COMMENTARYEconomic & Political Weekly EPW march 28, 2009 vol xliv no 1321Emerging Trends in MicrofinanceK G KarmakarTo enable the transition of microfinance to a well- functioning and mature industry so that financial inclusion has a better social impact, the existing system needs to be strengthened by addressing certain core issues. The self-help group-bank linkage programme needs upscaling and structured financing to microfinance institutions is required if they are to get wide access to funds for a better approach that will enable them to deliver on their potential to reduce poverty.Microfinance covers the delivery of banking and other financial services at affordable costs to the vast sections of disadvantaged and low-income groups. Easy access to public goods and services is essential for an open, inclusive and efficient society.1 IntroductionMicrofinance, in India, presently provides mainly savings and credit facilities under different models, viz (a) the banks provid-ing “no-frills” deposit facilities, remit-tances, insurance and small loans; (b) the self-help group (SHG)-bank linkage model; (c) the microfinance institutions (MFI) model; (d) the post offices, one of the most widespread organisations in the country, with 1,38,000 rural offices have also been providing small savings, remittance facili-ties and postal life insurance facilities.The National Bank for Agriculture and Rural Development (NABARD) has been the main facilitator of the SHG-bank link-age approach in which small informal groups called “self-help groups” have been provided with financial support in the form of grants to develop themselves as institu-tions capable of accessing credit from the formal banking structure in the country. TheMFI approach has evolved to meet the vast unmet potential for microfinance in the country. The microfinance institu-tions having varied ownership structure like societies, trusts, not for profit compa-nies and for profit companies, etc, are pro-viding microfinance to the poorer sections of the society. A number of private sector banks are using the MFIs to meet their priority sector obligations.The emergingSHG federations at vil-lage/block/district levels as in Andhra Pradesh, Uttar Pradesh and Bihar and other models provide valuable support and handholding functions to enable the emergence of micro-enterprises. This is being actively promoted so that the earn-ing capacity of the poor people is enhanced and this will enrich the rural economy. These efforts need to be strengthened, to ensure financial inclusion utilising the microfinance system, especially in un-banked rural areas.Microfinance has had a tremendous im-pact on the lives of the underprivileged rural people. As on 31 March 2007, 41,60,584 SHGs were maintaining savings bank accounts with the banking sector with outstanding savings of Rs 3,512.71 crore, thereby ensuring financial inclusion for more than 5.8 crore poor households within its fold. More noteworthy, women empowerment has been one of the major outcomes of the SHG movement. The number of village micro-enterprises have been increased and income levels ofSHG members have also increased. The need for better governance and involvement of panchayati raj institutions (PRIs) in de-velopment activities is also being en-hanced. Rural infrastructure is also be-ing improved thanks to the Rural Infra-structure Development Fund (RIDF) and this involves enhanced economic devel-opment activities.2 Evolution of Microfinance TheNABARD has successfully spearheaded the microfinance programme through partnership with various stakeholders like non-governmental organisations (NGOs), banks, cooperatives, etc, in the formal and informal sector, with support from both the government of India (GoI) and the Re-serve Bank of India (RBI) since the early 1990s. TheSHG-bank linkage programme (BLP) was launched byNABARD as a pilot project in 1992 against the backdrop of a for the Formulation of the Eleventh Five-Year Plan (2007-2012) (New Delhi: Government of India). – (2008): Eleventh Five-Year Plan (2007-2012),Vols I & III, New Delhi. – (2008): Draft Report of the Committee on Financial Sector Reforms, New Delhi.Radhakrishna, R and Shovan Ray, ed. (2005): Hand-book of Poverty in India – Perspectives, Policies, and Programmes(New Delhi: Oxford University Press).Rao, C H H (2005): Agriculture, Food Security, Poverty, and Environment – Essays on Post-Reform India (New Delhi: Oxford University Press). – (2006): “Growing Regional Disparities in Devel-opment in India – Post-Reform Experience and Challenges Ahead”, Lecture dedicated to the Memory of Professor A M Khusro, delivered at the 88th Annual Conference of the Indian Economic Association, held at Visakhapatnam, 27-29 De-cember 2005; published in, The Indian Economic Journal,Vol 54, No 1, April-June. Reserve Bank of India (2008): Handbook of Statistics on the Indian Economy, Mumbai.World Bank (2008): Report of the Commission on Growth and Development, Washington.K G Karmakar is the managing director of the National Bank for Agriculture and Rural Development.ge and has clearly
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COMMENTARYEconomic & Political Weekly EPW march 28, 2009 vol xliv no 1323Grain Banks and SHGs: The pilot project enables the poor to save in kind, raise re-sources against such savings and provide access to self-managed, participative food security systems. Encouraged by the suc-cessful establishment and maintenance of three grain banks bySHGs formed by tribal communities covering 17 villages in two blocks of Kalahandi district, Orissa, NABARD extended the pilot project in the predominantly tribal area of Chhattisgarh. A grant assistance of Rs 2.4 lakh has been sanctioned for construction and establish-ment of 10 grain banks in Bastar and Kanker districts in the state.3.1 Microfinance and Social EmpowermentTheSHG-BLP itself has had a profound so-cial impact. A number of studies con-ducted on the effectiveness of the pro-gramme, have highlighted its impact on the social empowerment process. Impor-tant findings with respect to the SHG programme are:– It has enabled households to spend much more on education than non-client house-holds. Families participating in the pro-gramme have reported better school attendance and lower dropout rates. – It has empowered women by enhancing their contribution to household income, increasing the value of their assets and generally by giving them better control over decisions that affect their lives. – In certain areas, microfinance has re-duced child mortality, improved maternal health and the ability of the poor to com-bat disease through better nutrition, hous-ing and health – especially among women and children.– It has contributed to reduced dependen-cy on informal moneylenders and other non-institutional lenders in rural areas.4 Spread of MicrofinanceThe southern regions had taken a lead in SHG-BLP from the beginning of the pro-gramme which led to more concentration of SHGs in southern India. In order to re-duce the regional imbalance in the spread of theSHG-BLP, NABARD identi-fied 13 states which have a large popula-tion of poor, for focused attention. The cumulative number ofSHGs credit-linked in these 13 states has significantly increased over the last few years. The cumulative share ofSHGs in the non-southern regions has risen from 29% as on March 2001 to approximately 52% as on March 2008. 5 CourseCorrectionsFor the development of the microfi-nance sector and the rapid growth of the microfinance institutions certain coursecorrection measures need to be put in place. SHG-Bank Linkage Programme Upscaling of the SHG-BLP in a sustainable manner is a formidable task before vari-ous stakeholders. There are various chal-lenges prevailing under the sector that need to be addressed. Regional Imbalances: There is a need for even distribution of group formation and linkage efforts especially in the northern, central, eastern and north-eastern states and to put a check on the uneven spread of theSHG-BLP in the southern region (52%) of the country. This is more important in view of higher concentration of the rural poor in these regions. Special surveys and analytical studies need to be taken up in such regions to identify positive factors affect-ing the spread and sustainability of SHGs. There is a need to invest muchmore incapa-city building programmes in these areas.Capacity Building: It has been observed that among SHGs, in case there is with-drawal of promoting institutions, there is a tendency for a slip in performance. The solution lies in nurturing of the SHG up to a point where it becomes self managed and independent of the promoting institution. This implies setting up of a proper system for accounts keeping and auditing, credit management, capacity building, skills up-gradation, etc. There is a need to identify ways and means of improving the quality of SHGs consistent with rapid growth and balancing sustainability with easier finan-cial access besides continuous emphasis on capacity building for bankers, NGOs and government officials involved in promot-ing and financing SHGs. Livelihood Promotion: There are a sub-stantial number of credit-linkedSHGs which are over three years old and stabi-lised in their credit and savings opera-tions. It is necessary that members of suchSHGs be encouraged to scale up and diversify their income-generating acti-vities. ManyNGOs are trying to promote micro-enterprises among SHG members. But their marketing abilities, skills and experience remain rather limited. The critical constraining factor is thatSHG members face a lot of problems in market-ing of their produce besides low level of appropriate skills. There is a need to evolve the methodology for promoting micro-enterprises to create livelihood and employ-ment opportunities among SHG members, besides imparting relevant financial skills and developing their risk-taking abilities. In this direction, NABARD has initiated a three-year “pilot project” in nine districts across nine states through professional marketing agencies and the project has shown encouraging results. There is a need to rapidly upscale such efforts. Low Bank Loan Per SHG Member: Under the SHG-BLP, the average size of bank loan per SHG is low and translates to about Rs 7,000 per member. However, var-iations at the field level shows that in the older SHGs which have already participated in multiple loan cycles, the average loan per member is in the range of Rs 25,000 to Rs 40,000. Such small per capita loans do not enable the members to overcome poverty or acquire capital assets and thus, there is a need to increase the absorbing capacity of group members by way of enhancing their level of skills, literacy levels, access to information, etc. Nonethe-less, the challenge remains for all the stake-holders, viz, government, bankers, NGOs, etc, to join hands in the collective effort for economic upliftment of the SHG members through various repeat cycles of credit.Micro Insurance Products: TheSHG members have little or no access to insur-ance services, which are crucial for secu-rity and sustainability of these groups. According to a study conducted in 2003, over 82% of SHG households surveyed did not have any insurance cover and practically none of the poorest house-holds surveyed had any insurance policy. There is a felt need to introduce micro 
