Micro credit in India: an overview

Mohanan Sankaran
Faculty of Economics and Business Administration,
Department of Business Sciences,
Universidad Catolica Del Northe, Antofagasta, Chile
Fax: 56 55 355878 E-mail: [email protected]
Abstract: The present paper reviews origin, development and growth of the
micro credit programme in India. National Bank for Agriculture and Rural
Development in India launched its pilot phase of the Self Help Group Bank
Linkage programme in 1992. Self Help Groups have been recognised by the
policy makers as the effective conduits for accomplishing the distributional
objectives of monetary policy. The SHG-bank linkage programme has emerged
as the largest micro credit programme in the world. The programme has made
rapid progress since its inception in 1992. The progress under the SHG-Bank
linkage programme has been quite impressive. Nearly 16.7 million families
were assisted through this programme and 1079091 Self Help Groups were
provided with bank loans. Total amounts of 867 million US$ were given to the
Self Help Groups for employment generating activities. NGOs have emerged as
effective change agents by organising, nurturing and stabilising SHGs and
affecting their linkage with banks as also by adopting other delivery
mechanisms for providing financial services directly or indirectly to the poor.
Keywords: India; micro credit; Self Help Groups.
Reference to this paper should be made as follows: Sankaran, M. (2005)
‘Micro credit in India: an overview’, World Review of Entrepreneurship,
Management and Sust. Development, Vol. 1, No. 1, pp.91–100.
Biographical notes: Dr. Mohanan Sankaran has obtained his PhD in
Commerce (Finance) from the University of Kerala, India. He is now working
as Professor in the Department of Business Sciences, Universidad Católica del
Norte, Antofagasta, Chile. He worked two years as Associate Professor in
Jimma University, Ethiopia. He has more than twenty years of teaching
experience at undergraduate and postgraduate levels. He is an approved
research guide of the University of Kerala in Commerce Faculty. He has ten
years of research guidance experience at doctorate level. He has produced four
Doctorate Degrees in Commerce. He has published fifteen research articles and
co-authored two books (Institutional Finance and Rural Development and
Industrial Relations in Public Sector).
1 Introduction
Micro credit programmes extend small loans to poor people for self-
employment projects
that generate income, allowing them to care for themselves and their families.
Micro
credit has come to be recognised and accepted as one of the new development
paradigms
for alleviating poverty through social and economic empowerment of the poor,
with
92 M. Sankaran
focus on empowering women (Puhazhendhi and Badatya, 2002). Credit is
usually
provided to groups of individuals or village organisations that use joint-liability
to
enforce loan repayment. Through group savings and loans, poor people often
increase
their economic security and well being. Over the past two decades micro credit
programs
have emerged as one of the leading strategies in the overall movement to end
poverty.
Micro credit programmes have become a major tool of development and found
to be the
only practical and most appropriate solution to alleviate poverty. Micro credit
programmes have been employed in developing countries for some years, and
their
effectiveness in the development and poverty alleviation is increasingly
acknowledged
(Krog, 2000). In many countries micro credit programmes have proved to be an
effective
tool in freeing people from poverty and have helped to increase their
participation in the
economic and political processes of society (Secretary General, United Nations,
1998).
The Asia-Pacific region is home to many micro credit institutions, and the
majority of
programs are directed at women in rural areas. Targeting women as clients of
micro
credit programs has been an effective method to ensure that the benefits of
increased
family income are directed towards the general welfare of the family, and
particularly the
children.
The objective of the present article is to make a review of the origin,
development and
growth of micro credit programme in India. For the purpose of this article, data
published
by National Bank for Agriculture and Rural Development in India have been
used. Data
relating to number of Self-help groups linked with banks, amount of bank loan
provided to clients, models of Self-help groups, number of participating banks,
number of
non-governmental organisations (NGOs) participating in the programme,
number
of families assisted under the programme have been used and analysed. In the
case of
number of self-help groups linked with banks and bank loan provided to them
data for a
period from 1992–1993 to 2003–2004 have been collected and analysed and in
the case
of other variables data for a period of four years starting from 2001 have been
used.
2 Origin of micro credit system in India
Despite having a wide network of rural bank branches in India which
implemented
specific poverty alleviation programmes that sought creation of self-
employment
opportunities through bank credit for almost two decades, a very large number
of the
poorest of the poor continued to remain outside the fold of the formal banking
system
(National Bank for Agriculture and Rural Development, 1999). Therefore a
need was felt
for alternative policies, systems and procedures, savings and loan products,
other
complementary services, and new delivery mechanisms, which would fulfil the
requirements of the poorest, especially of the women members of such
households. As a
result National Bank for Agriculture and Rural Development (NABARD) in
India
launched its pilot phase of the Self Help Group Bank Linkage programme in
February 1992. In India as also in other countries, Self Help Groups have been
recognised by the policy makers as the effective conduits for accomplishing the
distributional objectives of monetary policy. Group model as developed by
Bangladesh
Grameen Bank is by and large followed in most of the South East Asian
Countries. India
has adopted somewhat a similar model to Bangladesh Grameen model
(Vasanthakumari
and Sharma, 2002). The SHG-informal thrift and credit groups of poor came to
be
recognised as bank clients under the pilot phase. The strategy involved forming
small,
Micro credit in India: an overview 93
cohesive and participative groups of the poor, encouraging them to pool their
thrift
regularly and using the pooled thrift to make small interest bearing loans to
members, and
in the process learning the nuances of financial discipline. Subsequently, bank
credit also
becomes available to the Group, to augment its resources for lending to its
members.
It needs to be emphasised that NABARD sees the promotion and bank linking
of SHGs
not as a credit programme but as part of an overall arrangement for providing
financial
services to the poor in a sustainable manner and also an empowerment process
for the
members of these SHGs. The NABARD led Pilot Project commenced with the
support of
the Central Bank of the country, i.e., Reserve Bank of India, from 1992 onwards
aimed at
promoting and financing 500 SHGs across the entire country, the SHG- bank
linkage
strategy has come a long way. The strategy includes financing of SHGs
promoted by
external facilitators like NGOs, bankers, socially spirited individuals and
government
agencies, as also promotion of SHGs by banks themselves and financing SHGs
directly
by banks or indirectly where NGOs and similar organisations act as financial
intermediaries as well. Through the Self-help bank linkage programme the
Reserve bank
of India and National Bank for Agricultural and Rural Development Bank
aimed to
improve relations existing between the poor and bankers with the social
intermediation of
NGOs (Bansal, 2003).
3 Formation, nurturing and functioning of self help groups in India
Self-help groups form the basic constituent unit of microfinance movement in
India
(Chakrabarti, 2004). Experiments in various developing countries proved that
poor can be
helped by organising them into small self help groups. To touch the core of
poverty,
women are the best agents. Hence women self help group have become the ray
of hope to
the developmental practitioners. Self-Help Group (SHG) is a small voluntary
association
of poor people, preferably from the same socio-economic background. They
come
together for the purpose of solving their common problems through self-help
and mutual
help. The SHG promotes small savings among its members. The savings are
kept with a
bank. This common fund is in the name of the SHG. Usually, the number of
members in
one SHG does not exceed 20.
The SHGs comprise very poor people who do not have access to formal
financial
institutions. They act as the forum for the members to provide space and support
to each
other. It also enables the members to learn and cooperate and work in a group
environment. The SHGs provide savings mechanism, which suits the needs of
the
members. It also provides a cost effective delivery mechanism for small credit
to its
members. The SHGs significantly contribute to the empowerment of poor
women. Often
the women belonging to neighbourhood communities, sharing thoughts and
problems
with one other form into SHG. Members of SHGs save equal amounts as
decided in their
groups. Once the like minded members come together, they open an account in
either
bank or post office in the home of the group. The group authorises any of the
members
(elected as group leaders) to operate the group account. Thrift is a good entry
point and a
binding force for poor women. They view their future in their savings, the
savings which
meet their immediate needs, and also provide security for their old age. The
meager
savings of an individual may not be sufficient to meet the needs but all the
savings of the
groups members put together can be of great help to one or two members of the
group.
In any best SHG, the credit operations also start at the end of first month itself
where in
94 M. Sankaran
the members’ pool together their savings and sanction loan to a needy member.
Every
group will have its own set of rules and regulations like amount of savings by
members,
interest rate on savings, basis on which loans are to be prioritised, interest on
loans and
penal interest on defaulted amount. Every group decides frequency of group
meeting,
when and where to hold meeting. Best SHGs meet once in a week, but normally
any SHG
should meet at least once in a month. The frequency of meetings strengthens the
group
processes, higher the frequency, the better it is. Best groups exert their
discipline through
fining the absentee members and late coming members. The thrift as well as
credit
operations take place in the group meetings. The meetings have specific agenda
and the
discussions go on as per the agenda. A poor women coming out of her house
and
attending meeting as a stake holder itself is a step towards empowerment. In the
meetings
various issues are discussed at length and members decide who should be given
the loan.
The discussions take place in a democratic and transparent manner. In best
SHGs, each
meeting is presided by members in rotation and this helps to impart leadership
qualities to
all the members. Accounts are written in the meeting itself. The standard
accounts include attendance register, savings and loan ledger, cash book,
individual pass
books. The accounts of are written either by members themselves or by a person
employed by the SHG. Best practices in SHG are being evolved continuously
based on
experiences.
4 Training and capacity building of self-help groups
It is not sufficient to promote SHG but the group has to be sustained. Constant
inputs of
training and capacity building are required to sustain SHGs. District Rural
Development
Agencies (DRDA) are striving towards this goal by constantly organising
training
programmes. Apart from DRDAs, NGOs and NABARD are actively associated
with the
training and capacity building of SHGs. It has been of general observation that
any group
at least requires four training days in a year. The groups are to be intensively
given inputs
in group management, best practices in group management, conduct of group
meetings,
accounts and book keeping and mode of accessing to government schemes and
bank
finance. Once the SHG completes six months and members, continuously
practicing
thrift, rotating the corpus generated, then it becomes eligible to get bank loan.
The loan
amount ranges from two times of savings amount to four times.
5 Number of self-help groups linked with banks and the amount of loan
disbursed
Growth in the number of self-help groups and the amount of loan disbursed to
them is the
two important indicators to judge the success of the programme. In India the
SHG-bank
linkage programme has emerged as the largest micro credit programme in the
world
(National Bank for Agriculture and Rural development, 2004). The pilot project
started
in 1992 has turned into a national movement, linking more than one million
SHGs with
bank credit and leading to the socio-economic empowerment of women.
It is also important that the bank loans enable the group members to
undertake income generating activities which leads to sustainable development.
The number of Self-help group linked with banks increased from 255 in 1992–
1993 to
Micro credit in India: an overview 95
1079091 in 2003–2004 registering a growth of nearly 4,231 times higher than
the base
year (Table 1). The amount of bank loan disbursed reveals a staggering growth.
It increased from 0.10 million US$ in 1992–1993 to 867 million US$ in 2003–
2004,
8,670 times higher than the base year. The increasing number in linking self-
help groups
with banks and the loan provided by the banks reveal the success and
acceptance of
micro credit programme among the poor people and the sustainability of the
programme.
6 Models of self-help group-bank linkage in India
In India broadly three different credit lending models have emerged under the
micro
credit programme. In the first model, the bank itself acts as a Self Help Group
Promoting
Institutions (SHPI). It takes initiatives in forming the groups, nurtures them over
a period
of time and then provides credit to them after satisfying itself about their
maturity to
absorb credit. In the second model, groups are formed by NGOs or by
government
agencies. The groups are nurtured and trained by these agencies. The bank then
provides
credit directly to the SHGs after observing their operations and maturity to
absorb credit.
While the bank provides loans to the groups directly, the facilitating agencies
continue
their interactions with the SHGs. Most linkage experiences begin with this
model with
NGOs playing a major role. This model has also been popular and more
acceptable to
banks, as some of the difficult functions of social dynamics are externalised. In
the third
model the NGOs act as both facilitators and microfinance intermediaries. First,
they
promote the groups, nurture and train them and then approach banks for bulk
loans for
lending to the SHGs. Table 2 shows the number and percentage of self-help
groups under
the three models. The table reveals that the SHGs formed by formal agencies
and NGOs
but directly financed by banks is more acceptable to all related with micro credit
96 M. Sankaran
programmes. Of the total Self-help groups linked to banks above 70% belong to
this
group. The total number of such self-help groups increased from 200507 in
2000–2001 to
776948 in 2003–2004. But there is not much difference in percentages to the
total
number of self-help groups.
7 Participating banks in micro credit programmes in India
The role of financial institutions especially banks in the developmental
programmes
which aims at improving the well being of the people are important. The
success of the
programme to a large extent depends upon the availability of funds. The
formation and
nurturing of self-help groups and the confidence created among them will
sustain only if
they are provided with adequate funds for the chosen economic activities. Table
3 shows
the different banks participating in the programme. The table reveals that the
total
number of participating banks in the programme also increased substantially
during the
period under review. It increased from 314 to 560 (78.34% increase than the
base year).
Bank wise classification reveals that the number of commercial banks
participating in the
programme is almost same in all the four years under review. But it should be
noted that
now commercial banks are ready to support and grant loans to the poor sections
of the
society.
Micro credit in India: an overview 97
8 Non-governmental organisations and micro credit programme
The role and participation of non-governmental organisations in micro credit
programme
in India needs special focus. Year after year the number of non-governmental
organisation participating in the programme shows an increasing trend. The
non-governmental organisations have been playing a vital role in the country
over the last
quarter of the century in the sphere of social development (Mohanan, 2002).
NGOs are
playing the most prominent role in group formation and nurturing prior to
establishing
linkages with banks (Kropp and Suran, 2002). The micro credit movement in
India
encouraged NGOs to undertake not only social engineering but also financial
intermediation (Rao, 2004). As the development actors they have passed
through
different stages taking up challenges from time to time. With the launching of
the micro
credit system, the NGOs also have come to the forefront of the system.
Grassroot level
organisations usually have good community contacts, knowledge of local
languages,
patience and skill to organise groups of people (Wilson, 2002). Table 4 shows
the number
of NGOs participating in the programme for a period from 2001 to 2004. The
table
reveals that the number of Non-governmental organisations participating in the
programme is increasing. It increased from 1030 in 2000–2001 to 3024 in
2003–2004
with growth of 193.59% when it is compared with the base year. Year–wise
analysis reveals that the largest increase in growth in the number of NGOs can
be seen in
2001–2002. In that year it increased to 2155 from 1030 in 2000–2001 with a
growth of
109.22%. The least growth in the number of NGOs is noted in 2003–2004. In
that year
98 M. Sankaran
the number increased from 2800–3024 registering an increase of 8%. The large
number
of NGOs participating in the programme shows their social commitment and
experience
in the field of social work and ability to organise people.
9 Families assisted through micro credit programme in India
The micro credit programmes essentially aims at giving financial assistance to
the weaker
sections of the society. The loans are provided to start income generating
activities and
thereby uplifting the poor from economic and social backwardness. Number of
families
assisted through the programme is an important indicator to assess the progress
and
success of the programme. There is remarkable growth in the number of
families assisted
through the programme. A recent impact study (Puhazhendhi and Badatya,
2002) has
observed that there is deepening and widening of institutional credit among the
rural poor
people. Availing loans from money lenders and other informal sources with
higher
interest have been significantly reduced due to SHGs intervention and general
well being
of the beneficiaries have been improved. Table 5 shows the number of families
assisted
through the micro credit programme in India. The table reveals that there is
amazing
increase in the number of families assisted through the programme. The number
of
families assisted increased from 4.5 million from 2000–2001 to 16.7 million in
2003–2004 showing an increase of 271% during the period under review. The
highest
increase is noted in 2002–2003 (73.33%) and the lowest is in 2003–
2004(43.97%). It can
be concluded from the figures that the micro credit programme has become a
movement
of the people.
10 Conclusion
Micro credit programme has become an important tool to eradicate poverty in
India. It is
gathering momentum to become a major force in India. The self-help group
(SHG) model
with bank lending to groups of poor women without collateral has become an
accepted
part of rural finance. In India forming and nurturing small, homogeneous and
participatory self-help groups (SHGs) of the poor has today emerged as a potent
tool for
human development. This process enables the poor, especially the women from
the poor
households, to collectively identify and analyse the problems they face in the
perspective
of their social and economic environment. It helps them to pool their meager
resources,
human and financial, and prioritise the use of resources for solving their own
problems.
SHG-Bank Linkage Programme has proved to be the major supplementary
credit delivery
system with wide acceptance by banks, NGOs and various government
departments.
The programme has made rapid progress since its inception in 1992. The
progress
under the SHG-Bank linkage programme has been quite impressive. Nearly
16.7 million
families were assisted through this programme and 1079091 Self Help Groups
were
provided with bank loan. Total amounts of 867 million US$ were given to the
Self Help
Groups for employment generating activities. Broadly three different models
have
emerged under the programme (SHGs formed and financed by banks, SHGs
formed by
formal agencies and NGOs but directly financed by banks, SHGs financed by
banks
through NGOs). Self Help Groups formed and nurtured by formal agencies and
NGOs
and financed by banks is the most popular form in India (above 70%). 560
banks are
participating in the programme (commercial banks-48; regional rural banks-
196; and
cooperative banks-316). NGOs have emerged as effective change agents by
organising,
nurturing and stabilising SHGs and affecting their linkage with banks as also by
adopting
other delivery mechanisms for providing financial services directly or indirectly
to the
poor. As on March 2004 a total of 3024 NGOs are participating in the
programme.
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