Impact of Microfinance on Indebtedness to Informal Sources among Clients of Microfinance Models in Palakkad

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1 Impact of Microfinance on Indebtedness to Informal Sources among Clients of Microfinance Models in Palakkad Deepa Viswan Research Scholar, Department of Commerce and Management Studies University of Calicut Dr. M.A. Joseph Associate Professor, Department of Commerce and Management Studies University of Calicut Abstract In the past several decades, the underprivileged sections of the society continue to depend on informal sources of credit. Formal financial institutions have faced difficulties in dealing with the poor people, whose credit needs are small and their ability to offer collaterals is limited. In this context, microfinance has emerged as the most appropriate and realistic alternative to the conventional banking system in reaching the unbanked poor. In this background, this paper examines the relationship between the level of indebtedness to moneylenders and experience in a microfinance model. This study was conducted in Palakkad district of Kerala. The findings revealed that the level of indebtedness to moneylenders is higher in the case of clients of Microfinance Institutions (MFI) model. Keywords: Microfinance, Indebtedness, Moneylender, Microfinance Institutions, Self Help Groups Introduction Microfinance has been emerged as a popular instrument, towards financial inclusion, to mainstream the poor with the formal financial system. Basic objective of a microfinance programme is to alleviate the poverty, but it include one of the arguments that microfinance is a substitute for informal credit and helps the poor people to escape from the clutches of moneylenders who allegedly charge usurious rates of interest. Actually before getting credit from any type of microfinance institution, informal credit lending is an important source of credit for the unbanked part of the population. In the past years, there are several models for microfinance are being applied by the government, financial institutions, NGOs etc., to provide positive alternatives to the informal finance. These microfinance approaches have been designed to combine the safety and reliability of formal finance with the convenience and flexibility that are typically associated with informal finance. However, there are various opinion about microfinance fails to meet huge credit demand of the poor, in fact, it may increase informal money lending if clients need further loans, or borrow to repay outstanding debt from various banks and microfinance institutions. Hence, the present study aimed to analyse impact of microfinance on indebtedness to informal source among clients of Self Help Group model and MFI intermediation model. Microfinance is the provision of broad range of financial services such as deposits, loans, payment services, money transfers and insurance to poor people and low income households. There are two different ways of using groups for financial intermediation. One is Global Wisdom Research Publications All Rights Reserved. 1

2 the Grameen Bank method, which refers to as the MFI intermediation model in the study, and the other is Self Help Group system or SHG model. Both systems are dominated by female clients, but they differ in many other fundamental respects. More clearly, SHG model provides savings-led services and the later render credit-led services. Objectives To know the average level of indebtedness to moneylenders among clients of microfinance models before and after joining microfinance programme. To test whether there is a significant association between the two variables i.e. indebtedness to moneylender and being client of particular type of microfinance model. Hypothesis Hypothesis 1: There is a significant difference between the average borrowing from money lenders before and after joining microfinance programme. Hypothesis 2: There is a significant association between indebtedness to moneylenders among clients of SHG model and MFI model. Methodology The study was conducted in Palakkad district of Kerala. From this district, two blocks were selected and from each block, two villages were selected. From each village 5 groups organised by the selected MFI and 5 SHGs assisted under SGSY scheme were selected. While selecting the sample, relatively older groups alone were considered and attention was given to choose the sample in such a way that it must be at least three years old. Thus, a total of 10 groups were selected from each village. From each group, 5 respondents were selected and sample of 100 respondents were finally chosen. Multi-stage random sampling method was used for the study. Primary data were collected using a well-defined and pre-tested interview schedule. Results and Discussions Moneylenders played a major role in advancing credit to 81% of the sample respondents. Out of the 81 respondents, 43 respondents were members of self help groups whereas 38 belonged to one of the leading MFI in the study area. Cast status of the respondents indicates that 90 % of the beneficiaries include the SC and OBC. The fact that majority of the beneficiaries of the programme were focused on the backward communities was indeed a satisfactory aspect. The education profile shows that 38% of the women had education SSLC and above and 24% of them opined that they had never been to school. From the Marital status of beneficiaries 11 women of the sample population are either widowed or divorced. In this case, moneylenders are the main source of loan. Indebtedness to moneylenders was found more common among members in the pre SHG situation. The Table 1 gives details of the dependency on moneylenders for loan during pre and post SHG situation. About 60% of respondents had an average borrowing of Rs to above Rs.5000 in the pre situation. It was reduced to 41% in the post period. This concluded that the dependency on moneylenders has come down drastically. Still, dependency on moneylenders for loan continues. Global Wisdom Research Publications All Rights Reserved. 2

3 Table. 1: Distribution of the Sample Respondents by Average Borrowings from Moneylenders during pre and post situation Borrowing level (Rs.) Pre Situation Post- Situation Frequency Percent Frequency Percent Nil Up to & above Total The result of paired t-test shows that there was a significant difference between average borrowing from money lenders during pre and post situation. Hence it shows that the average borrowing from money lenders has a significant change in post situation (5.377 > Accepted hypothesis 1). But the average borrowing given in the table shows a declining trend in borrowing after availing benefits from microfinance programme. Variable Loan from moneylenders Result of Paired t-test Mean Difference in Mean t Before After level of Significance df sig % The number of SHG and MFI clients indebted to moneylenders in the post SHG period is shown below: Table. 2: Distribution of Respondents by Indebtedness to Moneylenders SHG Model MFI Model Row Total Indebted to Moneylender Not indebted to Moneylender Column Total The result of Chi-square test shows that there is a significant variation in the tendency to borrow from the moneylenders among clients of SHG and MFI model of microfinance (4.314 > Accepted hypothesis 2). Global Wisdom Research Publications All Rights Reserved. 3

4 Result of chi-square Calculated value df Level of significance Sig. Inference Chi-square Significant Hence, it is concluded that there is significant relationship between client s tendency to borrow from moneylender and their association with different microfinance model. It has been found more, among MFI clients. Peer pressure and strict monitoring by MFIs compel its clients to maintain a clear payment record irrespective of the type of emergency they face at home. This could be reason for such a tendency to borrow from moneylenders. Majority of respondents from the MFI model reported that borrowing from moneylenders was used to repay the outstanding debt from microfinance institution. It is shown from the table 3 that 28% of the respondents are well protected from moneylenders, 21% responded that they reduced their dependence on moneylenders to some extent and 51% are still seeking the help of moneylenders. Table. 3: Model-wise Distribution of Respondents by Liberation from Moneylenders SHG Model MFI Model Total No % No % No % Well protected Reduced to some extent Still seeking their help Total CONCLUSION Microfinance is very useful innovation in advancing formal credit to the poor and has gained importance because of its increased accessibility by the poor. This study tried to question the existence of various microfinance models towards the objective as to help the poor people to escape from the clutches of moneylenders. However the findings revealed that indebtedness to moneylenders is common among the clients of microfinance programme. While comparing two microfinance models in study area found that tendency to borrow from moneylender is more among MFI clients than SHGs. This is due to the difficulties MFI client s face, when they are compelled to ensure prompt and regular loan repayments through further borrowing from even money lenders. But the study implies that a declining trend in the average borrowing from money lenders after availing benefits from microfinance programme and still, dependency on moneylenders for loan continues. In a nutshell, the tendency to continue borrow from informal sources exists because the formal financial system has not yet come up with adequate solution. Hence, it is necessary to remember all microfinance providers to extend adequate financial services which will cope with the needs of their clients. This may reduce the over-indebtedness of their clients. Global Wisdom Research Publications All Rights Reserved. 4

5 REFERENCE 1. Barman, D., Mathur, H. P. and Kalra, V. (2009). Role of Microfinance Interventions in Financial Inclusion: A Comparative Study of Microfinance Models, VISION-The Journal of Business Perspective, Vol.13 (l), pp Jaya S. A. (2008). Self-Help Groups in Empowering Women: Case study of selected SHGs and NHGs, Discussion Paper No. 38, Kerala Research Programme on Local Level Development Centre for Development Studies, Thiruvananthapuram. 3. Malcolm Harper (2002). Promotion of Self Help Groups under the SHG Bank Linkage Programme in India, Paper presented at the Seminar on SHG-bank Linkage Programme, NABARD, New Delhi. 4. Mallick and Debdulal (2009). Microfinance and Moneylender Interest Rate: Evidence from Bangladesh, MPRA Paper No , 5. Rangarajan, C. (2008). Report of the Committee on Financial Inclusion, Government of India, New Delhi. comfinancial.asp 6. Prema Basargekar (2009). Economic Empowerment through Microfinance, International Journal of Business Insights and Transformation, vol.2(1), pp Global Wisdom Research Publications All Rights Reserved. 5