Microfinance through financial inclusion and Self Help Groups (SHGs) for Economic Development in India Dipak Biswas, Assistant Professor in Commerce Swami Niswambalananda Girls College, 115, B.P.M.B Sarani, P.O. Bhadrakali, Dist. Hooghly, West Bengal, 712232 Email ID:dipakbiswas.1965@gmail.com ABSTRACT: Microfinance and activities of Self Help Groups (SHGs) are highly important to alleviate poverty and for the overall rural development in a developing economy like India. In this study we actually attempts to demonstrate the role of Microfinance and Self help group in economic development considering three parameters of Microfinance i) Indicator of microfinance Penetration ii) Indicator of microfinance usage and iii) Indicator of microfinance availability, overall microfinance index known as microfinance outreach is calculated for various Indian states and the states are ranked accordingly. We also have run a regression analysis to demonstrate that, all the three parameters of microfinance have significant contribution in determining overall microfinance outreach. Keywords: Microfinance, Self help group, Microfinance outreach. 30
IINTRODUCTION: The concept of Microfinance and Self-help Groups (SHGs) has been evolved for the benefit of below poverty level people who are called the poorest of the poor in the society. Microfinance is generally provided through SHGs formed by the beneficiaries of such finance. It is propagated as an alternative system of credit delivery for the sake of vulnerable section of the people. Microfinance has emerged as a powerful mechanism which enhances the economic condition of the poor people. It has emerged a major strategy to solve twin problems of poverty and unemployment that continue a major threat to the policy and economy of the developing country like India.. Several studies have been identified on some economic impact of Microfinance as woman empowerment, poverty alleviation, income and employment generation (Qazi, 2007; Narender, 2007; Sing, 2009) SHGs play a very significant role for changing the social scenario by empowering the poor people. NABARD had taken a vital role by introducing SHGs-Bank linkage program since 1992. It was one of the largest microfinance initiatives in the world to finance SHGs across the country through the formal system. Under this program, different activities like financial services to the poor, poverty reduction and microcredit etc. have been provided. During the last two decades it had covered more than 9.07% core Indian poor household and it had considered the largest community based microfinance program in India as well as in the world. It has not spread over all the regions of India in similar ways. Southern parts of India have dominated than other parts of India. In no of SHGs and volume of microfinance amount the southern regions has about 36.96 larks SHGs And 49% of total SHGs in India. On The other hand bank had savings outstanding s of southern region was Rs-6000 cores. The aforesaid region along had obtained 63% of total savings outstanding followed by eastern and other region of India. Several measures have been used to explore the level of microfinance outreach and its variations across the regions. A comprehensive index of microfinance outreach should include both the demand 31
side and the supply side demonstration of the problem. The supply side demonstrations measure the availability and penetration of the microfinance outreach, while the demand side dimension measures the use of microfinance services. In an attempt to measure the microfinance outreach in India and its states, applying by the method of index of microfinance outreach (IMO).. REVIEW OF LITERATURES: On the issue of microfinance access, there exist a number of literatures covering theoretical and empirical aspects of the problems. Among these, some of the important literatures have been formulated as follows: Literature on Microfinance: Basu (2006) examined the impact of micro-finance on women empowerment by Tarkeswar block conducting a primary survey of Hooghly district in West Bengal. This district was selected by him on the basis of highest no. of SHGs formation. In this study, it was observed that though in Andhra Pradesh, commercial bank and regional rural banks played a crucial rolein promoting SHG-Bank linkage programme, while in West Bengal, vital role was played by cooperative bank in the formation of SHGs. He also argued that though loans have been taken by women for income generating activities, but these are not properly utilized. Even the decision of appropriation of loan was shared by family members. So, he concluded that micro-finance programme did not explain the strong form of women empowerment rather than weak form of women empowerment. 32
Shetty (2007) reported that microfinance can be looked as a new means of addressing poverty, some may content to our failure to have proper institutional rural credit delivery. He argued that socio-economic empowerment of the poor households in the village would be better served only if increased institutional credit. The article suggests that policy planners should aim at larger development prospective of the village and create adequate infrastructure to enable efficient function of the banks in rural areas. The expansion of rural credit has to be on commercial principles to facilitate the expansion of disbursement of rural credit at various credits to solve the problems of the poverty and unemployment in the country. Chavan (2008) analyzed the lamentable socio-economic condition of women in urban area irrespective of increase the number of SHGs, facilities of micro-finance and financial inclusion through banks in Indian prospective. He argued that gender inequality had reached in a very significant level. Women being the half of the Indian population were earning less amount of money and getting minimum facilities of loan from banks. He pointed out that access to banking facilities which were getting by the women could be examine by considering two parameters: extend of credit supplied to them and extent of deposits received from them. He suggested that gender inequality could be removed by proper and systemic policy of financial inclusion and micro-finance without considering caste, religion and area. Barman, Mathur and Kalra (2009) analyzed that microfinance intervention was considered an important component of development strategy to mainstream the poor rural households with the formal financial system in India. He argued that microfinance might be increase informal money lending if clients needed top up micro loans, or borrowed to repay according to the installment schedule. The objectives of the paper was to examine the relationship between the level of indebtedness to money lenders and the type of microfinance 33
model through a case study in Varanasi, U.P. It is concluded that the MFIs had to remember that the interest of their sustainability without complete information on the credit worthiness of borrowers might be continued to the overall indebtedness of their clients as well as damage their performance. Sharma (2009) highlighted that 80% poor people of Bangladesh are covered under microfinance and remaining 20% are expected to be covered within the next two years. It is also pointed out that student in Bangladesh were given loan, most of whom have opted to become entrepreneurs after they completed their studies. Sing (2009) discussed that 71% the linked bank-shgs were southern region which were located in Andhra Pradesh, Karnataka, Kerala and Tamil Nadu. The share of southern region come down progressively over the years but it is still at 44%. Many states like Uttar Pradesh and Bihar with higher incidence of poverty have shown poor performance under the program. The study recommended that the role of microfinance institute is very important in Rural Development and Poverty eradication. It is in this context enumerated that one needs to appreciate the role of played by microfinance institutions, Government, NGO s and social organizations. Hermes and Lensink (2011) pointed out that the role of microfinance had attracted significantly both the policy makers as well as academic circles. He also touched upon the issue of the tradeoff between the financial sustainability and outreach of microfinance programme. In this context he also provided much more evidence on the trade of between sustainability and outreach. He argued that asses to finance may contribute to an improvement of the social and economic situation of women. It is concluded that microfinance might have positive spillover effects such that its impact surpassed the economic and social improvement of the borrowers. 34
Pokhriyal and Ghildiyal (2011) highlighted that microfinance had been introduced and promoted to bridge this gap and it had been successful to a great extent. SHG-Bank linkage programme had been analyzed critically to assess its contribution towards removing the disparities prevailing in various regions of the country. An attempt had been made to find out that weather this program had reduced regional disparities or had it itself became prey to regional imbalances. It was concluded that a large number of disparities had been seen in the context of SHGs-bank linkage program and southern region, especially Andhra Pradesh had shown its dominance. Mohanta, Panda and Sreekumar (2012) enumerated that the microfinance had come forward to fillup the gap. But the outreach was too small as compared to the requirement and potential. However there was some progress in this regard after active role played by NABARD and formation of SHGs group. It argued that the study had dealt with the need for a regulatory body to regulate, developed and guide the numerous MFIs and NGOs who worked in the field of microcredit. It is concluded that the factor and theoretical position associated with the evolution of the microfinance had played a significant role in global scenario. Murria and Verma (2013) reported that an attempt had been made to present a thematic review focusing on the theoretical frame work, socio economic characteristics of the member SHGs and impact of SHGs on the socio economic condition of the members of the SHGs. It also pointed out that introspection in to the problems which had faced by SHGs members. Microfinance institution in microfinance activity. Microfinance had emerged as a powerful mechanism which ensures the social and economic empowerment of the poor. It is concluded that the study had highlighted the problems being faced in microfinance provision as the 35
opportunity cost in terms delivery of credit and collection of repayment installment due to geographical constraints in rural areas. Nasir (2013) pointed out that microfinance referred to small savings, credit and insurances services extended to socially and economically disadvantaged segment of society. He tried to outline the prevailing condition of microfinance in India in the light of its emergence till now. He argued that the microfinance institutions were lagging behind in terms of loan and credit. It was concluded that MFI would have positive results on economy that lead to greater efficiency and improvement on leaving slandered of thousands of poor. Porkodi and Aravazi (2013) highlighted that the role of microfinance empowered the people and enriched the position of financial inclusion in India. He also suggested that MFIs should be managed with better scrutiny in terms of finance technology as well as social responsibility. It is concluded that a need to evolved an incentive package which should motivate these NGOs to diversity in to other backward area. Usha and Raghavendra (2013) described that microfinance had emerged as a catalyst of rural development, especially in the overpopulated country like India. The impact of microfinance especially through Self-Help Groups had been effective in marketing positive social change to all members, irrespective of the direct borrowers of the micro credit. He argued that Bank had also leveraged the Self-Help Groups channel to provide to provide direct credit to group borrowers. It was concluded that easily accessible and affordable credit plus services should be provided to the vulnerable poor who were excluded socially and economically for a long period of time. 36
Ramath and Preethi (2014) enumerated that microfinance was a source of financial services for entrepreneurs and small businesses lacking access to banking and related services. He argued that microfinance was a broad category services which included microcredit. Microcredit was one of the aspect of microfinance and two wear often confused the microfinance revolution in India as a powerful tool for poverty alleviation where institutional finance failed microfinance delivered but the outreach was too small. It was concluded that Govt. of India considered microfinance was the major tool for reducing the poverty, support to the lower income people for self-employment and poverty reduction. RESEARCH METHODOLOGY: The variations in the extent of microfinance outreach are measured on the basis of twenty nine different states of India. It was developed by constructing a comprehensive index on the basis of three dimensions of micro finance inclusion viz. penetration, availability and usage. For each indicator, the performance of the state is evaluated on the basis of national average. For instance, to measure penetration of micro finance, at first, the share of number of SHG members of the state to the countries total number of SHG members was calculated. The indicators of the micro finance penetration are then workout as a ratio between the share of the state in SHG members and the share of the women population of the state. The score higher than one indicates higher penetration of SHG members vis-à-vis. Proportion of the women population of 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 the indicator used in the construction of the index of microfinance outreach is given in Table-1. 37
Table: 1 Description of Several Indicators and its Data Sources Indicator Description Proportional measure Data Source Indicator of microfinance Penetration (MP 1 ) Share of SHG members of the state as a proportion of the share of women population of the state Where A indicates the ratio of number of SHG members of the state to the total members of the SHG members of India and B indicates the ratio of number of women population of the state to total number of women population in India Status of micro finance of India (NABARD- 2015) and Census, 2011 Indicator of microfinance Availability (MP 2 ) Share of credit SHG of the state as a proportion of the share of the total number of SHG (savings & credits) of the state Where C indicates the ratio of number of credit SHG 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 Status of micro finance in India (NABARD- 2015) Indicator of microfinance Usage (MP 3 ) Share of volume of microfinance savings & credits as a proportion of share of NSDP of the state Where E indicates the volume of savings & credits in India and F indicates the ratio of NSDP of the state to total NSDP in India Status of micro finance in India (NABARD- 2015) and CSO, 2014 To derive the comprehensive index of micro finance outreach (IMO) data driven weighting system was used which was derived from principal component analysis. The comprehensive index can be written as, Where ( i = 1, 2, 3 ) are the corresponding weights of the indicators. Depending on the values of IMO, states are categorized into three categories. States 38
with an IMO value less than one were considered to have a low level of microfinance outreach, those in between 1 to 2 a medium level and those greater than two a high level. In the next stage I shall apply multivariate regression technique to study the influence of MP1, MP2 and MP3 on the dependent variable overall index of Microfinance outreach IMO. Hench our regression equation is:\ IMO 1 2. MP1 3MP2 4MP3 Here 2, 3, 4 are the marginal effects of MP 1, MP 2 and MP 3. RESULTS AND FINDINGS The demand for microfinance services is measured by means of actual utilization of the credit and savings services of microfinance programs. On the other hand, the supply of microfinance services is also measured by means of penetration and availability of credit services to the population. The depth of the microfinance outreach in India is measured by constructing a composite index of microfinance outreach, using the demand for and the supply of microfinance services in India. The value of each dimension across the states of India along with their ranks has been presented in table-2. A wide interstate disparity is found in the individual indicators of microfinance outreach. In respect of penetration of microfinance services, states like Kerala, Tamil Nadu, and Karnataka belong to the category of higher outreach of microfinance program (as shown in column 2 of table-2). These three southern states have secured highest place in the outreaching of microfinance program for the women sections of the population. In fact the shares of the SHGs members in those states are observed to be on average two times and more compared to the paired group of the other states. On the other hand, a 39
majority of 67.88% of the states fall in the category of lower penetration of the microfinance program. In the table it was also observed that the north eastern states falls in the lower microfinance outlets among the rest of the states. Inter-state disparity in the availability of microfinance is represented in column-4 of Table-2. In respect of availability poor result was observed in the states like Arunachal Pradesh, Meghalaya, Manipur, Nagaland etc. in comparison with the states like Kerala, Tamil Nadu, Andhra Pradesh, Telengana and Karnataka (as shown in column 2 of table-2). The usage of these facilities by the SHG members subject to the constraints of the penetration and availability of the micro finance services actually determines their demands for microfinance. It is observed that the inequality in the usages of the financial services is wide spread across states of India. Once again, southern states (Andhra Pradesh, Telengana and Karnataka) retain their supremacy in utilization of microfinance services. A poor rating of utilization 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. Exceptionally Odisa have shown same type of higher rank in all the three cases just after the southern states. Table: 2 Ranking of the states on the Basis of Indicators of Microfinance Outreach (2014-2015) STATE MP 1 Rank of Rank of Rank of Rank of MP MP 2 MP 1 MP 3 IMO 2 MP 3 IMO Andra Pradesh 1.64 5 1.54 2 4.89 1 2.69 1 Telangana 1.4 6 2.54 1 2.19 2 2.04 2 Karnataka 2.06 3 1.44 3 1.89 3 1.79 3 Kerala 2.9 1 0.62 10 1.47 6 1.66 4 Odisha 1.8 4 1.29 5 1.7 4 1.56 5 Tamil Nadu 2.57 2 0.7 9 1.16 7 1.47 6 West Bengal 1.18 8 1.04 6 1.52 5 1.16 7 Bihar 0.36 22 1.42 4 0.74 9 0.97 8 Assam 1.39 7 0.3 19 0.55 10 0.8 9 40
Chattisgarh 0.94 11 0.58 13 0.89 8 0.78 10 Maharashtra 1.07 10 0.47 18 0.54 11 0.74 11 Mizoram 1.11 9 0.24 25 0.26 20 0.68 12 Uttar Pradesh 0.28 25 0.73 8 0.37 14 0.53 13 Himachal Pradesh 0.74 13 0.53 14 0.31 17 0.52 14 Madhya Pradesh 0.38 21 0.61 11 0.49 12 0.51 15 Goa 0.92 12 0.51 15 0.22 22 0.5 16 Rajasthan 0.56 17 0.6 12 0.27 19 0.47 17 Uttarakhand 0.59 16 0.29 21 0.36 15 0.43 18 Gujarat 0.62 15 0.49 16 0.23 21 0.42 19 Manipur 0.73 14 0.08 27 0.12 26 0.41 20 Jammu & Kashmir 0.06 29 0.84 7 0.07 28 0.4 21 Jharkhand 0.42 19 0.27 23 0.43 13 0.39 22 Sikkim 0.44 18 0.3 20 0.17 23 0.33 23 Tripura 0.31 24 0.24 24 0.28 18 0.28 24 Meghalaya 0.34 23 0.06 28 0.34 16 0.27 25 Arunachal Pradesh 0.38 20 0.04 29 0.16 24 0.24 26 Punjab 0.16 28 0.49 17 0.06 29 0.22 27 Haryana 0.25 26 0.29 22 0.08 27 0.2 28 Nagaland 0.19 27 0.12 26 0.13 25 0.16 29 Note: MP 1 : Indicators of Microfinance Penetration; MP2: Indicators of Microfinance Availability MP3: Indicators of Microfinance usage, IMO: Index of Microfinance Outreach Sources: Authors calculation based on Status of Microfinance in India (NABARD, 2015), C.S.O- 2014 and Census- 2011 The combined measure of penetration, availability and usages 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 Telengana) have been classified under the category of high level of micro finance outreach. Five states (Karnataka, Kerala, Odisa, Tamil Nadu and West Bengal) have full filled the criteria of medium level of microfinance Outreach as the Value of IMO lying in between one and two. All the other states belonging to the lower stratum in the ladder of microfinance outreach. 41
Results of Regression SUMMARY OUTPUT Regression Statistics Multiple R 0.99641328 R Square 0.992839425 Adjusted R Square 0.991980156 Standard Error 0.057164172 Observations 29 ANOVA df SS MS F Significance F Regression 3 11.32710644 3.775702145 1155.44663 6.29514E-27 Residual 25 0.081693564 0.003267743 Total 28 11.4088 Coefficients Standard Error t Stat P-value Lower 95% - Intercept 0.029561345 0.019738634 1.497638855 0.14674788 0.011091132 X Variable 1 0.322712418 0.018632181 17.32016304 1.9525E-15 0.284338722 X Variable 2 0.332634631 0.02743152 12.12600069 5.74E-12 0.276138358 X Variable 3 0.326587533 0.017483425 18.67983761 3.3635E-16 0.290579746 From the above regression analysis it is clear that p-value is very small for the estimated coefficients of X 1, X 2 and X 3. Hence β 2, β 3 and β 4 are significant. This means MP1, MP2 and MP3 have significant contribution in determining overall index of Microfinance outreach IMO. SUMMARY AND CONCLUSION: The promotion of microfinance outreach shows the picture of financial inclusion of Indian states. The paper focuses the extent of microfinance outreach across different states of India on the basis of an index of microfinance outreach. Empirical findings suggests that only two 42
(Andhrapradesh & Telangana) out of 29 states have been classified under the category of high level of microfinance outreach states. While 5 other states have fulfilled the criteria of medium level of microfinance outreach, all the other states belong to the lower category in the field of microfinance outreach. Region wise analysis reveals that the southern region is leading in the outreach of microfinance services in comparison to western, central & northern regions. The demand for microfinance services in this better performing region is adequately addressed by the supply of the product in the region. It is thus desirable to create conditions for enhancing the outreach of microfinance services especially to those lower penetrating states so as to generate a higher demand for those services in such regions. An institutional based supply landing approach in outreaching of microfinance programme is thus observed to be desirable to achieve a balanced regional development in India. Our regression analysis shows that microfinance availability, penetration and usage have significant contribution in determining overall microfinance outreach. REFERENCE: 1. Basu, Dr. J.P. (2006); Microfinance and Women Empowerment An Empirical Study with Special Reference to West Bengal, accessed from 2. Nasir,S (2013) ; microfinance in India: contemporary issue and challenges ; Middleeast journal of scientific research; 15(2);pp.191-199; 3. Murria, P and S, Verma(2013); Microfinance through self-help groups: A thematic prospectives Produtivity ; vol-54 no-3; 43
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13. Chavan, P(2008): Gender inequality in Banking Service, Economic and Political Weekly, Nov 22, 2008, pp.- 18-22 14. Sharma, A (2009): The success of Microfinance in India,Microfinance World, April-June, 2009, pp.4-6 15.Qazi, M (2007): Microfinance and Woman s Empowerment, in Kamdar (eds), Microfinance Self-employment and Poverty Alleviation, Himalaya Publishing House, Mumbai, p 158-177 16. Narender, K (2007): Microfinance for poverty reduction-the Dhan Foundation Experience, in Kamdar (eds), Microfinance Self-employment and Poverty Alleviation, Himalaya Publishing House, Mumbai, p 205-226 17. Sing, G (2009): Microfinance An Innovation in Rural Credit System, Kurukshetra, Feb.2009, p 3-6 18. NABARD (2015): Status of microfinance of India, 2014-2015; 19. NABARD (2014): Status of microfinance of India, 2013-2014; Appendix: Y 3 X Variable 1 Line Fit Plot 2 1 0 0 1 2 3 4 X Variable 1 Y Predicted Y 45
X Variable 2 Line Fit Plot Y 3 2.5 2 1.5 1 0.5 0 Y Predicted Y 0 1 X Variable 2 2 3 Y 3 2 1 0 X Variable 3 Line Fit Plot Y Predicted Y 0 2 4 6 X Variable 3 46