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Indian Microfinance: Lessons from Bangladesh
Debnarayan Sarkar
While Grameen II, launched by Bangladesh’s Grameen Bank in 2000, tailors the terms of microcredit to the diverse requirements of its borrowers, in India, despite prompt repayments, 78.7 per cent of self-help groups who were previously financed by mainstream banks did not receive additional credit in 2005-06. This article traces the fundamental differences in the provision of microcredit between Indian mainstream banks and the Grameen Bank.
Debnarayan Sarkar (sarkar_d_n@rediffmail. com) is at the Centre for Economic Studies, Presidency College, Kolkata.
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NABARD’s progress report of SHG-bank linkage programmes shows that the cumulative number of SHGs credit linked with banks up to March 31, 2006 was 22,38,565; in 2000-01 the cumulative number was 2,63,825. Under these programmes, loans are given to the SHGs in certain multiples of the accumulated savings of the SHGs, i e, the groups’ own accumulated savings are part of the aggregate loan the group can receive from the mainstream bank. Despite providing loans to the SHGs in certain multiples of their accumulated savings, timely repay
ment of SHG loans reported by participating banks was around 95 per cent and around 90 per cent of the SHGs linked were exclusive women SHGs during 1992-2006.
Key Issues
NABARD’s report reveals that during 200506, 6,20,109 new SHGs were credit linked with mainstream banks; but, out of the remaining SHGs – 16,18,456 already financed in earlier years – a repeat loan was provided to only 3,44,502 SHGs during the same year. That is, only 21.29 per cent of SHGs were provided with repeat loans in 2005-06.
However, a pertinent issue is why, in every year, more than 76 per cent of the old SHGs, already financed in earlier years by mainstream banks, remain outside further access to credit from the same source, although around 95 per cent of all SHG loans are repaid on time. Is it for the fact that the economic condition of more than 76 per cent of old SHGs has improved so much after receiving the primary loan(s) as a result of which they have overcome poverty and so they need not receive any further microcredit? Or, is it for the
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fact that, the pressure to repay the first instalment of the microcredit loan is so overbearing that the borrowers have to borrow from moneylenders in order to repay the same, forcing the concerned SHG to keep out of the microcredit programme? A number of studies deal with the success of microcredit in India, but there are hardly any on the overbearing pressure of the borrowers to repay the loan that compels them to borrow from moneylenders. Why more than three-fourths of old credit linked SHGs, financed in earlier years by a mainstream bank, are not receiving further microcredit from the same source, although more than 95 per cent of such loans are repaid in time? Neither the central government nor NABARD has brought out any concrete report about such old credit linked SHGs, who are involved in some stable income-generating projects, and are working for the removal of their own poverty, despite the fact that the microcredit programme in India has been working as the principal mode of poverty alleviation from April 1, 1999 onwards. All the same, it is argued that microcredit is out of the reach of the poorest, as the ability to repay the first few instalments depends on the initial resource base of the borrowers [Zaman 1997:247; Ramchandran and Swaminathan 2002:532; Hulme and Mosley 1996; Johnson and Rogaly 1997]. There are also the claims that the Grameen Bank of Bangladesh usually excludes the poorest [Sebstad and Cohen 2000].
Grameen’s Record
However, more than half of the Grameen Bank borrowers in Bangladesh (close to 50 million) have risen out of acute poverty with the help of microcredit. This is according to measures such as having all children of school-going age in school, all household members eating three meals a day, having a sanitary toilet, clean drinking water, and a rainproof house, and capable of reimbursing a 300 taka-a-week ($ 8) loan [Khandelwal 2007: 1133]. Starting its journey from 1976 onwards, the Grameen Bank had lent microcredit loans to 86 per cent of villages in Bangladesh worth Tk 290.03 billion (the repayment rate being about 99 per cent) to 6.67 million borrowers, of which
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97 per cent were women as of May 2006 [Yunus 2006]. A number of studies have shown a significant impact on the lives of Grameen Bank members across a wide range of economic and social indicators, including better access to education for the children, greater empowerment of women and increased participation of women in social and political activities [Yunus 2004:4077; Zohir 2004]. But research focused largely on the Grameen Bank and other Grameen-modelled microcredit programmes in Bangladesh critiqued the rigidities in the financial products of earlier microcredit programmes, which came into being before the introduction of second generation microcredit, Grameen II [Rutherford 2006; Jain and Moore 2003]. The shift from the older Grameen (or “Classic Grameen”) to Grameen II was the “response to a series of crises such as borrowers’ boycott of weekly group meetings and cessation of loan repayment, in protest against certain rigid programme features” [Kalpana 2006:5111]. In its institutional history, at an interesting phase beginning in 2000, the Grameen Bank came up with a new system (Grameen II), which introduced customer-tailored-credit service for greater flexibility to its borrowers, instead of the old system of a singlesize-fits-all [Yunus 2004]. Yunus remarks that the most important features of Grameen II are tension-free microcredit and full dignity to the borrower [Yunus 2002, cited in Kalpana 2006:5111]. A subsequent analysis of Grameen II finds that the diversity of financial services offered had greatly spurred Grameen’s growth, ending an earlier period of stagnation [Rutherford 2006]. What are the fundamental differences between our microcredit programmes and those of Grameen II?
The Differences
Grameen II introduced loans of different duration, suited to individual member needs. Under this new system, local staff can design a loan product to best meet client needs, whereas the earlier system had constrained local staff from tailoring the terms of credit to the needs of the borrower. The new system introduced loans of different duration suited to individual member needs, recognising the maturity of members and the diversity of their needs. Besides the duration of the loan, the size of weekly instalments can be varied and the borrower can pay less during the lean season and pay more during the busy season. Another distinguishing feature of the Grameen II is the concept of a flexible loan, which is simply a rescheduled basic loan. The basic loan of Grameen II is the prime loan product, which is provided for income-generating activities. All borrowers start with a basic loan. In addition to the basic loan, the same borrowers are also granted a housing loan and a higher education loan simultaneously. If the borrowers face some difficulties or problems in repaying the basic loan, there is an exit option with its own set of separate rules according to the repayment schedule. The most important feature of the flexible loan is that, if borrowers are unable to repay their loans, they are no longer seen as defaulters; rather they have a legitimate way to remain within the folds of the organisation so that they may continue to receive loans [Yunus 2004]. But Indian institutional microfinance models have not yet introduced such institutional reforms in microcredit programmes that the Grameen Bank pioneered in 2000.
For its borrowers, the Grameen II also introduced a range of attractive new savings products which the SHG programme under the SHG-bank linkage model of India is lacking. The Grameen Bank has introduced a pension fund for its borrowers with a minimum contribution for each borrower towards a pension deposit scheme, which yields an amount almost double that paid by the borrower over a period of 120 months. The Grameen Bank has also introduced loan insurance for its borrowers to pay off a member’s debt in the event of her/his death. Yunus (2004) argues that as the Grameen Bank is owned by the poor borrowers (95 per cent of the total equity of the bank is owned by the borrowers) and works exclusively for them, the saving products of Grameen II are enabling not only its members to become self-reliant but also helping the bank’s own self-sufficiency.
Beyond trying to meet the credit needs of its borrowers, the Grameen Bank has been undertaking a process of transformation of the lives of individual members
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by building up social capital among the group with a social charter developed by the members themselves. They encompass decisions relating to one’s economic and social life which members commit to implement. These decisions include such things as sending and ensuring that children stay in school, committing to building a good house for oneself, keeping families small, taking joint actions to help the community, not accepting or not giving dowry, drinking clean water, growing plants and vegetables, keeping their children and the environment clean (ibid: 4078).
The microfinance development strategy for Indian commercial banks need not just encompass financial capital or services, but should also focus on people’s basicneeds: a home, good health, education for their children, etc [Khandelwal 2007: 1133]. Indian banks face regulatory, policyrelated and operational barriers (ibid).
Most importantly, if the credit linked SHGs wither within a short period of their formation, the microcredit programmes would, no doubt, be futile. So, the urgent need of the hour is to bring about some institutional reforms in the microfinance development strategy of Indian banks as the Grameen Bank did with the introduction of Grameen II.
References
Hulme, D and P Mosley (1996): Finance against Poverty, Volume 1, Rutledge, London and New York.
Jain, P and M Moore (2003): ‘What Makes Microcredit Programmes Effective? Fashionable Fallacies and Workable Realities’, IDS Working paper 177, Institute of Development Studies, Brighton, Sussex, England.
Johnson, S and B Rogaly (1997): Microfinance and Poverty Reduction, Oxfam (UK and Ireland) and Action Aid (UK).
Kalpana, K (2006): ‘Microcredit Wins Nobel: A Stocktaking’, Economic & Political Weekly, Vol 41, No 50, December.
Khandelwal, A K (2007): ‘Microfinance Development Strategy for India’, Economic & Political Weekly, Vol 42, No 13, March.
NABARD (2004-05): ‘Progress of SHG-Bank Linkage Programme in India’, NABARD.
– (2005-06): ‘Progress of SHG-Bank Linkage Programme in India’, NABARD.
Ramchandran, V K and M Swaminathan (2002): ‘Rural Banking and Landless Labour Households: Institutional Reforms and Rural Credit Market in India’, Journal of Agrarian Change, Vol 2, No 4.
Rutherford, S (2006): ‘Grameen II: The First Five-Year 2001-2005: A ‘Grounded’ View of Grameen’s New Initiative’, written for MicroSave with Md Maniruzzaman, S K Sinha and Acnabin and Co, Dhaka, Bangladesh.
Sebstad, J and M Cohen (2000): Microfinance, Risk Management and Poverty, US Agency for International Development and World Bank, Washington DC.
Yunus, M (2002): ‘Grameen Bank II: Designed to Open New Possibilities’, http.//www.grameen-info. org/bank/bank2.html.
Zaman, H (1997): ‘Microcredit Programmes: Who Participates and What Does It Matter’? in G D Wood and I A Sharif (eds), Who Needs Credit? Poverty in Bangladesh, Zed Books, London.
Zohir, S (2004): ‘NGO Sector in Bangladesh: An Overview’, Economic & Political Weekly, Vol 39, No 36, September.
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