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Bank credits – boon or bane?

Big loans are a great risk for small groups. Investments should match the group’s ability to save and produce. Strengthening groups, forming federations and building up group fund is a better option of accessing timely credit, also leading to building up social capital.

Bank credits – boon or bane

Dulal, an NGO in Orissa has been working with community groups helping them improve their livelihoods. The groups which were facilitated by Dulal initially were supported through grants and subsidies. Later these groups were enabled to start their own savings and were linked to bank credits and government programmes to avail the benefits. Dulal felt that providing access to credit through bank linkages would strengthen the groups and help them improve their lives by taking up income generating activities. But the experience on the ground proved something different – that the inflexible bank credit and subsidies often end up with farmers getting into huge debt situations. Experience of Shibaparbati SHG illustrates this.

Shibaparbati SHG of Indusahi, Kuliana was formed in 2001. In 2004 they initiated groundnut cultivation as an income generating activity (IGP) on a small scale of less than one acre of leased land. This expanded to 12 acres by the year 2007. In 2007, the group availed financial support of Rs.2.5 lakhs from the government programme, SGSY (Swarna Jayanthi Sawarozgar Yojana) for expanding their activities. The group first withdrew Rs.70000 of which Rs.40000 was invested in groundnut cultivation. The remaining Rs.30000 was divided among members who invested in their individual business. They realized Rs.27000 as profit in that phase and repaid Rs.8000 towards the interest amount in the bank. The group members calculated that if they were to pay the interests to the principal amount they would have to pay Rs.16000 annually. To reduce the interest amount, the members planned to pay Rs19000 towards the principal amount borrowed. But the Bank refused to accept the amount at that time.

The members then withdrew the rest of the Rs. 1.8 lakhs from their group account. They invested Rs.60000 in groundnut cultivation and Rs. 32000 for Mahua business. That year the market price for Mahua flower was low. The group had to sell the entire stock before it was destroyed by pests at this low price. Similarly, heavy rains affected groundnut production. However, the group’s quick action and multiple approaches of not just relying on one IGP but doing ground nut cultivation, Mahua and paddy retailing helped them make net profits – Rs.8000 from Mahua business, Rs.7000 from groundnut cultivation and Rs. 40000 from paddy retailing. This helped them repay the interest on loan.

From this experience the group members realized that big loans are always a great risk for small groups. Investments should match the ability to save and produce. It is not worth availing huge amounts just because they are being offered through schemes. Instead, building up the group fund and forming a cooperative with several such groups would be a better option. This will also help in leveraging collective action.

Though Shibaparbati group members had saved themselves from a sure debt situation by taking quick action and responding wisely to external fluctuations of market and climate, they strongly feel that big money affected the group unity. The group has since then not taken credits from Banks and they rely on their group’s savings for business investments which is around Rs.1.45 lakhs. Having learnt lessons from the experience of Shibaparbati SHG, twelve other groups in the working areas in Kuliana who are ‘credit’ worthy as per the Banks criteria have refused support from SGSY scheme.

Convent Road, Baripada P.O
Mayurbhanj district,
Orissa – 757001
E-mail: dulalbaripada@yahoo.co.in; dulalorissa@gmail.com
Website: www.dulal.in