Milestones : How Microcredit Works
The Microcredit loan mechanism works by providing very small loans that are repayable in weekly installments spread over a year. Eligibility for a subsequent loan is dependent upon repayment of the first loan. Bank branches are set up with a branch manager and a number of borrower-group managers to handle about 15 to 22 villages. Groups of five prospective borrowers are formed, and of those five, two receive loans in the first stage.

After six weeks, assuming those two begin repayment—and they will be under considerable group pressure to do so—other group members also become eligible for loans. Thus collective responsibility serves as collateral on the loan. Credit is supervised closely both by the groups of borrowers formed by the bank, and by bank staff. There is a stress on credit discipline and collective borrower responsibility, and in addition the bank focuses on saving, with both compulsory and voluntary savings programs.

Interest on all loans is set at 16% and the repayment rate is above 95%.
 

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