World Review of Entrepreneurship, Management and Sust. Development, Vol. 1, No. 1, 2005 91 Micro credit in India: an overview Mohanan Sankaran Faculty of Economics and Business Administration, Department of Business Sciences, Universidad Catolica Del Northe, Antofagasta, Chile Fax: 56 55 355878 E-mail: msankaran@ucn.cl Abstract: The present paper reviews origin, development and growth of the micro credit programme in India. National Bank for Agriculture and Rural Development in India launched its pilot phase of the Self Help Group Bank Linkage programme in 1992. Self Help Groups have been recognised by the policy makers as the effective conduits for accomplishing the distributional objectives of monetary policy. The SHG-bank linkage programme has emerged as the largest micro credit programme in the world. The programme has made rapid progress since its inception in 1992. The progress under the SHG-Bank linkage programme has been quite impressive. Nearly 16.7 million families were assisted through this programme and 1079091 Self Help Groups were provided with bank loans. Total amounts of 867 million US$ were given to the Self Help Groups for employment generating activities. NGOs have emerged as effective change agents by organising, nurturing and stabilising SHGs and affecting their linkage with banks as also by adopting other delivery mechanisms for providing financial services directly or indirectly to the poor. Keywords: India; micro credit; Self Help Groups. Reference to this paper should be made as follows: Sankaran, M. (2005) Micro credit in India: an overview, World Review of Entrepreneurship, Management and Sust. Development, Vol. 1, No. 1, pp.91 100. Biographical notes: Dr. Mohanan Sankaran has obtained his PhD in Commerce (Finance) from the University of Kerala, India. He is now working as Professor in the Department of Business Sciences, Universidad Católica del Norte, Antofagasta, Chile. He worked two years as Associate Professor in Jimma University, Ethiopia. He has more than twenty years of teaching experience at undergraduate and postgraduate levels. He is an approved research guide of the University of Kerala in Commerce Faculty. He has ten years of research guidance experience at doctorate level. He has produced four Doctorate Degrees in Commerce. He has published fifteen research articles and co-authored two books (Institutional Finance and Rural Development and Industrial Relations in Public Sector). 1 Introduction Micro credit programmes extend small loans to poor people for self-employment projects that generate income, allowing them to care for themselves and their families. Micro credit has come to be recognised and accepted as one of the new development paradigms for alleviating poverty through social and economic empowerment of the poor, with Copyright 2005 Inderscience Enterprises Ltd.
92 M. Sankaran focus on empowering women (Puhazhendhi and Badatya, 2002). Credit is usually provided to groups of individuals or village organisations that use joint-liability to enforce loan repayment. Through group savings and loans, poor people often increase their economic security and well being. Over the past two decades micro credit programs have emerged as one of the leading strategies in the overall movement to end poverty. Micro credit programmes have become a major tool of development and found to be the only practical and most appropriate solution to alleviate poverty. Micro credit programmes have been employed in developing countries for some years, and their effectiveness in the development and poverty alleviation is increasingly acknowledged (Krog, 2000). In many countries micro credit programmes have proved to be an effective tool in freeing people from poverty and have helped to increase their participation in the economic and political processes of society (Secretary General, United Nations, 1998). The Asia-Pacific region is home to many micro credit institutions, and the majority of programs are directed at women in rural areas. Targeting women as clients of micro credit programs has been an effective method to ensure that the benefits of increased family income are directed towards the general welfare of the family, and particularly the children. The objective of the present article is to make a review of the origin, development and growth of micro credit programme in India. For the purpose of this article, data published by National Bank for Agriculture and Rural Development in India have been used. Data relating to number of Self-help groups linked with banks, amount of bank loan provided to clients, models of Self-help groups, number of participating banks, number of non-governmental organisations (NGOs) participating in the programme, number of families assisted under the programme have been used and analysed. In the case of number of self-help groups linked with banks and bank loan provided to them data for a period from 1992 1993 to 2003 2004 have been collected and analysed and in the case of other variables data for a period of four years starting from 2001 have been used. 2 Origin of micro credit system in India Despite having a wide network of rural bank branches in India which implemented specific poverty alleviation programmes that sought creation of self-employment opportunities through bank credit for almost two decades, a very large number of the poorest of the poor continued to remain outside the fold of the formal banking system (National Bank for Agriculture and Rural Development, 1999). Therefore a need was felt for alternative policies, systems and procedures, savings and loan products, other complementary services, and new delivery mechanisms, which would fulfil the requirements of the poorest, especially of the women members of such households. As a result National Bank for Agriculture and Rural Development (NABARD) in India launched its pilot phase of the Self Help Group Bank Linkage programme in February 1992. In India as also in other countries, Self Help Groups have been recognised by the policy makers as the effective conduits for accomplishing the distributional objectives of monetary policy. Group model as developed by Bangladesh Grameen Bank is by and large followed in most of the South East Asian Countries. India has adopted somewhat a similar model to Bangladesh Grameen model (Vasanthakumari and Sharma, 2002). The SHG-informal thrift and credit groups of poor came to be recognised as bank clients under the pilot phase. The strategy involved forming small,
Micro credit in India: an overview 93 cohesive and participative groups of the poor, encouraging them to pool their thrift regularly and using the pooled thrift to make small interest bearing loans to members, and in the process learning the nuances of financial discipline. Subsequently, bank credit also becomes available to the Group, to augment its resources for lending to its members. It needs to be emphasised that NABARD sees the promotion and bank linking of SHGs not as a credit programme but as part of an overall arrangement for providing financial services to the poor in a sustainable manner and also an empowerment process for the members of these SHGs. The NABARD led Pilot Project commenced with the support of the Central Bank of the country, i.e., Reserve Bank of India, from 1992 onwards aimed at promoting and financing 500 SHGs across the entire country, the SHG- bank linkage strategy has come a long way. The strategy includes financing of SHGs promoted by external facilitators like NGOs, bankers, socially spirited individuals and government agencies, as also promotion of SHGs by banks themselves and financing SHGs directly by banks or indirectly where NGOs and similar organisations act as financial intermediaries as well. Through the Self-help bank linkage programme the Reserve bank of India and National Bank for Agricultural and Rural Development Bank aimed to improve relations existing between the poor and bankers with the social intermediation of NGOs (Bansal, 2003). 3 Formation, nurturing and functioning of self help groups in India Self-help groups form the basic constituent unit of microfinance movement in India (Chakrabarti, 2004). Experiments in various developing countries proved that poor can be helped by organising them into small self help groups. To touch the core of poverty, women are the best agents. Hence women self help group have become the ray of hope to the developmental practitioners. Self-Help Group (SHG) is a small voluntary association of poor people, preferably from the same socio-economic background. They come together for the purpose of solving their common problems through self-help and mutual help. The SHG promotes small savings among its members. The savings are kept with a bank. This common fund is in the name of the SHG. Usually, the number of members in one SHG does not exceed 20. The SHGs comprise very poor people who do not have access to formal financial institutions. They act as the forum for the members to provide space and support to each other. It also enables the members to learn and cooperate and work in a group environment. The SHGs provide savings mechanism, which suits the needs of the members. It also provides a cost effective delivery mechanism for small credit to its members. The SHGs significantly contribute to the empowerment of poor women. Often the women belonging to neighbourhood communities, sharing thoughts and problems with one other form into SHG. Members of SHGs save equal amounts as decided in their groups. Once the like minded members come together, they open an account in either bank or post office in the home of the group. The group authorises any of the members (elected as group leaders) to operate the group account. Thrift is a good entry point and a binding force for poor women. They view their future in their savings, the savings which meet their immediate needs, and also provide security for their old age. The meager savings of an individual may not be sufficient to meet the needs but all the savings of the groups members put together can be of great help to one or two members of the group. In any best SHG, the credit operations also start at the end of first month itself where in
94 M. Sankaran the members pool together their savings and sanction loan to a needy member. Every group will have its own set of rules and regulations like amount of savings by members, interest rate on savings, basis on which loans are to be prioritised, interest on loans and penal interest on defaulted amount. Every group decides frequency of group meeting, when and where to hold meeting. Best SHGs meet once in a week, but normally any SHG should meet at least once in a month. The frequency of meetings strengthens the group processes, higher the frequency, the better it is. Best groups exert their discipline through fining the absentee members and late coming members. The thrift as well as credit operations take place in the group meetings. The meetings have specific agenda and the discussions go on as per the agenda. A poor women coming out of her house and attending meeting as a stake holder itself is a step towards empowerment. In the meetings various issues are discussed at length and members decide who should be given the loan. The discussions take place in a democratic and transparent manner. In best SHGs, each meeting is presided by members in rotation and this helps to impart leadership qualities to all the members. Accounts are written in the meeting itself. The standard accounts include attendance register, savings and loan ledger, cash book, individual pass books. The accounts of are written either by members themselves or by a person employed by the SHG. Best practices in SHG are being evolved continuously based on experiences. 4 Training and capacity building of self-help groups It is not sufficient to promote SHG but the group has to be sustained. Constant inputs of training and capacity building are required to sustain SHGs. District Rural Development Agencies (DRDA) are striving towards this goal by constantly organising training programmes. Apart from DRDAs, NGOs and NABARD are actively associated with the training and capacity building of SHGs. It has been of general observation that any group at least requires four training days in a year. The groups are to be intensively given inputs in group management, best practices in group management, conduct of group meetings, accounts and book keeping and mode of accessing to government schemes and bank finance. Once the SHG completes six months and members, continuously practicing thrift, rotating the corpus generated, then it becomes eligible to get bank loan. The loan amount ranges from two times of savings amount to four times. 5 Number of self-help groups linked with banks and the amount of loan disbursed Growth in the number of self-help groups and the amount of loan disbursed to them is the two important indicators to judge the success of the programme. In India the SHG-bank linkage programme has emerged as the largest micro credit programme in the world (National Bank for Agriculture and Rural development, 2004). The pilot project started in 1992 has turned into a national movement, linking more than one million SHGs with bank credit and leading to the socio-economic empowerment of women. It is also important that the bank loans enable the group members to undertake income generating activities which leads to sustainable development. The number of Self-help group linked with banks increased from 255 in 1992 1993 to
Micro credit in India: an overview 95 1079091 in 2003 2004 registering a growth of nearly 4,231 times higher than the base year (Table 1). The amount of bank loan disbursed reveals a staggering growth. It increased from 0.10 million US$ in 1992 1993 to 867 million US$ in 2003 2004, 8,670 times higher than the base year. The increasing number in linking self-help groups with banks and the loan provided by the banks reveal the success and acceptance of micro credit programme among the poor people and the sustainability of the programme. Table 1 Number of self-help groups linked with banks and the amount of loan disbursed (amount in million US$) Year Number of SHGs linked with banks Percentage of change over previous year Bank loan Percentage of change over previous year 1992 1993 255 0.10 1993 1994 620 143.14 0.20 100.00 1994 1995 2122 242.26 0.78 290.00 1995 1996 4757 124.17 1.81 132.05 1996 1997 8598 80.74 3.33 83.98 1997 1998 14317 66.52 6.40 92.19 1998 1999 32995 130.46 13.57 112.03 1999 2000 114775 247.85 44.53 228.15 2000 2001 263825 129.86 105.26 136.38 2001 2002 461478 74.92 215.20 104.45 2002 2003 717360 55.45 455.00 111.43 2003 2004 1079091 50.43 867.00 90.55 Source: Annual Reports (2000 01 to 2003 04), National Bank for Agriculture and Rural Development, Mumbai, India (Adapted) 6 Models of self-help group-bank linkage in India In India broadly three different credit lending models have emerged under the micro credit programme. In the first model, the bank itself acts as a Self Help Group Promoting Institutions (SHPI). It takes initiatives in forming the groups, nurtures them over a period of time and then provides credit to them after satisfying itself about their maturity to absorb credit. In the second model, groups are formed by NGOs or by government agencies. The groups are nurtured and trained by these agencies. The bank then provides credit directly to the SHGs after observing their operations and maturity to absorb credit. While the bank provides loans to the groups directly, the facilitating agencies continue their interactions with the SHGs. Most linkage experiences begin with this model with NGOs playing a major role. This model has also been popular and more acceptable to banks, as some of the difficult functions of social dynamics are externalised. In the third model the NGOs act as both facilitators and microfinance intermediaries. First, they promote the groups, nurture and train them and then approach banks for bulk loans for lending to the SHGs. Table 2 shows the number and percentage of self-help groups under the three models. The table reveals that the SHGs formed by formal agencies and NGOs but directly financed by banks is more acceptable to all related with micro credit
96 M. Sankaran programmes. Of the total Self-help groups linked to banks above 70% belong to this group. The total number of such self-help groups increased from 200507 in 2000 2001 to 776948 in 2003 2004. But there is not much difference in percentages to the total number of self-help groups. Table 2 Number of self-help groups under three models Models 2000 2001 2001 2002 2002 2003 2003 2004 SHGs formed and financed by banks 34297(13) 73836(16) 143472(20) 215818(20) SHGs formed by formal agencies 200507(76) 346109(75) 516499(72) 776946(72) and NGOs but directly financed by banks SHGs financed by banks through 29021(11) 41533(9) 75389(8) 86327(8) NGOs Total 263825 461478 717360 1079091 Source: SHG Bank Linkage Programme-Highlights (2004), National Bank for Agriculture and Rural Development, Mumbai, India (Adapted). Figures in brackets are percentages to the totals There are some advantages for this model when compared with other models. Considering the acceptance and confidence for NGOs among the poor section of the people and their participation in socio-economic activities for the development they can easily outreach the poor section of the society. Nearly 13 20% belong to the first category of SHGs formed and financed by banks during the period 2001 2004 and the last category there is only a small percentage. The average for four years constitutes only 9%. This implies that there is less popularity for this model. 7 Participating banks in micro credit programmes in India The role of financial institutions especially banks in the developmental programmes which aims at improving the well being of the people are important. The success of the programme to a large extent depends upon the availability of funds. The formation and nurturing of self-help groups and the confidence created among them will sustain only if they are provided with adequate funds for the chosen economic activities. Table 3 shows the different banks participating in the programme. The table reveals that the total number of participating banks in the programme also increased substantially during the period under review. It increased from 314 to 560 (78.34% increase than the base year). Bank wise classification reveals that the number of commercial banks participating in the programme is almost same in all the four years under review. But it should be noted that now commercial banks are ready to support and grant loans to the poor sections of the society.
Micro credit in India: an overview 97 Table 3 Number of participating banks in the programme during the period 2001 2004 Year Number of commercial banks Number of regional rural banks Number of cooperative banks Total number of banks Percentage of change over previous year 2001 43(13.69) 177(56.37) 94(29.94) 314 2002 44(9.91) 191(43.02) 209(47.07) 444 41.40 2003 48(9.50) 192(38.02) 265(52.48) 505 13.74 2004 48(8.57) 196(35.00) 316(56.53) 560 10.89 Figures in brackets are percentages to the totals. Source: SHG Bank linkage Programme- Highlights (2004), National Bank for Agriculture and Rural Development, Mumbai, India (Adapted) The table also exhibits that the role of regional rural banks and cooperative banks are increasing even within the short period of four years under study. The number of participating regional rural banks in the programme increased from 177 in 2001 to 196 in 2004, showing an increase of nearly 10.73%. At the same time the number of participating cooperative banks increased to from 94 in 2001 to 316 registering an increase of 236.17%. The reasons for this increasing role of regional rural banks and cooperative banks are their rural based operations and rich experience in financing economic activities of the rural poor and their increased confidence in prompt repayment due to the proper functioning of self help groups and their savings that are deposited in the banks. 8 Non-governmental organisations and micro credit programme The role and participation of non-governmental organisations in micro credit programme in India needs special focus. Year after year the number of non-governmental organisation participating in the programme shows an increasing trend. The non-governmental organisations have been playing a vital role in the country over the last quarter of the century in the sphere of social development (Mohanan, 2002). NGOs are playing the most prominent role in group formation and nurturing prior to establishing linkages with banks (Kropp and Suran, 2002). The micro credit movement in India encouraged NGOs to undertake not only social engineering but also financial intermediation (Rao, 2004). As the development actors they have passed through different stages taking up challenges from time to time. With the launching of the micro credit system, the NGOs also have come to the forefront of the system. Grassroot level organisations usually have good community contacts, knowledge of local languages, patience and skill to organise groups of people (Wilson, 2002). Table 4 shows the number of NGOs participating in the programme for a period from 2001 to 2004. The table reveals that the number of Non-governmental organisations participating in the programme is increasing. It increased from 1030 in 2000 2001 to 3024 in 2003 2004 with growth of 193.59% when it is compared with the base year. Year wise analysis reveals that the largest increase in growth in the number of NGOs can be seen in 2001 2002. In that year it increased to 2155 from 1030 in 2000 2001 with a growth of 109.22%. The least growth in the number of NGOs is noted in 2003 2004. In that year
98 M. Sankaran the number increased from 2800 3024 registering an increase of 8%. The large number of NGOs participating in the programme shows their social commitment and experience in the field of social work and ability to organise people. Table 4 Number of NGOs participating in micro credit programme Year Number of NGOs Percentage of change over previous year 2000 2001 1030 2001 2002 2155 109.22 2002 2003 2800 29.93 2003 2004 3024 8.00 Source: SHG Bank linkage Programme- Highlights (2004), National Bank for Agriculture and Rural Development, Mumbai, India 9 Families assisted through micro credit programme in India The micro credit programmes essentially aims at giving financial assistance to the weaker sections of the society. The loans are provided to start income generating activities and thereby uplifting the poor from economic and social backwardness. Number of families assisted through the programme is an important indicator to assess the progress and success of the programme. There is remarkable growth in the number of families assisted through the programme. A recent impact study (Puhazhendhi and Badatya, 2002) has observed that there is deepening and widening of institutional credit among the rural poor people. Availing loans from money lenders and other informal sources with higher interest have been significantly reduced due to SHGs intervention and general well being of the beneficiaries have been improved. Table 5 shows the number of families assisted through the micro credit programme in India. The table reveals that there is amazing increase in the number of families assisted through the programme. The number of families assisted increased from 4.5 million from 2000 2001 to 16.7 million in 2003 2004 showing an increase of 271% during the period under review. The highest increase is noted in 2002 2003 (73.33%) and the lowest is in 2003 2004(43.97%). It can be concluded from the figures that the micro credit programme has become a movement of the people. Table 5 Number of families assisted (in million) Year Number Percentage of change over previous year 2000 2001 4.5 2001 2002 7.8 73.33 2002 2003 11.6 48.18 2003 2004 16.7 43.97 Source: SHG Bank linkage Programme- Highlights (2004), National Bank for Agriculture and Rural Development, Mumbai, India
Micro credit in India: an overview 99 10 Conclusion Micro credit programme has become an important tool to eradicate poverty in India. It is gathering momentum to become a major force in India. The self-help group (SHG) model with bank lending to groups of poor women without collateral has become an accepted part of rural finance. In India forming and nurturing small, homogeneous and participatory self-help groups (SHGs) of the poor has today emerged as a potent tool for human development. This process enables the poor, especially the women from the poor households, to collectively identify and analyse the problems they face in the perspective of their social and economic environment. It helps them to pool their meager resources, human and financial, and prioritise the use of resources for solving their own problems. SHG-Bank Linkage Programme has proved to be the major supplementary credit delivery system with wide acceptance by banks, NGOs and various government departments. The programme has made rapid progress since its inception in 1992. The progress under the SHG-Bank linkage programme has been quite impressive. Nearly 16.7 million families were assisted through this programme and 1079091 Self Help Groups were provided with bank loan. Total amounts of 867 million US$ were given to the Self Help Groups for employment generating activities. Broadly three different models have emerged under the programme (SHGs formed and financed by banks, SHGs formed by formal agencies and NGOs but directly financed by banks, SHGs financed by banks through NGOs). Self Help Groups formed and nurtured by formal agencies and NGOs and financed by banks is the most popular form in India (above 70%). 560 banks are participating in the programme (commercial banks-48; regional rural banks-196; and cooperative banks-316). NGOs have emerged as effective change agents by organising, nurturing and stabilising SHGs and affecting their linkage with banks as also by adopting other delivery mechanisms for providing financial services directly or indirectly to the poor. As on March 2004 a total of 3024 NGOs are participating in the programme. References Bansal, H. (2003) SHG- bank linkage programme in India: an overview, Journal of Micro Finance, Vol. 5, No. 1, pp.21 49. Chakrabarti, R. (2004) The Indian Microfinance Experience Accomplishments and Challenges, www.microfinacegateway.org. Krog, J. (2000) Attacking Poverty with Decentralization and Micro credit: Indian Experiences, www.ulandslaere.au.dk. Kropp, W.E. and Suran, B.S. (2002) Study of Linking Banks and (Financial) SHGs in India, National Bank for Agriculture and Rural Development, Mumbai, India. Mohanan, S. (2000) Micro Credit and Empowerment of Women- Role of NGOs, Yojana, Vol. 44, No. 2, pp.22 28. National Bank for Agriculture and Rural Development (1999) Task Force Report on Supportive Policy and Regulatory Framework for Micro Finance, Mumbai, India. National Bank for Agriculture and Rural Developement (2004), SHG Bank Linkage programme-highlights, Mumbai, India. National Bank for Agriculture and Rural Development (2004) Annual Report, Mumbai, India. Puhazhendhi, V. and Badatya, K.C. (2002) SHG Bank Linkage Programme for Rural Poor-An Impact Assessment, National Bank for Agriculture and Rural Development, Mumbai, India.
100 M. Sankaran Rao, M. (2004) Micro Finance Institutions in India, National Bank for Agriculture and Rural Development, Mumbai, India. Secretary General (1998) Report on Role of Micro Credit in the Eradication of Poverty, United Nations, New York. Vasanthakumari and Vani, S.J. (2002) Microfinance: Theoretical Framework and Empirical Evidence-An Indian Experience, Paper presented at the Seminar on micro credit operation, www.bangladesh_bank.org/seminar/cpindia.html. Wilson, K. (2002) The new microfinance-an essay on the self-help group movement in India, Journal of Microfinance, Vol. 4, No. 2, pp.21 245.