MICROFINANCE AN OVERVIEW

CHAPTER III MICROFINANCE AN OVERVIEW The term Micro literally means Small. In a simple language, microfinance means provision of financial services on a small scale to the rural and urban poor, including the self employed. Broadly, Microfinance refers to small scale financial services for both credits and deposits that are provided to people who farm or fish or herd; operate small or micro enterprise where goods are produced, recycled, repaired, or traded; provide services; work for wages or commissions; gain income from renting out small amounts of land, vehicles, draft animals, or machinery and tools; and to other individuals and local groups in developing countries in both rural and urban areas (Marguerite S. Robinson, 1998). 1 The term microfinance sometimes is used interchangeably with the term micro credit. However, while micro credit refers to purveyance of loans in small quantities, the term microfinance has a broader meaning covering in its ambit other financial services like saving, insurance, etc. as well. The taskforce on Policy and Regulatory Framework for Microfinance has defined microfinance as Provision of thrift, credit and other financial services and products of very small amounts to the poor in rural, semi-urban or urban areas for enabling them to raise their income levels and improve living standards. But the task force has not defined any amount. However, as per Micro Credit Special Cell of the Reserve Bank of India, the borrowing amounts up to the limit of Rs.25,000/- could be considered as micro credit products and this amount could be gradually increased up to Rs.40,000/- over a period of time. As per international perceptions a standard for South Asia roughly equals to $500. However the Micro Financial Sector (Development and Regulation) Bill, 2007 defined the micro-credit as loans not exceeding Rs.50,000 (Rs. 1,50,000 in case of housing). 1 Marguerite S. Robinson, (1998), Microfinance: The Paradigm Shift from Credit Delivery to Sustainable Financial Intermediation, in Mwangi S. Kimenyi, Robert C. Wieland and J.D Vion Pischke (eds), 1998, Strategic Issues in Microfinance, Ashgate Publishing: Aldershot, England. 52

3.1 Evolution of Micro finance Microfinance as an industry evolved in all the third world countries almost at the same time span. World over, it was getting widely recognized that improving income levels of low-income community is essential to improve their well-being besides the State sponsored welfare programmers. During the 1970s and 1980s, the micro-enterprise movement led to the emergence of Non- Governmental Organizations (NGOs) that provided small loans for the poor. In 1990s, across the world, a number of these institutions transformed themselves into formal financial institutions in order to access and on-lend funds, thus enhancing their outreach. The earliest initiatives to bring microfinance under formal regulation and supervision were undertaken in Latin America. Around the world, microfinance has been on the agenda of policy makers, regulators and supervisors. Over 50 countries have implemented or are considering specific arrangements for regulation and supervision of microfinance either as a separate new law or as amendments to the existing legal and regulatory framework. In certain countries, Central Bank has assumed the supervisory and regulatory role, while in others separate authority (existing authorities or newly created authority/networks) has been empowered and delegated powers of regulation/ supervision. In some countries Self-Regulatory Organisations (SRO) has been tried, particularly for non-prudential regulation. The principles define regulation as set of statutory rules that apply to MFIs while supervision is the process of implementing and enforcing compliance with these rules. A clear distinction between prudential and non-prudential regulation is also established. Prudential regulation mandates capital adequacy requirements, loan loss provisioning, financial solvency, etc., for protecting the depositors. Non-prudential regulation covers enabling aspects like business operation, performance monitoring, credit information services, transparent reporting and disclosure, codes of fair practices and system, consumer protection, fraud prevention, etc. There have been differences in the extent and application of regulations. Some have extended prudential to only deposit-taking MFIs. In recognition of uniqueness of MFIs and small, mostly uncollatoralised loans, lower minimum capital, higher capital adequacy, lower unsecured lending limits, more aggressive loan loss provision, simpler loan documentation, lower physical security and branching needs, lower frequency and content of reporting, lower reserve against deposits, ownership suitablility and diversification requirements are suggested. 53

One of the significant events that helped it gain prominence in the 1970s was through the efforts of Muhammad Yunus, a microfinance pioneer and founder of the Grameen Bank of Bangladesh. In 2006, Prof. Yunus was awarded Nobel Peace Prize for his efforts to create economic and social development from below. The importance of microfinance in the field of development was reinforced with the launch of the Micro-credit Summit in 1997. The Summit aims to reach 175 million of the world s poorest families, especially the women of those families, with credit for the self-employed and other financial and business services, by the end of 2015 (Micro-credit Summit, 2005). The United Nations declared the year 2005 as the International Year of Micro-credit. Sam Daley-Harris 2 of the Micro-credit Summit Campaign States: Micro-credit is not a panacea, but it is the most powerful intervention we have toward cutting absolute poverty in half by 2015. Viewed from a historical perspective, the origin of microfinance can be traced to the beginning of the Co-operative Movement in Germany, where the movement was started in 1944 in the field of cooperative based credit system by the Raiffeisen Societies but Bangladesh has been acknowledged as a pioneer in the field of micro-finance. Dr.Muhmud Yunus, Professor of Economics in Chittagong University of Bangladesh, was an initiator of an action research project Grameen Bank. The project started in 1976 and it was formally recognised as a bank through an ordinance, issued by the government in 1983. The Grameen Bank provides loans to the landless poor, particularly women, to promote self-employment. In 2006, Prof. Yunus was awarded Nobel Peace Prize for his efforts to create economic and social development from below. He views micro finance as a Fundamental Right and defines micro finance as a foundational need upon which other rights are built, and which fosters other opportunities for betterment 3. 2 3 Daley-Harris, S. Presentation to the UN Social and Economic Council (ECOSOC) Brainstorming Session, 3/2003 Grameen Bank materials, www.grameenbank.org and www.grameenfoundation.org 54

3.2 Emergence of Micro finance sector in India The birth of microfinance movement in India can be traced to 70s. The main aim of the movement was to alleviate poverty by delivering financial services to the poor. The basic idea was to enable poor to access the financial services so that poor can have an asset base and initiate income generating activities. Self Employed Women Association (SEWA) is considered one of the pioneers of the microfinance movement in India. The post-nationalization period in the banking sector, i.e., 1969, witnessed a substantial amount of resources being earmarked towards meeting the credit needs of the poor. There were several objectives for the bank nationalization strategy including expanding the outreach of financial services to neglected sectors. As a result of this strategy, banking network underwent an expansion phase without comparables in the world. Credit came to be recognized as a remedy for poverty. This has lead to the emergence of several pro-poor financial services, supported by both the State and Central governments, which included credit packages and programmes customized to the perceived needs of the poor. A series of policy measures were taken up by the Govt. of India in the financial sector, which have facilitated intensification and deepening of microfinance. These included nationalisation of commercial banking sector in 1969, setting-up of Regional Rural Banks (RRBs) in 1975, reforms of financial sector (since 1991), implementation of pro-poor schemes/programmes through credit delivery system, etc. Similarly, Reserve Bank of India s (RBI - the Central Bank of the Country) initiatives in terms of focus on expansion of rural branches of banks, priority sector norms, financial inclusion, etc., had positive bearing on microfinance development. The priority sector norms envisaged that 40% of Net Bank Credit should be directed towards the identified sectors/activities of which 18% for agriculture, 10% for weaker sections, etc were allocated. With over 6,00,000 villages and 74% of poor people living in rural areas, microfinance continued to be the major challenge for rural credit. Thus, the formal financial sector which consists of about 36,000 rural and semi-urban branches of Commercial banks, 14,000 branches of RRBs, 13,000 branches of Cooperative Banks 55

and over a hundred thousands of rural Cooperative Societies have been engaged in rural credit and the bulk of their loan accounts are small size loans within the purview of microfinance. National Bank for Agriculture and Rural Development (NABARD) was set-up by an Act of Parliament in 1982 for pursuing the mandate of integrated rural development through triple major functions namely financial, developmental and supervisory. It also played a catalytical role in the microfinance development. The pioneering efforts at this were made by National Bank for Agriculture and Rural Development (NABARD), which was given the tasks of framing appropriate policy for rural credit, provision of technical assistance backed liquidity support to banks, supervision of rural credit institutions and other development initiatives. In the early 1980s, the Govt. of India launched a massive poverty alleviation credit programme known as the Integrated Rural Development Programme (IRDP), which provided government subsidized credit through banks to the poor. It was aimed that the poor would be able to use the inexpensive credit to finance themselves over the poverty line. In 1999, the Government of India merged various credit programmes together, refined them and launched a new programme called Swaranjayanti Gram Swarozagar Yojana (SGSY). The mandate of SGSY is to continue to provide subsidized credit to the poor through the banking sector to generate self-employment through a self-help group approach and the programme has grown to an enormous size. Further various studies (Basu, 2006; 4 Deshpande and Niraj, 2003; 5 Robin et al, 2004; 6 Yunus, 2003 7 ) also revealed that in India, generally banks are for people with money; not for people without. To overcome poverty, they need to be able to borrow, save and invest money to protect their families from adversity. Therefore, a need was felt for alternative polices, systems and procedures, savings and loan products, other complementary 4 5 6 7 Basu, Priya (2006), Improving Access to Finance for India s Rural Poor, Direction in Development, International Bank for Reconstruction and Development / World Bank, No. 36448., Washington DC. Deshpande, Ramesh and Niraj Verma (2003), Review of Rural Financial Institutions in India, Background paper prepared for the World Bank, Washington DC : World Bank. Robin, Burgess, Rohini Pande and Grace Wong (2004), Banking for Poor Evidence from India accessed on http://www.econ.yale.edu/~rp269/website/papers/jeeabankindia.pdf Muhammad Yunus (2003), Expanding Micro-credit Outreach to Reach the Millennium Development Goals, International Seminar on Attacking Poverty with Micro-credit, Dhaka, Bangladesh, January. 56

services and new delivery mechanisms, which would fulfill the requirements of the poorest in rural India. In India, institutional credit agencies (banks) made an entry in rural areas initially to provide an alternative to the rural money-enders who provided credit support, but not without exploiting the rural poor. There are 3 main factors that count to the bringing up of microfinance as a Policy in India. 1. The first of these pivotal events was bank nationalization drive launched in 1969 which required commercial banks to open rural branches in India between 1973 and 1985. Today, India has over 32,000 rural branches of commercial banks and regional rural banks, 14,000 cooperative bank branches. 2. The second national policy that has had a significant impact on the evolution of India s banking and financial system is the Integrated Rural Development Programme (IRDP) introduced in 1978 and designed to be a direct instrument for attacking India s rural poverty. 3. The last major event which impacted the financial and banking system in India was the liberalization of India s financial system in the 1990s characterized by a series of structural adjustments and financial policy reforms initiated by the Reserve Bank of India (RBI). The systems and procedures of banking institutions was emphasizing complicated qualifying requirements, tangible collateral, margin, etc., that resulted in a large section of the rural poor shying away from the formal banking sector. The banks too experienced that the rapid expansion of branch network was not contributing to an increasing volume of business to meet high transaction costs and risk provisioning, which even threatened the viability of banking institutions and sustainability of their operations. 3.3 Demand for Microfinance Services in India In terms of demand for micro-credit, there are three segments. At the very bottom, there are landless agricultural labourers and manual labourers. The next market segment is of small and marginal farmers and rural artisans, weavers and self-employed informal sectors such as hawkers, vendors and workers in household micro-enterprises. 57

The third market segment is of other farmers who have gone in for commercial crops and others engaged in dairy farming, poultry, fisheries, etc. Tea shops, provisional stores and other manufacturing activities are examples of non-farm activities in this segment. 3.4 Supply of Microfinance Services in India The Indian Microfinance sector is characterized by a variety of microfinance service providers. These includes apex financial institutions like the National Bank for Agriculture and Rural Development (NABARD), Small Industries Development Bank of India (SIDBI) and government owned societies like Rashtriya Mahila Kosh (RMK), formal sector institutions, Commercial Banks, Regional Rural Banks (RRBs), member based institutions like Co-operatives, Mutually Aided Co-operative Societies (MACS), SHG Federations, Private Sector Companies, Specialized Non-Banking Financial Corporations (NBFCs), Societies, Trusts, etc. Banks are pursuing a new and innovative approach to microfinance as a potential business and not merely as a social or priority sector lending obligation. 3.5 Rural India and Microfinance Micro finance is expected to play a significant role in poverty alleviation and development. The need, therefore, is to share experiences and materials which will help not only in understanding successes and failures but also provide knowledge and guidelines to strengthen and expand micro finance programmes. The development process through a typical micro-finance intervention can be understood with the help of the following Chart. The ultimate aim is to attain social and economic empowerment. Successful intervention is therefore, dependent on how each of these stages has been carefully dealt with and also the capabilities of the implementing organizations in achieving the final goal, e.g., if credit delivery takes place without consolidation of SHGs, it may have problems of self-sustainability and recovery. A number of schemes under banks, Central and State governments offer direct credit to potential individuals without forcing them to join SHGs. 58

Exhibit 3.1: Development process through Microfinance 3.6 Bank Linkage Scheme The Model The SHG Bank Linkage Programme has its origin in a sponsored project in Indonesia. Launched in 1992 in India, early results of such a programme achieved by SHGs promoted by NGOs prompted NABARD to offer refinance to banks for collateral free loans to groups, progressively upto four times the level of group s savings deposits. 59

SHGs thus linked with banks function as micro-banks were able to access funds from the formal banking system. The linkage has resulted in the reduction of transaction costs of banks through the externalization of costs of servicing individual loans and also ensuring their repayment through the peer pressure mechanism. The three broad models of linkage are: Model I: SHGs formed and financed by banks. SHGs are formed directly by banks under this model. The banks themselves act as Self Help Group Promotion Institutions in forming and nurturing groups, opening savings accounts for them and providing them with bank credit after satisfying themselves about their maturity to absorb credit. Bank SHGs In this case, banks directly promote self-help groups. Here, the bank assumes the role of NGOs and ensure linkage with SHGs. These SHG-NGO-Bank integration is very much essential to credit delivery, self-employment and for other business activities which could be an effective vaccine against poverty. The ultimate goal of this linkage programme is not just promotion of SHGs but the focus is on poverty eradication. It is an established fact that micro-finance is an important means of poverty alleviation. The SHG route is one of the cost-effective methods of credit flow to the poor who need it most. Model II: SHGs formed by NGOs and formal agencies but directly financed by banks These SHGs are called as NGO facilitated SHGs. This appears to be the most popular model amongst bankers. Under this model, the NGOs and the formal agencies in the field of micro finance act as facilitators. They propagate the message, organize groups, train the members in thrift and credit management and nurture them over a period. Banks in due course link these groups, by directly providing loans to them. More than 70 per cent of the SHGs have been linked through this model. Bank NGO Facilitator SHGs 60

In this model, NGO would organize the poor into SHGs, undertake training for awareness building, entrepreneurship and skill training, help in arranging inputs, extension and marketing, introduce saving and internal lending, help in maintenance of accounts and link them with the banks for credit requirements. Banks directly provide loans to SHG with recommendation of the NGO. In this model, NGO acts as facilitators. Model III: SHGs financed by banks using NGOs as financial intermediaries In this model, NGOs take the dual role of facilitators and financial intermediaries. They help in formation of SHGs, nurture them and train them in thrift and credit management. Eventually, the NGOs approach banks for bulk loan assistance for lending to these SHGs. In areas where a very large number of SHGs have been financed by bank branches, intermediate agencies like Federations of SHGs have come up as links between bank branch and member SHGs. These Federations are financed by banks, which in turn, finance their member SHGs. Bank NGO Financial Intermediaries SHG In this case, besides acting as a facilitator, the NGO also works as a financial intermediary. Here the loan is given to NGOs by the bank for on-lending the SHGs/individuals. In this linkage model NGO would be largely responsible for repayment; and would bear the risk of non-payment. Involvement of NGOs in microfinance system would have positive influence as they are grass-root agencies with good information about borrowers. Thus, adverse selection and production of recovery could be avoided. At the same time, NGOs would be in a position to help rural poor, particularly women to bring them above poverty line and create rural employment. While banks and NGOs facilitiate SHG formation, the reporting of credit linkage of SHGs is under SHG Bank Linkage Model and MFI-Bank Linkage Model since 2007-08. From the year 2006-07, SBLP follows a two model strategy where the focus is on credit linkage to SHG. Model I SHG Bank Linkage Model: SHGs are directly financed by the banks. Model II MFI-Bank Linkage Model: Banks lend to MFIs for on-lending to SHGs. 61

Table 3.1 Model-wise distribution of linked Self Help Groups Year Model I Model II Model III Cumulative Total Savings and Credit Linkage 2000-01 34297 200507 29021 263825 2001-02 73836 346109 41533 461478 2002-03 143472 516499 57389 717360 2003-04 215818 776946 86327 1079091 2004-05 339876 1165288 113292 1618456 2005-06 447713 1656538 134314 2238565 Model I Model II (SHG Bank Linkage Model) (MFI-Bank Linkage Model) Credit Linkage 2006-07 4160584 550 4161134 2007-08 5009794 1109 5010903 2008-09 6121147 1915 6123062 2009-10 6953250 1659 6954909 2010-11 7461946 2315 7464261 2011-12 7960349 1960 7962309 2012-13 7317551 2042 7319593 Source: Status of Micro Finance in India, NABARD Report. www.nabard.org It can be seen from Table 3.1 that majority of the Self Help Groups were linked under Model II under SBLP upto 2006. It shows that NGOs and SHPIs have helped banks to increase the outreach under SBLP. The overall outreach was growing at a rate of 124 percent per annum during the period from 2001-2006. After 2006, however, it can be seen that majority of SHGs are linked under newly defined model I where banks linked the SHGs directly. Overall, the number of credit linked SHGs was increasing from 2006-07 and has reached its maximum in 2011-12 and has declined in the year 2012-13. 62

3.7 Progress and Highlights of the Linkage Programme The Self Help Group Bank Linkage Programme is assumed to be the dominant model of microfinance in India, in terms of both number of borrowers and loans outstanding (Ghate, 2006) 8. The programme exhibited significant growth in terms of coverage and outreach of credit to the rural poor. Studies reveal that the on-time repayment of SHG loans to banks was over 90 per cent and highly profitable for the banks relative to other financial products despite interest rates which are among the lowest in developing countries (Seibel and Dave, 2002) 9. The SHG Bank Linkage Programme shows a tremendous growth over the period from 1993-93 to 2012-13. The programme exhibited a significant growth in terms of coverage and outreach of micro-credit to the rural poor. Beginning with a modest number of 255 Self Help Groups in 1992-93, a total of 1219821 Self Help Groups were credit linked with banks in 2012-13. The cumulative disbursement of bank loan was Rs.0.29 crores in 1992-93, which increased to Rs.20,585.36 crores in 2012-13. Total refinance increased from Rs.0.27 crore in 1992-93 to Rs.22,396.24 in the year 2012-13. The progress is notable in case of granting bank loan to the beneficiaries, refinance programme and then the number of groups linked. 8 9 Ghate, Prabhu (2006), Indian Microfinance: The Challenges of Rapid Growth, Sage Publications, New Delhi. Seibel, Hans. D and Dave H.R (2002), Commercial Aspects of SHG Banking in India, Paper presented at the Seminar on SHG Bank Linkage Programme at New Delhi, November 25-26, 2002. 63

Year (end of March) Table 3.2 Progress of Self Help Group Bank Linkage Programme No. of SHGs financed by banks (During the year) Cumulative Bank loam (During the year) Cumulative Refinance (During the year (Amount in Crores) Cumulative 1992-93 255 255 0.29 0.29 0.27 0.27 1993-94 365 620 0.36 0.65.019 0.46 1994-95 1502 2122 1.79 2.44 1.67 2.13 1995-96 2635 4757 3.62 6.06 3.53 5.66 1996-97 3841 8598 5.78 11.84 4.99 10.65 1997-98 5719 14317 11.92 23.76 10.74 21.39 1998-99 18678 32995 33.31 57.07 30.67 52.06 1999-00 81780 114775 135.91 192.98 98.07 150.13 2000-01 149050 263825 287.89 480.87 244.85 394.98 2001-02 197653 461478 545.47 1026.34 395.26 790.24 2002-03 255882 717360 1023.33 2049 622.47 1412.71 2003-04 361731 1079091 1855.53 3904 705.44 2118.15 2004-05 539365 1618456 2995 6899 967.76 3085.91 2005-06 620109 2238565 4499 11398 1067.72 4153.63 2006-07 1105749-6570.39-1292.86-2007-08 1227770-8849.26-1615.5-2008-09 1609586-12253.51-2620.03-2009-10 1586822-14453.30-3173.56-2010-11 1196134-14547.73-2545.36-2011-12 1147878-16534.77-3072.59-2012-13 1219821-20585.36-3916.64 - Note: Data relates to Commercial Banks, RRBs and Co-operative Banks from 2006-07 onwards. Data on number of SHGs finance by banks and bank loans are inclusive of Swarnajayati Gram Swarozar Yogna (SGSY) SHGs and existing groups receiving repeat loans; owing to this change, NABARD discontinued the publication of data on a cumulative basis from 2006-07. Source : SHG- Bank Linkage, Status of Microfinance, various years, NABARD. 64

Table 3.3 Highlights of the SHG-Bank Linkage Programme (2011-12 & 2012-13) S. No. Particulars 1 Total number of SHGs saving linked with banks Out of total (of which) exclusive Women SHGs 2 Total number of SHGs credit linked during 2011-12 Out of total (of which) exclusive Women SHGs 3 Total number of SHGs having loans outstanding as on 31 March 2012 Out of total (of which) exclusive Women SHGs 4 Average loan amount outstanding/ SHG as on March (in Rs.) 5 Average loan amount disbursed/shg (in Rs.) 6 Estimated number of families covered upto 31 March Physical (No. in lakh) 2011-12 2012-13 Financial (Rs. in crore) Physical (No. in lakh) Financial (Rs. in crore) 79.60 6551.41 73.18 8217.25 62.99 5104.33 59.38 6514.87 11.48 16534.77 12.20 20585.36 9.23 14132.02 10.37 17854.31 43.54 36340.00 44.51 39375.30 36.49 30465.28 37.57 32840.04 103 millions 83455.01 88455.31 144046.41 168757.26 95 million Source: Status of Microfinance in India, 2011-12 & 2012-13, NABARD Report. 2011-12 The initiative of 1992 to make the traditional and formal banks to extend financial services to deprived sections through informal Self Help Groups (SHGs), has now blossomed into a monolith microfinance initiative. It has been recognised as a decentralised, cost effective and fastest growing micro-finance initiative in the world, enabling over 103 million poor households access to a variety of sustainable financial services from the banking system by becoming members of nearly 8 million SHGs. The linkage with banks has provided the members of the groups the facility of not only pooling their thrift /savings and access to credit from the banking system, but also created 65

a platform through which they could launch a number of livelihood initiatives and also facilitate the empowerment process. Together, the 8 million SHGs of the poor maintain a balance of over Rs.6,550 crore in the Savings Bank accounts with the Banks, while they are estimated to have harnessed savings of over Rs.22,000 crore of which nearly 70% (over Rs.15,000 crore) goes for internal lendings. Over 4.4 million SHGs are regularly availing credit facilities from the Banks. During 2011-12 alone, over 1.15 million groups availed loans amounting to Rs.16,535 crore from Banks and together 4.4 million groups have loans to the extent of Rs.36,340 crore outstanding against them with the financing banks. 2012-13 The journey so far traversed by the Self Help Group Bank Linkage Programme (SHG-BLP) crossed many milestones from linking a pilot of 500 SHGs of rural poor two decades ago to cross 8 million groups a year ago. Similarly, from a total savings corpus of a few thousands of Indian rupees in the early years to a whopping Rs.27,000 crore today, from a few crore of bank credit to a credit outstanding of Rs.40,000 crore and disbursements touching Rs.20,000 crore during 2012-13. The geographical spread of the movement has also been quite impressive now spreading to even the most remote corners of India. Over 95 million poor rural households are now part of this world s largest micro-credit initiative. The SHG-BLP though made impressive progress during the last two decades of its existence, is at an inquisitive juncture now. For the first time since the programme was launched two decades ago, the number of SHGs linked to Banks showed a decline during 2012-13. Similarly, fresh loans to SHGs have been near stagnant for last few years, though it showed a marginal rise during 2012-13. Under the SHG-Bank linkage programme, the coverage of rural households having access to regular savings through SHGs linked to banks came down by around 8% during the year to 95 million as on 31 March 2013. A similar decline of number of SHGs savings linked to Banks was also observed with only 73.18 lakh SHGs linked to Banks as against 79.60 lakh a year ago. Number of SHGs having outstanding credit with banks, however, showed a marginal increase of 2% to 44.5 lakh as against 43.5 lakh the previous 66

year. The average loan outstanding of SHGs with banks is Rs.88,500 against Rs.83,500 a year ago. There has also been a 6% spurt in the number of SHGs getting fresh loans from banks during the year to 12.2 lakh (up from 11.5 lakh the previous year) and the quantum of fresh loans issued also showed a significant growth of about 24% during the year. The share of exclusive women SHGs in the total number of SHGs savings linked to banks now stands at 81% of the total number of groups. 3.8 Regional Spread of SHG Bank Linkage (Region-wise) The SHG Bank Linkage has made inroads into different regions in India. Table 3.6 has recorded the trends in cumulative growth of SHGs linked to Banks. Exhibit No. 3. SHG - Bank Linkage Programme - Regional-Wise Progress (Cumulative) 80 70 60 Bank Linkage 50 40 30 20 10 0 Years Northern Region North Eastern Region Eastern Region Central Region Western region Southern Region 67

Northern Region North Eastern Region Eastern Region Central Region 2011-12 212041 4.87 159416 3.66 985329 22.63 352452 8.09 289472 6.65 2355732 54.10 4354442 100 2012-13 213955 4.81 143660 3.23 1020656 22.93 362521 8.14 295451 6.64 2415191 54.25 4451434 100 Western region Southern Region All India Table 3.4 SHG - Bank Linkage Programme - Regional-Wise Progress (Cumulative) Year % % % % % % % 2001-02 19231 4.17 1490 0.32 45892 9.94 48181 10.44 29318 6.35 317262 68.75 461478 100 2002-03 34923 4.87 4069 0.57 90893 12.67 81583 11.37 42180 5.88 463712 64.64 717360 100 2003-04 52396 4.86 12278 1.14 158237 14.66 127009 11.77 54815 5.08 674356 62.49 1079091 100 2004-05 86018 5.31 34328 2.12 265628 16.41 197365 12.19 92266 5.70 938941 58.01 1618456 100 2005-06 133097 5.95 62517 2.79 394351 17.62 267915 11.97 166254 7.43 1214431 54.25 2238565 100 2006-07 182018 6.22 91754 3.14 525881 17.98 332729 11.38 270447 9.25 1522144 52.04 2924973 100 2007-08 134783 3.72 103424 2.85 753048 20.77 326763 9.01 446550 12.32 1861373 51.33 3625941 100 2008-09 166511 3.94 117812 2.79 933489 22.10 332116 7.86 393499 9.32 2280911 53.99 4224338 100 2009-10 158829 3.46 85276 1.86 985094 21.48 497340 10.84 439199 9.57 2421440 52.79 4587178 100 2010-11 149108 3.12 150021 3.13 1105533 23.09 358872 7.50 316821 6.62 2706408 56.54 4786763 100 Source : SHG- Bank Linkage, Status of Microfinance, various years, NABARD Report. 68

The data has revealed that the Southern region accounts for a huge share in the total SHGs of the country. The progress is low in the northeast and northern regions. A series of initiatives have been taken by NABARD to propagate micro finance in Northern, North Eastern region and Central region. The southern region continues to lead in terms of share in client outreach as well as loan disbursement and outstanding. It shows that the share of the southern region was 68.75 percent in 2001-02 and still it has a larger share of 54.25 in 2012-13. 3.9 Agency-wise Distribution of SHGs financed NABARD has been instrumental in the formation and nurturing of quality SHGs by means of promotional grant support to partner agencies. The partners include Commercial Banks, Co-operative Banks and Regional Rural Banks (RRBs). Almost all Public sector Commercial Banks, Private sector Commercial Banks, Regional Rural Banks, State Co-operative Banks and District Co-operative Banks participated in SHG-Bank Linkage Programme. Further, Self Help Promotion Institutions (SHPIs) over the years resulted in the expansion programme throughout the country. Exhibit No. 3. Agency-wise distribution of SHGs financed (cumulative) 80 70 60 Agency-wise distribution 50 40 30 20 10 0 Years Co-operative Bank Commercial Banks Regional Rural Banks 69

2012-13 480096 10.79 22146.24 5.62 2643971 59.39 266394.44 67.66 1327367 29.82 105212.29 26.72 Table 3.5 (Rs. in Crores) Agency-wise distribution of SHGs financed (cumulative) Co-operative Bank Commercial Banks Regional Rural Banks Year No. of SHGs Bank Loan No. of SHGs Bank Loan No. of SHGs Bank Loan No % No % No % No % No % Number % 2001-02 39906 8 795 8 272247 54 6009 58 188738 38 3459 34 2002-03 78959 11 1720 8 361061 50 11495 56 277340 39 7272 36 2003-04 134671 12 3711 9 538422 50 22548 58 405998 38 12782 33 2004-05 211137 13.04 6398.47 9.28 843473 52.11 41159.5 60.38 563846 34.83 20995.47 30.44 2005-06 310501 13.87 10879.47 9.54 1188040 53.07 69874.5 61.61 740024 33.06 33221.47 29.15 2006-07 272234 9.4 8043.5 6.5 1893016 65.4 87638 70.8 729255 25.2 28017.6 22.7 2007-08 371378 10.2 11300.9 6.5 2378847 65.6 114755 67.5 875716 24.2 44210.4 26 2008-09 415130 9.8 13060 5.8 2831334 67.1 161494 71.2 977834 23.1 52244.16 23 2009-10 510113 10.51 17289.86 6.17 3237263 66.73 201647 71.92 1103980 22.76 61445.82 21.91 2010-11 451798 9.44 19078.57 6.11 3053472 63.79 218833 70.09 1281493 26.77 74300.52 23.8 2011-12 443434 10.18 19161.35 5.27 2617199 60.11 258102.89 71.03 1293809 29.71 86135.78 23.70 Source : SHG- Bank Linkage, Status of Microfinance in India, various years, NABARD Report. 70

Commercial Banks and SHG-Bank Linkage Programme Commercial Banks have had a larger share in the linkage programme right from the initial years. The percentage of SHGs linked with the banks was 54% in 2001-02 which increased to its maximum (67.1%) in 2008-09 and started decreasing thereafter. In 2001-02, its share in total loan amount to SHGs was 58%, which increased to 71.92% in 2009-10 and thereafter it started to decrease. Public sector banks have been in the forefront of SHG-Bank Linkage Programme. Regional Rural Banks and SHG-Bank Linkage Programme Regional Rural Banks were more liberal than the Co-operative Banks and were conservative compared to Commercial Banks. Regional Rural Banks had a share of 34% in disbursing loans in 2001-02 and 26.72% in 2012-13. Its coverage of the Self Help Groups was 38% in 2001-02 and in the year 2012-13 it was 29.82%. Regional Rural Banks have been functioning as Self Help Promoting Institutions (SHPIs) with grant support from NABARD. Co-operative Banks and SHG-Bank Linkage Programme Co-operative Banks have been late entrants to microfinance through Self Help Groups. The performance of co-operative banks has to a large extent influenced by the State government policies. Co-operative banks had a share of 8% coverage of Self Help Groups in 2001-02 and increased to 10.79% in 2012-13. Its share in disbursing loans was 8% in 2001-02 and has decreased to 5.62 in 2012-13. Co-operative banks also act as SHPIs. They form an important link to SHGs and monitor their performance with their own staff of Primary Agricultural Credit Societies. 3.10 Self Help Groups A Self Help Group is a group of like-minded people especially women, who come together to pool their small savings to a common fund and agree to meet their emergency need on mutual help basis. The group decides whom the loan should be given to, for which purposes, on what terms and at what schedule of recovery. SHGs are considered a new lease of life for the women in villages for their social and economic empowerment. Since SHGs have been able to mobilize savings from 71

persons or groups who were not normally expected to have any saving and also to recycle effectively the pooled resources amongst the members, their activities have attracted attention as a supportive mechanism for meeting the credit needs of the poor (NABARD, 2004) 10. 3.11 Objectives of Self Help Groups The main objective of targeting women for giving micro-credit is to empower women in the household through helping them to create self-employment by establishing micro-enterprises. The main characteristics of SHGs are as follows: a) The ideal size of an SHG is 10 to 20 members (In a bigger group, members cannot actively participate), b) The group need not be registered, c) From one family, only one member (More families can join SHGs this way), d) The group consists of either only men or of only women (Mixed groups are generally not preferred), e) Women s groups are generally found to perform better, f) Members have the same social and financial background (Members interact more freely this way), and g) Compulsory attendance (Full attendance for larger participation). 3.12 Function of Self Help Groups The SHGs in India are small, informal and homogenous groups of not more than twenty members each. Among them, a member is selected as an animator and two members are selected as representatives. The animator is selected for a period of two years. Members of the group meet every week. They discuss social and community programmes, group savings, rotation of funds, bank loan and repayment of loan. 10 NABARD Report, 2004. 72

The group members are encouraged to make voluntary thrift on a regular basis. These pooled resources are used to make small interest bearing loans to their members. The process helps them imbibe the essentials of financial intermediation including prioritization of needs, setting terms and condition, and accounts keeping. This gradually builds financial discipline in all of them. Once the groups show this mature financial behavior, banks are encouraged to make loans to the SHG in certain multiples of the accumulated savings of the SHG. The bank loans are given without any collateral and at market interest rates. Exhibit 3.4: Role of Group Corpus Govt. Banks NGOs Consumption purposes Employment opportunities Corpus of SHG Inter Group Loaning Production/ income activities Income Generation Repayment as per the time schedule Profitability Expenditure on Education, Health, Hygiene, etc., It is seen from the above chart that, while the funds from the Government enrich the group corpus by way of subsidy, the NGOs and the banks supply credit as per the needs of the group. The group is then involved in inter-loaning activities for consumption 73

and production purposes. By pursuing productive economic activities, the group enhances its income, repays the loan amount to the bank and spends it on basic health, education, etc, so as to drive out of poverty trap. 3.13 Growth of Self Help Groups in India India is brimming with Self Help Groups which are part of a bank linkage programme supported by the National Bank for Agriculture and Rural Development (NABARD). This programme involves banks, NGOs and Government agencies throughout the country. It is now the largest microfinance movement in the world, with 95 million rural households in the microfinance sector in India. Self Help Groups or SHGs represent a unique approach to financial intermediation. The approach combines access to low-cost financial services with a process of self-management and development for the women who are SHG members. Micro-finance schemes using Self Help Groups (SHGs) were designed and NABARD considered this SHG Bank Linkage Model as a core strategy for rural development. Micro-finance through SHGs has proved the notion wrong and showed that even the poor are bankable. The SHG members thrift, mobilize the savings and investment in micro-enterprises had reported that the recovery rate was around 95 percent and microfinance through SHGs has evolved as an accepted institutional framework to provide financial services to the poor. It is regarded as a better mechanism to reduce poverty gradually as against giving one loan for productive assets which may or may not lead to sustained increase in income (Madheswaran and Dharmadhikary, 2001) 11. 11 Madheswaran S. and Dharmadhikary A. (2001): Empowering Rural Women through Self Help Groups: Lessons from Maharashtra Rural Credit Project, Indian Journal of Agricultural Economics, Vol. 56 (3), 427-43. 74

Table-3.6 Position of Women Self Help Groups in India (in lakhs) Particulars Year Total SHGS % Growth Women SHGs % Growth % of Women SHGs to Total SHGs Saving Linked to SHGs 2007 41.60-32.71-78.63 2008 51.00 (22.6) 39.86 (21.8) 78.16 2009 61.21 (20.0) 48.6 (21.9) 79.40 2010 69.53 (13.6) 53.1 (9.3) 76.37 2011 74.62 (7.32) 60.98 (14.84) 81.72 2012 79.60 (6.7) 62.99 (3.3) 79.1 2013 73.18 (-8.1) 59.38 (-5.7) 81.1 Bank Loans Disbursed to SHGs 2007 11.06-9.58-86.62 2008 12.28 (11.03) 10.41 (8.66) 84.77 2009 16.09 (31.03) 13.75 (32.08) 85.4 2010 15.87 (-1.37) 12.94 (-5.89) 81.54 2011 11.96 (-24.64) 10.17 (-21.41) 85.03 2012 11.48 (-4) 9.23 (-9.2) 80.4 2013 12.20 (6.3) 10.37 (12.4) 85.1 Bank Loans Outstanding with SHGs 2007 28.94-23.89-82.55 2008 36.26 (25.29) 29.17 (22.1) 80.45 2009 42.24 (16.49) 32.77 (12.34) 77.6 2010 48.51 (14.84) 38.97 (18.92) 80.33 2011 47.87 (-1.32) 39.84 (2.23) 83.23 2012 43.54 (-9) 36.49 (-8.4) 83.8 2013 44.51 (2.2) 37.57 (2.9) 84.4 Source: Status of Micro Finance in India, NABARD Report. www.nabard.org 75

The table 3.6 indicates the share of exclusive women SHGs in the total number of SHGs savings linked to banks now stands at 81% of the total number of groups. The number of SHGs linked to Banks showed a decline during 2012-13. Similarly, fresh loans to SHGs have been near stagnant for last few years; though it showed a marginal rise during 2013. The coverage of rural households having access to regular savings through SHGs linked to banks came down by around 8% during the year 2013. A similar decline of number of SHGs savings linked to Banks was also observed with only 73.18 lakh self help groups linked to Banks as against 79.60 lakh a year ago. There has also been a 6% spurt in the number of SHGs getting fresh loans from banks during the year to 12.2 lakh when compared to 11.48 lakh self help groups in the year 2012. The number of self help groups having outstanding credit with banks, however, showed a marginal increase of 2% to 44.5 lakh as against 43.5 lakh the previous year. 3.14 Origin of Self Help Groups in Tamilnadu Mahalir Thittam is a socio-economic empowerment programme for women implemented by Tamil Nadu Corporation for Development of Women Ltd. It is based on Self Help Group (SHG) approach and is implemented in partnership with Non- Governmental Organisations (NGOs) and Community based organizations. Tamil Nadu Women Development Project under the name of Mahalir Thittam, with State funding covers all rural and urban areas of the entire State, except the six city corporation areas since 1.4.2000. The original announcement made in 1996 can also be seen as a path-breaker, involving a massive replication of TNWDP to cover about 10 lakhs poor women of the State. This scheme is intended to promote economic development and social empowerment of the poorest women through a network of Self Help Groups formed with active support of NGOs. These groups would not only engage in productive economic activities, but also function as important sustainable rural organisations, for dissemination of knowledge about health, nutrition, literacy, education, adoption of new agricultural practices, farm and non-farm sector economic activities and help prepare women to take up leadership positions. 76

Mahalir Thittam Of SHG Women By SHG Women For SHG Women The objectives of the project are Social empowerment, Economic empowerment and Capacity Building of the poorest and most disadvantaged women in the State. The hallmark of the SHGs promoted by Mahalir Thittam is the systematic training provided to the SHG members and the office bearers. This capacity building brings about qualitative changes in the attitude of the women and promotes cohesion and effective functioning of the group. In addition, SHG members who are interested in starting economic activities or develop skills to get self employment are provided skill training. The SHG approach was started in a small way in Dharmapuri district in the year 1989. Today the SHG movement is a very vibrant movement spread across all districts of the State. In Tamilnadu, Chinnapillai an illiterate woman in Parparanpatti, Madurai District, initiated the feedback of SHGs in the State, she was honored by the former Prime Ministers of India, Honorable Atal Bihari Vajpayee, for forming a group and nurtured saving habits among the illiterate women in the village. The Indian microfinance sector has witnessed a tremendous growth over the past two decades and the geographical spread of the Self Help Group - Bank Linkage Programme through various agencies has reached even the most remote corners of the country by covering 95 million poor households with 81% exclusive women groups. After 2006, majority of SHGs are linked under newly defined model I where banks are directly linked with the Self Help Groups. 77