Microfinance Development Strategy for India
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Economic and Political WeeklyMarch 31, 20071131While almost 75 per cent of the production credit (whichaccounted for about one-third of the total credit availed ofby the rural masses) was met by the formal sector, mainly banksand cooperatives, almost the entire demand for consumptioncredit was met by informal sources at high to exploitativeinterest rates that varied from 30 to 90 per cent pa. Due tothe inability of poor borrowers to offer any securityfor theirsmall consumption loans, they were unable to take short-termconsumption loans from the formal banking system eventhough theRBI guidelines did provide for granting of consump-tion credit by banks. Consequently, a large number of theruralpoor continued to remain outside the fold of the formalbanking system.Banking ExpansionIncreasing access to credit for the poor has always remainedat the core of Indian planning in fighting against the poverty.Starting in the late 1960s, India was home to one of the largeststate interventions in the rural credit market. This phase is knownas the “social banking” phase.It witnessed the nationalisation of existing private commercialbanks, massive expansion of branch network in rural areas,mandatory directed credit to priority sectors of the economy,subsidised rates of interest and creation of a new set of regionalrural banks (RRBs) at the district level and a specialised apexbank for agriculture and rural development (NABARD) at thenational level.These measures resulted in impressive gains in rural outreachand volumes of credit. The branches of commercial banks andthe RRBs increased from 8,321 in the year 1969 to 68,282branches as at the end of March 2005. The average populationper branch office has decreased from 64,000 to 16,000 duringthe same period. This a spectacular growth in providing bankingservices to the masses.However, there are certain under-banked states such asBihar, Orissa, Rajasthan, Uttar Pradesh, Chhattisgarh, Jharkhand,West Bengal and a large number of north-eastern states,where the average population per branch office continues tobequite high compared to the national average, particularly inrural areas.This skewed banking expansion becomes apparent when weconsider deposits of scheduled commercial banks and bank creditas a proportion of net state domestic product (NSDP) at currentprices. The NSDP is a measure of the economic activity in thestate and comparing it with the utilisation of bank credit or bankdeposits indicates how much economic activity is being financedby banks and whether there exists untapped potential for increas-ing deposits in that state. Figure 1 shows bank credit utilised ina state as a percentage of NSDP at current prices and bank depositsin a state as a share of NSDP. It also shows some surprising results.For instance, the percentage of bank deposits to NSDP is prettyhigh in Bihar and Jharkhand, or these states are not as under-banked as thought to be. While it is well known that the north-eastern states are under-banked, states such as Andhra Pradesh,Haryana and Rajasthan, too, have a low bank deposits-NSDPratio. In contrast, banks have already tapped most of the potentialof states such as Punjab and Maharashtra as far as bank depositsare concerned.Hilly states such as Sikkim, Himachal Pradesh and evenArunachal Pradesh have a surprisingly high proportion of bankdeposits to SDP. If banks wish to expand into those areas wherethe potential of deposits has been relatively untapped, theywould have to expand in states such as Andhra Pradesh,Haryana,Chhattisgarh, Madhya Pradesh, Orissa and Rajasthan.The data on “bank credit utilised to SDP” gives more predict-able results, with the north-eastern states at the bottom of theladder along with Bihar and Jharkhand, while the southern statesdo very well. Gujarat’s relatively low rank is probably becausebusinesses there have access to different sources of fundingbesides commercial banks such as non-banking financialinstitutions,cooperative banks and equity.This skewed banking expansion is also reflected in the percapita credit outstanding of some of states and union territories.Here, we can see a huge disparity in the per capita outstandingcredit in Chandigarh and Delhi on the one hand and the rest ofthe states on the other. Bihar and Jharkhand stay at the bottomof the list here with just Rs 1,937 as per capita outstanding credit,whereas, the figures for Chandigarh and Delhi surpass the “onelakh” mark.Due to the nature of the expansion of banking services in thecountry and constraints on banking entities, microfinance andmicrofinancing institutions have gained immense relevance today.The microfinancing activities of banks and self-help groups havegrown to new heights. Table 4 shows the figures till March 2006.It depicts how much the SHG-bank linkage programme initiatedby NABARD has helped millions of Indians in improving theirlifestyle and also contributing to the development of the economy.IIIInternational Experience in MicrofinanceMicrofinance has changed many lives in diverse societal settingsacross the globe. It is being exploited as a tool for financialliberation in underdeveloped, developing and even developedcountries. It tries to create a more inclusive financial universefor the whole society. By trying to bring more people in thenetwork, an inclusive financial sector allows poor and low-income people to access credit, insurance, remittances andsavingsproducts. In many countries, the formal and institutionalfinancial sectors do not provide these services to the lower incomesegments of the market. An inclusive financial sector will supportthe full participation of the lower income levels of the populationto promote economic growth. Now, let us have a look at someof the best practices across the world.Developing and Least Developed CountriesAsia, Latin America and Africa badly need a financial systemthat is more inclusive in nature. The reason behind this is thatthere is already a scarcity of capital even for funding the basicTable 4: Progress under Microfinance ProgrammesCumulative No ofCumulative SHGPersons ReachedLoan Disbursed(In Lakh)(In Rs Crore)NABARD1,649.0011,397.00SFMC26.25761.81RMK5.48147.53FWWB5.29240.10Total1,686.0212,546.44Source:NABARD, SIDBI Foundation for Micro-Credit (SFMC), Rastriya MahilaKosh (RMK) and Friends of Women’s World Banking (FWWB).
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Economic and Political WeeklyMarch 31, 20071133minimum growth. The financial and banking institutions inthese countries (due to their inability to acquire enough funds)find themselves unable to address the micro-credit demands.Because of this, several new institutions cropped up in thesecountries, which were addressing the problem of unavailabilityof funds to the poor or people with small physical assets.Governments, regulators and international institutions have startedgiving assistance to these institutions for a better microfinancinginstitutionalframework.Policymakers started realising that these microfinancinginstitutions are potentially a very significant contribution togender equality and women’s empowerment, as well as pro-poordevelopment and civil society strengthening. Through theircontribution to women’s ability to earn an income these financingactivities have the potential to initiate a series of “virtuous spirals”of economic empowerment, increased well-being of women andtheir families and wider social and political empowerment.Microfinance services and groups involving men also havethepotential to question and significantly change men’s attitudesand behaviour as an essential component of achievinggenderequality.Thus microfinance programmes targeting women became amajor plank of donor poverty alleviation and gender strategiesin the 1990s. Increasing evidence of the centrality of genderequality to poverty reduction and women’s higher credit repay-ment rates led to a general consensus on the desirability oftargeting women. Microfinancing programmes, thus, are alsoserving as a tool for “social re-engineering” for policymakersacross the world, especially the least developed and developingcountries.There are several successful examples from these parts ofthe world that have been instrumental in improving the livingconditions of small farmers, artisans, pensioners, etc. Andthese have been done with a “positive bias towards thewomen”ofthese segments of the society. We will look at someof them:Grameen Bank, Bangladesh: The Grameen Bank is the brain-child of the economist and Nobel laureate Muhammad Yunus.In 1976,heexperimented with his ideas of micro-credit in thevillage of Jobra and other villages. The bank was immenselysuccessful and the project, with government support, wasintroduced in 1979 in Tangail district (to the north of thecapital, Dhaka). The bank’s success continued and it soonspreadtovarious other districts of Bangladesh and in 1983 itwas transformed into an independent bank by the legislatureof Bangladesh.The bank today continues to expand across the nation and stillprovides small loans to the rural poor. As of December 2006,Grameen Bank branches numbered over 2,319 providing servicesin 74,462 villages, covering more than 89 per cent of the totalvillages in Bangladesh. It has 6.91 million borrowers, 97 per centof whom are women.The system is the basis for the micro-credit and the SHG system.Each group of five individuals are loaned money, but the wholegroup is denied further credit if one person defaults. This createseconomic incentives for the group to act responsibly (such asother members then being able to receive additional loans),increasing Grameen’s economic viability.In a country in which few women may take out loans fromlarge commercial banks, the fact that most (97 per cent) loanrecipients are women is an amazing accomplishment. In otherareas too, Grameen’s track record has been astonishing, with veryhigh payback rates – over 98 per cent. More than half of Grameenborrowers in Bangladesh (close to 50 million) have risen out ofacute poverty thanks to their loan, as measured by such standardsas having all children of school age in school, all householdmembers eating three meals a day, a sanitary toilet, a rainproofhouse, clean drinking water and the ability to repay a 300 taka-a-week ($ 8) loan.ShoreBank, USA: There are some communities even in thedeveloped economies, which are at a comparative disadvan-tageinacquiring loans. Milton Davis founded ShoreBank in 1973for lending to underserved communities and in the developmentof micro-credit and microfinance loans benefiting localresidentsin the South Side of Chicago. Frequently called the“inventors” of community development banking, ShoreBank’ssuccessful community lending models have been the inspirationfor community development banking institutions aroundtheworld.Over the last 30 years, loans made by ShoreBank, especiallyhome mortgage loans and loans to small businesses, have con-tributed to the economic resurgence of Chicago neighbourhoodslike Kenwood, Chatham, Bronzeville, Austin, and most dramati-cally, South Shore. Over one-quarter of all mortgage and rehabloans in the South Shore area have been made through ShoreBank.ShoreBank has helped finance the purchase and renovation of49,000 affordable housing residences. Between 2000 and 2006,it issued nearly $ 900 million in loans to citizens in Chicago,Detroit, and Cleveland.ShoreBank today has branches in Chicago’s South and Westsides, Cleveland, and Detroit. It has affiliates in Oregon andWashington State, and in Michigan’s Upper Peninsula.ShoreBank’s international consulting services have offices inChicago, Washington DC and London, and projects in 30 countriesaround the world.IVKey Issues forIndian Banks in MicrofinanceNow, let us look at some of the major issues, which are relatedto the microfinance activities and institutions. The issues rangefrom the necessity to the viability of the programmes itself.Indian Banks’ perspectives: Risk- return analysis: Risks involvedin lending to small borrowers imply a high probability of defaultof repayments. There are many interesting observations in thisregard.Experience in micro-lending of different social agencies sug-gests that poor people are more prompt in repaying debts. Forexample, the repayment for Grameen Bank is 98 per cent; SEWAis more than 92 per cent, etc. The repayment rate is as high foralmost all micro-lending institutions, as the default rate hoversaround a maximum of 10 per cent only.However, according to the statistics, the default rate for banksin the same segment is as high as 40 per cent. That is why thebanks feel a bit hesitant in providing micro-credit to poor people.Apart from the default risk, micro-credit also has yield risks andprice risks attached to it. Banks and other formal credit disburse-ment institutions are exposed to the following risks and impedi-ments in the area.– Credit risk– High transaction and service cost
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