REVIEW OF MICROFINANCE SCHEME IN INDIA

CHAPTER 2 REVIEW OF MICROFINANCE SCHEME IN INDIA Microfinance plays a significant role in poverty alleviation and rural development as credit is one of the necessary inputs in the process of rural development. To achieve the objective of poverty alleviation and empowerment of rural women, microfinance has become one of the most promising ways to use scarce development funds. 2.1 Microfinance Microfinance is a term for the practice of providing financial services such as micro credit, micro savings and micro insurance to the rural poor. It is a financial service provided by the financial institutions to the poor and may include savings, credit, insurance, leasing, money transfer etc. There is a difference between Microfinance and Microcredit. Microcredit gives more emphasis on loans while Microfinance includes support services where channels for thrift, market assistance, technical assistance, capacity building, social and cultural programs are opened. Rutherford (2000) 1 and Armendáriz & Morduch (2005) 2 explained the difference between Microfinance and Microcredit. According to them Microcredit referred specifically to small loans given to the poor people but Microfinance was a broader term which embraced efforts to collect savings from low-income households, provide consumption loans and insurance along with microcredit. It also helped in distributing and marketing of client s output. Microfinance embraced a range of financial services that seek to meet the needs of poor people, protecting them from fluctuating incomes and other shocks and helping to promote their income levels and livelihood. Thus where Microcredit is Only Credit, Microfinance is Credit Plus. In the present study these two terms have been used interchangeably. 36

Thus microfinance is the provision of the broad range of financial services such as deposits, loans, payments, money transfers and insurance to the low-income households and their micro enterprises. The basic purpose of microfinance is to provide access to financial assistance including credit to the poor to enable them to start/expand micro enterprises to break out of poverty. Microcredit enables the poor people to be thrifty and helps them in availing the credit and other financial services for improving their income level and raising the living standards. There is several microfinance implementing organizations in India which provides small loans to the rural poor. Some of them have successfully extended their services to thousands of borrowers. The poor find it difficult to have an access to financial services through the formal sector because of the cumbersome procedure. They also do not have any collateral to secure a loan though they have small savings. These poor people have to approach village moneylenders to meet their credit needs who charged exorbitant interest rates thus adding to their misery. Microfinance has become one of the most effective interventions for economic empowerment of the poor. The concept of microfinance originated in Bangladesh in seventies through a pioneering experience by Dr. Mohammad Yunus who was then a Professor of Economics. Dr. Yunus and the Grameen Bank (which he founded) were awarded the Nobel Peace Prize in 2006. Professor Yunus 3 has said, If one can come up with a system which allows everybody an access to credit while ensuring excellent repayment- I can give you guarantee that poverty will not last long. Role of microfinance in eradication of poverty has also been stressed by the United Nations Organization (UNO) in its Economic and Social Council Meet on July 25, 1997, in which the council called for strengthening the microfinance institutions. It also recognized the importance of access to credit for the people living below poverty line to develop farm sector and to undertake micro economic enterprises to generate self- 37

employment in the rural areas. UNO while declaring the year 2005 as the International Year of Microfinance has focused on many important issues concerning microfinance. To justify the need of microfinance as a crucial input, we have to understand the problems and the challenges of Indian economy which is still a rural economy and a Land of Villages. The real India has been and still is Village India. Mahatma Gandhi has rightly said that, Real India lives in villages. As per 2011 census, out of the 121.01 crores of the total population of the country, 68.84 percent people live in villages and out of them more than 25 percent live below the poverty line and lead a miserable life. These estimates of poverty are based on Planning Commission s 4 latest report which is based on the Suresh Tendulkar s Methodology of Poverty Line in which Rs. 816 per person monthly expenditure has been taken for rural areas and Rs.1000 per person for the urban areas. According to this criterion of poverty, if a person is incurring expenditure more than this limit than that person is not living below the poverty line. Widespread and acute poverty is obviously the greatest social evil in under developed countries including India. Such widespread poverty is a challenge which no society in modern times can afford to ignore for long. To quote Mahatma Gandhi, Recall the face of the poorest and the weakest man, whom you may have seen and ask yourself if the step you contemplate is going to be of any use to him. In other words, will it lead to self-reliance for the hungry and spiritually starving millions? Then you will find your doubts and yourself melting away. In India, the awareness about the problem of poverty arose right from the British period when Dadabhai Naoroji published his famous book Poverty and Un-British Rule in India. However, little was done during the British period to solve the problems of poverty and inequality in the country. 38

The problem of poverty in India is basically the rural one. One of the main causes of rural poverty is the low productivity of land and labor. The other contributing factors include inequitable land distributions, institutional inadequacies and lack of infrastructure. Rural poverty is reflected in poor nutrition, inadequate shelter and low health standards. Because of the deplorable plight of such a large number of rural masses, India s effort towards development is focused on Rural Development which has been evolved as a strategy to improve the social and economic conditions of the rural masses. It aims at developing the economy so as to improve the living standards of those rural people who require betterment. 2.2 The Concept of Rural Development Rural development is one of the most formidable and fundamental concern of development efforts in developing countries including India. Rural Development means desired changes in all components of rural life i.e., social, economical, technological, natural and political. It means the development of rural areas in such a manner that each component of rural life changes in a desired direction and in sympathy with the other components 5. Furthermore, rural development means structural changes in the socioeconomic conditions in the rural areas in such a manner that the human welfare, which is the prime goal of all the developments, is secured at the earliest and the society is able to absorb changes in the field of technology, man-environment relationship, population growth etc 6. Rural development can also be defined as improvement in the living standard of the masses from low income population residing in rural areas and making the process of their economic development self-sustaining 7. Cropp has defined rural development as a process which aims at improving the well being and self-realization of people living outside the urbanized areas through collective efforts 8. Maheshwari considers rural development as an interminable process. He views it as a strategy to bring out improvement in 39

the economic and social life of the rural poor 9. According to Bose and Vashist, Rural development means the development of rural areas in a way that social, economic, technological and natural components of rural life change in a desired direction and within the framework of national goals and objectives and without prejudice to the urban areas of the country. 10 Rural development according to the World Bank is a strategy to improve the economic and social life of a specific group of people i.e., the rural poor. It involves extending the benefits of development to the poorest among those who seek a livelihood in the rural areas which include small and marginal farmers, tenants and landless laborers. Thus, rural development is a multi-dimensional concept which involves all kinds of development of rural areas through collective, governmental and voluntary agency efforts. 2.3 Rural Development Strategy under the Plans It hardly needs any justification that the Government of India has been making efforts to alleviate rural poverty. In spite of eleven five year plans that have been implemented in the country since 1951, the extent of poverty does not seem to have diminished in any significant manner. Experiences of rural development during the past six decades have shown that the achievements in qualitative terms were far below expectations and non-commensurable with investment made. Despite many significant changes in the approach and strategy of rural development, we are yet to achieve the minimum desirable targets in field of education, nutrition, health, drinking water and employment. Since the fifth five year plan, Removal of Poverty continues to be the main objective of five year plans in India. To begin with TRYSEM (Training Rural Youth for Self-Employment), a number of allied programs such as IRDP (Integrated Rural Development Program), DWACRA (Development of Women and Children in Rural Areas), SITRA (Supply of Improved Toolkits to Rural Artisans) and GKY (Ganga Kalyan Yojna) were added subsequently over the years. Major rural development programs being implemented in India since 1951 can be broadly divided into five categories: 40

1. Self- employment programs 2. Wage employment programs 3. Public distribution systems 4. Nutritional program 5. Social security programs Out of these above mentioned programs, Self- employment programs assumed significance as only they could provide income to the rural poor on a sustainable basis. But even these programs failed to provide desired results in the country due to lack of proper social intermediation, absence of desired linkages and implementation being more concerned with achieving individual program targets rather than focusing on the substantive issue of sustainable income generation. To rectify the situation government decided to restructure the various ongoing self employment rural development programs. A new program known as Swaranjayanti Gram Swarojgar Yojna (SGSY) was launched in the country from 1 st April, 1999. With the launching of SGSY, the earlier programs such as TRYSEM, IRDP, DWACRA, SITRA, GKY are no longer in operation. The basic objective of the SGSY is to bring the assisted poor families (Swarozgaris) above the Poverty Line by providing income-generating assets through a mix of Bank Credit and Government Subsidy. This program aims at establishing a large number of micro enterprises in the rural areas based on the ability of the poor and economic potential of the area. SGSY is different from earlier programs in terms of the strategy envisaged for its implementation. It has been conceived as a holistic program of self-employment and covers all aspects of selfemployment of the rural poor viz. organization of the poor into Self Help Groups (SHGs), their capacity building, training, selection of key activities, planning of activity clusters, infrastructure build up, technology and marketing support etc 11. Financing of Self Help Groups under SGSY is based on the concept of Microfinance. 41

2.4 Role of the Banking Sector After independence, Government of India and the Reserve Bank of India (RBI) have been making concerted efforts to provide the poor with access to credit. Since the early national plans, successive governments have emphasized the role of finance in promoting equitable growth. With the overwhelming majority of India s poor living in rural areas, policies aimed at financial inclusion have understandably had a rural focus. Prior to the nationalization of major commercial banks in 1969, the main emphasis of the banking sector was concentrated on the credit needs of the big industries belonging to the major business houses in the country. Nationalization had mainly four goals: to prevent a few corporations from controlling all the banks; to mobilize the savings of public particularly from the remote areas; to limit the concentration of wealth and economic power by using resources mobilized by banks to achieve egalitarian growth; and to pay more attention to the priority sectors ( agriculture and small industry). It was only after nationalization of fourteen major commercial banks in 1969 and than six banks in 1980 that the emphasis of the banking sector shifted to rural credit and priority sector lending. The present credit accessibility in the country can be explained with the help of following flow chart: Figure 2.1 Sources of Credit Accessibility in India 42

The present institutional framework of rural credit system in India consists of Cooperative Banks, rural branches of Commercial Banks and Regional Rural Banks. These different financial institutions have originated at different time periods under different situations and all of them have come to stay as a part of multi-agency approach to serve the rural sector according to their various capabilities and propensities 12. Among these financial institutions, Co-operatives are the oldest and most popular with the rural masses. The idea of Co-operatives took concrete shape for the first time in 1904 when the Co-operative Societies Act was passed in India. The second important source of rural credit is the Commercial Banks. The role of Commercial Banks in rural credit came into existence after nationalization of State Bank of India in 1955 and then fourteen major commercial banks in 1969 and six in 1980. Regional Rural Banks are the third major source of rural credit and the latest one. The RRBs were set up in the mid-70 s with a clear mandate for lending to the rural poor as it was felt that the Cooperative Banks were being dominated by the rural wealthy and that the Commercial Banks had an urban bias. The Banking Commission (1972) which also evaluated the cooperative credit structure opined that a chain of rural banks should be established in India to meet the inadequacy of rural credit. Subsequently, the Government of India set up a working group in 1975 under the chairmanship of M. Narasimham to examine the issue as it felt the need to consider the establishment of new institutions on the basis of attitudinal and operational ethos entirely different from those prevailing in the public sector banks. The Narasimham Group recommended the establishment of Regional Rural Banks which were to be State sponsored, regionally based and rural oriented financial institutions. In pursuance of above recommendation, RRBs emerged on the scene on October 2, 1975 as a hybrid of Cooperatives and Commercial banks 13. The growth of the banking sector in India after nationalization is depicted in the following table and figure: 43

Table 2.1 Growth of Banking Sector in India after Nationalization Number of Commercial Banks (Including Regional Rural Banks) Year 1969 1991 2012 73 272 165 Number of Bank Branches 8,262 60,220 99,884 Deposits (Crore Rs ) 4,338 1,92,541 59,09,082 Credit (Crore Rs ) 3,396 1,16,301 46,11,852 C/D Ratio 78 60 78 Rural Branches 1833 35,206 36,130 Semi Urban Branches 3342 11,344 25,931 Urban Branches 3087 13,670 37,823 Source: RBI website (The decline in the number of Commercial Banks (including Regional Rural Banks) from 272 in 1991 to 165 in 2012 is mainly due to merger and amalgamation of various RRBs) Figure 2.2 Growth of Bank Branches 44

There are 99884 branches of various banks in India as on 31.03.2012 which include 36130 rural branches of Cooperative Banks and Commercial Banks including RRBs. There is a twelve time increase in the total number of bank branches and twenty time increase in rural branches after nationalization of banks in the country. There are 3659 branches of various banks in Haryana State as on 31.03.2012 which include 625 branches of Cooperative Banks and 3034 branches of Commercial Banks including RRBs. The growth of deposits and credits is shown with the help of Figure 2.3 below: Figure 2.3 Growth of Deposits and Credit There has been a tremendous increase in the amount of deposits and credit after nationalization of banks in the country. Deposits have increased 1362 times and credit increased 1358 times after nationalization of the banks. Despite the phenomenal increase in the physical outreach of formal credit institutions in the past several decades, the rural poor continued to depend on informal sources of credit. Institutions also faced difficulties in dealing effectively with a large number of small borrowers, whose credit 45

needs were small and frequent and their ability to offer collaterals was very limited. Besides, cumbersome procedures and risk perceptions of the banks left a gap in serving the credit needs of the rural poor. This led to a search for alternative policies, systems and procedures, saving and loan products, other complimentary services and new delivery mechanisms which could fulfill the requirements of the poor. It was in this context that micro credit emerged as one of the most suitable and practical alternative to the conventional banking in reaching the hitherto unreached poor population. Microfinance through Self Help Groups is now considered as a supplementary credit delivery mechanism for poor in the country. 2.5 Evolution of Microfinance in India India has been experimenting with microfinance strategy in the form of Self Help Group (SHG) scheme as a part of formal credit delivery system since 1960s while giving lot of freedom to Non-Government Organizations (NGOs) for setting up Self Help Groups based on various models. Government of India, RBI and NABARD has made concerted efforts to provide the poor with access to microfinance through formation of SHGs and the formal credit delivery system. The evolution of microfinance in India (since 1960) is depicted in the following Figure 2.4. However, the real impetus to microfinance was provided after announcement of Microfinance Development Fund of Rs. 100 crore by Union Finance Minister in his budget speech for the year 2000-01. The microcredit program, which was formally heralded in 1992 with a modest pilot project of linking around 500 Self-Help Groups (SHGs) with the banks, has made rapid strides in India exhibiting considerable democratic functioning and group dynamism. The microcredit program in India is now one of the largest in the world. The SHG-Bank linkage Program was launched in 1992 as a flagship program by National Bank for Agriculture and Rural Development (NABARD). 46

Figure 2.4 Evolution of Microfinance in India (1960-2012) Phase-I (1960-80) Social Banking Approach Phase II (1990 s) Financial System Approach Phase-III (2000 onwards) Financial Inclusion Approach Nationalization of Private Commercial Banks Expansion of Rural Branch Network Extension of Subsidized Credit Establishment of RRBs Peer Pressure SHG-Bank Linkage Establishment of MFIs typically of Non-Profit origin NGOs, MFI and SHGs gaining more legitimacy MFIs emerging as Strategic partners to diverse entities interested in low Income segments Consumer finance emerged as high growth area Establishment of Apex Institutions NABARD, SIDBI Source: George, Maheshwari and Pandhian (2007) Increase in Policy Regulations Increasing Commercialization This program envisages organization of the rural poor into SHGs for building their capacities to manage their own finances and then negotiate bank credit on commercial terms. The microfinance initiative of NABARD has passed through various phases over the last two decades i.e. pilot testing from 1992-95, mainstreaming from 1996-98 and expansion from 1998 onwards. In India microfinance services are being provided primarily through three main sources: Informal Sources: Money lenders and shopkeepers 47

Semi-formal Institutions: Non-Government Organizations (NGOs) Formal Institutions: Commercial Banks, Regional Rural Banks (RRBs) and Cooperative Banks 2.5.1 Models of Microfinance There are mainly three models of the Microfinance which are in operation in India at present. This categorization is based on the modes of formation, nurturing and credit linkage. These models are explained as under: Model I Banks themselves take up the formation and nurturing of the SHGs, opening their accounts, train the members in record keeping, managing credit and providing them with bank loans. 20 percent of the financing have been made under this model. Figure 2.5 explains the working of this model: Figure 2.5 Working of Model I BANKS Formation, Nurturing, Credit Savings SHGs Source: Evaluation study of SHG Bank Linkage Program in KBK region in Orissa by NABARD- Bhubneshwar Model II SHGs are formed by formal agencies other than banks i.e., NGOs, Individual Rural Volunteers (IRVs), Farmer s Club (FCs) and others but are directly financed by banks. 74 percent financing has been done under this model. Financing under Swaranjayanti Gram Swarozgar Yojna (SGSY) also comes under this model. The working of this model in explained with the help of the following Figure 2.6: 48

Figure 2.6 Working of Model II Formation, Nurturing, Monitoring NGOs, IRVs, FCs Banks Saving Credit SHGs Source: Evaluation study of SHG Bank Linkage Program in KBK region in Orissa by NABARD- Bhubneshwar Model III SHGs are financed by banks using NGOs and other agencies like SHG Federations as financial intermediaries. Bank finance these agencies that in turn finance their member SHGs. Only 6 percent of financing has been done under this model in India. Working of this model is explained with the help of the figure below: Figure 2.7 Working of Model III Formation, Nurturing, Monitoring NGOs, Federations Credit Credit BANKS Savings SHGs Credit Source: Evaluation study of SHG Bank Linkage Program in KBK region in Orissa by NABARD-Bhubneshwar 49

2.5.2 Microfinance Institutions (MFIs) According to NABARD, Microfinance Institutions are those institutions which provide thrift, credit and other financial services and products to the poor in rural, semi-urban and urban areas to raise their income level and living standards. A large number of microfinance institutions from formal and informal sectors are providing financial service to the poor people in the country. These institutions are using different delivery mechanisms and channels to provide their services. Institutions such as NGOs, Federations of SHGs, Mutually Aided Cooperative Societies, State and National Cooperatives and Non-Bank Financial Companies providing specific financial services are classified as MFIs. Banks which provide microfinance besides their other usual services are called Microfinance Service Providers. NABARD and Small Industries Development Bank of India (SIDBI) are the apex level microfinance service providers and Rashtriya Mahila Kosh (RMK) is an apex MFI. NABARD provides refinance to the banks which give credit to the SHGs. Microfinance Institutions can broadly be divided into three subcategories: Profit MFIs include Non-Banking Financial Companies incorporated under the Indian Companies Act, 1956 and duly registered with the RBI Non-Profit MFIs includes Societies registered under Societies Registration Act, 1860 or under the State Acts such as SHGs Federation and RMK Mutual Benefit MFIs includes State Credit Cooperatives registered under various State Acts, National Credit Cooperatives and Mutually Aided Cooperative Societies 2.6 Self Help Groups (SHGs) SELF HELP GROUP (SHG) is a group of rural poor who have volunteered themselves in a group of 10-20 people from a homogeneous class for addressing their common financial problems. They agree to convert their 50

savings into a common fund known as Group Corpus. The members of the group agree to pool their savings in this common fund to make small interest bearing loans to their members on rotational basis. The Group Corpus is supplemented with Revolving Fund sanctioned as cash credit limit by the banks or the group could also have access to credit under the Self Help Group- Bank Linkage program of NABARD. Thus, SHGs are small informal groups aiming at collective action. They are generally formed by the funding and voluntary agencies in the context of Microfinance. The basic principles of SHGs are group approach, mutual trust, organization of small and manageable groups, group cohesiveness, spirit of thrift, demand based lending, collateral free women friendly loans, peer group pressure in repayment, skill training, capacity building and employment 14. Government of India and the Reserve Bank realizing the importance of microcredit in the development programs have taken up many steps for the linkage of SHGs with formal financial institutions. The basic purpose of linkage is to strengthen the financial health of SHGs by ensuring adequate flow of bank credit to them. There are three main credit needs of the SHG members: Social Needs: Food, marriage, birth and death, festivals, family events, education and housing etc. Production Needs: Agriculture, allied activities and micro entrepreneurship etc. Emergency Needs: Medical, fire, theft, flood, earth quake, cyclone, drought etc. A World Bank Study (1998) 15 reveals that 67 percent of the credit needs of poor people in India are for consumption and out of the consumption credit required, 75 percent was for short period for emergencies such as illness and household expenses during the lean monsoon seasons. It was also estimated that 75 percent of production credit (33 percent of the total credit) was met by banks while 100 percent of the consumption credit requirements were met by 51

informal sources at the interest rates ranging from 30 percent to 90 percent per annum. 2.6.1 Major Target Group of SHGs Major target groups of the SHG can be divided into four categories: 1. Small and marginal farmers having land up to 2.5 Acres. 2. Landless agricultural laborers, who usually sell their labor to earn livelihood, have limited access to formal financial sector due to absence of adequate collateral. 3. Rural artisans such as carpenters, barbers, weavers, blacksmiths, potters, basket makers and others who depend on their family run business. 4. Petty rural traders who earn their income by running small retail outlets which cater to the needs of rural masses. They lack funds to operate their business. They usually depend on non-formal sources for their working capital requirements. 2.6.2 SHG Federations To realize economies of scale, reduce transaction costs and to provide value added services, the SHGS are federated by promoting agencies like diary and credit federations but differs from other type of federations. While organization of other federations is formal, the organization of SHG federations is informal in nature. The SHG federations are basically promoted to provide sustainability and support to the SHGs and can be withdrawn subsequently after the same is ensured. According to Nair (2002) 16, in case of SHG federation, SHGs are small informal organizations and these were promoted primarily as an exit strategy, i.e. to allow an organization that had founded SHGs to withdraw its support to SHGs while ensuring their sustainability. The structure of SHG federations and its working is depicted in the following Figure 2.8: 52

Figure 2.8 Structure and Working of SHG Federations Source: Beyond Microcredit: Building Nested Institutions of Savings and Credit Groups in India- The Kalanjiam Experience, Research paper by K. Narender presented at Microcredit Summit, 10-13 November, 2002 at New York, USA. 2.7 Swarnjayanti Gram Swarojgar Yojna (SGSY) Swaranjayanti Gram Swarojgar Yojna (SGSY) was launched in the country from 1 st April, 1999. The basic objective of the SGSY is to bring the assisted poor families (Swarozgaris) above the Poverty Line by providing them income-generating assets through a mix of Bank Credit and Government Subsidy. This program aims at establishing a large number of micro enterprises in the rural areas based on the ability of the poor and economic potential of the area. The SGSY is different from earlier program in terms of the strategy envisaged for its implementation. It has been conceived as a holistic program of self-employment and covers all aspects of selfemployment of the rural poor viz. organization of the poor into Self Help Groups (SHGs) and their capacity building, training, selection of key activities, planning of activity clusters, infrastructure build up, technology and marketing support. SGSY focus on organization of the poor at grass root level with a 53

process of social mobilization for poverty eradication. SGSY s approach to organize the poor stems from the conviction that there is tremendous potential within the poor to help themselves and that the potential can be harnessed by organizing them. Social mobilization enables the poor build their own organizations i.e., Self Help Groups (SHGs), in which they participate fully and directly and take decisions on all issues concerning poverty eradication. Simultaneously, SHGs have the advantage of the assistance be it in terms of credit or technology or market guidance etc., thus reaching the poor faster and more effectively. Social mobilization is not a spontaneous process, it has to be induced. DRDAs (District Rural Development Agency) are expected to initiate and sustain the process of social mobilization for poverty eradication by formation, development and strengthening the SHGs. Issues which are the key to poverty eradication should become entry points for DRDAs to organize the poor into SHGs. There could be different entry points for different SHGs depending on the local situations. The groups that are formed with thrift and credit as an entry point have demonstrated that the poor can secure greater access to credit and other support services for enhancing their income levels. Self Help Groups broadly go through three stages of evolution- Group formation (formation, development and strengthening of the groups to evolve into self-managed people s organizations at grass root level). Capital formation through the revolving fund and skill development (managerial skills for management of their organizations as well as the economic activity). Taking up economic activity for income generation. 2.7.1 Formation of Self Help Groups under SGSY SHG is a group of rural poor who have volunteered to organize themselves into a group for eradication of poverty of the members. They 54

agree to save regularly and convert their savings into a Common Fund. The members of the group agree to use this common fund and such other funds that they may receive as a group through a common management. The group formation will keep in view the following broad guidelines: a) Under SGSY, a Self Help Group may consist of 10-20 persons. In case of minor irrigation and disabled persons, this number may be minimum of 5. b) All the members of group should belong to families living below poverty line. The group shall not consist of more than one person from the same family. A person should not be a member of more than one group. c) The group should devise a code of conduct (Group Management Norms) to bind itself. This should be in the form of regular meetings (weekly or fortnightly), functioning in a democratic manner allowing free exchange of views and participation by the members in the decision making process. d) The group should be able to draw up an agenda for each meeting and take up discussions as per the agenda. e) The members should build their group corpus through regular savings. They themselves should decide the quantum of savings. The group should be able to collect the minimum voluntary saving amount from all the members regularly on monthly basis. The savings so collected will constitute the group Corpus fund. f) The group Corpus fund should be used to advance loans to the members. The group should develop financial management norms covering the loan sanction procedure, repayment schedule and interest rates etc. g) The members should take all the loaning decisions in the group meetings through a participatory decision making process. h) The group should be able to prioritize the loan applications, fix repayment schedule, fix appropriate rate of interest for the loans advanced and closely monitor the repayment of the loan installments from the borrowers. 55

i) The group should operate a saving account in a bank so as to deposit the balance amounts left with the group after disbursing loan to its members. j) The group should maintain simple basic records such as Minutes Book, Attendance Register, Loan Ledger, General Ledger, Cash Book, Bank Passbook and Individual Passbooks. At least fifty percent of the groups formed in each block of a district should be exclusively for the women. In case of disabled persons, the groups formed should ideally be disability-specific wherever possible, however in case sufficient number of people for formation of disability-specific groups is not available, the group may comprise of persons with diverse disabilities. By and large, the SHG will be an informal group. However, the groups can also register themselves under the Societies Registration Act, the State Cooperative Act or as a partnership firm. The SHGs can be further strengthened and stabilized by federating them at village or group of village s level. This would facilitate regular interaction and exchange of experiences including flow of information from DRDAs and other departments to the group members. Social mobilization and community organization is a process oriented approach and is different from target oriented approach. The group formation should not be driven by any targets but lend itself to a process approach. The members of the SHGs should fully internalize the concept of self-help among them. A large number of DWCRA groups have been formed and assisted by DRDAs in the past. Likewise, there is a number of self-help groups formed by NABARD, other banks and by the Rashtriya Mahila Kosh etc. In the first year of implementation of SGSY, where such groups exist, the DRDAs should put in concerted efforts to strengthen these groups and then take steps to form new groups. 56

2.7.2 Role of the NGOs Experiences across the country have shown that group formation and development is not a spontaneous process. An external facilitator working closely with the communities at the grassroots level can play a critical role in the group formation and development effort. The quality of the groups can be influenced by the capacity of the facilitator. The facilitator may or may not be an official person. In some cases, NGOs can not only make available the facilitator and/or also help in building their capacity. DRDAs may support such sensitive support mechanisms in the shape of NGOs or community based organizations or a team of dedicated functionaries of the Government who are fully engaged in the task of initiating and sustaining the group development process. Whether the support machinery (SHG promotion institutions) is offered by NGOs or DRDA itself is not important. What is crucial is the capacity of the support machinery. DRDAs will have to play very crucial role in facilitating development of the capacity to nurture and strengthen the groups. 2.7.3 Linkage of SHGs with the Banks During the stage of group formation, the SHG should be brought into contact with the nearby local bank. It may start in the third or the fourth month of formation and has a dual purpose. The SHG begins to realize the opportunities and also the mode of dealing with the banks. Likewise, the bankers also get familiarize themselves with the SHGs. Establishment of these linkages at the early stages will ensure the formation of strong SHGs which will be mutually beneficial to both. The BDO and the banker may visit the SHG as often as they can and explain to the members the opportunities for self-employment. They may also explain to them about the process of gradation of the SHG for taking up full-fledged self-employment activity. 57

2.7.4 Grading of the Self-Help Groups The formation stage generally lasts in six months. After completion of six months, it is necessary to subject each Self Help Group to a test whether it has evolved into a group and is ready to go into the next stage of evolution. This is done through a grading exercise. The objective of this exercise is to identify the weaknesses, if any and help the group to overcome the same so as to develop into a good sustainable group. Grading exercises thus should help to focus attention on weak groups so that DRDAs can assist them to overcome the weaknesses and graduate into good groups. Grading of the group should also enable the DRDAs to establish linkages of the good groups with the Banks. 2.7.5 Capacity building of the Self-Help Groups Every SHG which is in existence for at least a period of six months and has demonstrated the potential of a viable group, enters the second stage wherein it receives the Revolving Fund and also embarks on future building capacity of its entire team members. DRDAs will arrange to provide the revolving fund to such groups, meeting their share from out of 10 percent of SGSY fund. These groups should observe the following principles concerning the management of the Revolving Funda) The Revolving Fund is provided to the groups to augment the group corpus so as to enable more members to access loans and also to facilitate increase in the per capita loan availability. b) As the Revolving Fund become part and parcel of the Group Corpus, the group should follow same norms for utilization as in the case of their own saving fund. c) The group should discuss the credit requirements of the members and advance loans out of the corpus (Savings + Interest + Revolving fund) to a few members and fix repayment schedule and interest rates. Out of the 58

amount recovered from the loaned members, new members could be covered. d) The Revolving Fund imparts credit discipline and financial management skills to the members so that they become creditworthy and bankable in the eyes of the bank. e) On receipt of the Revolving Fund, the group shall utilize the fund in a manner and for purpose it deems fit. The idea is that the group should develop the capacity to utilize funds it has received from outside. The Revolving Fund can be used by the group for purchase of raw materials, marketing or infrastructure support for income generating activities. It can alternatively be used for lending to individual members for their own purposes. The members shall inculcate the habit of prompt and full repayment of the loans taken by them from the Revolving Fund. 2.7.6 Taking up of Economic Activities Once the SHG has demonstrated that it has successfully passed through the second stage, it is eligible to receive the assistance for economic activities. This is in the form of loan and subsidy. There are two ways in which SHG can receive this assistance. Loan-cum-subsidy to the individuals in the group provided the prospective Swarozgaris if the groups are capable of and willing to take up income generation activities. Loan-cum-subsidy to the group where all the members in the group want to take up a group activity. 2.7.7 Loan-cum-Subsidy to the Members of the Group Though a few individuals are identified as beneficiaries under loancum-subsidy, it is essentially the group that is standing guarantee for the prompt repayment of the loan to the bank. The group also undertakes responsibility to closely monitor the asset management and income generation. The group is also expected to access services from the 59

departments concerned to enable the members to derive the expected income from the activities undertaken. Since the groups are constantly interacting with the banks, their initiative to secure continuous line of credit to the Swarozgaris to access multiple dose of loan becomes critical. In any case, the members of the group who are assisted under SGSY s loan-cum-subsidy assistance want to avail the back-end subsidy nothing should prevent the members to do so. Considering multifarious support services that Swarozgaris are receiving by being a member of the group, it is natural that group may like to charge a part of the subsidy provided to the Swarozgaris as individual contribution to the group corpus. The Swarozgaris are expected to repay all the loan installments to the banks through the group and the group may keep with itself a part of subsidy component. In any case, this is an issue that has to be left to be decided by the group itself. 2.7.8 Loan-cum-Subsidy for the Group Activity Group activities stand a better chance of success because it is easier to provide back-up support and marketing linkages for group activities. SGSY will primarily follow the group approach. The group should demonstrate minimum levels of group dynamism, as detailed above before considering for assistance with loan-cum-subsidy. The group loans are entitled to 50 percent subsidy subject to a maximum limit of Rs. 1.25. lakh. 2.7.9 Training and Skill Development DRDAs should conduct training programs for the members and the representatives of the groups so that the members become fully self-managed and evolve into strong groups. The cost of the group formation and development should be met from the SGSY Revolving Fund (10 percent of SGSY fund allocation). Considering the experiences of the NGOs involved in development of SHGs in the country, it is estimated that an amount of Rs 10,000 per group would be the investment required over 3 to 4 years. 60

2.8 National Rural Livelihood Mission (NRLM) Due to certain shortcomings in the SGSY, the government has restructured this program as National Rural Livelihood Mission (NRLM) also known as Aajeevika, to be implemented in a mission mode in the whole country. The main shortcomings of SGSY were noted to be vast regional variation in mobilization of the rural poor, insufficient capacity building of the beneficiaries, insufficient investments for building community institutions and weak linkages with banks leading to low credit mobilization and low repeated financing 17 The main objective of the restructured NRLM is to reduce poverty by enabling the poor households to access gainful self employment and skilled wage employment opportunities resulting in appreciable improvement in their livelihood on a sustainable basis by building strong grass root institutions for the poor. It is based on the belief that poor have capabilities and a strong desire to come out of poverty. These capabilities of the poor can be utilized only when they are organized into institutions which are truly owned by them and provide them sufficient capacity building. 2.8.1 Shift from SGSY to NRLM National Rural Livelihood Mission (Aajeevika) has been formally launched on 3 June, 2011 in the country. The main points of shift from SGSY to NRLM can be summarized as follows: a) Allocation based strategy to demand driven strategy. b) Professional support structure from State level to sub-district level. c) Federations at all levels. d) One time grant of Rs.10000 at Panchayat level, Rs. 20000 at block level and Rs. 100000 at district level to be provided. e) Subsidies to be enhanced as given in the table below: 61

Table 2.2 Increase in Subsidy (SGSY to NRLM) Category From (Rs.) To (Rs.) For General Category For SC Beneficiary For Self Help Group Revolving Fund Source: www.haryanarural.gov.in. 7500 10000 125000 10000 f) Interest subsidy above 7% rate of interest to be provided. 15000 20000 250000 15000 To conclude, the provisions under the scheme of microfinance are necessary but not sufficient. To make them sufficient, we have to consider the policy implications flowing from our study in chapter 5. 62

References: 1. Rutherford, Stuart (2000), The Poor and their Money, Oxford University Press, New Delhi. 2. Armendáriz, Beatriz and Morduch Jonathan (2005), The Economics of Microfinance, MIT Press. 3. Yunus, Muhammad (2005), Grameen Bank's Struggling (Beggar) Members Program, Available at: http://www.grameen-info.org. 4. Planning Commission, Estimates of Poverty 2011-12 Government of India. 5. Sinha, Rabinder Kumar (1984), Rural Development: A Perspective, Kurukshetra, Vol.XXXII, No.11, August, p.29. 6. Ibid. 7. Rao, Y.V. (1984), Training for Rural Development, Kurukshetra Vol. XXXII, No.10, July, p.14. 8. Cropp, James H. (1972), Rural Sociology and Rural Development, Rural Sociology, Vol. 87, No. 4, December, pp.515-33. 9. Maheshwari, S. R. (1985), Rural Development in India, Sage Publications, New Delhi, p.18. 10 Bose, P.R. and Vashisht, V.N. (1980), Rural Development and Technology-A Status Report-cum- Bibliography, Centre for the Study of Science, Technology and Development, New Delhi, CSIR, p. xv. 11. Ministry of Rural Development, SGSY Guidelines, Government of India. 12. Kumar, Yugesh (1996), Financial Institutions and Agriculture Development in Haryana, Un- published Ph.D.Thesis, Kurukshetra University, Kurukshetra. 13. Sharma, R.K. (1993), Institutional Finance for Agriculture in India, H.K. Publications, Delhi-Chandigarh, p. 101. 63

14. Lalitha, N. (2004), Women thrift and Credit Groups - Breaking the barriers at grassroots, Peninsular Economist, Vol. XII, No. 2, pp 181-187. 15. World Bank (1998), PREM Notes, No. 8, Washington. 16. Nair, Ajay (2002), Sustainability of Microfinance Self Help Groups in India:Would Federating Help? Woodrow Wilson School of Public and International Affairs, Princeton University, USA. 17. www.haryanarural.gov.in. 64