4 Stages of Microfinance in India with their Development and Evolution; The Grameen Bank model of microfinance based on the “joint liability” of members has received wide international appeal and popularity in numerous emerging economies like India. The developing economies have even tried to replicate these models for developing small-scale businesses and reducing poverty levels.
Here is the article to explain, Development and evolution of Microfinance in India with its 4 Stages!
The evolution of Indian microfinance can broadly divide into four distinct phases:
The Cooperative Movement (1900-1960);
During this phase, there was the dominance of two sources of credit viz. institutional sources and non-institutional sources. The noninstitutional sources catered to 93 percent of credit requirement in the year 1951-52; and, institutional sources accounted for 7 percent of total credit requirements about that year. The preponderance of informal sources of credit was due to the provision of loans for both productive and nonproductive purposes; as well as for short-term and long-term purposes and simple procedures of lending adopted.
But they involved several malpractices like charging high rates of interest, denial of repayment, misappropriation of collaterals, etc. At that time, the government considered cooperatives as an instrument of economic development of disadvantaged masses. The credit cooperatives were vehicles to extend subsidized credit to the poor under government sponsorship.
They existed characterized as non-exploitative, voluntary membership, and decentralized decision-making. The Primary Agricultural societies (PACS) provide mainly short-term and medium-term loans; and Land Development Banks provide long-term loans as a part of the cooperative movement.
Subsidized Social Banking (1960 – 1990);
It stood observed that cooperatives could not do much as existed expected of them. With the failure of cooperatives, the All India Rural Credit Survey Committee in 1969 emphasized the adoption of the “Multiagency Approach to Institutional Credit”; which assigned an important role to the commercial banks in addition to cooperatives. Even Indian planners in the fifth five-year plan (1974-79), emphasized “Garibi Hatao” (Removal of poverty) and the “growth with social justice”.
It was due to this approach that in 1969, 14 leading banks stood nationalized, and later on; five regional rural banks stood set up for the purpose on October 2, 1975, at Moradabad and Gorakhpur in Uttar Pradesh, Bhiwani in Haryana, Jaipur in Rajasthan and Malda in West Bengal. Hence, as a result of the Multiagency approach and other planning initiatives; the Government focused on measures such as the nationalization of Banks, expansion of rural branch networks; the establishment of Regional Rural Banks (RRBs), and the setting up of apex institutions.
Such as the National Bank for Agriculture and Rural Development (NABARD); and the Small Scale Industries Development Bank of India (SIDBI). The Reserve Bank of India (RBI) as the central bank of the country played a crucial role by giving overall direction for providing credit and financial support to the national bank for its operations. Therefore, after the multiagency approach, the commercial banks and regional rural banks assumed a major role in providing both short-term and long-term funds for serving the poorest of the poor.
Despite, the multiagency approach adopted; a very large number of the poorest of the poor continued to remain outside the fold of the formal banking system. While these steps led to reaching a large population, the period stood characterized by large-scale misuse of credit; creating a negative perception about the credibility of micro borrowers among bankers; thus further hindering access to banking services for low-income people.
However, the gap between demand and supply of financial services still prevailed due to shortcomings of the institutional credit system; as it provides funds only for productive purposes, the requirement of collateral, massive paperwork leading to inordinate delays. As a response to the failure of the formal financial system in reaching the destitute masses; microfinance through Self-help groups existed innovated and institutionalized in the India scenario.
“While no definitive date has been determined for the actual conception and propagation of SHGs; the practice of small groups of rural and urban people banding together to form a savings and credit organization well establish in India. In the early stages, NGOs played a pivotal role in innovating the SHG model and in implementing the model to develop the process fully”.
The first step towards Microfinance intervention was the establishment of the Self Employed Women’s Association (SEWA); a nonformal organization owned by women of petty trade groups. It stood established on the cooperative principle in 1974 in Gujarat. This initiative existed undertaken for providing banking services to the poor women employed in the unorganized sector of Ahmadabad. Shree Mahila Sahkari Bank stood set up as an urban cooperative bank. At the national level, the SHG movement involves NGOs helping in the formation of the groups.
During this time, the planners and policymakers were desperately searching for viable ways of poverty alleviation. Around that time, the Government of India launched the Integrated Rural Development Program (IRDP); a large poverty alleviation credit program, to provide credit to the poor and underprivileged; which involved the provision of government-subsidized credit through banks to the poor. But the IRDP was a “supply-led” program and the clients had no choice over the purpose and the amount. At this stage, it existed realized that the poor needed better access to these services and products, rather than cheap subsidized credit. That is when the experts started talking about microfinance, rather than microcredit.
Keeping in view the economic scenario of those days, a strong need existed felt for alternative policies, procedures, savings and loan products, other complementary services, and new delivery mechanisms; which would fulfill the requirements of the poorest, especially of the women members of such households. It was during this time, NABARD conducted a series of research studies independently and in association with MYRADA, a leading NGO from Southern India; which showed that a very large number of poor continued to remain outside the fold of the formal banking system. Later on, PRADAN in its Madurai projects started forming women SHG groups”.
During 1988-89, NABARD in association with Asia Pacific Rural and Agricultural Credit Association (APRACA) undertook a survey of 43 NGOs in 11 states in India, to study the functioning of microfinance SHGs and their collaboration possibilities with the formal banking system. Both these research projects laid the foundation stone for the initiation of a pilot project called the SHG linkage project.
SHG-Bank Linkage Program (1990 – 2000);
The failure of subsidized social banking lead to the delivery of credit with NABARD initiating the Self Help Group (SHG) Bank Linkage Programme in 1992 (SBLP), aiming to link informal women’s groups to formal banks. This was the first official attempt in linking informal groups with formal lending structures. “To initiate this project NABARD held extensive consultations with the RBI. This resulted from the RBI issuing a policy circular in 1991 to all Commercial Banks to participate and extend finance to SHGs” (RBI, 1991). This was the first instance of mature SHGs that were directly financed by a commercial bank. “The informal thrift and credit groups of poor were recognized as bankable clients. Soon after, the RBI advised Commercial Banks to consider lending to SHGs as part of their rural credit operations thus creating SHG Bank Linkage”.
The program has been extremely useful in increasing banking system outreach to unreached people. The program has been extremely advantageous due to the reduction of transaction costs; due to less paperwork and record keeping as group lending rather than individual lending involved. The SHG bank linkage is a strong method of financial inclusion; providing unbanked rural clientele with access to formal financial services from the existing banking infrastructure.
The major benefit of linking SHGs with the banks is that it helps in overcoming the problem of high transaction costs of banks; as the responsibility of loan appraisal, follow-up, recovery of loans is left to the poor themselves. On the other side, SHGs gain by enjoying larger and cheaper sources.
Later, the planners in the Ninth Five-year plan (1997-2002) emphasized “Growth with Social Justice and Equality”. The objective of the Ninth plan as approved by the National Development Council explicitly states as follows:
“Promoting and developing participatory institutions like Panchayati Raj Institutions, cooperatives, and Self -Help Groups”.
Hence, it was a ninth five-year plan that expressly laid down the objective of establishment of Self Help Groups to achieve the objective of Growth with Social Justice and Equality” as a part of the microfinance initiative. Meanwhile, in 1999, the Government of India merged various credit programs, refined them; and launched a new program called Swaranjayanti Gram Swarazagar Yojana (SGSY). SGSY aimed to continue to provide subsidized credit to the poor through the banking sector to generate self-employment through a Self-Help Group approach.
Commercialization of Microfinance: The first decade of the new millennium;
This stage involves greater participation of new microfinance institutions that started taking interest in the sector not only as part of their corporate social responsibility but also as a new business line in India. Several institutions have been set up over time; which stood required to meet the credit requirements of the new society and downtrodden.
At present Eleventh Five Year Plan (2007-2012) aims at “Towards More and Inclusive Growth”. The word inclusive growth means including and considering; those who are somehow excluded from the benefits which they (poor) should avail. Microfinance is a step towards inclusive growth via inclusive finance; which moves around serving the financial needs and non-financial needs of the poor to improve the level of living of rural masses.