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Conditions in Which Microfinance Has Emerged in Certain Regions

The paper looks at some macro data on the availability of infrastructure, economic growth, density of population and the availability of formal financial services to examine if any of these factors explain its growth of microfinance in certain regions.


Conditions in Which Microfinance Has Emerged in Certain Regions

M S Sriram, Radha Kumar

The paper looks at some macro data on the availability of infrastructure, economic growth, density of population and the availability of formal financial services to examine if any of these factors explain its growth of microfinance in certain regions.

We acknowledge the generous support of the Microfinance Management Institute as part of their Microfinance in MBA programmes, under which this research was carried out. This paper was written on the basis of the original work done by Radha Kumar when she was at IIMA. An earlier version of this paper was presented at the High Level Policy Conference on Micro finance in India, Delhi, May 3-6, 2005.

M S Sriram ( is at the Centre for Management in Agriculture, Indian Institute of Management, Ahmedabad and Radha Kumar is with Ernst and Young, Mumbai.

Economic & Political Weekly december 8, 2007

icrofinance is the provision of a broad range of financial services such as deposits, loans, payment services, money transfers and insurance to poor and low income households and their micro-enterprises.


India has two strands of microfinance – the “mutual” strand, where microfinance is organised around the concept of mutuality covering an entire range of experiments such as informal self-help groups (SHGs) and formal thrift and credit cooperatives incorporated under the cooperative legislation. The other strand may be termed that of “providers”, wherein an external agency commonly known as microfinance institutions (MFIs) offers the financial services without opening up its own governance structure to the clients. SHGs provide scope for a two way transaction, starting on the base of small savings – rotating that and later linking it to loans that could address the issue of livelihoods. In some places attempts are being made to provide exclusively designed risk mitigation products for the poor and vulnerable. Microfinance has become an attractive mechanism to reach financial services to the poor and the methods evolved reduce certain types of transaction costs, eliminate basic problems of incorrect client identification and mitigate repayment risks to a great extent [Sriram 2002]. Therefore there is great enthusiasm amongst various players in the financial services market to participate in this sector.

While there are some places where men participate in microfinance type of activities, by design, the movement has been women-centric. Though the mutuals have been in the country for about two decades and the providers have been operating for over a decade, the movement has not spread throughout the country. We find that microfinance activities seem to happen only in certain pockets of the country, irrespective of whether they follow the mutual or the provider strategy. While microfinance has had the patronage of successive governments irrespective of party affiliation at the centre, the regional spread of the movement is very disparate. Even within states, we find that certain pockets develop as microfinance pockets. We would like to understand if there are specific reasons or external conditions that are conducive to the growth of microfinance in certain regions that are not there elsewhere. For the purposes of analysis, we shall focus only on mutuals. While it is possible to recognise some thought leaders in the design of mutuals, the spread of the movement cannot be attributed either to a small set of individuals or organisations. Therefore these mutuals operate with different parentage,


diverse funding sources, different cost absorption models and different operational details that foster trust and bondage. However, the common thread amongst all these are that the participants meet regularly, undertake financial transactions and try to scale up as they go along.

A Primer on Mutuals in India

In India, the statistics put out by National Bank for Agriculture and Rural Development (NABARD) attribute three types of parentages to the mutuals. The first set where the bankers themselves help in formation of these groups and then finance them. Under this model the cost of the forma

institutions usually deal with the bank and do financial intermediation for the mutuals. (6) Mutuals are more liberal than the providers in terms of discipline. Repayment terms could usually be more friendly and genuine default treated with compassion. Mutuals do not usually report a 100 per cent recovery rate, unlike most providers.

The Need for Promoting Agencies: With the above features it can be assumed that there have to be certain conditions for mutuals to flourish. Since most mutuals are externally triggered, it may be important to have a promoting agency that does the

Table 1: Annual Growth in Net State Domestic Product (%) initial work of group forming and stabition is usually borne by the bank, and State 1961-62 1971-72 1981-82 1991-92lisation. In states that have been in the

to toto to

possibly treated as an investment for a 1970-71 1980-81 1990-91 2000-01forefront of this model of microfinance it

good business with moderate risk. Alter- Andhra Pradesh 3.11 3.46 6.58 5.52is possible to identify some large organi Karnataka 4.36 3.38 5.09 7.51

natively the bank might do this as a part sations that do the promotional work. In

Kerala 4.00 2.30 3.34 5.74of its contribution towards social responsi- Tamil Nadu 2.59 2.10 5.71 6.25Karnataka and parts of Tamil Nadu we

bility. The second set of mutuals are those promoted by an external party other than the banks, but eventually linked to banks. Most of these would be promoted by nongovernmental organisations (NGOs) and the cost would have been met by developmental funding. The third set of mutuals are those that are not only promoted by

Gujarat 4.83 4.31 5.99 6.34

Maharashtra 2.95 4.51 6.12 5.74

Rajasthan 5.78 4.10 4.35 4.47

Source: Bureau of Applied Economics and Statistics, Government of India.

Table 2: Statistics on Connectivity

State Road Length (Kms) Connectivity (March 31, 2002) (May 2001)

Area Population No of No of % (Per 100 (Per 1 Lakh) Villages/ Connected Sq kms) Habitations Habitations

have Mysore Rural Development Agency (MYRADA) one of the original thinkers of the mutual model. Apart from this, Dhan Foundation in Tamil Nadu, has been promoting mutuals in a big way, for a long time. In Andhra Pradesh, it is difficult to identify one single organisation that has an encompassing size, but it could be

NGOs, but also funded by them. In such Andhra Pradesh 65.2 239.0 67505 60681 89.9 safely said that the government has been Karnataka 79.2 294.4 56682 45167 79.7

cases the NGOs get linked with the financ-one of the largest promoters of this move-

Kerala 381.7 462.1 10820 6928 64.0 ing institutions or banks and interact with Tamil Nadu 117.7 249.3 77923 72411 92.9 ment. This phenomenon is what triggers

the mutuals themselves.

Irrespective of the parentage, the mutuals have the following salient features:

(1) The mutuals usually have between 10 and 20 members. Each of the promoting agencies would have criteria that specify how these groups should be formed. The basic consideration being that they have to

Gujarat 47.6 195.3 23104 19734 85.4

Maharashtra 124.1 422.3 40412 38245 94.6

Rajasthan 41.2 266.3 37889 15903 42.0


Table 3: Population Density and Incidence of Poverty

State Population Density Rural Poverty Ratio (per sq km – 2001) (1999-2000)

Andhra Pradesh 275 11.05
Karnataka 275 17.38
Kerala 819 9.38

similar efforts in north Rajasthan – Alwar where Professional Assistance for Development Action (PRADAN) has had a big role to play in promoting these activities. The same applies to Jharkhand where PRADAN is active.

For the purpose of this paper, we undertake a comparative analysis of south-

Tamil Nadu 478 20.55 Gujarat 258 13.17

be cohesive, able to save and borrow and ern states – Karnataka, Andhra Pradesh,

eventually conduct meetings and main-Tamil Nadu and Kerala with that of the

Maharashtra 314 23.72 tain books. (2) All mutuals would meet Rajasthan 165 13.74 western states of Maharashtra, Gujarat

regularly. These meetings happen at the Source: Population Density from and Rajasthan, to see whether there are

Poverty Ratio from Planning Commission, Government of India.

frequency of a week, fortnight or a month depending on the promoting agency’s advise and the type of activity they carry out. (3) The mutuals start their activity by all the members saving a specified amount to be remitted every week. This would be compulsory thrift. In addition some groups might have voluntary savings schemes as well. The money collected is lent to some members within the group as per the norms. The interest rate charged on loans is decided locally. Some groups pay interest on deposits, some pay year end dividends based on savings and some just accumulate these as group funds. (4) The mutuals typically start their external borrowing programme after six months of rotating savings. This is termed as the linkage programme. The banks typically lend a multiple of the group fund, usually not exceeding four times. (5) In areas where there are multiple mutuals within a given area, they might form into cluster organisations and/or federations. In such cases the federal

some natural conditions that seem to explain the development of these mutuals only in certain pockets. We have deliberately left out the northern and eastern parts of the country, because there are so many extraneous factors that come to play and we may not be able to isolate factors that foster the mutuals.

Broad Parameters

We start by looking at the broad parameters of the states we are examining. Table 1 gives the growth in state domestic product in percentage terms from 1961-62 onwards.

From Table 1 it is evident that Rajasthan is one state that has been growing at a slow pace, in the decades starting 1981-82. We therefore will have to treat Rajasthan as an outlier in all our analysis and look at that state carefully as far as the roll out of financial services is concerned. Possibly the issue of financial

december 8, 2007 Economic & Political Weekly


services in Rajasthan will be closely linked to broader developmental parameters and an isolated intervention might not have a big impact unless the other issues are addressed. The only other state that has grown slow in net terms is Kerala, but it has also caught up in the decade of 1991-92.

Table 4: Number of Financial Services Outlets

State Rural Household Rural/Semi-Urban Bank PACSs Number of Outlets as on March 2002* PNACSs Formal Sector SHGs Total
(million)# Branches@ Outlets Outlets
Andhra Pradesh 12.68 3,652 4,104 3,761 11,517 2,43,714 2,55,231
(1.4) (1.6) (1.5) (4.5) (95.5) (100)
Karnataka 6.2 3,237 4,653 2,528 10,418 37,032 47,450
(6.82) (9.81) (5.33) (21.95) (78.04) (100)
Kerala 5.01 2,748 1,914 1,017 5,679 14,759 20,438
(13.45) (9.36) (4.98) (27.78) (72.21) (100)
Tamil Nadu 8.28 3,001 3,609 1,749 8,359 62,709 71,068
(4.22) (5.08) (2.46) (11.76) (88.24) (100)
Gujarat 5.88 2,367 6,785 4,313 13,465 9,496 22,961
(10.31) (29.55) (18.78) (58.64) (41.36) (100)
Maharashtra 3,390 20,598 20,405 44,393 19,619 64,012
11.17 (5.30) (32.18) (31.87) (69.35) (30.65) (100)
Rajasthan 7.05 2,629 4,780 720 8,129 12,564 20,693
(12.70) (23.10) (3.48) (39.28) (60.72) (100)
Number of Households to be Serviced Per Outlet
Bank PACSs PNACSs * Formal SHGs All
Branches Sector Outlets
Andhra Pradesh 3,474 3,090 3,374 1,101 52 50
Karnataka 1,915 1,332 2,452 595 167 131
Kerala 1,823 2,618 4,926 882 339 245
Tamil Nadu 2,759 2,294 4,734 991 132 116
Gujarat 2,484 867 1,363 436 619 256
Maharashtra 3,294 5,42 547 252 569 174
Rajasthan 2,682 1,475 9,792 867 561 341
  • (1) # Data from primary census abstract based on 2001 Census.
  • (2) @ Statistical Tables Relating to Banks in India, 2002 published by RBI. Only rural and semi urban branches have been considered in the analysis.
  • (3) * The data for PACS and PNACS is from the database of NAFSCOB. PNACS Data pertains to 1999-2000.
  • (4) Figures in parentheses are percentages.
  • At this juncture it might be useful to look at the other parameters of development that might impact the emergence of mutuals. Table 2 (p 68) gives some statistics on connectivity. We assume that regions that are well connected should have more formal institutions and regions that are not well connected would have the propensity to promote their own local solutions. If this proposition were to be true, then the ideal candidates for the spread of local institutions should have been Kerala and Rajasthan where the number of connected habitations is low on percentage terms. However Kerala presents a contradictory picture of having the highest density of roads, where connected. This possibly represents a significant number of habitations that are sparsely populated and are not connected by road, or might be because they are connected by waterways. There seems to be no relationship between the habitations that are connected, the road length and the spread of microfinance. We cannot even use the counter argument that if the connectivity is high, then the external agencies would have easy access and therefore there is a natural tendency for microfinance to grow.

    The other aspect we need to examine is if there is an explanation in figures such as density of population, overall poverty ratios that trigger external agencies to come in and work with these sections of the population. If the poverty ratios are high, then naturally the development-oriented organisations would like to make an intervention in such areas. At the same time, in order to be more effective they might want to work in areas where the population is dense. Getting to form groups and transact would

    Economic & Political Weekly december 8, 2007

    need a natural meeting place for the beneficiaries and therefore density and the way the local society is organised might make a difference. Table 3 (p 68) (gives some data that could be used in our analysis.

    From Table 3 using the poverty incidence, Maharashtra and Tamil Nadu would be the destinations for developmental oriented organisations to operate. Surprisingly the incidence of poverty in Rajasthan seems to be lower than many of the other states and almost comparable to Gujarat. Possibly the reason why Rajasthan scores low on other parameters is because of its population density. With such sparse population, it possibly does not make sense to form groups. Even in the non-desert areas of south Rajasthan groups do not get naturally formed because of the way the tribal society is organised. Therefore promotion of microfinance in Rajasthan possibly would need an out-of-the box model.

    Specific Parameters

    If we were to look at some specific parameters that have a bearing on the development of financial markets, particularly of the nature that we are discussing we will have to look at how the formal markets have emerged and what sort of gaps they have left on the rural landscape. The first question that we ask is whether mutuals naturally emerge in places where the formal markets have failed to reach out to the poor. The formal sources of savings and credit would include bank branches and cooperatives. The macro trends indicate that across the country, the formal sources are moving away from the poor – the share of neighbourhood outlets such as cooperatives is falling and the average size of the loans disbursed by the banks are going up, with number of accounts in the rural areas actually falling. In addition after the branch

    Table 5: Amounts Outstanding by Different Outlet Types

    State Rural Total Amount Outstanding as of March 2002 (Rs million)
    Households# Bank PACSs PNACSs * Formal SHGs Total
    (million) Branches@ Sources
    Andhra Pradesh 12.68 9,607 49,762 4,133 63,502 5,213 68,715
    (13.98) (72.42) (6.01) (92.41) (7.59) (100)
    Karnataka 6.2 10,793 23,150 8,173 42,116 715 42,831
    (25.2) (54.05) (19.08) (98.33) (1.67) (100)
    Kerala 5.01 12,758 73,385 3,623 89,766 340 90,106
    (14.16) (81.44) (4.02) (99.62) (0.38) (100)
    Tamil Nadu 8.28 10,509 48,425 5,127 64,061 2,027 66,088
    (15.9) (73.27) (7.76) (96.93) (3.07) (100)
    Gujarat 5.88 6,837 25,367 2,714 34,918 85 35,003
    (19.53) (72.47) (7.76) (99.76) (0.24) (100)
    Maharashtra 11.17 11,083 59,850 52,441 1,23,374 423 1,23,797
    (8.95) (48.35) (42.36) (99.66) (0.34) (100)
    Rajasthan 7.05 6,125 9,869 102 16,096 232 16,328
    (37.51) (60.44) (0.63) (98.58) (1.42) (100)
    Amount Outstanding Per Household (March 2002)
    Bank PACSs PNACSs * Formal SHGs All
    Branches Sources Sources
    Andhra Pradesh 758 3,924 326 5,008 411 5,419
    Karnataka 1,740 3,734 1,318 6,793 115 6,908
    Kerala 2,547 14,648 723 17,918 68 17,986
    Tamil Nadu 1,269 5,848 619 7,736 245 7,981
    Gujarat 1,163 4,314 462 5,939 14 5,952
    Maharashtra 992 5,358 4,695 11,045 38 11,083
    Rajasthan 869 1,400 14 2,283 33 2,316
  • (1) # Data from primary census abstract based on 2001 Census.
  • (2) @ Statistical Tables Relating to Banks in India, 2002 published by RBI. Only rural and semi urban branches have been considered in the analysis. In calculating the outstandings, we have deducted the amount outstanding from SHGs, as that is reported as a separate category. Since the data is sourced from RBI, the outstandings of SHGs are essentially what the banks have lent to the groups. In fact the credit extended by SHGs out of their own revolving funds have not been captured here and the amounts available to the ultimate client from this source is expected to be larger than what is depicted in the table.
  • (3) * The data for PACS and PNACS is from the database of NAFSCOB. PNACS Data pertains to 1999-2000.
  • (4) Figures in parentheses are percentages.

    licensing policy was modified in 1991, there has been a fall in The next question we need to examine is whether there is any the rural and semi-urban branches of commercial and regional correlation between the number of mutuals and the amount of rural banks [NCAER/World Bank 2003]. Therefore the question is loans that flow through these channels. Are the states that have whether mutuals emerge in areas where the formal sources have more formal channels getting more credit per household than either failed or are having a shrinking role. those that are dependent on informal sources or mutuals. Table 5

    The mutuals could be treated as semi-formal sources while (p 69) has the total amount outstanding against each of the outthe informal sources could include externally triggered rotating lets. We have chosen to take the stock figure instead of the flow

    saving and credit associations (ROSCAS) and local finance companies and moneylenders. Table 6: Credit Deposit Ratios of Banks (in %) Year 2000 2004 figure because the stock figure would perhaps give a more stable picture.
    It would be useful to look at some numbers State Rural Semi-Urban Rural Semi-Urban Branches Branches Branches Branches When we look at the amounts outstanding,
    from the supply side. While the development Andhra Pradesh 76.0 52.2 84.3 54.7 Kerala and Maharashtra stand out as states
    of mutuals serve the dual purpose of providing avenues for savings as well as purveying KarnatakaKeralaTamil Nadu 69.0 54.7 61.9 55.1 34.3 51.3 74.6 58.1 61.6 61.7 37.8 55.2 that have a high outstanding per household from the formal sector. In case of Kerala,
    of credit, we focus on the access to credit to Gujarat 43.8 31.4 32.0 26.3 most of the money is flowing through the
    start with. Table 4 (p 69)has statistics about the number of outlets of formal sources and mutuals. Maharashtra 58.4 43.3 Rajasthan 45.7 32.9 Source: Banking Statistics of RBI. 76.5 54.6 43.6 39.8 primary cooperatives, while in Maharashtra it is the PNACS that are playing a significant role. Rajasthan shows low amounts of formal
    From the figures it is evident that Maharashtra has the maximum number of formal Table 7: Number of Post Offices Circles Population No of Rural, in Villages POs (as on Population Served by a credit as well as microfinance. This might be due to the overall backwardness of the
    sector outlets, largely owing to the spread (2001 Census) March 31, (in Million) 2003) Post Office in Rural Areas state. Gujarat presents a surprising figure of
    of primary non-agricultural credit societies (2001 Census) lower per household credit outstanding than
    (PNACS). The PNACS perform a role similar to mutuals, and though are formally registered Andhra Pradesh 55.22 Karnataka 34.81 Kerala and Lakshadweep 23.6 14,857 8,569 4,195 3,717 4,062 5,626 Karnataka and Tamil Nadu. Andhra Pradesh in comparison maintains the pattern where
    with the registrar of cooperative societies, Tamil Nadu the penetration of formal sources is lower
    have similarities with ROSCAs and mutuals in their operation. The studies by Thorat (no (including Pondicherry) 34.87 Gujarat (including Dadra and Nagar Haveli, Diu 10,205 3,417 than the other states (except Rajasthan) and therefore a place where alternate channels
    date) and Bouman (1989)demonstrate these and Daman) 31.98 8,234 3,884 emerge. What is clear from Table 5 is that
    similarities. In a way it might be appropriate to club these PNACS with mutuals. The lim- Maharashtra Rajasthan Source: 55.73 43.27 11,270 9,648 4,945 4,485 wherever the penetration of microfinance is high, the average loans through the mutu
    ited growth of mutuals in Maharashtra may als have also been higher than the rest. This

    perhaps be explained by the fact that there are a large number may indicate that the network developed in Andhra Pradesh, of PNACS. As we can see Maharashtra has the largest number of Tamil Nadu and Karnataka can actually bear more credit and efformal sector outlets, and these outlets are predominantly neigh-fectively supplement the formal channels. However, as a word bourhood institutions such as cooperatives. So it might be pos-of caution it may not be appropriate to look at the statistics persible to explain why the microfinance movement has not gained taining to all channels including SHGs as there could be an elemomentum in this state. This possibly holds true for Gujarat ment of double counting – the mutuals in most cases have been which has the penetration of formal sector though not as inten-financed by banks and those numbers could be subsumed in the sive as Maharashtra. By the same argument, it appears that And-overall outstandings of the banks. Therefore it might be better to hra Pradesh and Tamil Nadu which have the least penetration on look at figures pertaining to the formal sources as far as amounts the basis on number of households to be serviced per outlet of are concerned. formal institutions naturally become fit candidates for microfinance to naturally emerge. This leaves three states that do not fit Credit Deposit Ratio and Microfinance: The other figure that into the pattern. Karnataka, where the formal sector has a better is regularly used in order to find out if the banking system is perpresence also has a good network of microfinance activities. One forming its role locally is the credit-deposit (CD) ratio. The policyis not sure if this is to be explained by the extraneous factor of the makers get unduly worried if the CD ratios of certain regions are presence of a promoting institution like MYRADA. Kerala stands not favourable, indicating certain skewness in just collecting out as a state where the banking penetration is not as deep as deposits or disbursing loans. It has been known traditionally Karnataka, but at the same time, micro finance has not emerged that the regulators get worried in areas where the CD ratios are in a big way. This might be due to the presence of non-formal in-low, thereby indicating a flight of capital from the local area to stitutions such as chit funds that are not captured in the statistics, the outside world. There have been task forces set up to look at while Rajasthan may be explained by general backwardness. adverse CD ratios, particularly in the north-eastern region and

    The most telling figure in Table 4 is that with the penetration states like Kerala, West Bengal and Rajasthan. We present the of microfinance – particularly in the case of Andhra Pradesh, we figures of the CD ratios of the selected states in Table 6. However, find an outlet for every 52 households. If these outlets are used as a look at the figures in Table 6 gives no indication as to whether a base network, the potential for penetration of credit and other this could be the trigger for spread of alternative channels of financial services would be immense. finance. Andhra Pradesh has the best performance on CD ratios

    december 8, 2007 Economic & Political Weekly


    in its rural branches and almost is number one in semi-urban With the low penetration of microfinance in Maharashtra, branches. What could this mean? Since we maintained that the we may not be able to establish the importance of the post of-SHG loans are subsumed in the overall figures, do we then assume fices. Even the National Council of Applied Economic Research that the funding for microfinance has swung the CD ratio in fa-(NCAER) study found that the mean distance from the households vour of banks in these states? Prima facie, it appears so, when we surveyed to the nearest post office was the highest amongst all look at the CD ratios in the states the financial institutions, while

    Table 8: Parameters Influencing Microfinance

    where microfinance has spread the median distance was low.

    State Net GDP Connectivity Poverty Population No of Amount Postfast – Andhra Pradesh, Karnata- Growth Incidence Density Formal Outstanding/ Offices This essentially means that there

    Outlets HH

    ka and Tamil Nadu. Gujarat and are some really far flung villages

    Andhra Pradesh √√ Kerala are behind. Maharashtra Karnataka √√ that bring the mean figure to be

    Kerala √√

    is an outlier, and Rajasthan in-high and the variability of dis-

    Tamil Nadu √√ √

    dicates a double failure of the tance from the location to the

    Gujarat √ banking system as well as that of Maharashtra √√ post office might be very high.

    Rajasthan √√ √√

    the microfinance. However, it would not be appro

    √ indicates hypothesis that the state has the potential to have more microfinance.

    However, if we did arrive at the conclusions that in states where the CD ratio is good, it could be a result of better spread of microfinance, we might be attributing more than the due share of glory to microfinance. This is because the overall numbers in terms of deposit collected and credit disbursed through micro finance might not be large enough to significantly impact the CD ratios. From Table 4 (p 69) it is evident that the share of SHGs in the overall financing of the rural and semi-urban households is usually a very small percentage, except in Andhra Pradesh where it is around 7 per cent. If we assume this figure to be the one we have resorted to double counting, this could not have an overbearing impact on the direction of the CD ratios, particularly when the funding by the banks is a small multiple of the group funds generated.

    The above data might actually indicate the relative failure of the banking system in these areas, where, the disbursement of credit is generally impressive on the base of the deposits, but the deposits themselves might not have been collected in a significant manner.

    Microfinance and the Post Office: The other issue that would possibly impact the emergence of microfinance, particularly the mutual model might be the pres

    priate to focus on the post offices, as they do not offer full-fledged financial services.


    All data examined till now indicate that there are no macro-economic or demographic reasons as to why microfinance emerges in certain places. Using the summary of the above data, if we were to assume that microfinance naturally emerges in places where the economic growth is slow, the connectivity is low, the poverty incidence is high, with dense population and a failure of formal financial institutions, then the ideal states where microfinance should have naturally emerged would have been Rajasthan, followed by Kerala and Tamil Nadu. If we were to consider the singular factor of the failure of formal sector outlets, then the data seems to fall in place, as far as Andhra Pradesh and Karnataka are concerned, but this does not explain the growth in Tamil Nadu and also why Rajasthan is an outlier.

    In the absence of any statistically significant data to show any one or a group of factors that could explain the presence of mutuals in any one state and absence in another, we decided to look at the data of “parentage” and promoting institutions in the above states. Table 9 gives a break up of the parentage of mutuals.

    From the above data, two things

    Table 9: Distribution of SHGs as per the Promoting Agency (%)

    ence of post offices. Post offices do not State SHGs Formed SHGs Formed by SHGs Financed emerge clearly. The role of banks in and Financed SHPIs but Directly by Banks provide credit services, but they do pro-by Banks Financed by through NGOs promotion of SHGs seems to be limited, Banks

    vide savings services. In a recent study while their role in directly financing

    Andhra Pradesh 1 98 1

    it was found that in the states of Andhra them seems to be the preferred route.

    Karnataka 33 38 29 Pradesh and Uttar Pradesh, only 2 per Kerala 15 26 59 Except in case of Karnataka, where the

    Tamil Nadu 7 81 12

    cent of the sample households surveyed SHG movement is strong and the banks

    Gujarat 7 90 2.5

    had an account in the post office, and have also taken a keen interest in pro-

    Maharashtra 51 49 0 it also had the maximum overlap with Rajasthan 40 60 0 moting SHGs, in other significant states

    Source: Micro Credit Innovation Department, NABARD.

    people who had transactions elsewhere of Andhra Pradesh and Tamil Nadu, in the formal sector [NCAER/World there is evidence that NGOs and other

    Table 10: Partner Agencies and Groups Promoted Bank 2003]. Therefore this data is to be (March 2002) agencies have largely assumed the role

    treated with caution. However, it might be worthwhile to examine the data on the penetration of post offices. The data is readily available from the 1991 Census and it indicates a deep penetration of post

    State No of Groups Promoted No of Groups Partner by Partner Agencies Promoted Agencies (cumulative no) by SHPIs

    Andhra Pradesh 113 2,40,257 2,31,654

    Karnataka 442 12,6,256 76,696

    Kerala 180 33,400 2,200

    Tamil Nadu 330 10,9,694 721

    of promotion of SHGs. The outlier here is Maharashtra, where the role of banks seem to be significant, but the number of SHGs and the amount disbursed through SHGs are really small. There-

    Gujarat 80 16,563

    offices in Kerala. However, the figures are fore, it appears that the bank-promo-

    Maharashtra 21 2,365

    low from Maharashtra and Karnataka tion has largely happened with central

    Rajasthan 90 31,008 20,450 (Table 7, p 70 ). Source: NABARD. targets rather than a natural tendency

    Economic & Political Weekly december 8, 2007


    for the formation of mutuals. This gets further illustrated by Table 10 where we can see the number of partner agencies and the cumulative number of groups that has been promoted and linked by them.

    From Table 10 it is clear that in states where microfinance has taken off, the number of agencies involved is not only high, but the number of groups are higher where the NGOs had a larger role to play. The exception to this might be Karnataka, where we have already found that the bank branches have had a significant role in promotion of microfinance (Table 9, p 71). From the above analysis, the story that emerges is that it is difficult to find external explanations for the regional development of microfinance in certain regions. One of the reasons why a pattern might not be emerging may be because even after so much of focus on microfinance, the quantum of credit and savings managed by this system – even to the extent of the most optimistic figures that are available – are not significant vis-à-vis the size of the rural financial markets. Therefore it might at this point be difficult to find patterns, unless the numbers and the amounts become significant enough.

    However there are a series of anecdotal evidence to suggest that the government and external agencies like NGOs and international development agencies have taken a great deal of interest in the SHG movement in states like Andhra Pradesh. For instance, the Andhra Pradesh has routed several of its poverty reduction schemes via the SHG route. The Velugu programme was one of the largest of these. This Rural Poverty Alleviation Programme was taken up by the state government in two phases, covering all the districts in the state; the first phase between 2000 and 2005 and the second phase commencing two years after the first. The project had the support of the government at the highest level: the chief minister was the chairperson of the programme. The project was supported by the World Bank, at a cost of Rs 2079.12 crore and targeted 29 lakh people in 22 districts. The Tamil Nadu government has also extended a lot of support to the SHG movement through the support of the International Fund for Agriculture Development and the Tamil Nadu Women’s Development Programme. In Karnataka, MYRADA was an early collaborator with the commercial banks. With several commercial banks having their headquarters in Karnataka and having had the legacy of looking at rural markets positively, it was possible to get the involvement in a significant manner. In fact numbers suggest that Karnataka had the most significant share in SHGs before the Andhra Pradesh avalanche took it over, with fair amount of state support.

    The story of Andhra Pradesh reveals something more. Since the state has been topping the numbers in SHG and bank linkage, the language and syntax of microfinance is understood well there. Therefore there possibly is a natural environment for other models of microfinance to emerge there. That possibly explains why four major microfinance agencies that do not necessarily follow the mutual model – BASIX, Share, Swayam Krushi Sangham and Spandana are headquartered there. This could be a cluster effect, but this needs to be studied in greater detail.

    Policy Implications: It seems from the available data that the spread of microfinance is possibly not so much a natural movement whose emergence indicates conditions ripe for growth of micro-enterprise as is often commonly supposed. Rather it would seem that it in fact requires some degree of sustained external intervention, whether of the local government or of NGOs. While from the above data it appears that Rajasthan seems to be the right state where there should be large-scale intervention in microfinance, it would be much more difficult to make it successful, given the geographical conditions and the density of population. However, it could take off in certain pockets of north Rajasthan and then naturally spread across the state. For this, there needs to be systematic and synergistic intervention from three players – the state government, the non-profits operating in the area and the banking systems. If we are thinking of alternative methods of reaching financial services to the poor beyond the existing sources and with the limitations of infrastructure, it is imperative that there has to be some significant external push.

    What is even more interesting would be to look at the growth of the movement in states where it has already spread. In these states, the density of outlets that provide savings and credit services have penetrated deep, with Andhra Pradesh claiming to have one SHG for every 50 households. The challenge in these states will be to leverage these outlets to provide greater variety and quantum of financial services.

    Limitations and Scope for Further Research: A serious limitation of the study is that only those SHGs that fall under the NABARD perview have been included. This may not factor in efforts of some large NGOs in the movement. However there is a problem of availability of consolidated data in this respect. A second severe constraint has been that the efforts of NGOs and state governments have been largely understood only through anecdotal evidence. There is no quantifiable way of comparing these data. These and the role of clustering present opportunities for further research. The role of individual commercial banks in spreading the movement in their area of coverage also can be studied.


    Bouman, F J A (1989): Small, Short and Unsecured: Informal Rural Finance in India, Oxford University Press, Delhi. NCAER/World Bank (2003): Rural Finance Access Survey, World Bank, New Delhi. Sriram, M S (2002): ‘Information Asymmetry and Trust: A Framework for Studying Microfinance in India’, IIMA Working Paper Series 2002-09-02, IIMA, Ahmedabad. Thorat, YSP (no date): Rural Financial Services Market: Findings from a Field Study, (mimeo).

    available at Ganapathy Agencies 3/4, 2 Link Street, Jaffarkhanpet, Ragavan Colony, Chennai - 600 083 Tamil Nadu Ph: 24747538, 24895263

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