Background

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,

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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

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

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

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

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)

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 www.indiastat.com and Rajasthan, to see whether there are

Poverty Ratio from Planning Commission, Government of India.

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

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

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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

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.

Conclusions

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

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

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-

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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.

References

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