India’s rural poor are overwhelmingly dependent on agriculture as their primary source of income; the majority are marginal or small farmers, and the poorest households are landless. Rural households typically depend on two types of incomes: farm income which is seasonal and part-time wage labor which is highly irregular. Farmers need money for various purposes which typically falls under consumption needs and production needs. Also a majority of rural households have to deal with unexpected expenditures which they are forced to finance either from cash at home, or through informal loans from family, friends, or moneylenders.
The need for multiple financial services
Credit is not the only financial service needed by small holders. They need to save and also want to cover themselves against risks through insurance. The poor need a wide range of financial services, from small advances to tide over consumption needs to loans for investment for productive purposes and long term saving that help them manage life cycle needs.
India has a range of rural financial service providers, including the formal sector financial institutions at one end of the spectrum, informal providers (mostly moneylenders) at the other end of the spectrum, and between these two extremes, a number of semiformal/ microfinance providers. The formal sector financial institutions which include Commercial banks, Regional rural banks, Cooperatives and Insurance Companies account for almost all institutional loans to rural areas. However, the formal loans are the least preferred by farmers owing to longer processing time and untimeliness of credit. Studies indicate that it takes, on an average, 33 weeks for a loan to be approved by a commercial bank. Bankers too find it high risk and high cost proposition to serve the rural poor. The transactions costs of rural lending in India are high, mainly due to the small loan size, high frequency of transactions in rural finance, large geographical spread, heterogeneity of borrowers, and widespread illiteracy. Not surprisingly, informal borrowing despite the high interest rates is very important for the poorest, who are the most deprived of formal finance.
Improving credit access – the micro finance models
As access to financial services reduces vulnerability and helps poor people increase their income, improving this access has become an important part of many development initiatives. In light of the inefficiencies that characterize India’s rural finance markets and the relative lack of success of the formal rural finance institutions in delivering timely finance to the poor, NGOs, financial institutions, and government have made efforts, in partnership, to develop new financial inclusion approaches to service the financial needs of the rural poor. These approaches – or “microfinance” programs – have been designed to overcome some of the risks and costs associated with formal financing.
One approach to microfinance that has gained prominence in recent years is the self help group (SHG)-bank linkage program, pioneered by a few NGOs such as MYRADA in Karnataka and PRADAN in Rajasthan with strong support from NABARD. SHG-bank linkage involves organizing the poor, usually 15-20 women, into self-help groups (SHGs), inculcating in the group the habit of saving, linking the group to a bank and rotating the saved and borrowed funds through lending within the group. The SHGs thus save, borrow and repay collectively.
Over the last 10 years, the SHG-linkage model has become the dominant mode of micro finance in India, and the model has been successful in encouraging significant savings and high repayment rates. The number of SHGs linked to banks has increased from just 500 in the early 1990s, to over 69,53,000 by 2010. The SHGbank linkage program today reaches around 97 million poor households.
The other model is Micro Finance Institutions (MFI), which has a reach of around 1 million clients. This sector has emerged to dole out small loans to poor people unable to access conventional lending mechanisms. In India, in the year 2010, the microfinance sector after growing into huge proportions, (supposedly 25000 crore or 41 million euro industry) is facing a crisis. Presently, the sector is facing criticism for its rate of interest, the purpose for which it has lent, and extending multiple loans, ignoring the abilities to repay. Also it is felt that the micro finance institutions, by targeting individuals has weakened the existing social cohesion. (Venkatesh Tagat, p. 20)
Moving beyond credit
In an impact assessment study carried out by BASIX six years after inception, brought out that the micro credit programme addressed the issue of livelihoods only peripherally. The study found that only 52% percent of the three-year plus microcredit customers reported an increase in income, 23% reported no change while another 25% actually reported a decline. The reasons stated were (i) un-managed risk (ii) low productivity in crop cultivation and livestock rearing and (iii) inability to get good prices from theinput and output markets. It is therefore necessary to broaden the paradigm from microcredit to Livelihood Finance.
“May be its time to suggest that the focus on credit for ‘agriculture’ should shift to ‘credit to families’ living in rural areas”, says Alsoyius Fernandez, former Director of MYRADA, who pioneered the SHG movement. Declining size of holdings, increasing risks generated by shifting to high cost inputs, declining quality of soils and fluctuating market prices has made it difficult for small holders to increase farm productivity using credit. With this changed focus, farming families especially small and marginal farmers in dryland areas can increase and diversify the income generating activities in their portfolio of livelihood activities and continue to be credit worthy (A. Fernandez, p. 6).
Management of natural resources is crucial in enabling better returns from land. Micro finance is only a catalyst in achieving sustainable agriculture. Therefore focus should be on building up natural resources using credit and not just dump credit without helping communities on how to use it productively. For instance, Hand in Hand besides providing access to credit has organized workshops and field training for farmers to take up organic farming and guided them to practice sustainable agriculture. Today, many farmers in Thiruvannamalai district have switched over to organic paddy cultivation and are reaping benefits.(Jeevan, p. 9). Similarly the fishermen federation of Orissa used credit as a tool to conserve the marine biodiversity (Utkarsh, p. 11).
Some innovative mechanisms have been developed by the development agencies to help farmers access as well as strengthen their repayment capacities. The Pragathinidhi, an innovative financing development fund promoted by SKDRDP in Karnataka (Manjunath, p. 23), encourages farmers to take up several farm related activities and enterprises which increases their income source. Similar is the Community Biodiversity Management Fund which is used as a mechanism to achieve the twin goal of biodiversity conservation and livelihood improvements in Western Tarai regions of Nepal (Shree Kumar Maharjan et.al., p. 35).
Also credit needs to be supplemented with supportive services. The support services like veterinary care, fodder and water are not available often because the poor do not have access to these resources. Strong local institutions like the Social Affinity Groups (SAG) can help overcome even this hurdle by organised lobbying (A. Fernandez, p. 6).
It is assumed that credit can automatically translate into successful micro-enterprises. Micro credit is a necessary but not a sufficient condition for micro enterprise promotion, says Vijay Mahajan of BASIX. Other inputs are required, such as identification of livelihood opportunities, selection and motivation of the microentrepreneurs, business and technical training, establishing of market linkages for inputs and outputs, common infrastructure and some times regulatory approvals. In the absence of these, microcredit by itself, works only for a limited set of activities – small farming, livestock rearing and petty trading, and even those where market linkages are in place.
Strong organizations – Self regulation and management
Access to resources is influenced by the extent to which farmers are organized and the institutional arrangements available and finally the contextual social and political structure. Farmers’ associations are viable platforms to bring farmers together, build their capacities and enable them to gain access to resources, credit, inputs and markets. This would directly help them in cutting uncertainty and transaction costs, and empower them to make choices relating to feasibility, productivity and profitability of farm enterprises. It would also help to pinpoint asymmetric access rules, and allow farmers to raise their voice and have it heard. Farmers’ organizations, therefore, have a vital role to play in access to rural finance.
Handholding by an external agency like an NGO is imminent in building the capacities of group members in using credit productively, thus making the groups strong and sustainable. For instance, the dynamics of thousands of SHGs nurtured by Hand in Hand over the years has been such that most farmers have been able to pay back the amount and also improved their livelihood standards. It is also in the process of evolving a marketing mechanism to make products viable in different markets. Simultaneously, the organization has undertaken several confidence-building measures to motivate poor farmers (Jeevan, p. 9).
However, it is also important that these groups and their federations at a higher level, become independent in all aspects and take full ownership. Future of SHGs and their federations lies in members taking full responsibility for the entire structure – the SHG and their federation. This means that the facilitating agencies should minimise their role, and enable representatives of the movement to take full ownership, especially for the agenda of promoting increased member-control and ownership. Hence promoting institution needs to focus on bottom up approach and ensure that the self regulation of SHGs and their federations, should be designed, implemented and managed by the women themselves(Rama Lakshmi, p. 17).
While some of these programs have been more successful than others, their limited outreach, scalability and financial sustainability remain matters of concern. SHGs have become a means to quickly reach targets in the government programmes. The emphasis on targets without adequate attention to nurturing and strengthening the SHGs could lead to a general deterioration in the quality of groups promoted, threatening the longer term credibility and viability of the entire program.
Groups can become financially sustainable if their resources are built on internal savings rather than depending on external funding and subsidies. Big loans from formal sources could be risky especially for small and marginal farmers group when their means are limited. This may push them into a new spiral of debts and suicides as is evident with the experience of MFIs in several states in India.
Making systems and procedures simpler can help increase access to formal sources of finance. Also, better credit information and use of ICTs like mobile phone banking, Kisan credit cards and biometric ATMs can go a long way in reducing the transaction costs, ultimately reaching out to larger number of small farmers.
INDIA: Scaling-up Access to Finance for India’s Rural Poor;
September 6, 2004; Finance And Private Sector Development Unit;
South Asia Region, The World Bank.
NABARD, Status of Micro Finance in India – 2010.