Micro-finance in the India-Role of Self help Groups.

SUHAIL KHAKI.

Abstract: Micro-Finance is emerging as a powerful instrument for poverty alleviation in the new economy. In India, micro-Finance scene is dominated by Self Help Groups (SHGs) - Banks linkage Programme, aimed at providing a cost effective mechanism for providing financial services to the 'unreached poor'. In the Indian context terms like "small and marginal farmers", " rural artisans" and "economically weaker sections" have been used to broadly define micro-finance customers. Research across the globe has shown that, over time, microfinance clients increase their income and assets, increase the number of years of schooling their children receive, and improve the health and nutrition of their families A more refined model of micro-credit delivery has evolved lately, which emphasizes the combined delivery of financial services along with technical assistance, and agricultural business development services. When compared to the wider SHG bank linkage movement in India, private MFIs have had limited outreach. However, we have seen a recent trend of larger microfinance institutions transforming into Non-Bank Financial Institutions (NBFCs). This changing face of microfinance in India appears to be positive in terms of the ability of microfinance to attract more funds and therefore increase outreach. In overall terms an organizational structure will help them achieve more transparence and efficiency.

INTRODUCTION.

Home to about 1.1 billion people as of 2007, India constitutes approximately one sixth of the worlds total population. It is a key emerging market alongside China and Brazil. The picture of growing GDP and rising foreign investments shows an environment where wealth is increasing for the nation. Due to its large size and population of around 1000 million, India's GDP ranks among the top 15 economies of the world. However, around 300 million people or about 60 million households, are living below the poverty line. It is further estimated that of these households, only about 20 percent have access to credit from the formal sector. Additionally, the segment of the rural population above the poverty line but not rich enough to be of interest to the formal financial institutions also does not have good access to the formal financial intermediary services, including savings services. A group of micro-finance practitioners estimated the annualised credit usage of all poor families (rural and urban) at over Rs 45,000 crores, of which some 80 percent is met by informal sources. This figure has been extrapolated using the numbers of rural and urban poor households and their average annual credit usage (Rs 6000 and Rs 9000 pa respectively) assessed through various micro studies. For the purposes of this study microfinance can be defined as any activity that includes the provision of financial services such as credit, savings, and insurance to low income individuals which fall just above the nationally defined poverty line, and poor individuals which fall below that poverty line, with the goal of creating social value. The creation of social value includes poverty alleviation and the broader impact of improving livelihood opportunities through the provision of capital for micro enterprise, and insurance and savings for risk mitigation and consumption smoothing.

Micro-Finance Institutional Structure in India. The different organisations in this field can be classified as "Mainstream" and "Alternative" Micro Finance Institutions (MFI). Mainstream Micro Finance Institutions NABARD, Small Industries Development Bank of India (SIDBI), Housing Development Finance Corporation (HDFC), Commercial Banks, Regional Rural Banks (RRBs), the

credit co-operative societies etc are some of the mainstream financial institutions involved in extending micro finance. Alternative Micro Finance Institutions These are the institutions, which have come up to fill the gap between the demand and supply for microfinance. MFIs were recently defined by the Task Force as "those which provide thrift, credit and other financial services and products of very small amounts, mainly to the poor, in rural, semi-urban or urban areas for enabling them to raise their income level and improve living standards." The MFIs can broadly be classified as: . NGOs, which are mainly engaged in promoting self-help groups (SHGs) and their federations at a cluster level, and linking SHGs with banks, under the NABARD scheme. NGOs directly lending to borrowers, who are either organised into SHGs or into Grameen Bank style groups and centres. These NGOs borrow bulk funds from RMK, SIDBI, FWWB and various donors. . MFIs which are specifically organised as cooperatives, such as the SEWA Bank and various Mutually Aided Cooperative Thrift and Credit Societies (MACTS) in AP.
. MFIs, which are organised as non-banking finance companies, such as BASIX, CFTS,

Mirzapur and SHARE Microfin Ltd.

The Problems Associated with Mainstream MFIs. To enable the reach of micro finance services to the needy, the problems associated with the legal, regulatory, organisational systems and the attitudes should be addressed to and the desired changes brought in these, to make them more effective. . Borrower Unfriendly Products and Procedures, with a majority of the customers being illiterate, a majority of them needing consumption loans and a majority of them requiring high documentation and collateral security, the products are not reaching the rural poor. . Inflexibility and Delay, the rigid systems and procedures result in lot of time delay for the borrowers and demotivate them to take further loans. High Transaction Costs, both Legitimate and Illegal .Although the interest rate offered to the borrowers is regulated, the transaction costs interms of the number of trips to be made, the documents to be furnished etc, plus the illegal charges to be paid, result in increasing the cost of borrowing. Thus, making it less attractive to the borrowers.

Social Obligation and not a Business Opportunity, Micro-finance has historically been seen as a social obligation rather than a potential business opportunity.

Problems for Alternative Micro-Finance Institutions. The main aim with which the alternative MFIs have come up is to bridge the increasing gap between the demand and supply. A vast majority of them set up as NGOs for getting access to funds as, the existing practices of mainstream financing institutions such as SIDBI and NABARD, is to fund only NGOs, or NGO promoted SHGs. As a result, the largest incentive to enter such services remains through the non-profit route. The alternative finance institutions also have not been fully successful in reaching the needy. There are many reasons for this:

Financial problems leading to setting up of inappropriate legal structures.

 Lack of commercial orientation.

Lack of proper governance and accountability. Isolated and scattered.

THE ROLE OF SELF HELP GROUPS SHGs. The SHG Bank Linkage Programme started as an Action Research Project in 1989. In 1992, the findings led to the setting up of a Pilot Project. The pilot project was designed as a partnership model between three agencies, viz., the SHGs, banks and Non Governmental Organisations (NGOs). SHGs were to facilitate collective decision-making by the poor and provide 'doorstep banking; Banks as wholesalers of credit, were to provide the resources and NGOs were to act as agencies to organise the poor, build their capacities and facilitate the process of empowering them. Achievements. The programme has come a long way from the pilot stage of financing 500 SHGs across the country. Of the total SHGs formed more than 1.6 million have been linked with 35,294 bank branches of 560 banks in 563 districts across 30 States of the Indian Union. Cumulatively, they have so far accessed credit of Rs.6.86 billion. About 24 million poor households have gained access to the formal banking system through the programme. The conceptual thinking behind the SHG philosophy and the bank linkage could be summarized as follows: -

Self Help supplemented with mutual help can be a powerful vehicle for the poor's effort to socio-economic upward transition Participative financial services management is more efficient and responsive. Poor can save and are bankable

 The mismatch between the expectations of the poor and capabilities of the formal banking system needs to be minimised Poor need not only credit support but also savings and other services Small affinity groups of the poor, with initial outside support, can effectively manage and supervise micro credit among their members Collective wisdom of the group and peer pressure are valuable collateral substitutes SHGs could be a pre- microenterprise stage for a majority of rural poor SHGs facilitate wider outreach, lower transaction cost and much lower risk costs and Empowerment of poor especially of poor women, is a major outcome

NABARD has played a notable role not only in promoting SHGs but also in standing behind the SHG bank linkage programme. The total re-finance released by NABARD amounted to Rs.3130 crore. The performance of the SHGs has been extremely encouraging. Repayments by members to SHGs have been exceedingly high and on time payments have hovered around 98 per cent. Many of the expectations behind the basic philosophy enunciated earlier seem to have been fulfilled. However, there is a concentration of SHGs in southern states. Some questions have also been raised on the quality in maintenance of books of accounts.

Impact of the SHG Bank Linkage Programme Given these quantitative achievements, what has been the impact of the programme. The main findings are that: Microfinance has reduced the incidence of poverty through increase in income, enabled the poor to build assets and thereby reduce their vulnerability. It has enabled households that have access to it to spend more on education than nonclient households. Families participating in the programme have reported better school attendance and lower drop out rates.

 It has empowered women by enhancing their contribution to household income, increasing the value of their assets and generally by giving them better control over decisions that affect their lives. In certain areas it has reduced child mortality, improved maternal health and the ability of the poor to combat disease through better nutrition, housing and health especially among women and children. It has contributed to a reduced dependency on informal money lenders and other noninstitutional sources. It has facilitated significant research into the provision of financial services for the poor and helped in building capacity at the SHG level. Finally it has offered space for different stakeholders to innovate, learn and replicate. As a result, some NGOs have added micro-insurance products to their portfolios, a couple of federations have experimented with undertaking livelihood activities and grain banks have been successfully built into the SHG model in the eastern region. SHGs in some areas have employed local accountants for keeping their books; and IT applications are now being explored by almost all for better MIS, accounting and internal controls. A Conceptual Model Lets take a virtual Microcredit Financing unit XYZ Corporation. Let it be an organization which brings together both , the organizational structures of an Nonbanking Finance Corporation(NBFC) like Samruddhi , and an NGO (Indian Grameen Services (IGS)) under a holding company in order to give itself the benefit of both donor funds for research and development as well greater access to commercial sources of funding. The figure1 below gives a view of XYZs products and the segments they are meant to target.

Figure 1 Segment-focused product line The functions of XYZ operations are 3 fold Firstly, XYZ targets small enterprises for employment creation through the provision of individual loans with collaterized security to the top of its customer Pyramid, the non poor. It then targets the middle of the pyramid, micro-entrepreneurs and small farmers whom we might estimate are the marginally poor or vulnerable with Individualized loans to join liability groups (Grameen Model). For the bottom of its pyramid, whom we estimate are the poorest of the poor, XYZ offers loans to self-help-groups for on lending to members.

To achieve the objectives of production, productivity and poverty alleviation, the stance of policy on rural credit was to ensure that sufficient and timely credit was reached as expeditiously as possible to as large a segment of the rural population at reasonable rates of interest.

The strategy devised for this purpose comprised :

Expansion of the institutional structure, .Directed lending to disadvantaged borrowers and sectors and

Interest rates supported by subsidies. The institutional vehicles chosen for this were cooperatives, commercial banks and Regional Rural Banks [RRBs]. During this period, intervention of the Central Bank (Reserve Bank of India) was essential to enable the system to overcome factors which were perceived as discouraging the flow of credit to the rural sector such as absence of collateral among the poor, high cost of servicing geographically dispersed customers, lack of trained and motivated rural bankers, etc. The policy response was multi dimensional and included special credit programmes for channeling subsidized credit to the rural sector and operationalising the concept of priority sector. The latter was evolved in the late sixties to focus attention on the credit needs of neglected sectors and under-privileged borrowers. There is a general consensus that the strategies followed .Helped to build a broad based institutional infrastructure for the delivery and deployment of credit and .Ensured a wider physical access of financial services to the poor. The indicators speak for themselves.
Access in terms of rural branches increased from 1,833 in 1969 to around 32,200 at

present, .The population per rural branch declined from 2,01,854 in 1969 to around 16,000 at present.

 .The proportion of borrowings of rural households from institutional sources increased from 7 per cent in 1951 to more than 60 per cent at present.

This significant increase in the credit flow from institutional sources gave rise to a strong sense of expectation from the state agencies. However, this expectation could not be sustained because the emphasis, among others, was on achieving certain quantitative targets. As a result, inadequate attention was paid to the qualitative aspects of lending leading to loan defaults and erosion of repayment ethics by all categories of borrowers. The end result was a disturbing growth in overdue, which not only hampered the recycling of scarce resources of banks, but also affected profitability and viability of financial institutions. This not only blunted the desire of banks to lend to the poor but also the development impact of rural finance. This was the position on the eve of reforms, which marks the second watershed, in the history of rural credit. The basic aim of the financial sector reforms was to improve the efficiency and productivity of all credit institutions including rural financial institutions (RFIs) whose financial health was far from satisfactory. In regard to RFIs, the reforms sought to enhance the areas of commercial freedom, increase their outreach to the poor and stimulate additional flows to the sector. The reforms included far reaching changes in the incentive regime through liberalising interest rates for cooperatives and RRBs, relaxing controls on where, for what purpose and for whom RFIs could lend, reworking the sub-heads under the priority sector, introducing prudential norms and restructuring and recapitalising of RRBs. The object of this narrative is to bring home to you two facts and four effects. The two facts are:
That right from the time of independence, the overriding concern of development policy

makers has been to find ways and means to finance the poor and reduce the burden upon them.
Between the concern of the policy makers and the quality of the effort, however, there

has been a gap. The efforts made were not able to achieve the success envisaged for a variety of reasons mainly, defects in policy design, infirmities in implementation and the

inability of the government of the day to desist from resorting to measures such as loan waivers.

The four consequences flowing from these facts are: 1.That the banking system was not able to internalise lending to the poor as a viable activity but only as a social obligation something that had to be done because the authorities wanted it so. 2 .This was translated into the banking language of the day : Loans to the poor were part of social sector lending and not commercial lending ; the poor were not borrowers, they were beneficiaries ; poor beneficiaries did not avail of loans they availed of assistance. The language of the time resulted in an attitude of carefully disguised cynicism towards the poor. The attitude was that the poor are not bankable, that they can never be bankable, that commercial principles cannot be applied in lending to the poor, that what the poor require are not loans but charity. Once this mindset hardened it became more and more difficult for commercial bankers to accept that lending to the poor could be a viable activity. It is significant to note that the system had to wait for almost a decade for the concept of microfinance to become credible. . Conclusion. Poor people have demonstrated an appetite for micro-loans, and repay them. This proves there is a great demand, and that it's viable. Even if it does not reduce poverty immediately, mere access to finance is a boon. Banks lose heavily in small loans to the poor - their wages are five times higher than in MFIs, and politicians encourage poor borrowers to default. These two problems, plus corruption, sank the Integrated Rural Development Programme, which provided subsidized micro-credit through nationalized banks in the 1980s. Banks now give loans to MFIs (classified as a priority sector), which then lend to the poor. This raises interest costs, but has proved viable.

New problems are cropping up with MFI expansion. Without technical assistance, some businesses fail. Competition in some states is so intense that MFIs accuse rivals of stealing their clients through unethical offers. Some women have borrowed from four or more different MFIs, and could get into debt traps, which also hit MFIs through higher defaults. Moneylenders are said to have entered the MFI business, using thugs rather than group loyalty to enforce payment. Some private equity funds are investing in MFIs, fuelling misgivings that these have become purely commercial and shed their original social mission. These misgivings are legitimate but exaggerated. Micro-finance will always differ from commercial ventures in one respect - the loans go almost entirely to women. Although many husbands appropriate the money, MFIs nevertheless confer status and power on women in a country with oppressive male domination. That's a huge social change Suggestions Greater legitimacy, accountability and transparency will not only enable MFIs to source adequate debt and equity funds, but could eventually enable MFIs to take and use savings as a low cost source for on-lending. A voluntary mutual code of conduct has been prepared by some MFIs covering aspects including mission, governance, transparency, interest rates, handling of customer grievances, staff conduct, recovery practices, etc. After due consultations within the sector, such code of conduct may be made mandatory for MFIs.

Reference 1. The World Bank in India. World Bank Country Brief, available From: http://www.worldbank.org. 2. Wolfgang ,Hannover. : Impact of Microfinance Linkage Banking in India on the Millennium Development Goals

(MDG), in NABARD journal , May 2005 3. Ajai Nair- Sustainability of Microfinance Self Help Groups in India: Would Federating Help (2005) 4.Facts and reports, national survey, survey of rural market.