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SGSY: Need for a Paradigm Shift

An appraisal of the report of the central government committee set up to look into credit-related issues under the Swarnjayanti Gram Swarozgar Yojana.

COMMENTARY

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SGSY: Need for a Paradigm Shift

Rajaram Dasgupta

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and causes for the inadequate flow of credit, and related issues.

The committee analysed data on the SGSY and SHGs, and visited a few places to understand the functioning of different

An appraisal of the report of the central government committee set up to look into credit-related issues under the Swarnjayanti Gram Swarozgar Yojana.

Rajaram Dasgupta (Dasgupta@nibmindia.org) is with the National Institute of Bank Management, Pune.

Economic & Political Weekly

EPW
october 24, 2009

T
he Ministry of Rural Development set up a committee on credit-related issues under the Swarnjayanti Gram Swarozgar Yojana (SGSY) under the chairmanship of R Radhakrishna (henceforth the RRC) in April 2008. Its terms of reference were to review the status of credit flow to members of selfhelp groups (SHGs) and individual beneficiaries under the SGSY since its inception, examine the policy environment and guidelines governing credit under the SGSY, analyse ambiguities, constraints

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systems working on social mobilisation and providing microfinance. Armed with the necessary information, it arrived at some conclusions and offered recommendations to make the programme work more efficiently.

Report

The committee observed that only 71% of the credit target had been achieved; 84% of government funds had been utilised, and against the allocation of 10% and 20% for training and infrastructure, only 6% and 16% had been made use of. Two-thirds

COMMENTARY

of the allocated funds had been used for subsidies. The allocation of central funds was more in the southern region than in the eastern when compared on the basis of the poor in either area. The credit port folio was still dominated by the primary sector and milch cattle. A National Institute of Bank Management-National Institute of Public Finance and Policy (NIBM-NIPFP 2007; henceforth the NN) study, showed the same scenario and it observed that credit disbursement gained pace only in the fourth quarter of the year, motivated by the aim of fulfilling the target. Governments not releasing funds and banks’ indifference were the reasons for the tardiness.

The RRC was highly impressed with the functioning of the SHG Federation in Andhra Pradesh, the Kudambasree model in Kerala, the Village Development Board (VDB) in Nagaland, a financial institution Marup in Manipur, a committee of village elders (Namghar) extending loans in Assam, and the cluster approach to SHGs by the State Institute of Rural Development (SIRD) there. The RRC, however, does not provide any information on performance except growth figures. One needs to know the age of these institutions, their benefits in terms of income and employment generation, and their repayment level to reach an informed conclusion about their viability and sustainability. In the case of the VDB, however, a 90% rate of repayment has been reported. Kudambasree’s network mainly concerns itself with non-credit activities while the SGSY is a credit-based scheme.

The RRC has, however, made four very pertinent observations. (i) Even in Kerala and Andhra Pradesh only about one-fourth of the SHGs could engage themselves in self-employment activities, implying a flaw in the notion of creating credit-led, self-employment programmes; (ii) the cluster approach has generally been a nonstarter; (iii) the rate of attrition among Grade I and II SHGs indicates that a large number of groups fizzle out mid-way after availing themselves of the revolving fund, thus implying the foundation of the SHG programme is very weak; and (iv) SHGs that have cleared the Grade II stage seem to wait for long periods before availing themselves of the loan and subsidy. The NN also found that 34% of the sample SGSY-SHGs was “duping groups”.

The RRC then identifies two major constraints. One, weaknesses in the delivery system, and the failure of credit to reach the poor combined with the lack of public intervention to promote creditworthy swarozgaris (self-employed people). Two, a low level of investment because of the low gains made by swarozgaris catering for local markets. The NN observed that whereas the most important feature of SHG lending was supposed to be the microfinance approach, branches of banks were found to be following the traditional lending method.

The RRC outlines a two-pronged strategy for tackling the basic ills of poverty. It involves improving the present blueprint of the SGSY operation and a paradigm shift from “self-employment” to “wage employment too”. The committee also suggests opening more rural branches, paying a uniform interest rate of 7% per annum with the government subsidising the bank for the shortfall, and delivering the entire investment amount, including loan and subsidy, upfront, with only the loan component attracting interest. It also favours delivering the capital subsidy to the borrower in half-yearly instalments over the entire loan period.

In addition the RRC recommends setting up a National Rural Livelihood Mission (NRLM), a Rural Livelihood Fund (RLF), and a hybrid model of the SGSY for generating both wage and self-employment.

The RRC points out the NRLM must have the following objectives in mind. (a) Promoting state-level autonomous umbrella agencies by the state governments for providing institutional support to povertyelimination programmes. (b) Providing professional and technical support to the state agencies in disseminating pro-poor technologies. (c) Studying the best practices across the country and supporting their adoption elsewhere. (d) Developing suitable modules of training. (e) Analysing the impact of macro-economic policies on the poor. (f) Periodically updating databanks and information systems.

It suggests creating the RLF with an initial corpus of Rs 1,000 crore for providing financial assistance to the states for supporting state and district-level organisations working on poverty reduction. The fund will be available to states which come up with comprehensive, time-bound poverty-reduction plans based on social mobilisation and community empowerment.

Comments

In these days of information technology and financial reform, taking banking services to the doorsteps of the poor is needed rather than more rural branches. The RRC discusses some of the options.

On the issue of interest rates, it says the poor should not be burdened by usurious rates of interest. This, however, does not mean they should be only asked to pay a charitable rate of interest. They require access to hassle-free, collateral-less and demand-based credit at appropriate times. Government subsidies may compensate the banks for their loss, but it will definitely distort the market. SHGs will then be formed to avail themselves of cheap credit while they sell at market prices. The Raghuram G Rajan Committee (Planning Commission 2009) comments that the difference often goes towards hidden fees and bribes, which diminishes the incentive to repay. The very poor, who have the least ability to pay these charges, are excluded. The interest rate needs to be tackled not through administrative fiat but a competitive market mechanism. The SGSY borrowers are not the only poor; there are so many among the disadvantaged who need access to affordable credit. If the SHG is considered to be the main vehicle for SGSY

Corrigendum

The email address in the advertisement for the post of Professor (IDFC Chair Professor in Urban Economics and Finance), published in EPW (3 October 2009, p 27) should be read as

jmpandit@nipfp.org.in

october 24, 2009 vol xliv no 43

EPW
Economic & Political Weekly

COMMENTARY

disbursement, the interest rate to members should be left to the group. For them, the interest will be the cost of the fund in the short run but forced savings in the long run.

The release of subsidies at half-yearly intervals is a good idea. It, however, should be linked with the level of repayment to take care of the lender’s concern, and with project performance to take care of the SGSY’s objective. What needs to be mentioned here is that the SGSY directs the release of the entire investment amount upfront but charges interest only on the loan component. But the field experience of the NN did not match this. Bank branches maintained that the subsidy was credited only when it was released by the DRDA. It was also found that they charge interest on the total investment amount; although in several cases the interest was reversed. The headquarters should thoroughly brief auditors to take care of these operational details. Computer software could also be useful in matters such as this.

Forming federations plays an important role in the SHG movement. They enable scaling up, the withdrawal of NGOs, taking up a variety of issues, and collective bargaining. Most importantly, they bring in the principle of subsidiaries, that is, they help individual SHGs overcome the constraints faced by them in undertaking certain tasks (Reddy 2008). Most of the successful federations have been formed after the maturation of SHGs when they felt the need to do so. But unfortunately there has been a mushrooming of federations, especially in Andhra Pradesh. The average performance level of 83 federations there, evaluated by Reddy, is B minus. With regard to asset quality, efficiency and profitability, the grades are C and C+. Obviously, plenty needs to be done with regard to governance, viability, portfolio quality, microfinance and information systems (MIS) if SHGs are to be nurtured.

If the SGSY shows a better performance in terms of lending and repayment in southern India, it is not because of its federal structure but because of the maturing of SHGs before the commencement of the programme. SHGs in large numbers had already taken strong root in the region, internalising the principles of credit management. There was no problem in selecting the right SHG. But elsewhere,

Economic & Political Weekly

EPW
october 24, 2009

where SHGs had not even taken off, the target approach and seductive appeal of subsidies prompted the growth of fly-bynight outfits. If politicians are really interested in the success of the SGSY and improving the lives of the poor in unsuccessful states, they should adopt an apolitical approach, which could very well yield long-term political gains. More effectively, there could be a moratorium on the SGSY for a few years, and all resources could be directed towards forming good, creditworthy SHGs and helping them mature. The targets of all these years could be accumulated and adjusted in the next few years. Federations imposed from the top are a blunder; they have to be built bottom up.

Upgrading the lead district manager’s office is very necessary. The office was conceived as a scale III posting, where the officer could command the respect of bank managers and the bureaucracy. Banks have unfortunately diluted this position. However, it is doubtful whether in the absence of any authority over the bank managers, and the de facto supremacy of district authorities, whether even an upgraded LDM will make much change.

NGOs are already invitees to block and district-level coordination committee meetings. But all these meetings are dominated by a single subject: why has the credit target not been achieved by the bank managers? There are no discussions on the quality of SHGs, the repayment performance, the functioning of the line departments, productivity enhancement, marketing problems, and finally, employment and income generation. There is the need for a paradigm shift from a financial to an economic target; from quantity to quality. In the training system, there is the need for much improvement in the knowledge all government functionaries have about the functioning of SHGs.

The NRLM is definitely a very good idea. The government should concentrate on capital formation, both human and physical, rather than taking part in banking operations. It can take up a series of analytical studies on providing incentives to banks and government institutions. The disbursement of RLF money should be based not only on an ex ante plan but also on ex post performance. The NRLM may assist in this process.

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However, the idea of state-level agencies under the chairmanship of chief ministers does not seem very appealing. Social mobilisation does not seem to be any government’s cup of tea. Neither should it be politicised. An autonomous institution with professional staff and leadership may deliver the goods better, provided accountability is properly integrated in the constitution of such an agency. The Mahila Arthik Vikas Mahamandal (MAVIM), set up as a company by the government of Maharashtra, is doing a reasonably good job.

Skill development for wage employment is perhaps the most crucial recommendation of this report. However, much thought needs to be devoted to evolving the right training method. It should mostly focus on “learning by doing” rather than “classroom learning”. A range of entrepreneurs in the fields of construction, textiles, leather, gems and jewellery, and so on will have to be accommodated and candidates will need to work as apprentices.

Beyond the Report

A better approach to eliminate poverty, however, would be to make the environment conducive to increased flow of credit to the poor rather than directing it, leaving micro-level credit management to financial institutions, and transferring the subsidy from the individual level to the community level for human capital formation of the poor and developing physical infrastructure useful to them. The involvement of the government must be confined to only macro affairs such as policy formulation, framing incentive mechanisms for both banks and the bureaucracy to make poverty reduction a priority, and capital formation.

References

Department of Rural Development (2009): “Report of the Committee on Credit Related Issues under SGSY” (Delhi: Ministry of Rural Development, Government of India), February.

NIBM-NIPFP (2007): “Report on Action Research Project on Gendering Microfinance under SGSY” (Pune: National Institute of Bank Management and Delh: National Institute of Public Finance and Policy), January.

Planning Commission, Government of India (2009): “Broadening Access to Finance” (Chapter 3) in A Hundred Small Steps: Report of the Committee on Financial Sector Reforms (New Delhi: Sage).

Reddy, C S (2008): “Emerging SHG Federations and Challenges” in Microfinance in India (ed.), K G Karmakar (Delhi: Sage).

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