Poverty and Microfinance Programme in India: An Overview

Transcription

1 Chapter II Poverty and Microfinance Programme in India: An Overview 2.0 Introduction Poverty is a pressing problem in India. The persistence of high incidence of poverty decelerates the economic development of the country. The Indian Planners and Policy-makers lay emphasis on various strategies which aim at eradicating poverty from the country. In the first part of this chapter, the overall picture of poverty in India and various poverty alleviation strategies and programmes adopted by the Governments over the years are highlighted. The emergence of microfinance programmes in India as a tool of poverty alleviation and its growth has been analyzed in the second part of the chapter. A. Poverty in India: An Overview 2.1 Poverty: Conceptual Framework Poverty is a condition faced by families and individuals that fail to receive sufficient income to meet their basic needs. It is a condition of material deprivation. Poverty as a multi-dimensional concept, describes the general conditions of people who are badly off, and encompasses many inter-locked aspects of disadvantages. Chambers mentions five clusters of disadvantages that characterize the poor in rural areas, namely, lack of assets, physical weakness, isolation, vulnerability and powerlessness 1. Kurien defines poverty as a socio-economic phenomenon whereby the resources available to a society are used to satisfy the wants of the few, while, many do not have even their basic needs met. According to him, it is essentially a social phenomenon and only secondarily a material or physical phenomenon 2. 34

2 Singh considers poverty as a state wherein individual cannot satisfy his minimum wants for healthy living in a given social environment 3. Poverty, according to the World Development Report, 2001, implies lack of adequate food, shelter, deprivation that keep them away from the decent standard of living - implying better housing, sanitation, access to safe drinking water, education, health and nutrition. The main manifestations of poverty are lack of income and asset to attain basic necessities such as food, shelter, clothing, and acceptable levels of health and education, sense of voicelessness and powerlessness in the institution of State and Society, vulnerability to adverse shocks linked to an inability to cope with them 4. Dreze and Sen describe poverty as a severe failure of basic capabilities 5. The measurement of poverty can be split into two distinct operations; viz. the identification of the poor and the aggregation of their poverty characteristics into an over-all measure 6. UNDP has developed two measures of poverty, known as Human Poverty Index and Multi-dimensional Poverty Index. Human Poverty Index takes into account mainly three deprivations such as (i) the deprivation of longevity represented by the percentage of people not expected to survive to age 40; (ii) the deprivation in knowledge i.e. the percentage of adults who are illiterate and (iii) the deprivation of standard of living consisting of three variables, namely, (a) percentage of people without access to water, (b) the percentage of people without access to health service and, (c) the percentage of moderately and severely under-weight children under five. Hence, Human Poverty Index is the average of these three types of deprivations 7. The Multi-dimensional Poverty Index was introduced in the Human Development Report of It assesses the nature and intensity of poverty at the individual level, with poor people being those who are deprived of their diverse needs and the extent of their poverty being measured by the extent of their deprivations. This new measure replaces the Human Poverty Index (HPI) that has been used in the UNDP s annual Human Development Report since The Multi-dimensional Poverty Index identifies over-lapping deprivations at the 35

3 household level across the same three dimensions as the HDI such as health, education, and standard of living which are reflected in 10 indicators. They are: six indicators 8. Health - (1) Child mortality and (2) Nutrition Education - (1) Years of schooling and (2) Child enrolment Standard of living - (1) Electricity, (2) Drinking water, (3) Sanitation, (4) Flooring, (5) Cooking fuel and (6) Assets A household is multi-dimensionally poor if it is deprived of at least two to Poverty is associated with the socially perceived deprivation with respect to basic human needs. The basic human needs are usually listed in the material dimensions as the need to be adequately nourished, the need to be decently clothed, the need to be decently sheltered, the need to escape from avoidable diseases, the need to be at least minimally educated and the need to be mobile for the purpose of social interaction and participation in economic activity. Thus, poverty is defined as the inability of an individual or a household to afford a socially perceived normative minimal basket of basic human needs that is expected to be reflected in some normative minimal standard of living that should be assured to every individual household. The uniquely specified numerical poverty line is used to separate the poor from the non-poor, which is the approximation of socially acceptable minimum living standard Incidence of Poverty in India The Planning Commission of India has been estimating the incidence of poverty in India at the National and State level on the basis of household consumption expenditure survey conducted by the National Sample Survey Organization at an interval of approximately five years. The estimation of poverty in India is based on the poverty line approach. Poverty line is based on the norm of minimum calorie requirement in which all persons below the norm are treated as poor. The basis of estimating poverty line in India is determined in terms of the desired requirement of calories of 2400 per person per day in the rural areas and 2100 per person per day in the urban areas. Further, this minimum 36

4 required calorie needs are translated into monetary terms i.e. the monetary expenditure per capita needed for meeting these calorie requirements. Poverty line is revised periodically taking into account the price variations. Accordingly, India s official poverty line was ` and ` per person per month in rural and urban areas respectively in at prices. The percentage of poor in India estimated from uniform recall period from the consumption distribution data of the NSS 61 st Round yields poverty ratio of 28.3 percent in rural areas, 25.7 percent in urban areas and 27.5 percent in the country as a whole in The following table shows the incidence of poverty in India from to : Table 2.1 Incidence of Poverty in India: to Year Poverty Ratio (%) Number of Poor (Million) Rural Urban Total Rural Urban Total Source: Planning Commission Estimates The data furnished in table 2.1 reveals that during the period between and the incidence of poverty expressed as a percentage of people below the poverty line declined continuously from 54.9 percent to 27.5 percent. In absolute terms, the number of the poor dropped from million in to million in However, in urban areas, it has been increased from 60 million to 80.8 million during the same period. 37

5 The World Bank estimated poverty in India in 2005 at 41.6 percent based on a international poverty line of $1.25 per day per person at 2005 purchasing power parity prices 11. Corresponding estimate from the Asian Development Bank using Asian poverty line of $1.35 per day is 65.3 percent 12. The UNDP using a multi-dimensional poverty incorporating deprivation in terms of health, education and standard of living, has estimated poverty in India at 55.4 percent in The Tendulkar Committee in 2009 estimated that All-India rural headcount ratio and All-India combined headcount ratio using the recommended poverty line are 41.8 percent and 37.2 percent respectively in , in comparison with official estimates of 28.3 percent and 27.5 percent. At All-India level, the revised headcount ratios in are 50.1 percent in rural areas, 31.8 percent in urban areas and 45.3 percent in the country as a whole. This is against existing official poverty estimates of 37.2 percent, 32.6 percent and 36 percent respectively 14. The Saxena Committee in 2009 observed that the monetary cut-off line for the estimation of poverty left out a large number of rural poor consuming between `356 and `539 per month left out of the BPL benefits since this poverty line permitted both rural and urban people to consume about 1820 calories as against the desired norm of 2400/2100 calories. The Committee, therefore, recommended that the poverty line for determining BPL status should have been around `700 in rural areas and `1000 in urban areas and the percentage of people entitled to BPL status should be drastically revised upwards at least 50 percent, though the calorie norm of 2400 would demand this figure to be about 80 percent Poverty in the States Wide inter-state disparities are observed in the poverty ratios and also in the rates of decline of poverty. The poorer States like Bihar, Madhya Pradesh, Orissa, and Uttar Pradesh are the most poverty-stricken regions accounting for 46 percent of India s poor in 1983 and over 54 percent in This reveals the fact that these States have experienced slower rate of poverty reduction than in 38

6 other States over the periods. This implies an increase in the geographical concentration of poverty. North-western States, namely, Punjab, Haryana, Himachal Pradesh, and Jammu and Kashmir have experienced substantial progress in poverty alleviation by the early 1980s and their combined share in all India poor was 2.7 percent in 1983 and this further declined to 2.2 percent in Table 2.2 Percentage of Population Below Poverty Line by States & UTs: to (Combined (Rural + Urban) (In % of persons) No. States/ UTs (URP) (MRP) 1 Andhra Pradesh Arunachal Pradesh Assam Bihar Chhattisgarh Delhi Goa Gujarat Haryana Himachal Pradesh Jammu& Kashmir Jharkhand Karnataka Kerala Madhya Pradesh Maharashtra

7 17 Manipur Meghalaya Mizoram Nagaland Orissa Punjab Rajasthan Sikkim Tamil Nadu Tripura Uttar Pradesh Uttarkhand West Bengal A & N Islands Chandigarh Dadra & Nagar Haveli Daman & Diu Lakshadweep Pondicherry All India URP Uniform Reference Period: MRP- Mixed Reference Period Source: Planning Commission, Government of India More than half of India s urban poor lived in the States of Maharashtra, Madhya Pradesh, Uttar Pradesh, and Tamil Nadu in The rate of poverty reduction in Kerala, Tamil Nadu and West Bengal is found to be faster than in other States. 40

8 2.2.2 Incidence of Poverty in Kerala Though Kerala has made substantial progress in health, literacy, and social sectors, multiple manifestations of poverty are still prevalent in the State. More than 32 lakh families are in the clutches of poverty in Kerala in 2010 as per the poverty estimate of the State Government. According to the Planning Commission s estimates, the headcount ratio in Kerala was percent in and it came down to 15 percent in showing a significant reduction in poverty in the State. Poverty ratio in the State is observed to be higher in urban areas than in rural areas (Table 2.3). Table 2.3 Incidence of Poverty in Kerala: to Year Poverty Ratio (%) Number of Poor (Lakh) Rural Urban Total Rural Urban Total Source: Planning Commission, Government of India The extent of poverty in Kerala estimated by the Planning Commission is very low and much lower than the extent of poverty estimated by the Government of Kerala. This is owing to unique dimensions of poverty in Kerala on account of peculiar path of socio-economic development in the State. Hence, the extent of poverty as per the norms adopted by the Planning Commission to measure poverty has resulted in the gross under-estimation of poverty in Kerala. Consequently, Planning Commission has reduced the quantum of central assistance to the State to reduce poverty in Kerala

9 The study by Sundran and Tendulkar indicates that percent of the people in Kerala were below poverty line in the year 1983, and it had declined to percent in As per the estimate of the Planning Commission Expert Group in 2009, Poverty in Kerala was 33.9 per cent in rural areas, 23.9 per cent in urban areas and 31.3 percent combined in It had come down to 20.2 percent in rural, 18.4 percent in urban and 19.7 percent in the State as a whole in The Saxena Committee, constituted by the Ministry of Rural Development for recommending a methodology for estimation of BPL households in rural areas, suggested that the percentage of rural population below poverty line in Kerala was percent in Causes of Poverty in India Several reasons are cited for the persistent problem of poverty in India. A major cause of poverty in both rural and urban India is the unequal distribution of the basic factors of production especially, land and capital. This shapes the nature as well as the composition of growth which excludes rather than includes the poor from the process of growth. Assetlessness also leads to further disempowerment as the poor are unable to build up human capabilities in terms of education and health 21. The poor lack ownership of income-earning assets which may lead to perpetuating poverty in India. The sum total of income-earning assets which poor households command, including land, capital and labour cannot provide an income above the poverty line. In the absence of productive asset holdings, majority of the poor are dependent on poorly paid and irregular wage employment in the informal sector. The labour endowment of the poor consists essentially of unskilled labour, which typically does not provide a high level of wage income on account of low wages and less availability of employment 22. The poor also do not have access to formal credit which limits the ability of poor households to improve their incomes by undertaking viable economic activities. It is impossible for the poor households to avail themselves of credit 42

10 from banks even for economically viable projects since financial institutions consider them a risk, as they often lack collateral to guarantee repayment of the loan. The widespread poverty in India is attributable to a host of factors such as lack of productive employment opportunities, population explosion, lack of industrialization, failure of land reforms and failure of fiscal policy to bridge the gap between the rich and the poor 23. The broader enabling environment in India in both rural and urban areas does not adequately support the needs of the poor. Rural poverty can be associated with isolation, poor infrastructure facilities and limited institutional presence, while urban poverty is generally associated with poor quality of housing, over-crowded, unsanitary slum settlements, ill-health related to spread of infectious diseases and exposure to environmental hazards. There are also leakages and diversions of funds meant for poverty alleviation. The root-cause of all corruption in the villages is the freedom with which village officials can falsify bills, vouchers, and daily wage register and attendance books. Since the system is so corrupt and in the absence of accountability and no fear of being caught and suspended, every year crores of rupees of funds earmarked for poverty eradication go into the pockets of village officials and politicians Poverty Alleviation Strategies and Programmes in India Poverty alleviation through rapid economic growth and direct attack on poverty through launching specific poverty alleviation programmes are the two broad aspects of poverty alleviation strategies in India. The approach of poverty alleviation through economic growth focuses on the poverty reducing potentials of growth process by appropriate choice of policies and strategies which would enhance the flow of benefits to the poor 25. Accordingly, the Government of India attached greater emphasis on fostering economic growth, believing that the benefits of fast growing economy would trickle down to the lowest economic strata of society, and which would automatically tackle the problem of poverty. 43

11 However, this strategy did not work on desired lines that the benefits of growth did not trickle down to the weaker sections of the society. As a consequence, inequalities in income and wealth and number of poor have increased in India over the years. Hence, Indian planners and policy-makers recognized that direct intervention through poverty alleviation programmes is necessary to solve the problem of poverty. The direct assault on poverty approach relies on targeted programmes aimed at directly improving the socio-economic conditions of identified groups of poor households by enhancing their income earning capacity. It attempts to guarantee the poor a certain minimum standard of living and also strives to remove various constraints confronted by the poor like poor infrastructure and limited or no access to formal credit. Under this approach, various employment programmes aimed at providing wage employment for the poor and financial assistance programmes directed at generating additional income for the poor from self-employments were introduced in India during the 6 th plan period onwards. Land reforms, empowering of the Panchayati Raj institutions, strengthening of public distribution system, providing access to basic minimum services, and promotion of microfinance programmes are the other critical measures initiated by the Government of India to alleviate the problem of poverty. Since the failure of economic growth to reduce poverty significantly, the Government have increasingly resorted to direct attack on poverty through rural development and poverty alleviation programmes which are designed to generate self-employment and wage employment to the poor sections of the society. The major objective of self employment programme is to assist the poor households to acquire productive assets through a scheme of bank loan and subsidy since lack of productive asset is a major cause of poverty. One such programme was Integrated Rural Development Programme (IRDP) started in Two sub-programmes, namely, Training of Rural Youth for Self- 44

12 Employment (TRYSEM) and Development of Women and Children in Rural Areas (DWCRA) were also launched with a view to building capacity to undertake self-employment ventures. IRDP and its allied programmes were replaced by the Swarnajayanti Gram Swarozgar Yojana (SGSY) in It is the only self-employment programme currently being implemented for rural poor. The main purpose of this programme is to provide self-employment to the poor by establishing large number of micro-enterprises. It is implemented by organizing the poor into SHGs and given emphasis to collective lending rather than lending to the individuals. The scheme is implemented on a 75:25 cost sharing between the Centre Government and the State Government. Primary objective of the wage employment programmes was to generate employment opportunities for the poor in rural areas. A secondary objective was to create rural infrastructure in the process of employment generation. A series of wage employment programmes were initiated over plan periods, namely, National Rural Employment Programme, Rural Landless Employment Guarantee Programme, Jawahar Lal Nehru Rozgar Yojana, National Rural Employment Guarantee Programme, Rural Landless Employment Guarantee Programme. Employment Assurance Scheme, Jawahar Rozhar Yojna and Jawahar Gram Samridhi Yojana. All the rural wage employment programmes were integrated into one selfemployment programme in 2001, known as Sampoorna Grameen Rozgar Yojana (SGRY). The objective of this scheme is to provide additional wage employment to ensure food security to the rural poor and to create durable social and economic infrastructure in rural areas. The SGRY is open to all rural poor who are in need of wage employment. The scheme envisages generation of at least 100 man-days of employment in a year; payment of wages under the scheme was to be partly in cash and partly in food grains. A significant addition to the wage employment programmes is the Mahatma Gandhi National Rural Employment Guarantee Scheme under the National Rural Employment Guarantee Act (NREGA), It provides for a legally backed employment provision, guaranteeing 100 days of wage 45

13 employment at statutory minimum wages to every rural household whose adult members are ready to do manual and unskilled work. It obviously makes a substantial dent on the incomes of rural households and enhances their livelihood security. This National Rural Employment Guarantee Programme influenced the rural labour market in such a way that it led to acute shortage of agricultural labourers and upward pressure on their wage rates. The Indira Awas Yojana launched in aims at providing dwelling units free of cost to the BPL families in the rural areas. The beneficiaries are eligible for a grant-in- aid of ` 27,500 per house. Antyodaya Anna Yojana (AAY) is another prominent anti-poverty programme which was started in Under this scheme, thirty five Kgs. of food-grains were made available to the poorest among the BPL families covered under the Targeted Public Distribution System (TPDS) at a highly subsidized rate of ` 2 per Kg for wheat and ` 3 per Kg for rice. Land reforms, strengthening and revamping of public distribution system, providing access to basic minimum services, programmes towards social and economic upliftment of scheduled caste, scheduled tribes and other backward classes, promotion of microfinance programmes and empowerment of Panchayati Raj institutions are the other major measures initiated by the Government of India to resolve the problem of poverty. Thus, the poverty alleviation measures taken up by the Government can be grouped into five main categories: a) Land distribution and land reforms. b) Area-based community and rural development schemes with specific focus on marginal and small farmers. c) Individually targeted programmes providing access to productive capital and skills for the poor and the vulnerable women, scheduled castes and tribes and the landless. 46

14 d) Measures for providing social security to the poor through special employment programmes, relief work programmes and distribution of basic commodities like food, clothing and housing. e) Special schemes for education of the socially marginalized groups, such as scheduled castes and tribes, subsidized primary education and special nutrition programme for mothers and children Poverty Alleviation Programmes in India: A Critique A number of recent studies in India have revealed that self-employment programmes suffered from leakages of various kinds such as high percentage of non-poor beneficiaries, poor quality of assets acquired/delivered and high transaction cost 27. Another issue pertains to the effectiveness of self- employment programmes in generating additional income for the beneficiaries. The initial increase in income from such activities is often not sustained over a long period. There are cases of outright misappropriation of funds or more likely the assets provided for the self-employment venture, namely, milk cattle, goats, pump sets, sewing machine etc. have been sold in a relatively short time and the proceeds consumed. Poor households may be compelled to sell even an asset which is earning a reasonably high rate of return in times of distress because it cannot get access to credit to tide over temporary difficulties. A serious problem in the implementation of a credit-based self-employment scheme is that an impression is often created among the beneficiaries that the credit does not need to be repaid, leading to unavoidable overdues 28. The poor performance of most of the poverty alleviation schemes is due to poor follow-up and monitoring of activities of the loan recipient by the implementing agencies. The success of most of the self-employment programmes heavily depends on the factors outside the purview of the programme such as beneficiary capacity, infrastructure and markets, which are a function of overall socio-economic development. Hence, they do not succeed among the socially and the poorly endowed households and the less developed areas. Most beneficiary households were not able to raise their income to that extent to cross the poverty line and on a 47

15 sustainable basis owing to low amount of investment and absence of infrastructure and linkages necessary to start and sustain enterprises 29. The quality of the assets created under wage employment programmes in the past has been poor and the assets are typically not durable. This has been repeatedly found in the case of rural roads built under these programmes which are either washed away or deteriorate after every monsoon season. The wage employment programmes which were aimed at creating productive assets have also been criticized on the ground that the assets created, such as irrigation works or even roads, ultimately enhance the value of land and the benefits and therefore, accrue mainly to upper-income-land-owning-groups and not to the poor. These programmes have not been as successful as they should have been in ensuring that resources are devoted to potentially productive works such as renovation of tanks, minor irrigation works and soil conservation. Such works constitute investment activity which could greatly raise land productivity and enhance the long term employment generation capacity of local agriculture. However, this can only be achieved if the employment programmes are integrated with designed area and watershed plans in which specific works are clearly identified for implementation through employment programmes. This demands considerable expertise in field-level planning and a high degree of organizational efficiency at the implementation level 30. Wage employment programmes are meant to provide only short term employment, and would need to be repeated every year, as they can only alleviate current poverty and do not lead to an improvement in the capability of the poor to generate incomes on a sustained basis 31. The World Bank study (1998) disclosed that wage employment programmes of India were by and large the most effective in reaching the poor, while the self-employment programmes ranked with a relatively higher proportion of non-poor beneficiaries 32. Two aspects of mis-targeting in poverty alleviation programme have been identified by the Saxena Committee i.e. exclusion of large number of poor families from the list of potential beneficiaries of poverty alleviation programmes and inclusion of ineligible categories or the non-poor in the programme

16 In the light of these serious issues, the Planning Commission constituted a Committee in 1997 to review the existing poverty alleviation programmes in India. In accordance with the recommendations of this committee, many changes were made in the design of both wage employment and self-employment programmes in India. Rural anti-poverty programmes were revamped and refocused for greater effectiveness through rationalization and better targeting with greater role to Panchayati Raj institutions for implementation such as selection of programme beneficiaries and monitoring. In the case of selfemployment programmes, emphasis was given on group lending, linkage effects such as training programmes, access to markets for finished products and building up programme infrastructure. There is also greater involvement of Panchayati Raj institution for their better implementation of the scheme. Further, the Government of India have recognized the role of SHGs for credit mobilization and have been involving NGOs in the poverty alleviation programmes. The multiplicity of existing programmes is being consolidated into two or three major programmes to strengthen the effectiveness of anti-poverty programmes Poverty Alleviation Initiatives in Kerala Several measures were taken by the Government of Kerala to tackle the problem of poverty in the State. Effective implementation of land reforms, introduction of several social security measures, high investment in education and health care, pro-poor labour laws (like fixation of minimum wages), better food security measures, decentralized system of governance through the empowerment of Local Self-Governments were the major steps taken by the State Government to reduce the incidence of poverty in Kerala. The successive Governments in the State made much emphasis on social security measures and public utility services for getting wider access to the poor 34. While some States have reduced income poverty through high economic growth (e.g. Punjab), Kerala has relied a great deal on the expansion of basic education, health care and equitable land distribution for its success in reducing penury

17 A participatory poverty reduction strategy had been introduced through decentralization of poverty alleviation programmes. The implementation of centrally sponsored poverty alleviation programmes had been handed over to the rural and urban Local Self-Governments. A further step in this regard was the introduction of People s Planning for poverty reduction in (Ninth Five Year Plan). In People s Planning, the plans were formulated with people s participation and devolved 40 percent of the development funds of the State to the three tier Panchayats and Municipalities primarily based on the criterion of population with due weight assigned to those Panchayats having sizable population belonging to SC/ST. The Economic Review (2001) pointed out the accomplishments and potential of People s Planning in poverty-reduction strategy in the following words: Decentralization has proved that in providing basic minimum needs, infrastructure like housing, water supply, sanitation and connectivity, the Local Governments have performed creditably. The speed and the extent of coverage as well as efficiency in implementation in respect of provision of minimum needs has been superior to that of Government 36. During the Ninth Five Year Plan, around 40 per cent of the Plan funds transferred to the Local Self-Governments had been utilized to solve the problem of poverty. Local Governments have shown a strong anti-poverty bias. Moreover, funds have flown more to families below poverty line through Local Governments than would normally have been 37. Another major initiative made by the State Government towards poverty alleviation was the introduction of Kudumbashree project in It is a participatory women-oriented poverty eradication programme launched by the State Government with the active support of Central Government and NABARD, for eradicating absolute poverty from the State within a decade. The project is implemented by the State Poverty Eradication Mission through Local Self- Governments. It seeks to attain holistic development of the poor families through self-help and group action. In order to provide food security to the poor, State Government have strengthened public distribution system by providing food grains at subsidized prices. 50

18 Twenty eight Kgs. of rice and seven Kgs. of wheat were made available to each BPL households per month at a highly subsidized rate of `2 per kg. B. Microfinance Programme in India: Emergence and Growth 2.5 Introduction Microfinance is regarded as one of the prominent development paradigms for eradicating poverty through social and economic empowerment of the poor by delivering credit-plus services to them. It has been recognized and accepted as an effective tool for poverty alleviation throughout the world. Microfinance can alleviate liquidity constraints, stabilize consumption, and enhance both income and consumption for the poor, thereby augmenting the welfare of the poor Microfinance: Conceptual Framework The Task Force on Supportive and Regulatory Framework for Microfinance set up by NABARD defined microfinance as the provision of thrift, credit and other financial services and products of very small amounts to the poor in rural, semi-urban and urban areas enabling to raise their income levels and to improve their living standards. The declaration of the Micro-credit Summit held in Washington D.C. in 1997 defined micro-credit programme as those extending small loans to poor people for self-employment projects that generate income, allowing them to care for themselves and their families. The Asian Development Bank defined microfinance as the provision of a broad range of financial services such as deposits, loan, money transfer and insurance to small enterprise and households. The terms microcredit and microfinance are often used interchangeably, but these two terms are not the same. Microcredit refers to a small loan extended to a client by a bank or other institutions; whereas, microfinance refers to loans, savings, insurance, pension, and other financial services targeted at poor clients. Hence, microfinance is a credit plus other financial services. Under the microfinance programme there is shift of emphasis from individual lending to group-based lending. The lending to groups transfers the 51

19 functions of selection of borrowers, monitoring the borrowers, and ensuring repayment of loan from the lenders to the borrowers. The group lending is done based on the principle of joint liability, where the members guarantee each other s loans. Since joint liability alleviates the requirement of collateral to access credit, poor people without any collateral can easily get credit under microfinance. Microfinance employs a graduated loan policy, where the amount of loan issued, may be increased based on the borrowers past history of repayment. Microfinance also rests on the premise that the poor women can save even in small amounts. Mobilization of such savings is essential to avail more loans. Thus, it supports mostly poor women to come out of poverty. 2.7 Objectives of Microfinance The primary objective of microfinance is to alleviate poverty by uplifting their socio-economic conditions of the poor. The other main objectives are women empowerment, making of easy access to formal credit to the poor, promoting of saving mobilization among the poor, creation of more employment opportunities for the poor and helping the poor to achieve greater level of asset creation and income security. 2.8 Evolution and Growth of Microfinance at the Global Level Although microfinance is a recent phenomenon, its origin can be historically traced back to centuries. The idea of microfinance was emerged in Europe during the 16 th and 17 th centuries owing to severe increase in poverty. One of the earliest microfinance organizations was the Irish Loan Fund System founded in 1720 by Irish author and essayist Jonnathan Swift. The major objective of the organization was to alleviate poverty by providing credit without collateral to the poor. The Irish Loan Fund System used peer-monitoring to enforce the repayment of loan in weekly instalments. In the case of Germany, the microfinance programme began in 1778 based on self-help and self-reliance and saving mobilization. It generated opportunities for the lower-income households to save and to get credit for 52

20 starting their enterprises mainly through the movements of Savings and Credit Co-operatives. The striking success of microfinance in Germany pushed moneylenders and most private banks out of business 39. The modern microfinance revolution took place only after 1970s. It had European roots, especially in the microfinance experiments of Ireland and Germany. One of the first pioneers was ACCION International, which emerged in Brazil in It was founded by Joseph Blach Ford for alleviating poverty in Latin America by extending loans to poor people who were willing to establish small business. The experiment of ACCION International proved to be a success in reducing the problem of poverty. Hence, it has spread its activities to South and Central America, the United States, Africa, India, and China. In India, the microfinance initiative was emerged informally with the launching of Self-Employed Women s Association Bank in 1974 by the noted Gandhian and civil rights leader Dr. Ela Bhatt in Ahmedabad. It s major objectives were to resolve the problem of lack of access to timely savings and credit facilities and to free them from the vicious circle of external debt. It disbursed loans to its members without any collateral. The most successful pioneer in modern microfinance is the Grameen Bank of Bangladesh. It was launched in 1976 by Nobel laureate Muhammad Yunus, a Bangladeshi Economist and Professor of Economics for providing loans without collateral to the poor people of Bangladesh. He believed that small loans were capable of uplifting the socio-economic conditions of the poor. The loans were issued to groups of poor households for undertaking small incomegenerating projects. The groups were formed voluntarily. While loans were made available to individuals, all in the groups were held responsible for loan repayment. The group consisted of five borrowers each, with lending first to two, then to the next two, and finally to the fifth. As per the rules of the Grameen Bank, if one member ever defaulted, all in the group were denied subsequent loans 40. The Grameen Bank has been highly successful in delivering credit and other financial services to the poor as well as in alleviating poverty in Bangladesh. It is this pioneering effort that earned international acclaim in

21 that the Norwegian Nobel Committee awarded Nobel Peace Prize to both Muhammad Yunus and the Grameen Bank for their efforts to create economic and social development from below. The great success of the Grameen Bank stimulated replicas worldwide in developed as well as developing countries. In 1981, National Development Foundation, Jamaica was set up with the aid of Pan America Development Foundation. In 1983, Association for Development of Micro Enterprises was started in Dominican Republic, Santo Domingo with the support from ACCION International. Bank Rakayat Indonesia established microfinance in Indonesia in The microcredit programme of Kenya namely Kenya Rural Enterprise Programme was started in 1984 with the assistance of United States Agency for International Development (USAID). In 1986, Agency de Credit Pour L Enterprise Privee was started in Senegal with the aid of USAID. In Bolivia, the microfinance programme, known as Foundation for the Promotion and Development of Micro Enterprise, was established in 1986 with the support of USAID and ACCION International and later on, it was converted into a Bank called Banco Solidario in Further, the programme has been replicated in many countries in America, Asia, Europe and Africa. Recognizing the potential role of microfinance in alleviating poverty, the United Nations declared 2005 the International Year of Microcredit, which gave further impetus to the growth of microfinance sector at the global level. 2.9 Emergence of Microfinance in India The continuous failure of the formal financial system to deliver credit and other financial services to the poor and the realization of potential role of microfinance in poverty alleviation led to the emergence of microfinance in India. The planners and policy-makers identified that one major cause of poverty in India is the inability of the poor to access capital to make productive investment for income and employment generation owing to the exclusion of the poor by the formal financial institutions in their lending activities. It also gave rise to the problem of heavy dependence of the poor upon highly exploitative moneylenders and other informal source of finance. 54

22 Government of India have made intensive efforts over the years to enhance the flow of bank credit to the poor and the underprivileged sections of the society and thereby to resolve the problem of poverty through its various policies and programmes. The prominent measures taken by the Government of India in this direction included nationalization of 20 Private Commercial Banks, massive expansion of bank branch network into unbanked rural areas, a mandatory system of priority-sector-lending, subsidized rural credit programme, implementation of many credit-linked poverty alleviation programmes and creation of new set of rural banks such as Regional Rural Banks, Co-operative Banks, and an apex level institution, NABARD etc. Despite these critical measures of the Government a very large number of the poor continued to remain outside the fold of formal banking system. As per All-India Debt and Investment Survey of 2002, only about 13.4 per cent of the rural households had borrowed from various formal sources 41. This proportion was even much lower among the poor. Similarly, the Rural Finance Access Survey conducted by National Council of Applied Economic Research revealed that nearly 87 percent of the poor households were without access to any formal credit 41. The failure of India s formal financial institutions to deliver credit to the poor may be attributed to a host of factors affecting both banks and their clients. From the perspective of the rural banks, catering to the credit requirements of the rural poor is highly risky on account of uncertainty regarding the repayment capacity of the rural poor borrowers, their irregular/volatile income streams, expenditure patterns and their inability to provide collateral. Further, transaction costs of rural lending in India are high owing to small loan size, high frequency of transactions in rural finance, large geographical spread and heterogeneity of borrowers and wide-spread illiteracy. From the perspective of small rural borrowers, rural banks are unattractive because rural banks do not provide flexible products and services to meet the income and expenditure pattern of small rural borrowers (frequent borrowing and repayment in small instalments). Moreover, the transaction cost of dealing with formal banks are high owing to large distance to the nearest financial institutions or since the procedures for 55

23 opening an account or seeking a loan are cumbersome or it required costly and longer processing time for loan 43. Similarly, the major problems identified with the rural credit programmes are target based approach focusing on achieving quantitative results in reaching the poor, linkage to subsidies resulting in large-scale leakage of benefits to the non-poor, high rate of failure of self-employment programmes owing to poor project formulation and implementation, low loan repayment rate both because of failure of projects and creation of widespread impression among the scheme beneficiaries about loan as non-returnable grant. Overall the State-led initiatives have not succeeded fully in creating sustainable financial services for the poor 44. A series of research studies conducted by NABARD during the early 1980s observed that the existing banking policies, systems and procedures, and saving and loan products were not fitted to the immediate needs of the poor and what the poor really required was better access to the banking services and products rather than cheap subsidized credit 45. In this back-drop, NABARD s search for alternative banking policies, systems and procedures, savings and loan products, and suitable delivery model for serving the financial needs of the poor contributed to the emergence of microfinance in India. The successful microfinance interventions in other parts of the world also provided further inspiration to the NABARD for launching a microfinance programme in India under the name of SHG-Bank Linkage Programme in February The programme became a landmark development in the history of Indian banking sector, as the informal thrift and credit groups of the poor came to be recognized as bankable clients Microfinance Approaches in India The microfinance sector in India is characterized by two broad approaches namely, SHG-Bank Linkage approach and Microfinance Institution Model approach. 56

24 SHG-Bank Linkage (SBL) Approach The SBL approach is initiated by NABARD in 1992 with the objective of delivering financial services to the unreached poor to alleviate poverty. The SBL programme has emerged as the most popular and dominant model of microfinance in India. It involves the formation of SHGs. An SHG is a small homogenous affinity group of about 15 to 20 people who join together to address common issues. The group undertakes voluntary thrift activities on a regular basis and these pooled savings are used to make interest-bearing loans among its group members. The SHG activity not only inculcates the habit of thrift but also imbibes concepts like financial intermediation and handling of resources. Once the group is stabilized, i.e. after a certain period of disciplined functioning, it gets linked to the banks and avails financial services from the banks using its savings and group guarantee as the collateral 46. Reserve Bank of India has made the SHG-Bank Linkage as a mainstream activity of banks under priority sector lending in NABARD has provided subsidized re-financing support to banks as an encouragement to lend to SHGs. All these measures made substantial dent on the rapid growth of this programme in India Microfinance Institution Model Approach The approach of delivering microfinance through Microfinance Institutions (MFIs) is a newly emerging model of microfinance in India. The Microfinance Institutions act as an intermediary and borrow from banking sector for on-lending to SHGs. The MFIs in India are characterized by a diversity of institutional and legal forms. Microfinance Institutions in India fall under two broad sectors formal and informal. Commercial Banks, Regional Rural Banks and Co-operative Sector Banks form the formal financial sector and NGOs, Trusts, and Mutually Aided Co-operatives constitute the informal sector. The apex financial institutions in India such as the NABARD, SIDBI and Rashtriya Mahila Kosh (RMK) have taken several initiatives over the years to encourage microfinance movements in India. Further, the new generation banks and foreign funding agencies also support MFIs highly to expand their activities 57

25 in India. Microfinance Institutions are guided by the profit-motive and hence, they charge higher interest rate on their loans under the adverse terms and conditions. They charge borrowers interest on the entire remaining period as well, even if they were to repay the loan early. People are reported to have had to borrow from money-lenders in order to repay the loans availed from MFIs 47. In India during the year , bank loans amounting `3,732 crore were disbursed to 581 MFIs, taking the total loans outstanding to `5,009 crore to 1915 MFIs as on March 31, Microfinance Models in India There are various types of microfinance delivery models prevalent in India. They are listed below: (a) SHG- Bank Linkage Model: It is emerged as the dominant microfinance model in India. There are three models of linkage in the country: (i) ii) Model I SHGs Formed and Financed by Banks: In this model, the banks themselves act as both promoter of SHGs and also provider of credit to SHGs. Model II SHGs Formed by Formal Agencies other than Banks (NGO and others) but Directly Financed by Bank: Under this model, NGOs and other formal agencies in the microfinance sector act as facilitators. (iii) Model III - SHGs Financed by Banks using NGOs and other Agencies as Financial Intermediaries: In this model, NGOs and other agencies play the dual role of facilitators and financial intermediaries. They form SHGs, nurture them and train them in thrift and credit management and eventually they avail themselves of bulk loans from banks for on-lending to these SHGs. (b) Grameen Model : In this model, microfinance organizations would ask potential clients to organize themselves into groups of five members which are further organized into centres of around five to seven such 58