What are disadvantages of microloans ?

disadvantages of microloans

What are the disadvantages of microloans?

What is microcredit? 

Microloans or microcredits are smaller than normal loans and are useful for small business owners or any other purpose. Microloans are easy to get and very helpful for people with lesser income who are ineligible to apply for normal bank loans. These loans provide funds in very less time and are helpful with small needs. microloans

These loans have many benefits such as easy availability, ease to obtain for people with low income, credit access, etc. Microfinance is pretty common nowadays and many people are getting benefits from it but it has some disadvantages and everyone should be aware of them before applying for it.

The cons of microcredit are :

  • he banks. They also give loans without collateral and which increases the risks of bad debts. This also negatively affects the growth of microfinance institutions.
  • The interest rates charged by microfinance institutions are far much higher than the ones charged by commercial banks. These interest rates may vary from 12% to 30% which is very high and puts a lot of pressure on the loan applicants especially when most of these applicants come from marginalized groups.
  • Many of these institutions are dependent on banks which is also a reason behind higher interest rates and also affects the abilities of a microfinance institution. 
  • These loans are supposed to be paid off in much lesser time and sometimes it is even lesser than a year which puts a burden on the borrower to pay off the loan with high-interest rates in time.

 

Many of these institutions are facing issues due to the regulations laid out by the Reserve Bank of India. This affects the sustainability of a microfinance institution negatively.

The history of microcredit or microfinance goes back to 1976 and it was started in Bangladesh, It was started to support small workers and craftsmen to get the funds needed for their business ventures. It gathered a lot of advantages there because of the needs of the people and it was easy to get. Later it spread to other parts of the world and also in India. There are many companies in the market which provide micro-loans to borrowers and some of these companies have seen a good growth in the Indian market.

How does microcredit works?

The working of the micro-loans is pretty simple, The loans are provided by the company to applicants with small needs at a specific interest rate with a small time period to pay off the loan. The needs of the applicant are checked and the loan is given without collateral. The company gets the benefit from the interest rates it gets when the loan is being paid off.

Microloans are a useful tool for people with lower incomes. It helps them in increasing their business or for any other necessary purpose but there are many loopholes in the system and working of many microcredit institutions which causes many problems.

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