The banks participating in the linkage programme were provided cent percent refinance at the concessional interest rate of 6.5 per cent per annum
This was further facilitated by the RBI circular issued to banks in February 2000 for mainstreaming the micro credit and reckoning it as priority sector lending.
The credit-linking programme covered 412 Districts in 27 States and Union Territories. A notable feature is that 90 per cent of the groups formed were exclusively of women members. The repayment of bank loans issued to the SHGs was above 95 per cent.
Cumulatively till March 31, 2002, the bank loans disbursed to the SHGs aggregated US $ 215.20 million while NABARD's refinance availed of by the banks aggregated US $ 166.90 million forming about 77.6 per cent of the total disbursements. Further, the bank loans disbursed to SHGs increased to US $ 244.11 million as on September 9, 2002. According to the Union Budget for 2002-03, the target of 0.1 million additional self-helf groups during the current year is expected to be achieved taking the total so far to more than 0.35 million covering more than 7.0 million families, making it the largest micro credit programme in the world. As the scheme of micro-credit through SHGs is progressing well, the target for the same has been raised to 0.13 million for 2002-03.
Strengths and issues of concern of Indian Micro Finance Sector
(A) Strengths of Indian Micro Finance Sector:
India is the largest democracy in the world. Unity in diversity is the greatest strength of India. Despite vast differences in terms of language, caste, religion, etc., driven by the co-operative spirit, people are interwoven with common affiliations and social obligations. The factors like personal rapport and proximity and like-mindedness have added to the spread of the programme.
Many SHGs have come into existence in India spontaneously and have exhibited tremendous democratic functioning and group dynamism. Their adroitness in assessing and appraising the credit needs of members, their business like functioning and efficiency in recycling the funds often with repayment rates nearing cent percent are additional positive features. Some of the best practices followed under micro finance sector in India include inter alia: 1) broad based definition of micro finance 2) adoption of multi model approach 3) greater freedom to micro finance institutions 4) creation of Micro Finance Development Fund 5) the use of computers in micro finance and 6) certain other important best practices. These aspects have been discussed in greater details in the following paragraphs.
1). Broad-based Definition
In India definition of Micro-finance is unique in the sense that it has the potential to offer an array of credit and savings products as well as other finance services, which are required by the poor. Micro-finance in India is defined as " Provision of thrift credit and other financial services and products of very small amount mainly to the poor in rural and urban areas for enabling them to reach their income level and thereby improving the standard of living". As a result of this broad-based definition, micro-finance institutions are in a better leverage to help the poor.
2). Multi Agency approach
It has been decided to involve various agencies in mainstreaming and upscaling of micro-finance. All the major credit institutions viz., commercial banks, co-operative banks, regional rural banks have been involved in micro finance programme. In all, three distinct linkage models are being followed. Under Model-I, banks themselves take up the work of forming and nurturing the groups, opening their saving accounts and providing them bank loans. Up to March 2002, 16 per cent of the total number of SHGs financed were from this category. Under Model-II, SHGs are formed by NGOs and formal agencies but are directly financed by banks. This model continues to have the major share, with 75 per cent of SHGs financed up to March 2002 falling under this category. Under Model-III, SHGs are financed by banks using NGOs and other agencies as financial intermediaries. In areas where formal banking system faces constraints, the NGOs are encouraged to approach suitable bank for bulk loan assistance. The share of cumulative number of SHGs linked under this model up to end-March 2002, continued to be relatively small at 9 per cent. The linkage programme is gaining a momentum.
3). Establishment of Micro Finance Development Fund:
Micro Finance Development Fund (MFDF) in NABARD with a start up contribution of US $ 8.76 million from RBI and US $ 8.76 million from NABARD was set up in 2000-01. Further, US $ 4.38 million was contributed to the fund by 11 commercial banks. As at end-March 2002, the Fund aggregated to US $ 21.33 million. Under this fund, NABARD, banks and other institutions to provide start up funds to micro finance institutions and infrastructural support for training system, arrangement and data building under micro finance
4). Greater Freedom to the Micro Finance Institutions:
i) RBI has allowed banks to formulate their own models or choose any conduit/ intermediary for extending micro credit. Banks are allowed to choose suitable branch/pocket/ area where micro credit programmes can be implemented.
ii) Banks are permitted to prescribe their own lending norms keeping in view the ground realities.
iii) Banks are also allowed to devise appropriate loan and saving products and related terms and conditions including the size of loan, unit cost, unit size, maturity period, grace period, margins and purpose of borrowing including for housing and shelter needs.
iv) Interest rates on bank's loans given to micro finance institutions are completely deregulated.
v) Bank lending under micro finance is treated as part of priority sector targets as well as under sub-target of lending to the weaker sections.
vi) The micro finance institutions registered as not for profit NBFCs have been exempted from registration and prudential requirements. RBI has permitted such NBFCs to provide credit not exceeding US $ 0.001 million for business activity and US $ 0.003 million for meeting the cost of a dwelling unit to the poor.
vii) Unsecured advances given by banks to SHGs against group guarantees be excluded for the purpose of computation of the prudential norms on unsecured guarantees and advances until further notice.
This apart, the Government of India has also allowed foreign direct investment in micro credit to encourage foreign participation in various micro finance projects.
5). Computerisation of Micro finance Operations
Generally, the facilitator tracks member accounts at the village level with hand written sheets and passbooks. A good measure of time is devoted to manually updating the records and little time is spent on interface and discussions on economic and social aspects. Elsewhere in southern part of the country a micro credit institution known as Swayam Krishi Sangam (SKS) has introduced Smart Card into its micro credit programme. The facilitators carry a Hand Held Computer (HHC) to the meeting. The HHC downloads information from the branch computer in the village. Each member has a smart card, which electronically holds member's information and records of transactions. During the meeting each member inserts her or his smart card in the HHC and transactions are updated both in the smart card and the HHC. At the end of each day, facilitator uploads the information from HHC to branch computer and all accounts are updated. A record along with HHC is kept in the village so that members can confirm their accounts. In this manner smart cards eliminates the need for manual record keeping, which greatly enhances time for interface.
Similarly, another micro finance institution popularly known as called SEWA Bank has adopted a specially designed software, which maintains area-wise and occupation-wise information on overdue accounts. This software has been given to field workers, which has greatly facilitated the transaction of business. Computerization has now also made available the services of a substantial part of the workforce, hitherto deployed in operational work-areas for collection purposes.
6). Upscaling the Outreach to the Urban Poor
The emphasis of micro finance programmes in most of the countries has been on rural areas. However, there has been a growing migration of rural poor in search of employment to urban areas. As a consequence, the number of poor in urban areas has multiplied. The access of urban poor to the formal banking sector is equally constrained due to lack of collaterals. Hence, there is a need to expand the outreach of micro finance to cover the urban poor. Recognising such an imperative, some of the micro finance institutions such as SEWA Bank and SRFS (Sungamitra Rural Financial Services) and also a number of NGOs have started organizing the poor into SHGs and operating on the principles of micro finance in urban areas.
(B) Some Issues of Concern:
i) Fragile Sustainability:
By and large micro finance institutions in India are still in nascent stage. However, some of the case studies representing major models of micro finance institutions in India taken up by us for this paper, reveal the inherent weaknesses, which pose a serious concern about the viability of these institutions. A closer examination of the profiles of these institutions reveals that most of these institutions are depending heavily on the grants/donations from outside sources. For instance, in case of Swayam Krishi Sangam (SKS) grants and donations formed around 95 to 99 percent of its total income. Although, their income is rising, but increase in their expenditure has outweighed the increase in income resulting into an excess of expenditure over income. Added to this, the expenditure incurred on salaries and allowances has a major share in the total expenditure, which for instance, amounted to as high as 59.0 per cent of total expenditure in case of SKS in 2001-02. The total cost including interest paid and operational charges per US $ 100 of the loan works out to be as high as US $ 53.3 in case of SEWA Bank in 2001-02. Similarly, interest earning per US $ 100 works out to US $ 44.7 in case of SEWA Bank. Though, these ratios have worked out to be somewhat lower in case of other institutions, in case of most of these institutions, either there is a mismatch between income and expenditure or the cost of administering the loan is high or interest earnings have turned out to be low. These factors expose the fragile nature of such programmes. Added to this, higher interests on the loans given to SHGs pose a serious concern over the viability of these institutions in the long term (Table-2). In this context, the selection of appropriate areas having efficient infrastructure will also help to reduce the transaction costs.
Micro finance market in India has made rapid strides both in terms of SHGs linked with the banks and the number of beneficiaries covered. The freedom given by the Reserve Bank of India has paved the way for its fast upscaling. Multi-model approach involving banks, NBFCs, Trusts, Foundations and NGOs has paid rich dividends. Establishment of Micro Finance Development Fund has also helped the various entities for orderly development of micro-finance sector by providing required infrastructure and training system. Some of the impact assessment studies conducted by RBI, NABARD and select micro finance institutions reveal that micro finance has a very positive impact on the lives of the poor. It has emerged as a cost-effective, operationally simple and low-risk strategy for expanding client base and business. It has afforded a positive institutional alternative and has cut into the informal sector hold on rural market. Infact micro finance is making the informal sector accept benchmarking of formal credit. Micro finance is not simply a banking activity; it is emerging as a developmental tool. Micro finance has ushered in the economic independence of women and change in inter & intra-household dynamics.
of micro finance operations will go a long way in the sustainable
development of micro finance sector. This apart, selection of appropriate
areas having efficient infrastructure and network of intermediaries will
also help to reduce the transaction costs. Last but not the least, in an
anxiety to have faster upscaling and mainstreaming of micro finance sector,
we should not dilute the basic principles of micro finance and load it with
bureaucratic pressures as has been experienced in the past in the other
segments of formal sector.
Average Exchange Rates of the Indian Rupee visa-vis the Us Dollar
as at end-September 2002
* List of Reference:
* RBI (1994), Report of the Working Group on supportive Policy and Regulatory Framework for Micro-finance (Chairman: S.K. Kalia), Mumbai.
* RBI (1999), Report on Micro Credit, Micro Credit Special Cell, Mumbai.
* NABARD (2002), Annual Report- 2001-02, Mumbai
* V.Puhazhendhi and K.J.S Satyasai (2000), Micro Finance for Rural People- An Impact Evaluation, NABARD, Mumbai
* V.Puhazhendhi (2000), Evaluation Study of Self Help Groups in Tamil Nadu, NABARD, Mumbai
* Fisher, T. and M.S. Sriram (2002). Beyond Micro Credit: Putting Development Back into Micro-Finance, Vistaar Publications, New Delhi.
* Dadhich.C.L (2002) "Relevance of Micro-finance in Socio-economic Resurgence of Mumbai" The City – A Publication of Bombay First, Vol. 1, No.3.
* Sungamithra Rural Financial Services (2001), Annual Report: 2000-01, Mysore.
* Sungamithra Rural Financial Services (2002), Annual Report: 2001-02, Mysore.
* Swayam Krishi Sangam (2001), Annual Report: 2000-01, Hyderabad.
* Swayam Krishi Sangam (2002), Annual Report: 2001-02, Hyderabad.
* Shri Mahila SEWA Sahakari Bank Ltd. (2002), Annual Report: 2001-02.
* Ms. R. M.Vasnthakumari is Adviser in the Department of Economic Analysis and Policy and Ms. Vani. J. Sharma is Chief General Manager in the Rural Planning and Credit Department of Reserve Bank of India, Mumbai. The views expressed in this paper are those of the authors. The authors are grateful to Dr.C.L Dadhich and his staff of Division of Rural Economics, DEAP and Shri S.Ghosh, Manager, RPCD for their invaluable assistance.
sector lending refers to bank advances that are in accordance with
the direction of the Government and Central Bank. Under priority
sector targets have been stipulated for the banks to channelise
the credit into priority areas like agriculture, small scale
industries, exports and others.