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April - May 2007
Understanding Microfinance in India
Microfinance took the limelight in 2006 when Bangladeshi economist, Dr. Muhammad Yunus won the Nobel Peace Prize. India is a vast land of trial and error when it comes to poverty alleviation and she too is no stranger to this latest development phenomenon.
In recent years, over 15 million families in Bangladesh have benefited from the small credit loans, micro-savings and micro-insurance known as microfinance. Since its launch in 1976, Yunus’ Grameen Bank has secured a 98% loan recovery rate and 90% of its borrowers are poor, landless women. Thus it is only natural that neighboring India should try and adopt a similar strategy by providing banking facilities to the poor. At present India has the highest number of microfinance institutions (MFI) based on the Grameen model outside of Bangladesh.
India however, is not one to follow blindly. She has launched her own unique genre of microfinance that is widely referred to as the self help group (SHG) –bank linkage model. This approach lends money to groups without collateral aid. Over half a million SHGs are now linked to banks. Looking at the wider picture though, this figure remains too small to make a difference to India’s aggregate poverty levels. 87% of Indians cannot access credit from formal sources whilst 400 million live below the poverty line. At present, just under a quarter or 75 million households are beneficiaries of microfinance.
That said, the microfinance boom is picking up full force and South Asia is now home to over 45% of microfinance users worldwide. The success of SEWA, SHARE and Basix in India support the optimism of the World Bank when it hailed South Asia the "cradle of microfinance". SHARE alone reaches 900,000 beneficiaries.
Essentially the Indian model involves the SHG as the basic unit made up of usually five to 20 people (average 14) who pool their savings as a group (usually starting with monthly deposits of 10 to 20 rupees) and link up to a bank. The value of this approach lies in its participatory nature. Peer pressure encourages dialogue on economic affairs and members monitor themselves and each other to ensure timely and efficient repayments. The use of non governmental organisations (NGOs) as financial intermediaries between the SHG and bank (as is common in India) allows for flexibility. Yet NGOs are often criticised for lacking the understandings and stability of a financial institution.
So how does the SHG model vary from the Grameen approach? Undoubtedly, Yunus has created a simple yet highly effective model. Grameen however, is entire credit focused. The SHG model incorporates empowering features crucial to social development. The decentralised nature of the SHG model helps to achieve this whilst balancing the financial priorities of growth with socially equitable goals.
The microfinance logic is clear. Lack of stable income force the poor into the claws of local money lenders who charge extortionate interest rates and formal financial institutions cannot cater for such vulnerable households. Therefore small loans are required to assist the poor. Microfinance however receives its fair share of criticism from aid and development agencies as well academics.
Common criticisms include the need for microfinance to become a national priority in the run up 2015 in order to exceed the millennium development goals. Formalising the sector would better equip microfinance to deal with fundamental structural problems facing India and its economy.
The microfinance "plus" services need to be better enhanced. Loans remain inflexible and therefore suppress innovation and enterprise at local level. Regulatory barriers in India mean that savings and insurance services to the poor are also restricted.
Equally, continued and more advanced data collection on client level impact together with exit reviews to assess why women leave SHGs are also needed. Delhi based, Sa-Dhan (the association of Indian MFIs) are attempting to address this gap through diverse research activities.
Most importantly, it is fundamental to recognise that whilst credit can expand the economic space, it alone cannot expand the mental space of both women and men without sufficient education and skills. How to convert microfinance into micro enterprise (including micro consulting, saving and business planning) whilst overcoming patriarchy and illiteracy amongst other rogues is central to its development and success. Microfinance should lead the way to micro savings and micro enterprise if it is to really make its mark in India.
Better relationships need to be established between all stakeholders and governments by enhancing communications and reducing the potential for conflict. Likewise, the informal sector should develop its rapport with formal sector equivalents. The two have a great deal to learn from each other when it comes to poverty reduction (the informal’s adaptability compared to the formal’s wider access to resources). Working together allows for deeper understandings of ground realities and state level capacities.
In progressing, microfinance must not exclude the poorest of the poor from its beneficiaries. How can microfinance for example benefit the disabled and the elderly? Should the responsibility of caring for such groups fall on the shoulders of the government? The microfinance debate is indeed rich, as is its future.
The microfinance promise in India has every chance of being fulfilled. Yet scale remains an issue as the numbers of potential beneficiaries requiring access to credit at market rates is vast. These beneficiaries are also located beyond the south of India where three quarters of current microfinance activity occurs. How to convert credit into skills and savings into enterprise remains the fundamental challenge for Indian microfinance, but also for the entire concept of banking for the poor.
Finally, in a country as socially diverse as India, the need for capacity building and gender sensitive entry is crucial. Whilst market orientated solutions to development are essential, focusing too much on the financial and less so on the social is a risky and dangerous compromise which India cannot afford to make if gender and wealth gaps are to be reduced.
A Beginner’s Guide to Microfinance
1. What is microfinance?
Microfinance is the provision of extremely small loans (micro credit) to the poor that encourage financially sustainable activities at micro enterprise level. It also includes a range of financial services such as savings and insurance helping the poor to have access to diverse financial products.
2. So is microfinance the same as micro credit?
Micro credit is the actual loan offered to an individual, collateral or group by a bank or other financial institution. Microfinance is a range of diverse financial products offered in addition to loans such as savings, insurance and transfer services.
3. I have heard a lot about Self Help Groups (SHGS) in India but do not understand what they are.
A self help group is a group borrowing system with five to 20 members who as a group save about 10 to 50 rupees per month. The scale to which this is carried out is unique to India. Members usually meet at least once a month and their activity is often coordinated through an NGO. The self help groups come together to develop skills and promote livelihoods. As a group, the members are subject to join liability and decide how to allocate the loan together. In this way the model promotes participation and empowerment, whilst reducing vulnerability to external shock by borrowing in a group.
4 How does Microfinance help the poor?
Microfinance promotes the idea that economic empowerment can enable the poor, especially women, to become agents of change. The extent to which this can be done is highly debated due to poverty being a multidimensional concept. By borrowing in a self help group, as is popular in India, group empowerment is promoted. Income generating activity promotes household income, family health and education for all family members including children whilst bringing the woman into the public realm helping to build her confidence.
5. Where can I find out more?
Microfinance Gateway www.microfinancegateway.org
(Krupa Thakrar graduated from Warwick Warwick in French and International Relations followed by MSc. from LSE in International Development Management. Professionally, she focuses on social development in South Asia as well as gender and child rights. She is a keen musician and holds an Associate Diploma from the Victoria College of Music, London.