beyond micro-credit: putting development back into micro-finance

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Beyond micro-credit



Beyond micro-credit

Putting development back

into micro-finance

Thom as Fisher and M.S. Sriram

With contribu tions from:

Malcolm HarperAjit Kanitkar

Frances Sinha

Sanjay Sinha

Mathew Titus

Vistaar PublicationsNew Delhi

oOxfamOxford, UKPublished in association with

g&new••economics

F O U N D A T I O N

New Economics Foun dation, London



Copyright © Thomas Fisher and M.S. Sriram, 2002

All rights reserved. No part of this book may be reproducedor utilised in any form or by any means, electronic ormechanical, including photocopying, recording or by anyinformation storage or retrieval system without permissionin writing from the publisher.

For copyright reasons, th is ed ition is for sale only in India,Pakistan, Bangladesh, Nepal, Bhutan, the Maldives andSri Lanka.

First published in 2002 by

Vistaar Publications(A division of Sage Publications India Pvt Ltd)

32 M-block Market, Greater Kailash-INew Delhi 110 048

Published by Tejeshwar Singh for Vistaar Publications,phototypset in 10 pt Brooklyn by S.R. Enterprises, New Delhi,and printed at Chaman Enterprises, Delhi.

ISBN: 81-7829-171-1 (India-PB)

Production Team: Jaya Dalai, Shweta Vachani. SushantaGayen and Santosh Rawat

This book converted to digital file in 2010



7b

Vijay and Bharti, Ela andjayshree

Rama Reddy and Shashi, Deep and Achintya

Jane, Rolf and Tom

Thank you for your friendship,

insight and inspiration



Table of contents

List of tables 9List of figures 10List of boxes 11List of abbreviations 12

Acknowledgements 161. Introduction 19

2. Introduction to the financial sector in India 33

Part One: Micro-finance and development

3. Micro-finance and social and economic security 49

4. Micro-finance and livelihoods:

The challenge of BASIX 73

5. Micro-finance and people's organisations 104

6. Micro-finance and system-wide change 137

Part Two: Micro-finance: Organisations and institutions

7. Self-help groups and G rameen Bank groups:

What are the differences? 169Malcolm Harper

8. Costs in micro-finance: What do urbanself-help groups tell us? 199Mathew Titus

9. Exploring empowerment and leadership atthe grassroots: Social entrepreneurshipin the SHG movement in India 234

AjitKanitkar10. Sustainability and development: Evaluating

the performance of Indian micro-finance 263Sanjay Sinha and Frances Sinha



11. Rising to the challenge of scale in India:Growing the micro-finance sector 300Mathew Titus

12. Emerging lessons and challenges 325Thomas Fisher

Appendix: Capacity-building and organisationallearning project for development finance in India 361

Glossary 370

Bibliography 372

Index 380

About the au tho rs and contributors 389



List of tables

Table 2.1: Present rural financial system in India 44

Table 3 .1 : Incidence and cost of economicstress events 58

Table 4 .1 : BASIX' seven I's of new generationdevelopment finance 78

Table 4 .2: Comparing financial indicators forBASIX and fully sustainable micro-financeorganisations reported in the MicrobankingBulletin (as on 31 March 2000) 81

Table 4 .3: BASIX clientele by type and sector 84

Table 5.1: SHGs, their clusters and federations,

promoted by the DHAN Foundation 117Table 6 .1: BASIX' characterisation of existing and

new generation financial intermediaries 146

Table 7 .1 : Summary of the pros and cons ofthe SHG and Grameen system s 170

Table 8 .1: Areas and financials of Sharan'sSHG programme (March 1996) 206

Table 9.1: The life-cycle of an SHG(as se t out by PRADAN) 239

Table 10.1: MFOs rated by M-CRIL up to

November 2000 269

Table 10.2: M-CRIL sam ple tota ls 270

Table 10.3: Different approaches to

impact assessm ent 285Table 10.4: Summ ary of impact assessm ent

stu die s of micro-finance in India 286Table 11.1: The role of stakeholders in

developing the micro-finance sector 314



List of figures

Figure 1.1: Combining outreach and sustainability 20

Figure 2 .1 : Hierarchy of credit need s and creditavailability from formal sources, leadingto 'adverse usa ge' 40

Figure 3.1: Moving ou t of the vicious cycle of poverty 63

Figure 4.1: The pyramid of rural producersand BASIX clientele 83

Figure 8.1: Three functions that contribute tothe costs of promoting SHGs 201

Figure 8.2: Structure of SHGs and federations

promoted by Sh aran 206

Figure 10.1: MFOs' sou rces of funds 274

Figure 10.2: Utilisation of funds by MFOs 276

Figure 10.3: Relationship between portfolio

size and efficiency 278Figure 12.1: The organisational pyramid 341



List of boxes

Box 2 .1 : Chronological summary of development

initiatives with the Indian financial system 34

Box 3.1 : SEWA Bank and the SEWAmovement 51

Box 3.2: Insurance services provided by SEWA

Bank in 2001 59Box 4 .1 : Summary of technical assistan ce and

support services provided by BASIX 87

Box 6 .1 : Policy work by BASIX 145

Box 6.2 : Sa-Dhan, the association of Indian MFOs 151

Box 6.3: SEWA campaigns 155Box 10.1:

Micro-Credit Ratings International Limited(M-CRIL): An innovative organisationalmechanism for Asian micro-finance 264

Box 10.2: Clients have diverse credit needs 291



List of abbreviations

AIMS As sessin g th e Im pac t of M icro-enterprise Services(pro gram me of USAID)

AKRSP Aga Khan Rural Su pp or t Programm e

APDDCF A nd hr a Pr ad esh Dairy Development Cooperative

FederationAPMAS A nd hr a P rad es h M ahi la Ab hivru ddh i Socie ty(capacity-building organisation for savings andcredit groups)

ASA Activists for Social Alternatives (NGO in Tamil Nadu)ASA A ssocia t ion for Social A dv an cem en t (MFO in

Bangladesh)ASSEFA Association for Sa rva Seva F ar m s (NGO ba sed in

Chennai)AW1D As sociation for W om en's Righ ts in De velop ment

(based in Toronto, Canada)BAAC Ba nk for Ag riculture an d Ag ricultural Coop era-

tives, Thai landBASICS Bhart iya Sa m ru dd hi Investments and Consult ing

Services Ltd, HyderabadBASIX Nam e of th e gr ou p of co m pa nies of w hic h BASICS

is the ho lding com pan y (see C hap ter 4 , no te 2)BRAC Ba ng lad esh Ru ral Action Co mm ittee (MFO)

BRI Ban k Rakyat Ind one sia

CBGP Co m m unity-b ased Gro up Prom oters (of SHG s su p-ported by PRADAN)

CDF Cooperative Development Fo und ation (NGO ba sed

in Hyderabad)CDRA Co m m unity Developm ent Reso urce Association

(NGO in South Africa)CEO Chief Ex ecu tive OfficerCGAP Co nsu ltative G ro up to Assist th e Poo rest (consor-

tium of donors on micro-finance, based at theWorld Bank)



List of abbreviations 13

CSA C us to m er Service Agent (of BASIX, Hyderabad)DflD D ep art m en t for Inte rna tion al De velopm ent (British

aid agency)DID De sjardins Internat ion al Development , C an ad aDHAN De velopm ent of H u m an Action (Fou ndation ) (NGO

in Tamil Nadu)DOW D eve lopm ent O rg an isa tion for W ome n (NGO in

Tamil Nadu)DWCRA De velopm ent of Wom en an d C hildren in Rural

Areas ( Indian government programme)

FAMIS Finan cial Ac coun ting an d M ana gem ent Informa-tion S yst em (of BASIX)

FWWB Fr ien ds of W om en's World B an kin g, India (based

in Ahmedabad)GB G eneral Body or federation of SH Gs in B arhi block

of Hazar ibag dis t r ic t , JharkhandGIC Ge neral In su ran ce Co rporation, IndiaGTB Global T ru st Ba nk, India

GTZ G erm an technical ass is ta nc e agency (DeutscheGesel lschaft fur Tech nische Zu sam me narbe i t )

HDFC H ousing Developm ent Fina nce Co rporation, IndiaHUDCO Hou sing an d Urban Development Corpo ration, IndiaIBP Individu al-ban king Pro gram m es (category us ed by

the rating agency M-CRIL)ICICI Ind ustr ia l Credit an d Inv estm ent Co rporation of

India Ltd

IDPM In stitu te for Dev elopm ent Policy an d M an age m en t,University of Manchester, UK

IDS Ins t i tute of Developm ent St ud ies , Universi ty ofSu ssex, UK

IFAD In tern atio na l F un d for A gricultu ral D evelopm ent(United Nations agency)

IFC In tern atio na l Fin an ce Corpo ration (World B an k af-filiate)

IGS Ind ian G ram een Services (part of the BASIX gro up ,Hyderabad)

IIM-A Indian Ins t i tute of M ana gem ent, A hm ed aba dILO Intern ationa l Labour O rganisa tion (United Na tions

agency)IRDP Integra ted Ru ral Dev elopme nt Prog ram me (Indian

government programme)



14 Beyond micro-credit

KfW G er m an deve lopm en t ba nk (Kre d i t ans ta l t fur

Wiederaufbau)

LAB Local Are a B an k (ope rating in u p to th re e co n-t iguous d is tr icts in India)

LIC Life In su ra n c e Co rpo rat ion of Ind ia

LINK Livelihood Initiativ es in N ort he rn K a rn a ta ka

Ltd Limited (com pany)

MACS M utua lly-aid ed Coop erative Society (a ne w form of

cooperat ive au to no m ou s of gove rnm ent control)

MBB Microbanking Bulletin

M-CRIL Micro-Credit Ra tin gs In ter na tio na l Limited (based

in Gurgaon outside New Delhi)

MD M anaging Director

MFI Micro-finance ins ti tu tio n

MFO Micro-finance orga nisa t ion

MIS M ana gem ent information syste m

MYRADA Mysore Resettlement and Development Agency

(NGO based in Bangalore)

NABARD Na tional B an k for Ag ricultu re a n d R ura l Develop-

ment , India

NBFC No n-ban king f inance com pan y

NCL Nationa l C en tre for Labour, India

NEF New Econ omic s Fou nda tion

NGO Non -governm ental organ isat ion

NORAD Norw egian Agency for De velo pm ent Co ope ratio n

OBC Oriental B an k of Com me rce, IndiaOBC Oth er Bac kw ard C as tes (formal categorisa t ion in

India)

ODI Ove rseas Deve lopmen t Inst i tu te , London

OS S O pe ra tio na l self-sufficiency (financial m ea su re )

PAR Portfolio a t ris k (financial m ea su re )

PCO Pu bli c call office

PKSF Palli Ka rm a Sa ha ya k Foun dat ion , Ba nglade sh

PRADAN Profes sional A ss is ta nc e for De velo pm ent Action(NGO based in New Delhi)

Pvt. Ltd Private limited (compan y)

RBI Reserve B an k of India (India's ce ntra l ba nk )

Re Indian Rupe e

RGVN Ra sh triy a G ra m in Vika s Nidhi (foundation for th e

nor th -eas tern s ta tes in Ind ia)



List of abbreviations 15

RMK Ra sh triy a M ahila Kosh (National Cre dit Fu nd forWomen, India)

RNBC Residuary no n-b ank ing com pan ies (NBFCs th atcan raise unl imited deposi ts but must place 80per cen t of the m in gov ernm ent or b an k deposits)

ROSCA Rotat ing savings an d credi t asso ciat ionRRB Regional Ru ral Ba nk, IndiaRs Indian Rup eesSANASA Si nh ala acr on ym for th e m ov em en t of thrift a nd

credit cooperative societies in Sri Lanka

SDC Th e Sw iss Agency for Dev elopm ent a n d Coop era-tion (bilateral aid agency)

SDI Su bs idy De pen den ce Index (financial m easu re)SEWA Self-employed W om en's Ass ociation (union ba sed

in Ahmedabad)SFMC SIDBI Fo un da tio n for M icro-credit, Ind ia

SHARE Society for Helping, Aw aken ing R ur al Poor th ro ug hEd uca t ion (NGO bas ed in Hy derabad)

SHG Self-help gro up (savings an d cred it gr ou p in India)SIDBI Sm all In du stri es Dev elopm ent B an k of India

SJSY Sw arn a Ja ya nt i Swarozgar Yojana (Indian govern-ment programme that succeeded the IRDP andothe r progra mm es for sup porting poor self-employedpeople)

UK Un ited KingdomUNDP United Nat ions Development Prog ram m eUSA Un ited S ta te s of Am ericaUSAID United St ate s Agency for Inte rna tional DevelopmentUT Un ion Territory in IndiaWWB W omen 's World Ba nkin g



Acknowledgements

In addition to those towhom this book is dedicated, who haveprovided us so much friendship, insight and inspiration, bothas individuals and through their organisations, we would

like to thank the five experts who have contributed so muchto Part Two of this volume: Malcolm Harper, Ajit Kanitkar,Frances and Sanjay Sinh a and Mathew Titus. Titus h as alsohelped facilitate this book within the Indian micro-financesector. We would also like to thank Jenn y C hapman and DaveHarding who wrote informative background papers on socialenterprises and on capacity-building.

This book would not have been possible without the gen-

erous support of the Ford Foundation, New Delhi for the long-term project that enabled the New Economics Foundation toengage in the micro-finance sector in India. This book con-cludes the project. Special than ks to Jane Rosserwho helpeddesign the project and supported it through its early yearswith such enthusiasm and determination, and to RekhaMehra who ably saw it to its completion.

At the New Economics Foundation, Thomas would like to

thank Genevieve Matthews for providing vital support, SarahMcGeehan who m anaged the team so well while I was in Indiaand Ed Mayo for his encouragement and inspiration. DaveHarding, my mentor, also provided much food for thoughtduring the project which led to this book.

Thank s also to Bharti, Sushil an d Divi who provided suc hhospitality when finishing the manuscript in Delhi, to Mumand Dad while doing the proofs, and to Julie who was so

supportive and loving throughout the process of bringing thisbook into reality.

For Thom as th is book m arks the end of 12 years of work onlivelihoods in India— thanks to all the organisations I workedwith, especially BASIX, CDF, PRADAN and SEW ABank, andabove all to my many friends and colleagues, especially Vijay



Acknowledgements 17

and Savita, for such generosity and inspiration, which has

made my experience of India so profound. I am particularly

indebted to Vijay for all his support over 12 years and hisdeep experience which has informed so much in this book.

At the Indian Institute of Management, Ahmedabad, Sriram

would like to thank Professor Gopal Naik for his encourage-

ment. Thanks also to appa and amma for understanding the

pressures of work, and to Gowri and Arjun for being a source

of strength, as always.

We hope that the book will contribute in its own small way

to the development of micro-finance in India, and make therichness of Indian micro-finance practice better known and

understood.

Delhi and Ahmedabad Thomas Fisher

March 2002 M.S. Sriram



Chapter 1

Introduction

Micro-credit has become a major tool of development, and isfast developing as an international industry, with its owntrade associations, dedicated finance, training and othersupport organisations, research and jou rna ls. In a phase inthe international development endeavour in which ideologyis out of fashion, the search is on for practical, workable so-lutions to the deep-seated challenges of poverty. Micro-creditseems to provide ju s t such a solution.

By delivering financial services at a scale, and by mecha-nisms appropriate to them, micro-credit can reach poor people.By providing poor people with credit for m icro-enterprise itcan help them work their own way out of poverty. And byproviding loans rath er tha n g ran ts the micro-credit providercan become sustainable by recycling resources over and overagain. In other words, micro-credit appears to deliver the 'holytrinity' of outreach, impact and sustainability. No wonder

the development sector has become so excited.International debate has been dominated by two schools

of though t, which we call the finance school and the povertyschool. Sometimes these schools have been in conflict witheach other. The former celebrates the mainstream ing of micro-credit as a financial service (BancoSol, a micro-finance bank inBolivia, has sold certificates of deposit on Wall Street), the latteremphasises the need to reach poor people and may be susp i-

cious of financial sustainability, believing it is likely to lead amicro-finance provider away from its focus on poorer clients.

The micro-credit industry has sought to resolve the ten-sions between a focus on poverty and a comm itment to sus -tainability by integrating them within a matrix defined bytwo axes, of outreach (or access) and financial sustainability.




Figure 1.1: Com bining outreach and sustainability

2. Sustainable financialservices wtfth low accessby target clients

High sustainability

1. Sustainable financialservices reach target

Lowaccess

3. Highly subsidisedfinancial services withlow access by targetclients

clientsHighaccess

4. Highly subsidisedfinancial servicesreach target clients

Low sustainability

Source: Mahajan and Ramola (1996).

The formal financial sector may achieve financial su sta in-ability, bu t h as little outreach to poor clients (quadrant 2 inFigure 1.1). Traditional efforts by non-governmental organi-sations (NGOs) may reach poor clients, but are often unsus-

tainable (quadrant 4). Good micro-finance practice, on theother hand, combines both outreach and sustainability inthe virtuous quadrant 1. Such practice is perhaps mostclearly embodied in the micro-finance bank, which marries thebest of the formal financial sector in terms of sustainabilitywith the outreach to poor clients of the development NGO.

This book argues that if such a framework is allowed todom inate debate and practice, as it often has, it will severely

limit the potential developmental ends to which micro-finance,as a means or instrument, can be put. The industry hasbecome dom inated by a techno-m anagerial perspective, witha large num ber of technical m anua ls an d co urses on how tomanage micro-financial services and financial sustainability,and how to achieve outreach.

1In the process, the develop-

ment impetus which first gave rise to micro-finance is oftenlost (except in the narrow est sense of outreach to poor people).

It is time to put development back into the provision ofmicro-financial services, and for this we need to go beyondmicro-credit. Going beyond micro-credit has usually beenframed in terms of including micro-financial services otherthan credit for micro-enterprise: savings, consumption loansand insurance in particular (Rutherford, 2000). In other



Introduction 21

words, micro-finance can embrace a range of financial ser-vices that seek to meet the needs of poor people, both pro-

tecting them from fluctuating incomes and other shocks, andhelping to promote their incomes and livelihoods (Rogaly etal., 1999).

In th is book we seek to explore developmental purposes towhich micro-finance can be pu t that go well beyond integrat-ing a range of micro-financial services for poverty allevia-tion. We include livelihood promotion, developing the localeconomy, empowerment, building democratic people's

organisations, and changing wider systems or institutionswithin society. We elaborate on the practice of using micro-finance to address th ese developmental objectives in the firstpart of the book.

Putting development back into micro-finance presentschallenges to all those involved in micro-finance. Technicalexperts in micro-finance need to see that there is more to theprovision of micro-financial services than technical and

managerial inputs to enhance performance and efficiency.Micro-finance organisations (MFOs) may be well managedfinancial organisations, but are they developmental? Indeed,if micro-finance is to achieve any developmental outcomes,the nature of these inputs must be shaped and guided by aclear understan ding of the developmental outcomes soug ht.

The same applies to those who have apparently resolvedthe tension between the d em and s of development on the one

hand and of managing financial services on the other by com-bining outreach with sustainability. With millions of poorpeople in developing countries still unbanked, there is clearlya need for the provision of micro-financial intermediation ata mass scale, and this can often only be achieved throughsustainability. In this sense, the combination of outreachand sustainability is developmental. However, there is muchmore to development than the provision of financial services.

Micro-financial services on their own are clearly not going tosolve poverty, but can only serve as a complementary toolwithin a broader strategy to reduce poverty.

Putting development back into micro-finance also presentschallenges to the poverty school. Too often, debates on pov-erty and micro-finance have been limited to the number of




clients reached, to income and the gendered control of re-sources within the household, and to impacts on different

categories of poor people, from the destitute to those ju s t be-low the poverty line. The poorest people have been a particu-lar focus of attention, even though many others also havevalid and developmental financial needs.

A narrow focus on micro-financial services for poor peoplehas therefore often hidden the range of development pur-poses to which micro-finance as an instrum ent can be used.As ju s t two examples, we illustrate micro-finance practice

that suggests the need to lend to the non-poor to generatewage-employment for poor people (Chapter 4), and that anexclusive focus on poor people may work against the develop-m ent of effective local democratic organisations (Chapter 5).

Research on ou treach and impact on poor people ha s alsonot contributed significantly to better product development(Rutherford, 2000: 109) or to strategies on how to combinemicro-finance provision with developmental outcomes for poorpeople tha t go beyond access to financial ntermediation (how-ever necessary the latter is).

Finally, putting development back into micro-finance pre-se nts a challenge to the growing num ber of critics of micro-finance. Development is concerned, on the one hand, withideology and processes that underlie current economic struc-tures , and, on the other, with practical solutions to addresseither the immediate needs of poor people or to change theunderlying structures. Ideological critiques are only helpfulif they contribute to the process of finding such practicalsolutions.

This book explores practical initiatives to use micro-financeinstrumentally to address a range of developmental needs.This is the key challenge for the micro-finance industry: tofind how micro-finance as an instrument can be combined

in practice with appropriate developmental objectives toachieve positive change.Th is challenge can only be met by organisations tha t seek

to combine micro-financial services with clear developmentmissions. Such organisations fall into a category th at is some-times referred to as 'development enterprises ' and increasingly(at least in the industrialised world) as 'social enterprises'.



Introduction 23

The organisation of micro-finance is therefore a t the heartof this book, both in Part One and then in Part Two, from

small local savings and credit groups to developing the wholemicro-finance sector in India. The organisational challengesof combining often broadly conceived developmental goalswith the technical delivery of micro-financial services are akey theme of the an alysis. Organisational sustainability, in-cluding sustaining a focus on development mission, is aschallenging as achieving financial sustainability!

While the micro-finance industry genera tes many manuals

on how to manage the technical delivery of micro-financialservices, genuine analysis either of MFOs, which goes be-yond managing a board of directors or staff, for example, or ofdevelopment entrepreneurs who are by and large respon-sible for founding and leading MFOs, rem ains very weak. Thisapplies in particular to analysis that can help practitionerswhen they confront, often on a daily basis, the tension be-tween their developmental objectives and the demands of

micro-finance as a technical tool.Fortunately, micro-finance practice in India has much to

offer on these dilemmas. Indian practice is extraordinary inits diversity, not least in terms of the development missionswith which micro-finance is combined. As suggested above,these include poverty alleviation, livelihood promotion, de-veloping the local economy, em powerment, building people'sorganisations, and changing wider systems and institutions

within society.India is also fast becoming one of the largest micro-finance

markets in the world, especially with the growth of women'ssavings and credit groups (known in India as 'self-help groups'[SHGs]) which are set to reach 17 million women by 2008 a tthe latest and which we explore in depth, and from a range ofdifferent perspectives, in this book.

In India, an exclusive focus on micro-credit for micro-enterprise is the exception rather than the norm. It is nosurprise that Ela Bhatt, India's micro-finance pioneer whofounded the Self-employed Women's Association (SEWA) Bankin 1974, chaired a working group that produced a paper forthe first Micro-credit Summit entitled 'Beyond micro-credit:Structures th at increase th e economic power of th e poor'



Introduction 25

them their own, rather than see them as irreconcilable po-larities. Third, India remains the largest democracy in the

world, and democratic issues have been at the heart of manydevelopmental initiatives, including micro-finance.

At the sam e time, India ha s a long tradition of atten tion toentrepreneurial and organisational development. Indeed,India has been a major home of the growth of these profes-sional disciplines.

2This makes it appropriate tha t th is book

reviews som e of the organisational challenges that face MFOs.from an organisational development perspective ra the r than

from a technical perspective that sees them purely as func-tional financial intermediaries.

This book in fact a rises out of a four-year organisationaldevelopment project, m anaged by the New Econom ics Foun-dation (NEF) in London, for four major MFOs in India (see theAppendix). It would be presu m ptu ou s to suggest that eitherthe project or this book have provided simple guidelines tomanage these organisational challenges, but at least they

place them at the heart of practice rathe r than burying themunder a heap of technical manuals.

The project also provided the insights that underpin theanalysis in this book, an encompassing and integrating analy-sis that ranges from the diverse developmental motives ofdevelopment entrepreneurs to hard analysis of costs in pro-moting micro-financial services at the community level; fromdetailed attention to the dynamics of individual savings and

credit groups to developing the whole micro-finance sector tomeet the challenge of scale th at India always presents ; fromthe need to achieve financial sustainability in order to serveand empower poor people to a diverse range of potential im-pacts that micro-finance can have on them , for example interms of their security and democratic voice.

In many chapters in this book we challenge a narrowfocus on the technical 'solutions' that micro-finance seemsto offer. At the sam e time we challenge weak performance bytaking a hard look at sustainability and impact issues (Chap-ter 10). We challenge the dominant understanding of effi-ciency as a highly unsophisticated measure (Chapter 8). Wealso challenge some of the ideals of local democratic organi-sation by looking at the hard realities of how small savings




and credit groups within poor communities work (Chapters 8and 9).

Indian practice of micro-finance has taught us not to seeirreconcilable differences but to recognise the value of differ-ent perspectives and to seek to integrate them into a morecoherent rather th an compartmentalised whole. The point isnot to decide, for example, between pursu ing financial s us-tainability or developmental impact, between offering creditor savings and insurance, between addressing poverty orbuilding democratic organisations. All of these may be needed

in a given developmental context or a given community.The point is to recognise and understand the complexity

of the developmental challenges within th at context or com-munity, to see how a range of appropriate strategies can becombined in practice to meet those challenges, and how thetensions likely to arise within an organisation (or a group oforganisations) embracing different strategies may be man-aged effectively. This is more in tune with the complex dailyrealities poor people face, and with the complex daily reali-ties of most micro-finance practitioners we know.

Beyond micro-credit:

An outline of the book

Some issues

The link between micro-credit and poverty reduction h as notbeen proven. Among the range of possible micro-financialservices, micro-credit has predominated, on the assumptionthat it will deliver higher incomes and increased assets tothe poor through micro-enterprise. Far less attention hasbeen paid to the need to reduce risk, perhap s the m ost press-ing need especially for the poorest households. Indeed, in-jecting capital into existing micro-enterprises, or creating newones, may enhance the risk tha t their poor owners face. Thereis indeed evidence that, as a result, a proportion of micro-credit clients have become worse off after accessing micro-loan s (Hulme an d Mosley, 1996). The need to reduce risk is



Introduction 27

why many poor people would prefer regular wage labour thanmanaging their own micro-enterprise, if only such opportu-

nities were available (Mahajan, 1997).Micro-credit providers cannot of course take their poor

borrowers for a ride. While most providers emphasise invest-ments of working or fixed capital in m icro-enterprises, thereality is that many clients use the credit for consumption-smoothing, especially as most funds are fungible within ahousehold. Such consum ption-smoothing can allow house-holds to cope more effectively, but it also runs the risk of

push ing them further into debt if they cann ot repay the loanout of enhanced income stream s. More appropriate financialproducts for this purpose are savings, insurance and loansto allow poor people to repay their high-interest loans tomoneylenders and to meet emergency expenditure. And yetthese have received far less attention than micro-credit formicro-enterprise. At the same time, while such products toenable consumption-smoothing can stabilise a poor house-

hold's condition, they cannot propel them out of poverty.With such a strong focus on micro-credit for micro-enterprise, it is perhaps surprising that less attention hasalso been paid to linking poor people to growing m arket op-portunities and to enhancing the control they can exerciseover their economic environment.

Enterprise promotion was a focus of development activityuntil the early 1990s. Many involved in those endeavours

feel that the growth of minimalist micro-credit has divertedattention from the on-going challenges of creating or strength-ening enterprise. An important conclusion of initiatives topromote enterprises had in fact been that finance is oftennot the ruling constraint, and yet thinking and practice onthe wider needs of enterprises has progressed little since theearly 1990s. It is gradually resurfacing under the name of'business development services'.

Another important conclusion was that assisting indi-vidual enterprises was often not effective, whether throughminimalist micro-credit or wider business services. A moresystematic approach, often encompassing a sub-sectoral fo-cus, was needed to impact a wider range of enterprises orlocal or regional economies as a whole (Dichter and Mahajan,1990; USAID, 1987).




In terms of greater control within the economic environ-ment, th e ownership of asse ts in par ticula r can significantly

reduce risk to households in the face of fluctuating incomesor expenditure demands. However, as individual micro-entrepreneurs, most micro-credit clients remain as vulner-able to economic circumstances as they were before takingany m icro-loans. Economic development is therefore a s muchabou t empowerment, of individuals and groups, as about in-comes and individual assets.

For many poor people the only route to empowerment is

through collective endeavours that can overcome the severelimitations imposed by individual isolation. This immediatelybrings in issues of collective ownership, including of theorganisation delivering micro-financial services. This is sucha fundamental issue in a development context, where un-equal access to and ownership of as se ts often u nde rpins theunequal distribution of power, that it is surprising that de-bate on the ownership and governance of MFOs ha s so often

ignored it.

Outline of the book

These are some of the issues that lead into the first part ofthis book (Chapters 3 to 6). After a shor t introduction to theIndian financial sector (Chapter 2), for those unfamiliar with

the context of practice analysed in this book, we take thefirst step beyond micro-credit to embrace a range of micro-financial services (savings, credit and insurance) to providesocial and economic security to poor people (Chapter 3). Weillustrate this through the case of SEWA Bank, as well asother MFOs innovating micro-financial products, from sav-ings to credit for housing and education to insurance forwomen to cover a broad range of diseases, including gynae-

cological disorders and occupational health, and providematernity benefits, and for farmers against crop failure.In Chapter 4 , we analyse the work of BASIX in promoting

rural livelihoods. BASIX goes beyond minimalist micro-creditby integrating the provision of micro-credit with a wide rangeof technical assistance and support services, including inhighly cost-effective ways. However, BASIX also seeks to go



Introduction 29

beyond such integration of financial and non-financial ser-vices by developing them a s in stru m en ts w ithin wider str at-

egies for livelihood promotion, which also involve, for example,supporting small enterprises to generate wage employment,intervening in promising sub-sectors and engaging a rangeof relevant market actors, and reviving moribund rural in-frastructure and organisations.

In Chapter 5, we go beyond micro-credit to look at thedemocratic functioning of groups providing micro-financialservices. We go beyond the concept of'social intermediation' as

a process to prepare potential clients to access micro-financialservices and turn the arg um ent on its head. Micro-financialservices are a tool or ins trum ent around which to build socialcapital through democratic people's groups and organisa-tions. We illustrate this through the savings and credit oper-ation s of SHGs, and th rough detailed analysis of savings andcredit cooperatives promoted by CDF.

With its focus on democratic organisations, this chapter

tackles the issue of who owns the as se ts and profits th at arisefrom the provision of micro-financial services. The analysistherefore takes us beyond the efficient delivery of micro-financial services to embrace issues of accountability, own-ership and control.

In exploring women's empowerment through micro-finance, we also go beyond an exclusive focus on poor peopleto recognise the broader (village) community and its demo-cratic organisations. We also go beyond th e traditional focuson who controls loans within th e household to look at oppor-tunities for women emerging ou t of savings and credit groupsto engage in informal and formal democratic processes.

Finally, in Part One, we look at how MFOs have sought tobring about wider system-level or institutional change (Chap-ter 6), taking u s beyond a focus on individual MFOs to theirrole in wider system s. We briefly review the impacts that micro-finance can have on the local economy as a whole, beyondfinancial services or individual clients. We look in detail at thepractical strategies of BASIX and the Indian association of MFOs,Sa-D han, in influencing the policy and regulatory environmentfor micro-finance; a t the integration of micro-financial serviceswithin the trade union SEWA's broad strategy to promote therecognition and rights of poor self-employed women; and at




CDF in changing the legal environment for cooperativesthroughout India, for which CDF is putting its savings and

credit cooperatives to good instrum ental use.It is in Chapter 6, as well as Chapter 8, th at we introduce

the only technical language in this book, drawing on eco-nomic theory to distinguish carefully between institutionsand organisations. Institutions a re not formal o rganisationsof some significance, but the rules of the game that shapehuman interaction by providing the structure for transac-tions and incentives. Because of this distinction we refer

throughout this book to micro-finance organisations ratherthan micro-finance institutions (MFIs). Few MFOs could claimto be institutions even as commonly understood as formalorganisations of some significance beyond their immediateoperations, although C hapter 6 shows how those who aspireto such a role strive to do so in practice.

Part Two of the book then focuses in greater depth on theorganisational and institutional issues confronting micro-finance. The first three chapters (7 to 9) analyse SHGs indetail.

Chapter 7 compares Grameen Bank groups with the SHGsemerging in large num bers in India, contrasting the greater'regimentation' of Gram een-style operations to the more au-tonomous and democratic groups in India, placing each withintheir institutional context and investigating how the differ-ences may influence co sts, sustainability and empowermentoutcomes. This chapter makes a significant contribution inanalysing the diversity in group mechanisms in practice tha tare often lumped together as one micro-finance tool.

Chapter 8 looks at SHGs operating in urban slum s, whichtakes u s beyond th e traditional reliance on comm unity andkinship ties, which are often regarded as critical to any groupmechanism s, to see how groups fare when such ties may not

exist. The chapter places SHGs within the context of otherfinancial services available to slum-dwellers, and show s howfragile groups can be.

Above all this chapter challenges a prevalent bu t simplis-tic approach that assum es costs simply reflect organisationalefficiency, dem onstrating tha t many factors contribute to thecosts of promoting SHGs, only some of which are un der the



Introduction 31

control of the promoting organisation. These different costshave to be recognised if more efficient and appropriate

micro-finance practice is to develop.The analysis also challenges negative attitudes towards

NGO ideology, which often regard such ideology as incom-patible with the efficient delivery of micro-financial services,to show how it can in fact enh ance efficiency by significantlyreducing transaction costs.

Chapter 9, on the other hand, goes beyond the use ofgroups as channels for financial services to analyse the de-

velopment stages of SHGs, their tasks and processes, and inparticular, leadership and social entrepreneurship withinthem. Like Chapter 8, this chapter demonstrates the widevariations in performance of SHGs, even when promoted bythe sam e organisation. This is perhaps inevitable given th atSHGs are autonom ous organisations which determine theirown policies and processes within widely different con texts.For such groups, leadership is clearly vital, and the chapter

explores entrepreneurial traits and qualities among womenleaders, and the costs and rewards of such leadership.

In Chap ter 10, we then go beyond financial sustainabilityand outreach, first by incorporating organisational as wellas financial parameters into a sophisticated rating mecha-nism for micro-finance, and second, by looking at evidence ofwider developmental impacts, as well as reviewing evolvingmethods in India for measuring such impact. Thus this chap-

ter both takes a hard look at the financial and organisationalperformance of micro-finance, and pays detailed atten tion todevelopmental outcomes.

Drawing on all this analysis, we shift focus in Chap ter 11to the sectoral level, looking at measures that are needed topromote the micro-finance sector in India to address the vastdem and for micro-financial services at an appropriate scale.For this, all the different stakeholders in the sector have to

play clear and distinctive roles.To conclude. Chapter 12 first draws out five emerging les-

sons and challenges, on micro-financial services as an in-stru ment of development; on the adaptation of those servicesto their context; on the distinct role of NGOs; on dealing withsystem s; and especially on how the fast emerging movement




of savings and credit groups in India urgently requires sys-tem-wide attention. Finally this chapter draws on the insights

developed in the book to take up five additional challenges ofcapacity-building, a topic that has often failed to att ract suf-ficient reflective analysis, and provides a framework forcapacity-building that places development at the heart ofmicro-finance practice.

Notes

1. For examples, see especially www.cgap.org, as well as the MicrobcuikingBulletin, Ledgerwood (1999) and those cited in Rutherford (2000:121).

2. Sec, for example, McClelland and Winter (1969), Lynton and Pareek(1992) and Lynton (1998: 159-60).



Chapter 2

Introduction to the

financial sector in India

The financial sector in Indiaas a vehicle for development:Three phases

This chapter provides a brief introduction to the financialsector in India, for those who are unfamiliar with the contextin which micro-finance organisations (MFOs) in India operate.The chapte r focuses in particular on efforts to achieve devel-opmental goals through the financial sector, which have along history in India, going back almost a century (see Box 2.1).

Box 2.1 suggests three broad chronological phases. Dur-ing the first phase until the 1960s, pursuing developmentalobjectives through the financial sector focused primarily ondelivering agricultural credit through cooperatives.

With increasing frustration at the outcomes of these en-deavours, attention shifted in the second ph ase to the com-mercial bank s, 14 of which were nationalised in 1969, whilea network of Regional Rural Banks (RRBs) was established

in the 1970s. This had a major impact. India still ha s one ofthe largest banking networks in the world: there is a bankbranch for every 15,000 rural households and a cooperativein almost every village.

The impact on ru ral credit supply was also significant asthe proportion of rural credit from the formal financial sector




Box 2.1: Chronological summ ary of development

initiatives with the Indian financial system1891 - The earliest, cooperative societies estab lished .1904 -T he first cooperative societies act passed by the state.1915 - Maclagan Com mittee advocates one-village one-coopconcept.1928 - Royal Commission on Agriculture advocates expan-sion of rural credit with state patronage.1931 - Central Banking Enquiry Committee suggests link-ing agricultural finance with central banking functions.

1934 - Committee headed by Malcolm Darling examines ifthe operations of commercial banks could be coordinatedto the advantage of agriculturists.1935 - Agricultural Credit Department established in theReserve Bank of India (RBI) to promote cooperative credit.1945 - The agricultural finance sub-com mittee subm its itsreport, recommending liquidation of non-performing as se tsof members by adjusting the claims of the cooperative tothe capacity of members to repay. This m arks the first blowto credit discipline.1945 - The Cooperative Planning Committee advocates th atthe cooperative sector receive state protection from privatecompetition.1949 - The Rural Banking Enquiry Committee finds thatcooperative infrastructure is satisfactory but commercialbanks have not shown any significant interest in agricul-tural and rural credit.

1954 -A ll India Rural Credit Survey submits report. Advo-cates majority participation by the s tate (51 per cent sha recapital) in cooperatives at all levels; recommends a com-mon cadre for employees of cooperatives and suggests a three-tier cooperative stru ctu re. Share of informal sources in to-tal rura l credit usage is 70 per cent, compared to coopera-tives (6.4 per cent) and commercial banks (0.9 per cent).

> 1960 - The Committee on Cooperative Credit proposes astrong and stable institutional framework for cooperatives.

> 1969 - Nariman Committee introduces 'Lead Bank Scheme',thereby starting a process of district credit p lans and coor-dination among various formal financial intermediaries.

> 1969 - Nationalisation of 14 commercial banks.> 1971 - All India Debt and Investment Survey shows that

share of the formal financial sector in total rural creditusage is 29.2 per cent compared to 70.8 per cent from infor-mal sources.



Introduction to the financial sector in India 35

1975 - The concept of Regional Rural Banks (RRBs) advo-cated to overcome the failure of cooperatives. Agricultural

Refinance and Development Corporation set up.1975 - Hazari Committee advocates the integration of short -and long-term credit structure.1976 - National Commission on Agriculture experiments witha new form of cooperative, the Farmers' Service Coopera-tive, with active collaboration from the commercial banks.1980-81 - The government sets up the Integrated RuralDevelopment Programm e (IRDP) to direct subsidised loansto poor self-employed people through the banking sector.

Over almost two decades IRDP extended assistance to about55 million families.• 1981 - All India Debt and Investment Survey shows that

share of the formal financial sector in total rural creditusage is now 61.2 per cent, while informal sources havefallen to 38.8 per cent.

< 1982 - The National Bank for Agriculture and Rural Devel-opment (NABARD) is set up.

> 1982 - The government establishes Development of Womenand Children in Rural Areas (DWCRA) as a sub-scheme ofthe IRDP to enable poor women to take up income-generatingactivities by giving groups of 15 to 20 women a revolving fund.

> mid-1980s - Savings and credit groups (self-help groups orSHGs) begin emerging all over the country, most catalysedby non-govem mental organ isations (NGOs) without the in-volvement of the state .

» 1989 - The first formal loan waiver announced, seriouslyimpacting credit discipline.

» 1989 - Khusro Committee recom mends a more m arket-oriented approach for cooperatives.

• 1991 - Economic liberalisation takes off.» 1991 - All India Debt and Investment Survey shows that

share of the formal financial sector in total rural credit us-age is 56.6 per cen t, compared to informal finance (39.6 percent) and unspecified (3.8 per cent).

» 1991 - Brahm Prakash Comm ittee comes out with a model

cooperative societies act, with less state involvement.» 1991 - Narasimham Committee's Report on the Financial

System suggests, among other th ings, phasing out conces-sional rates of interest.

• 1992 - NABARD s ta rt s its 'linkage' programm e of refinanc-ing and encouraging bank lending to SHGs.

(Conld)




(Box 2.1 Contd)

• 1993 - Rashtriya Manila Kosh (RMK or the National Credit

Fund for Women) estab lished to accelerate the flow of creditthrough NGOs to self-employed women in the unorganisedsector. (Until March 2001, RMK had supported close to 1,100NGOs with disbursements of Rs 72.6 crore [726 million] tobenefit 393.000 women.)

• 1995 - The Government of Andhra Pradesh passes the newMutually-aided Cooperative Societies (MACS) Act, grantingautonomy to cooperatives.

• Several slates follow suit and pass the new act..

• Several savings and credit cooperatives in Andhra Pradeshregister un der the new cooperative act.• 1996 - RBI deregulates interest rates for small loans (below

Rs 200.000) by Cooperative and Regional Rural Banks.• 1996 - RBI introduces a new form of bank, the Local Area

Bank, to operate in three contiguous d istricts, modelled onsimilar ban ks in Indonesia.

• 1998 - R.V. Gupta Committee sub mits report on the flow ofrural credit from commercial banks and suggests freeing

interest rates and introducing substantial changes in ap-praisal methodologies.

• 1998 - Sa-D han (The Association of Community Develop-ment Finance Institutions') set u p by micro-finance organ-isations (MFOs) in India.

• 1998 - The Small Industries Development Bank of India(SIDBI) sets up a Foundation for Micro-Credit with initialcapital of Rs 100 crore (1.000 million).

• 1999 - Taskforce on Supportive Policy and Regulatory

Framework for Micro-finance submits report, signifying amajor step towards mainstreaming micro-finance.

• 2000 - RBI declares bank lending to MFOs as part of thepriority sector.

• 2001 - By April 2001. 285,000 SHGs have taken loans from41 commercial banks, 166 RRBs and 111 cooperative bank s(average loan per group about Rs 18,000). During the year2000-2001. 171,000 SHGs take loans, of which 149,000 arefirst-time borrowers.

• 2001 - The Andhra Pradesh Manila Abhivruddhi Society(APMAS) is estab lished to provide capacity-building inpu tsto the vast movement of SHGs and MACS providing sav-ings and credit facilities to women in the state.

• 2001 - A Working Group to review the legislation and regu-latory framework for RRBs is established.




(banks and cooperatives) rose from 29.2 per cen t in 1971 to61.2 per cent in 1981, although this fell back to 56.6 per cent

by 1991.During this phase, the government also established the

Integrated Rural Development Programm e (IRDP) in 1980-81to direct subsidised loans to poor self-employed people throughthe banking sector. Over almost two decades IRDP extendedassistance to about 55 million families.

The second phase culminated in 1989 with the first offi-cial loan waiver which severely undermined what was left ofany credit discipline.

The third phase was started by the financial crisis of theearly 1990s leading to the first significant economic liberali-sation measures, including reforms in the financial sector.These included th e slow restructuring of the commercial andregional rural banks, the freeing of some interest rates, theconsolidation of the governm ent's self-employment schemes

(into Swarna Jayanti Swarozgar Yojana [SJSY]), the intro-duction of Local Area Banks, the introduction of mutually-aided cooperative societies (MACS) autonomous of governmentcontrol, and other such measures. This process of restruc-turing continues to date.

As the 1990s progressed, a fast growing number of sav-ings and credit groups (known in India as self-help groups orSHGs), predominantly with women members, also emerged,

as well as a range of specialised MFOs. By the end of thecentury significant support structures for SHGs and MFOshad been put in place, including active promotion by thepublic National Bank for Agriculture and Rural Development(NABARD) of bank lending to SHGs and a Foundation formicro-credit set up by the Small Industries DevelopmentBank of India (SIDBI).

The impact has been significant. For example, by April

2001, 285,000 SHGs had taken loans from 41 commercialbanks, 166 RRBs and 111 cooperative bank s, with an aver-age loan per group of Rs 18,000. During the year 2000-2001alone, 171,000 SHGs took loans from banks, of which 149,000were first-time borrowers, suggesting a rapid acceleration ofthis process towards NABARD's target of ensuring bank loans




are extended to 1 million SHGs by 2008. With an averagemembership of 17, this would mean banks reach out to some

17 million members, the vast majority of whom will be women(see Ch ap ter 7 below).

In 2000, specialist MFOs in India (including the newmutually-aided cooperatives) had over a half-a-million clients.The MFO SHARE, in the s tate of Andhra Pradesh, projects tha tit alone will be reaching over 1.7 million women by early 2006.

Many of these new mechanisms, especially the SHGs andMACS, are essentially addressing financial services on thebasis of mutuality, sorting out local dem and-supply gaps lo-cally, while looking beyond the local context to meet incre-mental or residual capital needs from the formal sector.

The consequences forthe formal financial sector

The context in which micro-finance initiatives emerged inIndia is not dissimilar from many other countries in the South.The financial sector developed in India by the end of the 1980swas largely supply- and target-driven, characterised by:

• a hugely expanded bank branch and cooperative network,

and new organisational forms like RRBs;• a greater focus on credit rather than other financial ser-

vices like savings and insurance, although the banks andcooperatives did provide deposit facilities;

• lending targets directed a t a range of 'priority sectors ' suchas agriculture, "weaker sections' of the population, and so on;

• interest-rate ceilings;• significant government subsidies channelled through the

ba nk s an d cooperatives, as well as through related govern-ment programmes;

• a dominant perspective that finance for rural and poorpeople was a social obligation, not a potential bu sin ess op-portunity.



Introduction to the financial sec tor in India 39

The outcomes were not entirely surprising:

• high default rates. For example, the IRDP programme expe-rienced repayment rates of less than a third and created40 million defaulters. An official loan-waiver in 1989 un-dermined what was left of a repaym ent cultu re;

• corruption and a high-degree of cynicism among bankersabout the credit-worthiness of poor people;

• significant government intervention and control, badly erod-ing the autonomy of the financial sector, making it highlydependent on subsidies even though it had access to a hugebase of savings, and creating groups with large vested in-terests.

All of this might have been acceptable had the measuresbeen able to extend effective financial services to poor people.Unfortunately, this was far from the case. Savings products

were inflexible and inappropriately designed, and appropri-ate insurance products few and far between. On the creditside, while the share in rural borrowing supplied by informalsources fell to 40 per cent in 1991. households with the leastassets were far more dependent on informal sources.1 Bor-rowers faced high transaction costs to secure subsidisedloans, making their real cost around 22 to 33 per cent(Mahajan and Ramola, 1996). There were very few repeat loans

available, and defaulters were excluded from further loans.Worse still, the formal financial sector failed to recognise

the m ismatch between the hierarchy of credit needs and cred-it availability, resulting in 'adverse usage' of credit (see Fig-ure 2.1). Credit needs sta rt with consum ption purposes, whichare only being met through informal sources at high cost.Higher needs come into play only when the lower needs aresatisfied. However, credit (often a t subsidised rates) is usua l-

ly available for new enterprises (i.e., for diversification). Sincemoney is fungible, loans are therefore taken for diversifica-tion but used in lower rungs of the hierarchy. This meansthat any appraisal of the loan is not honoured, resulting inadverse usage and hence adverse repayment performance.



40 Beyond mfcro-credit

Figure 2.1: Hierarchy of credit needs and credit availabilityfrom formal sources, leading to 'adverse usage'

Credit I—»v

usage r-r

Diversification needs

Production and productivity

enhancement needs

Production and productivity

effect ivisation needs

Consumption-smoothening

needs

Note: Effcctivisation means small improvements to an existing livelihoodactivity to increase the return from existing resources (e.g., improvedfeed for cattle instead of traditional fodder). Enhancement means in-creasing the asset base (e.g., more cattle). Diversification involves theintroduction of new livelihoods.

The immediate impact of the reforms to the financial sec-tor that became necessary by the 1990s have in many ways

made things worse for poor people. There h as been a drasticfall in the share of cooperatives in rural credit (Karmakar,1999: 108-9). The share of rural credit in the total creditdisbursed by commercial banks, which grew from 3.5 to 15 percent from 1971 to 1991, has nowdecbned again, to 11 percentin 1998 (Sa-Dhan, 2001). During the 1990s the ban ks couldnot in fact meet their agricultural credit target of 18 per centof net bank credit. This was also a decade when the RRBs

went through a res truc turin g program me. All these develop-m ents have resulted in a fall in the availability of credit fromthe formal financial system, leaving informal sources as wellas SHGs and MFOs to fill he gaps.




Demand for micro-financial serv ices2

Given the context described above, it is not surprising thatthere is large demand for micro-financial services (savings,credit and insurance). Indeed, such demand is apparentlyinsatiable, and India is perhaps the largest emerging marke tfor micro-financial services in the world.

In the case of savings, while ba nk s have provided accessto a large number of small depositors, demand is nowhere

near being met, particularly for small, frequent, 'recurring'deposits. Transaction costs of savings in formal financial in-termediaries such as bank s can be as high as 10 per cen t forpoor rural households. Poor people therefore turn to othermeans such as informal chit-funds and bishis, and to sav-ings mobilisation companies.

The large non-banking finance companies like Peerless,Sanchayani and Sahara raise thousands of crores of rural

deposits. In fact there is so much demand for savings thatpeople are willing to pay for savings services, in the form of lowerthan inflation interest rates on deposits and high transactioncosts, apart from the risk of losing their deposits altogether,when saving with num erous private 'finance companies'. Thereha s been much malpractice among such private companies,and many poor people have lost their money as a resu lt.3

In the emerging micro-finance sector, SHGs and mutually-aided cooperatives in the s tate of Andhra Pradesh alone havealready collected more than Rs 500 crore (5,000 million) inmicro-savings.

In terms of micro-credit, India h as nearly 400 million peopleliving below or just above an austerely defined poverty line.Approximately 75 million households therefore need micro-finance. Of these, nearly 60 million households are in ruralIndia and the remaining 15 million are urban slum-dwellers.The current annual credit usage by these households wasestimated in 1998 to be Rs 465 ,000 million or US$10 billion.This represents usage and not unmet demand.




Compare this w ith the supply of small loans by banks. It isestimated that the num ber of small loan accounts from banks

covered some 40 million househ olds in 2000. The rem aining35 million households are perhaps meeting their credit needsfrom the informal sector. Micro-finance organisations haveof course arisen because of this gap between demand andthe formal sector's limited supply.

One million SHGs, NABARD's targe t for 2008, will absorbat least Rs 50,000 million worth of funds, a huge challenge forthe bank ing system. In Chap ter 7, Malcolm Harper estimates

that, if such targets for the outreach of SHGs and of MFOs aremet, by 2009 a quarter of all poor households will have ac-cess to micro-financial services through such intermediaries.

Finally, on micro-insurance, during the 1990s a large num-ber of low-premium insurance schemes emerged, coveringpoor people against death, accidents, natu ral calamities, andloss of as se ts due to fire, theft, and so on. Livestock and assetinsu rance was extended along with the subsidised IRDP loans(now taken up in SJSY), and t hus remained scheme-driven,with little awareness among clients. Livestock insurance,however, is quite expensive and its reach to poor people isnegligible, except when linked to governm ent schemes. Cropinsu ran ce, on the other hand , has been a great money-loserfor the public sector provider, the General Insurance Corpo-ration (GIC). There is therefore significant unmet demand formicro-insurance services also.

This brief overview of demand for micro-financial servicessuggests the huge challenges and opportunities the Indianm arket pre sents . While this book focuses largely on the roleof SHGs, cooperatives and specialised MFOs in rising to thesechallenges and opportunities, it would be foolish to believethey could address all the dem and. This can only be done ifthe mainstream financial sector also reaches out to millions

of poor househo lds to provide them with micro-financial ser-vices, bo th directly and through interm ediaries. To concludethis chapter, we therefore summarise the organisational pro-file of the financial sector.




Summary of the organisational profile

of the financial sector

Formal financial sector entities include:

• Branches of commercial bank s and RRBs, which both takedeposits and extend loans.

• Cooperative banks at the village, town and district levels,

and u rban cooperative banks , which both take deposits andextend loans, although a significant part of their lendingfunds come from NABARD.

• The Post Office, which provides savings as well as insur-ance services, and the National Small Savings Organisa-tion, which sells deposit instruments.

• Non-banking finance com panies (NBFCs), very few of whichare allowed by th e Reserve Bank of India (RBI), India 's cen-

tral bank, to take deposits. W ithin NBFCs, there is a spe-cial category called residuary non-banking companies, orRNBCs, which are allowed to raise an unlimited am ount ofdeposits, as long as 80 per cent of it is pu t in governmentand bank deposits. Peerless, Sanchayani and Sahara areexamples of such RNBCs.

• The Life and General Insurance Corporations.

The range of MFOs emerging comprise:

• Not-for-profit MFOs such as societies and trusts (legal formsofNGOs) that lend to borrowers, usually organised into SHGsor into Grameen Bank-style groups and centres.

• Mutual-benefit MFOs, especially cooperatives, som e like theSelf-employed Women's Association (SEWA) Bank registeredas urban cooperative ban ks , while new ones, especially in

Andhra Pradesh, are increasingly emerging as MACS un-der the new cooperative acts .

• For-profit MFOs incorporated as non-banking financial com-panies such as BASIX and SHARE Micro-finance Limited.

The overall financial system is summarised in Table 2 .1 .



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Notes

1. The share of debt from informal sources stood at 58 per cent for thelowest asset group with less than Rs 5,000 In assets, compared toonly 19 per cent for the highest asset group with assets of Rs 250,000and above (Mahajan, 2000: 170).

2. The estimates In this section come from Mahajan (nd) and Mahajanand Nagasri (1999).

3. One survey showed that over 55 per cent of slum-dwellers surveyedIn Delhi had lost money to one or other deposit-taker of this kind

(Titus, 1995).

beyond micro-credit: putting development back into micro-finance

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