Measuring Outreach of Microfinance in India Towards A Comprehensive Index

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1 From the SelectedWorks of Dr. Arindam Laha January, 2012 Measuring Outreach of Microfinance in India Towards A Comprehensive Index Dr. Arindam Laha Prof. Pravat Kumar Kuri Available at:

2 V o l u m e 5 9 N u m b e r 4 J a n u a r y - M a r c h, A R T I C L E S 1. Empirical Macroeconomics THOMAS J. SARGENT AND CHRISTOPHER A. SIMS 2. Impact of Product Patents on the Indian Pharmaceutical Industry: A Summary of Recent Literature ISHITA G. TRIPATHY, SURENDRA S. YADAV AND SEEMA SHARMA 3. Openness and Output Dynamics in South Asia BIRU PAKSHA PAUL AND ANUPAM DAS 4. Power Sector Reforms in North Western India: With Special Reference to Punjab... NISHA BHARGAVA 5. Rural Non-Farm Employment in Uttarakhand Hill Economy: Empirical Evidences I.C. AWASTHI 6. Fiscal and Monetary and Policy Responses to Global Economic Downturn in Small Island Developing States: An Empirical Study of Mauritius... T.K. JAYARAMAN, CHEE-KEONG CHOONG AND RUBYNA BUDHOO 7. Textiles and Clothing: Challenges to be the Dynamic Sector of India..... SAURABH BANDYOPADHYAY C O M M U N I C A T I O N S F O R D E B A T E & R E S E A R C H 1. Measuring Outreach of Microfinance in India: Towards A Comprehensive Index ARINDAM LAHA AND PRAVAT KUMAR KURI 2. Business Leaders Perceptions on Tax, and Finance Policy for Improving the Investment Climate in Bangladesh MOHAMMAD OSMAN GANI AND A.F.M. MAINUL AHSAN B O O K S C A N >> R E V I E W 1. Growth and Poverty: The Great Debate The Foundations of Small Business Enterprise: An Entrepreneurial Analysis of Small Firm Inception and Growth International Trade in Services in India: Implications for Growth and Inequality in a Globalising World B.S. PRAKASH MADHU BALA ANJU KOHLI

3 Communications for Debate and Research In this section, we present Communications for Debate and Research (CDR). We also give a profile of some select issues on which policy-oriented high-quality research is required. Senior academicians from the universities and research organisations, senior officials in the various ministries in the central government and also in the state governments, Planning Commission, Reserve Bank of India (RBI) and other banks, economic advisers in the industrial organisations and scholars in India and from abroad are requested to communicate to the Journal, the themes on which significant research gaps exists and on which researchers need to undertake both analytical and policy-oriented research. The purpose of this section is to bridge the information gap that exists between the research world and the policy/practical world. We have now introduced the system of publishing brief accounts of the proceedings of select conferences organised by our professional community in recent times. The purpose of these write ups is to provide some information about the research issues that have become manifest in these events, for the benefit of the research community. It is our intention to focus on the research issues and not on the general proceedings of the events. We welcome such write ups on the conferences organised by the members of the economic associations and by the research institutions, for possible publication in the CDR section of the Journal. Articles on the suggested themes and of course, on other relevant themes may be sent to Managing Editor, The Indian Economic Journal (iejpanch@yahoo.co.in). Articles selected on the basis of rigorous refereeing system now adopted by the Journal, would be published. Managing Editor

4 The Indian Economic Journal Volume 59(4), January-March COMMUNICATION FOR DEBATE & RESEARCH / 1 Measuring Outreach of Microfinance in India Towards A Comprehensive Index Arindam Laha and Pravat Kumar Kuri The outreach of microfinance institutions is considered to be an effective instrumental mechanism to facilitate those sections of the population, who had traditionally been excluded from formal financial institutions. In India, microfinance penetration is characterised by wide inter-state variations. This paper attempts to formulate a comprehensive index of microfinance outreach to examine inter-state variation in the outreach of microfinance services in India. Empirical evidence suggests that only two states like Andhra Pradesh and Puducherry belongs to the category of high level of microfinance inclusion states. While seven other states have fulfilled the criteria of medium level of microfinance inclusion, all the other states belong to the lower stratum in the ladder of microfinance outreach. The paper argues that an allinclusive microfinance system is the need of the hour to strengthen the process of financial inclusion by addressing the basic distortions in the provision of financial services in India. I. Introduction The promotion of microfinance is expected to reinforce the process of financial inclusion. 1 In fact, micro finance institutions play a significant role in facilitating financial inclusion, as they are uniquely positioned in reaching out to the rural poor (NABARD, 2008). In India, there exists a wide regional disparity in the development of microfinance institutions. The formation of Self Help Group (SHG) and its linkages with bank is an emerging institutional mechanism to enhance the outreach of microfinance in India. The disparity in the spread of the SHG-Bank Linkage Programme in India is observed to be conditioned upon the pro-active role of State Governments and commercial banks, performance of NGOs and the nature of social change brought about by the socioeconomic Arindam Laha, Assistant Professor, Department of Commerce, The University of Burdwan. -arindamlaha2004@yahoo.co.in Pravat Kumar Kuri, Associate Professor, Department of Economics, The University of Burdwan. 1. The process of financial inclusion is an attempt to bring the weaker and vulnerable sections of society within the ambit of the organised financial system. It may, therefore, be defined as the process of enabling access to timely and adequate credit and other financial services by vulnerable groups, such as weaker sections and low income groups at affordable cost (Karmakar, 2007).

5 Measuring Outreach of Microfinance in India ARINDAM LAHA AND PRAVAT KUMAR KURI 147 factors. The southern region outperformed north-eastern and central parts of the country in respect of the outreach of microfinance programme. In March, 2001, 71 per cent of the linked SHGs were from southern region consisting of Andhra Pradesh, Karnataka, Kerala and Tamil Nadu. The share of Southern Region has come down progressively over the years but it is still at per cent in 2010 (NABARD, 2010). There is a slow progress of the SHG-Bank Linkage movement in the north-eastern and central parts of the country (NABARD, 2008). Several measures have been used in the literature to explore the level of microfinance outreach and its variations across the regions. These measures can broadly be divided into two categories; one based on the supply side information from the perspective of credit providers, such as banks and other service providers. The supply side indicators are: number of microfinance accounts (per 1000 adult population) and number of microfinance institutions (per million people). The other measure is based on demand side information from the perspective of microfinance users, notable among them are the amount of micro-savings, micro-insurance, remittance and outstanding credit, which actually represents the actual utilisation of microfinance service. A comprehensive index of microfinance outreach should include both the demand side and the supply side dimensions of the problem. The supply side dimension measures the availability and the penetration of microfinance outreach, while the demand side dimension measures the usage of microfinance services. In an attempt to measure the microfinance outreach in India and its states, Srinivasan (2009) used the supply side dimension only to construct Microfinance Penetration Index (MPI) in order to capture the client mobilisation effort in the context of its significance to the states population. The intensity of penetration of microfinance was computed by the dividing the share of the state in microfinance clients by the share of the state in population. 2 However, an attempt has been made in this paper to construct a comprehensive measure of microfinance outreach that will capture information on both demand and supply dimensions of microfinance outreach viz., penetration, availability and usage of microfinance services. For convenience, the paper is divided into four sections. The next section considers the data and methodological aspects relating to the construction of an Index of Microfinance Outreach (IMO hereafter). Section III examines the extent of microfinance inclusion of different states of India on the basis of the IMO. The concluding remarks are presented in section IV. II. Data and Methodology The interstate variation in the extent of microfinance outreach is measured by constructing a comprehensive index, encompassing three dimensions of microfinance 2. The estimated values of Microfinance Penetration Index across states of India in 2011 (Srinivasan, 2012) are presented in Appendix Table A-1.

6 148 The Indian Economic Journal Volume 59(4), January-March 2012 Table 1 Description of the Indicators and its Data Sources Indicator Description Proportional Measure Data Source Indicator of Microfinance Penetration (MP 1 ) Indicator of Microfinance Availability (MP 2 ) Indicator of Microfinance Usage (MP 3 ) Share of SHG members of the state as a proportion of the share of women population of the state Share of credit SHGs of the state as a proportion of share of total number of SHGs (savings and credit) of the state Share of volume of microfinance credit and saving as a proportion of share of NSDP of the state MP 1 =A/B Where A indicates the ratio of number of SHG members of the state to total number of SHG members in India, and B indicates the ratio of number of women population of the state to total number of women population in India MP 2 =C/D Where C indicates the ratio of number of credit SHGs of the state to total credit SHGs in India, and D indicates the ratio of number of total SHGs of the state to total SHGs in India MP 3 =E/F Where E indicates the ratio of volume of saving and credit of the state to total volume of saving and credit in India, and F indicates the ratio of NSDP of the state to total NSDP in India Status of Microfinance in India (NABARD, 2011) and Census, 2011 Status of Microfinance in India (NABARD, 2011) Status of Microfinance in India (NABARD, 2011) and CSO, 2011 inclusion, viz., penetration, availability and usage. For each indicator, the performance of the state is evaluated in respect of the national average. For instance, to measure penetration of microfinance, at first, the share of number of SHG members 3 of a state to the country s total number of SHG members is computed. The indicator of microfinance penetration is then worked out as a ratio between the share of state in SHG members and the share of women population 4 of the state. The score higher than one indicates higher penetration of SHG members vis-à-vis proportion of women population in the state. In other words, larger the distance from one greater is the SHG outreach in the state. For, a clear exposition, the description of indicators used in the construction of the index of microfinance outreach is given in Table 1. To derive comprehensive index of microfinance outreach (IMO), we have used data driven weighting system derived from Principal Component Analysis. The comprehensive 3. The study considers the total number of SHG members liked with public sector commercial bank, private sector commercial bank, regional rural bank and cooperative bank. 4. As per NABARD report on the Status of Microfinance in India, 81.7 per cent of the SHGs are exclusively women groups and they are linked with banks for promoting economic activities (NABARD, 2011).

7 Measuring Outreach of Microfinance in India ARINDAM LAHA AND PRAVAT KUMAR KURI 149 index can be written as IMO 3 w MP i is = i= 1 s 3 i= 1 W t, where w i (i=1, 2, 3) are the corresponding weights of the indicators. Depending on the values of IMO, states are categorised into three categories. States with an IMO value below 1 are considered to have a low level of microfinance outreach, those in between 1 to 2 a medium level and those above 2 a high level. III. Microfinance Outreach in India: An Inter state Analysis Existing literature on the trends and progress of microfinance centers around the supply side perspectives from the point of view of bankers, NGOs and governments (NABARD, 2008; Sangwan, 2008; Verman, 2005). However, mere supply side solution does not provide a comprehensive picture of microfinance outreach. There is a need to take into account the demand side dimensions (NABARD, 2008). The demand for microfinance services is measured by means of actual utilisation of the credit and savings services of microfinance programme, while the supply of microfinance services is measured by means of penetration and availability of credit services to the population. The depth of the level of microfinance outreach in India is examined by constructing a composite index of microfinance outreach, using the demand for and the supply of microfinance services in India. The values of each dimension across the states of India along with their ranks are presented in Table 2. A wide inter-state disparity is visible in the individual indicators of microfinance outreach. In respect of the penetration of microfinance services, states like Puducherry, Kerala, Andhra Pradesh and Tamil Nadu belong to the category of higher outreach of microfinance programme (as shown in column 2 of Table 2). These four southern states excel in outreaching microfinance programme to the women sections of the population. In fact, the shares of SHG members in those states are observed to be on average two times in comparison to the share of women population. On the other hand, a majority of per cent of the states fall in the category of lower penetration of microfinance programme. The states in the lower end of the tail are mainly confined to the north-eastern, central, northern and eastern region. Inter-state disparity in the availability of microcredit is represented in column 4 of Table 2. Access to credit without any resort to collateral is considered as the most important financial service of the microfinance programme. It is evident that in Goa, the share of credit SHGs is found to be doubled than the share of total number of SHGs working in state. In another six states (Andhra Pradesh, Tamil Nadu, West Bengal, Puducherry, Tripura and Kerala), SHGs are more sustainable in having access of credit. In more than 75 per cent of the states, most of the SHGs are now performing as a saving institution. However, actual utilisation of microfinance services considers both savings and credit facilities. The usage of these facilities by the SHG members subject to the constraint of the penetration and availability of microfinance services actually determines their demand

8 150 The Indian Economic Journal Volume 59(4), January-March 2012 for microfinance. It is observed that the inequality in the usage of financial services is widespread across states of India. Once again, southern states (Andhra Pradesh, Puducherry and Tamil Nadu) retains their supremacy in utilisation of microfinance services. A poor rating of utilisation of microfinance products are observed in central, northern, eastern and north-eastern states. Thus, demand for microfinance services in these states are adequately addressed by the supply of those products. The combined measure of penetration, availability and usage of microfinance outreach is measured by an index of microfinance outreach. In terms of IMO, it is evident that only two states (Andhra Pradesh and Pondicherry) have been classified under the category of Table 2 Ranking of the States on the Basis of Indicators of Microfinance Outreach ( ) State MP 1 Rank MP 1 MP 2 Rank MP 2 MP 3 Rank MP 3 IMO Rank IMO Andhra Pradesh Puducherry Tamil Nadu Kerala Karnataka Odisha Tripura Goa West Bengal Maharashtra Himachal Pradesh Assam Jharkhand Arunachal Pradesh Bihar Rajasthan Mizoram Chhattisgarh Gujarat Meghalaya Uttaranchal Manipur Haryana Uttar Pradesh Jammu & Kashmir Madhya Pradesh Delhi Punjab Note: MP 1 : Indicator of Microfinance Penetration, MP 2 : Indicator of Microfinance Availability, MP 3 : Indicator of Microfinance Usage, IMO: Index of Microfinance Outreach. Source: Author s calculation based on Status of Microfinance in India (NABARD, 2011) and C.S.O, 2011 and Census, 2011.

9 Measuring Outreach of Microfinance in India ARINDAM LAHA AND PRAVAT KUMAR KURI 151 high level of microfinance outreach. Seven states (Tamil Nadu, Kerala, Karnataka, Orissa, Tripura, Goa and West Bengal) have fulfilled the criteria of medium level of microfinance outreach as the value of IMO lying in between 1 and 2. All the other states belong to the lower stratum in the ladder of microfinance outreach. IV. Conclusions The promotion of microfinance outreach is expected to create an enabling environment for tackling distortions in the process of financial inclusion of an economy. The paper focuses the extent of microfinance outreach across different states of India on the basis of an index of microfinance outreach. Empirical findings suggest that only two (Andhra Pradesh and Puducherry) out of 28 states have been classified under the category of high level of microfinance outreach states. While seven other states have fulfilled the criteria of medium level of microfinance outreach, all the other states belong to the lower stratum in the ladder of microfinance outreach. A region wise analysis reveals that the southern region is leading in the outreach of microfinance services. Western region is placed next best, whereas central and northern regions are worst performers in such outreach indicators. The demand for microfinance services in those better performing regions are adequately addressed by the supply of those products in the region. It is thus desirable to create conditions for enhancing the outreach of microfinance services specially to those lower penetrating states so as to generate a higher demand for those services in such regions. An institutional based supply lending approach in outreaching microfinance programme is thus observed to be desirable to achieve a balanced regional development in India. Appendix Table A-1 Microfinance Penetration Index for Different States of India in 2011 State MPI MPI Rank State MPI MPI Rank Manipur Maharashtra Andhra Pradesh Uttarakhand Pondicherry Arunachal Pradesh Tamil Nadu 2 4 Jharkhand Orissa Madhya Pradesh Sikkim Bihar West Bengal Uttar Pradesh Karnataka Rajasthan Goa Haryana Kerala Nagaland Tripura Meghalaya Assam Punjab Chhattisgarh New Delhi Himachal Pradesh Mizoram Gujarat Jammu & Kashmir Source: Srinivasan, 2012.

10 152 The Indian Economic Journal Volume 59(4), January-March 2012 References Karmakar, K.G. (2007). Rural Credit and Self-help Groups: Micro-finance Needs and Concepts in India. Sage Publications. NABARD (2008). Report of the Committee on Financial Inclusion. January.. (2010). Status of Microfinance in India, (2011). Status of Microfinance in India, Sangwan, S.S. (2008). Financial Inclusion and Self Help Groups. Available at: Financial%20lnclusion%20and%20SHGs.pdf Srinivasan, N. (2009). Microfinance India-State of the Sector Report, Sage Publications India Pvt. Ltd.. (2012). Microfinance India-State of the Sector Report, Sage Publications India Pvt. Ltd. Verman, M.P. (2005). Impact of Self Help Groups on Formal Banking Habits, Economic and Political Weekly: , April 23.

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