectiveness being questioned:

  • Microcredit amounts are insufficient to raise the living standards.
  • Issue of multiple regulations (treatment as commercial banks, even though they are different).
  • Huge chunk of NPAs & problem of inefficient credit culture.
  • Lower level of penetration affecting their functioning.
  • Insignificant contribution in loan portfolio of poor sections.

Positive side of Microcredit:

  • Targeted delivery of loans.
  • Decentralized approach takes local issues into account.
  • Focus is on poorer sections and SMEs, so it promotes formalization of economy.
  • Helps in formal credit culture & financial inclusion.

Microcredit (e.g. MUDRA loans) has been critical to growth of MSME sector & enhancing low skill jobs which is needed in India to revive growth. Hence, the policy focus & regulatory framework needs to be redesigned to focus on this sector specially.

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