Inland Foreign

Particulars
(Rs.) (US $)
Individual Subscription
For One Year 500 60
For Lifetime 5000 500
Institutional Subscription
For One Year 1000 120
For Five Years 4500 500
 CONTENTS Page No.
Microfinance in Distressed Areas of J&K, Rajasthan and Andhra Pradesh: Some Issues
Gyanendra Mani and Suparna Tandon ........................................................................................................................................ 1

Evaluating the Role of Microfinance in Mitigating the Problems of Distress
Out-Migrants: A Study in KBK Districts of Orissa
S N Tripathy ............................................................................................................................................................................... 26

Drivers of Self-Help Group Approach: Lessons from Comparative Performance

of Himachal Pradesh and Haryana
S S Sangwan and Gagan Deep ................................................................................................................................................... 39

Distinct Models of SHG Micro-enterprises Organised in Diverse Regions of J&K

Mohinder Kumar ......................................................................................................................................................................... 57

Microfinance in Areas of Ecological Distress – Evidence from the Field

Samir R Samantara ..................................................................................................................................................................... 76

Linking Farmers’ Access to Microfinance, Input and Service Delivery Systems

with Crop Production Performance: A Study in the Disadvantaged Areas
of North Bank Plains Zone of Assam
R N Barman ................................................................................................................................................................................. 91

Multiple Group Memberships and its Effect on Repayment of Loans:

A Case Study of Thiruvananthapuram District in Kerala
Gopa Kumaran Nair G ............................................................................................................................................................... 107

Competition, Multiple Borrowing and Over – Indebtedness in Microfinance:

An Empirical Investigation
Sunil Puliyakot and H K Pradhan .............................................................................................................................................. 126

Determinant of Repayment Problems of Microfinance Clients — A Case Study

Vinita Kalra ................................................................................................................................................................................ 140

Comparative Study of Self-Help Group Bank Linkage Model and Microfinance Institution
Model in Raibareli District of Uttar Pradesh
D V Deshpande, K C Sharma and Gyanendra Rout ................................................................................................................... 158
.
Repayment Performance and Costs of Defaults in a Group Lending Programme –
A Case Study in Urban Microfinance
Mani Arul Nandhi ...................................................................................................................................................................... 169

Community Based Microfinance: A Study with Reference to Urban Women Self-Help Groups
in AP and Telangana
K Raja Reddy, TCS Reddy and S Prahalladaiah ......................................................................................................................... 186

Determinants of Operating Expense of Microfinance Institutions: A Study on Select MFIs in Assam

Pinky Dutta and Debabrata Das ................................................................................................................................................ 199

Transaction Costs of Lending to Vulnerable People

N Srinivasan ............................................................................................................................................................................... 212

Outreach and Financial Performance of select MFIs in India –

An Empirical Analysis
Narayan Chandra Pradhan and Prabha V Jadav ....................................................................................................................... 220

Digitization of SHGs for a Success of Microfinance in India

G R Chintala .............................................................................................................................................................................. 236
 Microfinance in Distressed
­Areas of J&K, Rajasthan and
Andhra Pradesh: Some Issues
- Gyanendra Mani* and Suparna Tandon*

Abstract
The successful This paper attempts to understand as to how effectively
i­mplementation ­ icrofinance interventions help group members to sustain them-
m
of ­microfinance selves during periods of disaster and in ecologically ­distressed
­programmes throughout areas. The multiplicity of Self-Help Group (SHG) promotion
the world has proved schemes/ institutions and the difference in ­financial benefits
that the poor can accruing therefrom has been found to have ­encouraged the mi-
and do save, and gration of a significant number of SHGs/WSHGs ­(Women Self-
are capable of using Help Group) promoted under the ­National Bank for Agricul-
credit in a productive ture and Rural Development (NABARD) ­format to the National
manner provided there Rural Livelihoods Mission (NRLM) format. The major issues
exists an ­opportunity ­emerging from field visits and requiring ­attention were, lack
for the same, as of need based credit support to groups, apathy from banks and
also an ­appropriate ­denial of ­credit by some branch ­managers to SHGs, ­insufficient
­institutional credit for income ­generating activities on ­account of various
­mechanism which reasons, good number of groups not practicing/ not allowed
is sensitive and to practice ­internal lending, etc. The ­solution to ­addressing
­responsive to the the inequities in the various microfinance ­approaches lies in
needs of the poor, by ­Ministry of ­Rural ­Development (MoRD) agreeing to ­extend
d­esigning ­specific ­financial support available under NRLM to all the SHGs in a
products and ­services district, irrespective of the SHG ­promoting institution/ ­model.
suited to their The ­possibility of working out a new set of work ­allocation
­requirements. ­between MoRD and NABARD may be ­explored taking the
­entire ­process of livelihood promotion in the ­country to a ­higher
plane. ­Further, since the extant microfinance initiatives have
not been able to ­provide an adequate coping mechanism to the
SHG members during the periods of disaster/extreme stress
and the rural poor barely manage to stay above ­subsistence
* Deputy General Managers,
­levels only because of the extant ­social security schemes, such
Department of Economic as Mahatma Gandhi National Rural Employment Guarantee
Analysis and Research,
NABARD, Mumbai. Key Words: Self-Help Groups, Microfinance
2 THE MICROFINANCE REVIEW  •  Volume VII(2)  July - December 2015

Act (MNREGA), food ­subsidy under the National Food Security Mission (NFSM), and
­interest subvention, as a solution, therefore, a two pronged strategy is recommended,
comprising (i) a microfinance product specially designed for disaster-prone areas aimed
at ensuring a viable productive unit and (ii) enhanced social security measures in such
areas in terms of number of schemes with higher ceiling for various programmes.

Introduction
The importance of providing credit to the assetless rural poor and small farmers
for meeting their consumption/production needs, helping them to cross the poverty
line and to reduce their dependence on informal sources of credit was felt by the plan-
ners as early as 1904 when the Cooperative Credit Societies’ Act was first enacted in
India, by the then British Government. The cooperative credit system was put in place
­primarily to combat the problem of usury and indebtedness of the farmers to money-
lenders and to bring together people of small means for promoting thrift and mutual
help for ­socio ­economic development. After independence, the Government of India
appointed a number of ­committees to review arrangements for improving ­institutional
credit ­delivery. The focus of these committees was “sector oriented” rather than ­“people
oriented”, possibly because of the then prevalent view that investment in some ­identified
pockets of the economy would result in benefits which would “trickle down” to ­various
strata of society and reduce social and economic inequalities. However, despite a
number of institutional measures such as bank nationalisation, allocating targets for
various ­sectors identified as “priority” areas, creation of dedicated institutions such as
Regional Rural Banks (RRBs) to specifically cater to the credit needs of people with
small means, a large number of the rural poor continued to remain outside the ambit of
the institutional credit delivery system, because of the “top down” approach.
The successful implementation of microfinance programmes throughout the world
has amply proved that the poor can and do save, and are capable of using credit in
a productive manner provided there exists an opportunity for the same, as also an
appropriate institutional mechanism which is sensitive and responsive to the needs of
the poor, by designing specific products and services suited to their requirements. The
extant format of microfinance interventions called the “Self-Help Group Bank Linkage
Programme (SBLP)” in India got its first institutional approval with the issuance of The
Reserve Bank of India Circular No. RPCD No. Plan BC-13/PL-09-22/90-91 dated 24 July,
1991, on ‘Improving access of the rural poor to banking – Role of intervening ­agencies
– SHGs’, wherein, it was clarified, inter alia, that the advances given by banks to SHGs
shall be treated as advances to ‘weaker sections’. Consequent upon this, ­NABARD issued
its first circular on the ‘guidelines for the Pilot Project for ­Linking Banks with SHGs
vide Ref No. NB.DPD.FS/4631/92-A/91-92 (Circular No. DPD/104) dated 26 ­February,
1992. The ­results of the Pilot Projects were quite encouraging and the ‘SHG’ concept
Microfinance in Distressed Areas of J&K, Rajasthan and Andhra Pradesh: Some Issues 3

was ­accepted as a potential poverty alleviation tool. Since then, a number of need
based changes in the policies/guidelines have been made to facilitate ­implementation
of ­various ­microfinance interventions aimed at social and economic upliftment of those
belonging to the lower strata of society.
The experiment also proved that the group approach of financing to the poor may
yield better results for banks as well as group members as compared to financing ­directly
to poor individuals.
A review of various policies/guidelines governing the microfinance sector in India
­reveals that majority thereof have prescribed a common approach for the entire ­country
in implementing various microfinance interventions with some specific provisions for
women beneficiaries, hilly terrain and people belonging to SC and ST communities.
Although various microfinance products, prima facie, have inbuilt flexibility to adapt
to the local conditions and needs, none of the microfinance innovations/products have
an inbuilt mechanism to enable the SHG members to sustain themselves during ­periods
of disaster and in ecologically fragile or distressed areas. It may be appreciated that
SHG members, in areas which are affected by repeated disasters or those who live
in ­ecologically fragile regions, face repeated and significant setbacks in terms of loss
of ­assets, property, crops, and disruptions in livelihood and income, which have the
­potential to disrupt their thrift and savings, affect their repayments and ultimately push
them back financially.

Objectives and Methodology

Objectives of the Study
This paper has made an attempt to understand as to how and to what extent
­ icrofinance interventions have helped group members to sustain themselves ­during
m
periods of ­disaster and in ecologically fragile or distressed areas. The paper has
also tried to identify the issues which need attention of the planners as well as the
­implementing agencies in order to make various microfinance policies more effective
and result ­oriented.
Selection of Study Area
Keeping the above objectives in view, the districts of Doda and Udhampur in J&K,
Barmer in Rajasthan and Visakhapatnam in AP, all of which have been found affected
by repeated ecological distress were selected for the study.
Doda is prone to multiple types of fragility, i.e., earthquakes (Doda falls under the
Seismic Zone V, the most vulnerable in terms of frequency and intensity and the earth-
quakes of October 2005 and May 2013 had affected Doda significantly), landslides,
­avalanches and snow blizzards, drought, cloud bursts, etc. In terms of the Survey Report
on “01 May 2013 Doda Earthquake - Post-Earthquake Reconnaissance”, by the Centre for
4 THE MICROFINANCE REVIEW  •  Volume VII(2)  July - December 2015

Earthquake Engineering, International Institute of Information Technology, inter alia,

“the roads are freshly cut on the hill slopes, which are not yet stabilised. In several
stretches, there is accumulation of loose hill slope material, which is sliding from these
open cut slopes; even with little rain, the road becomes unmotorable. Also, there are
many stretches of the road, which see regular rock fall. Every year, during monsoons,
parts of the national and state highways connecting Doda to other parts of the state, as
well as places within the district, get cut off due to major landslides.”
The district of Udhampur is a mountainous and rainfed (6% agricultural land
­irrigated) district which observes all natural calamities of a hilly region.
Barmer district is located in the western part of Rajasthan forming a part of the Thar
Desert which receives an average rainfall of 277 mm in a year. Barmer is one of the
250 most backward districts of the country. The major problems faced by the district
include water shortage, formation of sand dunes due to wind velocity resulting in heavy
soil ­erosion and depleting productivity of agricultural lands. Culturable ­wastelands and
fallow lands are quite high in Barmer, and are not put to any productive use because
of large average holdings. Soils are sandy, of poor water holding capacity and low in
­nutrients. Seasonal migration to neighbouring districts and other states during ­summer
for wage employment and for grazing of animals is quite common for many poor ­families
in the districts. The major crops grown are bajra, guar, moong and moth during kharif
and cumin and isabgol during rabi. Dairy, goat rearing and handicrafts are other major
economic activities.
Visakhapatnam district is one of the North Eastern coastal districts of AP. Paddy is
the principal food crop of the district followed by ragi, bajra and jowar and cash crops
such as sugarcane, groundnut, sesamum, niger and chillies are important. About 36%
of the cropped area is irrigated. Fisheries is an important economic activity for about
13,000 fishermen living in about 59 coastal villages and hamlets and deriving their
livelihood from marine, inland and brackish water fishing, besides catching fish from
the ­Thandava and Raiwada reservoirs. Visakhapatnam is a cyclone prone district and
the latest cyclone, namely ‘Hudhud’, which hit the port city on 12 October, 2014, at wind
speeds of 206 kmph, was considered to be the third highest intensity cyclonic storm out
of the 515 cyclonic storms that developed either in the Bay of Bengal or the Arabian Sea
since 1891.
Selection of SHG Promoting Agencies in the Study Area
During the course of the study, the team came across various institutional support
models which are working towards livelihood promotion, each with unique features. In
the state of J&K, MoRD promoted NRLM and NABARD supported SHG/ Women SHG
Bank-Linkage Programme (SBLP) are being used as livelihood support models. In the
State of Rajasthan, in addition to NRLM and NABARD SBLP, the “Mitigating Poverty in
Western Rajasthan” (MPOWER) project, jointly supported by the ‘International Fund
Microfinance in Distressed Areas of J&K, Rajasthan and Andhra Pradesh: Some Issues 5

for Agricultural Development’ (IFAD), Sir Ratan Tata Trust (SRTT) and the ­Government
of Rajasthan, is being implemented in six districts of western Rajasthan falling un-
der the hot and arid zone. This programme targets all BPL households and focuses on
­organising women for empowerment and sustainable livelihoods, following the SHG
based livelihood model. The programme is being implemented over six years, ending
December, 2016, with the support of identified NGOs. The financial assistance provided
under MPOWER includes Revolving Fund Assistance of Rs. 15,000 per group followed
by seed capital at the rate of Rs. 10,000 per member. Thereafter credit linkage by banks
for income generating activities is ensured. In the state of Andhra Pradesh, ­Society for
Elimination of Rural Poverty (SERP) established by the ­Government of ­Andhra Pradesh
(GoAP) to facilitate poverty reduction through social mobilisation and ­improvement of
livelihoods of rural poor has got its unique well established federated structure for the
benefit of the rural poor. A programme called the ‘Mission for ­Elimination of Poverty
in Municipal Areas’ (MEPMA), parallel to SERP in urban areas, has been initiated by
the GoAP on 04 June, 2007. MEPMA has mobilised around 20 lakh urban poor women
into about 1.85 lakh SHGs. MEPMA is also working on the ­federation model (Slum Level
Federation and Town Level Federation). In AP, the ‘STREE NIDHI’ (State Level ­Womens’
Credit Cooperative Society), an initiative of the GoAP, also provides ‘Credit Gap F­unding’
­support to SHGs in the state.
Sample Size
The field visits to the selected districts were made during June 2015, and data ­pertaining
to various parameters were collected for the financial/ agricultural year 2014-15. During
the course of the field visit, the study team interacted with various bank officials, NGOs/
MFIs, other institutions engaged in SHG bank linkage, ­government ­officials, farmers as
well as SHG members. The district-wise number of SHGs and SHG members covered
for collection of primary data pertaining to their microfinance ­operations are given in
Table 1.
Table 1: Sample Size of the Study
State District No. of Villages No. of SHG Covered/ Total No. of Members No. of SHG Members
Covered Visited in these SHGs Interviewed
J&K Doda 4 8 51 40
Udhampur 4 9 86 66
Rajasthan Barmer 12 32 367 154
Andhra Pradesh Vizag 6 27* 285 132
Total Sample 26 76 789 392
Note: * Out of 27 groups covered in Vizag, 6 groups were promoted by MEPMA in urban areas.

Although the basic information pertaining to the socio-economic profile was ­collected
for all the members of the SHGs visited, only 392 SHG members were interviewed
­directly to obtain detailed information with respect to various select parameters, so as
to meet the objectives of the study. Fewer SHGs could be interacted in the state of J&K
6 THE MICROFINANCE REVIEW  •  Volume VII(2)  July - December 2015

as compared to Rajasthan and AP, due to lesser ­intensity/coverage of the programme

in case of the former as well as longer travel time required during the field visits on
­account of difficult terrain in the state of J&K.
In order to assess the responsiveness of the institutional credit delivery system at the
grassroots level, SHGs financed by Commercial Banks, Cooperative Banks and RRBs
were interacted with, in each district, as may be seen from Table 2.

Table 2: Bank-wise Distribution of SHGs

State District No of SHGs Bank-wise Distribution of Groups
SBI J&K Bank SBBJ RMGB APGVB ICICI EDB, J&K CCB/ PACS
J&K Doda 8 1 5 2 0
Udhampur 9 4 5 0
Rajasthan Barmer 32 8 7 3 14
A.P. Vizag 27 7 13 7
Total Sample 76 12 5 8 7 13 3 7 21

Findings of the Study

The observations on the functioning of the sample SHGs and SHG members are
­presented in the following sections.
Profile of SHGs Studied
This section presents the observations of the study team with respect to the ­functioning
of the SHGs in the study area. An analysis of the characteristics of the sample SHGs
­(Table 3) indicates that the number of members per SHG varies from 6.4 in Doda to 11.5
in Barmer. This indicates that NGOs generally prefer to form groups with the minimum
acceptable level in order to save financial cost (NB Circular No. 122 dated 27 May, 2013
allows SHGs in NER/hilly tracts to have between 5 and 8 members and in other regions

Table 3: Profile of SHGs Studied

State District No of Avg No of Landless Avg Agri Land BPL Literate Members Belonging
SHGs Mem/ SHG Members Holding (acre) Members Members to Community (%)
(%) Over Total Sample (%) (%) SC ST OBC Gen
J&K Doda 8 6.4 38 1.1 100 54 18 0 0 81
Udhampur 9 9.6 24 2.3 41 45 48 0 17 35
Rajasthan Barmer 32 11.5 30 3.8 92 36 42 7 30 21
A.P. Vizag 27* 10.6 65 0.7 89 42 10 0 58 32
Total Sample 76 10.4 43 2.2 86 41 29 3 35 33
Note: * includes 6 MEPMA groups (66 members), 95% members of which are landless

between 9 and 20 members). On an average, of the total 789 members of 76 groups

­covered in the study, 43% members were landless; 86% belonged to the BPL category
and 41% were literate members. Members belonging to Scheduled Castes ­accounted for
29% of the total members covered in the study.
Microfinance in Distressed Areas of J&K, Rajasthan and Andhra Pradesh: Some Issues 7

Regularity in the Conduct of Meetings

The health of SHGs may be discerned from the regularity of meetings, strength/
continuity of leadership, duration of membership/members exiting groups, etc., all of
which affect the groups’ resilience against future external shocks. As may be seen from
Table 4, the attrition rate was “Nil” in Udhampur with the same members continuing
since inception, and highest in Doda, with 50% of the sample SHGs reporting change in
­membership. The groups observing more regular meetings were observed to be ­pursuing
their SHG based activities more actively as compared to those which were observed to
be irregular in meetings. The regularity in meeting was also observed to be one of the
major factors for strong cohesiveness amongst group members.
Table 4: Regularity in the Conduct of Meeting
No. of SHGs
State District No. of SHGs Groups with Groups with Groups Avg Dormant Groups Groups
Same Pres. & Sec Same Members Meeting Attend- Stopped disinte-
Continuing Continuing Regular ance (%) Meeting grated
J&K Doda 8 8 4 6 80 2 0
Udhampur 9 7 9 9 90 0 0
Rajasthan Barmer 32 25 14 24 68 6 2
A.P. Vizag 27 25 20 26 94 1 0
Total Sample 76 65 47 65 84 9 2

On an average, 86% SHGs were found to be continuing with the same president
and secretary since inception with the highest incidence in Doda (100%) and lowest in
­Barmer district (78%). The average attendance during meetings was found to be ­highest
in Vizag (94%), followed by Udhampur (90%), Doda (80%) and Barmer (68%). The
number of dormant groups in Barmer was high (6 of the total 32 groups were dormant
and 2 other groups had disintegrated), due to lack of credit linkage, members unable to
save regularly, etc., with average attendance being 68%. In contrast, the dormancy and
disintegration rate was “Nil” in Udhampur and negligible in Vizag.
Saving and Internal Lending Behaviour of Sample SHGs
The savings behaviour of sample groups indicates (Tables 5 and 6) that even though
they have been in existence for about five and a half years (average life of sample SHGs),
many groups have not reached the microenterprise level. Although lack of proper ­support
from promoting agencies and lukewarm response from financial institutions are also the
Table 5: Saving Behaviour of Sample SHGs
State District No of SHGs No of SHGs Present O/s in S/B
Irregular Stopped Increased Savings Account as
in Savings Savings their monthly Rs. Pm on Date of
Savings (Range in Rs.) Filed Visit
J&K Doda 8 1 2 1 100 (50-200) 8132
Udhampur 9 0 0 0 100 (100) 5780
Rajasthan Barmer 32 5 8 3 95 (50-100) 13979
Andhra Pradesh Vizag 27 4 1 19 90 (30-100) 51568
Total Sample 76 10 11 23 94 25747
8 THE MICROFINANCE REVIEW  •  Volume VII(2)  July - December 2015

Table 6: Internal Lending Behaviour of Sample SHGs

State District No. of No of Avg. Age Internal lending during last 3 years
SHGs Groups with of SHGs (01 Apr 12 to 31 Mar 15)
no internal (Range) Avg. no of Avg. amount
lending withdrawals withdrawn per
group (3 year
cumulative – Rs.)
J&K Doda 8 2 2.5 (1-3) 1.6 27500
Udhampur 9 0 3.9 (2-6) 8.3 97600
Rajasthan Barmer 32 10# 3.3 (1-7) 5.2* 84800
Andhra Pradesh Vizag 27 19 9.4 (1-16) 3.2$ 43240
Total Sample 76 31 5.5 4.5 65519
Notes: # Dormant for 2-3 years. There used to be internal lending before they became dormant (Avg withdrawal =2.3 times)
*Excluding dormant SHG $ relates to only those SHGs where internal lending was observed

contributing factors, lack of sufficient opportunities for income generation due to fragile
conditions in the selected districts are the major reasons for groups becoming dormant.
The low level of outstanding balance in savings bank accounts of SHGs in Doda is on
account of comparatively small group size (6.4 per group), relatively younger age (1-3
years) and 3 out of 8 groups having become irregular in savings. In Udhampur district,
in spite of most of groups being in the age group of 2-6 years (average 3.9 years), lower
outstanding balance in savings bank account was on account of better internal lending.
In case of Barmer district, various groups exhibited diverse savings behaviour. Despite
many groups experiencing dormancy, many other groups resorted to vigorous internal
lending due to poor credit linkage support from financial institutions. High outstand-
ing balances in S/B accounts of SHG groups in case of Vizag district is basically due to
restrictions on withdrawal of savings by banks in the light of high loan outstanding as
also poor internal lending.
Many groups in Vizag promoted by SERP/Velugu and in Udhampur district have been
saving Rs. 100 since inception. Considering that some of these SHGs are more than
eight or nine years old, it is surprising that there is no change in the quantum of ­savings
­(example, SHGs in Pedanagamayyapalam, Vizag). It is envisaged that with the passage
of time, the surplus available with the SHG members would have increased, leading to

Table 7: Utilisation of Internal Lending by Sample SHGs Members

Avg amt. Use of fund (as % of total fund withdrawal)
withdrawn Family Purchase Used for Used in business/ Repayment Used to
State District per group consumption of animals house other income toward repair the
(3 year exp* construction generating outside asset dama
cumulative) (excl. repair) activities borrowing ged during
(Rs.) incl. agri. disaster
J&K Doda 27500 47.4 11.5 7.4 17.8 2.3 13.6
Udhampur 67600 20.3 48.6 2.4 28.7 0 0
Rajasthan Barmer 84800 41.3 34.2 0 22.4 2.1 0
Andhra Pradesh Vizag 43240 56.2 0 0 21.7** 7.4 14.8
Total Sample 61967 44.7 21.4 1.1 22.4 3.8 6.7
Notes: * Includes expenditure for food & fuel, clothing, health & education, conveyance, social and religious functions, etc.
** includes fisheries trade
Microfinance in Distressed Areas of J&K, Rajasthan and Andhra Pradesh: Some Issues 9

higher voluntary savings. The reasons for static savings include high indebtedness (both
from institutional and non-institutional sources) and conspicuous/social expenditure
(marriage, death ceremonies, maturity ceremony for girls, liquor consumption by male
members, etc.), leaving less surplus for savings, and also no incentive to save (since
the members are not allowed to undertake internal lending and the savings is locked
away in the bank account), etc. The static quantum of monthly saving in Udhampur,
as ­explained by SHGs, is because of the fact that the second and subsequent credit
­linkages are not linked to the corpus of the SHGs and therefore, the groups are not very
­enthusiastic about increasing their savings.
The utilisation pattern of funds withdrawn from group savings in the form of inter-
nal lending varied widely across all the four districts. The highest proportion of the
internal loan was utilised for family consumption expenditure in case of Vizag (56.2%)
and Doda (47.4%) while the major proportion utilised for Income Generating Activi-
ties (IGA) was observed in case of Udhampur (77.3%) and Barmer (56.6%) districts.
Secondly, a ­portion of the group corpus was used by sample SHGs to repay their loans
from non-­institutional sources (7.4% in Vizag, 2.3% in Doda and 2.1% in Barmer). A
significant portion of the fund was also used to repair assets damaged during disaster
in Vizag (14.8%) and Doda (13.6%) since inadequate compensation was received from
Box 1: Good show by Aman SHG, Village Manpa, District Udhampur
Promoted in 2009 by the Grameen Pragati Sangathan, Udhampur, “Aman” SHG is the
oldest SHG associated with the NABARD SHG Bank Linkage Programme in Udhampur
district. All the 8 members of the group belong to the Muslim community. At the time
of group formation, all the male family members used to work as wage labourers for
some contractors for barely 15 days in a month. Although all the members own some
agricultural land, farming has not been profitable at all as the area is entirely rain fed
and monsoons have been very deficient. This group has exhibited the true potential of
the SHG Bank Linkage Programme by effectively mobilising the group corpus (internal
lending of Rs.1,33,570 over 22 transactions). Starting with an initial dose of Rs. 50,000,
the members have now cumulatively absorbed bank credit of almost Rs. 11.60 lakh over 4
cycles. While 7 members have purchased a pair of mules each at Rs. 1.75 lakh per pair, one
member has started a feed & implement shop to cater to the needs of the other members.
Each member now owns 3 to 4 mules. These members who were labourers sometime back
have now employed workers and are easily saving around Rs. 400 to Rs. 500 per day dur-
ing the peak season. The women have now purchased 1/2 buffaloes each and get milk of
8 to 10 litres per animal daily. The families who used to live in kutcha houses have slowly
but painstakingly built one or two roomed pucca houses. All the members are covered
by micro insurance in association with LIC. The most heartening sign of progress is that
although all the members are illiterate, their children are now attending private schools.
There has been gradual but perceptible change in the standard of living of the members.
The success of this group lies in the cohesiveness of the group members, continuous
handholding by the NGO and timely support by the banks. This proves that if sincere and
united efforts are made, success may be achieved even in such stressful conditions.
10 THE MICROFINANCE REVIEW  •  Volume VII(2)  July - December 2015

the government. In Barmer district, the effect of fragility in terms of drought was quite
visible as crops were ­reportedly damaged continuously for 2-3 years which led to mi-
gration of residents/SHG members to nearby towns/ districts/ states in search of liveli-
hood as well as ­grazing of animal population (goats/ sheep). A success story of ‘Aman
SHG’ is given in Box 1.
Pattern of Credit Linkage of Sample SHGs
The observations regarding the pattern of credit linkage (Table 8) clearly indicates
a divergent pattern in the quantum of credit availed by the SHG members. As may be
seen from the Table, 5 out of 8 groups in Doda district had not been credit linked due
to poor follow up by the NGO as well as lack of confidence of the banks regarding the
groups’ repayment capacity. The average number of credit cycles per SHG was quite high
in Vizag (3.37) and Udhampur (3.33) districts mainly on account of better utilisation by
the members, good follow up by promoting institutions and good repayment record.
Further, a sizeable number of sample SHGs in Udhampur (44%) had availed 4-5 cycles
of credit followed by Vizag (37%). It was learnt that most of the groups were avoiding
bank loan beyond Rs 3.0 lakh on account of higher interest rate for loans above Rs 3.0
lakh due to non-availability of subvention, although they had requirement for higher
quantum of credit.
Despite an average age of 3.3 years of the sample SHGs in Barmer, they had received
only 1.45 credit cycles on account of high level of dormancy of WSHG groups, denial of
credit by some banks (Rajasthan Marudhara Gramin Bank, RMGB), no livelihood plan
with the NGOs (other than those dealing with MPOWER) and lack of trust between
the banks and the groups. The average loan amount per group was also quite high in
case of ­Udhampur (Rs. 2.9 lakh) and Vizag (Rs. 2.8 lakh), and very low in case of Doda
(Rs.  0.25 lakh). The loan delinquency in respect of the last loan availed was very high in
case of Barmer (34.5%) on account of the presumption by the groups that they may not
get future doses of loan as also lack of follow up by the promoting NGO. The ­irregularity
in repayment/default of loan by SHG members in Vizag (14.8% of sample SHGs) was
mainly on account of expectation of loan waiver.

Table 8: Pattern of Credit Linkage of Sample SHGs

State District No. of No of SHGs who received Average Loan Amount per No of
SHG Credit Cycles per Cycle (Rs.) SHGs Groups
Nil 1 2 3 4-5 Avg 1st 2nd 3rd whose
No Cycle cycle to 5th last loan
Cycles Cycle is irregular
J&K Doda 8 5 3 2 0 0 1.5* 10000 25000 N.A. 0
Udhampur 9 0 9 4 4 4 3.33 42778 131111 294167 0
Rajasthan Barmer 32 1 31 9 6 0 1.45* 36742 84778 104333 11
Andhra Pradesh Vizag 27 0 27 27 23 10$ 3.37 50111 133148 279459 4
Total Sample 76 6 70 42 33 14 2.4 39391 101157 178047 15
Notes: * excluding groups who are yet to be credit linked; $ 10 members got 4th loan and 4 members got 5th loan
Microfinance in Distressed Areas of J&K, Rajasthan and Andhra Pradesh: Some Issues 11

All the SHGs in Udhampur, Barmer (especially promoted by MPOWER) and Vizag
districts which had availed higher credit cycles/quantum were found to be those with
common activity/livelihood. Secondly, a detailed livelihood plan had been formulated
for these SHGs by the promoting institutions, and other support in terms of revolving
fund assistance, training and basic infrastructural support was provided to the groups
from the initial stages. This in turn increased the confidence of the banks for dispens-
ing increased credit whereas the absence of the same factors elsewhere discouraged the
same banks from extending credit support.
Utilisation of Bank Loan by Members of Sample SHGs
A definite pattern of shift from consumption expenditure to income generating
a­ ctivities was observed in the utilisation of the loan amount by SHGs (Table 9) in all the
sample districts. It was also observed that many members had started new businesses,
upscaled their existing business, diversified from single occupation (only farm based or
only non-farm based) to a mix of activities.
Further, promotion of ‘complementary activities’ were conceived of by some groups, to
support the main activities of their own groups. For example, where dairy was the main
activity of group members, one member of the group had started a feed and ­fertiliser
shop and was providing animal feed to other members of the groups at reasonable
prices. Similarly, purchase of a ram for breed improvement by one member of the group
where other members of the group had taken up goat rearing was also observed in some
cases in Barmer district. A group member in Vizag district was planning to purchase
a van to ­facilitate other members of her group in transporting their fish to the market
­immediately after the catch.

Table 9: Utilisation of Bank Loan by Sample SHGs Members

Uses of funds (as % of total loan availed)
Average Family Purchase Used for Purchased Used in Repayment Used to
Cumulative Consumption of Crop Other Assets/ existing business/ Toward Repair the
State District Loan exp (incl Edu)* Animals@ Produ- Working Capital Other Income Outside Asset Dama-
Amount (Rs) ction for starting Generating Borrowing ged During
new activity^ activities Disaster
J&K Doda 28750 38.2 16.5 19.4 7.6 4.3 0 14
Udhampur 566111 16.6 52.5 4.6 18.2 4.5 3.6 0
Rajasthan Barmer 79000 26.1 36.3 11.4 13.0 9.2 4 0
Andhra Pradesh Vizag 570223 28.5 6.6 10.0 17.2 21.5 7.4 8.8
Total Sample 305908 27.1 25.6 10.9 14.5 12.5 4.7 4.6
Notes: * Family consumption includes expenditure on education also. Many families have started sending their children to private schools,
particularly in Udhampur and Vizag.
@ Purchase of cow, buffalo, goat, sheep, mules, bullocks. MPOWER had also provided a ram to one member of each SHG in a –village
for breed improvement.
^ New activities started: tailoring, embroidery, boutique, animal trade, pan shop, catering, sound and light equipment, primary
school, etc.
• Some members have used bank loan for onlending to other group members who have used it for IGA. This has been accounted
for, for the purpose for which it was used ultimately.
• Two members of a group in Vizag had not utilised the loan, kept it idle for sometime and returned the same afterwards (amount
included under consumption).
12 THE MICROFINANCE REVIEW  •  Volume VII(2)  July - December 2015

Sources of Income
The average income per household (of sample SHG members) from all sources was
e­ stimated at Rs. 1.14 lakh per annum which was largely contributed by income from
wage employment including MNREGA (39.5%) followed by income from other services/
business (33.5%) as 43% members were landless. The savings on account of PDS support
of about Rs. 5,000 per family per annum is not included in the total sources of income.
Table 10: Sources of Income of SHG Members
SHG Total Distribution of Income (%)
District/ State Member Family Income Livestock Wage Other Income
Inter- Income from and Employment sources (service/
viewed (Rs) Land Fisheries* incl. MNREGA^ business/Self Empl)@
Doda (J&K) 40 68173 17.1 10.9 46.5 25.4
Udhampur (J&K) 66 130411 7.6 26.1 36.6 29.7
Barmer (Raj) 154 81112 0 18.8 44.9 36.2
Vizag (AP) 132 157439 12.1 20.8 32.5 34.6
Total Sample 392 113794 7.1 19.9 39.5 33.5
Notes: * Income from Livestock: from Milch Cattle, Sheep and Goat (Doda, Barmer & Udhampur) and from fisheries (mainly) and Milch Cattle
in some cases) in Vizag district;
@ Self-Employment/Service Units: Tailoring, Beauty Parlour, Barber, Atta Chakki, Embroidery, Xerox, Photography, Sound and Light Equipment;
@ Shops: Kirana, Garments, Animal Feed, Fertilizer, Pan Shop, Vegetable Vending;
^ Other Wage Labour: Construction (house/ road), Agricultural Labour, Carpentry, Porters, Mechanic, Painters, Electrician, Plumber, etc.

MNREGA and PDS have been found to be the major livelihood support measures
available from the government in all the four districts selected for the study which are
facing one or the other type of ecological distress.

Issues Emerging from the Study

The issues emerging from the study and requiring attention of the policy planners as
well as implementing agencies are presented in the following sections.
Multiple Formats of SHG Promotion
At the national level, there are two major models supporting the promotion of SHGs
– (i) Ministry of Rural Development led NRLM (Ajeevika) and (ii) NABARD promoted
SHG/ WSHG model. The approach of these two institutions in promotion, nurturing
and the empowerment process – social as well as economical, are widely different - the
SHGs promoted by these institutions differ from each other in many aspects leading to
confusion amongst the grass root level functionaries as well as the groups. Some State
government initiatives like ‘VELUGU’ in AP and ‘Kudumbashree’ in Kerala having their
own version of women empowerment schemes have proved to be very effective tools for
social and economic upliftment.
It has been observed that the multiplicity of SHG promotion schemes/ institutions has
led to various types of problems at the ground level, i.e., (i) migration of a significant
number of SHGs/ WSHGs promoted under the NABARD format to the NRLM format, ­(ii)
Microfinance in Distressed Areas of J&K, Rajasthan and Andhra Pradesh: Some Issues 13

some SHG members having membership of more than one group, etc. A close ­scrutiny of
NABARD’s SBLP vis-à-vis NRLM indicates that the latter appears to be more ­attractive
on account of (i) availability of credit at 7% interest with an additional 3% ­subvention in
250 most backward districts, (ii) revolving fund assistance of Rs. 10,000 to Rs. 15,000
per group within 3 to 4 months of promotion (iii) Provision of Community Investment
Fund as Seed Capital to SHG Federations at the cluster level to meet the credit needs
of the members through the SHGs/Village Organisations and to meet the working
capital needs of collective activities at various levels. However, despite the ­absence of
such ­financial benefits, the groups promoted under NABARD SBLP model, have done
­extremely well in majority of the cases as far as social and economic empowerment is
concerned. Further, NABARD support is routed through local or state level NGOs who
do not have multiple sources of funding and depend much on NABARD financial support
to a major extent which affects their monitoring and other promotional efforts and this
finally affects the resilience of the groups. On the contrary, the NRLM has a permanent
setup at the district/block level and promotional and linkage efforts are not constrained
either by staff or financial resources. Conversion of NABARD promoted groups into
NRLM group results in wastage of resources as Rs. 10,000 per SHGs is paid to SHPIs for
their ­promotional efforts on account of various policy and institutional issues.
Lack of Need Based Credit Support to Groups
As may be seen from Table 8, some groups in Doda district of J&K and Barmer district
of Rajasthan have not even got the first dose of credit and many have not got second
doses of credit, even after three years of their existence. Under SBLP, many NGOs have
been found abandoning groups after ensuring first credit linkage. In a large number
of cases, the quantum of loan was as small as Rs. 10,000 to Rs 25,000 per group. On
­account of withdrawal of NGOs immediately after the first linkage, most of the SHGs are
not able to take up income generating activities since banks hesitate extending second
linkage in the absence of any intermediary.
Normally, second and subsequent doses of credit should be aimed at creating
­productive assets which can be ensured by applying suitable credit need assessment
tools by the bankers themselves. However, it is observed that a lump sum fixed amount
is disbursed to all the groups which is in turn distributed equally among all the group
members.
Apathy from Banks and Denial of Credit by Branch Manager
Many banks in Doda, except J&K Bank (in a few cases) were not found to be very
keen to provide credit to SHGs. A few reasons observed therefor include (i) ­majority
of the bank staff being from Jammu or other places and they consider Doda as a
­difficult/­punishment posting, (ii) as such, they have insignificant knowledge about local
­socio-economic conditions and are quite risk averse, (iii) a few branch managers cited
14 THE MICROFINANCE REVIEW  •  Volume VII(2)  July - December 2015

Box 2: Denial of Credit by Branch Manager, Rajasthan Marudhara Gramin

Bank (RMGB), Dhanau Branch, Dhanau Block, Barmer

An instance of denial of credit linkage of 14 out of 18 SHGs (as on 15 June, 2015) by the
Branch Manager of RMGB, Dhanau branch was brought to the notice of the study team. All
18 groups, promoted by ‘CECOEDECON’ NGO, had opened Savings Bank Account 3 years
back (between May and December, 2012) with RMGB, Dhanau Branch. As on the date of the
field visit, all the groups were found to be active and were managing their activities through
internal lending.
As reported by the NGO and SHGs, the SHG members have approached the concerned
Branch Manager many times during the last two years. Each time they have not only been
denied credit, but demotivated and even threatened. They have been discouraged and
­advised to disband the SHGs. Almost all the members of these SHGs are erstwhile refugees
from Pakistan who are either landless or do not own productive land. Most of these mem-
bers are engaged in embroidery/ applique work, for which they are heavily dependent on
middlemen. They are paid a meagre amount of Rs. 5 to Rs. 10 per cushion cover, which is
a fraction of the price women from other organised groups earn. The study team could not
contact the Branch Manager to know his view point in this regard.

high NPA levels as the major reason for not financing SHGs, (iv) Rural Artisans Welfare
­Society (RAWS) the major NGO, has of late, not been very active in the district, and
this has affected the confidence of the bank officials for lending. This has resulted in a
number of the WSHGs shifting to NRLM, where they are assured of bank credit.
Groups Backed by Strong Institutional Support Mechanism have Progressed Well
The good progress made by the groups promoted by MPOWER indicates that a strong
institutional set up, dedicated and well paid manpower, an effective roadmap, regular
monitoring and a strong MIS are necessary to ensure social and economic ­empowerment
of rural poor on a sustainable basis.
In case of MPOWER (Baitu Block in Rajasthan), the process of identification of
­activities begins with a PRA/PLA exercise. After promotion and bank linkage, an amount
of Rs.15,000 is provided to each SHG as a Revolving Fund for internal ­lending. Six
months thereafter, a “Livelihood Plan” is prepared by the field staff and SHG ­members
and ­thereafter, income generating activities are taken up on a cluster basis. The major
­activities chosen were goat rearing, and cultivation of bajra, guar moong and ­vegetables in
clusters. Social activities like construction of toilets (through CARE, ­India) and ­rainwater
harvesting structures have also been implemented intensively. While IFAD has granted
a loan of Rs. 121 crore and a grant of Rs. 3 crore to the ­Government of ­Rajasthan (GoR),
the GoR has provided Rs. 87 crore as grant for establishing a ­Community ­Infrastructure
Development Fund (CIDF) for building reservoirs (for storing water), water tanks, etc.
The project has a well-developed cadre of Pashu Sakhis or paravets for goat clusters and
Swastha Sakhis or Health Workers to take care of health issues related to women.
The MPOWER project is being implemented in 12 Gram Panchayat (GPs) of Baytu
Microfinance in Distressed Areas of J&K, Rajasthan and Andhra Pradesh: Some Issues 15

block by ‘SURE’ NGO, and which is one of the four NGOs implimenting the project. Of
the 350 SHGs formed so far, 320 have been savings linked, 238 SHGs have seen first
­linkage while 129 have seen second linkage. The total savings of 350 SHGs is Rs. 1.20
crore and the seed capital released to 185 SHGs is Rs. 1.49 crore. The SHGs have been
linked to Gram Sewa Samiti (GSS), Bajwa, Marudhar Gramin Bank and ICICI Bank
respectively. The groups who have been financed goats, have also been provided ‘goat
sheds’ which costs Rs. 25,000 each, of which Rs. 20,000 was provided by MPOWER and
Rs. 5,000 was ­contributed by SHG member as ‘Shramdaan’.
MPOWER supports the federation model and a cluster of 5 to 15 SHGs form a Village
Organisation (VO). Presently, 91 such VOs are registered with MPOWER. MPOWER has
a plan to federate VOs at the block or district level which will be a registered body. The
functions of MPOWER will gradually be handed over to the Federation. Thus, there is
a well thought out handholding as well as withdrawal strategy which is reflected in the
socio economic empowerment, democratic decision making, successful credit utilisation
and increase in income levels of the SHG members.
Both Bankers as well SHGs Need an Intermediary/ NGO
Continued presence of an intermediary/ NGO was found to be necessary even af-
ter the first credit linkage. In the absence of regular visit/ monitoring by the NGO
­(particularly in DODA in J&K and Barmer in Rajasthan), many SHGs had become dor-
mant. Such groups were not meeting regularly and had stopped collecting the thrift
amount. The RAWS, an NGO, which is based at Jammu and is ­implementing the WSHG
Scheme in Doda ­district, was of the view that the grant of Rs. 10,000 per SHG (sanc-
tioned by ­NABARD for ­promoting WSHGs) is not sufficient to cover all expenditure,
from ­formation to credit linkage in hilly and remote areas like Doda district, which has
very poor road ­connectivity and other infrastructure facilities. The RAWS opined that
a large portion of the incentive provided to the NGO field staff (almost 70% to 80%) is
spent towards travelling expenses, leaving them hand to mouth. This situation provides
very little incentive for them and they are forced to limit their visits to the SHGs/ bank
branches.
Many banks also indicated that in absence of any intermediary/ NGO, the SHGs
­hesitate visiting the bank branch on their own. Even if some of the groups visit the
bank, they do not have any specific plan for taking up income generating activities.
Under these ­circumstances, the banks find it difficult to consider higher doses of bank
loan to such groups. The Branch Manager, State Bank of Bikaner and Jaipur (SBBJ),
­Swaupadamsingh Branch and ­Deputy Registrar/Executive Officer, Barmer DCCB
­informed that some SHGs were found investing their share of bank loan in fixed ­deposits
and repaying the loan on the due date. Majority of the groups were not practicing the
distribution of loan as per individual needs and were distributing the loan amount
equally amongst all the members.
16 THE MICROFINANCE REVIEW  •  Volume VII(2)  July - December 2015

Insufficient Credit for Income Generating Activities (IGA)

As already indicated, most banks disburse a lump sum fixed amount to the groups
without any logical calculation about credit needs of members, which is in turn distrib-
uted ­equally among all the group members. This results in insufficient funds for some
members who are sincerely desirous of taking up economic activities and on the other
hand, few other members end up investing the loan amount in fixed deposits since they
are not in ­immediate need of credit.
For example, all the SHGs in Vishakhapatnam promoted by SERP/­Velugu/MEPMA
are provided fixed doses of credit, without assessing the realistic credit needs of the
­members, their occupation and income streams, if any, as well as their repayment
­capacity. ­Secondly, the amount is divided equally between all members, ­irrespective of
need. Accordingly, SHGs are financed fixed doses of Rs. 10,000, Rs. 20,000, Rs. 50,000,
Rs. 2,00,000 and Rs. 3,00,000 in five cycles. Since most SHGs have ten ­members
each, the individual members get Rs. 1,000, Rs. 2,000, Rs. 5,000, Rs. 20,000 and
Rs.50,000 each. The first three doses are quite miniscule and are accordingly utilised for
­consumption needs only. Those members who want to start entrepreneurial ­activities
such as dairy or readymade garments (Sri Tulasi Group, Yellamanchili), auto loan, or
­expanding fish ­business (SERP SHGs in Pedanagamayyapalam village) find the bank
loan quite ­insufficient and have to necessarily fall back on moneylenders to meet the
­balance amount. On the other hand, there are a few members who are not into any
income generating activities or do not require funds at that particular point of time for
income generating activities. Such members either keep aside the money, unutilised,
and repay the instalments (in which case they pay interest unnecessarily) or squander
away the sum in wasteful or avoidable expenditure.
This also highlights the need for considering interest subvention for loans up to at
least Rs. 5,00,000 for group loan, for the time being.
No Internal Lending
As may be seen from Table 6, 31 out of total 67 SHGs covered during the study were
not doing internal lending for various reasons. ‘Nil’ or less internal lending in Doda and
Barmer districts was mainly because the SHGs concerned had become dormant, whereas
in Vizag district, it was mainly because of discouragement by the banks. In some cases,
it was informed that majority of the groups are not able to decide on the credit needs of
their members democratically, which results in infighting among ­members. However, it
was gathered that the main reason was to keep the group ­savings as a “safety net” against
default in respect of loans availed from banks/MACS. Not ­allowing SHG ­members to
utilise their own savings for internal lending defeats one of the basic principles of group
functioning, and affects the cohesiveness and financial ­empowerment of the groups.
Disallowing SHG members/individuals to utilise their own savings and ­forcing them to
Microfinance in Distressed Areas of J&K, Rajasthan and Andhra Pradesh: Some Issues 17

avail loans at higher rates of interest, renders them ­perpetually ­dependent on external
funds/agencies for their financial needs and defeats the avowed objective of financial
empowerment and self-help. Interaction with some MEPMA groups in Yellamanchili
(Sri Tulasi Group) indicated that there is no cohesiveness among group members. The
­members interviewed by the Study Team barely knew each other. It was evident that
they had formed groups merely for availing bank credit. There is no internal lending and
the meagre bank loan is divided equally among members. The group had ­disintegrated
three to four years back. The reasons indicated thereof were lack of understanding
among members, scant financial awareness, underfinancing by bankers forcing the
members to resort to loans from moneylenders, etc. The group was ­subsequently revived
but the above issues persist. This is the situation with majority of the MEPMA groups
interviewed by the Study Team.
Different Rates of Interest for SHG Members
Although Doda was identified as a WSHG district in terms of GoI letter No.F.No.
3/6/2011-AC dated 30 March, 2012, and the SHGs are eligible for bank credit at 7%, the
same is not being extended to WSHGs in Doda. Similarly, in Barmer district of Rajasthan
which has also been designated as WSHG district, some banks (GSS, Bajwa Branch and
RMGB, Batadoo Branch) were reportedly charging as high as 13.5% rate of interest on
SHG accounts.
High Levels of Indebtedness
The level of indebtedness from institutional and non-institutional sources is very high
in the state of AP, despite many SHGs being in existence for seven to eight years and
­having absorbed four to five cycles of credit. The reasons gathered by the study team
include (i) banks discouraging internal lending after groups have been credit linked.
The MACS (AP) do not allow internal lending by members in any case and ask loanee
member to contribute to the compulsory savings (Share MACS - Group thrift at Rs.
250 per month which is refunded after loan repayment with 6% interest) in addition
to the voluntary savings, which is refunded only after the loan is repaid. The feed-
back received from members of the Share MACS as well as SERP SHGs was that they
are forced to ­borrow from moneylenders for emergent needs at 36% to 48% rates of
­interest which otherwise they could have managed from their group corpus. (ii) it was
found that a number of group members incur very high expenditure on social functions
such as shraddh of family members, ceremony on daughters attaining puberty, as well
as high levels of alcoholism. As per Project Director, DRDA, ­Vishakhapatnam, almost
50% of microfinance loans availed are spent on liquor and another 20% on conspicuous
­consumption, leaving only 30% for meeting other needs. This unnecessarily increases
the debt burden since needy members are forced to borrow from moneylenders to meet
their emergent credit needs.
18 THE MICROFINANCE REVIEW  •  Volume VII(2)  July - December 2015

Bharat Matha SHG, Yellamanchili, promoted by MEPMA and financed by DCCB,

­Yellamanchili, is an example of high indebtedness by all the members of the group. A
few members were into coconut oil extraction, chilli powder making and other activities
while few others were not engaged in any activity. The loan availed by the group was
distributed equally. During the discussion with the members, they indicated that all of
them were borrowing regularly from the moneylender at 24% interest. The loan amount
varied from Rs. 15,000 to Rs. 1,50,000 at a time and was used mainly for ­activities like,
granddaughter’s maturity function, daughter’s marriage, house ­construction, ­children’s
education, purchase of plot, etc.
Insurance of Crops and Animals
A total of 74 individual farmers were also interviewed with an objective to understand
the issues pertaining to agricultural operations in distressed areas. In Doda district of
J&K, except Jammu Central Coop Bank (JCCB), Bhaderwah branch, none of the Kisan
Credit Card (KCC) loanees of the banks visited during the study was found to have been
covered under crop insurance. Majority of the loanees of JCCB, Bhaderwah branch were
covered under National Agricultural Insurance Scheme for maize crops. Some other
farmers were also covered for paddy and potato crops. The general excuse offered by
other banks was that majority of farmers in J&K grow a mix of cereal and vegetable
crops and therefore, it becomes very difficult to decide as to which crop needs to be
insured. In the district of Udhampur, all the loanee members were covered under crop
loans as reported by the bankers. However, most of the banks reported that SHG mem-
bers are not opting for animal insurance.
The district of Barmer, Rajasthan is facing drought for the last three consecutive years.
The loanee farmers indicated that they are receiving insurance pay-outs every year but
the claim amount received is delayed and quite insufficient to cover the crop losses. For
example, the total claim received (2015) by GSS, Bajwa, for 860 farmers was Rs. 99.22
lakh against a loan amount of Rs. 3.0 crore. The premium for most of the farmers was
fixed at Rs. 150 per hectare keeping the bajra, guar and moth crops in view. ­Similarly in
case of RMGB, Batadoo branch, the claim amount received was meagre, receiving just
Rs. 49 lakh against a claim of Rs. 3.50 crore (2014).
In Vizag, all the farmers were reportedly covered under crop (except vegetable crops)
and animal insurance. It was reported that during the Hudhud cyclone, most of the farm-
ers had lost their entire crop but the payout received by them was quite meagre. Further,
wherever crop insurance was received, the delay in settlement was by two to three
years. For instance, the Kharif 2012 claim was received on 07 November, 2014 (Andhra
Pradesh Grameena Vikas Bank, Yellamanchili) and the amount of claim ­received was
hardly 10 to 30% of the KCC outstanding.
The operational area of Dimili Primary Agricultural Credit Society (PACS), ­Andhra
Pradesh, covers villages located mostly within 4 to 5 kms. from the coast and has
Microfinance in Distressed Areas of J&K, Rajasthan and Andhra Pradesh: Some Issues 19

e­ xperienced consecutive crop losses during the last four years. During Hudhud, the crop
loss was assessed to the extent of 70% and more and on account of that, 2,857 farmers
received cumulative claim amount to the extent of Rs. 5.3 crore as against the actual
claim of Rs. 7.7 crore for 2012-13. Next year, the farmers did not renew the KCC account
in anticipation of loan waiver by the state government and the payout received was just
Rs. 14.0 lakh in spite of heavy crop loss.
Some farmers in Vizag district (Bhumipatnam, Thurangalapalam villages) were
found to be cultivating vegetables on leased-in lands. These farmers could not avail any
compensation during recent cyclone as vegetables are not covered by crop insurance.
Many SHG members and other individuals in Vizag district were found to be ­purchasing
cows through ‘Vishakha Dairy’ with a condition that they would supply milk to Vishakha
Dairy only. In all such cases, Vishakha Dairy ensured animal insurance cover as well
as renewal thereof, of all the animals purchased from Vishakha Dairy. However, some
farmers who had lost their animals during the cyclone indicated that the compensation
received from the insurance company was much lower than the cost of the animals.
During discussions with the Branch Manager, SBBJ, Swaupadamsingh, and a few
other branch managers in Barmer district, the study team was appraised that of late,
the KCC availed by farmers in the district is mainly utilised for consumption and fodder
purposes. This is because of the fact that the drought being prevalent for last few years,
there is little scope for utilising the KCC for crop production.
Partial Loan/Interest Waiver Affects Loanees of Other Banks
As reported by the banks, the loan waiver announced by the Government of ­Rajasthan
during 2013-14 and 2014-15 was limited to KCC issued by the Cooperative Banks only.
The SHG members and other famers who had availed crop loan from other banks were
found demotivated and were inclined not to repay the loans. This had also affected the
harmony within and between the groups in the same village.
Repeated loan waivers in the past has given rise to a tendency to expect loan ­waivers
quite often and this has not only made SHGs members who were hitherto regular in
­repayment to default on various loans but also made banks hesitant in issuing fresh
loans. As indicated by PD, DRDA, Vishakhapatnam, the last waiver in the state has
resulted in increased NPAs of almost Rs. 100 crore, out of the total loan outstanding
to SHGs to the tune of Rs. 500 crore. This has also brought down the loan outstanding
substantially from Rs. 500 crore to Rs. 355 crore in about two years’ time since banks
are now reluctant to lend to SHGs.
Inadequate Government Assistance to Affected Families during and after Disasters
The institutional coping mechanism was not found to be very effective in ­earthquake
affected Doda district. A compensation package of Rs. 1,900 for partially damaged
­houses to a maximum of Rs. 70,000 for fully destroyed houses was announced by the
20 THE MICROFINANCE REVIEW  •  Volume VII(2)  July - December 2015

Government of J&K. It was gathered during the field visit that many people did not get
any compensation and very few had got full compensation for completely destroyed
houses. However, many had got Rs. 1,900 irrespective of extent of damage. Landslides
do occur quite frequently in the study area in Doda district which damage ­agricultural
land and agricultural crops to a large extent every year. However, no assistance is
­provided by the government for such incidents. The district has witnessed three major
earthquakes in 2005, 2011 and 2013 and experiences good number of tremors/minor
quakes quite regularly.
In Vizag district too, the compensation/relief announced by the state government for
destruction of assets due to cyclone was also found to be inadequate. Compensation was
restricted to Rs. 5,000 per house (thatched house) and Rs. 1,000 per tree (cashew nut,
coconut). It was learnt during the field visit that many members did not get any com-
pensation for loss of their assets and this resulted in a few members (from many groups)
taking shelter in relatives’ houses/ schools or staying in rented accommodation since
they did not have sufficient funds to rebuild their houses (e.g., in Bhumunipatnam vil-
lage). Further, as many as 5,200 houses in Dimili village were partially damaged while
80 were fully destroyed during the Hudhud cyclone and most villagers were given a flat
compensation of Rs. 5,000 each, irrespective of the extent of damage.
Quite a large number of fishermen also lost their fishing boats and other assets but
they were not given any compensation which forced them to either borrow from money­
lenders or to postpone the repair/reconstruction of house/ arranging new boats, etc.

Recommendations
1. The solution to addressing the inequities in the various microfinance ­approaches
may lie in the Ministry of Rural Development (MoRD) considering extension of
financial ­support available under the National Rural Livelihood Mission to all the
SHGs in the country, irrespective of the SHG promoting institution/ model. There
is a need to evolve a single programme by way of convergence of strengths and
best practices of various models under implementation in the country, i.e., ‘pro-
motion and nurturing approach’ under the NABARD SBLP programme, financial
benefits under NRLM and ensuring productive asset creation under MPOWER
project to reap the benefits of the SHG approach on a sustainable basis.
2. MoRD and NABARD may put in joint efforts to develop a single programme for
group based livelihood support mechanism in the entire country. For the pur-
pose, the list of entire works/ responsibilities involved in the process of liveli-
hood ­promotion may be prepared and allocated between MoRD and NABARD to
achieve the objectives of the programme in a time bound manner.
3. There should be at least a single MIS for all SHGs in the country capturing the
details of all the SHGs promoted and credit linked by various agencies. This
Microfinance in Distressed Areas of J&K, Rajasthan and Andhra Pradesh: Some Issues 21

will minimise the duplication of number of SHGs, help in tracking the level of
­dormancy and assess the quality of the SHGs. However, each agency can ­maintain
its own internal MIS for its use. MoRD and NABARD may initiate action to make
this need a reality. Digitisation of SHGs being piloted by NABARD is a welcome
step in this regard and the same may be implemented across the country for
­ensuring a uniform database for SHGs, with financial support from MoRD.
4. There is a need to bifurcate the entire SHG promotion and linkage efforts into two
stages. The first stage or SHG-1 may be limited to promotion and nurturing and
inculcating habit of financial management through savings and internal ­lending
and the second stage or SHG-2 should be specifically designed to ­develop the
­entrepreneurial skills of the SHG members so that the majority of them ­become
either independent entrepreneurs or graduate into viable units ­under the ­umbrella
of ‘Producers’ Organisations’. In this connection, an ­institutional ­arrangement
­between MoRD and the Ministry of Skill Development and Entrepreneurship’ and
other relevant government departments and institutions (Ministry of Textiles,
Cooperative Dairy Federation, etc.) may be considered to develop the technical
and entrepreneurial skills of the SHGs members.
5. The SHG is not an end in itself. It is envisaged that, in the long run, if not all,
a majority of the group members would take up income generating activities
and graduate to successful entrepreneurs, capable of absorbing higher individual
quantum of credit. SHGs cannot be expected to continue in perpetuity. However,
it was observed from the SERP groups/ WSHG groups that the SHGs are being
forced to stay together as groups. The SHPIs should appreciate that the SHG is a
platform to inculcate the habit of savings and converting the financial ­resources
into a viable productive enterprise. Once the members have graduated to an
­enterprise level, they may be offered one of the following options: (i) If majority
of the members have started pursuing various economic activities, they should be
allowed to dissociate from the group and to upscale his/her chosen activity or, (ii)
if majority of the members are pursuing similar activity, they may be facilitated
in forming/joining a ‘Producers’ Organisation’ by mobilising similar other units to
manage backward and forward linkages in an effective manner.
6. The concept of federating the SHG does not find favour from the study team. It
may have worked well in certain pockets and may have the potential of keeping
the SHG flock together, but it is at a cost, to be borne either by the SHGs or by the
taxpayers of the country.
7. There is also a need to formulate an Action Plan to facilitate graduation of
­majority of the group members to the entrepreneurship level within a prescribed
time frame. This will require appraisal of SHG members as individual ­entities
taking into account their credit and training needs. At present, NRLM as well
22 THE MICROFINANCE REVIEW  •  Volume VII(2)  July - December 2015

as NABARD’s ‘Micro Enterprise Development Programme’ (MEDP) programme

for members of matured SHGs focus on group approach for training related to
­activities identified by the NGO. It is suggested that suitable agencies, particularly
those who run production cum training centres, may be identified to impart need
based training to identified SHG members.
8. The policy regarding conduct of MEDPs may be revisited and reviewed. While
­selecting any activity for MEDP, the scope for the activity may be assessed in
terms of linkage support as well as demand for the product. The study team
came across instances where MEDPs have been conducted for members of SHGs
­without ­assessing the scope of such activities in the area. For example, all the
SHG ­members in a remote village in Barmer were provided MEDP training for
­‘tailoring’, without assessing the fact that there would be limited scope for ­tailoring
in such a remote area. Besides, the banks were not involved in the ­selection of
activity/ beneficiaries, etc., as a result of which the beneficiaries did not get the
required bank finance to purchase sewing machines. As a result, none of the
SHG members were in a position to take up tailoring as an income generating
­activity.
9. NGOs/SHPIs do not often have a well designated withdrawal strategy. The study
team could not be assured by the NGOs who were interacted with during the field
visit, whether they intended to withdraw at a particular stage. The impression
gathered in many cases was that the NGOs would remain till financial support
was available from NABARD/other developmental agencies. Accordingly, despite
the SHGs being formed and credit linked for more than four to five years, very
often, the book keeping/maintenance of registers was being done by the SHPI
volunteers, rather than by individual members. Additionally, the SHG members
are often under the impression that the NGOs would be providing ­handholding
support for indefinite periods. It is suggested that NGOs should have a well
­designated withdrawal strategy before which group leaders should be trained
­adequately in all aspects. This is more so in respect of disaster prone regions
which would ­require greater/more intensive efforts in nurturing and monitoring
group ­activity.
10. Majority of the groups in all the four districts have been found to be ­distributing
withdrawal of saving and bank loan equally among themselves leading to
­underfinancing in respect of some members who wish to establish a viable ­income
generating activity and over financing in case of other members who use the
funds for consumption or keep the funds idle, simply because they have no need
of the same at that point of time. Resultantly, in the former case, the members
have to borrow from moneylenders at high rates of interest. Keeping this in view,
the following suggestions are made :
Microfinance in Distressed Areas of J&K, Rajasthan and Andhra Pradesh: Some Issues 23

(a) The equal distribution of funds, in case so decided, should be limited to

­internal lending only;
(b) SHPIs should adopt it as a strategy to start convincing the groups from the
time of promotion and nurturing stage itself, to distribute the bank loan as
per their investment needs/working capital requirements for creating viable
units, if not for all the members at the same time, at least in stages, so that
all the members graduate to microenterprise/self-employment level within a
given timeframe.
(c) Bankers in association with SHPIs may undertake sincere efforts to make
­realistic credit and training needs assessment of each and every member of
the identified SHG and may implement the microenterprise/livelihood plan
in a phased manner.
11. Wherever the SHGs have been formed around specific income generating ­activities,
such SHGs are more resilient to external shocks/stress, as compared to SHGs
which have been formed without assessing the same. e.g., the SHGs ­supported by
the IFAD project “MPOWER” in Barmer have been formed around the main occu-
pation prevalent in the area, i.e., goat rearing. Similarly, most of the members of
Jagruti MACS from Ganapati Nagar village are dairy farmers. ­Accordingly, a few
members in the latter case are trained as “Gopal Mitra” and their ­remuneration
is contributed by Vishakha Dairy and the members in the ­ratio of 50:50.
­Accordingly, a range of activities have been introduced to the group ­members
from the ­preliminary stages, i.e., breed improvement, fodder ­management, Vet
Sakhis/medicine kits, weighing machines, etc. It is ­recommended that SHPIs may
identified one or two major income generating activities in the area, which have
adequate potential, market, as well as good linkage support and encourage group
formation around these activities.
12. The SHG concept can prove to be a success only if it is supported by a strong insti-
tutional mechanism which is reflected in the functioning of MPOWER in Barmer
and SERP in Vizag. It was observed during the field visit that SHPIs who are
operating on a very small scale and do not have financial support from multiple
sources, are not able to provide adequate support to SHGs at the grassroots level,
coordinate and follow up with banks, etc.
13. NABARD vide Circular No. 244/MCID-20/2014-15 dated 04 December 2014, has
­initiated a Scheme for tracking and revival of dormant SHGs. MoRD may consider
incorporating the features threreof as a compenent in the present NRLM Scheme.
14. Insurance of crops and animals (including those of SHGs assets) in the distressed
areas may not be viable for both SHG members as well as insurers in the long run
keeping in view the frequency of occurrence of calamities in such areas. Instead,
MoRD and NABARD may jointly develop a suitable model to securitise the loans
24 THE MICROFINANCE REVIEW  •  Volume VII(2)  July - December 2015

extended to SHGs/individual enterprises emanating from the SHGs as majority

of the group members were found avoiding the renewal of insurance created out
of SHG loans. This will facilitate recovery of institutional credit during periods of
distress.
15. It is felt that the extant microfinance initiatives have not been able to provide
an adequate coping mechanism to the SHG members during the periods of
­disaster/extreme stress in the study area. Instances of borrowing from informal
sources, ­depletion of personal savings, deferment of investment decisions (like
­replacement of animals lost during disaster, repair of damaged houses, repair
of damaged boats) were observed during the post disaster period. The rural
poor survive crises, rather, barely manage to stay above subsistence levels only
because of the extant social security schemes, such as MNREGA, food subsidy
(NFSM), and ­interest subvention. As a solution, therefore, a two pronged ­strategy
is ­recommended comprising (i) a microfinance product specially designed for
disaster-prone areas aimed at ensuring a viable productive unit and (ii) enhanced
social security measures in such areas in terms on number of schemes with higher
ceiling for various programmes. For example, the minimum number of days of em-
ployment may be increased from 100 at present, to 120-150 days, enhanced ceiling
for supply of food grains under NFSM, timely and adequate settlement of insur-
ance claims, introducing ­compulsory micro-insurance, etc., may be ­considered.
16. A majority of the policies in the country aimed at socio-economic ­empowerment
of the rural poor are neutral in their scope and application to many situations
like, distress/calamity-prone areas or otherwise. However, the work of social
­mobilisation, group promotion and hand holding, etc., would require much
­greater efforts in ecologically fragile or disaster prone areas, since the individual
members/groups may be faced with repeated displacement, loss of livelihood,
loss of assets, etc., thus requiring intensive support from the SHPIs and other
stakeholders during the periods of distress or otherwise, who in return would
­require much greater human and financial resources than would be required
under normal circumstances/in areas not affected by disaster. For example, the
period immediately after the incidence of disaster also affects the repayment of
loan instalment and monthly savings by individual members and they are at their
most vulnerable stage. It is during this period that greater handholding support
is required from the facilitating agency. Therefore, it is suggested that a separate
policy may be formulated for SHG promotion in such areas.
17. NABARD’s Potential Linked Credit Plans (PLPs) of districts repeatedly affected by,
as well as prone to disaster/ecological stress, may have an additional ­chapter on
the incidence of disaster/stress, the impact thereof as well as the ­ameliorating/
relief measures undertaken by the government/relief agencies. Credit and
Microfinance in Distressed Areas of J&K, Rajasthan and Andhra Pradesh: Some Issues 25

i­nfrastructure requirements for the next year should factor in the enhanced
­investment required (both in terms of institutional credit as well as crucial
­infrastructural needs) into the projections. This would go a long way in providing
ground level feedback to NABARD and other stakeholders about the ‘stress’, and
enable better allocation of resources, including credit.

Conclusion
The ground level realities in the study area highlight the fact that microfinance
­interventions alone are not sufficient to sustain the livelihoods of the rural poor or to
­enable them to achieve socio economic empowerment in distressed areas. Micro-credit
has to be necessarily accompanied by other social security schemes such as MNREGA,
supply of subsidised foodgrains under the National Food Security Mission, micro-­pension
schemes, and subsidised healthcare. For micro-credit itself to succeed as an effective
tool of financial empowerment and to facilitate sustainable rural microenterprise, the
same has to be built around specific livelihoods which have a strong linkage support, are
­promoted by efficient NGOs/intermediaries with a strong institutional machinery and
support system, and the process envisages building of strong institutional support system.
The target oriented policy for SHG promotion and linkage may serve the purpose of
­financial inclusion in the immediate term. However, over a longer period of time, sustain-
ability and eventual economic empowerment will be based only on ensuring ­qualitative
aspects such as proper handholding and support for Income Generating ­Activities.
acknowledgement
[The help and support provided by District Development Managers, Rajesh Kumar
(Doda), Manohar Lal (Udhampur), Manak Chand Regar (Barmer, Rajasthan) and
K V S S L V Prasad Rao (Vizag, AP) are gratefully acknowledged.]

disclaimer
[The views expressed in this paper are those of the authors and do not necessarily
reflect the views of the organisation they belong to.]

References
Chintala, G R and G Mani (2009): “Is Convergence of SHGs and SGSY Approaches of
Lending a Necessary Condition for the Growth of the Microfinance Sector in India”,
Vol. I, No. 1, pp. 121-130.
Jaya R (2010): “Implementation of the SGSY Scheme: Need for a New Orientation to
Administration”, The MicroFINANCE REVIEW, Vol. II, No. 2, pp. 92-106.
Mani, G (2011): “Microfinance in North East Region: Status and Issues”, The microFINANCE
REVIEW, Vol. III, No. 1, pp. 74-93.
Sudan, F K (2010): “Impact of Self-Help Credit Programme on Livelihood Diversification
and Women Empowerment: Evidence from Jammu and Kashmir”, The microFINANCE
REVIEW, Vol. II, No. 2, pp. 107-131.
Vasanthakumari, P (2009): “Evaluation, Problems and Challenges of SHG Linked
Microenterprise Development in India with Special Reference to Kudumbashree in
Kerala, The microFINANCE REVIEW, Vol. II, No. 2, pp. 32-53.
 Evaluating the Role of
­Microfinance in ­Mitigating
the Problems of Distress
­Out-Migrants: A Study in KBK
Districts of Orissa
- S. N. Tripathy*

Abstract
Microfinance is an
­attempt to improve Microfinance is an attempt to improve access to small
access to small deposits ­ eposits and small loans for poor households neglected by
d
and small loans for banks. ­Microfinance offers the finance discipline a possible
poor households ­avenue to make a significant difference in the lives of millions
neglected by banks of poor people. In the context of Orissa, despite its abundant
and offers the finance natural and skilled human resources, has been the poorest state
­discipline a possible in the country with as much as 78% of the population ­living
avenue to make a below the poverty line in the most backward KBK region of the
significant difference in state. An attempt has been made to focus on the role played by
the lives of millions of the microfinance in mitigating the problems ­encountered by
poor people. the distress poor migrants of Bolangir and Kalahandi districts
of Orissa through the formation of Self-Help Groups (SHGs), on
the basis of both primary and secondary sources of data. The
study concludes that Microfinance through SHGs is a ­viable
alternative in involving the community in tackling a crisis
­originating due to failure of crops or natural calamity.

Introduction
With regard to Orissa, the poorest state in India, there is
46% of people living below the poverty line in 1999-2000, as
against 26% for the entire country. The undivided ­districts
of Koraput (i.e., Koraput, Nawarangpur, Malkanagiri and
­Rayagada), Bolangir (i.e., Subarnapur and Bolangir) and
­Kalahandi (i.e., Kalahandi and Nuapada) popularly known as
KBK region of Orissa state is one of the poorest and backward
* Professor of Economics,
Gokhale Institute of Politics regions in the country. As per the estimates of the 55th round of
and Economics, (Deemed
University), Pune. Key Words: Poverty, Distress Migration, Microfinance, Migrant Households
Evaluating the Role of Microfinance in Mitigating the Problems of Distress.......... 27

National Sample Survey conducted in the year 1999-2000, the incidence of rural poverty
in KBK region was as high as 87.1%. Tribes constitutes about 23% of total population
of the state who are the backward, marginalised and poverty stricken population and
KBK ­districts account for 19.7% tribal population over 30.6% geographical area of the
state and tribes constitutes 38.7%. The population of KBK suffers from high morbidity
on account of under-nutrition as well as endemic malaria and other localised diseases.
In terms of infrastructure, road connectivity is a major constraint in the region and
missing links pose significant challenges to the people to access markets, educational
­institutions and health services. Ecologically, rainfall is generally erratic and irrigation
facilities are unevenly distributed. All the present eight KBK districts are ecologically
fragile and problems of soil erosion and land degradation are common. Other socio-
economic ­indicators such as population composition, net area irrigated, availability of
hospital beds and connectivity to growth centres are far from satisfactory.
Migration is a significant livelihood strategy for poor households. Nevertheless,
the role of migration in supporting or moving out of poverty is largely shaped by the
­social, cultural, geographical and economic exclusions experienced by the poor. Rural
out-­migration is often perceived to be the result of poverty, particularly in the case
of seasonal migration, in which the poor migrate in search of alternative livelihoods
in ­response to the detrimental effects of, for instance, the dry season on agricultural
­production and livelihoods, impairing home production and increasing vulnerability.

Objectives of the Study

The study has following two objectives:
1. To study the nature, causes and consequences of out-migration prevailing in tribal
concentrated sample villages of Kalahandi and Bolangir districts of Orissa.
2. To focus the rationale of Microfinance as an alternative credit mechanism and
­security to the distress poor migrant households.

Methodology
Keeping the objectives in view, the present study has been mainly confined to ­migrants
of tribal concentrated sample villages of Kalahandi and Bolangir - the poverty stricken;
drought ravaged tribal dominated districts of Orissa. These two districts have been
­purposively selected, as these districts are the most backward districts in the ­country
known as KBK districts. However, though the field analysis has been based on the sam-
ple tribal dominated villages of these districts, but the overall work has been developed
on the basis of general framework and in-depth study of various issues relating to rural-
urban migration in the State of Orissa with the help of both primary and secondary
sources of available data.
Keeping in view the constraints of time and cost, it was decided to collect field data
28 THE MICROFINANCE REVIEW  •  Volume VII(2)  July - December 2015

from 4 blocks on the basis of random sampling method for the purpose of field study. Two
blocks from each sample district have been randomly selected for the purpose of field
study. First of all a list of the blocks falling in the selected districts has been ­prepared.
From among the blocks, two blocks named Kesinga and Dharamgarh blocks in ­Kalahandi
district, Belpara and Turekala block in Bolangir district have been ­selected on the basis
of their tribal concentration, migration potentiality and ­accessibility. Mostly, the head
of the returned migrant household was interviewed to fill up the ­questionnaire. It was
found that usually the migrant households migrate to different place within the state and
outside the state to work in the brick - kiln industries mostly in case of Bolangir district
and in case of Kalahandi to Raipur, Bastar and other places of ­Madhya Pradesh during
the month of November. After the list of tribal villages has been ­prepared, 2 ­villages in
each block have been selected through random sampling ­method. The ­returned migrant
respondents in their native village were identified through ­village survey at different
intervals during May 2012 to June 2013. Thus, all total eight migrant-prone villages have
been covered under this study to conceive the life cycle related pressures on migrant
prone households, socio-economic living conditions, high ­magnitude of poverty, and
heavy burden of indebtedness etc; contributing to vulnerability to distress migration.
To study the impact of Microfinance intervention in the frame-work of income ­security,
it was manifested that out of 140 migrant households extended over 8 sample villages;
only 30 (21.4%) households were identified as having members in the SHGs. Therefore,
an equal number of non-migrant households having members in the SHGs from two
blocks Kesinga (15 SHGs households) from Kalahandi and Turekala (15 SHGs house-
holds) from Bolangir district were selected on random sampling technique for assessing
the impact of Microfinance in mitigating the distress mitigation/ vulnerability. Thus,
a total of 60 SHGs households were covered from 8 sample villages and two blocks of
two selected districts consisting of both migrant and non-migrant households. Further,
one member from each Self Help Group households aggregating 60 members have been
selected for the purpose of collection of field data.
The specific objectives of the study were:
1. To examine the role of Microfinance, in meeting the crisis of such distress migrant
households,
2. To investigate the role of SHGs/ Microfinance as a security to the distress poor
migrant households in empowering the women, augmenting their income and
income-generating activities and finally, encountering their hocks/ ­vulnerability.
Table 1 unfolds that among the sample villages in the selected blocks Titkela village in
Kesinga block has the highest percentage of 30.8% of SC population, followed by Pati-
mal village (29.1) in Turekala block. Similarly, Golmunda village has also the distinction
of highest percentage of ST population (46.3), followed by Juba (42.0) in Belpara block.
It is found that the villages like Godtola, Juba, Barala and Kadalipali manifested more
Evaluating the Role of Microfinance in Mitigating the Problems of Distress.......... 29

Table 1: SC and ST Population and Sex-ratio of the Sample Villages in the Study Area
Name of the Name of the Name of the SC Population and ST Population and Sex-ratio
District Block Sample Villages its Percentage to its Percentage to (Females per
Total Population Total Population 1000 males)
Kalahandi 1) Kesinga 1) Tansir 330 (19.6) 184 (10.9) 972
2) Titkela 318 (30.8) 143 (13.8) 975
2) Dharamgada 1) Golmunda 433 (9.7) 2076 (46.3) 918
2) Kadalimunda 301 (14.33) 73 (3.5) 942
Bolangir 1) Belpara 1) Bahabal 119 (14.4) 247 (29.9) 995
2) Kapani 118 (9.8)) 399 (28.6) 997
2) Turekala 1) Barala 46 (8.0) 69 (11.1) 1032
2) Kadalipali 29 (18.6) 56 (35.9) 1026
Source: Census of India-2001, District Statistical Hand book

females per thousand of males. The village Golmunda exhibited the lowest sex-ratio
(918) among the villages.
Table 2 presents the list of households from which sample households were selected
for the study. There were 140 sample households from 8 villages; out of which 46 house-
holds (32.8%) were in the category of SC, 68 households (48.5%) were in the category of
ST and remaining 26 households (18.5%) were in the category of ‘other castes’.
Table 2: Caste-Wise Distribution of Migrant Households Surveyed from the List of Households
Name of Name of the SC Migrant ST Migrant Migrant House- Total Migrant
the Block Sample Villages Households Households holds (other castes) Households
1) Kesinga 1) Tansir 06 (30.0) 10 (50.0) 04(20.0) 20 (100.0)
2) Titkela 08 (80.0) 02 (20.0) - 10 (100.0)
Total 14 (46.6) 12 (40.0) 04(13.3) 30 (100.0)
2) Dharamgada 1) Golmunda 06 (20.0) 18 (60.0) 06 (20.0) 30 (100.0)
2) Kadalimunda 06 (60.0) 02 (20.0) 02 (20.0) 10 (100.0)
Total 12 (30.0) 20 (50.0) 08 (20.0) 40 (100.0)
1) Belpara 1) Bahabal 10 (33.3) 14 (46.6) 06 (20.0) 30 (100.0)
2) Kapani 06 (30.0) 10 (50.0) 04 (20.0) 20 (100.0)
Total 16 (32.0) 24 (48.0) 10 (20.0) 50 (100.0)
2) Turekala 1) Barala 02 (20.0) 06 (60.0) 02 (20.0) 10 (100.0)
2) Kadalipali 02 (20.0) 06 (60.0) 02 (20.0) 10 (100.0)
Total 04 (20.0) 12 (60.0) 04 (20.0) 140 (100.0)
Source: Field Study

It is found from the Table 3 that most of the migrant households were dependent on ag-
riculture (43%). In most of the households there are no authentic records with regard to
Table 3: Occupation-Wise Distribution of Migrant Households at the Place of Origin
Sl. No Occupation Migrants % Average per Worker
Monthly Income (In Rs)
1 Agricultural work 60 43.0 600
2 Non-agricultural work/ manual labour/wage earners 42 30.0 850
3 Leaf-plate making/ Bamboo basket weaving/ Rope making 5 3.5 600
4 Bidi making 6 4.3 600
5 Wine production 10 7.1 900
6 Kendu leaf plucking 10 7.1 600
7 Preparation of stone-chips 7 5.0 700
Total 140 100.0 444
Source: Field Study
30 THE MICROFINANCE REVIEW  •  Volume VII(2)  July - December 2015

Table 4: Occupation-Wise Distribution of Migrant Households at The Place of Destination

Sl.No Different Occupation No of Migrant % Average per worker
Households monthly income (In Rs.)
1 Brick-kiln industry 90 57.8 2800
2 Road laying, earth work and other 30 16.7 3600
3 Construction works, hotels/ commercial establishments 10 5.6 1600
4 Manual works 06 8.9 4000
5 Rickshaw pulling 04 6.7 3000
Total 140 100.0 2771
Source: Field Study

the possession of their land, size of holding, etc. The area of land holding by the ­migrant
household is not only extremely limited but also barren, scattered and rain-fed and as
such the income from the agriculture is inadequate. There were 42 households (30%)
reporting their engagements in non-agricultural work/manual labour/wage earning.
It is pertinent to know the nature of employment available to the migrant house-
holds at the place of destination. It is evident that the migrants are employed in a wide
range of employments but mostly in brick-kiln industry (57.7%) and road lying works
(16.6%). The average monthly income is Rs. 2,771 which is much higher than the income
receiving at their place of origin. But the scattered nature of work place, distressed and
discriminatory wages are the reality of migrant workers leading to extended poverty
(Table 4).
Table 5: Distribution of Migrant Households According to Their Sources and Purposes of Debt
Sources of Debt Migrant Households % Purpose of Loans Migrant Households %
Money lender 84 60.0 Consumption 32 22.8
Regional rural bank 12 8.6 Investment in land/ small business 14 10.0
Self-help group/ Microfinance 26 18.5 Social ceremony 18 12.8
Co-operatives 6 4.3 Sickness 14 10.0
Friends, relatives/others 12 8.6 Redemption of loans 54 38.5
- - - Others 8 5.7
Total 140 100.0 Total 140 100.0
Source: Field Study

In our analysis, the moneylenders dominate the credit market as about 60% of ­migrant
households are dependent on them. For various reason the credit flow to these sections of
the population for meeting their credit requirements could not be ­institutionalised. This
was due to the factors like inadequate supply of credit, demand- supply gap, ­improper
identification of beneficiaries and unhealthy competition from informal credit agencies.
Cumbersome and time consuming banking procedure, failure to supply credit at the
time of need and rigid collateral requirement are the major stumbling blocks causing
poor access to formal credit institutions. The crop loss due to natural calamities and
­unproductive utilisation of borrowed funds resulted in rising default rate and delayed
loan payments. The credit market has not been developed in the sample districts to
cater to the needs of the poor households mostly the tribes (Sarap, 1991, Swain, 2001,
Tripathy, 2006).
Evaluating the Role of Microfinance in Mitigating the Problems of Distress.......... 31

Institutional sources of credit supply have been made by Regional rural bank, and
Co-operatives which constitutes 8.6%, and 4.3% of credit requirements of the sample
migrant households. However, it is heartening to note that Microfinancehas made an
intervention in catering to the credit needs of the migrant households (18.5%).
Indebtedness leads to bondage and a type of contractual labour agreement between
the labour contractor or agents, bondage in turn, reinforces exploitation and distressed
payment of wages. With regard to purposes of loans it is seen that the highest percent-
age of 38.5% were intended for of redemption of loans, followed by 22.8% for consump-
tion purposes.
Table 6: Distribution of Households According to The Level of Income and Cash Remittance
Level of Income No of Migrant % Cash-Remittance No of Migrant %
(Annual in Rs.) Households (Annual in Rs.) Households
15,000-20,000 15 10.7 1000-3000 06 04.2
+20,000-25,000 42 30.0 +3000-8000 38 27.1
+25,000-30,000 46 32.8 +8000-10000 42 30.0
+30,000-35,000 22 15.7 +10000-12000 18 12.8
+35,000-40,000 15 10.7 +12000-15,000 15 10.7
No-Remittance Households 21 15.0
Total 140 100.0 140 100.0
Source: Field Study

Table 6 exhibits the data relating to the level of income and cash remittance of the mi-
grant households. It is revealed that 46 households (32.8%) have the annual income in
the range of Rs. +25,000-30,000 where as only 10.7% of households have their annual
income in the range of Rs. +35,000-40,000. On the contrary, the cash remittance of the
households shows that a total of 119 households (85%) reported to have remitted money
to their native place. There were 88 migrants within the income range of Rs. +20,000
to 30,000 who have remitted in the range of Rs. 3,000 to Rs. 10,000 to their native
places. There were 21 households (15%) who reported about their non-remittances to
their places of origin.
It is apparent from the above-analysis that distress migration is a common ­phenomenon
in the study villages but it is limited due to lower skill levels and exploitation by the
­middlemen. Capability deprivation such as education, poor health facilities, and poor
human development are other dimensions of poverty prevalent in the study villages.
Most of the villages are underdeveloped in terms of finance facilities and inaccessible
due to poor road transport networks. Actual access to health and education facilities are
poorer than the recorded official statistics.

Rationale of Microfinance in Reducing Distress Out-Migration

Microfinance is an attempt to improve access to small deposits and small loans for
poor households neglected by banks. Microfinance offers the finance discipline a pos-
sible avenue to make a significant difference in the lives of millions of poor people.
32 THE MICROFINANCE REVIEW  •  Volume VII(2)  July - December 2015

Microfinance services through contributing to the smoothing out of peaks and troughs
in income and expenditure thereby enabling the poor to cope with unpredictable shocks
and emergencies.
The most common understanding of microfinance is that microfinance provides poor
families with very small loans (micro-credit) to enable them to take up income gen-
erating activities or start small business enterprises. Microfinance is an area which is
looked upon as a very effective tool for poverty eradication. By getting access to fi-
nance, the poor people are able to start their own micro-enterprise that helps increase
their incomes and paves the way for their availability of consumption and reduce risks
­(Tripathy, 2004, 2006, 2009 and 2013)
In India, SHG model, promoted by NGOs, State Governments, Bankers and others,
has emerged as a significant strategy to promote women empowerment and enable SHG
members to come out of poverty. Moreover, experience shows that microfinance can
help the poor to increase income, build viable businesses, and reduce their vulnerabil-
ity to external shocks. It can also be a powerful instrument for self-empowerment by
enabling the poor, especially women, to become economic agents of change (Tripathy,
2009).
Table 7 demonstrates the socio-economic profile of the sample members in our study.
The occupation structure of the SHG members reveals that 23 members (38.3%) are
engaged in agriculture. There are 15 members employed in allied activities (poultry
Table 7: Socio-Economic Profile of the Sample Members (N=60)
Socio-Economic Profile No. of Members Percentage
Occupational Structure
Agriculture 23 38.3
Allied activities (poultry, others and selling of these products) 15 25.0
Collection of minor forest products 02 03.3
House hold industries/ crafts 08 13.3
Labour/wage earning/others 12 20.0
Total 60 100
Age-group
18-30 14 23.3
30-35 20 33.3
35-40 10 16.7
40 and above 16 26.7
Total 60 100
Level of literacy
Illiteracy 24 40.0
Knowing only signature 16 26.7
Read and write 20 33.3
Total 60 100
Marital Status
Married 46 76.7
Unmarried 14 23.3
Total 60 100
Source: Field Study
Evaluating the Role of Microfinance in Mitigating the Problems of Distress.......... 33

and others) constituting 25%. It is revealed that eight members (13.3%) of the sample
members depend on household industries/ crafts as their source of livelihood, and 12
members (20%) depend on wage earning. There are 20 members (33.3%) are in the
age group of 30 to 35 years where as there are 10 members in the age group of 35
to 40 (16.7%). Similarly, there are 24 members (40%) reported as illiterate and 26.7%
only know to put their signature. The marital status reveals that 46 members (76.7%)
­reported that they were married and remaining 14 members are unmarried (23.3%).
Table 8: Main Purpose of Loans ‘Before SHGs Formation’ by the Sample Members of the
‘Migrant’ and ‘Non-Migrant’ Households
Sl. No Purpose of loan 1st Weightage 2nd Weightage 3rd Weightage Final Rank
Priority Score Priority Score Priority Score Order
1 Consumption Needs 30 300 28 280 28 280 860 1st
2 Health Related Expenditure 4 40 5 50 4 40 130 5th
3 Repair of House 4 40 4 40 4 40 120 6th
4 Income Generating Activities 7 70 9 90 10 100 260 3rd
5 Debt redemption 10 100 8 80 9 90 270 2nd
6 Festival and Social Obligation 5 50 6 60 5 50 160 4th
Total 60 60 60
Source: Field Study

Table 8 analyses the different purposes of loans ‘before SHGs formation’ by the ­sample
members of the ‘migrant’ and ‘non-migrant’ households. Various reasons for taking loan
on the basis of priority have been presented in the Table 8. Each individual respondent
has been asked three questions. The weightage score of each priority reasons (number
of respondents multiplied by the assigned weightage) has been derived by summing up
horizontally all the calculated score of different reasons. Analysing the total weightage
score, the final rank order has been prepared in the last column. A per the ­column,
­‘consumption needs’, ‘debt redemption’, ‘income generating activities’ - were the ­different
most explanatory factors for obtaining loans by the sample households.
Response of the sample members on the basis of priority of obtaining loans after
the formation of SHGs’ and looking at the final rank order it was revealed that income
generating activities, Consumption needs, and Debt redemption-were the different most
explanatory factors for obtaining Microfinance by the sample households (Table 9).
Table 9: Main Purpose of Loans ‘after the Formation of SHGs’ and Availing Microfinance by the Sample Members of the
‘Migrant’ and ‘Non-migrant’ Households : After the Formation of SHGs
Sl. No Purpose of loan 1st Weightage 2nd Weightage 3rd Weightage Final Rank
Priority Score Priority Score Priority Score Order
1 Consumption Needs 20 200 22 220 20 200 620 2nd
2 Health Related Expenditure 6 60 4 40 4 40 140 4th
3 Repair of House 5 50 4 40 4 40 130 5th
4 Income Generating Activities 20 200 20 200 23 230 630 1st
5 Debt Redemption 4 40 6 60 6 60 160 3rd
6 Festival and Social Obligation 5 50 4 40 3 30 120 6th
Total 60 60 60
Source: Field Study
34 THE MICROFINANCE REVIEW  •  Volume VII(2)  July - December 2015

Pattern of Expenditures
A comparative study of Tables 10 & 11 pertaining to the main purpose of ­expenditure
of sample members before SHGs and after the formation of SHGs/ Microfinance
­intervention, depicts that while expenditure on food items, debt redemption and repair
Table 10: Main Purpose of Expenditures ‘Before SHGs Formation’ by the Sample Members of the
‘Migrant’ and ‘Non-migrant’ Households
Sl. No Items of Expenditures 1st Weightage 2nd Weightage 3rd Weightage Final Rank
Priority Score Priority Score Priority Score Order
1 Food Items 22 220 22 220 21 210 6501st
2 Clothes 07 70 05 50 05 50 1704th
3 Wine/ Liquor 04 40 05 50 04 40 1307th
4 Health 05 50 06 60 05 50 1605th
5 Ceremonies 04 40 05 50 05 50 1406th
6 Repair of House 05 50 06 60 07 70 1803rd
7 Income Generating Activities 03 30 03 30 04 40 1008th
8 Debt Redemption 10 100 08 80 09 90 2702nd
Total 60 60 60
Source: Field Study

of house - were dominant items of expenditure before the initiation of SHGs, ­expenditure
on food items, income generating activities and debt redemption have become the
prime items of expenditure after the formation of SHGs/ microfinance intervention. It is
­significant to note that there has been a paradigm shift to income generating ­activities
mainly production of honey through bee cultivation, beedi making from kendu leaf,
poultry etc after the formation of SHGs/ microfinance intervention. A huge portion of
their income is spent for redemption of debt. Hence, the micro-credit has to make a dent
in this region to ameliorate their socio-economic conditions and vulnerability.
Table 11: Main Purpose of Expenditures ‘after’ the formation of SHGs and Availing Microfinance’ by the Sample Members of
the ‘Migrant’ and ‘Non-migrant’ Households
Sl. No Items of Expenditures 1st Weightage 2nd Weightage 3rd Weightage Final Rank
Priority Score Priority Score Priority Score Order
1 Food items 20 200 22 220 20 200 620 1st
2 Clothes 03 30 05 50 04 40 160 4th
3 Wine/ liquor 03 30 04 40 04 40 110 7th
4 Health 03 30 04 40 05 50 120 6th
5 Ceremonies 04 40 02 20 04 40 100 8th
6 Repair of house 06 60 05 50 03 30 140 5th
7 Income generating activities 15 150 13 130 14 140 420 2nd
8 Debt redemption 06 60 05 50 06 60 170 3rd
Total 60 60 60
Source: Field Study

It is seen from Table 12 that in case of exigencies the sample group members borrow
money for petty consumption, medical expenses, purchase of farm inputs, undertak-
ing small business activity, etc. SHG members were also borrowing from the corpus
of the group. The members were borrowing according to their requirements and re-
Evaluating the Role of Microfinance in Mitigating the Problems of Distress.......... 35

Table 12: Distribution of SHGs Members of the ‘Migrant’ and ‘Non-migrant’ Households (N=60)
on the Basis of their Response on Savings, Loans and Interest Rates
Impact of Microfinance Intervention No. of Members Percentage
Availing loan Rs.8000/ and below 22 36.7
Availing loan Rs.8000/ plus to Rs.10,000/- 28 46.7
Availing loan above Rs.10, 000/- 10 16.7
Rate of interest charged to the SHGs 24% to 30% 45 75.0
Rate of interest charged to the SHGs 30% Plus 15 25.0
Source: Field Study

payment capacity. It is found that 36.7% of the on lending was below Rs. 8,000, and
46.7% ­borrowed between Rs. 8,001 and 10,000. Loss of food grains, illness and adverse
­dependency ratio in the family are found as contributing factors understanding the
life-cycle pressures on poor households during agricultural distress. The group used to
­decide loan amount considering priorities of borrowing members and corpus on hand.
Rate of interest charged to borrowing members of the sample SHG households was
a unanimous choice of the group. A significant percentage of sample members obtain
loans at a rate of interest charged in the range of 24% to 30%. The sample members were
highly satisfied to borrow among themselves as the moneylenders charge ­exorbitant rate
of interest in the range of 100% to 120%.
Table 13 summarises the socio economic changes among SHG members, as
­reported by the sample members. The ‘pre’ and ‘post’ Microfinance intervention has
brought ­remarkable changes in the socio-economic condition of sample households.
60% ­enhancement were noticed in terms of establishing liaison with banks through
­savings and/or credit; more than 66% increase in the savings, 50% depicted about
their ­improvements in social status and more than 33% about their economic ­security
and meeting the shocks/ vulnerability. Similarly, more than 50% hike in improvement
in ­employment opportunities and reduction of migration of family members were
­manifested. About 75% members paid their monthly contributions in time.
Table 13: Socio-Economic Changes through SHG-Bank Linkage Program (N=60)
Sl. No. Socio - Economic Change Sample Members Before After Change + %
1. Augment in social status 10 16.7 40 50.0
2. Coping the crisis in times of crop failure/ drought 06 10.0 30 40.0
3. Improvement in consumption pattern 14 23.3 30 26.7
4. Group approach among members 18 30.0 25 20.0
6. Freedom to work outside home 30 50.0 35 8.3
7. Leadership 20 33.3 30 16.7
8. Borrowing from money lenders 40 66.7 25 25.0
9. Additional income generation 20 33.3 40 33.3
10. Financial liaison with banks 06 10.0 42 60.0
11. Economic security /meeting shocks/ vulnerability 04 6.7 24 33.3
12. Improving Employment Opportunities 06 10.0 30 40.0
13. Less migration of family members 10 16.7 40 50.0
14. Increase of savings 04 6.7 44 66.7
15. Payment of monthly contribution to the SHGs 0 0 45 75.0
Source: Field Study
36 THE MICROFINANCE REVIEW  •  Volume VII(2)  July - December 2015

Concluding Remarks
Migration based work and earnings are the major source of survival for the
­communities of this poverty stricken and low endowment regions of Bolangir and
­Kalahandi ­districts of Orissa. Though migration is an irreversible reality for the majority
of those who ­depend on it, and indeed for many it is the single major outlet from rural
poverty, it is an act fraught with immense hardship and insecurity. There are several
reasons for this - skill levels are low, connections and networks are scarce, services are
absent and above all, labour and remuneration practices in industries and markets that
employ seasonal migrants tend to be callous and exploitative. Legal protection for this
category of workers is often missing. As a result of which there is a vicious circle of pov-
erty, ­unemployment, indebtedness and migration in the district of Kalahandi and Bolan-
gir. Lack of employment /income generating activities and poverty compels the tribal
migrants to take advance from the contractors resulting in migration. Whatever paltry
amount they save is insufficient to pay back the loan amount borrowed from the money-
lenders as the rate of interest is exorbitantly high. The cycle of poverty originates from
the sordid reality of crop loss, unemployment inducing to food insecurity, ­vulnerability
to health hazards and ultimately, indebtedness and chronic poverty. The vicious circle
continue unabated for decades in the sample districts as the planned measures could not
percolate benefits considerable in the rural regions of the districts.
Thus, the existence of poverty in the study villages is due to a state of ­deprivation
and vulnerability. The origin of risk include expensive illness, death of a bread winner,
­natural calamities like drought, flood, failure of crops, the need to meet the ­customary
obligations like wedding, funeral, and market shocks etc. The coping mechanism
against such crisis leads poor into a situation of further debt and ­impoverishment.
­Microfinance ­service extends the coping capacities of the poorer to a next level of
­leverage ­supplementing the role of savings and credit in mitigating their problem of
poverty and vulnerability.
A perusal of analysis clearly demonstrates that Microfinance through SHGs is a ­viable
alternative to achieve the objectives of community involvement in tackling a ­crisis
­originating due to failure of crops or natural calamity. Microfinance through SHGs
­enhances the quality of status of women as participants, decision makers and ­capacitates
to encounter the shocks/ crisis (Tripathy, 2006 p.108). On the whole, ­sample SHGs
­members revealed that they are a valuable tool for empowerment at both ­individual and
group level. Sample members’ attitude to life has become more optimistic and ­positive
enabling them to regenerate their income and encounter the crisis and ultimately,
­reversing the trend of distress migration. Indeed, they are well-placed to work with
other actors in the community to tackle economic/ social problems and economic crisis.
It is inferred that as institutional finance is inadequate in rural areas, moneylend-
ers play a dominant role in rural finance. The study revealed that the highest percent-
Evaluating the Role of Microfinance in Mitigating the Problems of Distress.......... 37

age of 38.5% of loans were intended for of redemption of loans, followed by 22.8%
for ­consumption purposes, and Microfinance has made an intervention about 18.5% in
catering to the credit needs of the migrant households (Table 5).
Microfinance institutions in the study region provide little support to the migrant
prone households for the onslaught of draughts/ shocks and the distress economic
­conditions of such households’ enforces them to heavily depend on moneylenders/ ­labour
­contactors. As a result of which, the poor rural population has been in the ­shackles
of debt and bondage leading to distress out-migration of poor households. Moreover,
­factors like demographic pressure; low land men ratio, uncertain monsoon, poverty of
the farmers, low infrastructure and global competition etc have resulted in ­deterioration
in agricultural income of the farmers. As far as absorbing any agrarian shocks such as
drought, over the years, these rural households put in place coping mechanisms that
include migration in search of non-farm employment.
The basic objective of the policies, intervention programs, enactments and ­institutions
are to bring the marginalised, poor households into the mainstream of development by
making them self-reliant. The institutional support through the flow of microfinance
organised and implemented through SHGs in the sample migrant prone districts of
KBK have accelerated in creating a better impact on the quality of life and instilled
­confidence to meet the crisis. In fact, the dynamics of Microfinance through SHG and
bank ­linkage have ameliorated the socio-economic conditions of disadvantaged groups,
have enhanced their coping capability, made them self-dependent and ultimately paved
the way for waging a crusade against the age-old exploitation of money-lenders and
traders.

Policy Implications
It is being perceived that Microfinance as a part of livelihood support has greater
potential to reduce risk and vulnerability of distress prone communities. Poor ­encounter
series of risks and shocks which make them vulnerable notwithstanding the access
to savings and credit services through micro finance. Hence, the policy intervention
should be aimed at preventing / reducing the vulnerability/ exposure to adversity of
­migrating labour, assuring them subsidy on crop loss, better flow of information, and
tackling the formidable challenge of reducing the high transaction costs. There is a
tremendous scope to design well-adapted insurance products for the poor which will
­reduce their ­vulnerability to environmental influences. Thus, there is mounting hope
that ­microfinance can be a large scale disaster mitigation tool especially in times of
drought and crop failures.
The potential of micro credit to tackle poverty should not blind us to the fact that
lending to the poor has to be regulated just like other lending, perhaps even more care-
fully considering their already weak economic standing. Pressures which push people
38 THE MICROFINANCE REVIEW  •  Volume VII(2)  July - December 2015

towards distress migration or vulnerability to borrow from money lender are expenses
towards social expenses and ill health; apart from failure of investment in business
­including farming. The initiative that needs to be rolled out is mechanism to ­strengthen
food security at the household level, reducing vulnerability due to ill-health, or a
­situation of drought. Therefore, to reduce the vulnerability social security constitutes an
integral part of the development program and hence, the Government has to provide a
protective cover to the migrant prone households. Microfinance and micro insurance are
being considered as part of social security measures to reduce risks and vulnerability;
needs to perceptibly penetrate in this region.
A holistic approach is needed in the context of KBK migrant prone poverty ­stricken
households which should comprises of skill formation, creating multiple avenues of
­employment, confidence building in mitigating recurring droughts, crisis management,
more access to Microfinance and investment guidance as well as marketing support.
Diversified livelihood opportunities, opening up of non-farm employment, ­removal
of infrastructure bottlenecks, addressing the specific needs through adequate
­microfinance/cash flow, generating income through labour intensive works, effective
disaster ­management response and mitigation to capture exodus of rural labour etc will
go a long way in mitigating the vulnerabity of distress migration in KBK region of Orissa.

References

Sarap, K (1991): “Interlinked Agrarian Markets in Rural India”, Sage, New Delhi,
Swain, M (2001): “Rural Indebtedness and Usurious Interest Rates in Eastern India: Some
Micro Evidence”, Journal of Social and Economic Development, Vol.3, No.1, pp. 122-143.
Tripathy, S N (2004): “Evaluating Women Self-Help Groups in Tribal Orissa”, Tribal
Women in India, Dominant Publishing House, New Delhi.
------ (2006): “Rural Finance and Self-Help Groups”, Self-Help Group and Women
Empowerment, Anmol Publishing House, New Delhi.
------ (2009): “Finance for Rural Development: Interface with Microfinance”, Manglam
Publications, Delhi.
------ (2013): “Self-Help Groups (SHGs), Microfinance and Poor People”, in Aparajita
Biswal and Bibhuti B Patro Edited Book, Micro-Credit and Women Empowerment,
Abhijeet Publications, New Delhi.
 Drivers of Self-Help Group
Approach: Lessons from
Comparative Performance of
Himachal Pradesh and Haryana
- S S Sangwan* and Gagan Deep**

Microfinance broadly Abstract

means financing small In this study, the implementation and impact of Self-Help
amounts to the poor for Groups (SHGs) in the hilly state of Himachal Pradesh (HP)
their emergent needs and Haryana have been compared in terms of participation
like illness, school by families of different social and economic status, stabilities
fees, electricity bills, of membership, documentations by the groups, regularity of
consumption, and their meetings and savings and process of decision making,
margin for their small to bring the driving forces behind the above functions by the
enterprises and to SHGs. The findings of the study are based upon feedback
supplement their basic obtained from the representatives of 90 SHGs from two
requirements like house good performing districts of Mandi and Kangra from HP and
construction, marriage Yamuna Nagar and Rohtak of the less performing Haryana.
and social ceremonies. The findings reveal that the management of SHGs is better in
HP in terms of regularity of meeting and savings which are
corner stone of their success. Grading before financing was
done for all SHGs in HP while in Haryana 18% SHGs were not
graded. The repeated loans by SHGs were more in HP than
Haryana, though loan as revolving cash credit was more in
Haryana then HP due to lack of explaining from banks. The
professional NGOs in HP were the main motivating agent for
better implementation and sustenance of SHGs in HP than
Haryana.

Introduction
Microfinance broadly means financing small amounts to
the poor for their emergent needs like illness, school fees,
* Professor SBI Chair and electricity bills, consumption, and margin for their small
** Research Assistant SBI enterprises and to supplement their basic requirements like
Chair, Centre for Research
in Rural and Industrial
Key Words: Microfinance, Self Help Groups, Self Help Group Promoting Institutions,
Development, Chandigarh
Grading
40 THE MICROFINANCE REVIEW  •  Volume VII(2)  July - December 2015

house construction, marriage, social ceremonies, etc (Sangwan 2013). In India, the
poor have been meeting these requirements from either informal sources like money
lenders, relatives or their own pooled savings through various social mechanism like
community savings, collection for marriage, contribution for house construction etc1.
Microfinance, especially the bank credit through the instrumentality of Self-Help Groups
(SHGs) saw growing enthusiasm in 1990s for poverty alleviation after its success in
Bangladesh, Indonesia, etc2. It is a paradigm shift in the strategy for resolving the
socio-economic deprivation because it intervenes in the process of social engineering.
SHGs are a small group of equal economic and social status who voluntarily start small
savings to lend among themselves for their small emergent needs (NABARD, 1999). It
may be called micro bank of such people. The SHGs are also the medium to achieve the
much talked about social inclusion.
Progress of SHGs in India
Micro bank credit through SHGs was first initiated by NABARD through a pilot
project during 1992-93 to 1994-953. After studying the success and utility of the
programme, Reserve Bank of India (RBI) declared SHG as a normal priority sector
lending since April 19964 (Nanda, 1994; NABARD, 1995). Taking a clue from the success
of NABARD-SHGs of the poor not necessarily BPL families, Government of India had
adopted this approach in its revamped poverty alleviation programme” Swaran Jayanti
Gramin Swarozgar Yozja” (SGSY) since April 1999. The involvement of government
functionaries through SGSY and support from NABARD, the number of SHGs linked
with banks increased in multiples and the number reaching to its peak in 2012 with a
slight decline thereafter. However, regional spread of the programme has been skewed
as revealed from region-wise achievement of the SHGs (NABARD 2012). The Southern
Region alone account for 46% saving linked and 54% of credit linked SHGs in 2012
whereas the Northern Region has just 5% in 2012 (Table 1). Within the Northern region
in 2014, Rajasthan accounted for about 71% (62% in 2001) of the SHGs credit linked
Table 1: Saving and Credit Linked SHGs in India and Northern Region/States as on March
No of Saving linked Region/state wise share in Credit Credit Linked as %
Region No of Credit linked SHGs
SHGs Linked SHGs of saving linked
Year 2012 2014 2001 2012 2014  2001  2012 2014  2014
All India 7960349 7429500 263825 4354442 4197338 100.00 100.00 100.00 56.50
Northern Region 409326 365208 9012 212041 183929 3.42 4.87 4.38 50.36
Chandigarh 619 468 0 213 138 0.00 0.10 0.08 29.49
Haryana 44184 43029 537 21433 20656 5.96 10.11 11.23 48.00
HP 65641 37674 2545 35872 17618 28.24 16.92 9.58 46.76
J&K 6349 873 203 3138 587 2.25 1.48 0.32 67.24
New Delhi 3536 2901 0 1120 893 0.00 0.53 0.49 30.78
Punjab 37343 23041 111 15304 14207 1.23 7.22 7.72 61.66
Rajasthan 251654 257262 5616 134981 19830 62.32 63.67 70.59 7.71
Note: data of saving linked SHGs was not available as on March 2001.
Source: Status of Microfinance in India (nabard/publications/archives 2001, 2012 and 2014).
Drivers of Self-Help Group Approach: Lessons from Comparative Performance... 41

followed by Himachal Pradesh 10% (28% in 2001), Haryana 11% (6% in 2001) Punjab
8% (1% in 2001) and negligible share of Jammu & Kashmir. The state wise shares in
northern region for the peak year 2011-12 are also shown in the table.
In fact till 2000, when the progress of SHGs in Punjab and Haryana was almost nil;
a few bankers/academicians, held the view that these States have little scope for micro
financing due to their higher per capita income. But the increased share of Punjab and
Haryana over time has belied this argument. Within northern region states, Rajasthan
and Himachal Pradesh are much ahead than Punjab and Haryana in implementation
of the SHG programme.
Questions are raised about slow progress of SHG approach of financing in Northern
region especially in Punjab and Haryana. Why the adjoining hilly state of Himachal
Pradesh has implemented better inspite almost similar banking net-work? Whether there
is demand side constraints or the drivers for the programmes are lacking? To illustrate,
whether, it is due to less number of poor families in these states or less orientation
of the people or less number of NGOs to promote the SHG programme? Whether
topographical situation of hilly Himachal Pradesh induce people for cooperation than
Haryana and Punjab? SHG is women dominated programme and whether women have
less freedom in Punjab and Haryana as compared to Himachal and Southern States?
To seek answers to these questions, the study attempts to analyze the ground level
situation in HP vis-à-vis Haryana.
Rationale for the Study
A number of studies (NABARD, 1995 and 1997; Sangwan, 1997; Datta and Raman,
2001) have documented the achievement and impact of SHGs in Karnataka, Uttar
Pradesh, Tamil Nadu and Andhra Pradesh, respectively. A comprehensive study by
NABARD (2000) in 22 districts of 11 states from a sample of 560 members of about 220
SHGs has revealed, inter alia, increase in income of households involved with SHGs.
Involvement of the members in the group activities significantly contributed in improving
their self confidence and communication skills. Even a study was conducted in Haryana
(Sangwan, 2002) covering the districts of Karnal, Gurgaon and Bhiwani which revealed
good impact and scope for further expediting. But still, the implementation SHG Bank
linkage programme is slow in Haryana as compared to Himachal Pradesh, therefore
the comparative study was undertaken to understand process of implementation and
evolve suggestions to expedite the SHG programme. The role of NGOs and attitude
of bankers has also been examined to bring out the future action points for NABARD,
Banks and NGOs.
Sample of the Study
The study is based upon two stage purposive sampling. In Himachal Pradesh (HP),
districts of Kangra and Mandi were selected in view of their rapid SHG progress and
42 THE MICROFINANCE REVIEW  •  Volume VII(2)  July - December 2015

in Haryana (HR), one least performing district of Rohtak and one best performing
Yamunanagar were selected. From these selected districts, 90 SHGs were randomly
selected from the list of SHGs which were credit linked at least two years before the
study to ensure perceptible impact of SHGs on the member households. District-wise
break up of SHGs is given in Table 2 along with BPL groups in the total sample.
Table 2: District-wise Break of the Sample
District/State No. of SHGs No. of BPL Sample District/State No. of SHGs No. of BPL Sample
Groups Groups
Mandi 21 1 Yamunanagar 20 10
Kangra 20 6 Rohtak 29 13
Himachal Pradesh 41 7 Haryana 49 23
Source: Field Survey, SBI Chair, CRRID, 2013

The information related to functioning of SHGs in terms of collection of saving,

regularity of meetings, participation of members, procedure of inter-loaning, pattern
of loans, repayment of loans etc. were collected by interviewing the representatives of
90 SHGs. Besides, the role of NGO and banks has also been ascertained during survey
through a structured questionnaire.
Comparative Features of Implementation in HP and Haryana
Participation by Economic Category
Of the sample 41 SHGs and 49 SHGs in HP and Haryana, 17% and 47%, respectively
were from Below Poverty Line (BPL) families (Table 3).
Table 3: Distribution of Sample SHGs by Economic Category (percentage share)
State Districts BPL APL Mixed Total/ No.
Himachal Pradesh Mandi 4.8 38.1 57.1 (100.0)21
Kangra 30.0 30.0 40.0 (100.0)20
Sub-Total-HP 17.1 34.1 48.8 (100.0)41
Haryana Yamunanagar 50.0 25.0 25.0 (100.0)20
Rohtak 44.8 27.6 27.6 (100.0)29
Sub-Total-Haryana 46.9 26.5 26.5 (100.0)49
All HP+Haryana 33.3 30.0 36.7 (100.0)90
Note: Figures in brackets are the number of SHGs
Source: Field Survey, SBI Chair, CRRID, March 2013

The mixed groups were 49 and 27% in HP and Haryana while Above Poverty Line
(APL) groups were 34 and 27%. Thus, more participation of APL families in HP than
Haryana may be one of the reasons for better achievement of SHG programme in the
former.
Participations by Social Category
The sample SHGs as per Social Category of Scheduled Caste (SC), Other Backward
Class (OBC) and general category are given in Table 4. The groups having two or
more social category members are termed as mixed groups. The table shows that in
Drivers of Self-Help Group Approach: Lessons from Comparative Performance... 43

Haryana sample SC groups are 55% as compared to 29% in HP and the mixed groups in
Haryana are 29% as compared to 51% in HP. It means caste affinity in Haryana appears
to be stronger than HP. The exclusive general category groups are the least in both the
States. SC and OBC members are not only reported in BPL groups but in APL and mixed
groups too. It indicates that the poor families especially from the SCs and OBCs, have
been more benefitted in both the states which was objective of the SHG programme.
Table 4: Distribution of Sample SHGs by Social and Economic Category
State BPL/APL Social Category (percentage share)
Mixed SHGs SC OBC General Mixed Total (No)
Himachal Pradesh BPL 0.0 28.6 0.0 71.4 7
APL 28.6 14.3 7.1 50.0 14
Mixed 40.0 15.0 0.0 45.0 20
Sub-total 29.3 17.1 2.4 51.2 41
Haryana BPL 69.6 4.3 4.3 21.7 23
APL 23.1 30.8 15.4 30.8 13
Mixed 61.5 0.0 0.0 38.5 13
Sub- total 55.1 10.2 6.1 28.6 49
Source: Field Survey, SBI Chair, CRRID, 2013

Cooperation of Banks
Table 5 presents distribution of sample SHGs as per the financing bank. In the
sample, SBI and PNB have linked about 30% each, followed by 13% by Oriental Bank
of Commerce and 21% by Cooperative and Regional Rural banks.
Table 5: Bank-wise Distribution of Sample SHGs (in percentage)
State BPL/APL/ SBI PNB SBP OBC/UCB RRB & Coop Total No.
Mixed/State
Himachal Pradesh BPL 28.6 0.0 0.0 0.0 71.4 7
APL 50.0 14.3 7.1 7.1 21.4 14
Mixed 45.0 5.0 20.0 5.0 25.0 20
HP 43.9 7.3 12.2 4.9 31.7 41
Haryana BPL 0.0 34.8 0.0 43.5 21.7 23
APL 30.8 61.5 0.0 0.0 7.7 13
Mixed 38.5 61.5 0.0 0.0 0.0 13
Haryana 18.4 49.0 0.0 20.4 12.2 49
Source: Field Survey, SBI Chair, CRRID, 2013

The share of SBI in Haryana was 18% as compared to 44% in HP and the share of PNB
was much greater in Haryana than in HP. The Cooperative and Regional Rural Banks
have linked more of BPL groups as compared to other banks in HP but in Haryana all
type of banks have financed BPL groups. In fact, it was reported as the initiative of
banks but the NGOs sponsored more groups to the banks which are more responsive.
Indirectly, it can be inferred that SBI is prominent CBs in HP while PNB in Haryana. In
HP, RRB and Cooperative Banks were more proactive than Haryana.
44 THE MICROFINANCE REVIEW  •  Volume VII(2)  July - December 2015

Stability of Membership
The average membership per SHGs is about 11 persons in all types of groups in both
the States at initial stage as well as at the time of survey (Table 6). However, there have
been changes in membership with replacement happening in 34% SHGs of HP and 37%
SHGs of Haryana. Replacement in members was more in BPL groups of Haryana and
APL and mixed groups of HP. In HP, there was decrease in membership of BPL groups
and negligible change in APL and mixed groups. In Haryana, there was net decrease
in number of members of APL and mixed groups while BPL membership was almost
unchanged.
Table 6: Stability in Membership of Sample SHGs
BPL/ APL/ Average No of per SHGs SHGs in which Members have Reasons for Exit of Members
Mixed/ at the Changed (% to total) (% multiple responses)
State Initial Stage Time of Survey Replaced Increased Decreased Not Satisfied Family Defaulter to a Bank
Problems
BPL 12.57 12.0 28.6 0.0 28.6 0.0 100.0 0.0
APL 11.0 11.0 35.7 14.3 21.4 20.0 40.0 0.0
Mixed 10.9 10.8 35.0 25.0 10.0 71.4 14.3 14.3
HP 11.2 11.1 34.1 17.1 17.1 42.9 35.7 7.1
BPL 10.6 10.5 52.2 34.8 17.4 8.3 66.7 33.3
APL 12.2 11.3 23.1 15.4 7.7 33.3 100.0 0.0
Mixed 12.3 11.9 23.1 23.1 0.0 100.0 66.7 33.3
Haryana 11.5 11.2 36.7 26.5 10.2 27.8 77.8 27.8
Source: Field Survey, SBI Chair, CRRID, 2013

The main reason for exit of members from groups was reported as family problem
in Haryana and non-satisfaction in HP. In Haryana, more male domination of family
may have compelled some women to exit while in HP this compulsion was reported
less. Therefore, male members may also be educated about SHGs which will have a
positive effect on stability of women groups especially in Haryana. Overall stability of
membership is more in HP than Haryana which affects their other quality too.
Role of Self-Help Group Promoting Institutions (SHPIs)
NGOs were the main SHPIs for forming APL groups with grant support from NABARD
while government Table 7: Role of Various SHPIs in forming SHGs (Percentage Share)
departments like State BPL/APL/Mixed Total SHG Nos. By NGOs By Govt. Deptt. By Bank
development office, Himachal Pradesh BPL 7 49.9 57.1 0.0
APL 14 78.6 21.4 0.0
department of
Mixed 20 90.0 10.0 0.0
Women and Child HP Total 41 78.0 22.0 0.0
Development have Haryana BPL 23 17.4 82.6 0.0
formed mainly BPL APL 13 84.6 7.7 7.7
Mixed 13 69.2 30.8 0.0
groups. The Table
Haryana-Total 49 49.0 49.0 2.0
7 shows that in HP, Source: Field Survey, SBI Chair, CRRID, 2013
NGOs have formed
Drivers of Self-Help Group Approach: Lessons from Comparative Performance... 45

78% of sample SHGs while their share in Haryana was only 49%. The Government
Departments formed 49% in Haryana and 22% in HP. There was negligible role of
Banks in forming SHGs. It was also ascertained that the NGOs in HP were bigger and
more professional than those of Haryana. This is revealed in further discussion too.
Documents at the Time of Saving and Credit Linkage
In saving linkage, address and photo identity proof of all members, group resolution to
open account and minutes of first meeting of SHG for its age are essential requirements.
Photos of office bearers were also taken. Some branches were asking for affidavits which
may be dispensed with to save cost of SHGs. At the time of financing, group photo of
the SHG members, details of own funds, grading of SHG and recommendations of the
NGO are taken with loan application. After sanctioning, the ‘Loan Agreement and Inter-
se-Agreement’ are executed on a stamp paper purchased in the name of SHG.
There was not much difference in documentation required by banks in both States
but the ease of their compliance was reported much easier in HP than Haryana.
Distance of SHGs from Banks
Distance of SHG from bank may affect participation of the later. Distance wise about
64% and 55% SHGs in HP and Haryana were having banks within 2 km while 7% in HP
and 8% in Haryana were having bank within 2 to 5 km (Table 8). About 25% SHGs of
both states had their Banks within 5 to 10 km while 5% in HP and 10% in Haryana had
the bank branch beyond 10 km. It may have resulted in less monitoring by bankers in
Haryana. It is more clearly reflected in discussions ahead.
Table 8: Distribution of sample SHGs by Distance from Bank (in %)
BPL/APL/Mixed/ States Within village <1km 1to 2 km 2 to 5 km 5 to 10 km >10km Total Total
BPL 14.3 14.3 0.0 71.4 0.0 100.0 7
APL 14.3 35.7 7.1 28.6 14.3 100.0 14
Mixed 15.0 70.0 10.0 5.0 0.0 100.0 20
Himachal Pradesh 14.6 48.8 7.3 24.4 4.9 100.0 41
BPL 69.6 8.7 4.3 17.4 0.0 100.0 23
APL 23.1 23.1 7.7 23.1 23.1 100.0 13
Mixed 7.7 15.4 15.4 46.2 15.4 100.0 13
Haryana 40.8 14.3 8.2 26.5 10.2 100.0 49
Source: Field Survey, SBI Chair, CRRID, 2013

Regularity of SHG-Meetings and Their Agenda

Regular meetings are foundation of good SHGs. In HP, 78% of the sample groups
were having their meetings at fixed date and time as compared to 51% of the sample
groups in Haryana (Table 9). To ensure participation of members in the meetings more
groups were imposing fine in HP (24%) than Haryana (14%).
In HP, both BPL and APL SHGs were having more regular meetings than Haryana.
Agenda of the meetings was almost same in both states like general issues, savings
46 THE MICROFINANCE REVIEW  •  Volume VII(2)  July - December 2015

Table 9: Frequency of Meetings & their Agenda (% Multiple Responses)

BPL/APL/Mixed/ Periodicity of meetings Agenda of Meetings Total (100 %)
States Fixed Date & Groups General Saving New Loan Any other SHGs
Time imposing fine issues Collection No
BPL 85.7 28.6 57.1 71.4 42.9 14.3 7
APL 78.6 21.4 35.7 85.7 7.1 28.6 14
Mixed 75.0 25.0 35.0 85.0 5.0 10.0 20
Himachal Pradesh 78.0 24.4 39.0 82.9 12.2 17.1 41
BPL 47.8 21.7 4.3 91.3 13.0 4.3 23
APL 38.5 15.4 0.0 92.3 38.5 0.0 13
Mixed 69.2 0.0 0.0 92.3 0.0 0.0 13
Haryana 51.0 14.3 2.0 91.8 16.3 2.0 49
Source: Field Survey, SBI Chair, CRRID, 2013

collection, new loans, etc. The issue of new loan is relatively more in BPL than APL
groups which reflect on their initial nurturing. Though, overall collection of savings is
the most important agenda item but new loans were relatively more important in the
BPL groups, which may be logical outcome of their need.
Decision Process for Meetings and Loans
Table 10 shows that all meetings were called by group leader in HP while in Haryana
only 80% were by group leader and remaining 20% are still propelled by NGOs/
Government Departments. Decisions in meetings were taken more by consensus of
members in HP than Haryana whereas influence by group leaders /project workers
was almost same in both the States. The consensus was reported much more higher in
BPL groups which may be due to economic homogeneity. Surprisingly, APL groups of
Haryana were more dependent on NGOs in their functioning. This dominance of APL
groups was much higher in Haryana than HP while it was vice versa in BPL groups.
Overall, consensus decisions were more in HP than Haryana.
Table 10: Decision Process for Meetings and Loans
BPL/APL/Mixed/ Who Calls the group Meetings Who take the Decisions
States (% response) (%age multiple response)
Group Leader NGO Mixed By Consensus By Project Project Workers & By Group
Workers SHG Leaders Leaders
BPL 100.0 0.0 0.0 85.7 42.9 14.3 71.4
APL 100.0 0.0 7.1 64.3 50.0 28.6 28.6
Mixed 100.0 20.0 10.0 25.0 60.0 20.0 30.0
Himachal Pradesh 100.0 9.8 7.3 48.8 53.7 22.0 36.6
BPL 95.7 13.0 13.0 56.5 39.1 26.1 30.4
APL 53.8 15.4 23.1 15.4 69.2 38.5 53.8
Mixed 76.9 0.0 15.4 23.1 61.5 7.7 53.8
Haryana 79.6 10.2 16.3 36.7 53.1 24.5 42.9
Source: Field Survey, SBI Chair, CRRID, 2013
Drivers of Self-Help Group Approach: Lessons from Comparative Performance... 47

Saving Qualities of Sample SHGs

Regularity of saving is the most important factor for success of SHGs. The average
saving per month in HP was Rs. 83 as compared to Rs. 87 in Haryana (column 3 of
Table 11). Average savings of BPL groups in HP was Rs. 41 and as high as Rs. 98 in
Haryana while average saving of APL groups was about Rs. 92 in HP and Rs. 77 in
Haryana. It means the APL members in HP may be better off than Haryana.
Table 11: Distribution Sample SHGs by Saving Quality
BPL/ Saving Regular Average Saving Cumulative Per Cumulative Per Source of Saving Total SHGs
APL/ (%age) Per Month (Rs.) Member SHG (%age of SHGs) (Nos.)
Mixed/States (Rs.) (Rs.) Family Individual
BPL 100.0 41 1852 21184 28.6 71.4 7
APL 78.6 91 4956 53865 35.7 64.3 14
Mixed 85.0 92 4444 49695 70.0 30.0 20
HP/Average 85.4 82.9 4176 46251 51.2 48.8 41
BPL 91.3 98 4497 44879 100.0 0.0 23
APL 84.6 77 2584 28956 84.6 15.4 13
Mixed 69.2 76 3209 32808 92.3 7.7 13
HR/Average 83.7 86.7 3648 37452 93.9 6.1 49
Notes: 1. Periodicity of meeting and saving is monthly in all sample SHGs. 2. Individual passbooks issued in – Mandi- 7 cases, Kangra-
nil, Yamunanagar-14 cases and in Rohtak- 20 cases. 3. Saving amount changed - Mandi in 9 cases, Kangra 14 cases, Yamunanagar 3
cases and Rohtak 6 cases. 4. Reason for change was more saving- Mandi 10 cases, Kangra 10 cases, Y’nagar 3 cases and Rohtak 8 cases.
Source: Field Survey, SBI Chair, CRRID, 2013

As regards source of saving, 94% savings are from family in Haryana while the same
was 51% in HP (columns 6 and 7). The members in Haryana have more dependent on
their families/spouse which explains the reason of more exits of them due to family
problems. The overall average monthly saving was less in HP than Haryana but the
cumulative average savings by per member as well cumulative saving per SHG were
higher in HP than Haryana. It may be due to more average age of SHGs in HP, where
the programme picked up earlier than Haryana.
As regards regularity in savings; 100% of sample BPL SHGs, 78% of APL and 85% of
mixed groups were saving regularly in HP as compared to 91% of BPL, 85% of APL and
69% of mixed groups in Haryana. Regularity in saving is better in HP than Haryana.
Management of Savings by SHGs
All groups were depositing their savings in banks and using these savings for inter-
loaning (Table 12). As per guidelines of SHGs, at least any two of President, Secretary
and Treasurer have to operate the bank account which was followed in all, though
in some groups depending upon the NGO involved, all three office bearers were also
involved to be more vigilant. Some cash in hand was kept with the treasurer in all the
groups, though groups in HP were having more cash in hand than Haryana. It may
be reason that frequency of visits to bank by SHG office bearers was less in HP than
Haryana. Cheques are used in loans by 40 to 70% SHGs in Haryana and 10 to 20%
groups in HP which again may be to minimise visits to bank.
48 THE MICROFINANCE REVIEW  •  Volume VII(2)  July - December 2015

The expenditure incurred in visit to banks was also reported by more groups in
Haryana than HP. Table 12: Management of Fund/Savings by SHGs
Particulars Districts of Haryana Districts of Himachal
The expenditure of
Rohtak Y’Nagar Mandi Kangra
bank visits by office Groups Depositing in Bank (% of total) 100.0 100.0 100.0 100.0
bearers is mostly born Used in Inter loaning (% of total) 100.0 100.0 100.0 100.0
Groups keeping cash in hand (% of total) 15.0 25.0 55.0 35.0
by themselves and Who keeps the cash in hand Treasurer Treasurer Treasurer Treasurer
the claims from SHGs Loan given by Cheque (% of total) 70.0 40.0 20.0 10.0
are more in Haryana Who operates Bank A/C (% response)
Any of two P, S &T 97.0 40.0 90.0 85.0
than HP. Apparently, All three any P, S &T 3.0 60.0 10.0 15.0
the SHG guidelines Frequency of visit to Bank (% response)
are ­followed in both Once in a Month 80.0 25.0 20.0 40.0
More than once a month 20.0 75.0 80.0 60.0
the state. Expenditure involved in Bank Visits (% response) 50.0 25.0 30.0 25.0
Who pays for expenses of visits (% response)
Purpose of Formation Self Office bearer 25.0 75.0 75.0 100.0
of Groups Group 75.0 25.0 25.0 0.0
Source: Field Survey, SBI Chair, CRRID, 2013
The urge to join
a SHG may reflect on the initial grooming by SHPI. Safe saving was reported the
purpose to join the SHGs by 63% in Haryana, followed by credit facility by 33% and self
sufficiency by 4%. In HP, safe saving was the purpose of 33%, getting loan of 39% and
self sufficiency of 28%. Self sufficiency as the purpose of SHG by more members in HP
than Haryana indicates better education about SHG philosophy in the hill state. Inter-
loaning within the SHGs was started on an average after 2 months of their formation in
both the states and in all types of groups (BPL and APL). Average Interest rate charged
per month by SHGs from members, ranges from 1.8% HP and 1.7% in Haryana (Table 13).

Table 13: Loaning by Sample SHGs by and Objective as Perceived by Office Bearers
State BPL/ Purpose of SHG Formation loaning started after Average Interest
APL/ (Multiple %age responses ) (Average In months) Rate(% Per Month)
Mixed/ Saving Saving & Loans Self Dependency
Himachal Pradesh BPL 57.1 14.3 28.6 2.1 2.0
APL 25.4 50.0 24.6 1.7 2.0
Mixed 30.0 40.0 30.0 2.0 1.7
Average 33.06 39.03 27.92 1.9 1.8
Haryana BPL 52.2 39.1 8.7 2.0 1.5
APL 76.9 23.1 0.0 2.3 1.8
Mixed 69.2 30.8 0.0 1.7 1.8
Average 63.3 32.7 4.1 2.0 1.7
Source: Field Survey, SBI Chair, CRRID, 2013

Grading of SHGs
Grading is like credit rating of SHG which is essential requirement before financing
by a bank. In HP, all sample SHGs were graded while in Haryana only 82% were
graded (Table 14).
Drivers of Self-Help Group Approach: Lessons from Comparative Performance... 49

Table 14: Grading of Sample SHGs (Multiple Responses)

BPL/ Total (100%) Graded SHGs as % Agency involved in Grading SHGs which gave date of Grading
APL/ SHGs of Total SHG (Multiple responses)
Mixed/ Graded Bank DRDA NGO 1st 2nd 3rd
States No. %age %age %age %age %age %age
BPL 7 100.0 42.9 14.3 57.1 85.7 28.6 14.3
APL 14 100.0 28.6 28.6 64.3 85.7 71.4 50.0
Mixed 20 100.0 10.0 15.0 85.0 90.0 80.0 65.0
Himachal Pradesh 41 100.0 22.0 19.5 73.2 87.8 68.3 51.2
BPL 18 78.26 26.1 34.8 78.3 60.9 47.8 26.1
APL 12 92.31 7.7 30.8 53.8 69.2 69.2 38.5
Mixed 10 76.92 7.7 76.9 7.7 84.6 69.2 61.5
Haryana 40 81.63 16.3 44.9 53.1 69.4 59.2 38.8
Source: Field Survey, SBI Chair, CRRID, 2013

The Table shows that involvement of NGOs in grading was the maximum followed by
DRDA and banks in both HP and Haryana. NGOs have more involvement in APL groups
in HP than Haryana and DRDA was more involved especially in grading of BPL & mixed
group in Haryana. Low involvement of banks in grading may not establish their relation
with SHGs and which may have adverse impact on functioning and recover of SHJGs.
Some groups passed through 2nd and 3rd grading to improve their quality. But 18%
non-graded SHGs may have adversely impacted their functioning after credit linkage.
Bank Loans to SHGs
Purpose wise loans by SHGs are widely discussed among academicians without real
ground feedback. Of the sample, 83% of groups in HP and about 90% of groups in
Haryana were credit linked (Table 15). Moreover in HP, more SHGs have taken loans
more than once (1.3) as compared to Haryana (1.1). However, the average loan amount
was higher in Haryana than HP. It may be mainly due to higher loan limits to BPL for
common activity financed to all members as per SGSY guidelines.
Table 15: Details of Bank Loans
BPL/APL/Mixed/ SHGs credit Average No. of Cumulative Average Out loans given Whether
State linked loans Limits of all amount per standing as CC loan amount
Loans loan % age of limit Adequate
No/%age No. Rs lakh Rs %age %age
BPL 6/85.7 1.0 8.7 145000 48.28 0.0 14.3
APL 11/78.6 1.7 32.7 174866 23.24 28.6 57.1
Mixed 17/85.0 1.6 32.3 118750 25.70 5.0 65.0
HP Total 34/82.9 1.3 73.7 166742 27.27 12.2 53.7
BPL 20/87.0 1.2 46.7 194583 35.76 43.5 69.6
APL 13/100.0 1.3 18.3 108284 47.54 53.8 46.2
Mixed 11/84.6 1.2 18.9 143182 36.51 46.2 61.5
HR Total 44/89.8 1.1 83.9 173347 38.50 46.9 61.2
Notes: 1. Bank does not keep any relationship with saving amount in deciding loans;
2. Estimated saving has not been taken by any bank in deciding loan limit up to the time of visit;
3. In Himachal a few SHGs have taken up to three loans while in Haryana no third loan.
Source: Field Survey, SBI Chair, CRRID, 2013
50 THE MICROFINANCE REVIEW  •  Volume VII(2)  July - December 2015

The average number of loans taken by BPL groups was one except a few cases in
Haryana where the revolving CC limit was counted as loan. APL groups have taken
more than one loan and even three loans by a few SHGs in HP and Haryana. The
average loan amount per APL groups is more in HP than Haryana. The outstanding
loan amount as% of loans limit was about 39% in Haryana compared to 27% in HP. It
may be because of more recent loans in Haryana while more HP loans are old. Loans
were given as cash credit limits to 47% SHGs in Haryana and only 12% in HP. The
branches in Himachal were pleading that members were not interested in limit while a
few SHGs were found insisting for CC limit. It indicates lack of proper awareness about
CC limit by banks. In HP, 54% groups and 61% of groups in Haryana reported that the
loan amounts were adequate.
Purpose-wise Number of Loans
On an average, each sample SHG had given 13 loans in HP and 15 loans in Haryana
during the last there years. As shown in Table 16, of the total number of loans in HP,
about 18% were taken for household expenses (16% in HR), 27% loans for miscellaneous
farm and non-farm activities (14% in HR), 13% for house repairs/construction (13% in
Haryana), 11% for marriage and other social ceremonies (12% in HR), 8% for fees of
children (6% in HR), 10% for dairy/shop (16% in HR) and 4% for debt repayment
(10% in HR). The remaining 9% in HP (14% in Haryana) loans were taken for other
purposes like illness, electricity bills, etc.
Table 16: Purpose-wise Loans (2009-10 to 2011-12) (Percentage to No. of Loans)
BPL/APL/ Shop Dairy Debt Fees of Electri- House Marriage H.H Illness Drinking Misc. FS Total
Mixed Payment Children city Bills Repair/new Expenses Water &NFS No
BPL 4.1 0.0 0.0 9.5 1.4 14.9 9.5 20.3 1.4 0.0 39.2 74
APL 4.5 0.0 5.1 8.3 1.9 14.7 12.8 17.9 10.3 1.9 22.4 156
Mixed 8.1 6.7 4.0 8.1 1.3 12.5 9.8 16.8 7.1 0.0 25.6 297
Total-HP 6.5 3.8 3.8 8.3 1.5 13.5 10.6 17.6 7.2 0.6 26.6 527
BPL 1.5 8.3 14.6 5.4 2.2 9.8 11.5 18.0 8.0 2.4 18.3 410
APL 7.1 21.2 3.2 6.4 3.8 16.0 12.2 10.3 11.5 5.1 3.2 156
Mixed 6.5 12.9 3.9 5.8 0.6 16.8 14.8 17.4 6.5 0.6 14.2 155
Total- HR 3.7 12.1 9.8 5.7 2.2 12.6 12.3 16.2 8.5 2.6 14.1 721
Source: Field Survey by SBI Chair, CRRID, 2013

In BPL groups of HP, the maximum loans were taken for miscellaneous, farm Sector
and non-farm sector (39%) followed by household expenses (20%), house repair
(15%) and marriages (10%). In Haryana (HR) BPL groups, the maximum number of
loans were taken for miscellaneous, farm sector and non-farm sector (18%) followed
by household expenses (18%), debt payments (15%) and marriages (12%). The other
notable difference is that, in Haryana, APL groups have taken more than 21% loans for
dairy as compared to nil in HP for this purpose.
Overall, household expenses are around 17%, though BPL groups have given slightly
more loans for household expenses (18 to 20%) and debt repayment (15% in Haryana)
Drivers of Self-Help Group Approach: Lessons from Comparative Performance... 51

as compared to APL and mixed groups. Other loans are not much different in BPL and
mixed groups, as the later also have members from the weaker sections. Interestingly,
social consumption requirements like illness, marriage, payments of children fees, bills
of electricity and water accounts for about 28% of SHG-loans in HP (31% in Haryana).
Thus, SHGs have enabled access to bank loans for these emergent social needs which
have no provision for bank credit.
Purpose-wise Loan Amount by Sample SHGs
Purpose-wise share in loan amount by sample SHGs is summarised in Table 17.
Table 17: Purpose-wise Loan Amount by SHGs in HP and Haryana (Percentage share) (2009-10 to 2011-12)
BPL/ Shop Dairy Debt Fees of Electricity House Marriage H.H Illness Drinking Misc. FS Total
APL/ Payment Children Bill Repair/ Expenses Water & NFS Amount
Mixed/ Const. in Rs 000
BPL 7.9 0.0 0.0 4.5 0.1 12.7 6.4 8.4 0.5 0.0 59.5 975
APL 5.2 0.0 4.4 3.7 0.3 22.7 11.1 4.0 1.9 0.7 45.9 2321
Mixed 5.4 15.2 7.0 5.3 0.7 13.0 18.1 7.2 2.0 0.0 26.2 3047
Total-HP 5.7 7.3 5.0 4.6 0.4 16.5 13.7 6.2 1.8 0.3 38.5 6343
BPL 1.8 14.6 14.3 2.0 0.4 11.1 10.7 7.7 4.3 1.3 31.8 5678
APL 4.2 53.0 0.5 1.7 0.6 27.5 3.3 4.0 2.9 0.9 1.3 2702
Mixed 6.6 44.5 0.8 2.5 0.1 9.4 21.7 3.3 3.4 0.1 7.5 1673
Total HR 3.3 29.9 8.4 2.0 0.4 15.2 10.6 6.0 3.8 1.0 19.5 10053
Source: Field Survey by SBI Chair, CRRID, 2013

In HP, 38% loan amount (20% in HR) was taken for miscellaneous farm and non-
farm activities, 17% for house repair/construction (15% in HR), 14% for marriage/
social ceremonies (11% in HR), 7% for dairy (30% in HR), 6% for trade/shop (3% in
HR) and the remaining 18% for repayment of debt, bills of electricity, water, school
fees, household expenses, etc., (21% in HR). The BPL groups have borrowed more for
miscellaneous activities up to 60% in HP and 32% in Haryana and less for dairy in both
the states. It means BPL members may be using the loan to support their small on-going
farm and non-farming activities.
Overall, the social consumption requirements like illness, marriage, payments of
children fees, bills of electricity and water were accounting for about 27% of SHG-loans
in HP and 24% in Haryana which was less than their share in number of loans. It means
social consumption loans may be more frequent but smaller in amount.
It clearly negates the widely held view that SHGs are mainly spending for consumption
needs. Overall, the loaning pattern brings out that the borrowing appears as per the
capability of member households as APL group members are taking more loans for
dairy, household repair and marriages whereas BPL groups have availed more loans for
small farm and non-farm activities and debt repayment.
Loan Availment and Repayment by Members
It was reported that all members of the sample groups in both Haryana and HP have
availed loans. At the time of survey, total amount outstanding (O/S) against members
52 THE MICROFINANCE REVIEW  •  Volume VII(2)  July - December 2015

of HP groups was Rs 25.6 lakh which about 1.35 times of their cumulative deposits
while in Haryana, the O/S amount was about 2.06 times of their cumulative deposits
(Table 18). It may be due to more loans in recent years in Haryana than HP or less
recovery or both. Further, all the O/S amounts may not be overdue.
Table 18: Members Availing Loans from SHGs and Repayment Status
BPL/ Members with Loan Amt O/S Amount in Cause of default
APL/ O/S loans (No) against members default (% Natural Less Non payment illness Wilful
Mixed (Rs lac) to O/S) calamity pressure by buyers
BPL 76 4.9 0.00 0.0 0.0 0.0 0.0 0.0
APL 176 10.8 13.89 0.0 50.0 50.0 0.0 0.0
Mixed 204 9.9 0.03 50.0 0.0 50.0 0.0 0.0
Total-HP 456 25.6 7.03 25.0 25.0 50.0 0.0 0.0
BPL 228 21.3 15.49 0.0 55.6 11.1 11.1 22.2
APL 128 11.0 40.00 25.0 25.0 0.0 50.0 0.0
Mixed 100 5.5 38.18 0.0 33.3 33.3 33.3 0.0
Total- HR 456 37.8 25.93 5.3 42.1 15.8 26.3 10.5
Note: O/S means outstanding
Source: Field Survey by SBI Chair, CRRID, 2013

Bankers could not provide specific demand, recovery and balance position; hence
the default amount was estimated with data available. The amount in default was
7% of O/S in HP while it was about 26% in HR. Surprisingly, the amount in default
was 15% in BPL groups and 40% in APL and 39% mixed groups in Haryana and it was
nil in BPL of HP. Though, number of irregular SHGs may be higher in BPL category.
State-wise, in HP only 1% SHG members were irregular whereas it was 4% in Haryana.
The main cause of default as given in Table 18, are non-payment from buyers (50%),
followed by less pressure of recovery (25%) and natural calamity (25%) in HP whereas
in Haryana, it is less pressure for recovery (42%), followed by illness (26%) and non-
payment from buyer (16%). It brings out that the pear pressure was not effective in
most of the groups of Haryana.
Record Keeping by Sample SHGs
The summary of responses about book keeping by sample SHGs is presented in
Table 19.
Table 19: Record-Keeping (Percentage as per Actual Verification)
BPL/APL/Mixed Membership Minute book/ Cash Saving Loan record Loan Pass
register attendance book record ledger book
BPL 100.0 100.0 57.1 100.0 85.7 71.4 100.0
APL 92.9 85.7 71.4 100.0 100.0 85.7 85.7
Mixed 85.0 95.0 90.0 95.0 95.0 90.0 95.0
Total-HP 90.2 92.7 78.0 97.6 95.1 85.4 92.7
BPL 100.0 100.0 69.6 30.4 91.3 100.0 100.0
APL 100.0 100.0 92.3 100.0 100.0 69.2 100.0
Mixed 100.0 100.0 53.8 100.0 100.0 100.0 84.6
Total- HR 100.0 100.0 71.4 67.3 95.9 91.8 95.9
Note: It is as per physical verification, though all documents were reported except cashbook and pass book of members.
Source: Field Survey by SBI Chair, CRRID, 2013
Drivers of Self-Help Group Approach: Lessons from Comparative Performance... 53

Membership register, minutes’ books and attendance, savings record, loan records
and individual pass book were reported by all the SHGs. Though, record books were not
kept properly by many SHGs. It indicates the need for small steel box with each SHG.
Membership resister could not be shown by 10% and minutes book/attendance by 8%
groups in HP. These groups were mainly APL and mixed groups. As per actual physical
verification; in HP, 78% groups had maintained cash book, 98% saving record, 95%
loan record, 85% loan ledger and 93% pass book whereas in Haryana, 71% reported
cash book, 67% saving record, 96% loan record, 92% loan ledger and 96% individual
pass books. Record keeping was almost similar in both the states.
Accounting and Auditing
Training for accounting was received by 78% of sample SHGs in HP and 92% in
Haryana (Table 20). As per auditing the accounts of 68% sample SHGs in and 49% in
Haryana were being checked by NGOs. Of the remaining, 27% SHGs in HP and 47% in
Haryana have checked themselves and the 5% groups in HP and 4% in Haryana were
not checked by anybody. Some of them have stopped regular savings.
Table 20: Accounting and Auditing of SHGs
BPL/ % of SHGs Members Who Checking A/C of SHGs (%) Frequency of Checking (%)
APL/ Taking Training of
Mixed/States Accounting NGO Own No body Monthly Quarterly annual
BPL 71.4 28.6 71.4 0.0 0.0 71.4 28.6
APL 64.3 57.1 35.7 7.1 7.1 64.3 28.6
Mixed 90.0 90.0 5.0 5.0 20.0 65.0 15.0
Total-HP 78.3 68.3 26.8 4.9 12.2 65.9 22.0
BPL 95.7 65.2 30.4 4.3 56.5 30.4 13.0
APL 92.3 30.8 61.5 7.7 30.8 61.5 7.7
Mixed 84.6 38.5 61.5 0.0 7.7 69.2 23.1
Total- HR 91.8 49.0 46.9 4.1 36.7 49.0 14.3
Source: Field Survey by SBI Chair, CRRID, 2013

The frequency of auditing in HP was monthly for 12% of groups, quarterly for 66%
the groups and annual for 22% of the groups while in Haryana, 37% of groups were
audited monthly, 49% quarterly and 14% half yearly or annually. On the whole, NGOs
are providing more support in HP than Haryana and even their quality of checking was
found better.
Credit plus Impact of SHGs
The feedback from SHG representatives about credit plus impact on Member-
Households is given in Table 21. Column one of the table shows that new activities
other then ongoing ones were started by 27% of SHGs in HP and 16% in Haryana. After
joining the SHG, improvement in health awareness and sanitation was reported in 7%
groups of HP and 49% groups of Haryana. Combined production activities were not
much successful, though combined marketing was reported by 15% SHGs in HP and 8%
in Haryana (last column Table 21).
54 THE MICROFINANCE REVIEW  •  Volume VII(2)  July - December 2015

Table 21: Credit plus Impact of SHGs (Percentage Multiple Responses)

BPL/ Started new Activity Health Awareness/ Eradiation of Social New Activity Combined Marketing
APL/ Sanitation Evils Combined
Mixed
BPL 14.3 14.3 0.0 0.0 14.3
APL 28.6 14.3 0.0 0.0 21.4
Mixed 30.0 0.0 0.0 5.0 10.0
Total-HP 26.8 7.3 0.0 2.4 14.6
BPL 26.1 100.0 4.3 0.0 13.0
APL 7.7 0.0 0.0 0.0 7.7
Mixed 7.7 7.7 0.0 0.0 0.0
Total-HR 16.3 49.0 2.0 0.0 8.2
Source: Field Survey by SBI Chair, CRRID, 2013

Social impact was much higher in BPL families of both states; however, SHGs could
not make much impact on social evils like drinking, dowry and preference for male
child. Perhaps, checking of these evils require intervention in the much wider social
canvas within which the families are living.

Conclusions
The comparative features of implementation and impact of SHGs in HP and Haryana
allow us to draw the following conclusions. In HP more groups have involved APL
families whereas in Haryana has more groups of BPL families which were mainly
formed by government departments under SGSY. The membership of SHGs was
found more stable in HP than Haryana and family problem due to male dominance in
Haryana was reported as major reason of instability of women SHGs. The cooperative
attitude of people was reported better in HP due to vagaries of the topography. Above
all, consistent support in HP from the bigger NGOs over longer period in nurturing,
grading, checking the accounts of the groups was the main driving force for the SHG
programme, while in Haryana the NGOs were relatively smaller and less professional.
The banks have also played more proactive role in HP than Haryana.
In terms of impact, the share of social consumption loans like illness, marriage,
payment of electricity and water bills, school fees and household expenses was about
27% of SHG-loans in HP and 24% in Haryana and the remaining loans were for purposes
like house construction, dairy animals, repayment of higher interest loans and small
economic activities. Thus, purpose wise share clearly negates the widely held view that
SHGs are mainly spending for consumption.
The issues of concern were increasing default to O/S loans at 7% in HP and 26% in
Haryana and decreasing number of SHGs with O/S loans. It was reported that loan
waiver of 2008 has adversely affected the repayment psyche of the SHGs members and
low interest rate on Kisan Credit Card reported was a better option especially in HP
than loan through SHGs.
Drivers of Self-Help Group Approach: Lessons from Comparative Performance... 55

Policy Suggestions
First, unlike individual loans, in SHGs, their regular meetings and savings are to be
ensured to sustain the functioning and recovery. This requires a better participation
of bankers before financing and at least quarterly visit either by bankers themselves
or engaging good NGOs of the area. Second, SHG loans are still sanctioned as term
loan by most of the branches inspite of guidelines for CC Limit which will be mutually
beneficial to both banks and SHGs. The concept of estimated savings have not been
applied for sanctioning loan to any SHG through which adequate loan can be provided.
Third, pattern of loans at SHG level revealed that the members have availed loans as
per their requirement and capabilities; hence, bankers should not impose activity at
their level. Fourth, about one third incumbent branch managers were not having any
knowledge of financing SHGs and the latest guidelines, therefore, SHG training must
be given in a slot in all programmes of branches heads/loan officers. Fourth, in HP,
there were on an average, 62 SHGs accounts per branch and the scope for formation
of new SHGs was almost exhausted whereas in Haryana, there were average 11 SHG
accounts per branch; therefore, strategy of credit deepening by financing exiting SHGs
and forming new SHG accounts may be adopted State wise. Fifth, interest subvention
as given on KCCs up to Rs. 3 lakh may be extended to SHGs too with members from
marginal farmers and landless families, which will increase the credit linkage of SHGs.
NOTES

1. In the hill villages, Community savings were prevalent for emergency needs. Nauta
(invitation) system was a practice in Punjab and Haryana, contribution of bricks at
the time of house construction was a tradition in some communities.
2. The History of Microfinance, prepared for CGAP UNCDF Donor Training, “The New
Vision of Microfinance: Financial Services for the Poor www.networkers.org/History
of Microfinance.doc
3. In late eighties, NABARD had commissioned two studies, one by Indian Institute
of Management, Ahmadabad and another by Gujarat Institute of Area Planning,
Ahmadabad, to evaluate the role of NGOs in rural development in regard to improving
access of rural poor to formal credit. As per recommendations of these studies the
project was to link 500 SHGs with banks against which 4700 SHGs were linked
during 1992 to 1995.
4. RBI issued a detailed circular on April 1st 1996 for financing through SHGs by the
Schedule Commercial banks.

REFERENCES

Datta, S K and M Raman (2001): “Can Heterogeneity and Social Cohesion Co-exist in
Self-Help Groups? An Evidence from Group Lending in Andhra Pradesh”, Indian
Journal of Agricultural Economics, Vol. 56, No.3, July-September, pp. 387-400.
NABARD (1995): Study of Credit Management Groups, NABARD, Mumbai.
------ (1995): “Linking Self-Help Groups with Banks – An Indian Experience”, NABARD,
Mumbai, May pp.1-55.
56 THE MICROFINANCE REVIEW  •  Volume VII(2)  July - December 2015

------ (1999): Task Force on Supportive Policy and Regulatory Framework for Microfinance,
NABARD, Mumbai.
------ (2000): Microfinance for Rural People: An Impact Evaluation Study, NABARD,
Mumbai.
------ (2012): Status of Microfinance in India, NABARD, Mumbai.
Nanda Y C (1994): “Significance of Establishing Linkages of SHGs with Banks”, National
Bank News Review, Vol. 10, No.4.
Ramalingam, C (1989): “Self-Help Groups of the Rural Poor”, NABARD, Mumbai, March.
Sangwan S S (1997): “Financing Through Self-Help Groups: An Experience of Commercial
Bank in Dehradun”, Quarterly Journal of Indian Institute of Bankers, April-June, pp.
63-67.
------ (2002): “Self-Help Groups in Karnal, Gurgoan and Bhiwani Districts of Haryana”,
NABARD, Chandigarh, September.
------ (2013): “A Comparative Study on Implementation and Impact of Microfinance
through SHGs in Himachal Pradesh and Haryana”, SBI Chair, Centre for Research in
Rural and Industrial Development, Chandigarh.
 Distinct Models of SHG
­Micro-Enterprises Organised
in ­Diverse Regions of Jammu
and Kashmir
- Mohinder Kumar*

The study ­focuses on the Abstract

micro-­enterprises aspect This paper presents the findings of a field study of
of Self-Help Groups ­micro-enterprises of Self-Help Groups (SHGs), formed under
(SHGs) formed ­under Swaranjayanti Gram Swarozgar Yojana (SGSY) in Jammu and
SGSY in J&K state. It Kashmir (J&K). Field study was conducted ­during June-July
examine district level 2013 covering six districts. Findings ­revealed three ­distinct
progress of SGSY groups models of micro-enterprises ­evolving in SHGs in three ­different
and analyze economic regions, of which two models appear as distortion and one
­performance of SHG model adheres to SGSY guidelines. Viewed in larger context,
micro-­enterprises. varied models of SHG micro-enterprises are reflective of so-
cial ethos of each region to be in tune with coping ­strategies
­adopted by rural people for survival against adversities in
particular regions. Ladakh region has developed SHG micro-­
enterprises which operated largely on “joint-­cooperative”
lines. SHG micro-enterprises in Kashmir valley are ­mostly
­operated as ­“Employer-Employee Enterprises” (EEE) based
on private employment relations developed ­between group
­leader ­assuming the role of employer and group members
­acting as wage-employees in SHG. In Jammu hilly region, SHG
­micro-enterprises are mostly characterised as “owner-­operator
units” of each ­member in SHG operating on ­independent
­individual lines. ­Resting on three distinct models of micro-
enterprises, SHGs earn fairly good income for survival by way
of joint-­employment, wage-­employment and self-­employment
­relations ­developing within SHG framework in different
­regions of J&K. ­Transition of SGSY into NRLM is also traced to
see ­whether models of micro-enterprises are compatible with
NRLM requirements.
* Assistant General Manager,
NABARD, J&K Regional
­Office, Jammu. Key Words: Self-Help Groups, Micro-Enterprises, Self-Employment
58 THE MICROFINANCE REVIEW  •  Volume VII(2)  July - December 2015

Introduction
An avowed objective of Swaranjayanti Gram Swarozgar Yojana (SGSY) ­programme
of Government of India was to establish a large number of micro-­enterprises in the
rural areas and building upon the potential of the rural poor. The ­emphasis was envis-
aged on ‘group approach’. This paper focuses on the ­micro-enterprises aspect of SHGs
formed under SGSY in J&K state. Its objective is to portray district level progress of SGSY
Table 1: Sample SHGs and Micro-enterprises Covered in J&K Districts under SGSY
District / Name of Village Name of SHG Name of Activity under Number of SHGs
Block Micro Enterprise
1. Leh
Chuchot Chuchot Gongma Rubina Chokspah Knitting 1
1
Chuchot Chuchot Tsestalulu Society Seabuckthorn processing & 1
vegetable cultivation
Leh Kharnak-Ling Carpet Weaving SHG Carpet weaving 1
Saspol Mangu Sakdot Sanspa Vegetable cultivation 1
Saspol Simchik Shemschik Thundil Tsogpa Polyhouse vegetable cultivation 1
Total Leh 5
2. Kargil
Kargil Minjee Baneen SHG Vegetable cultivation (summer) 1
Shargole Mulbekh Landup Dorje SHG Wood carving 1
Shargole Mulbekh P. Dorje SHG Carpentry workshop 1
Total Kargil 3
3. Baramulla
Sopore Menzsheer Aftab SHG Embroidery 1
Rafiabad Rawoocha Dilshad SHG Knitting, crewel 1
Total Baramulla 2
4. Kupwara
Trehgam Marhama New Fashion Altaf SHG 1
Rajwar/ Magam Magam Women SHG Tailoring, embroidery, knitting, 1
Handwara candle making
Sogam Lassipora Gulfam SHG Knitting 1
Total Kupwara 3
5. Doda
Bhadarwah Gowari-B Gowari Dairy SHG Dairy 1
Thathri Phaksoo Chinar SHG Tailoring 1
Assar Assar Chenab Knitting Group Knitting 1
Ghat Ghat Niaz Bakery House Bakery 1
Total Doda 4
6. Poonch
Mandi Rajpura Farida Group Vegetables/ poultry 1
Poonch Qazi Mohra Sozni SHG Embroidery 1
Poonch Kanhuiyan Dhar SHG Knitting 1
Buffliaz Draba Madina SHG Tailoring 1
Total Poonch 4
Total Sample 21
Distinct Models of SHG Micro-enterprises Organised in Diverse Regions of J&K 59

groups and analyze economic performance of SHG micro-enterprises. Total 21 SHGs

formed­ ­under SGSY were covered for study. Six districts selected in Ladakh ­region,
Kashmir ­valley and Jammu hilly ­region are amongst the most difficult terrain for ­normal
­survival by rural people even as ­livelihoods can sustain only with dedicated ­efforts
though ­survival is basically ­instinctive in humans. Ladakh, having two districts of Leh
and Kargil, is considered as “Cold Desert” even as economic ­activity comes to standstill
for six months of snowfall and extreme cold ­during the year. Baramulla and Kupwara
are two most sensitive ­districts of Kashmir valley where economics and business gets
outcompeted by politics so that any form of groups, SHGs, cooperatives, collectives,
­associations, etc. hardly spring-up. Both districts are located on Line of Control (LoC)
with Pakistan and face difficulties without basic ­infrastructure facilities though ­survival
is somehow made possible amid adversities by sheer grit and willpower. In Jammu hilly
region, Doda and Poonch districts have unique topographic features – being sensitive
from political and security viewpoint. For sample study in Ladakh region, five SHGs were
randomly selected from Leh district and three SHGs from Kargil districts. In ­Kashmir
Valley, two SHGs were covered from Baramulla district and three SHGs from Kupwara
district. Sample in Jammu hilly region comprised four SHGs from Doda district and four
SHGs also from Poonch district (Table 1).
Sample of SHGs for this study was selected on random basis from list of SHGs of
District Rural Development Center (DRDC) formed since inception of SGSY. The SHGs
were formed by DRDC deploying own staff, i.e., through Village Level Workers (VLWs)
in sample districts and also through NGOs as it Poonch district.

Contextualising Micro-Enterprises for Survival

Contextual background of this paper is Coping Mechanisms study of NABARD2. SHG
micro-enterprises can appear only in broader context of life of villagers. If this study could
include ‘Rabo’ nomads of Changthang (migrating 200 km to Leh) also ­operating SHG
micro-enterprises, it was possible because SHG members had rural-tribal ­background.
Though they adopted varied strategies for survival they also felt need for SHGs. SHG
micro-enterprises were substitute/ supplementary to the coping strategies. Rural-tribal
backdrop provides ecological setting to the SHG micro-enterprises. Though instinct for
survival is basic natural human trait and an “end”, micro-enterprises analysed in the
study fit well as “means” to achieve that end.
In Laddakh region, rural-tribal people faced natural adversities of severe cold due to
heavy snowfall as temperature went down to - 40oC. Calamities like cloudbursts, flash-
floods, landslides, avalanche, snowstorms, etc., contributed to crippling of economic life
and productive activity for six months each year. ­Ex-ante planning for survival by the
farmers adopting risk mitigating strategy of Crop ­Insurance was marked by total absence
even as basic infrastructure for crop ­insurance was non-existent3. However, institutional
60 THE MICROFINANCE REVIEW  •  Volume VII(2)  July - December 2015

mechanism of “Civil Defense Leh” agency is important by virtue of rescue and relief
operations in natural calamities. Central Government compensation also helped rural
people. Amid ex-ante and ex-post strategies adopted at levels of household, community
­(mutual-relief/ cooperation/ borrowing/ exchange), monastery-help, government-civic-
public institutions, etc., relevance of SHG micro-enterprises increased, which needed
exclusive study in overall milieu and social ecology of rural-­nomadic life of the people.
In Kashmir, adversities covered natural calamities (cold, snowfall, ­hailstorm,
earthquake, landslides, avalanche), negative/militant politics, depressed businesses,
­deprivation of basic amenities/rural infrastructures, etc. Exploitation of small ­apple
growers by Commission Agents (CA) and Pre-harvest ­Contractors (PHC) kept ­villagers
in a state of abject impoverishment4. Natural, political and economic adversities
­characterised the depressed state of rural economy of ­Kashmir even prior to floods of
2014. We may add fact of social adversity ­witnessing demise of cooperative structures
(multi-purpose PACS, cooperative marketing societies) thriving vibrantly prior to 1990,
after which militancy ­broke-out and broke the backbone of cooperatives in ­Kashmir.
Around 250 ­marketing cooperatives disappeared due to militancy5. ­Cooperative ­spirit
gave way to individualism. Individualism distinctive in SHG micro-enterprises of
­Kashmir is to be seen in larger context of individualist coping strategies of survival
adopted by rural people.
In Jammu hilly region, adversities faced by rural people and ‘Bakarwal’ nomads were
similar to the adversities faced by Kashmir. Upper reaches of hilly Mandi block in Poonch
district and parts of undivided Doda district face problems of extreme cold and snowfall.
Coping strategies of rural people for survival have one additional feature in Jammu hilly
region i.e., remittances even as thousands of village youths migrated to the Middle East
for wage-jobs. Instead of over-depending on hiring as wage-labourer in village, rural
people of Jammu hilly region generally take recourse to “owner-operator” livelihoods.
SHG Micro-enterprises in Jammu hilly region may be perceived in larger context of
­likeness of people for independent owner-operatorship.

Performance of SHGs
Macro District Level Findings
Ladakh: Since inception of SGSY Programme in Leh district, 592 SHGs were formed
by DRDC (96% Women SHGs). Many SHGs were located in far-flung Durbuk and
­Nyoma Blocks, 200 km from Leh. As on 31 March 2012, 50 SHGs had taken up economic
­activities (with/without bank loan). In Kargil district, as on 27 April 2013, total 185 SHGs
were formed since inception. Revolving Fund ­Assistance (RFA) was provided to all SHGs
though bank-loan-linkage did not take place in majority of SHGs. SHGs had started
micro-enterprises without availing subsidy or bank loan. Out of 185 SHGs formed, only
11% had received bank loan.
Distinct Models of SHG Micro-enterprises Organised in Diverse Regions of J&K 61

Kashmir Valley: In Baramulla district, from 2008-09 to 2012-13, total 182 SHGs were
provided subsidy and bank loan. During 2012-13, target of forming 108 SHGs was
fixed with 45% achievement. Under ‘training programmes’ ­target of 400 Swarozgaris
was fixed, with achievement of 44%. Target of 4,800 was fixed for ‘basic orientation/
awareness’ of members of SHGs and swarozgaris though achievement was nil. Target
for ‘orientation/ sensitising on SGSY’ among ­agencies was fixed “as per requirement”
– achievement was also reported as “as per ­requirement” devoid of statistics. Under
­‘Infrastructure Development’, target of four clusters6 was fixed though achievement was
nil. Target of 80 ­“exhibitions for marketing support” was fixed with achievement of
75%. Target of 200 ­swarozgaris for subsidy on insurance premium was fixed with nil’
­achievement. In ­Kupwara district, during 2012-13 only 22 SHGs were sanctioned bank-
loan ­(Rs. 25,000 to Rs. 2.20 lakh) to take up economic activities.
Jammu Hilly Region: In Doda district, from 2010-11, formation of SHGs was stopped
since banks submitted a list (not based on authentication) that purported to show all
SHGs were either “defunct” or “dormant” in their opinion. However, our field survey of
SHGs selected on random basis in 2013 revealed that sample SHGs were doing ­economic
activities and earning profit. Nonetheless since 2010-11, DRDC focused only on ­individual
beneficiaries as banks showed more interest in financing of individual swarozgaris than
SHGs. In 2013, present status of SHGs was indicated as: “Information in this regard is
still awaited from BDO/Banks”. All 400 SHGs awaited receipt of matching share of bank
in RFA. In Poonch ­district (August 2013), 63 SHGs which passed Grade-I, had started
micro-enterprises with or without access to bank loan.

Micro Primary Level Findings of Sample SHGs

With 87% women SHGs, average age of groups was six years. Field ­Functionary
along with Sarpanch or NGO was motivating force in SHG formation. Self ­motivation of
­members was also reported. Members were poor or very poor ­(vulnerable). BPL list was
criterion for membership since credit-linkage with bank would not take place ­without
members’ name in BPL list. In 86% groups, leader was already skilled and in 62%
groups members were already skilled or self-trained before joining SHG. ­Government
­training was provided to 43% members. A majority (95%) of members had joined
group for ­livelihood-income and freedom associated with economic self-sufficiency.
Two-third members (67%) contributed to group savings, kept in bank or with self as
cash; 95% SHGs were regular in monthly savings. Average savings was Rs. 138 per
member per month and accumulated savings per SHG was Rs. 38,000. Ladakh had a
novel ­feature: 63% SHGs undertook picnic tour – important for group affinity. Only 71%
SHGs ­maintained registers and pass books. Group meetings were organised by all SHGs.
Only 59% of SHGs were bank-loan linked. Average bank-loan was Rs. 1.15 lakh per SHG
and entire amount was repaid within two years. A majority of SHGs (92%) had taken
62 THE MICROFINANCE REVIEW  •  Volume VII(2)  July - December 2015

bank loan only once. Bank loan-linkage was not a sustained relationship. Within group
­borrowing was ­practiced in 52% SHGs. In Kashmir, intra-group borrowing did not have
system of charging ­interest. All SHGs showed good recovery even as main purpose of
borrowing from SHG (92%) was to meet expenses for household needs. Jammu hilly
region had a disquieting ­feature that went against group norms i.e., 25% SHGs practiced
­accepting ­deposits from ­members – interest paid was lucrative i.e., 24% per month –
which ­rendered SHG as sort of chit fund. Although all SHGs had passed Grade-I, only
75% received RFA or subsidy. Average support received was Rs. 37,000 per SHG, of
which 76% was invested in machines and materials (Appendix 1.1–1.15).

Micro-Enterprises
Micro-Enterprises Set up by SHGs
All sample SHGs had set up micro-enterprises. Some SHG members (45%) were
self-employed prior to forming SHG. A majority (86%) of SHGs preferred to have
joint-­cooperative activity. In Jammu hilly region 67% members preferred to have
joint ­economic activity. Members indicated principled preference/ideal likeness for
joint ­cooperative activity, if given free choice, not existing actual mode of ­organising
­economic activity (Table 2).
Table 2: Micro-Enterprises of SHGs
Particulars Ladakh Region Kashmir Valley Jammu Hilly Average
Leader/Members
Set up SHG micro-enterprise (%) 100 100 100 100
Self-employed before forming SHG (%) 88 0 33 45
Prefer joint cooperative activity (%) 100 100 67 86

Mode of Organising Micro-Enterprises

Most (55%) of SHGs organised micro-enterprises on the basis of joint ­cooperation,
which was maximum in Ladakh (88%) and minimum in Kashmir (20%). System of wage
employment of members was most popular (80%) in Kashmir. System of ­independent
economic activities was most popular (45%) in Jammu hilly region. The following
­pattern of organisation of micro-enterprises emerged: Ladakh region (joint cooperation
basis); Kashmir valley (wage/contract-job basis); and Jammu hilly region (independent
basis by individual members) (Table 3).

Table 3: Basis for Organising Micro-Enterprises under SHGs

Basis Ladakh Region Kashmir Valley Jammu Hilly Average
(i) Joint basis (%) 88 20 44 55
(ii) Wage/ job-contract basis (%) 12 80 11 27
(iii) Independent individual basis (%) 0 0 45 18
Total 100 100 100 100
Distinct Models of SHG Micro-enterprises Organised in Diverse Regions of J&K 63

Economics of Micro-Enterprises
Initial investment made by groups in starting micro-enterprise was Rs. 0.86 lakh per
SHG. Highest investment was made by SHGs in Kashmir valley (Rs. 1.11 lakh), ­followed
by Ladakh region (Rs. 1.00 lakh) and Jammu hilly region (Rs. 0.59 lakh). All SHGs
earned profit. Average annual net income of group was Rs. 1.40 lakh. Jammu region
SHGs earned higher net income per SHG; Kashmir valley SHGs earned lowest net ­income
per SHG. Each leader/member earned annual net income of Rs. 0.26 lakh. In Kashmir,
members were employed on wage/job-rate basis who worked part-time. Members’ net
income in Kashmir valley was lowest (Table 4).
Table 4: Economics of Micro-Enterprises of SHGs
Particulars Ladakh Region Kashmir Valley Jammu Hilly Average
Total initial investment (Rs.) 100500 111000 59667 86182
Profit earning SHGs (%) 100 100 100 100
During 2012:
SHG’s annual net income (Rs.) 153000 63400 173111 140286
Leader’s annual net income (Rs.) 20596 28818 31796 26304
Each member’s annual net income (Rs.) 20596 5373* 31796 26304
Note: *Wage-income

Profit Distribution Criteria

A majority (55%) of SHGs distributed net profit in equal share. All members ­including
leader had equal share in group’s net profit. This criterion was mostly applied in Ladakh
since 88% SHGs operated micro-enterprises on joint basis. Wage rate based ­distribution
of group’s income was made on an average in 27% SHGs; this wage criterion was most
applied in Kashmir valley (80%). In 18% SHGs, members operated in separated ­activities;
hence income was already separated; this criterion was most applicable (45%) in Jammu
hilly region (Table 5).
Table 5: Criteria of Distributing Profit in SHG Micro-Enterprises
Criteria Ladakh Region Kashmir Valley Jammu Hilly Average
Equal share basis (%) 88 20 44 55
Wage/ job-rate basis (%) 12 80 11 27
NA* (%) 0 0 45 18
Total (%) 100 100 100 100
Wage rate given by leader (Rs./day) 450 200 NA 367
Note: *NA: Not Applicable (because independent owner-operators).

Working Months
Average number of working months was reported as 11, with Ladakh minimum at
10 months and Kashmir maximum 12 months. Members had no problem of working
in ­winter since economic activity was carried in-house; even poly-house vegetable
­cultivation in Kargil district was carried-out in winter. Group leader in majority (82%)
of SHGs was full-time engaged in micro-enterprise. Members’ full-time engagement was
reported in 67% SHGs (Table 6).
64 THE MICROFINANCE REVIEW  •  Volume VII(2)  July - December 2015

Table 6: Working Months of Micro-Enterprises of SHGs

Particulars Ladakh Region Kashmir Valley Jammu Hilly Average
Working months (No.) 10 12 11 11
Engaged Full Time in Activity:
Leader (%) 88 100 67 82
Members (%) 88 40 33 67

Number of Activities
A majority (68%) of SHGs had single economic activity. In other SHGs (32%) members
had taken up two or even three activities – one major activity taken up by few members
and allied activity by remaining members. In Kashmir, SHGs strictly focused on one
single-most economic activity. Ladakh prominently operated average two activities per
SHG enterprise (Table 7).
Table 7: Economic Activities per SHG Micro-Enterprise
Particulars Ladakh Region Kashmir Valley Jammu Hilly Average
Single economic activity (%) 63 80 67 68
Average number of activities 2 1 1.3 1.5

Scope of Diversification and Expansion

A majority (91%) of SHGs expressed intention of members to expand ­economic
­activity, particularly in Ladakh region and Kashmir valley (100% each). ­However, most
of them (80%) wanted to do up-scaling same existing activity instead of starting new
activity because they were familiar with technical, production and marketing aspects of
ongoing activity. Even from aspect of purchase and source of raw materials they were
quite familiar with existing activity – so they wanted expansion of same enterprise. Few
(18%) SHGs wanted both expansion of ­existing activity and set up new activity – due to
market demand (Table 8).
Table 8: Diversification and Expansion of Micro-Enterprises by SHGs
Particulars Ladakh Region Kashmir Valley Jammu Hilly Average
Members wanted economic expansion (%) 100 100 78 91
Scope of Expansion in:
(i) Existing activity (%) 88 80 71 80
(ii) New diversified activities (%) 0 20 0 2
(iii) Existing and new activities both (%) 12 0 29 18

Constraints Faced in Micro-Enterprises

A majority (55%) of SHGs reported that group faced no major problem related to raw
materials, marketing, technology, skill/training, bank loan, machine/equipment, basic
infrastructures of transport and power. All SHGs in Kashmir valley reported ­normal
functioning and faced none of the problems and constraints mentioned above. “No
­problem felt” by groups implied that SHGs of Kashmir Valley did not make serious ­efforts
to achieve optimum outcomes by access to basic materials, infrastructures and markets.
They were content with average kind of technology or every kind of skill, dexterity and
excellence had been reduced to “average kind”; they seemed to be ­content also with low
Distinct Models of SHG Micro-enterprises Organised in Diverse Regions of J&K 65

price or they had lost hope. Although SHGs in all three regions received almost equal
­access to participation in Government supported exhibitions, SHGs in Kashmir valley
were most content and made least efforts to get access to other infrastructures and hence
their groups’ net profit was also lowest though these groups made largest ­investment.
Many SHGs (50%) of Ladakh region similarly reported “no problem felt” in facilities.
The fact is: SHGs may have tried though failed in efforts. Or basic facilities were not
required much since scale of economic activities was small and they acquired skills and
training normally, locally and informally. ­Demand for bank loan was expressed by SHG
micro-enterprises predominantly in ­Jammu hilly region (56%)7 – in other two regions
SHGs were not keen to borrow. ­Marketing problem was faced to ­minor extent (25%) by
enterprises in Ladakh despite that region had many tourist centers. ­Otherwise in both
regions (Jammu and Ladakh) enterprises faced little constraints i.e., not very serious.
Groups’ access to facility of sales exhibitions organised/ supported by state ­government
was also small - just 23% on an average (Table 9).
Table 9: Constraints Felt by Micro-Enterprises of SHGs
Type of Constraints Ladakh Region Kashmir Valley Jammu Hilly Average
Raw materials (%) 12 0 0 5
Marketing (%) 25 0 0 9
Technology, skill, training (%) 0 0 11 5
Bank loan (%) 0 0 56 22
Machines, equipment, etc. (%) 0 0 0 0
Infrastructure (power, transport) (%) 13 0 0 4
None of the above (%) 50 100 33 55
Total 100 100 100 100
Participated in Govt. Exhibitions (%) 38 20 11 23

Models of ‘SHG’ Micro-Enterprises

Although on an average majority of sample SHGs, as per guidelines of SGSY ­programme,
revealed intent and preference for joint-cooperative effort based ­micro-enterprises, in
reality what predominantly emerged in J&K state is three models of micro-enterprises in
three different regions. We may interpret it one way to say SHG enterprises of Kashmir
valley and Jammu hilly regions ­violated SGSY guidelines though seen from aspect of
specific socio-cultural ethos of three regions such development of micro-enterprises is
perfectly compatible with ­specific conditions in which these micro-enterprises emerged.
Distinct models of micro-enterprises served local social and economic purpose better in
that ­particular form. It requires explanation.
Model 1: Ladakh Joint-Cooperative Labour Enterprises
Impact of Buddhist culture of mutual sharing, exchange and equality is clearly visible
on micro-enterprises of SHGs in Ladakh. Local Ladakhi language word of expression
used for ‘Group’ is pronounced as ‘Sanspa’/ ‘Chokspa’/ ‘Tsogspa. It is commonly used
66 THE MICROFINANCE REVIEW  •  Volume VII(2)  July - December 2015

s­uffix in Ladakhi name of SHGs. This word is liked by local people with other ­similar
words commonly used, viz., ‘Sangat’ (cooperation), ‘Thundel’ (cooperative), ­‘Thundup’
(one who fulfils needs in cooperative) and ‘Shemchik’ (mutual). Ladakh has long ­tradition
of cooperative spirit. Those words sum up their approach to human life. ­Therefore,
­Buddhist Ladakhi socio-cultural ethos and environment of mutual help and cooperation
has strong positive impact on SHGs achieving the objective of joint-­cooperative effort
based growth of micro-enterprises in Ladakh. Even ‘Rabo’ tribal nomad migrants from
Changthang ­(Nyoma) had formed SHGs under SGSY.
A characteristic feature of SHGs in Ladakh relates to the cooperation of ­members
on joint-labour basis. They would select group leader who commanded respect of
­members and guided micro-enterprises on cooperative labour. He/she took decisions
on hours and days of work, place of work, etc., by consultation with members, and all
worked ­collectively in economic activity decided by them. There was distinct division
of ­labour in SHG – one member would clean wool; another would do spinning and
yarn-­making; some others would do ­weaving, etc. Sharp social division of labour led
them to ­social ­cooperation to produce output. As part of ­Ladakhi Buddhist culture, SHG
micro-­enterprises used a part of income on ­charity, donation and welfare of community
in Gompa (temple). ­Community food was served by each villager on rotation basis. They
would pool their ­resources and arrange community food on the occasion of worships or
Losar festival. A sense of collectivity thrived in village community, which helped SHGs
in ­imbibing ­cooperative spirit. There were SHGs in Leh district whereby youth members
were engaged in charity work through income earned from micro-­enterprise, e.g., by
putting a stall in fair, festival celebration or new-year ­celebration – and a part of ­income
was set aside and used for social welfare purposes, helping accident victims, charity,
donation, etc. Youths named their SHG e.g., “Sixteen Friends” or “Eleven ­Thundil”
­(cooperative members), etc. Such cooperative spirit developed for social objectives and
social responsibility provided SHG micro-enterprises a strong basis for equality-based
cooperative-joint labour and equal income ­sharing.
Model 2: Kashmir Valley Employer-Employee Enterprises
Distortion in the form of “Employer Employee Enterprise” has developed and crept
into SHGs in Kashmir valley due to the culture of casual wage-labour ­becoming predom-
inant over the past few years. Cooperative structures were lent heavy blow and suffered
severely under militancy after 1990. Out of 250 cooperative fruit marketing societies set
up by the State Government only two have survived, viz., Bandipora and Ganderbal.
Same thing has happened to primary credit cooperatives. Above all culture of “captive
growers” who borrow year ­after year from wholesale market CAs and PHCs to create
indebtedness also creates ­culture of feudal-merchant mindset which seeks to captivate
workers – free ­orchard owners have been rendered wage-labour captives who work
for agents acting as de facto employees. Moreover over-dependence of rural ­borrowers
Distinct Models of SHG Micro-enterprises Organised in Diverse Regions of J&K 67

(farmers, apple growers) for finance on traders and banks prominent in Kashmir ­valley
generates a sense of submissiveness among villagers. Under such environment and
­social milieu it is but natural that SHG micro-enterprises would acquire a form in which
group leader acted as a sort of employer and group members acted or were treated as
part-time wage-labourers of group leader who was himself engaged as full time “owner-
operator” in SHG.
Model 3: Jammu Hilly Region Individual Owner-Operator Enterprises
SGSY programme guidelines envisaged dual mode of employment ­generation, viz.,
i­ndividual “swarozgar” units and group employment units. Predominantly greater
­impact of individual “Swarozgaris” on SHGs is clearly visible in Jammu hilly region,
as our sample study, particularly in Doda district showed. Banks somehow started
­preferring individual “Swarozgaris” to SHG micro-enterprises for financing. Apathy of
banks to groups and preference for individual ­borrowers under SGSY gradually turned
­members of SHGs into individualist owner-­operators after they were credit-linked. Each
SHG member went separate ways after ­taking share of SHG loan – in a way group
got disintegrated as soon as ­individual ­members of SHG shared-out bank loan to set
up ­separated ­businesses. Absence of credit-linkage of bank also induces subterranean
disintegration of SHG even as members any way start own activities to survive. Banks
reported without proper verification that all SHGs in Doda district were “defunct” and
“dormant”. DRDC also did not verify it. So, it was natural for group ­members to start
­individual units. A sense of being autonomous and having “separate ­identity” (vis-à-vis
­Kashmir) is stronger in the culture/ villages of Jammu hilly region. People are ­natural
“owner-operators” and in absence of cooperative movement evolving there, group
­members were destined to dissipate into autonomous units under SHG. They derived
satisfaction from owned ­“individual” units instead of feeling dissuaded that “group”
­affinity was weak.

From ‘SGSY’ Micro-Enterprises to ‘NRLM’ Livelihoods

From 2009 onwards SGSY is renamed as National Rural Livelihood Mission (NRLM)
though objective is same i.e., “micro-enterprise” development under SGSY and
­“livelihood” promotion under NRLM. Since inception (1999), SGSY in J&K could manage
to introduce concept of SHG in villages. SGSY laid moderate foundation for acceleration
of micro-enterprise movement even as NRLM has arrived in J&K in 2013-14 on pilot basis
and now extended to all districts. Current year 2015-16 is third year of NRLM in J&K.
Over five years period NRLM aims to create 90,000 SHGs in all the Gram Panchayats of
J&K. Status of financing during 2015-16 indicates banks set the target of financing 4,320
SHGs with credit support of Rs. 30.58 crore against which achievement was 252 SHGs
(6%) with disbursement of Rs. 1.99 crore (7%). SHG formation, financing, livelihoods,
s­ustenance under NRLM has to traverse a long way in J&K (Table 10).
68 THE MICROFINANCE REVIEW  •  Volume VII(2)  July - December 2015

Table 10: Financing of SHGs under NRLM in J&K during 2015-16 (as on 30 June 2015)
(Amount in Rs. crore)
Region Target Achievement Achievement (%)
Accounts Amount Accounts Amount Accounts Amount
Kashmir 3941 26.95 131 1.07 3 4
Jammu 315 3.32 121 0.92 38 28
Ladakh 64 0.31 0 0.00 0 0
Total State 4320 30.58 252 1.99 6 7

Features of ‘NRLM’
The NRLM is a Centrally conceived programme in top-bottom approach, ­originally
in 2009 it aimed to reduce rural poverty in the country substantially by 2015. However,
it allows little element of local participatory and decentralised approach. It has scope
for “People’s Institutions”, local community, “best ­practitioners”, PRIs, etc. For J&K, BPL
criterion is replaced by a process of ­“Participatory Identification of Poor”. Named as
“Umeed” in J&K it emphasizes on adequate mission staff at all levels. Universal coverage
in so far as it aims to cover all GPs in J&K in five years.
The following is the ‘NRLM’ Strategy to Reduce Poverty:
• Identification of the poor
• Organising the poor
• Creating favorable environment to unleash their potential
• Showing them the path to capital
• Showing them the path to right livelihood
• Social awareness
• Safety nets around the poor and converging welfare schemes as their ­entitlements
The NRLM believes that social mobilisation does not happen by itself; an ­external
dedicated support structure like NRLM/ SRLM are needed to induce social mobilisation.

Findings
At macro level, limitations faced by SGSY in J&K districts as a whole look ­routine,
stereotyped and related to all levels of SHG formation, financing, handholding and sus-
tenance: low awareness creation among villagers; poor ­orientation-sensitisation of agen-
cies; low spread; difficulty in social mobilisation; preferred individual “sawarozgaris”
vis-à-vis groups; no/delayed matching share of banks in RFA; poor financing/ subsidy/
training, etc. Nonetheless Ladakh ­region appeared not far behind other regions and
responded well by forming SHGs and starting economic activities. Apathy of banks in
financing was main feature of Ladakh. Skills per se did not appear big issue as tribals
manage to learn various traditional crafts having immense local utility. Over-emphasis
on “skills” looked like rhetoric on benefits of SGSY - members keep expecting bank
loan and avoid using own funds in investment though few members do start activity.
­Kashmir witnessed relatively liberal approach of banks to SHG financing. Jammu hilly
Distinct Models of SHG Micro-enterprises Organised in Diverse Regions of J&K 69

region witnessed apathy of banks to the financing of SHGs though members were keen
to start traditional activities.
At micro SHG level, mixed inferences of SGSY Groups are related to: predominance of
Women-SHGs, formal necessity of “BPL” status, over-dependence for ­social mobilisation
on institutional mechanisms through meager resources of Field Functionaries/ NGOs,
meager attention to self-motivation/ decentralised participation in group formation,
low literacy, predominance of traditionally skilled members, economic “freedom” as a
­desired goal, majority contributing to group savings (regularly), low rate of bank credit
linkage, single-loan-linkage; intra-group borrowing for household needs, etc.
At micro-enterprise level, SGSY units revealed these traits: intended likeness for
joint cooperation-based organisation of labour; evolving three varied ­models of micro-­
enterprises; good investment; good profit earning; varied income ­sharing ­mechanisms;
10-12 months working despite adverse climatic conditions/ ­terrain; single activity ­focused;
desire for activity diversification and expansion/ up-­scaling; not much ­constraints in
facilities felt by enterprises (except bank ­credit perceived to some limited extent) since
level of economic activity is somewhat low and it easily caters to ­immediate “survival”
by sheer dent of ­enterprising members even as “progressive advancement” based on
future vision is not the goal as yet. Micro-enterprises were doing well ­economically by
­contributing own resources-savings, investment, operation, earning profit and ­surviving
for the past six years (average age of SHG) – without being too much particular about bank
­financing – provided rhetoric of institutional credit was not posited as credit-­fetishism
or ‘pucca’ panacea for perceived problems of groups/ enterprises. SGSY carried over to
NRLM has a long way to go in solving the livelihood ­problem on socially ­“sustainable”
basis through formation of 90,000 SHGs first in J&K. Empirical primary data of sample
study proposes broadly three varied models of ­organising micro-enterprises for 90,000
SHGs in the state. The question arises: are three models of micro-enterprises compatible
with NRLM objectives?

Models of SHG Micro-Enterprises and ‘NRLM’

Three empirical models of micro-enterprises that have developed in distinct ­regions
of J&K are suited to the objective and mission statement of NRLM. ­Mission and objective
of NRLM is . . .
“to reduce poverty among rural BPL through promotion of diversified and ­gainful
‘self-employment’ and ‘wage-employment’ opportunities to provide appreciable
increase in income on sustainable basis.”
Although SHG micro-enterprise models of Kashmir valley and Jammu hilly ­region
would be termed as distortions under erstwhile SGSY programme, they are compat-
ible with the objectives of NRLM. NRLM seems to acknowledge the validity, practi-
cality and replication of three models of SHG micro-enterprises in J&K. Rural people
70 THE MICROFINANCE REVIEW  •  Volume VII(2)  July - December 2015

already engaged themselves with skilled/ semi-skilled ­menial ­livelihoods to survive8

– by free owner-operatorship and wage-labour – before SGSY, MNREGA and NRLM (in
that ­order) appeared on the scene in J&K. ­Approach of MNREGA is wage-labour based;
approach of SGSY was SHG based; and NRLM too organises rural poor through SHGs.
NRLM aims at self-­employment and wage-employment both. As mark of freedom from
poverty, ­rural ­people in J&K adapt themselves to any form of employment. SGSY was yet
to establish for self-­employment generation when MNREGA appeared on the scene to
guarantee wage-employment generation backed by Act; it was followed by yet another
centralised programme NRLM. Scope of convergence of NRLM with MNREGA validates
three models of micro-enterprises under SHG mode through joint-labour employment,
self-employment and wage-employment. SHG micro-enterprises did not feel so much of
constraints except bank credit, for ­immediate survival. Practical reality of the ­existing
modes of employment through distinct forms of engaging labour cannot be ignored
by programmes in J&K: wage-­employment; self-employment; and joint-cooperative
­employment. ­Survival is not so ­difficult. This is what core beliefs of NRLM Mission
states: “Poor have lot of survival skills”. With Rs. 755 crore amount of capital set aside
by government of of India ­exclusively for “Umeed” project in J&K, should poverty be an
issue in the state if NRLM “shows the [SHG enterprises] path to capital”?

Vision for Future: Beyond Livelyhoods and ‘NRLM’

Any way the need is to have vision and look far beyond question of ­survival by
­livelihoods. We need to think about progressive advancement and all-round ­development
of human personality by acknowledging value of existing skills and human ­resources
(human capital) of rural people who do not wish to be over-­dependent on institutional
credit or any facility or capital that ­posits as fetish with miraculous power of ­eradicating
poverty.9 Centralised employment ­generation ­programmes are unwittingly treated as
fetish as reflected by ­presumed ­extraordinary power of programmes ­mistaken to be
a panacea for ­peoples’ ­problems who have lost living power in their quest for multiple
­livelihoods. Rural people wish to solve their livelihood question in localised, ­decentralised,
participatory way – in real sense of the terms. NRLM is focused on mere livelihoods.
Without revealed deep commitment by agencies under SRLM, or legal enforcement on
­implementers to implement projects in time-bound manner, or State’s commitment to
share expenditure, etc., even moderate objective of livelihood generation may not in all
likelihood be achieved under NRLM. It could meet ­destiny of hundreds of programmes
(including employment ­generation ­programs) implemented earlier. In 2009, NRLM had
aimed to reduce rural poverty in the country substantially by 2015 though still it reached
nowhere. At slow pace NRLM may not achieve its mission. We need to think beyond
continuing role of ­centralised interventions in mere livelihoods and subsistence.
Distinct Models of SHG Micro-enterprises Organised in Diverse Regions of J&K 71

Conclusions
Livelihood and poverty issues may not be restricted in a narrow compass of so-called
policy issues – rather, they are structural issues i.e., belong to the ­structural aspect of
economy. It has ‘class’ character. Predominance of capital may not ­ensure ­emancipation
of labour striving for livelihoods. Villagers are ­already skilled in their own capacity and
are useful and suitable for satisfaction of local needs. Capital investment ­hereby seems to
aim at creating new-age ‘apprentices’ that fit the requirements of ever-­changing ­economy
though rural people seem to be content with age-old traditional skills ­formations.
­Rural people seem to avoid capital dependency – particularly banks’ loan capital – for
­investment. They value freedom – freedom of enterprise, of organisation, of association,
of participation, of choosing from any mode of labour – joint, wage or self-employment
as ­revealed by three models of SHG micro-enterprises emerging in J&K. NRLM seems to
do away with deficiencies, assumptions and narrow organisational structures of SGSY.
J&K state requires structural issues to be addressed first and foremost for ­sustainable
development. Structure of production in rural economy needs to be changed from
wage-labor orientation. Asset base of rural people needs to be recognised; they are not
resource-less. Indispensability of bank credit-linkage for SHG enterprises needs to be
re-examined. Not external support structure of SRLM but self-motivation eventually
helps villagers in social mobilisation even as SRLM may need to make exit within fixed
timeframe. Full participatory approach in real sense of the term may be encouraged in
SHG formation.

Notes
1 ‘Seabuckthorn’ is a medicinal plant, common in Ladakh.
2 Coping Mechanisms Adopted by Marginalised Rural People for Survival against
Adversity in J & K (2014), study report of NABARD, J&K Regional Office, Jammu.
3 Crop Insurance and its Efficiency at Farmers’ Level: Issues and Challenges in J&K
(2015), study report of NABARD, J&K Regional Office, Jammu.
4 Price Spread, Marketing and Financing System of Apple Growers in Kashmir (2013),
study report of NABARD, J&K Regional Office, Jammu
5 Assessment of Potential for Storage Facilities in Jammu & Kashmir (2012), study
report of NABARD, J&K Regional Office, Jammu.
6 For dairy-sheep cluster based key activity (30-35 units per cluster)
7 SHGs of Jammu hilly region received lowest amount of bank loan and lowest financial
assistance from DRDC, deposited 33% assistance in savings account, made lowest
investment (though earned highest net profit) and their model of micro-enterprise
was based on individual activities. Hence they faced greatest demand for bank loan-
linkage as compared to other two regions. SHGs here witnessed decline in group size
even as members tended to leave since financial support of bank/ DRDC was not
coming forth adequately.
8 Coping Mechanisms Adopted by Marginalised Rural People for Survival against
Adversity in J&K (2014), study report of NABARD, J&K Regional Office, Jammu.
9 In neoliberal approach to growth, market mechanism is privileged to alleviate
72 THE MICROFINANCE REVIEW  •  Volume VII(2)  July - December 2015

poverty through capital accumulation. It overlooks that poverty is systemic outcome

of capitalist structure of production and distribution – hence endemic to capitalist
system. See Ghosh Jayati (2015)

References

Fayyaz, A A (2013): “New Norms for NRLM’s ‘Umeed’ in J&K”, The Hindu, May 2.
Ghosh, J (2015): “The Poverty Alleviation Way to Development”, Frontline, Vol.32, No.17,
August 22 - September 4.
Government of India (1999): “Swaranjayanti Gram Swarozgar Yojna – Guidelines”,
Ministry of Rural Development, New Delhi.
------ (2009): “National Rural Livelihoods Mission – Guidelines”, Ministry of Rural
Development, New Delhi.
------ (2010): “National Rural Livelihoods Mission – Framework for Implementation”,
Ministry of Rural Development, New Delhi.
------ (2013): “Aajeevika Skills (Learn Earn) – Guidelines”, Ministry of Rural ­Development,
New Delhi.
J&K SRLM (undated): NRLM Mission, Jammu & Kashmir.
NABARD (2012): “Assessment of Potential for Storage Facilities in Jammu & ­Kashmir”,
J&K Regional Office, Jammu.
------ (2013): “Price Spread, Marketing and Financing System of Apple Growers in
Kashmir”, J&K Regional Office, Jammu.
------ (2014): “Coping Mechanisms Adopted by Marginalised Rural People for ­Survival
against Adversity in Jammu & Kashmir”, J&K Regional Office, ­Jammu.
------ (2015): “Crop Insurance and its Efficiency at Farmers’ Level: Issues and ­Challenges
in Jammu & Kashmir”, J&K Regional Office, Jammu.
State Level Bankers’ Committee (2015): “Agenda and Issues for 98th SLBC ­Meeting”,
Jammu & Kashmir.
------ (2015): “Position of Implementation of Government Sponsored Schemes under
­Annual Credit Plan 2015-16 (as at the end of June 2015)”, Jammu & Kashmir.
Distinct Models of SHG Micro-enterprises Organised in Diverse Regions of J&K 73

Appendix 1: Tables on Features of Sample SHGs

Appendix 1.1: General Features of SHGs

Membership Ladakh Region Kashmir Valley Jammu Hilly Average
SHG formed (years ago) 10 4 4 6
At Inception:
Total Members (Number) 8 12 7 9
In 2013:
Total Members (Number) 10 12 6 8
Women (%) 88 83 88 87
Men (%) 12 17 12 13

Appendix 1.2: Motivating Force Behind Formation of SHGs

Motivating Factors Ladakh Region Kashmir Valley Jammu Hilly Average
Field Functionary/ Sarpanch/ NGO (%) 63 40 67 59
Members’ self-motivation and interest (%) 12 20 33 23
Block Development Office (BDO) (%) 25 20 0 14
BDO & members’ self-motivation (%) 0 20 0 4
Total (%) 100 100 100 100

Appendix 1.3: Economic Condition of Members of SHGs

Economic Status Ladakh Region Kashmir Valley Jammu Hilly Average
Poor (%) 75 40 78 68
Very poor (%) 25 60 22 32
Total (%) 100 100 100 100

Appendix 1.4: Cultural Features of Members of SHGs

Religion Background Ladakh Region Kashmir Valley Jammu Hilly Average
Buddhist (%) 63 0 0 22
Muslim (%) 25 100 67 59
Hindu (%) 0 0 11 5
Buddhist + Muslim (%) 12 0 0 5
Muslim + Hindu (%) 0 0 22 9
Total (%) 100 100 100 100

Appendix 1.5: Literacy of Members of SHGs

Literacy Level Ladakh Region Kashmir Valley Jammu Hilly Average
Literate members (number) 1 9 4 4
Literate members (%) 13 76 69 50
74 THE MICROFINANCE REVIEW  •  Volume VII(2)  July - December 2015

Appendix 1.6: Skills and Training of Members of SHGs

Skill Level Ladakh Region Kashmir Valley Jammu Hilly Average
Already skilled or self-trained:
Leader (%) 100 80 78 86
Members (%) 87 40 50 62
Any member or leader:
Did on-job learning (%) 13 40 50 33
Attended Govt. training (%) 25 60 50 43
Master trainer (%) 13 60 50 36

Appendix 1.7: Main Expectation from SHGs

Expectations Ladakh Region Kashmir Valley Jammu Hilly Average
Livelihood and freedom (%) 100 80 100 95
Children’s school-fee/ pocket money (%) 0 20 0 5

Appendix 1.8: Group Savings of SHGs

Group Saving Ladakh Region Kashmir Valley Jammu Hilly Average
Members:
Contribute savings (%) 75 40 75 67
Regular in monthly saving (%) 100 100 83 95
Mean saving (Rs. per month) 91 250 283 183
Group savings per SHG* (Rs.) 65300 13250 18667 38189
*Kept as own-cash with self or in bank account since inception (cumulative)

Appendix 1.9: Picnic and Recreation Tour Activities of SHGs

Recreation Ladakh Region Kashmir Valley Jammu Hilly Average
Recreation tour activity (%) 63 0 0 24
Expenses incurred per SHG (Rs.) 6429 0 0 5625

Appendix 1.10: Administration and Management of SHGs

Particulars Ladakh Region Kashmir Valley Jammu Hilly Average
Maintain books and registers* (%) 75 80 50 71
Hired/solicited outside manager (%) 13 0 11 9
Group meeting :
Monthly (%) 63 50 38 50
As per need (%) 37 50 62 50
*Attendance register/ accounts/ passbook/ cash book
Distinct Models of SHG Micro-enterprises Organised in Diverse Regions of J&K 75

Appendix 1.11: Bank Loan-Linkage of SHGs

Particulars Ladakh Region Kashmir Valley Jammu Hilly Average
Bank loan-linked (%) 50 80 56 59
Loan received (Rs.) 1,67,500 86,250 96,000 1,15,000
Balance o/s (as on date of survey) (Rs.) 6250 0 2800 3000
Repaid (within years) 2 2 2 2
Rate of interest paid to bank (%) 13 13 13 13
Loan taken from bank:
Once (%) 100 75 100 92
Twice (%) 0 25 0 8

Appendix 1.12: Intra-group Borrowing Among Members of SHGs

Particulars Ladakh Region Kashmir Valley Jammu Hilly Average
Borrowing done (%) 38 80 50 52
Interest charging system practiced (%) 33 0 67 30
Interest paid by members (% per month) 20 0 24 23
Good/ full loan recovery (%) 100 100 100 100

Appendix 1.13: Purpose of Borrowing by Members of SHGs

Reasons Ladakh Region Kashmir Valley Jammu Hilly Average
For household needs (%) 100 80 100 92
For individual economic activity (%) 0 0 0 0
For economic and household needs (%) 0 20 0 8
Total 100 100 100 100

Appendix 1.14: Intra-group Deposits by Members of SHGs

Particulars Ladakh Region Kashmir Valley Jammu Hilly Average
SHGs accept deposits* from members (%) 0 0 25 10
Interest paid to depositors (% per month) 0 0 24 24
*Other than ‘group savings’ (beyond SHG norms) on sporadic and voluntary basis.

Appendix 1.15: Financial Assistance Received from DRDC by SHGs

Particulars Ladakh Region Kashmir Valley Jammu Hilly Average
Received subsidy or RFA*:
SHGs (%) 63 80 86 75
Amount per SHG (Rs.) 57,000 47,500 19,375 37,059
Utilised subsidy or RFA for:
Machines and materials (%) 60 100 67 76
Savings bank account (%) 40 0 33 24
*Revolving Fund Assistance
 Microfinance in Areas of
­Ecological Distress – Evidence
from the Field
- Samir R Samantara*

Arunachal Pradesh Abstract

poses problems to the Arunachal Pradesh poses problems to the ­efforts of
­efforts of ­financial ­financial inclusion development of the state. This ­paper
inclusion development ­examines the question of convergence in ­financial ­inclusion
of the state. development during 2004-2014 ­using β-convergence
The diminution of and σ-convergence techniques. The tendency of low-­
­variance in financial financial inclusive districts to catch up with high-financial
inclusion development ­inclusive districts is studied through the unconditional
levels is tested by ­using β-convergence approach, and the operation of Galton’s
the σ-convergence fallacy through growth-terminal financial ­inclusion
approach and the ­development level regressions. The diminution of ­variance
­robustness of the in financial inclusion development levels is tested by ­using
­results is tested by the σ-convergence approach and the ­robustness of the
using ­alternative test ­results is tested by using alternative test statistics.
statistics. The results do suggest that comparatively low-financial
inclusive districts, if not all, have been able to catch up
with the high-financial inclusive districts, demonstrating
β-convergence. Although the growth of financial ­inclusion
drive varied across the districts, the average speed of
­convergence remained more or less equal during both the
periods. However, inter-district differences in growths
of financial inclusion drive have significantly declined in
the state indicating σ-convergence. These tendencies are
likely to continue in financial inclusion drive in ­Arunachal
Pradesh unless mission mode approach adopted to speed
up the financial inclusion drive. All stakeholders should
jointly create an ecosystem so as to improve credit
­absorption capacity of people in Arunachal Pradesh.
* Deputy General ­Manager,  
Banker's Institute of Rural
Development, Lucknow.
Email: samir.samantara@ Key Words: Ecological Distressed Area, Microfinance, Financial Inclusion, SHG-BLP,
gmail.com Convergence and Technological Innovation.
Microfinance in Areas of ­Ecological Distress – Evidence from the Field 77

Introduction
Arunachal Pradesh, though strategically very important, is one of the most
ecological distressed states in India in the traditional sense of microfinance
­parameters. The long isolation and separation from the main stream of the ­country,
posed formidable problems to the efforts of financial inclusion ­development of the
state. Further, the state's inhospitable topography, challenging climatic ­conditions
and communication bottle-necks make the cost of creation, ­maintenance of
­infrastructure and financial inclusion drive extremely high. Arunachal Pradesh
is situated in the North-Eastern part of India with 83,743 sq. kms area and has a
long international border with Bhutan to the west (160 km), China to the north
and north-east (1,080 km) and Myanmar to the east (440 km). It stretches from
snow-capped mountains in the north to the plains of Brahmaputra valley in the
south. The state has 18 districts, 27 census towns and 3,863 inhabited villages.
Arunachal Pradesh has a bank network of 88 branches of commercial banks, 27
branches of Arunachal Pradesh Rural Bank (APRB) and 32 Branches of ­Arunachal
Pradesh State Cooperative Apex Bank (APSCAB) Ltd.

Data and Methodology

This paper examines the question of convergence in financial inclusion
­development during 2004-2014. It focuses on the questions of (a) whether there
has been a catching-up tendency (β-convergence) of slow-growing ­districts
with ­fast-growing ones; and (b) whether there has been a tendency towards
­convergence (σ-convergence) in financial inclusion development during 2004-
2014. The ­paper also tests the operation of Galton’s fallacy through growth-­
terminal level ­regressions for robustness of the results. The tendency of low-
financial inclusive districts to catch up with high-financial inclusive districts is
studied through the unconditional β-convergence approach, and the operation of
Galton’s ­fallacy through growth-terminal financial inclusion development level
regressions. The diminution of variance in financial inclusion development levels
is tested using the σ-convergence approach and the robustness of the results is
tested using alternative test statistics. Concentration of SHG (Self-Help Group)
loans in SHG-BLP (SHG Bank-Linkage Programme) is the total SHG loans per
group and availability of micro-credit from NBFC, MFI, NGO and local level
­organisations is the total micro-credit per group not covered under SHG-BLP.
­Details on the district-wise SHG loans and micro-credit not covered under SHG-
BLP were collected from the district-wise Potential Credit Plans published from
NABARD and other ­published sources including Directorate of Statistics and
Evaluation (Government of ­Arunachal Pradesh).
On the empirical front, modelling and testing the convergence hypothesis is
78 THE MICROFINANCE REVIEW  •  Volume VII(2)  July - December 2015

far from settled. As Islam (2003) observed that either conditional or uncondi-
tional, the informal and formal cross section approaches, the panel approach,
and the time series approach (in part) had all studied β-convergence. The formal
cross section approach and panel approach have been used to study club-conver-
gence and total factor productivity (TFP) convergence. The time series approach
has been used to investigate convergence both within an economy and across
economies. But the cross section and panel approaches suffer from endogeneity
bias, since variables such as SHG loans and micro-credit not covered under SHG-
BLP growth rate used as explanatory variables in growth-convergence equations
are likely to be jointly determined. Despite the observations of Hotelling (1933),
Friedman (1992), Lichtenberg (1994), Sala-i-Martin (1996) and the criticisms of
Quah (1993), researchers have continued to be interested in β-convergence for
the reason that σ-convergence requires β-convergence. The other reason is that
β-convergence could provide information on the structural parameters of growth
models. The present study investigated both (unconditional) β-convergence and
σ-convergence in SHG loan and micro-credit not covered under SHG-BLP across
the districts in Arunachal Pradesh. Along with the growth-initial financial inclu-
sion development level regressions to study β-convergence, the paper attempted
to fit growth-terminal financial inclusion development level regressions for test-
ing Galton’s fallacy. The model is explained in Appendix.

Findings and Discussion

Trends in SHG loans and micro-credit not covered under SHG-BLP in Arunach-
al Pradesh during 2004-2014 are presented in Figure 1. Micro-credit not covered
under SHG-BLP was calculated as the ratio of total micro-credit per groups not
covered under SHG-BLP. The average SHG loan was calculated as the ratio of SHG
loans disbursed per SHG under SHG-BLP. To account for year-to-year fluctuations,
growth rates were estimated from three-year moving averages of the data series
which will take care of ecological distressed conditions in the state. Average fi-
nancial inclusion development level increased consistently through the period
with an average growth of 2.3% per annum. The 2004-2009 period registered
an annual growth of 2.2% and it increased slightly to 2.5% during 2009-2014.
Average SHG loans also increased but not as much average financial inclusion
development level. Average SHG loans growth attained during 2004-2014 (1.1%)
was less than the growth realised in financial inclusion development level. But
unlike SHG loans, where growth was almost equal in both the periods, financial
inclusion development level increased significantly for the same period. Such an
upward shift in financial inclusion development level growth could be attributed
to a significant increase in financial inclusion drive.
Microfinance in Areas of ­Ecological Distress – Evidence from the Field 79

Figure 1. : SHG Loan and financial inclusion development level Trends

in Arunachal Pradesh (2004-2014)
40
Financial Inclusion development Level

30
SHG Loans
In`000

20

10

2004 2009 2014

Source: Authors’ calculations.

Though the magnitudes differed, SHG loans increased in all the districts
­between 2004 and 2014. The growth was highest in East Siang (3.6%), followed
by East Kameng (2.9%) and Upper Siang (2.82%), while districts such as ­Lower
Dibang Valley (2.1%), Tawang (1.5%), Anjaw (1.7%) and Tirap (1.1%) ­increased at a
moderate rate (Table 1). Contrary to SHG loans, large number of districts achieved
Table 1: SHG loans and financial inclusion development Growth in Arunachal Pradesh (2004-2014)
Avg. SHG Loan per Avg. Micro-Credit not Covered Avg. Annual Growth
Districts Group (in Rs.) under SHG-BLP per Group* SHG Financial Inclusion
(in Rs) Loans Development
1 Tawang 20600 31600 1.46 2.60
2 West Kameng 20500 31500 -0.52 0.91
3 East Kameng 24200 31600 2.90 3.92
4 Papum Pare 26800 32500 1.22 2.25
5 Lower Subansiri 21400 32600 0.61 2.59
6 Upper Subansiri 28400 32700 0.32 2.82
7 East Siang 29300 32400 3.58 2.28
8 West Siang 25600 32600 0.50 2.16
9 Upper Siang 28400 32500 2.82 1.54
10 Dibang Valley 24300 30400 0.21 3.13
11 Lower Dibang Valley 25400 31300 2.14 3.34
12 Lohit 24200 32500 0.12 2.57
13 Changlang 21200 32100 0.76 1.32
14 Tirap 29600 33500 1.14 2.11
15 Kurung Kumey 22300 34600 0.73 2.16
16 Anjaw 28700 35500 1.16 1.89
17 Longding 24200 32400 0.21 2.32
* Growth of micro-credit not covered under SHG-BLP has been taken proxy for financial inclusion development level1
Source : Author’s Calculation
80 THE MICROFINANCE REVIEW  •  Volume VII(2)  July - December 2015

significant growth in financial inclusion development level. They included East

Kameng (3.9%), Lower Dibang Valley (3.3%) and Dibang Valley (3.1%). Rest of
the districts recorded growth rates (1-3%) during 2004-2014.

Convergence in Productivity: β-Convergence

As mentioned earlier, the convergence phenomenon was studied for different
periods. First, convergence in SHG loans and financial inclusion development
level was examined for the entire period (2004-2014). Subsequently, this period
was divided into two sub-periods 2004-2009 and 2009-2014 to study the conver-
gence phenomenon in two different periods. The growth-initial financial inclu-
sion development level (FIDL) regression for 2004-2014 reinforced existence of
β-convergence in SHG loans growth across the districts (Table 2). The coefficient
of SHG loans in the initial year (2004) against growth was negative (–1.172) and
it was highly significant (p value = 0.031), indicating that the districts with lower
SHG loans grew faster than the districts with high SHG loans (Figure 2a and
2b). SHG Loans growth was highest in East Siang (3.6%), followed by East Ka-
meng (2.9%) and Upper Siang (2.8%), But, in absolute terms, it was low in these
districts, that is, Rs 29,300 per group in East Siang, Rs 24,200 per group in East
Kameng, and Rs 28,400 per group in Upper Siang against the State average of Rs
25,006 per group in 2014. Other districts that grew fast despite low initial SHG
loans were Tawang, and Lower Dibang Valley. Annual average SGH loans growth
in these districts for the year 2004 and 2014 was 1.5% and 2.1%, respectively.
On the other hand, districts such as Lower Subansiri, Upper Subansiri, Kurung
Kumey and Longding, where the initial SHG loans level was relatively high, grew
by less than 1.0%. Thus, while districts with low SHG loans grew faster, by more

Figure 2a : Beta Convergence in SHG loans (2004-2014)

8
SHG Loans Growth (% pa)

Tawang y = -1.13x + 14.78

R² = 0.271
4

2
Longding
0
9.00 9.50 10.00 10.50 11.00 11.50
ln (FIDL)
Source: Authors’ calculations
Microfinance in Areas of ­Ecological Distress – Evidence from the Field 81

Figure 2b : Beta Convergence in Financial Inclusion Development Level

(2004-2014)
4
Tawang y = -0.46x + 5.51
R² = 0.038
FIDL (% pa)

0
Longding
-2
9.00 9.50 10.00 10.50 11.00 11.50
ln (SHG loans )
Source: Authors’ calculations.

than 2%, high SHG loans districts grew by less than 1%, indicating a strong (β)
­convergence across them.
As one could see from Table 2, the speed of convergence (coefficients of the
­initial years in growth-initial financial inclusion development level ­regressions)
­decreased over time, while the speed of convergence remained more or less
­unaltered in both the periods (1.5%), with a significant drop in p-values, from
1.5% during 2004-2009 to 1.2% during 2009-2014. Moreover, for 2009-2014,
the ­convergence hypothesis could not be established strongly, indicated by low
­significance of the coefficient corresponding to the initial financial ­inclusion
­development level ­variable (p-value = 0.270). This evidence was against the
­general belief that low financial inclusion development level districts ­performed
better during 2005-2010. For example, between 2004 and 2014, low-­financial
­inclusion development level districts such as Lower Subansiri (2.6%), ­Upper
Table 2: β-Convergence and Galton’s Fallacy in SHG loans (2004-2014)
Explanatory Variable Dependent Variable
Coefficient P>|t| R2 Shapiro-Wilk White
P>|z| P> χ2
Period: 2004-2014 SHG Loans Growth (2004-2014)
ln (SHG loans) -2004 -1.172 0.031 0.273 0.568 0.458
ln (SHG loans) -2014 -0.578 0.422 0.043 0.326 0.814
Period: 2004-2009 SHG Loans Growth (2004-2009)
ln (SHG loans) -2004 -1.533 0.037 0.260 0.846 0.465
ln (SHG loans) -2009 -0.794 0.366 0.055 0.554 0.286
Period: 2009-2014 SHG Loans Growth (2009-2014)
ln (SHG loans) -2009 -1.520 0.108 0.163 0.764 0.654
ln (SHG loans) -2014 -0.325 0.764 0.006 0.729 0.936
82 THE MICROFINANCE REVIEW  •  Volume VII(2)  July - December 2015

Table 3: β-Convergence and Galton’s Fallacy in Financial Inclusion Development Level (FIDL) (2004-2014)
Explanatory Variable Explained Variable
Coefficient P>|t| R2 Shapiro-Wilk White
P>|z| P> χ2
Period: 2004-2014 Financial Inclusion Development Level (2004-2014)
ln (FIDL) -2004 -0.473 0.447 0.039 0.662 0.923
ln (FIDL) -2014 0.348 0.574 0.022 0.215 0.208
Period: 2004-2009 Financial Inclusion Development Level (2004-2009)
ln (FIDL) -2004 -0.953 0.376 0.053 0.293 0.785
ln (FIDL) -2009 0.697 0.532 0.027 0.176 0.019
Period: 2009-2014 Financial Inclusion Development Level (2009-2014)
ln (FIDL) -2009 -0.224 0.819 0.004 0.645 0.701
ln (FIDL) -2014 0.909 0.329 0.064 0.833 0.533
Source: Author’s Estimates

­ ubansiri (2.8%), Kurung Kumey (2.2%) and Longding (2.3%) performed

S
­relatively better than West ­Kameng (0.9%), Upper Siang (1.5%), and Changlang
(1.3%), the districts with relatively high initial SHG loans levels. But the speed
of c­onvergence across districts between 2004 and 2014 was camouflaged by the
­underperformance of west Kameng, which registered a negative growth rate
(-0.5%) during this period. Having the lowest initial SHG loans level (Rs 25,600
per group), a negative growth rate in the district concealed the efforts of better
performing districts.
Contrary to SHG loans growth, the analysis failed to reject the null ­hypothesis
of β-convergence in financial inclusion development level in different periods
through negative but insignificant coefficients and much lower coefficients of
­determination in the growth-initial year financial inclusion development level
­regression (Table 3). No tendency to grow faster was observed in the low-­financial
inclusion development level districts, or to slow growth in the high-financial
­inclusion development level districts. Average financial inclusion development
level was the highest in East Siang (Rs. 32,400 per group), followed by Tirap
(Rs. 33,500 per group) and Papum Pare (Rs. 32,500 per group). During 2004-
2014, financial inclusion development level grew by 2.2%, 2.1% and 2.3% in East
Siang, Tirap and Papum Pare respectively. In contrast, Dibang Valley, which had
the lowest financial inclusion development level (Rs. 30,400 per group), grew
by 3.1%, compared to Papum Pare (3.3%) and East Kameng (3.9%), the districts
with the higher financial inclusion development level. Thus, the outcomes did not
establish β-convergence in financial inclusion development level.

Galton’s Fallacy
The tendency to converge (β-convergence) disappeared when the growth
was plotted against the terminal year rather than the initial year, the factors
inclined to diverge rather than converge. This phenomenon could be referred
Microfinance in Areas of ­Ecological Distress – Evidence from the Field 83

as ­Galton’s ­fallacy or statistical (regression) fallacy (Friedman 1992). Hotelling

(1933) ­observed this singularity and mentioned it as a statistical fallacy ­resulting
from the method of grouping and suggested σ-convergence was superior to
β-convergence. This ­paper, in addition to investigating β-convergence through
productivity ­regressions, also examined the operation of so-called Galton’s
­Fallacy through growth-­terminal regressions in SHG loans and financial ­inclusion
­development level (Tables 2 and 3). The paper failed to establish such statistical
fallacy both in SHG loans and financial inclusion development level in all the
­periods. The β-convergence observed in the growth-initial regressions did not
continue when growth rates were regressed against terminal years rather than
the initial years, shown by the ­negative and highly insignificant terminal year
SHG loans ­coefficients and the lowest coefficients of determination in ­different
periods. Thus, the ­seemingly converging tendency in the growth-initial level
­regressions turned up to have no relation in the growth-terminal level ­regressions.
The ­results of financial ­inclusion development level regressions proved the same,
except the difference of the positive terminal level coefficients. The results
­invalidated the assumption of superiority of σ-convergence over β-convergence
as argued by ­Hotelling (1933) and Friedman (1992). Since β-convergence was
a necessary but not a sufficient condition for convergence, the σ-convergence
­approach was adopted.

σ-Convergence
The trend in cross-sectional dispersion of SHG loans and financial inclusion
development level in all the districts was studied using standard deviation in a
natural logarithm as a measure of dispersion. The results obtained by regress-
ing standard deviation of (natural logarithm) SHG loans and financial inclusion
development level against the time variable were shown in Table 4. To test the
robustness of the results, the test statistics suggested by Lichtenberg (1994) and
Caree and Klomp (1997) were calculated (Table 5).
Table 4: σ - Convergence in SHG Loans Growth and Financial Inclusion Development Level (2004-2014)
Explained Variable Coefficient P>|t| R2 Shapiro-Wilk Breusche-Godfrey
P>|z| P> χ2
Period: 2004-2014
SD[ln(SHG loans)] -0.005 0.000 0.802 0.994 0.355
SD[ln(FIDL)] -0.001 0.824 0.003 0.932 0.069
Period: 2004-2009
SD[ln(SHG loans)] -0.006 0.044 0.416 0.998 0.413
SD[ln(FIDL)] -0.002 0.625 0.031 0.608 0.164
Period: 2009-2014
SD[ln(SHG loans)] -0.005 0.000 0.776 0.868 0.913
SD[ln(FIDL)] 0.002 0.093 0.281 0.060 0.972
84 THE MICROFINANCE REVIEW  •  Volume VII(2)  July - December 2015

Table 5: Results of Alternative Test Statistics of σ – Convergence

Variable Lichtenberg (1994) Caree and Klomp (1997)
T1 Critical F T2 Critical χ2 T3 Critical t
Period: 2004-2014
ln(SHG loans) 1.530 2.400 4.003 3.841 1.645 1.746
ln(FIDL) 0.981 2.400 0.009 3.841 -0.109 1.746
Period: 2004-2009
ln(SHG loans) 1.271 2.400 1.792 3.841 1.021 1.746
ln(FIDL) 1.059 2.400 0.070 3.841 0.262 1.746
Period: 2009-2014
ln(SHG loans) 1.203 2.400 0.990 3.841 0.807 1.746
ln(FIDL) 0.927 2.400 0.198 3.841 -0.811 1.746
Note: Critical values are significant at 5% level and at 10% level; critical values for T1, T2 and T3 will be 1.970, 2.705, and 1.337, respectively.
Source: Authors’ estimates.

Plotting the coefficient of variation against time showed that except in few
years dispersion in SHG loans across districts declined gradually (Figure 3).
The ­coefficients of the time variable were negative and highly significant in
all the ­periods, except 2009-2014. During 2009-14, though the coefficient was
­negative, it was significant only at higher level of significance. These results were
­inconsistent with those obtained in the β-convergence approach. Hence, the ­paper
­rejected the null of no convergence in SHG loans. The test statistic T1 failed to
establish ­convergence in SHG loans in different periods, thereby ­supporting the
view of Caree and Klomp (1997) that the T1 statistic is biased towards ­finding no
­convergence. Both T2 and T3 statistics established convergence during 2000-2010,
but they failed to do so for the other periods, as observed in earlier ­approaches of
convergence analysis.
Unlike SHG loans, no trend was observed in the standard deviation of ­financial
inclusion development level. The coefficients were negative and insignificant
in most of the regressions (except during 2004-2014, where the ­coefficient was
Figure 3 : Sigma Convergence in SHG Loan and Financial Inclusion
Development Level (2004-2014)
0.65
Financial Inclusion Development Level
SD in SHG Loans & FIDL

0.60

0.55
SHG Loans
0.50

0.45

0.40
2004 2009 2014
Source: Authors’ calculations.
Microfinance in Areas of ­Ecological Distress – Evidence from the Field 85

s­ ignificant at the 10% level). Hence, the study could not reject the no ­convergence
null hypothesis in the case of financial inclusion development level. ­Similar
­results were obtained in the alternative tests. A consistent increase in SHG loans
was found in all the districts since 2004. The growth in SHG loans was higher
in districts that had low initial (SHG loans) levels than in districts with high
levels of initial (SHG loans) levels. The results suggests that comparatively low
financial inclusion ­development level districts, if not all, have been able to catch
up with the high financial inclusion development level districts, demonstrating
β-convergence. Although the growth of SHG loans varied across the districts,
the average speed of convergence remained more or less equal during both
the ­periods. However, inter-district differences in growths of SHG loans have
­significantly declined in the state indicating σ-convergence. Neither did the low fi-
nancial ­inclusion ­development level districts grow faster, nor did the high ­financial
­inclusion development level districts grow slower to ­demonstrate the catching-up
or β-convergence process. These tendencies are likely to ­continue in financial
inclusion drive in Arunachal Pradesh unless mission mode ­approach adopted
to boost the financial inclusion drive. This would furthermore help in credit
d­eepening and credit widening (both horizontal and vertical financial ­inclusion)
through SHG-BLP and other microfinance programme, leading to a further con-
vergence. State ­governments, banks, NBFC, MFI, NGO and ­local level organi-
sations should create enabling environment that can improve ­credit ­absorption
capacity of people in ecological distressed areas like Arunachal Pradesh.

Summary and Conclusions

Given the fragile nature of disaster and distress area in Arunachal Pradesh and
findings/discussions in this paper, the success of SHG-BLP and ­financial ­inclusion
development process to empower people through decentralised, ­local-level,
­participatory institutions of governance, however, heavily depends on the actual
devolution of financial and other resources, creation of responsive ­support-systems
in terms of technical and administrative skills, capacity-building as well as
­horizontal coordination among various governmental agencies and traditional
community based institutions2 in the form of Civil Society ­Institution (CSI) and
Arunachal Pradesh Women Welfare Society (APWWS) working at the grassroots.
While the transition to the Panchayat Raj system has been r­elatively smooth,
the ­simultaneous existence of a multiplicity of institutional ­mechanisms – both
modern and traditional – at the village level without any clear cut ­demarcation
of their functions, may lead to ‘institutional crowding out’. It is also important to
note that without democratising the community-based institutions, community
participation in an increasingly differentiated and fragmented socio-economic
86 THE MICROFINANCE REVIEW  •  Volume VII(2)  July - December 2015

milieu may just result in peoples’ participation in a skewed form. The ­pluralisation
of the state, in the sense of increasing role of non-state entities in the process
of decision-making and implementation of developmental programmes, in the
­absence of adequate mechanisms for democratic accountability, is not ­always an
unmixed blessing.
It is essential that banks develop a strong alternative last mile link with the
­rural households through low costs intermediaries. Here, the BC-BF model
would be useful. However, the formation and management of SHGs is a full time
task and needs institutions which are dedicated to this activity. NGOs with an
­orientation towards social mobilisation could play a crucial role in this ­movement.
This paper has also demonstrated that NGOs can play a major role as facilitator
in ­financial inclusion development process and enhance the ­performance of the
SHGs ­particularly in the districts like Tawang, West Kameng, Lower ­Subansiri,
­Papum Pare, Upper Subansiri, West Siang, East Siang and Tirap. Community
based ­institution (CSI) structure is low cost, flexible and very mobile – very ­unlike
the other stakeholders in the movement. In Arunachal Pradesh, ­government
should therefore amend the Societies Act, 1860 to include social and economic
­development within the ambit of activities that can be undertaken so that the
CSIs3 along with NGOs can be made active partners in National Rural ­Livelihood
Mission (NRLM) emphasizing on the process and quality4 rather than target
and quantity. This would help the banks to expand the SHG-BLP movement and
achieve outreach at low costs.
At the district level, network of low cost training service provider for SHGs and
also SHPIs is necessary to take care of their capacity building needs. This network
of training institutions of low cost at local level linking up with a centralised
structure at the state level at a hub and spoke model could be of immense use.
The concept of Mother NGO as envisaged in some government schemes could
be thought of. This would ensure that the training needs of the groups are ca-
tered to on a continuous basis. The huge gap in the bank branch network in the
­Arunachal Pradesh would be difficult to bridge. It may sound cliché, but in order
to ­negate this effect and be able to deliver the services at the doorstep of the
households, banks must build close linkages particularly with the NGO driven BC-
BF ­model. However, in order to encourage better performance and ­accountability,
an ­evaluation of the performance of the SHPIs must be undertaken on a regular
basis with a provision for more incentives for better performing SHPIs. It is only
through this mechanism that the SHGs would be able meet the financial needs
of the poor as pronounced earlier. In order to reduce transaction costs of the
SHGs and increase reliability of financial services of the bank, the maximum
limit/time for ­disbursing loan after graduation and also for repeat loan, if it has
performed well, should be fixed and loans are disbursed on time and the ­process
Microfinance in Areas of ­Ecological Distress – Evidence from the Field 87

becomes more transparent, accountable and hence reliable. Groups should be

­encouraged to have female members preferably for a better chance of growth and
­sustainability.
Strategic planning and implementation in microfinance initiatives is ­necessary
to push ecologically distressed state like Arunachal Pradesh, marginally, if not
­significantly, increase in quality of life by integrating various models of ­microfinance,
innovative income generating activities duly supported by a ­mission mode ap-
proach from all the stakeholders viz, Banks, Government, NBFC, MFI, NGO and
local level organisations in the state. The factors ­responsible for low ­performance
in microfinance as compared to targeted included inter alia, difficult topogra-
phy, sparse population settlements, inadequate infrastructure, ­discouraging land
tenure system, lack of entrepreneurship, fragile ­ecological and disaster condi-
tion and law and order conditions in some parts of the state. ­Financial inclusion
development strategy has to be evolved depending on ­resources, ­environment
and people’s requirements and primacies. With ­appropriately defined targets,
clear outcomes, strategies and coordinated planning, Arunachal Pradesh could
be in a growth trajectory of financial inclusion process. Effective computer-based
­monitoring/management information system in microfinance could facilitate
timely implementation of programmes with improved quality, service delivery
without cost-cum-time over runs and produce intended outcomes.
The fundamental challenges facing the government and the civil society
in Arunachal Pradesh today include the tasks of secularising governance and
­democratising development. The goals of building capabilities, expanding
choices and safeguarding freedoms cannot be achieved unless the development
­process is made more inclusive and participatory in nature. The often talked
about but least implemented, bottom-up approach to development is likely to suit
the ­aspirations of the people in this state with so much cultural and ecological
diversity. However, there is an urgent need to develop a transparent and non-­
discriminatory framework for governance in microfinance sector, which in turn
requires effective ­monitoring mechanisms in ‘Social Capabilities’ and ‘Overall eco
system of SHG’ and accountability at all levels. In Arunachal Pradesh, the key
challenge in ­developing a non-discriminatory framework for governance, with-
out ­compromising with the basic collective rights of the indigenous population,
is to be able to address particularistic demand within the framework of universal
norms. This, by all counts, is a tough challenge before the decision-makers of
today and tomorrow.

disclaimer
[The view expressed are those of the author and not of the organisation he belongs
to. Usual disclaimer applies.]
88 THE MICROFINANCE REVIEW  •  Volume VII(2)  July - December 2015

Notes

1. Though the researcher acknowledge this as limitation of the present ­research, but it
may not affect the overall results and interpretations.
2. Traditional Community based institutions like Kebang of the Adis, the ­Builiang of the
Apatanis, the Nyele of the Nishings, the Mele of the Hrussos, the Tsorgan system of
the Monpas, the Jung of the Sherdukpens, the Abbala of the Idu Mishmis, the Pharai
of the Kaman Mishmis, the Mockchup of the Khamtis, the Ngojowa of the Wanchos
and Mungphong or Nockthung of the Tangsas.
3. The feature of fixed tenure-ship and disbursement of dividends to its ­members at the
end of the term is extremely popular with its members. This helps members to raise
lump sums and plan their household finances. The fixed term makes it mandatory to
balance the books on the pre-determined date ensuring proper accounting and hence
transparency. This increases the trust of its members on the institution. This feature
of fixed terms for disbursal of dividends to SHG members could also be probably
tried out. The fixed terms would ensure that the members receive benefits from
their capital invested on a pre-determined date. The SHG would continue even after
disbursal as some portion would still remain in the corpus of the SHG. This (process)
would ensure that the members have an abiding interest in the operations of the
group because of the dividend which they would ­receive at periodic intervals over the
life cycle of the group.
4. This would ensure that the members are not motivated to form groups for availing
subsidy and use it for a longer term and sustainable benefit.

References
Banerjee, A V and A F Newman (1993): “Occupational Choice and the Process of
Development”, The Journal of Political Economy, Vol. 101, No. 2, pp. 274-298.
Burgess, R and R Pande (2005): “Do Rural Banks Matter? Evidence from the ­Indian
Social Banking Experiment”, American Economic Review, Vol. 95, No. 3, 780-795.
Caree, M and L Klomp (1997): “Testing the Convergence Hypothesis: A ­Comment”,
Review of Economics and Statistics, 79, pp. 683-86.
Friedman, M (1992): “Do Old Fallacies Ever Die?”, Journal of Economic Literature, Vol. 3,
No. 4, pp. 2129-32.
Ghani, E, L Iyer and S Mishra (2010): “Are Lagging Regions Catching up with Leading
Regions?” In E Ghani (Ed.), The Poor Half Billion in South Asia, Oxford University
Press, pp. 64-89.
Ghosh, S (2009): “Does Financial Outreach Engender Economic Growth? ­Evidence from
Indian States”, Munich Personal RePEc Archive Paper, 32072.
Hotelling, H (1933): “Review of the Triumph of Mediocrity in Business”, Journal of
American Statistical Association, Vol. 28, No. 184, pp. 463-65.
Islam, N (2003): “What have we Learned from the Convergence Debate?”, Journal of
Economic Surveys, Vol. 17, No. 3, pp. 309-62.
Kochhar, K, U Kumar, R Rajan, A Subramanian and I Tokatlidis (2006): “India’s ­Pattern of
Development: What Happened, What Follows?” Journal of ­Monetary Economics, Vol.
53, No. 5, pp. 981-1019.
Lichtenberg, F R (1994): “Testing the Convergence Hypothesis”, Review of ­Economics and
Statistics, Vol. 76, No. 3, pp. 576-79.
McCunn, A and W Huffman (2000): “Convergence in US Productivity Growth for
Agriculture, Implications of Inter-state Research Spill-overs for Funding ­Agricultural
Research”, American Journal of Agricultural Economics, 82, pp. 370-88.
Microfinance in Areas of ­Ecological Distress – Evidence from the Field 89

Planning Commission (2002): “Support from the Banking System - A Case Study of Kisan
Credit Card”, (Study Report No. 146), Socio-Economic Research ­Division, New Delhi.
Quah, D (1993): “Galton’s Fallacy and Tests of the Convergence Hypothesis”, Scandinavian
Journal of Economics, 95, pp. 427-43.
Ramakumar, R and P Chavan (2007): “Revival of Agricultural Credit in the 2000s: An
Explanation”, Economic and Political Weekly, December, pp. 57-63.
Reserve Bank of India (2004): “Communication - Scheme to Cover Term Loans for
Agriculture and Allied Activities under KCC”, Mumbai.
Sala-i-Martin, X (1996): “Regional Cohesion, Evidence and Theories of Regional Growth
and Convergence”, European Economic Review, 40, pp. 1325-52.
Samantara, S R (2008): “Economic Growth and Deforestation: A Study in ­Odisha”,
Indian Journal of Agriculture Economics, Vol. 63, No. 3, pp. 436-437.
Samantara, S R (2009): “Revisiting the Non-Farm Employment Debate - Review of Issues
and Evidence”, APRACA Journal of Rural Finance (A Quarterly Journal of Asia-Pacific
Rural and Agricultural Credit Association (APRACA), International Edition, 7, pp.
34-39.
Samantara, S R (2012): “Diversification of Economic Activities under Rural Non-farm
Sector”, In B Sen and M Chinara (Ed.), Economic Development and Poverty in India,
New Century Publications, New Delhi, pp. 78-94.
Samantara, S R (2012): “Developmental Role of Institutional Incentives for ­Agricultural
Marketing in India”, Indian Journal of Agricultural Marketing, Vol. 23, No. 3, pp.63-71.
World Bank (2001): Global Development Finance Report, Washington, DC.

Appendix

The Model

(a) β -Convergence and Galton’s Fallacy

Following Sala-i-Martin’s (1996) exposition, the paper used the following equation to
­investigate unconditional β-convergence across the districts. Assuming that β -convergence holds
for districts i = 1, 2, ... , N. Natural log-income of ith district at time t could be approximated by,

ln yi,t = α + (1 – β) ln(yi,t–1) + ui,t ……………………. (1)
Where yi,t = SHG loans (or micro-credit not covered under SHG-BLP) financial inclusion
­development level in district i at time t,0 < β < 1 and ui,t has zero mean, finite variance, σ2u, and
independent over t and i. Since α is assumed to be constant across districts, balanced growth
paths were identical (allowing different αis for 0 < β < 1 could imply conditional β-convergence).
Manipulating equation (1) resulted,

ln(yi,t / yi,t–1) = α – β ln(yi,t–1) + ui,t ……....................... (2)
Thus, β > 0 implied a negative correlation between growth and initial log financial inclusion
development level. Between any period t and t + T, equation (2) could be written as

(1/T) ln(yi,t+T / yi,t) = α - βln(yi,t) + ui,t ………........... (3)
Replacing yi,t on the right-hand side of equation (3) with yi,t+T,

(1/T) ln(yi,t+T / yi,t) = α - βln(yi,t+T) + ui,t ……….......... (4)
90 THE MICROFINANCE REVIEW  •  Volume VII(2)  July - December 2015

Equation (4) referred to the relation between growth and the terminal year. β > 0 in equation
(3) and a consequent β < 0 in equation (4) represented Galton’s fallacy, observed in Friedman
(1992). The growth rates obtained in equations (3) and (4) consider only the initial and terminal
year financial inclusion development levels and ignores values in the rest of the period. To avoid
this limitation, the paper used trend growth rate in equations (3) and (4) given by,

ri = α – βln(yi,t) + ui,t ……………………..................... (3a)

ri = α – βln(yi,t+T) + ui,t …………………...................… (4a)
where ri = trend growth rate between any two time period t and t + T, which could be ob-
tained from the ordinary least squares (OLS) estimate β in the following regression.

lny t = α – βt ………..........................................………….. (5)

r = exp(β) – 1 ………………......................................…… (6)
where y t = SHG loans or micro-credit not covered under SHG-BLP, financial inclusion devel-
opment level at time ‘t’.
(b) σ-Convergence
Existence of β-convergence might not necessarily imply σ-convergence among districts. The
(σ) convergence hypothesis could be expressed as

d[var(ln (yi,t)] < 0 …………………….. (7)

dt
where yi,t = SHG loans (or micro-credit not covered under SHG-BLP) financial inclusion
­development level in district i at time t and var(yi,t) denoted variance across districts. Equation
(5) could be formally tested (McCunn and Huffman 2000) using

var [ln(yi,t)]φ1 + φ2t + εt ………………........….. (8)

where εt = zero mean random disturbance term. Sufficient condition for financial inclusion
development level (SHG loans or micro-credit not covered under SHG-BLP) convergence across
districts was negative φ2 and significantly different from zero. When φ2 was not significantly
negative, unconditional convergence did not occur, or growth rates across districts might di-
verge over time. To test the robustness of the results (σ-convergence), the paper followed the
tests suggested by Lichtenberg (1994) and Caree and Klomp (1997). Lichtenberg (1994) showed
that the test of mean-reversion hypothesis β<0(based on the t distribution with n-2 degrees of
freedom) was equivalent to a test of

T1 = {var(lnyi,t)}/ {var(lnyi,t+T)} = R2/(1+ β )2 >1 ….. (9)

where yi,t and yi,t+T = financial inclusion development level in initial and terminal years of
any given time period t and t + T respectively. Caree and Klomp (1997) observed that the test
statistic proposed by Lichtenberg (1994) discounted the dependency between the two Caree and
Klomp (1997) proposed two alternative test statistics (robust to shorter time periods)

T2 = (N - 2.5) ln [1+{1(σ21 - σ2T)2}/{4(σ21σ2T - σ21T )}] .…. (10)

T3 = [√N({σ21/ σ2T }- 1)/{2√1-Π2N} …………….............….. (11)
Test statistic T2 = χ2 (1) distribution and T3 = Normal distribution with N-1 degrees of ­freedom.
The paper computed all T1, T2 and T3 statistics in examining the convergence hypothesis.
 Linking Farmers’ Access
to Microfinance, Input and
Service Delivery Systems with
Crop Production Performance:
A Study in the Disadvantaged
Areas of North Bank Plains
Zone of Assam
- R N Barman*

The study explores Abstract

the scope for The present study is an attempt to analyse the impact of
innovations in linking institutional microfinance, inputs and adoption of
harnessing the modern technology in raising the net farm returns of farmers
potential for as also various constraints in linking credit and input delivery
services with production of important crops and livestock in
increasing credit
the disadvantaged areas of North Bank Plains (NBP) zone
and input demand of Assam. The study explores the scope for innovations in
and indicates a close harnessing the potential for increasing credit and input
linkage between the demand. The study indicates a close linkage between the
credit and quantum credit and quantum of input use. The study recommends
of input use. establishing more rural bank branches and adequate skill
building of farmers for proper utilisation of credit.

Introduction
Assam is predominantly an agricultural state and agriculture
has been the mainstay of the state’s economy. The state is
endowed with fertile soil, high rainfall and favourable climate
for growing a number of cereals, pulses, fruits and vegetable
crops. Rice is the major foodgrain crop grown over an area of
* Professor and Head, about 27 lakh hectare annually and occupies on an average,
Department of Agricultural about 70% of the net cropped area in different districts of the
Economics and Farm
Management, B N College state. Winter rice (sali) is the most important rice crop in the
of Agriculture, Assam.
E mail: ranenbarman@ Key Words: Microfinance, Self-Help Groups, Self-Help Group Promoting Institutions,
yahoo.co.uk Grading
92 THE MICROFINANCE REVIEW • Volume VII(2) July - December 2015

State occupying about 70% of the total annual rice area followed by autumn rice (ahu)
occupying about 24% and summer rice (boro) occupying about 6% of the total area
under rice. Rapeseed and mustard are the major oilseed crops grown in the state and
accounts for an area of about 92% of the total oilseed production in the state. The other
important oilseed crops grown in the state are sesamum, linseed, groundnut, sunflower
and castor. The state has a share of around 0.70% of the pulses produced in the country,
the major pulses produced being arhar (tur), summer green gram and black gram in
a negligible area of about 16 thousand hectares during the kharif season. Green gram,
black gram, pea, lentil etc., are grown during rabi season. Jute is grown in an area
of about 102 thousand hectares, purely as a rainfed crop. The other important crops
grown in the State are sugarcane, potato, different vegetables, fruits and spices. Even
though the State is richly endowed with natural resources, development of agriculture
has been slow over the decades and for most of the crops the average productivity is
lower than the all India averages. The irrigation potential created is only about 17% of
the net sown area of the State and agriculture is mostly rainfed.
The North Bank Plains (NBP) zone of Assam has a geographical area of 14,421sq km
(14.42 lakh hectare), which is 18.37% of the total geographical area of the state. This
zone falls in the humid and sub humid climatic belt with an average rainfall of 2,741
mm per year and covers the districts of Sonitpur, Lakhimpur, Dhemaji and Darrang.
The net cropped area of these four districts together is about 5.09 lakh hectare, of
which only about 11% is irrigated. Farmers, particularly small and marginal, living in
remote areas, are mostly subject to high costs in accessing various inputs and services,
poor physical distribution systems in terms of outreach, access and competition, along
with poor information and communication systems. These farmers are not in a position
to adopt modern agricultural practices unless they are supported by a system which
ensures adequate and timely availability of credit, on reasonable terms and conditions.
For improved production, farmers need to have reliable and timely access to farm
inputs and services, along with seasonal and medium/long term finance.
Most of the modern day agricultural inputs are capital intensive and adoption of
these inputs require substantial amount of capital, which majority of the small and
medium farmers consider to be risky investments, since they are not generally in a
position to meet these requirements from their own funds. There are two sources which
inspire the farmers to take up risks of adopting costlier farm inputs, i.e., the agricultural
credit provided by various financial institutions and the subsidy provided under various
schemes. But non availability of inputs at the doorstep or at reachable distances creates
problems for the farmers from remote villages, despite availing institutional credit.
Although the Government policy for agricultural credit is aimed at increasing the flow
of rural credit at a reasonable rate targeting the farming community at large, a large
section of farmers still remain outside the outreach thereof. Institutional sources meet
Linking Farmers’ Access to Microfinance, Input and Service Delivery Systems... 93

only 51% of the credit requirement of the farm sector (Rao, 2003). Besides, the coverage
of institutional credit indicate a bias towards large farmers as compared to marginal
and small farmers (Thorat, 2006). However, it is heartening to note that during the
last two decades, microfinance has gained a lot of significance and momentum in the
country and now India occupies a significant place and a niche in global microfinance
through promotion of SHGs under the SHG-Bank Linkage (SBL) programme and the
Microfinance Institution (MFI) model (Mansuri, 2010).
Quite often the terms microfinance and microcredit are used interchangeably. As
micro credit does not include savings, hence micro finance is used as a more appropriate
term in this study. Microfinance is a term used for the practice of providing financial
services such as microcredit, micro savings and micro insurance to poor people. The
Task Force on Supportive Policy and Regulatory Framework for Microfinance has
defined Microfinance as “the provision of thrift, credit and other financial services to
the poor in rural, semi-urban and urban areas to help raise their income levels and
improve their living standards” (NABARD, 1999).
The present study makes an attempt to fulfil the following objectives
(i) To analyze the impact of micro finance on input and technology adoption in
uplifting the farm net returns;
(ii) To suggest optimal plans for farmers with capital as a flexibility constraint;
(iii) To study various constraints of linking credit, input delivery and other services to
the production of important crops along with exploring the scope for innovations
in harnessing the input, technology and credit demand potential.

Data and Methodology

A detailed farm survey was conducted in two districts of the North Bank Plains
Zone, i.e., Sonitpur and Lakhimpur representing farmers availing agricultural credit
(beneficiary situation) and farmers not availing agricultural credit (non beneficiary
situation). The survey covered 30 input distribution firms or agencies, 110 households
(55 beneficiary and 55 non beneficiary) to assess the impact of micro finance on
technology adoption and production constraints of important crops. Of the beneficiary
farmers, 19 were small (<2.0 ha), 24 were medium (<4.0 ha) and 12 were large (>4.0
ha). Among the non beneficiary farmers 22 were small, 18 were medium and 15 were
large. Regional Rural Banks (RRBs) and Cooperatives are the major sources of credit
for the agricultural sector at the village level and Cooperatives alone account for 45%
share in rural credit flow in agriculture (Gulati and Bathla, 2002). The details of farmers
availing agriculture credit from the State Bank of India, Assam Gramin Vikas Bank,
Assam Cooperative Apex Bank branches of Biswanath Chariali and Lakhimpur were
collected. A pretested questionnaire designed specifically for the purpose was used to
collect the necessary farm level data for the year 2013-14, from the selected farmers.
94 THE MICROFINANCE REVIEW • Volume VII(2) July - December 2015

The sample farmers (both beneficiary and non beneficiary) were from Choiduar and
Borgang of Sonitpur district and Majgaon and Bardalani of Lakhimpur district. The
areas selected are considered disadvantaged because of the distance (about 10 to 20
km) from nearby towns and district and sub divisional headquarters and also because
of proneness to seasonal occurrence of flood.
The pattern of resource use was analysed in terms of land, labour (human and bullock
labour) and working capital used per hectare, by the beneficiary and non beneficiary
farmers. To study the levels of input and technology adoption, the average gap index
for the selected set of input and technology components for each of the selected crops
was computed. The gap index for a particular input and technology component under
a crop was computed by using the formula:
GI = [(R-A)/R] x 100
Where, R = Recommended package
A = Adopted package by the farmer
GI = Gap index
The average gap for each of the selected crops was calculated as per the formula
used by Ajore and Singh (1994) and is shown below:
Average gap = (gap index i) / n
Where, i = gap index in a particular major package
n = total number of major packages
The following components of inputs and technology have been identified for
computing gap index:
IT1 : Seed bed and field preparation( number of hoeings/tillage operations)
IT2 : Seed rate(kg/ha) and use of proper quality seed
IT3 : Sowing time and method of sowing/ planting
IT4 : Manuring and fertilization:
Farm yard manure (q/ha)
Nitrogen (kg/ha)
Phosphorus (kg/ha)
Potassium (kg/ha)
IT5 : Number of irrigations applied and percentage of area irrigated
IT6 : Interculture and weed control (number of weedings)
IT7 : Plant protection chemicals-insecticides, pesticides and weedicides
A maximum score of ‘1’ has been given for the recommended package for each
component. Based on deviation from the recommended package, due weightage is
given for adoption of each input and technology component. The reason for calculating
the adoption gap is to assess whether agricultural credit has really helped the farmers
in the adoption of modern inputs and technologies.
The farmers’ existing farm plans are compared with the optimal plans developed by
using deterministic linear programming model as :
Linking Farmers’ Access to Microfinance, Input and Service Delivery Systems... 95

n m 3 3 3 3
Max Z = ¦
i =1
RiXi + ¦
i ' =1
Ri' Xi'− W1 ¦
s =1
Lhs − Wb ¦s =1
Bhs − ¦
s =1
Ocs − Ic ¦ Cbs
s =1
n m
Subject to ¦ aij Xi + ¦ ai' jXi' ≤ Aj (j = 1..9)
i =1 i ' =1
(land)
n m

¦ lis Xi + ¦ li' sXi' − Lhs ≤ Ls

i =1 i ' =1
(s=1..3) (human labour)
n m

¦ bis Xi + ¦ bi' s Xi' − Bhs ≤ Bs (s=1..3)

i =1 i ' =1
(bullock labour)
n m 3 3 3 3

¦i =1
cij Xi + ¦
i ' =1
ci' jXi' + W1 ¦
s =1
Lhs + Wb ¦
s =1
Bhs + Pc ¦
s =1
Ocs − Ic ¦ Cbs ≤ Cs (Capital)
s =1
n

¦ aij Xj ≥ Pj (j=1..6)
i =1
(Minimum area under specific crops)

Non negativity constraints

Xi  0 , Xi/  0 , Lhs  0 , Bhs  0, Ocs  0, Cbs  0

Where,
Z = Total net return
Ri = Net return per hectare of i th crop activity
Xi = Activity level of i th crop
Ri/ = Net return per unit of i/ th livestock activity
Xi/ = Activity level of i/ th livestock
Wl = Wage rate per unit of hired human labour
Lhs = Number of hired human labour in sth season
Wb = Wage rate per unit of hired bullock labour
Bhs = Number of hired human labour in sth season
Pc = Price per unit of operating capital
Ocs = Units of operating capital
Ic = Rate of interest per season
Cbs = Amount of capital borrowed
The following optimal plans were developed for comparison
P0: Existing plan
P1: Optimal plan with existing resources
P2: Optimal Plan with minimum area requirement and input and credit flexibility
96 THE MICROFINANCE REVIEW • Volume VII(2) July - December 2015

Results and Discussion

Extent of Adoption Gap
The crops selected for studying the extent of adoption gap in terms of selected
inputs and technology components were rice (both Sali and Ahu), wheat, rapeseed
and mustard, jute and sugarcane. The extent of adoption gap in the production
technologies of the selected crops by the beneficiary and non beneficiary farmers are
shown in Table 1.
A perusal thereof indicates that in case of all the selected crops, adoption gaps
in terms of various inputs and technology components were higher in case of non
beneficiary farmers as compared to the beneficiary farmers. As the crops were grown
under rainfed conditions, the adoption gap as expected in terms of the technology
component irrigation (IT5) in case of non beneficiary farmers for winter or Sali rice ( the
main rice crop of the zone) was 91.1% for small , 78.6% for medium and 72.5% for large
groups. In case of beneficiary farmers growing Sali rice, the adoption gaps were to the
tune of 48.5%, 40.3% and 32.6% respectively, for small, medium and large categories
respectively. Thus it can be said that irrigation application was less than 28% in case of
non beneficiary farmers, whereas in case of beneficiary farmers, irrigation application
was more than 51%. Even in case of beneficiary farmers there still existed substantial
gaps in terms of various technology components though technology adoption rates were
comparatively higher as compared to their non beneficiary counterparts. The difference
in gaps between beneficiary and non beneficiary farm sizes varied from as low as 20% in
case of Sali rice for small beneficiary and non beneficiary groups under component IT1
to as high as 70.9% in case of medium beneficiary and non beneficiary groups for IT4
in case of jute. There were adoption gaps of more than 60% in case of non beneficiary
farmers in all the crops in terms of input and technology components IT4 (manuring
and fertilization) and IT5 (irrigation). The adoption gap index demonstrated gaps of
more than 90% in case of crops like sugarcane, jute, rapeseed and mustard for the non
beneficiary farmers. This has clearly indicated that credit in various forms enabled the
farmers significantly in adopting inputs and technologies but there is need for higher
capital inflow for farmers in order to bridge the existing adoption gaps.
Quantum of Credit and Subsidy
The average quantum of credit and subsidy received by the beneficiary farmers is
shown in Table 2. The data reveals that the subsidy component on credit varies from
25% to 50% with respect to various aspects for which the credit was provided. In case
of small beneficiary farmers, the average amount of credit received was highest at
Rs 18,500 for purchase of bullocks, followed by Rs. 16,500 for dairy animals and Rs.
16,000 for crop production. In case of medium farmers the quantum of credit for crop
production was Rs. 22,660. The average amount of credit received by the small, medium
Linking Farmers’ Access to Microfinance, Input and Service Delivery Systems... 97

Table 1: Extent of Adoption Gap in the Production Technologies of Important Rainfed Crops of NBP Zone of Assam
Crops & Components Beneficiary Farmers Non Beneficiary Farmers
Technology Small Medium Large Small Medium Large
Sali Rice
IT1 23.31 16.22 18.32 43.33 42.18 33.32
IT2 21.27 15.33 16.34 34.43 33.37 31.67
IT3 19.32 17.43 18.66 25.22 24.76 24.26
IT4 15.76 14.84 13.67 73.45 77.62 69.41
IT5 48.47 40.33 32.63 91.06 78.55 72.46
IT6 15.22 14.18 19.36 16.37 16.96 17.42
IT7 16.74 15.39 17.73 58.22 56.46 59.66
Ahu Rice
IT1 28.24 27.53 27.88 46.78 53.22 54.16
IT2 27.84 26.33 27.67 54.67 57.64 58.19
IT3 14.17 13.28 13.93 19.27 20.76 21.37
IT4 22.32 21.53 22.68 68.86 69.63 69.27
IT5 34.56 31.66 33.28 67.26 66.30 69.17
IT6 27.32 28.98 29.31 32.17 35.79 41.83
IT7 29.31 28.33 30.24 57.88 58.72 61.39
Wheat
IT1 25.39 24.64 26.33 30.46 31.75 31.27
IT2 17.35 16.35 17.83 21.39 22.43 25.44
IT3 17.96 17.44 18.29 19.04 19.32 19.69
IT4 22.27 21.32 22.71 60.16 60.23 61.96
IT5 42.99 38.47 39.73 86.93 88.39 89.38
IT6 43.29 39.97 40.76 46.34 48.54 49.77
IT7 24.77 22.64 25.22 71.56 73.25 79.33
Rapeseed & Mustard
IT1
IT2 13.54 12.27 13.64 15.38 16.45 17.83
IT3 14.32 13.48 13.55 17.54 16.93 18.34
IT4 12.65 11.86 13.21 16.85 16.44 17.32
IT5 21.34 18.64 19.95 71.44 73.63 73.26
IT6 36.47 35.31 37.84 90.37 91.33 95.43
IT7 42.33 39.55 43.28 48.66 49.76 51.17
34.59 33.88 35.32 54.23 56.84 58.31
Jute
IT1 16.62 16.04 17.26 19.21 18.77 21.32
IT2 15.32 14.45 15.51 18.50 18.78 19.59
IT3 14.65 13.66 14.22 19.55 20.58 21.54
IT4 22.32 21.54 22.75 91.44 92.42 92.84
IT5 46.47 45.31 47.42 93.37 95.15 94.67
IT6 42.63 39.05 42.69 58.66 59.26 59.96
IT7 44.59 43.45 45.32 54.47 55.28 56.42
Sugarcane
IT1 17.68 18.68 19.16 21.24 23.37 24.22
IT2 15.37 15.37 16.38 23.53 24.52 25.27
IT3 18.63 16.62 17.61 21.57 22.37 23.38
IT4 26.46 25.42 25.83 91.28 90.13 92.16
IT5 47.57 46.33 47.43 92.47 91.36 93.30
IT6 41.44 40.27 41.84 59.64 54.47 56.49
IT7 47.39 46.32 47.69 55.42 56.43 58.68
98 THE MICROFINANCE REVIEW • Volume VII(2) July - December 2015

Table 2: Average Quantum of Agricultural Credit & Subsidy Received by Various Categories of
Farmers in the NBP Zone of Assam
Particulars/purpose Credit (Rs) Subsidy (Rs)
Small Medium Large Small Medium Large
Purchase of Pump Sets, Sprayers & Equipment 12710.0 15400.0 19862.0 4448.5 (35) 4620.0 (30) 4965.5 (25)
Purchase of Tractor & Power Tillers 138900.0 165625.0 41670.0 (30) 49687.5 (30)
Purchase of Bullocks 18500.0 18860.0 7400.0 (40) 5658.0 (30)
Farm Development 45500.0 56500.0
Crop Production 16000.0 22660.0 6400.0 (40) 9064.0 (40)
Dairy Animals 16500.0 25000.0 6600.0 (40) 10000.0 (40)
Poultry Enterprise 10000.0 12000.0 4000.0 (40) 4800.0 (40)
Piggery Enterprise 10500.0 12000.0 5250.0 (50) 6000.0 (50)
Note: Figures within parentheses indicate percentage of total amount of credit.

and large farmers for purchase of pump sets, sprayers and equipment was to the tune
of Rs. 12,710, Rs. 15,400 and Rs. 19,862 respectively. There is a need for increasing the
volume of credit under crop production for seasonal agricultural operations for the
small and medium farmers. Considering the higher adoption gaps in terms of irrigation,
there is a need for increasing credit flow as well as subsidy component to farmers for
various irrigation equipment and structures. Not a single small farmer received any
loan for purchase of tractors and power tillers and for farm development in the study
area. The small farmers should be encouraged to avail loans, on partnership mode or
cooperative basis, for such costly machineries and equipment. The credit institutions
and extension agencies should also encourage financing small farmers under various
schemes and projects. On an average credit to the tune of Rs. 1,65,625 and subsidy of
30% was provided to the large farmers for the purchase of tractors and power tillers.
The medium and large farmers received on an average Rs. 45,500 and Rs. 56,500
respectively for farm development particularly for erection of fencing, earth filling and
construction of sheds, etc. The average amount of subsidy was as high as 50% for the
loans provided for piggery farming.
Optimal Plans
The optimal plans developed by using the deterministic linear programming model
are indicated in Tables 3 through 5. A perusal of the Tables indicates that there
remains scope for increasing the farm net returns by merely optimizing the existing
resource allocation for both beneficiary and non beneficiary farmers. Considering the
prevalence of mixed farming systems in the study area, the optimum plans have been
developed with the provision of both crops and livestock enterprises. The optimum
plans have shown decrease in the cropping intensity (CI) for each category of farms
with increase in the size of livestock enterprises, thereby indicating more profitability
of livestock enterprises in the locality. Thus, there is a high possibilities of shift in
Linking Farmers’ Access to Microfinance, Input and Service Delivery Systems... 99

Table 3: Non Beneficiary Situation: Existing Plan (Po) Vs Optimal Plan with Existing Resources (P1)
Particulars Unit Small Medium Large
Po P1 Po P1 Po P1
HYV ahu rice Ha 0.103 0.136 0.216 0.247 0.421 0.316
(6.08) (10.39) (6.80) (9.43) (7.49) (7.50)
Local ahu rice Ha 0.217 --- 0.312 --- 0.262 ---
(12.81) (9.82) (4.66)
HYV Sali rice Ha 0.522 0.530 0.723 0.767 1.210 1.160
(30.81) (40.52) (22.77) (29.31) (21.53) (27.53)
Local Sali rice Ha 0.346 --- 0.416 --- 0.864 -----
( 20.42) (13.1) (15.37)
Boro rice Ha 0.130 0.217 0.236 0.286 0.376 0.493
(7.67) (16.59) (7.43) (10.93) (6.69) (11.70)
Jute Ha ----- --- 0.018 --- 0.243 ---
(0.56) (4.32)
Wheat Ha 0.024 0.031 0.048 0.051 0.286 0.322
(1.42) (2.37) (1.51) (1.95) (5.08) (7.64)
Oilseed crops Ha 0.165 0.191 0.196 0.214 0.573 0.893
(9.74) (14.60) (6.17) (8.17) (10.19) (21.19)
Blackgram Ha 0.013 --- 0.021 --- 0.103 ---
(0.76) (0.66) (1.83)
Green gram Ha 0.041 --- 0.086 --- 0.212 ---
(2.42) (2.71) (3.77)
Potato Ha 0.065 0.082 0.106 0.113 0.152 0.262
(3.83) (6.27) (3.33) (4.31) (2.70) (6.22)
Maize Ha 0.022 --- 0.051 --- 0.176 ---
(1.29) (1.60) (3.13)
Sugarcane Ha ---- --- 0.200 0.043 0.272 0.296
(6.29) (1.64) (4.84) (7.02)
Vegetables Ha 0.046 0.121 0.561 0.896 0.469 0.471
( 2.71) (9.25) (17.66) (34.23) (8.34) (11.18)
Gross cropped area Ha 1.694 1.308 3.175 2.617 5.619 4.213
Net area sown Ha 1.120 1.120 2.280 2.280 3.779 3.779
Cropping intensity % 151.25 116.78 139.25 114.78 148.69 111.48
Dairy Nos 2 5 5 8 7 10
Poultry Nos 13 68 78 147 84 176
Piggery Nos --- --- 5 18 7 20
Goatery Nos 4 10 7 21 10 24
Duckery Nos 8 21 10 32 15 38
Net returns Rs 74,520.0 77650.0 98150.0 106568.0 143350.0 159530.0
Working capital Rs 56650.0 56650.0 73,350.0 73,350.0 104175.0 104175.0
Human labour Man days 191 191 221 221 291 291
Bullock labour Pair Days 61 54 71 65 81 74
Note : Figures within parentheses indicate percentages.
100 THE MICROFINANCE REVIEW • Volume VII(2) July - December 2015

Table 4: Beneficiary Situation: Existing Plan (Po) Vs Optimal Plan with Existing Resources (P1)
Particulars Unit Small Medium Large
Po P1 Po P1 Po P1
HYV ahu rice Ha 0.123 0.141 0.222 0.243 0.316 0.423
(6.89) (11.21) (7.30) (10.38) (5.77) (9.09)
Local ahu rice Ha 0.345 --- 0.423 --- 0.522 ---
(19.34) (13.91) (9.52)
HYV Sali rice Ha 0.560 0.771 0.734 0.712 1.212 1.243
(56.08) (61.28) (24.14) (30.68) (22.12) (26.71)
Local Sali rice Ha 0.495 --- 0.378 --- 0.378 ---
( 27.76) (12.43) (6.90)
Boro rice Ha 0.040 0.042 0.241 0.344 0.673 0.723
(2.24) (3.33) (7.92) (14.70) (12.28) (15.53)
Jute Ha 0.006 --- 0.018 --- 0.232 ---
(0.33) (0.59) (4.23)
Wheat Ha 0.044 0.057 0.078 0.221 0.331 0.452
(2.46) (4.53) (2.56) (9.44) (6.04) (9.71)
Oilseed crops Ha 0.097 0.112 0.312 0.353 0.586 0.613
(5.44) (8.90) (10.26) (15.08) (10.69) (13.17)
Black gram Ha 0.006 --- 0.022 --- 0.053 ---
(0.33) (0.72) (0.96)
Green gram Ha ---- --- 0.032 --- 0.051 ---
(1.05) (0.93)
Potato Ha 0.006 0.014 0.112 0.146 0.237 0.336
(0.33) (1.11) (3.68) (6.24) (4.32) (7.22)
Maize Ha 0.022 --- 0.123 --- 0.132 ---
(1.23) (4.04) (2.40)
Sugarcane Ha ---- --- 0.112 --- 0.212 0.302
(3.68) (3.87) (6.49)
Vegetables Ha 0.039 0.121 0.233 0.317 0.543 0.561
( 2.18) (9.61) (7.66) (13.54) (9.91) (12.05)
Gross cropped area Ha 1.783 1.258 3.040 2.340 5.478 4.653
Net area sown Ha 1.122 1.122 2.134 2.134 3.486 3.486
Cropping intensity % 158.91 112.12 142.45 109.46 157.14 133.47
Dairy Nos 2 5 5 9 7 12
Poultry Nos 55 108 98 164 120 280
Piggery Nos 5 9 8 21 14 38
Goatery Nos 4 12 8 21 10 31
Duckery Nos 8 27 10 37 17 34
Net returns Rs 118120.0 123050.0 184050.0 198268.0 274550.0 288470.0
Working capital Rs 93,150.0 93150.0 113350.0 113350.0 177475.0 177475.0
Human labour Man days 198 198 253 253 314 314
Bullock labour Pair Days 61 53 78 66 86 79
Note : Figures within parentheses indicate percentage
Linking Farmers’ Access to Microfinance, Input and Service Delivery Systems... 101

resource allocation towards livestock enterprises under mixed farming system in

the study area, unless diversification through high value crops is introduced. There
has been increase in area under potato, wheat and oilseeds in the optimal plans as
compared to reduction in area under rice crops in total. The increase in net returns
in the optimal plans vis-à-vis existing resources was to the tune of Rs. 3,130, Rs. 8,418
and Rs. 16,180 for small, medium and large non beneficiary farmers respectively. In
the case of beneficiary farmers, this increase was to the tune of Rs. 4,930, Rs. 14,218
and Rs. 13,920 for small, medium and large farmers respectively. Among the crop
enterprises, HYV Sali rice , HYV ahu rice, wheat, oilseeds and vegetable crops only were
considered for inclusion in the optimal plans (along with all the livestock enterprises)
of both beneficiary as well as non beneficiary farmers. As commonly observed, the
local varieties have been low yielders, hence the local varieties were eliminated due
to lower profitability or non profitability. As all these crops were capital intensive and
considering the need in the study area capital flexibility constraint was incorporated to
develop optimal plans (P2) by hiking the capital availability by 20% for the beneficiary
farmers. It is observed that a 20% hike in the capital led to increase in net returns by an
amount of 29.2% for small beneficiary, 26% in case of medium and 24.4% in case of
large farmers (Table 5). This result also substantiated the earlier findings of Atteri and
Joshi (1983) who observed that by augmenting capital in the marginal and small farms
through increased provision of credit at reasonable rates of interest helped them in
adopting improved inputs and technology and thereby increased their productivity and
made them economically viable. Thus, the present study also indicates a clear linkage
between inputs and technology adoption and credit. The optimal plans developed and
suggested for each category of farmers may be feasible for adoption in the locality
provided credit and subsidy components are made available as shown.
From the comparison of Tables 3, 4 and 5, the net return per rupee of working capital
invested has been computed and presented in Table 6. A perusal of the Table indicates
that in case of beneficiary farmers the net return generated per rupee of working capital
was more as compared to the non beneficiary farmers. The net returns per rupee of
working capital in the existing plans (P0) were 1.31 and 1.42 respectively in case of non
beneficiary and beneficiary small farmers. For the medium sized farmers in the existing
plans, the net returns per rupee of working capital were 1.34 and 1.62 respectively for
non beneficiary and beneficiary groups, and 1.37 and 1.54 for the non beneficiary and
beneficiary large farm size groups respectively. There has been further increase in the
net return generated per rupee of working capital invested in the optimal plans (P1
and P2) developed. This has clearly indicated that even without allowing the existing
resource base to change, substantial increase in the farm net returns are possible in the
optimal plans by merely increasing the credit inflow. Thus it could be established that
microfinance played a crucial role in uplifting the farm net returns in the study area.
102 THE MICROFINANCE REVIEW • Volume VII(2) July - December 2015

Table 5: Beneficiary Situation: Optimal Plan with Minimum Area Requirement & Capital Flexibility (P2)
Particulars unit Small Medium Large
P1 P2 P1 P2 P1 P2
HYV ahu rice ha 0.141 0.123 0.243 0.222 0.423 0.316
(11.21) (10.44) (10.38) (9.55) (9.09) (6.94)
Local ahu rice Ha --- --- --- --- --- ---
HYV Sali rice Ha 0.771 0.560 0.712 0.734 1.243 1.212
(61.28) (47.53) (30.68) (31.58) (26.71) (26.64)
Local Sali rice Ha --- --- --- --- --- ---
Boro rice Ha 0.042 0.137 0.344 0.246 0.723 0.734
(3.33) (11.62) (14.70) (10.58) (15.53) (16.13)
Jute Ha --- --- --- --- --- ---
Wheat Ha 0.057 --- 0.221 0.227 0.452 0.455
(4.53) (9.44) (9.76) (9.71) (10.00)
Oilseed crops Ha 0.112 0.144 0.353 0.396 0.613 0.621
(8.90) (12.22) (15.08) (17.03) (13.17) (13.65)
Blackgram Ha --- --- --- --- --- ---
Green gram Ha --- --- --- --- --- ---

Potato Ha 0.014 0.076 0.146 0.174 0.336 0.342

(1.11) (6.45) (6.24) (7.48) (7.22) (7.51)
Maize Ha --- --- --- --- --- ---
Sugarcane Ha --- --- --- --- 0.302 0.302
(6.49) (6.64)
Vegetables Ha 0.121 0.138 0.317 0.325 0.561 0.566
(9.61) (11.71) (13.54) (13.98) (12.05) (12.44)
Gross cropped area Ha 1.258 1.178 2.340 2.324 4.653 4.548
Net area sown Ha 1.122 1.122 2.134 2.134 3.486 3.486
Cropping intensity % 112.12 104.99 109.46 108.90 133.47 130.46
Dairy Nos 5 8 9 11 12 15
Poultry Nos 108 152 164 202 280 324
Piggery Nos 9 15 21 39 38 53
Goatery Nos 12 22 21 21 31 34
Duckery Nos 27 43 37 45 34 52
Net returns Rs 123050.00 158980.0 198268.00 249896.12 288470.00 358736.07
Working capital Rs 93150.0 111780.0 113350.0 136020.0 177475.0 212970.0
Human labour Man days 198 198 253 253 314 314
Bullock labour Pair Days 53 51 66 62 79 71
Note: Figures within parentheses indicate percentage
Linking Farmers’ Access to Microfinance, Input and Service Delivery Systems... 103

Table 6: Net Return Generated per Rupee of Working Capital Invested by the Beneficiary and
Non-Beneficiary Farmers (in Rs)
Size groups Non-Beneficiary Farmers Beneficiary Farmers
P0 P1 P0 P1 P2
Small 1.31 1.37 1.42 1.47 1.42
Medium 1.34 1.45 1.62 1.75 1.84
Large 1.37 1.53 1.54 1.63 1.68

Constraints Encountered
Regarding Credit
A number of constrains were faced by various stakeholders in the study area. Based
on the perception of farmers and financial institutions, the constraints are listed in
Table 7. Lack of sufficient number of rural bank branches and lack of training on funds
Table 7: Constraints Regarding Agricultural Credit Encountered by Stakeholders in the Study Area
SL No. Beneficiary farmers Non beneficiary farmers Banks & Govt agencies
1 Low literacy and lack of knowledge of Lack of knowledge about financial schemes Low literacy and lack of knowledge of
banking transaction (60%) (100%) farmers about banking transactions
2 Lack of training on fund management and Lack of proper security deposits to be High credit risks due to non availability of
record keeping (100%) offered (85%) proper security documents.
3 Lack of sufficient rural bank branches Lack of sufficient rural bank branches Difficulties in close monitoring and
(100%) (100%) supervision due to lack of sufficient bank
supervisory staff.
4 Lack of Crop Insurance (100%) Lack of Crop Insurance (100%)
5 Getting loans for a permanent Low literacy and lack of knowledge about Mandatory target
infrastructure set up (85%) banking transaction (85%)
6 Lack of efficient delivery of banking service ---- Non repayment of loan instalment in time
and lack of awareness and exposure about
modern technologies (60%)
7 Market linkage and non availability of ---- ----
marketing credit (60%)
8 Insufficient amount of credit .Need to ---- ----
increase credit by 10-20% (60%)
9 Lack of financial and kind assistance to
mitigate loss due to flood (60%)
Note: Figures within parentheses indicate percentage of total farmers.

management and record keeping by bankers severely restrained the outreach of

institutional agricultural finance. About 85% of the beneficiary farmers opined in
favour of providing credit for infrastructure build up. Another important observation
that emerged from the study was the need for provision of ‘marketing credit’, for
establishing proper market linkages for the farmers. Inefficient credit delivery system
and insufficient quantum of credit were the constraints identified by 60% of the
104 THE MICROFINANCE REVIEW • Volume VII(2) July - December 2015

beneficiary farmers. The quantum of credit may be increased by up to 20% from the
existing levels, as per individual needs of the farmers. The farmers who did not avail
credit in the study area did not do so because of ignorance about the credit schemes
and lack of knowledge regarding banking transactions. The micro financial institutions
and the government agencies providing credit and subsidies to the farmers in the area
considered the farmers in the high credit risk category because of low literacy rates and
lack of security that could be offered by the farmers. Majority of the farmers in the area
generally do not possess proper documents with respect to productive assets in their
names. Further on account of mandatory targets and inadequate staff, banks could not
provide the requisite services and fulfil 100% credit needs of the farmers.
Regarding Inputs and Services
a) Seeds
➢ Agencies (ASC Ltd., ASSCA, Monsanto India ltd, Syngenta India, etc.) →
State Department of Agriculture → District Agriculture Office → Farmers
➢ Agencies → Retailers → Farmers
b) Chemical Fertilizers
➢ Companies (Indian Potash Ltd., IFFCO, BVFCL ) → State Department of
Agriculture → District Agriculture Office → Farmers
c) Bio Fertilizers
➢ Agencies and firms (M/S North East Green Tech Pvt. Ltd., Multiplex Green
Harvest India, Bio-Tech Pvt. Ltd., etc. → State Department of Agriculture →
District Agriculture Office → Farmers
➢ Agencies and farms → Retailers → Farmers
d) Agro Chemicals
➢ Agencies and firms (Indofil Industries Ltd., Excel Crop Care, Bayer Crop
Science, Pesticides Industries India Ltd, etc.) → State Department of
Agriculture District Agriculture Office → Farmers
➢ Agencies and firms → Retailers → Farmers
e) Farm Machinery and Equipments
➢ Agencies and firms (Mahindra and Mahindra, Tractors and Farm Equipments
Ltd, Honda, Kirloskar Oil Engines ltd., New Holland Agriculture, USHA
International Ltd, Crompton Greaves Ltd, Jain Irrigation systems Ltd., etc.)
→ State Department of Agriculture → District Agriculture Office → Farmers
Farmers need to depend on the Government policy and programmes in respect to all
the channels. The State Department of Agriculture places supply orders to the agencies
or firms for inputs, as per its plans and schemes. The District Agriculture office plays
a key role in selecting the beneficiary farmers, hence input distribution through these
channels covers farmers of selected localities as per schemes. Large farmers generally
purchase directly from the agencies or retailer firms. Though very few in number, some
Linking Farmers’ Access to Microfinance, Input and Service Delivery Systems... 105

manufacturers, i.e., IFFCO, KRIBHCO, and NFL have their own retail outlets called
‘Farmers Service Centres’, ‘Service Centres’ or ‘Farm Information Centres’, whereby,
agricultural inputs like fertilisers, seeds, agro-chemicals and agricultural implements,
etc., are made available to farmers, through a single window, along with agricultural
production technology literature.
Table 8 indicates the ranking of constraints regarding poor input supply and
distribution services. About 80% of the farmers identified low literacy and lack of
knowledge about inputs and latest technology as the major constraints of input supply/
distribution. Location and distance of the input supply firms is another major constraint
faced by the farmers (77.3%) as most of these firms are located in towns and cities.
The suppliers and distributors identified poor road communication and non profitable/
low volume of rural retail sales as the first and second major constraints. Insufficient
numbers of rural bank branches was another important constraint. The number of
microfinancing agencies should be increased for higher penetration in rural areas. No
Crop insurance schemes covered the areas under study.
Table 8: Constraints Regarding Agricultural Inputs Encountered by Stakeholders in the Study Area
SL No. Constraints Sample farmers Suppliers/Distribution
agencies
1 Low literacy and lack of knowledge about inputs and latest technology 88 (80.00) 13(43.33)
2 Lack of proper training on scientific use and management of inputs 75(68.18) 13(43.33)
3 Insufficient and untimely delivery of inputs 54(49.09) 17(56.66)
4 Lack of seed replacement particularly in case of rice 38(34.54) 11(36.66)
5 Location and distance of the distribution firms 85(77.27) -----
6 Poor road communication to villages ------ 30(100.00)
7 Non profitable and low volume of village retail sale ------- 18(60.00)
8 Very few service outlets of manufacturers or agencies 72(65.45) --------
9 Distance to nearby town and district head quarter 110 (100%)
Note : Figures within parentheses indicate percentage of total numbers

Conclusions and Policy Suggestions

The study indicates that there were adoption gaps of higher quantum on different
inputs and technology components in the study area. The minimisation of adoption
gaps in terms of various technology components require higher quantum of capital
inflow to production. The farmers could not afford the recommended inputs and
technology due to poor economic conditions and lack of technical knowledge. There
is a need to bring more area under irrigation in order to increase cropping intensity
and crop diversification. To minimise the higher adoption gaps in terms of irrigation
there is a need for increasing credit flow as well as subsidy component to farmers for
various irrigation equipment and structures. The study suggests optimal plans (P2) to
the beneficiary farmers with a further increase of 20% in the working capital which
106 THE MICROFINANCE REVIEW • Volume VII(2) July - December 2015

the farmers may avail from financial institutions. A close linkage between credit and
quantum of input use has been indicated in the study. The study clearly indicates that
even without allowing the existing resource base to change, by merely increasing the
credit inflow, substantial increase in the farm net returns has been possible in the
optimal plans for all categories of farmers. There is a need for establishing higher
number of rural bank branches and rural retail outlets for inputs with sufficient
staff to cater to the needs of the rural farming community. Programmes for farmers’
orientation and training regarding the proper utilisation of credit may also be taken
up by the institutional lending agencies mandatorily or with the help of NGO-Bank
linkage programmes. Credit documentation should be simplified and farmer friendly.
Small farmers may be encouraged to avail loans for purchase of costly modern farm
machineries and equipment on partnership or cooperative basis, which otherwise they
cannot afford to purchase and may also not be economical to use individually. Credit
institutions may also consider financing small farmers working on cooperative basis
under different developmental schemes. Loans for development of farm infrastructure
may also be made available separately without clubbing the same with seasonal
agricultural loans. To increase the quantum of input inflow to the agricultural sector,
input sale and distribution services need streamlining along with strengthening the
road communication to reach the remote village areas easily. More and more farmers
need to be covered under various credit schemes so as to pump in more amounts of
modern inputs to the agricultural production.
REFERENCES

Atteri, B R and P K Joshi (1983): “Capital Requirement of Marginal and Small Farmers - a
Case Study of Union Territory of Delhi”, Agricultural Situation in India, Vol. 37, pp.
305-308.
Ajore, R and A P Singh (1994): “Causes of Wide Yield Gaps in Rice and Wheat on Sodic
Soils in Progressive and Less Progressive Districts in UP”, Agricultural Situation in
India, Vol. 49, No. 1, pp. 21-23.
Gulati, A and S Bathla (2002): “Institutional credit to Indian Agriculture: Defaults
and Policy Options”, Occasional Paper 23, National Bank for Agriculture and Rural
Development, Mumbai.
Mansuri B B (2010): “Microfinancing through Self-Help-Groups - A Case Study of Bank
Linkage Programme of NABARD”, APJRBM, Sri Krishna International Research &
Educational Consortium, Vol. 1, No. 3, December, pp. 141-150.
NABARD (1999): “Task Force Report on Supportive Policy and Regulatory Framework
for Microfinance”, National Bank for Agriculture and Rural Development, Mumbai.
Rao, C H H (2003): “Reform Agenda for Agriculture”, Economic and Political Weekly,
Vol.38, No. 1, January 4, pp. 615-620
Thorat, Y S P (2006): “Rural Credit in India: Issues and Concerns”, Indian Journal of
Agricultural Economics, Vol. 61, No. 1 January-March, pp. 1-10.
 Multiple Group Memberships
and its Effect on Repayment
of Loans: A Case Study of
Thiruvananthapuram District
in Kerala
- Gopa Kumaran Nair G*

Most of prominent Abstract

revelation of the Contribution of SHG-BLP to social re-engineering and
reports is that SHGs access to banking services in India is unrivalled. Alongside the
could bridge the gap positive attributes, the SHG-BLP has been misused, at least in
of collateral for rural some corners of the country. To take the advantage of benefit
poor in taking loan, of being a group member, it has become a common practice,
reduced the cost of especially in SHG intensive areas to be part of several groups
lending to suppliers and avail facilities like credit and social security programmes
of credit, simplified from multiple sources. The present study throw light on the
formalities and interest extent of such multiple membership in Thiruvananthapuram
comparable with district in Kerala and highlights different facets of the issue.
market rates and helped Multiple membership was observed to be with a major objective
financial transactions to avail credit from various sources which has culminated into
amongst the formal larger indebtedness among the members. The study reveals
rural banking system in that multiple membership had not influenced repayment of
India. loans taken through groups as repayment is linked strongly
with factors other than income generated through group
activity. However, membership in multiple groups was found
to have a bearing on repayment of loan taken directly by the
member and other aspects of the working of the group.

Background
The Self-Help Group-Bank Linkage Programme (SHG–BLP),
conceived to promote thrift habit among the rural poor and
develop mutual help has proved to be successful in filling
the gap in the formal financial network and extending the
* Deputy General Manager, outreach of banking to the poor. Several benefits have been
Department of Economic attributed to the proliferation of SHGs in the society (Kumar
Analysis and Research,
NABARD, Mumbai. Key Words: Self-Help Group–Bank Linkage Programme, Multiple Membership
108 THE MICROFINANCE REVIEW • Volume VII(2) July - December 2015

and Golait, 2009) such as financial inclusiveness of marginalised, lesser dependency on

informal money lenders, creation of assets, increased net income, reduced vulnerability,
increased on-time recovery of bank loan, etc. More than economic advantages, what
impressed more was the betterment in the quality of life (Das, 2012) through higher
education levels, empowerment of women (Puhazhendi and Badatya, 2002; APMAS,
2006) by enhancing their contribution to household income (Deininger and Liu, 2009),
better control over household decisions, reduced child mortality (Gopalan, 2007),
betterment in maternal health and the ability of the poor to combat disease through
better nutrition, etc.
The SHG–BLP has expanded tremendously since its launch in 1992 and there were
more than 74.30 lakh savings-linked SHGs as on 31 March 2014, covering over 9.7 crore
poor households with a total savings of Rs. 9,897 crore. The number of credit-linked
SHGs under the programme was 41.97 lakh with a loan outstanding of Rs. 42,927
crore (NABARD, 2014-15). During the last 11 years (2003-04 to 2013-14) the cumulative
number of SHGs linked to banks has gone up from 10.79 lakh during 2003-04 to 41.97
lakh during 2013-14, with compound annual growth rate (CAGR) of 14.6%.
The concept and its socio-economic impacts has been a hot study topic for almost
two decades and several reports highlighting a host of positive outcomes were
unleashed. Most of prominent revelation of the reports is that SHGs could bridge
the gap of collateral for rural poor in taking loan (Yadagiri and Gangadar, 2008),
reduced the cost of lending to suppliers of credit, simplified formalities and interest
comparable with market rates and helped financial transactions amongst the formal
rural banking system in India (Alam and Akhter, 2015). It has also emerged as a safe
routing mechanism, for government subsidised programmes as the identification of
beneficiaries are socially determined.
Alongside positive aspects, the movement has also been saddled with a few issues
such as regional imbalances in its spread, lack of or declining interest shown by
banks, especially for extending adequate/ re-loaning facilities, limited attention on
income generation activities (Sharma, 2012), monitoring of group activities, multiple
membership in various groups and availing credit, etc.
Multiplicity of Non-Government Organisations (NGOs), other Self-Help Group
Promotion Institutions (SHPIs) and government departments adopting SHG routes
for implementation of government schemes, memberships in more than one groups
is adopted (NABARD, 2012). Since SHG data is not centralised, membership in other
SHGs and MFIs is not traced while financing (Srinivasan, 2013). On the demand side,
though the banks are expected to meet the entire credit requirements of SHG members,
restrictions placed on loan limit loan to savings ratio, etc. and financial pressure on
account of diversified family needs have prompted SHG members to be a part of
different groups and to avail credit from multiple sources.
Kerala is a state where the SHG-BLP concept is deep rooted and is SHG high intensive
Multiple Group Memberships and its Effect on Repayment of Loans: A Case Study... 109

Figure 1: Cumulative Number of SHGs Credit Linked and Loan Outstanding in Kerala
ϯϬϬϬϬϬ ϮϬϬϬ
No of SHGs Bank Loan (Rs. crore) ϮϱϳϳϲϬ ϭϳϳϵ͘Ϯϯ ϭϳϬϱ͘ϮϱϭϴϬϬ
ϮϱϬϬϬϬ
ϭϲϬϬ
ϭϰϬϬ
ϮϬϬϬϬϬ ϭϳϴϮϭϭ
ϭϱϵϴϰϯ ϭϮϬϬ
ϭϱϬϬϬϬ ϭϬϭϱ͘ϯ ϭϬϬϬ
ϭϭϳϵϭϯ ϭϭϳϯϬϯ
ϴϬϵ͘ϳϰ ϴϬϬ
ϭϬϬϬϬϬ
ϲϬϴϬϵ ϲϬϬ
ϰϴϮ͘Ϯ
ϰϬϬ
ϱϬϬϬϬ ϮϭϬϭϮ
ϱϱϱϭ ϮϬϬ
ϵ͘ϲ ϯϰ ϭϮϯ
Ϭ Ϭ
ϮϬϬϬ ϮϬϬϭ ϮϬϬϮ ϮϬϬϯ ϮϬϬϰ ϮϬϬϱ ϮϬϬϲ ϮϬϬϳ ϮϬϬϴ ϮϬϬϵ ϮϬϭϬ ϮϬϭϭ ϮϬϭϮ ϮϬϭϯ ϮϬϭϰ

Source: NABARD, Status of Micro Finance in India, various issues

zone (where number of SHGs per lakh of population of per unit of geographical area is
high). All the measures of SHG intensity show that the state has high level of penetration
of SHGs. The details of growth in credit linked SHGs and loan outstanding as at the end
of March of the year are presented in Figure 1.
In Kerala, the number of SHGs with bank loan of 5,551 as on 31 March 2000 increased
tremendously and reached 1,17,913 by 2007, It peaked at 2,57,760 in 2010, but declined
thereafter to 1,17,303 in 2014 (NABARDa). The decline in the number of SHGs since
2010 is attributed to the change in the modalities of reporting system. However, there
is a steady increase in the bank loan outstanding which improved from Rs. 9.6 crore
as at the end of March 2000 to more than Rs. 1,705 crore by 2014. The trend especially
after 2007 point to the credit intensification process in the state. Bank loan outstanding
per SHG improved from Rs. 65,400 as on 31 March 2007 to Rs. 1,45,370 by 2014.
Another prominent feature of SHGs in Kerala, which again can be considered as
proxy for the existence of multiple membership in groups is the enormous number
of savings linked groups. As on 31 March 2014, more than 6.01 lakh SHGs have been
savings linked in the state, hinting that less than one SHG is credit linked out of the
five saving linked groups in the state; whereas, on an average, one in every 1.66 saving
linked SHGs in Southern region and 1.77 SHGs in the country is credit linked.
The high SHG intensity in Kerala further comes to the fore by comparing the number
of SHGs in the state with number of persons below poverty line. As per the Planning
Commission (Government of India, 2013), during 2011-12, there were 23.95 lakh people
below poverty line (using Tendulkar methodology), in Kerala. Assuming an average
membership of 15 per group, and restricting it to BPL members, entire BPL population
(irrespective of being rural-urban, male - female) must have received credit support
through SHGs that are credit linked. Using the same assumptions, each BPL population
will have membership in a minimum of five savings linked SHGs. Since, SHGs are not
restricted to BPL category alone, as also considering limited spread in urban centres
110 THE MICROFINANCE REVIEW • Volume VII(2) July - December 2015

and men, these can be considered as broad approximation, but hint at on multiple
groups available per person.

The Study - Objectives, Methodology and Coverage

Context of the Study: The issue of multiplicity is believed to have an adverse effect
on group cohesion, savings, group activities, participation in meeting and more
importantly on the repayment of loan dues. Though the issue of multiple membership
was raised and discussed in various forums and has got mention in various reports, a
close look on the issues through systematic study is scanty to note. Considering the
extent of the issue of multiple membership and its consequences on the sustainability
of SHG-BLP, it was thought appropriate to examine the issue, in detail, through a
ground level field check.
Objectives: As indicated in the context, major objective of the study is to look into
the issue of multiple membership in SHGs and to understand its effect on repayment of
loans taken by the members. The specific objectives of the study are to:
➢ understand the existence and extent of multiple membership in groups ;
➢ examine the factors leading to multiple memberships in groups and the motivation
➢ of member to join various groups ; and,
➢ study the effect of multiple membership in repayment of loans taken from SHGs
as well as directly from banks by the members and on the cumulative savings by
the members.
Methodology: The study was conducted based on primary data, collected from the
SHGs, their members and NGOs, which was supported by secondary data. Primary data
from the sample members were collected using pre-drawn schedules through direct
interview method. SHG level data was collected through Focused Group Discussion
(FGD) with group members of each of the SHGs, which was further cross-checked with
group records. Discussions were also held with concerned NGO staff, Bank officials,
NABARD Regional Office, etc.
Coverage of the Study: The field study was conducted in Thiruvananthapuram district
in Kerala state which is one among the top in terms of SHGs. Presence of various types
of NGOs in the field, operations of NBFCs in micro finance and SHGs promoted by
the product boards, makes the district suitable as a representative district of the state.
Of the six revenue taluks in Thiruvananthapuram, three viz., Thiruvananthapuram,
Kattakkada and Neyyattinkara were covered under the study. Care was taken to cover
different terrains such as coastal, interior and semi-urban areas in the study to get a mix
of groups. Accordingly, detailed study was launched in the coastal side of Vizhinjam,
interior area of Kattakkada and semi urban centre of Kazhakkottam.
The study was launched in the month of June 2015 and relevant data was collected
as on 31 March 2015. The study covered 30 SHGs, credit linked at least four years ago.
Multiple Group Memberships and its Effect on Repayment of Loans: A Case Study... 111

From each of the SHGs, three members were selected for detailed interview. Care was
taken to cover almost 30% members with one bank loan account which was considered
as control sample to study the repayment performance.

Findings
Features of the Sample Groups
The study covered 30 SHGs which was the primary touch point of the study. The
features of the groups were obtained through Focused Group Discussions (FGD) with
the members. Of the total sample 30 groups, 28 were Kudumbashree groups and two
were promoted by another NGO. Average years of existence of the formation was 10.5
years, of the total 14 were having more than 10 years of existence, while only six were
having five or less years of existence. All the groups were functioning normally since
formation.
All the sample SHGs were women groups with an average membership of 16. Of the
total sample, 50% had less than 15 members and eight groups were with 20 members.
Weekly savings was uniformly followed by all the groups but savings rate per week was
not uniform. While most of the SHGs collected Rs. 20 per week (56.7%), one fifth of the
groups collected Rs. 50 per week (Table 1).
Cumulative saving in the group per member was Rs. 8,690 as on 31 March 2015.
Due to the distribution of savings by some groups among members, larger number of
groups (43.3%) were having cumulative savings less than Rs. 5,000. However, 10% of
the groups were having savings more than Rs. 15,000 per member. Saving per SHG is
not high as compared to their age since a few groups returned the savings to members.
All the groups were credit linked and loan outstanding. Last loan availed averaged to
3.99 lakh per group. Loan per sample SHG is higher than the state average due to the
selection of active SHGs for the study.
In line with the promotional efforts of NABARD, the sample groups formed JLGs. It
was reported that in eight SHGs, one JLG was formed, while two JLGs were formed
from each of another eight SHGs,
Table 1: Savings Details of the Sample SHGs
there were no JLG members in 14
Saving rate (Rs. /week) Cumulative savings/member as on 31.03.2015 (Rs. )
sample SHGs. Figure 2 (A) Range No. % Range No. %
provides pattern of JLG 10 2 6.7 < 5000 13 43.3
memberships in the sample 20 17 56.7 5001-10000 7 23.3
SHGs. There were four SHGs in 30 6 20.0 10001-15000 7 23.3
each of the categories of less than 50 5 16.7 > 15000 3 10.0
five members, six to eight
members nine to 10 members and more than 10 members in JLGs.
The basic issue of multiple membership in groups by the members was rampant
in sample groups. Overall picture of multiple membership in groups by the members
112 THE MICROFINANCE REVIEW • Volume VII(2) July - December 2015

Figure 2: Memberships in JLGs and Multiple Membership

A. JLG members from each saample SHGs B. Multiplicity pattern in SHGs (as pper No. of
membership per member))

хϭϬ ϱ'ƌŽƵƉƐ
΀WZEd ϵ͘ϵй ϭ'ƌŽƵƉ
'΁ ϭϵ͘ϳй

ϵͲϭϬ ϰ'ƌŽƵƉƐ
EŽ:>'
ϭϯ͘ϯй ϭϵ͘ϳй
ŵĞŵďĞƌ
ϰϲ͘ϳй
Ϯ'ƌƌŽƵƉƐ
ϲͲϴ Ϯϭ͘ϭй
ϭϯ͘ϯй
фϱ ϯ'ƌŽƵƉƐ
΀WZEd Ϯϵ͘ϲй
'΁

in sample SHGs (Figure 2 B) indicates that almost one-fifth of the participants are
members in only one group whereas 21.1% had dual membership. About 30% of the
members are members in three groups 19.7 were members in four groups and another
9.9% were members in five or more groups.
Sample Member Features
Predominance of BPL category was observed in the sample as well. Almost two-
thirds of the members (64.4%) were from the below poverty line (BPL) category
families. Close to half (47.8%) of the total sample members belonged to the Other
Backward Category (OBC) and larger share (almost two-thirds) of them were in the
BPL category (Table 2). Table 2: Economic and Social Status of the Sample
Less than 14.4% of the sample was Economic and APL BPL Total
from SC/ST category; while, 37.8% social status No % No % No %
was in the general category. Except SC/ST 6 6.7 7 7.8 13 14.4
one member, all other sample OBC 11 12.2 32 35.6 43 47.8
members were having Aadhar cards Others 15 16.7 19 21.1 34 37.8
and almost three-fourths (74.4%) Sample 32 35.6 58 64.4 90 100
were having NREGA cards; of
which, majority availed employment under the scheme.
Average age of the sample members was 41.6 years. A larger share (46.7%) of the
members are in the age group of 31 to 40 years (Table 3) followed by 41 to 50 years
age group (27.8%). As in the case of the overall state situation, sample members were
also better educated. More than 82% of the sample has education levels between 8th
standard and 10+2 and close to 9% studied at degree level or above.
Nuclear family was common with family size of 4.4 members. Half of the families
Multiple Group Memberships and its Effect on Repayment of Loans: A Case Study... 113

have 4 members; while, 13.4% has less than 4 members and the rest (36.6%) had more
than 4 members in their family. Except two sample members, who were widows and
one unmarried, all other members were having spouse and supporting the household
head by providing supplementing income. Other members in the household of sample
members were not actively involved in group activities as observed in the case of total
90 households. In case of 28
Table 3: Age and Education Pattern of Sample Members
men (in as much sample
Age Group Education Level
households) are members in 32 Years No. % Education Level No. %
SHGs. Similarly, 14 other Up to 30 7 7.8 Illiterate 0 -
women members in the 31-40 42 46.7 Up to 7th standard 8 8.9
household of the sample 41-50 25 27.8 8-10 39 43.3
members have participated in 51-60 12 13.3 10-12 35 38.9
other SHGs. Above 60 4 4.4 Degree and above 8 8.9
More than half (54%) of
the sample’s family depended on agriculture as major source of income (Figure 3),
followed by non-farm sectors (NFS)/ business or shop (23%) and fixed income such as
salary or pension, etc. While the major source of income was influenced by the activity
followed by the head of the family, the same occupation pattern was not observed in
activities by the sample members.
Figure 3: Major Souurces of Family Income and Involvement of Members
A. Major Source of Family Income
I B. Activities by the Mem
mbers

KƚŚĞƌƐ ŐƌŝĐƵůƚƵ
^ĂůĂƌŝĞĚͬW ϭϮй ,ŽƵƐĞǁŝĨ ƌĞ
ĞŶƐŝŽŶ Ğ ϭϭй
ϭϭй Ϯϰй E&&^
ϮϬй
Őƌŝ
ͬǁĂŐĞ
E&^ͬƵƐŝŶ ůĂďŽƵƌ
ĞƐƐͬƐŚŽƉ ϱϰй EZ'
Ϯϯй Ϯϱй ƵƐŝŶĞƐƐ
ϮϬй

It could be noticed that NREGA was the major activity by the member with a quarter
of the members depending on it followed by NFS (20%), but almost another quarter
did not participate in any of the income generating activities.

SHG Categories
As indicated while discussing the group features, membership in more than one group
was common among the sample borrowers. There was a pattern of memberships in
114 THE MICROFINANCE REVIEW • Volume VII(2) July - December 2015

different groups promoted by various agencies. The SHG promoted by agencies/NGOs

were in various categories such as (i) state government sponsored Kudumbashree, (ii)
community or caste based agencies, (iii) political party based NGOs, (iv) social service
based NGOs, (v) product board/government department promoted groups, (vi) NBFC/
MFI promoted groups, (vii) JLG, etc., which need a little bit elaboration.
Kudumbashree a government sponsored agency for promoting neighborhood groups
(in the lines of SHG) has widespread presence with more than 72,600 credit linked
SHGs (loan of Rs. 970 crore). Since, government sponsored subsidy programmes are
routed through Kundumbashree and organically linked with PRIs, most of the members
who would like to join SHG bank linkage programme will have first choice to take
membership in NHGs. In the study sample also, it was observed that almost all (97.8%)
were members in Kudumbashree.
Table 4: SHG Related Information of Sample Members
Community NBFC based Product Board
Particulars Kudumbashree Other SHGs JLGs
based SHG SHG promoted
No. of sample having membership 88 56 40 14 26 31
Average tenure with SHG (years) 10.5 8.7 2.7 5.4 7.2 2.6
Average savings per member (Rs. /week) 25 15.7 0 15.0 10 16.7
Saving as at the end of March 2015 9224 4558 0 2046 1308 1237
Average attendance in meeting (%) 70.5 72.5 97.4 57.9 51.8 92.3

Another prominent group of NGOs involved in SHG promotion in the state is

community-based or caste-based. The presence of such agencies in SHG bank linkage
become strong after the realisation that the poor are more inclined towards credit
facilities available through SHG route. Some NGOs have also taken bulk loan from
bank for on-lending to member with/without margin; while others provide facilitator/
mediator role for getting loan from institutional sources. At present, these agencies
have very strong ties with the members, by influencing credit linkages.
With the influence of the commu-nity/caste leadership, repay-ments of loans are
ensured whereby banks have been following a lenient approach by offering higher loan
amount per member. In the sample members, 62.2% were members in community/caste
based SHGs. Distribution of sample members as per multiplicity of their membership
in various groups has been shown in Figure 3 and pattern of multiplicity in Figure 4.
One of the conspicuous turning points in the SHG movement in Kerala is the
increasing spread of NBFCs using the concept of groups. Most of the prominent NBFCs
engage agencies or staff to promote groups of likeminded women, who are in need of
money and lend larger amount per member with stringent recovery conditions. The
agency enjoyed the advantages of almost 100% recovery of loan and higher business
per group.
From the point of view of members, NBFCs enable higher loan amount starting from
Multiple Group Memberships and its Effect on Repayment of Loans: A Case Study... 115

Rs. 10,000 per member in the first linkage itself, which increased by Rs. 10,000 in the
subsequent doses on repaying the loans issued. Though the interest rate is more than
double as compared to that of institutional sources, easy availability (at doorsteps),
easy repayment terms (weekly basis and on the field collection from the groups),
minimum formalities involved, easy re-loaning on successful repayment, etc. attract
more members into the folder of NBFCs. It was also informed by the members that
such easy loaning facilities has contributed to asset creation in the poor household such
as repair of houses, purchase of two-wheelers, consumer durables and in a few cases
facilitated purchase of dairy animals, goats etc. which was not possible with small sized
normal SHG loans.
There are a few political parties using NGO route to promote groups almost similar to
SHG concept. However, activities of such groups are not very strong in the study area.
It was also observed that activities of traditional NGOs, which were based in social
welfare are also on the decline, as members are losing interest in involving with such
groups due to limited credit facilities they could arrange. Around 29% of the sample
members had membership in other SHGs including those promoted by political parties,
promoted under NRLM to avail the benefit of subsidized programmes under it, etc.
Conscious efforts to promote income generating activities among SHG members has
resulted in the formation of JLG in SHGs or among members across different SHGs.
In the sample also, majority of them engaged in income generating activities. More
than one-third of the sample were members in JLGs also. Activities pursued found
considered homogeneity in forming JLGs.
Effectiveness of group route in selection of beneficiaries, implementation of
programmes, minimum leakages, etc., have prompted government departments,
product boards and so on to form groups of such members. Department of agriculture,
fisheries, Coconut development board, Rubber board are a few worth mention. As
subsidy liked programmes are implemented through such groups and facilities such
as insurance and pension schemes interest free loans, etc. are also provided, those
involved in such activities prefer to join and continue in such groups. More than 15.6%
of the samples were involved in product board promoted SHGs.

Group Cohesion
There were no common members in more than one groups, except in case of some
JLGs and groups promoted by one community based NGO covered under the study.
In case of one community based NGO, common meetings along with Kudumbashree
group meeting were held, but separate registers were maintained for the SHGs. All
other SHGs held separate meetings and maintained separate registers. All the groups
met on weekly basis at specified time and day.
Average attendance in group meeting (ascertained through interaction and
116 THE MICROFINANCE REVIEW • Volume VII(2) July - December 2015

verification of group register) was found to be maximum in case of NBFC promoted

groups followed by JLG and community based SHGs. The trend is an indication of
declining interest in groups promoted by Kudumashree as more attention was paid to
groups which facilitated higher loan amount per members.
Consonant with the features of the sample SHGs covered under the study, the
member were having savings and tenure with the groups (Table 4) that was almost
similar to that of the groups. Members maintained savings with all the SHGs (where
they were members), except in case of groups promoted by NBFCs. Saving outstanding
(as at the end of March 2015) varied depending on the tenure of SHG and weekly
saving rate. Some of the SHGs repaid the a portion of the savings accumulated as
demanded by the members.

Multiple Memberships
The interaction and data revealed that more than three-fourths (77.8%) of the sample
members were involved in more than one SHG (Figure 4). While almost one-third sample
members were having memberships in
three groups, another one-third were Figure 4: Memberships in SHGs by Sample
(Total 90)
members in more than three groups.
<ƵĚƵŵďĂƐŚƌ
On an average, membership in groups ĞĞ;ϴϴͿ
by the sample members worked out ŽŵŵƵŶŝƚLJ
to 2.7. Reasons (justifications) for ďĂƐĞĚ^,'Ɛ;ϱϲͿ
E&WƌŽŵŽƚĞĚ
joining different groups were varying 'ƌŽƵƐ;ϯϵͿ

as different groups, were formed :>'Ɛ;ϯϭͿ

with varying objectives. The response KƚŚĞƌ
^,'Ɛ;ϮϲͿ
(major reason) received from the
members have been consolidated and
presented in Table 5.

Table 5: Major Reason for Joining Groups (% of Respondents who have Membership in that Category SHGs)
Community NBFC based Product Board
Reasons Kudumbashree Other SHGs JLGs
based SHG SHG promoted
No. of sample member 88 56 40 14 26 31
Access to loan 33.0 53.6 97.5 0.0 50.0 54.8
To have savings 10.3 0.0 0.0 0.0 0.0 0.0
Network of friends 36.4 0.0 0.0 0.0 46.2 0.0
Community/caste feeling 0.0 41.0 0.0 0.0 0.0 0.0
Self-employ / empowerment 15.9 0.0 0.0 14.3 3.8 45.2
Demonstration effect 4.5 0.0 2.5 0.0 0.0 0.0
Other reasons(like social security) 0.0 5.4 0.0 85.7 0.0 0.0
Multiple Group Memberships and its Effect on Repayment of Loans: A Case Study... 117

On expected lines, availing credit (overcoming collateral barrier) was the major reason
for joining different types of groups which was evident in case of groups promoted by
NBFCs, community/caste based NGOs and JLGs. Being an empowered social member
was also a dominated reason to join Kudumbashree groups and other groups (mostly
promoted by traditional NGOs). Self-employment in group based activities or by
availing loan through SHG was found to be the primary reason for joining JLG and to
some extent, Kudumbashree and product based SHGs. Other reasons such as pension,
interest free financial assistance, insurance, subsidised input supply etc. motivated
larger share of members (85.7%) to join product board promoted groups.
While the justification for joining Kudumbashree was the spread across various
reasoning, the factors leading to join other groups were related to the objectives of
such groups. It could be observed that almost all the members who joined NBFC based
SHG had the objective of availing easy credit (97.5%) while a larger share of members
who joined the community based group(41%) had an intension of strengthening with
a community relationship.

Multiplicity Pattern of Membership and Bank loans

SHG bank linkage can no longer be considered as a means to have access to small
sized bank credit. All the members covered under the study were having bank loan
through SHG and the average bank loan taken by the borrowing sample members was
worked out to Rs. 67,784 taken together as on 31 March 2015. All the loans except in
case of NBFC were group loans, which was divided equally among members, as decided
by the groups. NBFCs issued loans to the members individually by executing individual
agreements (but the entire group was held responsible for defaults). Banks have not
strictly considered the savings outstanding at the members’ level and the community
based group could mobilize larger loan amount to its members citing prompt repayment
and organisational guarantee. Nevertheless, members’ savings outstanding and bank
loan were positively correlated
Figure
F 5: Pattern of Multiplicity
with a coefficient of 0.51. (% of Members)
As in the case of memberships, ŵŽƌĞ
ĞƚŚĂŶ
multiple loans was also observed ϰŐƌŽ
ŽƵƉƐ
ϲ͘ϳ
ϳй
in 70% of the sample members ϭŐƌŽƵƉƐ
ϮϮ͘Ϯй
(Figure 5). More than 27.8% of the
ϰŐƌŽƵƉƐ
members availed loans through Ϯϲ͘ϳй
two groups; whereas 23.3% of the ϮŐƌŽƵƉƐ
borrowers had 3 loans and 18.9% ϭϮ͘Ϯй

of the borrowers had 4 loans or

more. On an average, one sample ϯŐƌŽƵƉƐ
member was having 2.43 loans. ϯϮ͘Ϯй
118 THE MICROFINANCE REVIEW • Volume VII(2) July - December 2015

The intention to join more groups was Figure 6: Multiplicity of Bank

k Loan
certainly to avail higher loan amount more
than 4
as is revealed by a very strong positive loans
correlation (0.83) between number of 6.7% 4 loans 1 loan
12.2% 30.0%
loans and the total loan amount availed.
Larger number of the sample members
(41.1%) had a loan in the range of Rs. 3 loans
50,001 to Rs. 1,00,000 and the remaining 23.3%

22.3% was in the loan range of above Rs. 2 loans

1,00,000 to Rs. 1,50,000 lakh (details of 27.8%

loan outstanding as at the end of March

2015 is given in Table 6).
Table 6: Details of Bank Loans Taken Through Groups
Community NBFC based Product Board
Particulars Kudumbashree Other SHGs JLGs
based SHG SHG promoted
No. of sample having membership 88 56 40 14 17 31
No. of sample with bank loans 81 54 31 14 3 31
Average loan amount (Rs) 19742 40176 23710 22964 10000 36568
Rate of interest (%) 12.4 12.5 25.5 1.9 12.0 12.5
Amount outstanding (Rs) 7630 32961 16694 21400 6667 25204
Amount defaulted (Rs) 623 0 0 0 0 0
% of members defaulted 4.9 0 0 0 0 0

All the members of groups promoted by product boards and JLGs availed loans.
However, of the 40 samples who were members of group promoted NBFC as on 31
March 2015, nine members did not have loan outstanding due to various reasons. Data
contained in Table 6 also indicate that average loan amount was highest in case of
sample members who borrowed through SHGs promoted by community based NGOs
(Rs. 40,176), followed by JLG loans (Rs.
Figure 7: Sample Distributtion
36,568) and NBFCs (Rs. 23,710). Lower (in different bank loan rangges)
loan amount, despite very high savings
outstanding at group has been cited as 0.0%
less than
100001 - 25000
a major reason for more preference to 150000 15.6%
22.3%
community based SHGs by the members.
Interest rate of the loan taken through 250001 -
group was uniform in case of different 500000
21.1%
commercial banks (around 12%). But,
NBFCs charged more than 25% interest, 50001-
100000
while loans from product boards were 41.1%

with very minimal interest rate of less

Multiple Group Memberships and its Effect on Repayment of Loans: A Case Study... 119

than 2% (some loans were interest free also). Willingness of SHG members to take
higher loan amount even at high interest rate is a pointer to inadequate loan provided
by institutional sources of lending.
Except roughly 5% of the members who have taken loan through Kudumbashree,
no sample members defaulted on any loan due, as at the end of March 2015. Average
amount defaulted worked out to Rs. 623 per member. Peer pressure, urge to take
subsequent loan of larger size, pressure from community/caste leaders, income from
NREGA, etc. ensured prompt repayment of loans.

End Use of Bank Loan

In the banking parlance, use of bank loan has large ramification on the repayment.
The discussion with the members and the other stakeholders revealed that repayment of
loan is not directly related to the utilisation of loan. Use of bank loan taken is normally
decided as per the priority of need which was collectively decided by spouse and other
family members. Similarly, larger share of repayment is through family income. Hence,
the link between end use of loan and repayment may not be appropriate to explore.

Table 7: Utilisation of Loan Amount (SHG Loan Wise) (% of Loan Amount Utilised – Approximately)
Community NBFC based Product Board
Loan used for Kudumbashree Other SHGs JLGs
based SHG SHG promoted
Income generating activity 13.3 19.3 20.9 67.7 50 24.2
Group activity 6.5 6.4 0.0 0.0 0 26.5
Education related 18.0 5.9 12.8 10.2 0 7.0
House repair 10.5 9.9 31.8 3.8 0 22.0
Social function 3.5 17.0 13.5 0.0 0 3.5
Repay outside 7.8 10.2 5.4 0.0 0 0.0
Other domestic 40.1 31.2 15.5 18.3 50 16.7
Others 0.5 0.0 0.0 0.0 0 0.2

On an average, larger share of the loan taken has been used for income generation
activities in the family, followed by domestic expenditure. There are differences in
the utilization depending on the sources of loan. A larger share of loan taken through
Kudumbashree and community based NGOs have been used domestic (mostly
consumption) purposes followed by social function/education related expense or
IGA. However, loan taken from NBFCs were used for the purposes like house repair,
IGA, social function, etc. Most productive use was reported in case of loan taken from
product boards ; where, almost two-thirds of the loan taken was utilised for IGA and
in loan through other NGOs where one-fourth was utilised for group based activities,
IGA and house repair.
120 THE MICROFINANCE REVIEW • Volume VII(2) July - December 2015

Benefits of Multiple Membership

Several benefits were highlighted by the sample on account of multiple membership
in various groups. Major benefits on account of each group as revealed by the members,
have been shown in Table 8. In general, membership in all groups reportedly benefited
the sample in gaining access to credit facilities. It has also been revealed that the groups
in general has helped in building up relationships and enabled to have group power.
In addition, members also received other benefits such as training, skill development,
computer literacy, etc. Surprisingly, only a few responded (Kudumbashree group) that
they have benefitted with higher savings, as members are more concerned about credit
facilities.
Table 8: Benefits on Account of Group Multiple Memberships
(% of Respondents)
Kudumba Community NBFC based Product Board
Benefits received Other SHGs JLGs
shree based SHG SHG promoted
Larger loan access 80.7 62.5 77.5 92.9 23.1 61.3
Higher savings 6.8 0.0 0.0 0.0 0.0 0.0
Developed friends networks/ 3.4 19.6 0.0 0.0 46.2 0.0
community unity/empowerment
I G A/self-employment 6.8 7.1 22.5 0.0 0.0 22.6
Others 2.3 10.7 0.0 7.1 30.8 16.1

Direct Loans by the Members

In addition to loans through groups, a good share of members were having direct
loans from banks, informal agencies and even from moneylenders (Table 9). Despite
substantial credit availed through groups (Rs. 67,784), more than 43% of the total
sample had exposure to direct loan also (both formal and informal sources). Of the
total sample borrowed directly, exactly one-third availed credit from informal sources
while 41% availed from commercial bank and the remaining (25.7%) from cooperative
societies.
Average loan amount taken was high at Rs. 1.18 lakh per borrowing sample and
interest rate averaged to 13.6%. House construction and repair works was the leading
purpose for which loan was taken (48.7%), followed by consumption (20.5%),
Agriculture (12.8%) and Education (10.3%). The important disclosure is the very high
default level in the direct loans taken. Table 10 also shows that more than 69% of the
direct loans are in the defaulted state and the default amount was a staggering Rs.
54,260. There is a sign of empowerment amongst women with increasing tendency
to avail credit by the female members in the family while use of loans and repayment
have been steered by the male members, which has been reflected in the increased
indebtedness among the group members.
Multiple Group Memberships and its Effect on Repayment of Loans: A Case Study... 121

Table 9: Details of Direct Loans by the Sample Members

A. Direct Loans by Members B. Purpose of Loans C. Sources of Loan
Particulars Purpose % share* Agency % Share*
Direct Loans (No) 39(43%) Education 10.3 Com Bank 41
Average Loan Amount ( Rs. ) 117510 Housing 48.7 Co-op Banks 25.7
Rate of Interest (%) 13.6 Agriculture 12.8 Private 33.3
Members Defaulted (%) 69.2 Consumption 20.5 Money
Amount Defaulted ( Rs. ) 54260 Others 7.7 Lenders
* Share in total sample who have taken direct loans

Several reasons were mentioned for enlarged default level of direct loans. Predictably,
low income level was highlighted as a major reason by more than three-fourth (77.8%)
while others were expecting write-off like relaxation in payment, broadly. Average
income earned by the members (including wages under NREGA) was Rs. 2,177 per
month which was less in case of members with single loan (Rs. 1,125) as compared to
members with multiple loans (Rs. 2,627). Relatively less pressure exerted by banks,
especially cooperative and commercial banks as compared to group based-loans has
also got a mention.

Influence of Multiple Account on Loan Default

It is generally perceived that existence of multiple accounts has influenced repayment
of the loans. However, if the loans are effectively utilised, multiple loans may not have
any impact on the repayment, as the investment will generate sufficient net income to
repay the loan dues. Nevertheless, considering smaller share of loan(less than 24%)
utilised for income generating activities, there was a chance that multiple loans and
larger indebtedness (SHG loan Rs. 67,784 and direct loan of Rs. 1.18 lakh of those who
have availed) might have a bearing on repayment of loan due. Impact of multiplicity of
loan account has been examined by comparing the repayment performance of sample
members who have single loan and members with more than one loan accounts (Table
10). Of the total 90 samples covered under the study, 30% was with single loan and the
remaining (70%) with multiple accounts (already explained with the help of Figure 5).
Loan amount by the sample borrower with single loan was low (Rs. 34,852) as
compared to that of multiple loan holders (Rs. 81,898), in case of group based loans.
It is interesting to note that there is no substantial difference in case of loan default
level or defaulted loan amount in both the category of samples. The tight follow-up
adopted by the NBFC, peer pressure and community/ caste leadership pressure, easy
re-loaning facility available through group etc. have made repayment of loans taken
through groups almost perfect, which has reflected in high repayment of loan dues.
Supporting the disconnect observed between the multiple loan account and the loan
122 THE MICROFINANCE REVIEW • Volume VII(2) July - December 2015

default level, it was informed that the major source of income for repayment of loan was
family income in 48 samples (53.3%) while the remaining (46.7%) depended mostly
on income from own efforts (group based or individual income generating activities).
Table 10: Repayment of Loans Taken Through Groups and Direct Loans
SHG loans Direct loans
Particulars Members with Members with Members with Members with
Single loan Multiple loan Single loan Multiple loan
Members taken loan (Nos.) 27 63 4 35
% of members taken loan 30.0 70.0 14.8 55.6
Loan amount (Rs.) 34852 81898 75250 122340
% of members* defaulted 3.7 4.8 50.0 71.4
Amount defaulted (Rs.) 550 647 31000 56120
Monthly repayment amount (Rs.) 1165 2740 2560 4160
Avg monthly income of member (Rs.) 1125 2627 1125 2627
Total savings in groups Rs./member) 10322 13766 10322 13766
Note: *Total members who have taken loan

Members who have taken loan directly from bank or informal sources were also
found to have small sized loan (Rs. 75,250) in case of samples with single loan when
compared with members with multiple loans (Rs. 1.22 lakh). The important revelation
from the data is the high level of default of loan dues observed in case of sample with
multiple group based loan at close to 71.4% of those who have taken loan compared to
a 50.0% in case of sample with single group based loan. Similar variation could also be
observed in the loan amount in default across these sample groups. A glance through
Table 11 also reveals that the average situation is that the net income of the sample
member is not sufficient for monthly repayment of loans taken through groups and
in case of sample members with outside loan, income earned by the SHG members is
grossly inadequate, which has been reflected in the repayment of loans.
Coefficient of correlation between multiplicity of loan account and default level has
been worked out to 0.57, pointing out that higher the number of loans, larger is the
extent of loan amount defaulted and vice versa.
The point derived is that the multiple loan through group has affected the repayment
of direct loan considerably. Stringent recovery practices / pressure followed in case
of loans taken through group and relatively less pressure from the banks to repay
the direct loans, showed the difference. Further, there was no link between income
generated from group based loans and repayment, as larger share of the repayment
amount is sourced from family income. Conversely, larger share of direct loans has
been utilised for non-income generating activities (directly), installment amount was
larger, there was some expectation of write off, etc. collectively affected the repayment
of dues.
Multiple Group Memberships and its Effect on Repayment of Loans: A Case Study... 123

When inquired about the prioritization of loan repayment, members are very clear
that they would give first choice to loans taken through group (by 94.4% in total),
while only a few (5.6% of the borrower) favoured direct loan on account of high
interest rate (informal loans). Within the loans taken through groups, larger share of
members prioritised loan taken through community based NGOs (47.8%), followed by
NBFC (32.2%), Kudumbashree groups (10.0%) and JLG loan (4.4%). Rigorous recovery
policy of NBFCs, community/ caste pressure, easy reloaning after repaying the current
loans, peer pressure, etc. have influenced the repayment decision across samples.

Conclusions and Recommendations

This study leads to the conclusion that multiple membership in groups is very high
in Kerala. On account of mounting formalities associated with SHG-BLP and limitation
in loan amount, members prefer to resort to loans from NBFCs and more preference
is for community/caste based SHGs. Except in a few cases, group meeting and other
formalities are kept separate for each group. Same member involved in many groups
participate in group meetings, avail loans from different sources, possibly, on account
of family requirement for credit.
A smaller share of loan taken through group was only used for income generating
activities while other pressing requirements are found to be of priority. Utilization
of loan and mobilization of income for repayment of loan due are a family activity.
Repayment of loan taken through groups has not been influenced due to the multiple
loans as repayment of dues are influenced by other factors such as family income,
easy re-loaning facility, peer pressure, influence of community/ caste leaders, etc. The
study also concludes that multiple membership has led directly to higher indebtedness
due to multiple loans and thus has adversely affected the repayment of loans taken by
members.

Recommendations
1. The existing operational guidelines do not categorically prevent members from
involving in activities of more than one group by becoming a member. It may
not be feasible to place any restriction for membership in various groups as
the operations/ activities of different groups are not uniform and members are
benefited with the membership. However, there is a need to restrict the practice
of using same meeting and related aspects to enable them to avail credit facilities
from various sources (since it leads to over-indebtedness).
2. Availing credit facilities from various group sources was found to be rampant as
compared with that of multiple membership. Through there was no direct impact
on loan taken through groups, direct loan taken by the members with multiple
group loans was found to be affected severely due to limited net income. There is
124 THE MICROFINANCE REVIEW • Volume VII(2) July - December 2015

a need to put in place a centralized directory of SHG members and made available
to the banks to avoid too much exposure to bank credit by the SHG members.
3. Inadequate credit from institutional sources and increased formalities involved
have been shown as the major reason for increased dependence on NBFCs for
credit at higher cost by the samples. It was also observed that the formalities for
sanction of SHG loans has become cumbersome, deterring SHGs from depending
on them. There is a need to have a relook on formalities involved in sanctioning
of SHG loans, simplify them to demotivate members from approaching high-cost
NBFC route.
4. Banks may also need to consider, liberally, for financing SHG members (in addition
to group based loan) by sanctioning composite loan to meet the credit requirement
of the members (including income generation activities, social needs like housing,
education, health, marriage, etc., and debt swapping), depending on their past
performance. Credit requirement of JLG needs to be considered separately and
adequately to make them economically viable units.
5. There is a lack of coordination among the agencies promoting SHGs giving
freedom to promote SHGs by highlighting different benefits. All the SHPIs need
to be brought under a common platform. There is a need to segregate the area of
operation / specialization of each SHPI to minimize overlapping and overexposure
to credit.
ACKNOWLEDGEMENT

[Acknowledge the guidance and cooperation by Shri. M V Ashok CGM, DEAR,

NABARD, Mumbai and Shri. Ramesh Tenkil, CGM, NABARD, Kerala RO. Thankful
to Mrs. Anita Kurien, Manager, NABARD, Kerala RO for the her association in
collection of primary data through field study.]

DISCLAIMER

The views expressed are personal and not necessarily of the organization the
author belongs to.

REFERENCES

Alam, M M and S M Akhter (2015): “Financial Inclusion in India: An Analysis of SHG-

Bank Linkage Programme”, accessed from http://www.academia.edu/1912037.
APMAS (2006): “Self-Help Groups in India: A Study of the Lights and Shades”, EDA
Rural Systems and Andhra Pradesh Mahila Abhivruddhi Society, (accessed from
http://www.edarural.com /documents/SHG-Study/Executive-Summary.pdf).
Das, S K (2012): “Best Practices of SHGs and Women Empowerment: A Case of Barek
Valley of Assam”, Far East Journal of Psychology and Business, Vol. 7, No. 2, pp. 25-47.
Deininger, K and Y Liu (2009): “Longer-Term Economic Impacts of Self-Help Groups in
India”, Policy Research Working Paper 4886, The World Bank.
Gopalan, S S (2007): “Microfinance and its Contributions to Health Care Access A Study
of Self-Help Groups in Kerala”, Health and Population: Perspectives and Issues, Vol. 30,
Multiple Group Memberships and its Effect on Repayment of Loans: A Case Study... 125

No. 2, pp. 134-149.

Kumar, P and R Golait (2009): “Bank Penetration and SHG-Bank Linkage Programme:
A Critique”, Reserve Bank of India Occasional Papers, Vol. 29, No.3, 2009, Mumbai.
NABARD (2015): Annual Report, NABARD, Mumbai.
------ (2012): Circular No: 65(A)/ MCID-04 / 2011-12, NABARD, Mumbai.
NABARDa : “Status of Microfinance in India”, NABARD, Mumbai, various issues.
Planning Commission (2013): Press Note on Poverty Estimate, Government of India, New
Delhi.
Puhazhendi, V and K C Badatya (2002): SHG-Bank Linkage Programme for Rural Poor - An
Impact Assessment, National Bank for Agriculture and Rural Development, Mumbai.
Sharma V (2012): State of India’s Livelihoods Report, Sage Publication, New Delhi.
Srinivasan, G (2013): Microfinance in India: A Social Performance Report, 2013, Access
Publications, New Delhi.
Yadagiri, M and V Gangadar (2008): “Microfinance: The Emerging Horizons”,
Management in Government, January-March, pp. 28-38.
 Competition, Multiple
Borrowing and Over-
Indebtedness in Microfinance:
An Empirical Investigation
- Sunil Puliyakot* and H K Pradhan**

The paper proves Abstract

that presence of more Of late, there is an active debate among the practice and policy
number of microfinance circles about the risk of indebtedness among the borrowers
institutions is created by micro-lenders. This debate has come up in the light
significantly associated of many crises the industry has faced in the recent past in many
with more number parts of the world which are active microfinance markets.
of loans taken in by Among many causes fuelling the crisis, multiple borrowing
the borrowers and a and over-indebtedness are reported to have played an active
deteriorating ability role. In this context, this paper is an attempt to explore the
to service debts of the role of competition in triggering multiple borrowing and over-
borrowers, though the indebtedness among the borrowing population. Based on a
sample does not provide unique primary data set collected from an active microfinance
clear and conclusive market as a part of an ongoing study, we find that there is
evidences for over- a very high incidence of multiple source borrowing. Further,
indebtedness in the all indicators of borrower indebtedness measured as ratios of
traditional sense. income as well as liquid assets of the borrowers were found to
be positively and significantly associated with competition in
the microfinance market, implying the need for strong policy
interventions in regulating the market.

Introduction
Beginning from the initial days of Grameen Bank, the
pioneer and still the icon of microfinance industry world over,
* Visiting Faculty,
Amrita School of Business,
the industry is famed for its near total repayment rates. The
Coimbatore. only exception to this rule is a few and far in between crises
email: sunil_puliyakot@ that the industry has experienced in the recent and not-so-
yahoo.co.in
** Professor of Finance and distant past in various fast growing microfinance markets of
Economics, XLRI Xavier the world1 when the practitioners experience large scale client
School of Management,
Jamshedpur.
defaults.
email:pradhan@xlri.ac.in Key Words: Microfinance, Multiple Borrowing, Indebtedness
Competition, Multiple Borrowing and Over – Indebtedness in Microfinance: An Empirical Investigation 127

Also pertinent in this context is the increasing debate of late, over the issue of client
over-borrowing in microfinance. For instance, many blogs and popular publications
are actively debating the matter2, while Microfinance Banana Skins 20123 considers
over-indebtedness and the resultant bad debts problem as one which deserves serious
attention from the practitioners and policy makers alike. In the light of this debate, as
argued by Guerin, et al (2011), if household’s strategies and practices towards debt are
more motivated by maintaining credit worthiness than by paying off debts, absence of
defaults or near total repayments may be camouflaging the hidden fault lines in the
form of over-indebtedness.
At the same time studies of over-indebtedness suffers from two serious issues. Since
it is extremely difficult to put a threshold level of borrowing beyond which further
borrowings can be considered risky for any borrower, any measure of over-indebtedness
can only be subjective and will remain a matter of debate. The only objective measure
of over-indebtedness can be client default, which is a lagging indicator and going by
past experiences in the context of microfinance industry, manifests itself only in crisis
proportions. As shown by the ensuing literature review, high growth in microfinance
markets, fierce competition among the incumbent players and multiple borrowing
by lenders are some common characteristics of the crisis situations that the industry
has undergone in the past. Therefore, this paper is a modest attempt to uncover any
association that may exist in microfinance markets between increased competition and
increasing debt burden among the borrowers. Based on a unique primary data set
collected as a part of a natural experiment from two villages in the Indian state of
Tamil Nadu, the paper clearly proves that presence of more number of microfinance
institutions is significantly associated with more number of loans taken in by the
borrowers and a deteriorating ability to service debts of the borrowers, though the
sample does not provide clear and conclusive evidences for over-indebtedness in the
traditional sense.

Literature Review
The broader socio-economic and political changes witnessed in India during the past
three decades have vastly influenced the aspiration levels of the poor and low income
households of the country. Along with this, the spread of mass media, social policies of
various governments and urban commuting have generally increased the willingness
of the poor to engage in costly market debt relationships. Complemented further by
a liberalising credit markets, many a time lead to situations of over-indebtedness
(Guerin, et al (2011)). Microfinance industry with it’s prime focus on lending to the
poor sections of the society is directly exposed to the consequences of the risk of this
over indebtedness. In a comprehensive review of the crisis of 2008 that the industry has
gone through in the Indian state of Andhra Pradesh, Mader (2013) clearly delineates
the role of multiple borrowing and over-indebtedness in the run up to the crisis. Prior
128 THE MICROFINANCE REVIEW • Volume VII(2) July - December 2015

to the crisis Ghate (2007) reports that 92% of the poor households in Andhra Pradesh
has been covered by the State run VELUGU SHG programme. Surveys by APMAS4
found that in the district of Guntur dual membership was as high as 67% and that 32%
of the respondents had multiple membership with more than two lenders. Based on a
survey of microfinance practitioners, Krishnaswamy (2007) reports that the prevalence
of multiple borrowing among microfinance borrowers can be anywhere between one
to forty per cent. Similarly, in a primary survey of the borrowers subsequent to the
mass defaults of microfinance borrowers in the towns of Kolar and Ramanagaram in
the Indian state of Karnataka in 2009, Krishnaswamy (2011) finds that on an average,
borrowers in the mass default towns had contracted more number of loans than their
peers in the nearby non-default towns. In terms of multiples of poor households,
Microfinance India – State of the Sector report 20115 states that, both the states of
Andhra Pradesh and Karnataka had achieved relatively high penetration ratios of 10.96
and 2.51 respectively, which indicates the level of competition prevailing in those states.
Vogelgesang (2003) has studied the various aspects of repayment behavior in Bolivia,
for loans from Caja Los Andes, a micro-lender with a substantial market presence. The
study covered the period of 1996 to 2000, which is reckoned as a period of fast growth
for microfinance industry in Bolivia characterised by expanding supply, increasing
competition and high levels of indebtedness. The author finds that during the period
under investigation the fraction of clients taking loans from multiple institutions
increased substantially from 13% in 1996 to 24% in 2000 for new clients. During the
same period default rate increased from 0.5% to 7.3%. In a focus note prepared for
CGAP Chen, et al (2010) studied the crises that the industry has gone through in four
of the fast growing markets of microfinance, namely, Nicaragua, Morocco, Bosnia-
Herzegovina and Pakistan. All four countries have experienced microfinance crises after
going through periods of high growth and are important microfinance markets in their
respective regions. The study identifies three vulnerabilities within the microfinance
industry which are at the core of the problem. Those vulnerabilities are categorised as
concentrated market competition and multiple borrowing; over stretched systems and
controls; and erosion of lending discipline.
More recently, in a study conducted for European Fund for South Eastern Europe
(EFSE), to analyze the indebtedness situation of microfinance clients in Bosnia and
Herzegovina, Maurer and Pytkowska (2011) finds that since 2007 fierce competition
existed as banks started offering credit to micro-entrepreneurs and micro credit
organizations stated serving salaried workers and pensioners. As a result the market
witnessed multiple borrowing with 60% of clients reporting five or more credit
contracts and there was a marked correlation between multiple borrowing and over-
indebtedness. Following the study conducted in Bosnia and Herzegovina, similar studies
were commissioned by EFSE in Kosovo and Azerbaijan. Unsurprisingly, the findings
were not significantly different from those of the earlier study. In both the markets,
Competition, Multiple Borrowing and Over – Indebtedness in Microfinance: An Empirical Investigation 129

high competition among microcredit providers was a common feature. Though the
incidence of multiple loans outstanding at the time of the study was not as high as that
observed in the other markets, the correlation between multiple borrowing and over-
indebtedness was found to be markedly significant (Pytkowska and Spannuth, 2011 and
2012). Another market for microfinance which has witnessed rapid growth in the recent
past is Cambodia. The fast growth of the sector has resulted in substantial competition
and raising concerns regarding over-indebtedness. The study reports presence of more
than one loan among 56% of the borrowers who form part of the sample (Liv, 2013).
In a slightly deviant note, Shicks (2011) finds that even in microfinance markets like
Ghana, which is different from other fast growing markets of the world in terms of
client penetration and lending practices characterised by strict adherence to single loan
per client policy, the extent of over-indebtedness as measured by subjective factors is
fairly significant. Even though this does not implicate the practice of multiple borrowing
directly, one cannot escape the inference that multiple borrowing can only worsen the
situation.
The above discussion very clearly shows the putative links between competition in
microfinance markets on one hand and the practice of multiple borrowing and the
prevalence of over-indebtedness on the other. But, till date there are no systematic
studies that address a possible causative link between competition on one hand and
multiple borrowing and over-borrowing on the other. Clear establishment of the link
will help the policy makers and practitioners address the issues of multiple borrowing
and over-indebtedness more effectively and thus would be able to save the industry
from future adverse shocks. This paper is a modest contribution towards the same
objective.

A Conceptual Framework
Despite the concern about over-indebtedness, there has been no systematic attempts
from anywhere across various countries which have gone through the problem to
attempt an objective and comprehensive measure for indicating the phenomena.
Various ad-hoc statistical measures compiled for studying the syndrome can be broadly
classified into four:
1. Measures based on total stock of outstanding debt.
2. Measures comparing stock of outstanding debt to ownership of assets as well as
those comparing debt service commitments to income measures.
3. Administrative measures like default or bankruptcy.
4. Subjective measures of hardships suffered by the borrowers to keep the debt
repayments alive.
Of the four measures mentioned above, the first two define over-indebtedness based
on an arbitrary threshold, devoid of any objective sanctity. The third is an objective
130 THE MICROFINANCE REVIEW • Volume VII(2) July - December 2015

but a lagging indicator. The fourth measure is based on the perceptions of hardships
and feeling of sacrifices, the degree of which is highly individual driven at the least.
Therefore, a universally applicable objective measure of over-indebtedness which is a
leading indicator of impending difficulties in servicing debt is yet to evolve. It is also a
well known empirical fact that a substantial portion of the borrowing by microfinance
clients are for consumption or consumption smoothing purposes6 which can aggravate
the problem of over-indebtedness.
Micro-lenders all over the world use four risk management measures to overcome
credit risk. They are, lending to joint liability groups and women groups, small size
loans, frequent repayment schedules and progressive lending (Armendariz & Morduch,
2007). Since lending is relatively in small size, many a time it becomes insufficient to
meet the borrowing needs of the clients and repayments start soon after disbursements,
forcing the clients to go for further borrowings to maintain the credit worthiness. This
can set off a cycle of multiple borrowing, with or without leading to over-indebtedness
in a traditional sense. It is also noteworthy that, number of loans alone is neither
a necessary or sufficient condition for deterioration in credit – worthiness of the
borrower. Therefore, presence of multiple borrowing alone need not signify a situation
of over-indebtedness, and thus cannot be taken either as a leading indicator or a proxy
for over-indebtedness. Thus, both these issues have to be studied separately.
Also relevant in the context of the current debate of over-indebtedness is the role
of growing and competitive microfinance lending in triggering multiple borrowing. As
mentioned above, certain specific and standardised features of microfinance lending
are weighed towards inducing multiple borrowing by microfinance clients. As long
as the multiple loans taken in by the clients do not result in over-indebtedness of
the borrowers, competition does no harm to the market (Lahkar, et al (2012)). But
simultaneous impact of competition on both multiple loans and over-indebtedness may
be indicative of the compromises in lending standards for the sake of promoting growth
and can be harmful for the industry in the long run. Accordingly, using the same data
set, the following model estimates the simultaneous significance of competition on
both multiple borrowing and over-indebtedness.

Model Estimation
The empirical model to be estimated as per the above conceptual framework is the
model estimating the role of competition in the microfinance markets on the number of
loans taken in by the borrowers as well as a measure of over-indebtedness. It involves
estimating the following model.
Yi = Xi + Ki………………………………………(1)
Where ‘Y’ is a measure of indebtedness and ‘X’ is a measure of competition. ‘K’ is a
vector of borrower specific factors which can influence both number as well as level of
Competition, Multiple Borrowing and Over – Indebtedness in Microfinance: An Empirical Investigation 131

indebtedness as implied by the life cycle - permanent income hypothesis of Friedman

(1957) and Modigliani (1966). The coefficient of interest here is ‘β’, which will show
the influence of competition dummy on the number of loans taken as well as the level
of indebtedness of the borrower ‘i’. Depending on the measure of indebtedness to be
regressed, the dependent variable ‘Y’ takes in different measures of indebtedness. There
are three measures of indebtedness used in the study. One of them is the monthly loan
repayment to income ratio (MRI). Higher the ratio signifies weakened ability of the
borrower to service the loan commitments and the sign of competition variable in this
case is likely to be positive, as higher competition is expected to trigger higher loan
repayment commitments. The second one, ratio of total loans outstanding as on the
date of survey to total liquid assets owned by the borrowers (LOLA). LOLA measures
total loans outstanding as a ratio of total liquid asset owned by the borrowers. LOLA is
measured as a ratio variable. In cases were reported liquid assets of the sample is zero,
the ratio is capped at the upper bound of the observed values in order to avoid division
by zero. Therefore, lower ratios than 1 imply better credit worthiness (and conversely
lower chances of over-indebtedness) of the borrower ‘i’ and the expected sign for
competition will be positive, as competition is expected to increase debt burden. Liquid
assets in this case include gold and other financial assets held by the borrowers.
The third one being the number of loans outstanding (NLO) for the borrower ‘i’.
Given the influence of competition this variable expected to show a positive sign. While
MRI indicate the capability of the borrower in servicing the loan commitments, LOLA
indicate the current solvency level of the borrower, NLO measures the number of loans
outstanding. The sample structure, data set and findings from the estimation of the
above model is given under.

Sample Structure, Data and Findings

Sample Structure
The data for the study was drawn from two townships in the district of Coimbatore
which is part of the Indian State of Tamil Nadu. As per the state of the sector report
on Indian microfinance 2013, Tamil Nadu is the state with second largest outreach
of microfinance after the state of Andhra Pradesh (Nair and Tankha, 2013). The two
townships were selected in such a way that, in one townships, known as Kavundan
Palayam, most of the active microfinance institutions in the state have their operations.
Where as in the other township, known as Ettimadai, only two banks operate their self
help groups and most households are exclusive members of one of the self help groups
(SHG). Multiple group memberships is almost non-existent in this township because
for one, it is in the outskirts of the city of Coimbatore and hence geographically a bit
difficult to service the households of this township out of the offices of the micro-
lenders located in the main parts of the city. Secondly, being in the foothills of western
132 THE MICROFINANCE REVIEW • Volume VII(2) July - December 2015

ghat ranges on which the city of Coimbatore borders on the west, the population
density is fairly sparse, making it less attractive again for the city based micro-lenders.
The near-by large private university and its auxiliary services provide employment to
most of the inhabitants of the township and thus, at least one member from each
family finds employment throughout the year. Kavundan Palayam on the other hand
is very close to the corporation borders of Coimbatore and most of the residents find
their jobs within the city, which is a fast growing tier II city in the country with a very
active construction, engineering goods, software and textile sectors. Thus, almost all
households covered in the survey earn a regular income, which makes both the markets
attractive for lenders prima facie. For the purpose of the study, sample households
from Kavundan Palayam township serve as treatment group, which is characterized by
active competition among MFIs and sample households from Ettimadai township serve
as control group which has only a few self SHGs offering memberships on an exclusive
basis. For the purposes of analysis, samples from the Kaundan Palayam township were
identified with dummy variable ‘1’ as it is a highly competitive market and the study
seeks to measure the impacts of competition. Samples from Ettimadai township are
identified with ‘0’ indicating very low levels or even lack of competition among various
microfinance providers. In the entire sample most of the households covered were
observationally identical too.
The survey method was simple random sampling which ensured that all households
in both the townships had an equal chance of being part of the survey. A total of
100 households were interviewed from both the townships put together, and after
accounting for incompleteness and lack of consistencies in information provided a total
of 92 responses were accepted from both the villages (N = 92). In the end the study
considered 52 households from treatment township and 40 households from control
township. The survey period was between 15 September 2014 to 15 October 2014, and
a preformatted questionnaire was used to collect the requisite information. Of the 92
respondents included in the survey, 82 had taken loans from one source or other and
10 respondents were non-borrowers.

Data Characteristics
Table 1 below shows the break-up of loans from Table 1: Break – up of Loans by Source
various sources reported by the respondents. Source Number of Loans
As can be seen from the above table, Microfinance loans 115
microfinance forms the main source of borrowing Loans from friends & relatives 6
for most of the respondents. The presence of the Jewel Loans 31
money lender is surprisingly marginal because of Loans from Money Lenders 8
the non-dependence of the respondent population Bank Loans 16
in agricultural and allied activities and also may be Chit Fund Loans 8
Competition, Multiple Borrowing and Over – Indebtedness in Microfinance: An Empirical Investigation 133

because of the fact that at least one member in Table 2: Loan Utilisation by Purposes
most households find regular work throughout Purpose Number of Loans
the year being close to sources of employment. Business Investments 18
Unemployment spells are largely voluntary Buying Assets 5
when the respondents decide to visit their native Buying Consumer Durables 14
villages or relatives during the festive seasons or Repaying an Old Loan 23
during spells of illness (Table 2). Children’s Education 29
The data on loan utilisation suggest that the House Construction / Repair 30
primary use of borrowing is for consumption Medical and Other Emergencies 10
purposes and is line with the findings from Social Ceremonies (Marriages etc.) 4
other such surveys7. The predominant purpose
General Household Needs 42
motivating the borrowings seems to be household
Other Miscellaneous Purposes 9
consumption needs which in direct contrast
with the implicit assumptions in the adverse selection and moral hazard models of
Ghatak (1999) and Stiglitz (1990) which form the basis of theoretical foundations of
microfinance practice (Table 3).

Findings from the Study

One major finding of significant interest in the study is that prevalence of over-
indebtedness as measured in Khandker, et al (2014) is not very clearly evidenced from
the sample that is used for the current study. Two composite measures of indebtedness,
one based on a ratio of monthly Table 3: Descriptive Statistics
income and total monthly loan Standard
Parameter Mean
repayment commitment which Deviation
serves as a flow measure and Competition dummy 0.56 0.49
Age of the household head (Years) 45 10
another one based on a ratio
Education of household head (No. of years schooling) 6 4
of total loans outstanding and Number of dependents (Number) 1.8 1.14
value of liquid assets held Monthly income (Rupees) 15939 7876
by the borrower, are used to Monthly expenses (Rupees) 9070 3732
measure indebtedness in the Consumer durable ownership (Number of items owned) 2.3 1.2
Length of stay in the same place (No. of Years) 21.31 16.41
study. Elsewhere, studies of
Income earning members (Number) 2.02 0.82
indebtedness use total assets Spending on children’s education (Rupees per month) 2405 3665
based measures rather than Non-discretionary expenses (Rupees per annum) 23015 51569
liquid assets based measure. Financial assets (Value in Rupees) 25368 50956
Due to two reasons peculiar Gold ownership (Value in Rupees) 105517 119939
Number of loans outstanding (Number) 2 1.42
for the study, a liquid assets
Loans outstanding (Value in rupees) 68188 87533
based measure is used here Monthly loan repayment (Rupees) 2820 2529
rather than total assets. One, Asset coverage ratio 11.29 20.66
as mentioned elsewhere Ratio of monthly loan repayment to monthly income 0.20 0.20
134 THE MICROFINANCE REVIEW • Volume VII(2) July - December 2015

in the paper, liquid assets consists of gold and financial asset ownership. The other
types of assets ownership normally prevalent among the households are the home
ownership and consumer durables. Because of the subjectivity associated with
valuation of house property, issues related with title deeds of land as well as small
and contagious parcels of land, valuation becomes extremely difficult and inaccurate.
Liquid asset ownership provides a much more accurate measure and using liquid
assets alone to measure indebtedness trades off completeness for the sake of accuracy
(Table 4).
Table 4: Levels of Indebtedness
Indebtedness Measure Number of Households with Loans Outstanding Number of Households Percentage of Monthly
as a percentage of Liquid Assets Loan Repayment to Monthly Income
Scantily indebted (Less than 20%) 31 (33.70%) 58 (63.04%)
Moderately indebted (20% to 40% 12 (13.04%) 19 (20.65%)
Over-indebted (40% to 60%) 10 (10.87%) 11 (11.96%)
Severely indebted (more than 60%) 39 (42.39%) 4 (4.35%)
Total 92 92

Two, nearly 78% of respondents in the sample live in own houses. The average size of
the houses is about 750 square feet and it occupies the entire parcel of the land owned
by the family. Ownership of a second house or another parcel of land is non-existent
among the entire sample respondents. Thus, the usage value of the house for the family
will be much more than the resale value of the property, and counting the house as
collateral to be liquidated in times of distress will be of no practical significance.
Table 4 shows that 42.4% of the sample respondents fall in the category of severely
over-indebted if indebtedness is measured as a ratio of loans outstanding over liquid
assets. Whereas, only 4.4% of the households fall in the same category if indebtedness
is measured as a ratio of total monthly loan repayment commitments to total monthly
income. The difference between the measures may be accounted by the prevalence of
gold loans among the respondents. Nearly 31% of the respondents are reported to be
having a gold loan current at the time of the survey. The fairly wide spread prevalence
of gold loans is also in line with the growth in gold loans8 reported by Non-Banking
Finance Companies (NBFC) and banks in the recent past. Moreover, the ‘interest only’
type of gold loan offered by many lenders is an attractive proposition for the lower
income people compared to equated monthly installments (EMI) based loans, since it
substantially reduces the monthly outflow required for loan servicing9. This can clearly
explain the difference in severe indebtedness observed between the criteria based on
assets and income. Severe indebtedness under income based criteria is substantially low
compared to asset based criteria because of the lower monthly outflow on gold loans.
This lower monthly outflow is without factoring in the need for principal repayments
in the ‘interest’ only gold loans.
Competition, Multiple Borrowing and Over – Indebtedness in Microfinance: An Empirical Investigation 135

Findings of ordinary least squares regression using dependant variables of number

of loans outstanding, monthly loan repayment to monthly income and ratio of liquid
assets to total loans outstanding as on the date of the survey are reported in Table 5.
Table 5: Results of OLS Regression of Competition Dummy on Various Measures of Multiple Loans and Indebtedness
Ratio of Monthly Loan Ratio of Total loans Outstanding
Variables Number of loans Outstanding
Repayments to Monthly Income to Liquid Assets
1.336422*** 0.166672*** 0.470893**
Competition
(0.30153) (0.046896) (.241121)
-0.008 0.001504 -0.03287***
Age of Household Head
(0.013037) (0.002028) (0.010425)
-0.00746 -0.00067 -0.04385*
Education of Household Head
(0.03222) (.005011) (0.025765)
0.147054 0.015516 0.021093
Consumer Durable Ownership
(0.128175) (0.019934) (0.102496)
-0.000001 -0.000015** -0.0000092*
Total Monthly household expenses
(0.00003) (0.00000741) (0.0000381)
-0.00003 -000000494 0.0000143
Education expenses
(0.00004) (0.0000775) (0.000039)
0.0000025 0.00 0.0000
Non-Discretionary Expenses
(0.0000026) (0.00) (0.0000)
R – Squared .27 .15 .18
F Value 4.410453 2.07959 2.70
Significance of F Value .000327 .05456 .014069
Note : ***1% significant level; **5% significant level; *10% significant level

As can be seen from the OLS regression, the competition dummy is significant for all
measures of indebtedness and for two of the regressions using dependant variables of
number of loans and ratio of monthly loan repayment to monthly income it is significant
at 1% level. For the regression using the dependant variable of total loans outstanding
to liquid assets, it is significant at 5%. For the dependant variable number of loans
outstanding, none of the demand side factors seems to be a significant determinant.
This shows that the supply side factors play a crucial role in determining access to
credit. The signs of all the demand side variables are in the expected lines except total
monthly household expenses. But it is not statistically significant either, to warrant any
serious investigation. The other variable of significance apart from competition dummy
in the case of total loan repayments to monthly income is the total monthly household
expense. The sign here is negative indicating that as the monthly household expense
increases the monthly loan repayment as a ratio to monthly income comes down, but
by an amount which is very close to zero. In the case of the third regression also,
competition dummy is significantly associated with ratio of loan outstanding to liquid
asset but at 5% significance levels. Age, education levels and total monthly expenses
136 THE MICROFINANCE REVIEW • Volume VII(2) July - December 2015

of the household seems to be significant drivers in this case. While the sign of age
and education levels are in the expected lines, that of household expenses are in the
opposite direction, but here again with a very low impact. All the three models exhibit
reasonable goodness of fit as shown by the F values and significance.

Discussion
The simultaneous significance of the competition dummy in all the regression models
signifies the importance of competition in fuelling indebtedness. The coefficients are
significantly different from zero with competition associated with 30% more number
loans, 16% higher burden on monthly repayment and 47% increase in the ratio of loans
outstanding to liquid assets. Needless to say that all the signs are in expected lines. The
measure of indebtedness, which shows signs of significant over-indebtedness in the
sample data is that of loans outstanding as a ratio of liquid assets. On this regression, it
is noteworthy that apart from competition dummy, the other variables of significance
are age of the household head and education levels of the household head. The signs of
both the variables are in expected lines. With age showing negative relationship with
ratio of loans outstanding to liquid assets, this is indicative of liquid asset accumulation
as the borrower approaches towards his old age, or reducing his debt burden. In the
case of education also, the negative relationship signifies that as the number of years of
schooling increases, the chances of the person being excessively indebted falls.
In the regression using number of loans outstanding, the signs of all the demand side
variables are in the expected lines, except that of total monthly household expenses
and children’s education expenses. Most of the households in the sample have only
school going children and school education in the state of Tamil Nadu being heavily
subsidized, those families do not spend significant amounts for the children’s education.
A few of the families do have children studying in private engineering colleges of the
state, but their proportion in the sample may not be large enough for the variable to
have a significant influence on the dependant variable. Non-discretionary expenses
included in the sample are mostly in the nature of emergencies, largely medical and
other emergencies. Combined influence of higher monthly incomes and interest only
gold loans may explain the negative sign of monthly income in the loan repayment to
monthly income regression, whereas, higher financial and gold assets may explain the
negative sign of the variable in the regression of total loans outstanding to liquid assets.

Conclusion
Theoretically, microfinance is expected to reduce the dependence of its borrowers
on other external sources of credit, though findings from the current study points to a
direction which is a bit contrary. Considering the fact that 82 sample respondents among
a total of 92 had taken any type of loans, the average number of loans contracted by a
Competition, Multiple Borrowing and Over – Indebtedness in Microfinance: An Empirical Investigation 137

typical borrower is 2.24 where as the average number of microfinance loans contracted
by her is 1.40 which is well below the regulatory sanction of 210 loans per borrower.
This shows that in terms of number of loans contracted nearly 40% (69 out of 184)
is from non-microfinance sources. As many as 52 sample respondents had contracted
loans from more than one source signifying multiple source borrowing in a relatively
larger section of the sample. Another noteworthy conclusion from the survey is that
competition from micro lenders seems to be strongly associated with a measure of
multiple borrowing as well as both the other measures of indebtedness used in the
survey. Simultaneous significance of competition dummy on both multiple borrowing
as well as indicators credit worthiness seems to suggest that level of competition
may be leading to dilution of lending standards, a finding which most studies on the
crises that the industry has gone through in the past shares with the current study
(Krishnaswamy, 2007 and 2011; Mader, 2013; Chen, et al (2010)). Very high level of
significance for the competition dummy associated with number of loans contracted by
the borrowers point to the conclusion that, borrowers with MFI loans also access more
number of other sources of credit than borrowers without MFI loans. One implication
of this finding may be that, MFI borrowers may be forced to depend on other source
of loans to maintain servicing of their MFI loans due to the rigid nature of repayment
schedules of MFI loans. Considering the fact that a large number of borrowings are for
non-income generating purpose, this may not be a conclusion which is out of place.
Seen in the context of 100% recoveries reported by almost all MFIs, this may point to a
situation of repayment rigidities of microfinance loans forcing the borrowers to look for
other sources of loans to keep meeting the microfinance loan repayment commitments.
This can be an important area of further enquiry which can facilitate a more meaning
role for microfinance industry in the society.

Policy Implications
While the debate on what actually constitute over-indebtedness may take a long time
to solve, the industry and policy makers can ill afford to ignore the trends, relationships
and implications highlighted by the study. Hence, the immediate imperative on the part
of the practice and policy makers is to regulate competition and modify operational
practices in such a way as to make the industry more flexible towards the borrower
needs without compromising on the risk parameters. This may be achieved by a more
flexible repayment regime which will not force the borrowers to look for other sources
of credit to service a microfinance loan. The recent regulatory steps of increasing the
loan exposure per client11 as well as increasing the tenure of repayment12 to two years
instead of the earlier requirement of one year, may be a step in the right direction. The
industry may be brought under strict supervision in the lines of banking supervision in
order to ensure that such relaxations in operational practices will not entail increased
138 THE MICROFINANCE REVIEW • Volume VII(2) July - December 2015

risk taking by the institutions.

Another highlight of the study may be a need for a comprehensive approach to
regulate micro-credit markets, rather than regulating only the microfinance institutions
at the exclusion of others, as many other players like NBFCs offering gold loans are also
becoming active in the market, targeting the same clientele.
NOTES

1. For instance, see the website http://www.microfinance-in-crisis.org/

2. For instance, please see http://www.cgap.org/blog/over-indebtedness-microfinance-
%E2%80%93-who-should-bear-risk;http://www.e-mfp.eu/blog/microfinance
debt-and-over-indebtedness-juggling-money-part-i;http://www.e-mfp.eu/
blog/microfinance-debt-and-over-indebtedness-juggling-money-part-ii;http://
www.mfc.org.pl/en/programs/overindebtedness-microfinance-clients;http://
microfinanceceoworkinggroup.org/?p=748;http://www.mfc.org.pl/en/content/
overindebtedness
3. http://www.csfi.org/files/Microfinance_Banana_Skins_2012.pdf
4. A self help promoting institution based in the state of Andhra Pradesh
5. http://www.accessdev.org/downloads/state_of_the_sector_2011.pdf
6. For instance, see: http://rbidocs.rbi.org.in/rdocs/PublicationReport/Pdfs/
YHMR190111.pdf
7. For instance, see Center for Microfinance Focus Note: MULTIPLE LOANS: HOW
FREQUENTLY DO RURAL POOR OPT FOR MULTIPLE BORROWING? (http://www.
ifmrlead.org/cmf/publications/focus-note/)
8. For instance see http://rbidocs.rbi.org.in/rdocs/PublicationReport/Pdfs/
RWGS02012013.pdf, page 90.
9. Please see http://www.business-standard.com/article/pf/don-t-be-dazzled-by-gold-
loans-111100200003_1.html for a discussion on ‘interest only’ loan
10. https://rbi.org.in/scripts/FAQView.aspx?Id=102
11. http://www.business-standard.com/article/finance/rbi-raises-borrowing-limit-of-
mfi-clients-115040800028_1.html
12. https://rbi.org.in/scripts/FAQView.aspx?Id=102

REFERENCES

Armendariz, B and J Morduch (2007): The Economics of Microfinance, New Delhi: Prentice
- Hall of India Private Limited.
Betti, G, N Dourmashkin, M Rossi and Y P Yin (2007): “Consumer Over-Indebtedness in
the EU: Measurement and Characteristics”, Journal of Economic Studies, pp. 136-156.
Chen, G, R Stephen and R Xavier (2010): Growth and Vulnerabilities in Microfinance,
Washington DC: CGAP.
Deepthi, K and S Gachot (2011): Multiple Loans: How Frequently Do Rural Poor Opt for
Multiple Borrowing, Chennai, India: Center For Microfinance.
Friedman, M A (1957): Theory of Consumption Function, New Jersey: Princeton University
Press.
Ghatak, M (1999): “Group Lending, Local Information and Peer Selection”, Journal of
Development Economics, pp. 27-50.
Competition, Multiple Borrowing and Over – Indebtedness in Microfinance: An Empirical Investigation 139

Ghate, P (2007): “Consumer Protection in Indian Microfinance: Lessons from Andhra

Pradesh and the Indian Microfinance Bill”, Economic and Political Weekly, Vol. 42, No.
13, pp. 1176 - 84.
Guerin, I, M Roesch, Venkatasubramanian and S Kumar (2011): The Social Meaning of
Over - Indebtedness and Credit Worthiness in the Context of Poor Rural South Indian
Households, RUME Working Paper No 2011 – 1.
Khandker, S R, R Faruqee and H A Samad (2014): “Are Microcredit Borrowers in
Bangladesh Over-indebted?” Institute of Microfinance Working Paper No 26.
Krishnaswamy, K (2007): “Competition and Multiple Borrowing in the Indian Microfinance
Sector”, Working Paper, Centre for Microfinance, Chennai, IFMR.
------ (2011): Some Insights into Over - Indebtedness in India, Washington DC: CGAP.
Lahkar, R, V Pingali and S Sadhu (2012): “Does Competition in the Microfinance Industry
Necessarily Mean Over - Borrowing?” Working Paper No. 2012 - 12-01, Indian Institute
of Management, Ahmedabad.
Liv, D (2013): Study on the Drivers of Over-Indebtedness of Microfinance Borrowers in
Cambodia: An In-depth Investigation of Saturated Areas, Cambodia Institute of
Development Study.
Mader, P (2013): “Raise and Fall of Microfinance in India: Andhra Pradesh Crisis in
Perspective”, Strategic Change, pp. 47-66.
Maurer, K and J Pytkowska (2011): “Indebtedness of Micro-credit Clients in Bosnia and
Herzegovina: Results from a Comprehensive Field Study”, Frankfurt: European Fund
for South East Europe.
Modigliani, F (1966): “The Life Cycle Hypothesis of Saving, Demand for Wealth and
Supply of Capital”, Social Research, pp. 160-217.
Nair, T and A Tankha (2013): Microfinance in India: State of the Sector Report, Sage
Publications, New Delhi.
Pytkowska, J and S Spannuth (2011): “ndebtedness of Microcredit Clients in Kosovo,
Frankfurt: European Fund for South East Europe.
------ (2012): The Risk of Over-Indebtedness of Microfinance Clients in Azerbaijan, Frankfurt:
European Fund for South East Europe.
Shicks, J (2011): Over - Indebtedness of Micro Borrowers in Ghana, Centre for Financial
Inclusion: Publication No.15.
Shicks, J and R Rosenberg (2011): Too Much Micro-credit? A Survey of the Evidence on
Over-Indebtedness, Washigton DC: CGAP Occasional Paper No 19.
Stiglitz, J E (1990): “Peer Monitoring and Credit Markets”, The World Economic Review,
pp. 351-366.
Vogelgesang, U (2003): “Microfinance in Times of Crisis: The Effects of Competition, Rising
Indebtedness, and Economic Crisis on Repayment Behavior”, World Development, pp.
2085–2114.
 Determinant of Repayment
Problems of Microfinance
Clients — A Case Study
- Vinita Kalra*

The paper investigates Abstract

the determinants Microfinance clients manage to repay their loans on time
of loan repayment because they go through unacceptably high personal sacrifices.
problems of Instead of delaying or stopping repayments when idiosyncratic
microfinance clients in shocks hit and debt service becomes unmanageable, borrowers
the research area. By absorb these shocks with personal suffering. In this case, what
using logistic regression looks as a success from a risk management point of view is a
model, this paper finds serious concern from a social point of view.
that the clients’ socio- This paper investigates the determinants of loan repayment
economic characteristic, problems of microfinance clients in the research area. By using
loan characteristics and logistic regression model, this paper finds that the clients’
business characteristics socio-economic characteristic (education, housing index,
are the factors annual household income), loan characteristics (average loan
contributing to micro- outstanding, group size, repeated borrowing) and business
credit loan repayment characteristics (mismatch of cash flow pattern and repayment
problems among frequency) are the factors contributing to micro-credit loan
microfinance clients. repayment problems among microfinance clients.

Introduction
With financial inclusion emerging as a major policy
objective in the country, microfinance has occupied centre
stage as a promising conduit for extending financial services
to unbanked sections of population. In India, a range of
institutions in the public sector as well as the private sector,
offer microfinance services. These can be broadly placed
into two categories namely, formal institutions and semi-
formal institutions. The former category comprises of apex
development financial institutions, commercial banks, regional
rural banks and cooperative banks that provide microfinance
* Assistant Professor,
Rajarshi School of services in addition to their general banking activities and on
Management and
Technology, Varanasi, UP. Key Words: Microfinance, Loan Repayment Problems
Determinant of Repayment Problems of Microfinance Clients 141

the other hand, semi-formal institutions that provide microfinance services exclusively
are referred to as microfinance institutions (MFIs). While both private and public
ownership are found in the case of formal financial institutions offering microfinance
services, the MFIs are mainly in the private sector and follow Grameen1 inspired Joint
Liability Group (JLG) model. In this model the loan is given to the individual (usually
by the MFI),backed by the group guarantee; and an individual credit history is created,
even though it may be skewed by the group guarantee scheme (An Intellicap white
paper, 2010).
The greatness of the JLG model is in the simplicity of design of products and delivery.
The process of delivery is scalable and the model could be replicated widely. However,
the JLG model works only under certain assumptions. As all the loans are only for
enterprise promotion, it assumes that all the poor want to be self-employed. The
repayment of loans starts the week after the loan is disbursed – the inherent assumption
being that the borrowers can service their loan from the ex-ante income. Both these
assumptions could be questioned (Mahajan, 2003).
Probably the most important rationale for group lending is the information and
monitoring advantages that member based financial institutions at the community
level have compared to individual contracts between bank and borrower. The main
argument is that – compared to socially and physically distant bank agents- group
members obtain information regarding the reputation, indebtedness and wealth of
the loan applicant and about his or her efforts to ensure the repayment of the loan
at a lower cost. On the other hand, several factors may undermine the repayment
performance of group lending under joint liability. First, repayment incentives for a
good borrower will vanish under JLG when the expectation is that a significant number
of peers will default. Second, under group based contract, the risk of default by an
individual is shared by the individual’s peers. To avoid this adverse selection of risky
projects, the peers can opt to assess the riskiness of each other’s projects (Zeller, 1998).
Furthermore, group members appear to be in a better position to assess the reason for
default and to offer insurance services to those members experiencing shocks beyond
their control, while imposing sanctions on willful defaulters (Zeller and Sharma, 1998).
Although empirical evidence suggests that repayment records of group-based credit
systems are much better than those of traditional commercial banks, economic theory
still suggests situations where groups may actually perform poorly. From a policy point
of view, it is important to know more about these types of situation so that changes can
be made in institutional design to minimise their impact.
This paper aims to empirically analyse the factors responsible for loan repayment
problems of MFI borrowers in the research area. The examination of the determinants
of the loan repayment problem among surveyed MFIs borrowers would benefit these
institutions in understanding the factors that lead borrowers miss their loan repayments
142 THE MICROFINANCE REVIEW • Volume VII(2) July - December 2015

or to default in the future. This understanding may improve their repayment collection
scheme and future profit margins.

Literature Review and Research Objectives

Microfinance continues to play a key role in approaches to poverty alleviation
around the world, both in policy and academic discussions and in practice. Despite the
attention paid to microfinance, some aspects of the design of credit contracts for small
uncollateralized loans remains a bit of a mystery. Much early academic work focused
on joint liability, small groups of borrowers being held jointly liable for one another’s
repayments, as the key to high loan recovery rates (Stiglitz and Varian, 1990; and
Ghatak, 1999).
The capability of borrowers to repay their micro-credit loans is an important issue
that needs attention. Research has shown that a group lending mechanism is effective
in reducing borrower defaults (Armendariz de Aghion, 1999). In group lending, the
loan is secured by the co-signature of members within the group and not by the MFIs.
Each member will put pressure on the others in the group to meet the loan repayment
schedule. Thus, group sanction is important in discouraging defaults among members
in microfinance (Van Tassel, 1999).
The determinants of loan repayment performance have been variously defined and
empirically identified in the literature. Bhatt and Tang (2002) list a set of influential
factors on the loan repayment performance such as gender, age, experience the
borrower has had in the same sector, education, income, business sector, formality
of the borrower’s business, social ties of the borrower, group homogeneity, payback
period, type of loan (cash or in kind), loan size, proximity of the borrower’s business to
the lending agency, and motivation of the borrower for receiving future loans.
Studies show that female borrowers have lower risk of default and consequently
have better loan repayment performances compared to male borrowers (Roslan and
Abd Karim, 2009). However, Godquin (2004) run a study and conclude that female
and male borrowers do not show a significantly different repayment performance
compared to male borrowers. Besides, loan repayment performance is also found to
depend on the age of the borrower (Mokhtar et al., 2012). Due to lack of experience,
borrowers at the age of 18-25 have higher default risk compared to older borrowers.
Moreover, research shows that educated borrowers have lower default risk (Matin,
1997; Khandker et al., 1995; Bhatt and Tang, 2002). Education supports borrowers in
two ways. First, better skills in mathematics and accounting can assist borrowers in
their business activities. Second, educated borrowers have higher chance of finding
a second job or part time job. So, they can pay back their loans with fewer problems
when they face difficulties (Bhatt et al., 2002).
Motivation is also among the parameters that affect loan repayment. MFIs generally
Determinant of Repayment Problems of Microfinance Clients 143

do not ask for significant collateral, so the main motivation for loan repayment is the
borrowers’ expectation for receiving future loans (Field and Pande, 2008). A further
motivational element capable of potentially influencing the loan repayment performance
is also related to the loan size. Evidence in the literature is somewhat contradictory in
this regard, some consider loan size as a factor relevant for repayment performance
(e.g., Godquin,2004), while others suggest that loan size does not crucially influence
repayment performance (Matin,1997). This paper also provides further evidence on
this somewhat mixed literature.
The typical loan contract requires repayment in small, frequent instalments beginning
immediately after origination. Most lending contracts require weekly repayment, and
there is a pervasive sense among practitioners that frequent repayment is critical to
achieving high repayment rates. This belief is captured well in the following observation
by Muhammad Yunus:
“It is hard to take a huge wad of bills out of one’s pocket and pay the lender. There
is enormous temptation from one’s family to use that money to meet immediate
consumption needs...Borrowers find this incremental process easier than having to
accumulate money to pay a lump sum because their lives are always under strain,
always difficult.”(Yunus, 2013, p. 114).
Hence, if a potential borrower needs a loan and also desires not to default, rigid
repayment rules have been found to be helpful for this borrower. Based on this sort of
argument, Bauer et al. (2012) examined the relationship in India between behavioural
weakness and participation in microfinance. Using data obtained from lab experiments
in the field, they found that present-biased women are more likely to borrow from
a local MFI to meet their loan demands. This result suggests that, when taking into
account the behavioural aspects of clients, a rigid schedule with frequent repayments
should be supported as a useful commitment device.
Barman et al.(2009) found few instances of borrowing from moneylenders to repay
the outstanding debt from MFIs during the survey conducted in north India. Such
cases illustrate the difficulties MFI clients face, when they have unproductive financial
requirements or they are compelled to ensure prompt and regular loan repayments
through further borrowing from even money lenders. This makes poverty worse in the
short run, and makes it harder to escape from poverty.

Objectives of the Study

Initially, the researcher wanted to examine the determinants of loan defaults among
the borrowers from three surveyed MFIs. However, two out of three MFIs show
Portfolio at Risk2 (PAR) as nil. Therefore, as an alternative, in the survey questionnaire
borrowers were asked whether they had to arrange (by borrowing from other sources
or selling assets) due loan repayments more than four times since they received the
144 THE MICROFINANCE REVIEW • Volume VII(2) July - December 2015

micro-credit loans. This approach is similar to Sexton (1977), who classified borrowers
who missed any repayments as bad borrowers. It is believed that the borrowers who
faced problems in repaying their loans are more likely to default in the future.
The main objective of this study is to analyze and identify the determinants of loan
repayment problems of the borrowers in MFIs and specific objectives are:
➢ To analyze and identify the major socio-economic factors that influence loan
repayment problems of MFI borrowers.
➢ To investigate and different loan and business related factors that affect loan
repayment problems of MFI borrowers.

Data Collection and Research Methodology

Data Collection
This study is conducted in the rural area of Varanasi district of Uttar Pradesh, India
on account of the fact that most of the microfinance activities in India currently take
place in rural area. The MFI clients’ population in the Varanasi district is considered as
universe for the proposed study. Further the scope if this study is limited only to MFIs
that follow Grameen Group Model and are working in the private sector for offering
services to its clients in the rural area of Varanasi district.
The data for the present study is collected in respect of three MFIs operating in
Varanasi district namely, Utkarsh Microfinance Pvt. Ltd., Cashpor Micro-credit and
Kashi Micro-credit out of which the first one was working as NBFC ( for profit) whereas
the other two were Section 25(Non Profit) companies. The sampling frame is chosen as
clients having outstanding loan from MFI/MFIs in the rural area. The estimated number
of total MFI clients in the selected villages was 6384 at the time of data collection. Four
out of eight development blocks and 15 villages per block were randomly selected and
finally MFI clients were selected as described below. The sample size of MFI clients was
determined by using the following formula:
n = N/(1+Ne2)
In selecting client households, it was not possible to randomly select seven households
from each village, because list of all the MFIs’ clients in selected villages was not
available. However, in order to ensure that the sample did not suffer from selection bias
and enjoyed a level of randomization, the survey was conducted in a minimum of four
hamlets per village. Additionally, no two respondents lived next door to each other; in
other words, every other house was skipped. Besides, only those clients were surveyed
who belong to at least one of the three MFIs selected for the study. After preliminary
examination, 240 out of 380 were found completed and valid that constituted 63.2%
response rate for the study. The data from MFI clients were collected through pre-
tested, well structured questionnaire on the demographic profile, borrowing details
and different aspects of loan repayment problems they faced.
Determinant of Repayment Problems of Microfinance Clients 145

All the three surveyed MFIs in Varanasi district (MFI1, MFI2 and MFI3) have similar
types of group lending systems for the tenure of 46 weeks with weekly repayment
schedule providing loans only to women. Though MFI1 and MFI2 also offer monthly
repayment schedule but during Continuous Group Training (CGT), clients are
encouraged for opting weekly schedule. MFI2, however, offers one week grace period
before repayment starts. MFI2 is also particular about client targeting and offer loans
to the poor and as well as hard-core poor women, other two MFIs give loans to both
poor and not-so-poor women borrowers. All the three MFIs sell credit life insurance
of third party providers (Birla Sun Life, Bajaj Allianz and LIC) that are offered to the
clients on a compulsory basis. The single premium amount charged is noted down on
the loan passbook.
Besides, all the surveyed MFIs adopt NTAP (No Tolerance of Arrears Policy) to ensure
that under every condition the
instalment collection should be Table 1: Loan Terms of Sample MFIs
MFI Names MFI 1 MFI 2 MFI 3
made the same day with the belief
that if the NTAP is implemented Loan Amount (Rs) 6000-10000 2000-8000 4000-10000
Tenure 46 Weeks 47 Weeks 46 Weeks
fully and consistently right from
Moratorium Period N/A 1 WEEK N/A
the time of the first arrears, it will
Repayment Schedule Weekly Weekly Weekly
prevent their spread and, before
Portfolio At Risk (PAR) NIL 0.08% NIL
long, result in their elimination, Source: Field Survey conducted in 2012
due to the peer group pressure
generated on the defaulters. The Table 1 presents a comparison of terms that three
surveyed MFIs offer to their clients.

Methodology
For determining the influence of socio economic, micro-credit loan and business
characteristics on the repayment problems of MFI clients, descriptive and econometric
analyses are done. The descriptive analysis made use of tools such as mean, standard
deviation, percentage, and frequency distribution. In addition t-test and chi square
statistics were employed to compare the group of respondents facing problems
regarding repayment and those who never faced repayment problems with respect to
some explanatory variables. The determinants of the loan repayment problem model
were analyzed using logistic regression.

Dependent Variable
The dependent variable for this model takes a value of “1” for borrowers who had to
borrow from other sources due loan repayment instalment more than four times in the
last year since they received the micro-credit loan and “0” if they had such problems
less than four times.
146 THE MICROFINANCE REVIEW • Volume VII(2) July - December 2015

Independent Variables
The socio-economic, loan and business related characteristics of the respondents such
as age, educational level, housing index, annual household (hh) income, dependency
ratio, disbursement lag, total amount of loan outstanding at the time of survey, number
of loans outstanding, loan diversion, repeated borrowing, shortage of money to run the
business and cash flow pattern of business of the two groups (facing and not facing
repayment problems) were analyzed by using descriptive statistics.

Results and Discussion

Descriptive Analysis
The socio-economic (age, educational level, housing index, annual hh income,
dependency ratio), loan (disbursement lag, total amount of loan outstanding at the
time of survey, number of loans outstanding, loan diversion, size of joint liability group,
repeated borrowing) and business related characteristics of the respondents (cash flow
pattern of business, shortage of money to run the business) of the two groups(facing
and not facing repayment problems) were analyzed by using descriptive statistics.

Socio-Economic Characteristics of Respondents

In the Table 2 the total sample has been shown according to age groups of respondents
and if they face problems while repaying the due instalment of micro-credit. The
proportion of respondents who face problem in repayment was highest in the age group
of 31-40 years by constituting 47.4% of respondents. The lowest problems occur in the
Table 2: Age, Education Level, Housing Index and Annual Household Income of Respondents
Variables Variable class No Repayment Problem Yes Sometimes Total sample 2 Value
(N=86) (N=154) (N=240)
Age (in years) 21-30 31 36.1% 56 36.4% 87 36.3% 1.076
31-40 45 52.3% 73 47.4% 118 49.2% P=.584

41-50 10 11.6% 25 16.2% 35 14.6%

Formal Illiterates 37 43.0% 93 60.4% 130 54.2% 7.173
Education Level Class 1-5 21 24.4% 30 19.5% 51 21.3% P=.028**

Class 6-12 28 32.6% 31 20.1% 59 24.6%

Housing Index 3 20 23.3% 45 29.2% 65 27.1% 13.485
(Indicator of poverty) 4 5 5.8% 26 16.9% 31 12.9% P=.004**

5 61 70.9% 83 53.9% 144 60.0%

Annual Income Group < 50000 16 18.6% 86 55.8% 102 42.5% 41.633
(Rs.) 50000-1 lakh 28 32.6% 45 29.2% 73 30.4% P=.000***

1-2 lakh 35 40.7% 19 12.3% 54 22.5%

>2 lakh 7 8.1% 4 2.6% 11 4.6%
Notes: *Significant at 10% probability level, **Significant at 5% probability level, ***Significant at 1% probability level
Source: Field Survey conducted in 2012.
Determinant of Repayment Problems of Microfinance Clients 147

age group of 41-50 years representing 16.2% because as age of borrowers increase they
acquire experience in business management that enable them to manage the repayment
better. However, based on chi-square value of the sample taken, it can be said that the
relationship between age group and ability to manage repayment has not been found
significant at 5% level. Almost similar proportions of age groups are found in the group
of respondents who claim that they never faced repayment problems.
As seen in Table 2, from the total respondents, 54.2% respondents were illiterates,
21.3% respondents were educated up to primary school (Class 1-8), while 24.6%
respondents had taken education up to class 12 (Class 6-12). The formal educational
level of those respondents who faced repayment problems were: 60.4% illiterates, 19.5%
respondents educated up to primary school (Class 1-5) and 20.1% respondents from
class 6-12, while for those who never faced any repayment problem, the proportion is
43%, 24.4%, and 32.6% respectively. Statistically, the chi-square results also confirmed
the presence of significant association between educational level and loan repayment
problems at 0.05 significance level (X2= 7.173, p = .028). This indicates that the level
of education and dependant variable has direct relationship. Education has positive
implication on loan usage and managing the business or using loan for income
generating activities.
Housing Index3 (poverty indicator) was found inversely and significantly related to
repayment problems at 5% significance level (X2=13.485 and p=.004). This implies
that the poorer the clients, the more difficult it is for them to repay due instalments of
micro-credit.
A household may have different sources of income and more than one household
member may contribute to it. Hence the researcher tried to enquire about each and
every source of income of the household and summed it up to calculate the annual
household income. The Annual household income has been divided into four groups
i.e., less than Rs. 50,000, Rs. 50,000 to Rs. 1 lakh, Rs. 1 to 2 lakh and more than Rs. 2
lakh per annum.
The chi square value of 41.633 (significant at 1% level) confirms the significant
association between annual income and repayment problem faced by respondents.
More than 80% of respondents, who belong to the income level of less than Rs. 50,000
per annum, find it difficult to repay the loan instalments on time. This percentage
drops as we proceed towards higher income groups.
Dependency ratio is calculated as number of children as a proportion of total number
of members in a household. In general, the higher the dependency ratio, lower would be
the capacity to repay instalments due every week and greater would be the repayment
pressure faced by the client because households with lower risk-bearing capacity would
want to avoid the loss of future borrowing privileges.
148 THE MICROFINANCE REVIEW • Volume VII(2) July - December 2015

Table 3: Dependency Ratio

Variables No Repayment Problem Yes Sometimes Total sample t-test
(N=86) (N=154) (N=240)
Mean SD Mean SD Mean SD
Dependency Ratio (proportion of children to 0.431 0.190 0.435 0.177 0.433 0.182 .161
total household members) P=.873
Source: Field Survey conducted in 2012

However, the chi square result shows that the association between dependency ratio
and loan repayment problem is not significant as shown in Table 3.
Loan (Micro-credit) Characteristics
In this section, six micro-credit related variables that were hypothesized to be
important determinants of repayment performance of microfinance clients are
included. It has been attempted to see the extent to which these variables explain the
level of repayment problems faced by microfinance clients. The variables considered
are Loan diversion for unproductive purposes, number of outstanding loans at the time
of survey, total loan amount outstanding, size of the joint liability group, time lapse
between loan application and its disbursement and repeated borrowing.
Table 4: Loan Diversion, No. of Outstanding Loans and Repeated Borrowing
Variables Variable class No Repayment Yes Sometimes Total sample 2 Value
Problem (N=86) (N=154) (N=240)
Loan Diversion No 75 87.2% 114 74.0% 189 78.8% 5.731
Yes 11 12.8% 40 26.0% 51 21.2% P=.017**
No. of outstanding Single 54 62.8% 74 48.1% 128 53.3% 4.816
loans Multiple (>=2) 32 37.2% 80 51.9% 112 46.7% P=.028**
Repeated Borrowing No (First Time Borrowers) 47 54.7% 88 57.1% 135 56.3% .139
Yes (Repeated Borrowers) 39 45.3% 66 42.9% 105 43.8% P=.709
Note: **Significant at 5% probability level
Source: Field Survey conducted in 2012

With the relation to loan diversion, 78.8% of respondents utilized it for income
generating purposes, while 21.2% of respondents diverted the loan for non-income
generating or consumption purposes. Sixty percent (114 out of 189) of respondents who
utilized the loan for intended purposes of business were found as facing repayment
problems, whereas, this proportion is 78.4% (40 out of 51) for those who have diverted
the loan. Statistically, chi-square result confirms that there is significance association
between loan diversion and loan repayment at 5% (X2=5.731, P=.017*).
In terms of sufficiency of loan size, loan amount was found sufficient by 53.3% of the
respondents, while the remaining 46.7% complained that it was not sufficient for their
intended purpose, hence borrowed from other MFIs. Out of those respondents who had
taken multiple loans, 71.4% (80 out of 112) were facing repayment problems and the
rest 28.6% respondents never faced any repayment problems. On the other hand, out of
Determinant of Repayment Problems of Microfinance Clients 149

those respondents who had taken single loans, 57.8% were facing repayment problems
and the rest 42.2% respondents did not face any repayment problems. Statistically, chi-
square result reveals the significant association between number of outstanding loans
and loan repayment problems at 5% significance level (X2=4.816, at p=028).
Sixty As much as 65% (88 out of 135) of the first time borrowers faced loan repayment
problems whereas the percentage of the respondents who were repeated borrowers
and faced repayment problems was found as 62.8%. This implies that if client borrow
loan for the number of rounds, then they become aware of obligation and responsibility
on loan usage as well as repayment more than those who are the first time borrowers.
However, the chi square value between these two groups was statistically found
insignificant at 5% level (Table 4).
Total loan outstanding is the total value of the loan (Rs.) borrowed from different
MFIs/formal sources. It has been hypothesised that greater the loan amount outstanding,
the greater the probability of repayment problem. The mean loan outstanding
(Rs.23203.49) for the group having repayment problems has been found more than the
mean loan outstanding for the group who never faced repayment problems. The t-value
has been calculated as significant at 1% level and therefore supports the hypothesis
(Table 5).
Table 5: Loan Amount, Group Size and Disbursement Lag
No Repayment Problem Yes Sometimes Total Sample
t-test
Variables (N=86) (N=154) (N=240)
Mean SD Mean SD Mean SD
5.193
Total Loan outstanding (Rs) 16208 7250 23203 11252 20697 10537
P=.000***
1.564
Group Size (in number) 18.95 3.060 18.31 3.12 18.54 3.11
P=.120
-1.807
Disbursement lag (in days) 17.33 13.70 21.14 16.71 19.78 15.77
P=.072*
Note: *Significant at 10% probability level, **Significant at 5% probability level, ***Significant at 1% probability level
Source: Field Survey conducted in 2012

Group Size is equal to number of members in a joint liability group. The hypothesis is
that bigger the group, the more likely it is that information flows are imperfect between
members. Hence, problems arising out of asymmetric information make monitoring
and enforcement costly and less effective. But in this study, group-size has been found
negatively associated with the repayment problems i.e., bigger the group size, lesser
the problems perceived by respondents. When respondents were asked where do
they arrange money from when facing the repayment problems, more than 60% said
that they had borrowed from relatives or friends. And the other important response
(16.3%) was that other group members make repayments on their behalf. This may be
one explanation possible why repayment problems lessen as the group size increases
150 THE MICROFINANCE REVIEW • Volume VII(2) July - December 2015

as respondents seek support from members of their group. Repayment problems are
therefore, expected to decrease with group size, however, this association has been
found insignificant at the 5% level.
Disbursement Lag can be defined as number of days pass between the day of loan
application and loan disbursement. The variable disbursement lag was directly related
to micro-credit repayment problem. Delay in disbursement of credit reduces the ability
of clients to pay such loan and create repayment problems. The mean disbursement
lag for the group that faced repayment problem was found as 21.14 days in compare
to 17.33 days for the group that did not face problems. The t-value of 1.807 was found
significant at 10% level of significance.
Business Characteristics
All the surveyed MFIs in the research area offered a similar repayment schedule on
a weekly basis. As hypothesised, a weekly schedule poses problems for borrowers who
have the monthly or irregular cash flow pattern. One very important observation is
that if cash flow from the business matches with the repayment schedule, it would be
easier for clients to repay the loan instalments. Respondents who had daily or weekly
cash flow from business faced lesser problems in repaying the loan in comparison to
those who have monthly or irregular cash flow. The association is found significant at
1% level (X2=20.423, p=.000).
Table 6: Cash Flow Pattern and Shortage of Money for Business
Variables Variable class No Repayment Problem Yes Sometimes Total Sample 2 Value
(N=86) (N=154) (N=240)
Cash Flow Pattern Daily/ Weekly 58 67.4% 70 45.5% 128 53.3% 20.423
Monthly/ Irregular 28 32.6% 84 54.6% 112 46.7% P=.000***

Shortage of money for No 32 37.2% 12 7.8% 44 18.3% 33.173

business Yes 54 62.8% 142 92.2% 196 81.6% P=.000***
Note: **Significant at 5% probability level, ***Significant at 1% probability level
Source: Field Survey conducted in 2012

The respondents were also asked if they ever had no money or shortage of money
to continue their business once they started it and what measures they took to avoid
the situation. As many as 81.6% of the respondents had felt cash problems to run
their business smoothly. Out of these respondents, 72.4% (142 out of 196) also faced
repayment problems. The association between shortage of money for running their
business and repayment problem has been found significant at 1% level (X2=33.173
and p=.000).
Determinants of Borrowers’ Loan Repayment Problems in Surveyed MFIs
The result of binary logistic model on determinants of loan repayment problems of
borrowers is presented in Table 7. A total of 13 explanatory variables were considered
in the econometric model. Out of which eight variables were found to be significant
Determinant of Repayment Problems of Microfinance Clients 151

at 5% level. These were formal education level, annual household income, housing
index, group size, total loan outstanding from all sources, repeated borrowing, cash
flow pattern of the business and shortage of money to run business. The coefficients
of all these significant variables were negative except that of cash flow pattern and
shortage of money for business.
On the other hand, five variables were found insignificant at 5% on dependent
variable namely age group of respondents, dependency ratio, number of outstanding
loans, loan diversion and disbursement lag. However out of these, two variables
(Dependency Ratio and Loan Diversion) were found significant at 10% level. Overall,
the binary logistic model successfully predicted factors contributing to 81.7% of micro
credit loan repayment problem among surveyed MFIs.
Table 7: Result of Binary Logistic Model
S. No. Independent Variables B SE Sig. Exp(B)
1 Age of the respondents -.223 .378 .555 .800
2. Education Level -.523 .236 .027** .593
3. Annual hh Income Group -1.061 .264 .000*** .346
4. Housing Index -.667 .199 .001*** 1.948
5. Dependency Ratio 2.574 1.440 .074* .076
6. Loan Diversion .996 .565 .078* .369
7. No. of outstanding loans .980 ..625 .117 2.664
8. Size of Group -.407 .094 .000*** .666
9. Repeated Borrowing -1.485 .718 .039** .226
10. Total loan outstanding(Rs.) .000 .000 .000*** 1.000
11. Disbursement Lag .001 .015 .969 1.001
12. Cash Flow Pattern 1.482 .319 .000*** 4.402
13. Shortage of money for business 1.453 .397 .000*** 4.278
B=regression coefficient, Exp (B) = odds ratio Overall, correct prediction = 81.7% Sig. = significance S.E = standard error
-2 Loglikelihood = 186.221 Nagelkerke R Square = .564
Source: Survey Result, 2012.

Education Level: The education level was negatively and significantly influencing
loan repayment at 5% significance level. An increase in level of formal education
from illiterates to primary and from primary to secondary education decreases the
probability of the loan repayment problem by 59.3%, than the borrowers who have
lesser education level/ illiterates (Table 7). This suggests that more educated borrower
may have ability to manage business and repayment better and have access to business
Information
Annual Household Income: The negative value of annual household income (-1.061)
indicates an inverse relationship between repayment problems and annual household
income of clients. This variable was found to be significant at 1% level and indicates
that improvement in the income level from lower to the higher one decreases the
152 THE MICROFINANCE REVIEW • Volume VII(2) July - December 2015

probability of repayment problems by 34.6%.

Housing Index: The negative value of coefficient shows that the clients who are
comparatively wealthy (housing index score as 5) have lesser repayment problems.
The Wald statistics is significant at 1% level. This implies that the poorer the clients, the
more difficult it is to repay micro-credit. One unit decrease in poverty (as measured by
Housing Index) increases the repayment problem by almost twice.
Size of Group: This variable was found to influence negatively and significantly the
borrowers’ loan repayment problems at 1% significance level. This implies that if other
variables held constant, bigger group size reduces the repayment problem by 66.6%.
Repeated Borrowing: The negative value of the coefficient shows that if client borrow
loan for the number of rounds, they are able to manage the repayment better hence have
lesser problems related to repayment. Repeated borrowing decreases the probability of
repayment problems by 22.6%.
Total Loan Outstanding: This has been calculated as the total loan outstanding from
all the formal sources (loans outstanding from multiple MFIs) at the time of survey. This
variable was also found to influence borrowers’ loan repayment problems significantly
at 1% however, odds ratio of 1 suggests that outcome in both the groups of increasing
loan size would be same keeping the other factors constant.
Cash Flow Pattern: This variable was found to influence positively and significantly
the borrowers’ loan repayment problems at 1% significance level. The mismatch of
loan repayment frequency with business cash flow pattern of borrowers increases the
chance of loan repayment problem by 4.4 times (Table 7).
Shortage of Money for Business: The positive and significant value of coefficient
implies that the problem of shortage of money for business investments also leads to
repayment problems by 4.28 times.

Conclusion and Policy Implications

Two notable features of micro-credit — namely, group liability lending and a fixed
repayment schedule with frequent instalments are thought to be important mechanisms
through which a lender could maintain high repayment rates. The repayment rate
of surveyed MFIs has been found excellent. Two MFIs have repayment rate of 100%
whereas one MFI recorded the repayment rate of 99.9% during survey. In case any
client fails to pay, other group members contribute for her instalment. The reasons
for 100% repayment is strong monitoring comprising operations monitoring, proper
internal audit system and ‘No Tolerance of Arrear Policy’ to ensure that under every
condition the instalment collection should be made the same day. Certainly this kind of
policy further increases the repayment difficulties for the borrowers.
According to the survey conducted on clients of three MFIs in Varanasi, loan
repayment difficulties were reported among 64% of borrowers. Therefore, this study
Determinant of Repayment Problems of Microfinance Clients 153

was intended to identify and analyze determinant factors which have an effect on
borrowers’ loan repayment problems in MFIs. For data analysis purpose both descriptive
statistics and binary logistic model were employed. The descriptive statistics findings
show that there were significant association between dependant variable with respect
to education level, housing index, annual household income, loan diversion, loan size,
number of outstanding loans, cash flow pattern and shortage of money for business.
On the other hand, eight variables out of thirteen explanatory variables entered into
binary logistic model were found significant to determine loan repayment problems of
borrowers except age group of respondents, dependency ratio, loan diversion, number
of outstanding loans and disbursement lag. The unfolding results from this study
give indications as to what is required to strengthen not only MFIs but also the rural
financial market in general. They also have implications for the articulation of effective
rural finance policy and successful performance of MFIs.
One of the important determinants of loan repayment problem is number of loans
outstanding or multiple borrowing. The instances of multiple borrowing stems from
insufficiency of loan size as MFIs provide step up loans. Multiple borrowing though
cannot be said bad but leads to create more repayments problems as descriptive statistics
suggests. Hence, not only objective and realistic project evaluation is necessary prior
to loan approval but client should also be trained to assess their repayment capacity to
avoid over-indebtedness. Apart from this, MFIs should embark into greater coordination
amongst themselves to curb the problem of multiple borrowing among clients which
enhances loan default. The policy option for MFIs is to collaborate in the creation of a
credit reference bureau for all their clients.
However, there are certain issues that pose questions on the effectiveness of credit
bureaus. While there are multiple credit bureaus operating in the micro finance and
retail credit market, they depend on the member MFIs for credit information about
borrowers. Most of the small and medium sized MFIs are concerned about frequent
violation by larger MFIs of stipulations regarding credit information sharing. Moreover,
it is not mandatory for banks that directly lend to microfinance clients to report credit
information of their borrowers to the credit bureaus, making it difficult for small and
medium sized MFIs to ascertain the level of indebtedness of prospects. Another issue
faced is the substantial time lag between credit check of a prospective customer and the
disbursement of funds. It is possible for another lender to disburse loan to the prospect
in this time window, thereby leading to possibility of over-indebtedness despite checks
with credit bureaus. It was also observed that only few MFIs upload credit information
of their borrowers immediately after disbursal. There is often a significant time lag
between disbursal of credit and uploading of credit information into credit bureau
databases, adding to the risk.
During field visits, 35% clients of surveyed MFIs mentioned that they repay on behalf
of other defaulting members occasionally in order to keep their credit history with the
154 THE MICROFINANCE REVIEW • Volume VII(2) July - December 2015

MFI intact. This hidden risk is not systematically measured by most of the MFIs and thus
not addressed. This mechanism may fail when the frequency of defaults increase where
multiple lending is rampant. Therefore, building or enhancing the financial awareness
of its clients about the specific product they offer becomes very important for MFIs. It
is also imperative that MFIs design loan products for planned household expenses. For
meeting unplanned household expenses a mix of savings and micro insurance products
should be developed by MFIs. Clients also need to be educated about the importance of
savings over micro credit in meeting unplanned household expenses. MFIs themselves,
but more importantly regulators, government and multilateral institutions have
a vital role in enhancing financial literacy of MFI clients focusing on these aspects.
In this regard, Kalra et al. (2015) have developed ‘’Microfinance Clients Awareness
Index (MCAI)’ which can be used to compare the extent of financial awareness across
different MFIs’ clients and to monitor the progress of the MFIs with respect to clients’
financial awareness over time.
As education is an important determinant of managing loan repayment better, this
study recommends that the government and other stakeholders in the sector should
ensure that prospective financial borrowers have access to formal education and
training on business management and financing.
This study also found that MFI borrowers whose cash flow pattern did not match
with weekly schedule of loan repayments had problems repaying their loans. The
heterogeneous nature of low income groups with varying cash flow patterns necessitates
multiple models of microfinance instead of a ‘one size fits all’ solution. Standardization,
therefore, cannot be the main driver even though it results in higher profits for the
NBFC-MFI. It is also necessary to ensure fair practices so that there is no over lending
or coercion in collection which, experience has shown, results from business models
driven by speed and scale to maximise profits.
Among empirical papers, Field and Pande (2008) find that a shift from a weekly
to a monthly repayment scheme leads to no significant difference in either delay, or
default. Besides, It was also reported (SIDBI, 2011) that the institutions following
weekly repayment frequencies has the higher Operational Expense Ratio (OER) than
that of the MFIs following fortnightly and monthly repayment frequencies. With the
RBI guidelines issued and over emphasis of decreasing costs, there are chances that
the institutions following weekly frequencies would change to fortnightly or monthly
instalment repayment system.
Our findings also indicate that loan diversion i.e. micro credit utilised for non-income
generating activities create repayment problems. Such problems can lead clients to drop
out of the program or become inactive borrowers. When poor households’ income flows
are interrupted, which is quite frequent, the clients may have to sell their fixed assets to
repay the loan. MFIs therefore has to consider a flexible loan policy (being practiced by
many MFIs all over the world) to allow poor households to reschedule the loan when
Determinant of Repayment Problems of Microfinance Clients 155

clients encounter any financial crisis. Designing a flexible micro-credit program with
flexible repayment system can attract more potential clients, reduce dropouts, enable
existing clients to receive more credit and retain clients for a longer period of time.
Flexible micro-credit services will enable clients to receive higher amount of loan and
therefore increase the household’s income and reduce repayment problem.
The results also revealed that repeated borrowing i.e. clients’ experience in regard
to borrowing loan is an important determinant of loan repayment performance. The
policy implication is that it is crucial for MFIs in India to work towards enhancing
their client retention rates to boost the loan repayment rates of clients. By implication,
the MFIs need to undertake periodic reviews of the factors that cause clients to drop
out of their programme with a view to addressing those that are attributed to MFI
institutional inefficiency.
From the results, it is also established that the factors that limit growth of women
businesses are also liable for their repayment difficulties. These results may imply that
for the borrowers to increase their avenues for loan repayment, it is imperative that the
measures used by microfinance programmes to ensure timely repayment, also include
support services that enable clients to expand their businesses; increase profit levels
and generate enough surplus for loan servicing and re-investment in the business.
Such services also could include training in business skills and management. There is a
need for an integrated and holistic policy approach in supporting and promoting micro
enterprising among the women rather than piecemeal initiatives.
Besides, there are other extraneous factors which are responsible for the inability
of borrower to fulfil their repayment obligations. These include the general economic
condition including instability of product prices, poor state of infrastructure for product
storage and transportation. These constraints need to be relaxed through appropriate
policy actions by all tiers of government in the country such as greater commitment
to rural infrastructure development. In addition, the recent developments in the social
security sector such as Pradhan Mantri Suraksha Bima Yojana, Pradhan Mantri Jeevan
Jyoti Bima Yojana and Atal Pension Yojana may help poor to absorb shocks. Pradhan
Mantri Jan Dhan Yojna will encourage savings which is necessary for consumption
smoothing. Spreading awareness about such schemes during group meetings with
clients may lessen the risk of default for MFIs.
In a nutshell, it can be concluded that intensifying financial literacy services to
promote responsible borrowing, building robust MIS and information bureau with geo-
mapping capability to track multiple borrowings, data sharing with formal financial
institutions, business training, enhancing client retention, promoting strong savings
focus, introducing innovative loan products, multiple loan repayment options and
mechanism of rescheduling the loan products may help in reducing repayment problems
and hidden risk due to repayment by peers.
156 THE MICROFINANCE REVIEW • Volume VII(2) July - December 2015

NOTES

1. The Grameen group comprises of 5 members who guarantee each other’s loans which
are provided by a microfinance institutions. The Grameen methodology originated
in Bangladesh, where it was configured into a highly standardised loan product that
allowed serving cost-efficiently poor people with small loan needs. Grameen approach
targets entrepreneurial poor who invest ever growing loans into their small-scale
businesses such as petty trade, poultry, milking cows and the like.
2. PAR is defined as a proportion of loan outstanding past due by more than 30 days
to total loan portfolio outstanding on a particular date. It is the experience of MFIs
worldwide that PAR represents the most comprehensive measure of delinquency. PAR
of not more than 5% is an international standard for measuring loan portfolio quality.
ABC has maintained PAR as nil consistently since its inception.
3. The Housing Index uses the structure of the house, and sometimes the compound, to
differentiate between economic levels of households and identify those who are poor.
Because housing is generally the most important asset of households, and because
people generally invest a lot in their houses, the building itself represents an extremely
visible reflection of household wealth. The size of the house and compound, the
material used for building the house, the number of rooms, the presence of running
water, bathroom facilities and access to electricity are examples of indicators that
provide evidence of a household’s economic level. The researcher observed each
house and scored each indicator. These are then added to create a composite score as
being used by few MFIs for client targeting. Hence this serves as an indicator of the
poverty.

REFERENCES

An Intellecap White Paper (2010): “Indian Microfinance Crisis of 2010: Turf War or a
Battle of Intentions?” [online], Intellecap, Available at: <ftp://ftp.solutionexchange.
net.in/ public/mf/cr/res27101001.pdf> [10.11.2012].
Armendariz de Aghion, B (1999): “On the Design of a Credit Agreement with Peer
Monitoring”, Journal of Development Economics, Vol. 60, No. 1, pp. 79-104.
Barman D, H P Mathur and V Kalra (2009): “Role of Microfinance Interventions in
Financial Inclusion: Comparative Study of Microfinance Models Vision”, The Journal
of Business Perspectives, Vol. 13, No. 3, pp. 51-59.
Bauer M, J Chytilova, J Morduch (2012): Behavioural Foundations of Micro-credit:
Experimental and Survey Evidence from Rural India, Am Econ Rev (forthcoming).
Bhatt, N and S Y Tang (2002): “Determinants of Repayment in Micro-credit: Evidence
from Programs in the United States”. International Journal of Urban and Regional
Research, Vol. 26, No. 6, pp. 360-376.
Field E, R Pande (2008): Repayment Frequency and Default in Microfinance: Evidence from
India, J Eur Econ Assoc 6(2–3):501–509.
Ghatak, M (1999): “Group Lending, Local Information and Peer Selection”, Journal of
Development Economics, Vol. 60, No. 1, pp. 27.50.
Godquin, M (2004): “Microfinance Repayment Performance in Bangladesh: How to
Improve the Allocation of Loans by MFIs”, World Development, Vol.32, No. 11, pp.
1909-1926.
Kalra et al (2015):”Microfinance Clients Awareness Index” to be published in IIMB
Management Review, December.
Determinant of Repayment Problems of Microfinance Clients 157

Khandker, S R, B Khalily and K Khan (1995): “Grameen Bank: Performance and

Sustainability”, World Bank Discussion Paper, 306, The World Bank, Washington, DC.
Mahajan, Vijay and B R Gupta (2003): Microfinance in India: Banyan Tree and Bonsai,
World Bank, Washington DC.
Matin, I (1997): Repayment Performance of Grameen Bank Borrowers: The “unzipped”
state, Savings and Development, 4
Mokhtar S H, G Nartea and C Gan (2012): “Determinants of Micro-credit Loan Repayment
Problems among Microfinance Borrowers in Malaysia State”, International Journal of
Business and Social Research, Vol. 2, No. 7, pp. 33-45.
Roslan, A H, and M Z A Karim (2009): “Determinants of Micro-credit Repayment in
Malaysia: The Case of Agrobank”, Humanity and Social Sciences Journal, Vol. 4, No.
1, pp. 45-52.
Sexton, D E J (1977): “Determining Good and Bad Credit Risks among High and Low
Income Families”, Journal of Business, Vol. 50, No. 2, pp. 236-239.
SIDBI (2011): “Study on Interest Rates and Costs of Microfinance”, Access Development
Services, New Delhi.
Stiglitz, J E (1990): “Peer Monitoring and Credit Markets”, World Bank Economic Review,
Vol. 4, No. 3, pp. 351-366.
Van Tassel, E (1999): “Group Lending under Asymmetric Information”, Journal of
Development Economics, 60, 3-25.
Varian, H R (1990): “Monitoring Agents with Other Agents”, Journal of Institutional and
Theoretical Economics, Vol. 146, No. 1, pp. 153-174.
Yunus, M, and A Jolis (2003): “Banker to the Poor: Micro-lending and the Battle against
World Poverty”, Public Affairs.
Zeller, M (1998): “Determinants of Repayment Performance in Credit Groups: The
Role of Program Design, Intra-group Risk Pooling, and Social Cohesion”; Economic
Development and Cultural Change, Vol. 46, No. 3, pp. 600-601.
Zeller, M and M Sharma (1998): Rural Finance and Poverty Alleviation, Food Policy Report,
Washington, D C: International Food Policy Research Institute.
 Comparative Study of Self-Help
Group Bank Linkage Model and
Microfinance Institution Model in
Raibareli District of Uttar Pradesh
- D V Deshpande*, K C Sharma* and Gyanendra Rout*
The study looks at Abstract
relevant aspects of There are mainly two models of microfinance delivery in
microfinance operations India - SHG Bank Linkage Programme (SBLP) and Micro
including recovery Finance Institutions (MFIs). Broadly speaking, SBLP covers
performance of about 72% of all microfinance loans in the country and
microfinance clients in remaining 28% are covered by MFIs. However, the issue of Non-
the light of their income Performing Assets (NPAs) remains vital in both the models.
flows, socio economic This study examined various aspects of recovery performance
profile of members, loan of microfinance clients and other relevant aspects. The study
related matters and is based on a comparison of SBLP supported by Rajiv Gandhi
group process in both Mahila Vikas Pariyojana (RGMVP) and Sonata Finance
the models, i.e., Private Limited, a MFI operating in Raibareli district of Uttar
SBLP and MFI in Pradesh. The findings show that recovery from members of
Raibareli, UP. both RGMVP SHGs and Sonata Groups is high. The cases of
multiple financing are very few in the study area. The findings
support the view that if an initiative like RGMVP is present,
problem of NPAs in SBLP can be addressed properly.

Introduction
Microfinance has attracted a lot of attention at global
and national level in recent past due to its wide ranging
impact on provision of financial services to poor. There are
primarily two modes of microfinance delivery in India - Self-
Help Group Bank Linkage Programme (SBLP) and Micro
Finance Institutions (MFIs). Under SBLP model, pioneered by
NABARD in the year 1992, saving and other banking services
* Director, Faculty Member
are inbuilt components along with micro-credit. However,
and Assistant General
Manager, respectively, at MFIs concentrate on extending micro-credit services to clients
Bankers Institute of Rural by raising resources from banks and other sources.
Development, Lucknow.
e-mail:birdjournal@yahoo.in Key Words: Microfinance, Loan Repayment Problems
Comparative Study of Self-Help Group Bank Linkage Model and Microfinance Institution Model... 159

Broadly speaking, SBLP covers about 72% of all micro-credit in the country and
remaining 28% is covered by MFIs (Table 1). However, the issue of Non-Performing
Assets (NPAs) remains vital in both the models. SBLP is experiencing rising NPAs in
recent years and MFIs are also reporting high NPAs.
Table 1: Bank Loans Outstanding to SHGs vis-à-vis MFIs and NPAs (March 2014) (Rs. Crore)
Particulars Loans Outstanding Share in total Loans (%) Amount of NPA NPA %
SBLP 42927 72 2932 6.83
MFIs 16517 28 756 4.58
Total 59444 100 3688 6.20
Source: NABARD (2014), Status of Microfinance in India 2013-14, p. 48, 176-177

Although the growth of microfinance loans has not been consistent in both the
models, recent years have shown faster growth of MFI loans than that of SBLP loans
after a brief lull in the
Table 2: Growth rate of Bank loans outstanding to SHGs vis-à-vis MFIs (March 2014)
aftermath of problems in Particulars 2011-12 2012-13 2013-14
Andhra Pradesh in 2010 SBLP 16.6 8.4 9.0
(Table 2).
MFIs -16.6 26.0 14.5
Further, data on NPAs Source: NABARD (2014): Status of Microfinance in India 2013-14, p. 8, 18
under SBLP show that
the percentage of NPAs Table 3: NPAs in case of SBLP in Uttar Pradesh and all India (March 2014) (Rs Crore)
under SBLP was about Particulars Uttar Pradeh All India Share (%)
20% in Uttar Pradesh Loan Outstanding 1937 42927 4.51
against the national Gross NPAs 389 2932 13.26
average of 6.83% as on NPA % 20.08 6.83 --
31 March 2014 (Table 3). Source: NABARD (2014), Status of Microfinance in India 2013-14, p. 48

Objectives
In view of the above, this study looks at relevant aspects of microfinance operations
including recovery performance of microfinance clients in the light of their income
flows, socio-economic profile of members, loan related matters and group process in
both the models i.e., SBLP and MFI in one district (Raibareli) of Uttar Pradesh (UP)
state.
The empirical part of the study is based on a comparison of SBLP supported by
Rajiv Gandhi Mahila Vikas Pariyojana (RGMVP) and Sonata Finance Private Limited
(henceforth referred as ‘Sonata’), a MFI operating in Raibareli district of Uttar Pradesh.
The selection of RGMVP was guided by its respectable experience and outreach under
SBLP in UP. The selection of Sonata was due to its operations in the operational area of
RGMVP, so that regional variation in comparison of the two models could be minimised.
The study was conducted during July- August 2015. A brief about RGMVP and Sonata
is given below:
160 THE MICROFINANCE REVIEW • Volume VII(2) July - December 2015

Rajiv Gandhi Mahila Vikas Pariyojana (RGMVP)

The RGMVP, an initiative of the Rajiv Gandhi Charitable Trust (RCT), is a rights-
based organisation that works for poverty reduction, women’s empowerment and rural
development in Uttar Pradesh using SHG Bank Linkage methodology. With the belief
that the poor have a strong desire and innate ability to overcome poverty, RGMVP
organises poor rural women into community institutions in the form of SHGs, each
consisting of 10-20 women. These SHGs act as social platforms to address issues of
financial inclusion through bank linkage, healthcare, livelihoods, education and the
environment. RGMVP is a key partner of NABARD for promotion of SBLP in Uttar
Pradesh and is operating since 2002 (http://www.rgmvp.org).
Sonata Finance Private Limited
Sonata is a Micro Finance Company registered as a Non-Banking Finance Company-
Microfinance Institution (NBFC-MFI) (Non deposit taking) with Reserve Bank of India.
Sonata began its micro finance business in January 2006 in Allahabad. Head office of
Sonata is located at Lucknow, UP. The company aims to make microfinance financially
self-sustainable. It provides small loans up to Rs. 50,000 to poor women so that they
can start and expand simple businesses and increase their incomes. The loans are given
both through groups as well as to individuals directly. The share of individual (personal)
channel is less than 5% of total number of clients (the total number of individual clients
was about 15000 out of about 4.50 lakh total clients at the time of study, constituting
3.3%). Further, in both the modes, the loan is in the name of the individual borrower.
In case of finance through group, the loan evokes group guarantee for repayment. For
purely individual loans, there is a system of two guarantors. As a policy, Sonata lends
only to women borrowers (http://www.sonataindia.com).
Sonata largely finances small traders /vendors /shop keepers, etc., (e.g., vegetable
Table 4: Salient Features of Group Approach followed by RGMVP and Sonata
Sl Particulars RGMVP Sonata
No.
1 Objective of the agency Women Empowerment, rural development and Business of micro-credit
poverty reduction
2 Orientation Developmental Profit orientation
3 Methodology SHG formation, capacity building and development Provision of micro credit is done through field
of local Community Resource Persons staff. Although, group approach is followed, it is
to a limited extent compared to RGMVP approach,
especially regarding group members’ involvement
and empowerment.
4 Formation of groups By women ‘Community Resource Persons (CRPs)’ By mostly male ‘Business Executives’
5 Services provided Credit plus like savings, health, sanitation, capacity Credit only
building
6 Loan Clients Groups Individuals with group guarantee
Comparative Study of Self-Help Group Bank Linkage Model and Microfinance Institution Model... 161

vendors, ‘chaat walas’, small retail shop owners) who have regular earnings, so that
the recovery of loan instalments could be smooth. Although loans are disbursed in the
names of the women members only, their spouses are made co-borrowers.
Although both the agencies mostly follow group approach, the group approach of
RGMVP and Sonata have some distinct differences as indicated in Table 4.

Methodology
The study area is Raibareli district of Uttar Pradesh where SBLP as well as MFI model
are operational as indicated earlier. SBLP clients under RGMVP are taken as sample
and clients of Sonata, also operating in the same district are chosen for comparison as
mentioned above.

Sample Design, Collection and Analysis of Data

A purposive random sampling method has been followed in the study. 20 RGMVP
SHGs were randomly selected and two members from each selected SHG were
interviewed for gathering relevant information. Thus, a total of 40 RGMVP SHG
members were interviewed. Similarly, a sample 20 groups linked with Sonata were
randomly selected and 2 members from each Sonata Group were interviewed. Thus, a
total of 40 Sonata Group members were interviewed. Primary data have been collected
from the sample clients by the method of direct personal interview using a semi-
structured questionnaire.

Empirical Analysis
Group Size
Table 5 depicts average size of groups under the two models. Average number of
members in Sonata Groups is 15 while RGMVP SHGs have average number of members
as 11. In Sonata Groups, minimum and maximum number of members are 6 and 20
respectively; in RGMVP SHGs, minimum and maximum number of members are 10 and
14 respectively.
Borrowing Members
Table 6 shows average number of members per group taking loan in the two models.
In Sonata Groups, all members are taking loan. In RGMVP, average number of members
taking loan is 9 compared to average size of 11 members (Table 5). This implies that
82% members of SHGs in RGMVP are taking loans.
Savings by Members
Table 7 shows saving balance in bank account of RGMVP SHGs. There is no system
of saving in Sonata Groups.
162 THE MICROFINANCE REVIEW • Volume VII(2) July - December 2015

Decision on Loan Amount Table 5: Average Number of Members in Groups under

Loan amount is decided by Sonata and RGMVP and Sonata

group members in case of Sonata Group Particulars RGMVP Sonata

members while in case of RGMVP SHGs, Average 11 15

Minimum 10 6
loan amount is decided by mutual consent
Maximum 14 20
of members within drawl limit i.e., 4 to 10
times of savings as fixed by linking bank. Table 6: Number of Borrowing Members in
In fact, Sonata has 13 standardised loan RGMVP and Sonata
products ranging from Rs.7270 to Rs.49600 Particulars RGMVP Sonata
which are offered to members. Average 9 15
Minimum 4 6
Loan Outstanding
Maximum 13 20
The amount of loan outstanding in groups
is shown in Table 8. Average outstanding Table 7: Savings Balance in Saving Account of
of Sonata loan in sample Groups is Rs. SHGs under RGMVP and Sonata (Rs)

3,25,059 while average outstanding of Bank Particulars RGMVP Sonata

loan in sample RGMVP SHGs is Rs. 82,405. Average 36543 0

Minimum 13148 0
Loan Utilization - Income Generation Maximum 119324 0
Activities Note: As mentioned earlier, Sonata is registered as Non Deposit
Table 9 depicts average number of taking NBFC-MFI, there is no system of saving collection and
therefore, members do not save regularly as is the case with
members of Sonata groups who started RGMVP following the SBLP model.
income generation activity after taking loan
Table 8: Loan Outstanding in RGMVP and
from Sonata. It implies that 93% members Sonata Groups (Rs. per Group)
of Sonata groups have started income Particulars RGMVP Sonata
generation (average size of group as shown Average 82405 325059
earlier is 15). Similarly, average number Minimum 5234 41330
of members of RGMVP SHGs who started Maximum 229500 614750
income generation activity after taking loan
from their SHGs is 8. It implies that 73% Table 9: Number of Group Members who started Income
Generation Activities in RGMVP and Sonata
members of RGMVP SHGs have started
Particulars RGMVP Sonata
income generation (average size of group
Average 8 14
as shown earlier is 11)
Minimum 4 6
Loan Repayment System
Maximum 12 20
Table 10 shows loan repayment system
in Sonata Groups and RGMVP SHGs. All
Sonata Groups have weekly repayment system while all RGMVP SHGs have monthly
repayment system. In Sonata groups, repayment received from members is deposited
in Sonata Branch. Repayment collected by Sonata Branch, in turn, is deposited in the
bank where Sonata has a current account.
Comparative Study of Self-Help Group Bank Linkage Model and Microfinance Institution Model... 163

In case of RGMVP SHGs, only in 85% of RGMVP SHGs, repayment received from
members is deposited in Bank. It is noteworthy that in RGMVP SHGs, repayment
received is deposited in Bank only when bank loan is outstanding. In case where bank
outstanding is zero and loan has been given to members from group savings and
internal accrual, repayment received from members is not deposited in bank; instead
it is given to other needy members as loan. In case of two RGMVP SHGs, one member
each has defaulted in repayment due to sudden death of husband, loss of agricultural
income and medical condition of a child (Table 10).
Table 10: Loan Repayment in RGMVP Groups and Sonata Groups
Particulars RGMVP Sonata
Periodicity of loan repayment Monthly Weekly
Repayment received from members is 85 100
deposited in banks/Sonata (%)
Recovery (%) 95 100
Reasons for non-repayment 1. Sudden death of husband Not applicable
2. Loss in agriculture and fracture in child’s
hand
Recovery system in group in case of non Members of both SHGs collectively go to Ensured by Sonata staff present in Weekly
repayment of members’ loan defaulting members house for repayment Group Meetings

Rate of interest charged is 24.5% per annum by Sonata and 24% per annum by
RGMVP SHGs respectively.

Comparative Socio-Economic Profile of Members

Education Table 11: Education Profile of Members of RGMVP and Sonata (%)

Table 11 shows education Particulars RGMVP Sonata

Illiterate 23 3
profile of members of
RGMVP SHGs as well as Literate 35 67
Primary 12 5
Sonata Groups. About 23%
Junior High School 20 12
members of RGMVP SHGs
High School 3 10
are illiterate while about
Intermediate 7 0
3% members from Sonata
Post Graduate 0 3
Groups are illiterate. Overall,
literacy seems to be better in Sonata members compared to RGMVP members.
Landholding Table 12: Landholding Status of Members in RGMVP and Sonata (%)
Table 12 shows landholding Particulars RGMVP Sonata
status of members from Members holding land 53 25
Sonata Groups and RGMVP Landless members 47 75
SHGs. 75% members from
Sonata Groups are landless while only 47% members from RGMVP SHGs are landless.
164 THE MICROFINANCE REVIEW • Volume VII(2) July - December 2015

Membership Experience Table 13: Length of Membership in RGMVP and Sonata Groups (%)
Table 13 shows length Since RGMVP Sonata
of membership of Sonata 2008 20 0
Groups and RGMVP SHGs. 2009 25 0
About 78% members from 2010 33 35
RGMVP SHGs have more than 2011 7 10

5 years of membership while 2012 5 5

around 55% members from 2013 5 22

Sonata Groups have more 2014 0 8

2015 5 20
than 3 years of membership.
All 100 (40)* 100 (40)
Thus, RGMVP members
* Number of observations is 40. The figures are rounded off to nearest full digit for
have longer membership ease in presentation
experience compared to Table 14: Member Satisfaction in RGMVP SHG and Sonata Groups
Sonata members. RGMVP Sonata
Particulars
Yes (%) Yes (%)
Member Satisfaction
Useful 100 100
All members of both
Help in Savings 100 0
RGMVP SHGs and Sonata
Provision of Credit. 100 100
Groups feel that SHGs and Creation of Assets. 90 100
their operations with Sonata Wish to Continue 100 100
(in case of Sonata members)
are useful to them as shown in Table 14. Further, they have also reasoned out how
these are useful to them. The reasons cited by members are help in saving, provision of
credit and asset creation. Further, all members wish to continue with their respective
institutions.

Comparison of Loan Related Matters

Loan Cycles Table 15: Distribution of Number of Loans Taken by Members
No of loans taken by members (since RGMVP (%) Sonata (%)
About 45% members from inception of Groups)
RGMVP SHGs took 1 to 2 loans while 1-2 45 37
42% members took 3 to 5 loans and 3-5 42 63
remaining 13% members took 6 to 6-10 13 0
10 loans since inception of SHGs. In
Table 16: Average Loan size in RGMVP SHG and
case of Sonata, 37% members took
Sonata Group (Rs. per member)
1 to 2 loans while 63% members Particular RGMVP Sonata
took 3 to 5 loans since inception of Average Loan 15288 22956
Groups (Table 15). Minimum Loan 500 7270
Maximum Loan 100000 49600
Loan Size
Table 16 shows average loan size per member in Sonata Groups and RGMVP SHGs.
Comparative Study of Self-Help Group Bank Linkage Model and Microfinance Institution Model... 165

Average size of a member loan is Rs. 22,956 in Sonata Groups and is Rs. 15,288 in
RGMVP SHGs. Minimum and maximum value of loan varies between Rs. 7,270 and Rs.
49,600 in Sonata Groups while it is varies between Rs. 500 and Rs. 1,00,000 in case
of RGMVP SHGs.
Occupation of Members
Table 17 depicts primary and secondary occupation of member households. Primary
occupations of 72%, 12% and 9% of sample households from Sonata groups are Retail
shop, Agriculture and Animal Husbandry respectively; while primary occupations of
30%, 30% and 18% sample households from RGMVP SHGs are Retail shop, Agriculture
and Labour respectively. Thus retail shop owners are the most dominant borrowing
category in case of Sonata. Other family occupations of small percentage of members
are Tailoring, Plumbing, Salaried job and transport activity.
Table 17: Occupation of Members’ Households
Sampled RGMVP - SHG members (%) Sampled Sonata - Group members
Primary (%) Secondary* (%) Primary (%) Secondary* (%)
Retail shop 30 Agriculture 3 Retail shop 72 Agriculture 3
Animal Husbandry 3 Animal Husbandry 3
Agriculture 30 Animal Husbandry 3 Agriculture 12 None 12
Animal Husbandry 5 Agriculture 5 Animal Husbandry 9 Labour 3
Tailoring 10 Salaried job 3 Tailoring 2 Agriculture 2
Transport 2 Salaried job 3 Transport 2 Agriculture 2
Labour 18 Agriculture 10 Salaried job 3 Agriculture 3
Salaried job 3 None 3 --
Plumbing 2 Salaried job 3
Note : *some of the respondents did not indicate any secondary occupation, therefore in a few cases the percentage of primary and
secondary may not match.

Purpose of Loan
Purpose of each loan extended to members of both Sonata Groups and RGMVP SHGs
is analysed and categorised in Table 18. It is evident that members from Sonata Groups
are taking loan for productive purpose while members of RGMVP SHGs are taking loan
for consumption as well.
Table 18: Purpose of Loans Taken by Members
RGMVP-SHG Members Sonata Group Members
% of sample % of sample
Purpose Purpose
members members
Retail shop 36 Retail shop 78
Agriculture 29 Agriculture 11
Animal Husbandry 13 Animal Husbandry 5
Consumption 13 Tailoring 3
Tailoring 5 Transport 3
Freedom from money lender 3 Consumption 0
Transport 1 Freedom from money lender 0
166 THE MICROFINANCE REVIEW • Volume VII(2) July - December 2015

Repayment Sources
Table 19 shows sources of repayment of each loan taken by members from their
respective financial institutions.
Table 19: Sources of Repayment by Members of RJMVP Groups and Sonata Groups
RGMVP-SHG Members Sonata Group Members
Source of repayment % of loan accounts repaid Source of repayment % of loan accounts repaid
Retail shop 43 Retail shop 79
Agriculture 26 Agriculture 11
Labour 19 Animal Husbandry 5
Animal Husbandry 10 Tailoring 3
Transport 1 Transport 2
Salaried job 1 Salaried job 0
Tailoring 0 Labour 0
All 100 All 100

The correspondence between purpose of loan and source of repayment is almost

100% in case of Sonata Group members whereas it is somewhat variable in case of
RGMVP Group members where income from wages (labour) is also used for repayment.
Reasons for High Performance in Repayment
All members from Sonata Groups and 93% members from RGMVP SHGs have
expressed that group meetings are held regularly. Similarly, 98% of members from
Sonata Groups and 90% members from RGMVP SHGs have expressed that repayment
issues become point of discussion in meeting agenda. Only 5% members from Sonata
Groups have said that they have taken loan from more than one source while no
member from RGMVP SHGs has taken loan from more than one source.
Table 20: Reasons for High Repayment Performance in RGMVP and Sonata
Affirmative Responses of Affirmative Responses of
Particulars RGMVP SHG Members as Sonata Group Members as
Yes (%) Yes (%)
Are group meetings regular? 93* 100
Are matters related with repayment become agenda point in the meeting? 90 98
Do other members of group remind you about repayment? 83 60
Have you taken loan from more than one source? 0 5
How many loans you have to repay as on today?
Zero loan 18 0
Single loan 78 95
Two loans 4 5
Are you earning that much from income generation activity that you are able
93 98
to repay your loan installment?
Have you taken loan more than your repayment capacity? 3 3
You are not able to repay loan because you have utilized loan amount on some
5 5
other purpose
Are you waiting for loan waver scheme? 3 3
Note : *Figures are rounded off to the nearest digit for ease in presentation.
Comparative Study of Self-Help Group Bank Linkage Model and Microfinance Institution Model... 167

About 95% members from Sonata Groups have expressed that they have to repay
single loan as on date of interview; while 78% members from RGMVP SHGs have
expressed that that they have to repay single loan as on date of interview. As on date
of interview 18% members from RGMVP SHGs don’t have to repay any loan. Further,
5% members from both Sonata Groups and RGMVP SHGs had to repay two loans
but reasons of both are different. In case of Sonata Group members, they have taken
loan from Sonata and some SHGs while in case of RGMVP SHGs members, they have
two loan from their own SHG. Sonata does not give new loan to any member unless
previous loan is repaid but SHGs give such loan in case of need. Also, members often
do not admit freely taking multiple loans from different sources. To that extent, the
empirical findings reported here need further validation.
About 98% members from Sonata Groups and 93% members from RGMVP SHGs said
that their earnings from income generation activity, which has been supported by the
loan, is adequate to repay the loan. Only 3% members from both Sonata Groups and
RGMVP SHGs admitted that they have taken loan which is more than their repayment
capacity. About 5% members from both Sonata Groups and RGMVP SHGs said that they
have utilised loan for the purpose other than loan sought for, thus diverting the loan.
Only 3% members from both Sonata Groups and RGMVP SHGs admitted that they are
waiting for loan waiver scheme, although they had not defaulted in repayments.
Thus, most positive features of group process to ensure high repayment performance
at the SHG level are demonstrated by both the models reported in this paper with
minor variations.

Concluding Remarks
Recovery from members of both RGMVP-SHGs and Sonata-groups is quite high (100%
in case of Sonata and 95% in case of RGMVP). In case of RGMVP SHGs, the primary
reason of high repayment is long existence of the positive facilitating environment
and organisational efforts of RGMVP in the study area. On the other hand, in case of
Sonata, the primary reason for 100% repayment is credit discipline (comprising of
proper selection, efficient disbursement and close monitoring and follow up) ensured
by field staff of Sonata.
Furthermore, the recovery is largely coming from the sources for which loan has
been taken in case of Sonata. This is understandable as the loan given by Sonata is only
for income generation activities. The case of RGMVP SHGs is somewhat different as
loans by members may be availed for other purposes, like consumption, as well.
The cases of multiple financing (borrowing from more than one source, generally
leading to over indebtedness) are very few in the study area - none in case of Sonata
and only 5% in case of RGMVP, as compared to those reported elsewhere (Kaur and
Dey, 2013).
168 THE MICROFINANCE REVIEW • Volume VII(2) July - December 2015

For policy on SBLP, the findings of the study support the view that if an initiative like
RGMVP is present, then the problem of NPAs in SBLP can be addressed properly. As it is
claimed by RGMVP that their structure is a low cost intervention, Government of India/
NABARD may take a view on supporting similar initiatives.
For MFI model, the suggestion that emerges is that saving component can be
introduced by allowing well-functioning MFIs to be able to collect small deposits
from members so that the members are encouraged to save small amounts beyond
regular repayment of loan. Further MFIs such as Sonata may consider introduction of
consumption loans (like that for house repair, medical treatment, education of children,
marriage of children, etc.) for members who have proven record of high repayment in
their first cycle of loan.
ACKNOWLEDGEMENT

The authors would like to thank RGMVP and Sonata for their help and cooperation
for data collection. We also thank profusely the clients of RGMVP and Sonata for
sharing their information used in this paper. The support of Arthik Vikas and Jan
Kalyan Sansthan, Lucknow for data collection is acknowledged. Special thanks to
the anonymous reviewer for valuable suggestions. However, the remaining errors
are owned by us.

DISCLAIMER

[The views expressed are those of authors and not necessarily reflect that of the
institution for which they work.]

REFERENCES

http://www.rgmvp.org/ accessed on 08.09.2015 at 09.25 hours

http://www.sonataindia.com/ accessed on 08.09.2015 at 09.30 hours
CMR (2011): “Study on Loan Default by SHGs”, Centre for Microfinance Research, Jaipur.
Kaur, P and S Dey (2013): “Andhra Pradesh Microfinance Crisis and its Repercussions on
Microfinance Activities in India”, Global Journal of Management and Business Studies,
Vol. 3, No.7, pp. 695-702
NABARD (2012): Study on NPAs of SHGs in Odisha, NABARD Regional Office, Bhubaneswar,
December.
NABARD (2014): Status of Microfinance in India 2013-14, NABARD Mumbai.
 Repayment Performance and
Costs of Defaults in a Group
Lending Programme – A Case
Study in Urban Microfinance
- Mani Arul Nandhi*

The paper ­explores the Abstract

hidden delinquency Under the Joint Liability Groups (JLGs), ‘joint ­liability’ f­eature
­behind the 100% ensures that if any one member of the group fails to repay her
­repayment ­performance loan, all group members are treated ­jointly ­being in default;
of an urban MFI. thus the repayment ­responsibility ­becomes a collective one.
­Findings indicated that Though this may result in collective res­ponsibilities and peer
the recovery mechanism pressure, many factors may weaken the repayment perform-
with an additional ance of group lending under joint liability. Evidence indicates
‘joint centre ­liability’ that repayment incentives for a good borrower will disappear
­feature ensured 100% under joint group liability when there is an expectation that a
on time ­repayment significant number of group members will default. Besides, the
record (OTRR) with no unilateral ­focus of Microfinance Institutions (MFIs) to achieve
­financial costs due to high repayment rates, among other factors, may lead to wilful
hidden ­delinquency for defaults with hidden costs for regular repayment clients.
the MFI. The paper explores the hidden delinquency behind the 100%
repayment performance of an urban MFI. In ­particular, the
study looks at the extent of loan ­delinquency among ­borrowers
of an MFI located in a peri-urban area of Uttar Pradesh, and
the financial and non-financial costs of such ­defaults borne
by ­repayment clients. Findings ­indicate that the recovery
­mechanism with an additional ‘joint centre liability’ feature
ensured 100% on time repayment record (OTRR) with no
­financial costs due to ­hidden delinquency for the MFI. The costs
of delinquent or ­default clients fell on the regular ­repayment
poor ­clients. It was found that the cost of borrowing for the
repayment clients increased from 18% to 30%; and the aver-
* Associate Professor and
Head, Department of
age cost for each repayment client was found to be Rs. 49.70
­Commerce, Jesus and
Mary College, University Key Words: Joint Liability Groups (JLGs), Microfinance Institutions, ­Repayment,
of Delhi, New Delhi. Hidden Delinquency
170 THE MICROFINANCE REVIEW  •  Volume VII(2)  July - December 2015

per week, besides the non-financial costs like personal hardships in arranging money
to ­repay the defaulter’s share, time and energy lost in unsuccessful attempts to recover
from the defaulters who had run away or moved away.

Introduction
Joint Liability Groups (JLGs) model adopted by a large number of MFIs in India follow
the runaway success of ‘Grameen Model’ with its greater than 95% ­repayment rate. In
a group-lending programme, the functions of screening, monitoring, and enforcement
of repayment are largely transferred to the group members. Joint liability feature of the
group lending programme posits that if any one member of the group fails to repay her
loan, all group members are treated jointly being in default themselves. That is, the risk
of default by an individual is shared by the individual’s peer group members leading to
an incentive to borrow for a riskier project in a group based contract than the member
would have done in an individual loan contract. Research indicates that if an individual
is more likely to default than others are, the individual member is being subsidised
­because the peers share the risk of default under joint liability.
Under formal lending, the credit worthiness of borrowers is assessed in terms of
­borrowers’ income, alternative sources of financing, economic ­activity, location and
other debt. Similar indicators also apply to group lending in ­determining ­repayment
capacity. Many studies show the role of group characteristics and ­dynamics in achieving
high repayment rates in group lending programme. ­Theoretically many features and
­dynamics that affect the repayment ­process range from domino effect1, group ­solidarity2,
peer pressure, group member ­homogeneity, variations in group repayment performance
through different loan cycles, etc.
While high repayment rates of the group lending is a prominent feature, many ­factors
may weaken the repayment performance of group lending under joint liability. Huppi and
Feder (1990) demonstrated that group lending shows mixed results when ­performance
is mixed with repayment rates. Evidence ­indicates that repayment ­incentives for a
good borrower will wane under joint group ­liability when there is expectation that a
­significant number of group members will ­default. Besley and Coate (1995) demonstrate
how the default of one group member can lead to a secondary default of a member who
otherwise would have repaid an individual loan and show that the success of group
lending is tied to the ­ability to harness social collateral (peer pressure) to enforce loan
repayment through social sanctions/penalties.
The phenomenal growth of JLGs as a method of group lending in recent years in the
Indian microfinance sector has been accompanied by large scale instances of ­individual
and mass defaults in India. As per MIX data, the average ­repayment rate of leading MFIs
in India is 98%. On the other hand, an estimate by ­Sa-Dhan, an industry ­association
­indicates that the microloans outstanding in India ­totaling $1.24 billion grew 72% in the
Repayment Performance and Costs of Defaults in a Group Lending Programme– A Case Study....... 171

year ending March 31, 2008. While the ­singular focus of some of the MFIs in ­achieving
high repayment rates under the microcredit groups is visibly seen, however, their
­humane concern for the costs borne by repayment clients in fulfilling the ­defaulters’
share of loan ­repayment within groups is found to be either minimal or nonexistent.
An area of concern is whether a hardnosed emphasis by MFIs on high group repayment
rates has steadily increased hidden delinquency among borrowers? And, what are the
costs that are imposed by default clients reneging on contract under the group lending
programme?

Research Objectives
The objective of this study was three fold: One, to explore the extent of loan ­delinquency
accompanied with ‘high’ (group) repayment rates in group ­lending mechanism; Two, to
probe the reasons for default among group members, ­triggers behind the delinquency;
and Finally, to understand the costs faced by each actor in the group lending programme
(group, individual group members and MFI) due to the existence of hidden delinquency.
Following three research questions were explored:
1) What is the actual number of defaulter clients to repayment clients?
2) How many borrowers among the groups’ poor defaulted, reasons for ­default,
­difficulties and costs to the members in the groups where defaults took place?
3) What are the methods and systems of recovery used by repayment clients as well
as the MFI on the default clients? What are the costs incurred for recovery from
defaulters?

Research Methods and Field Area

The field work was conducted by the author during April - June 2010 in Loni3,
­Ghaziabad district, Uttar Pradesh. 48 JLGs with a total number of 199 group members
in 17 Centres of a leading urban microfinance institution4 were randomly selected. Data
collection used a combination of methods comprising Focus Group Discussions (FGDs),
interviews as well as personal discussions with group members and leaders; besides in
depth interviews with key informants - which covered the managerial staff of the MFI’s
rural microfinance division and field personnel (branch manager, centre ­managers)
and information collected from the available records5 of the MFI form the basis of data
­presented in the study.

Lending Model and Loan Recovery Mechanism: An Outline

The group lending model (Joint Liability Group or JLG) of the MFI is patterned along
the Grameen model with some local adaptations. Stylised features of the model are:
a. Every centre manager (similar to a loan officer) assigned to a specific area collects
information about the income and asset level and other background checks of the
172 THE MICROFINANCE REVIEW  •  Volume VII(2)  July - December 2015

clients, the clients (based on self targeting) are organised in groups of five.
b. Selected clients are verified through a proof of identity (Ration card, Voter’s ID,
certificate from Gram Pradhan/ Government Official) including a photo.
c. The clients targeted are women in the age group of 18 to 52 years with household
incomes of Rs. 4,200 per month. Single women (widows/­divorcees/separated) and
women from agricultural households are consciously ­excluded.
d. No group should have any direct kin relation; but presence of kin - relations6
within a centre is permissible.
e. Loans are given at a flat 18% (33.4% EIR). The clients are given individual loans
for income generating activities but the group members take joint responsibility
for each other.
f. A unique feature of the MFI’s model is that the Joint Group Liability of members
in a group is accompanied with the Joint Centre Liability (which implies joint
r­esponsibility of members of all the groups belonging to a ­Centre).7
Every JLG group belongs to a Centre which oversees three to six groups8. Each Centre
has a Centre Manager (CM)9 and a Centre Leader (CL)10. There is a weekly meeting at
the Centre for all groups11 at a fixed time, where the CM regularly collects without fail the
total loan repayable amount that is due from all the groups in the centre12. Each ­Centre
is attached to a Branch with a Branch Manager supervising between 8 and 10 Centre
­Managers (CM). The systems and processes for loan collection and recovery13 are well
spelt out to ensure 100% recovery (OTRR) by the Branch Managers and Centre ­Managers.
Operational procedures of the MFI14 indicate no departure from established ­procedures.
There is a ­technology based Table 1: Group Profile
Centers* Number of JLGs Number of Members Nature of Groups
central tracking and control in Each Centre
mechanism for the loan recov- Toli Mohalla I 4 20 Muslim
ery process of all ­branches both Prashant Vihar 3 15 Mixed
Laxmi Garden I 3 15 Mixed
at the Divisional and Head
Shiv Vihar 3 15 Mixed
­Office levels. Anand Vihar 2 10 Hindu
Vikas Nagar 2 10 Hindu
Results and Findings Jamalpura I 4 20 Muslim
Ashok Vihar 4 20 Muslim
Group Profile Giri Market 2 10 Muslim
A bird’s eye view of Table 1 Jamalpura II 3 15 Muslim
Daburtalab 3 15 Muslim
indicates that out of 17 Centres
Laxmi Garden II 2 10 Mixed
in the sample, 4 Centres had Laxmi Garden III 2 9 Hindu
heterogeneous15 groups, and Laxmi Garden IV 3 15 Hindu
13 Centres had homogeneous Toli Mohalla II 2 10 Muslim
Toli Mohalla III 4 20 Muslim
groups (8 ­Centres had Muslim
Rajeev Garden 2 10 Hindu
only groups and 5 Centres with 17 48 239
Hindu only groups). A total of Note: * There was more than one Centre in many areas.
Source: Field Study
Repayment Performance and Costs of Defaults in a Group Lending Programme– A Case Study....... 173

239 active16 clients were registered17 in these Centres.

Default Clients and Repayment Clients

The study defined a ‘default client’ as one, who after repaying the loan installments
(EMI) for a few weeks during the one year loan cycle had either failed or refused to
­repay the outstanding loan installments. It was found that the number of EMIs that were
unpaid ranged from a minimum of 4 EMIs to a maximum of 44 EMI during the 52 weeks

Table 2: Default Status

Centres with Total No. of No. of No. of Number Number Reasons Nature Who Defaulted Background
Defaults Clients Repayment Default of EMIs of Unpaid For of CL/GL* of
Clients Clients Paid EMIs Default Group /Member Defaulter
Vikas Nagar 10 9 1 4 48 Wilful Hindu CL Non-poor, Rogue
Anand Vihar 10 9 1 8 44 Ran away Hindu CL Non-poor
Rajeev Garden 15 14 1 44 8 Wilful Muslim Member Poor
Rajeev Garden 10 8 2 22 30 Wilful Hindu CL Non-poor
Naipura 15 14 1 30 22 Moved Hindu Member NA
Naipura 20 19 1 30 22 Moved Muslim Member Non-poor
Julie Centre 10 8 2 48 4 Wilful/moved Muslim Member NA
Albi Nagar 10 8 2 12 40 Wilful/moved Muslim CL & Member Non-Poor
Mustafabad 15 11 4 NA NA Wilful,refused Muslim GL & Members Closed
Mustafabad 15 12 3 NA NA Economic, Muslim Members Poor
widowhood
Mustafabad 20 19 1 8 44 Ran away Muslim Member -
Shiv Vihar 10 6 4 NA NA Wilful Hindu Members Well off Closed
Ikram Nagar 10 4 6 NA NA Wilful Muslim Members Closed
Sangam Vihar 10 5 5 NA NA Wilful, moved Hindu GL, Closed
& rest refused Members
Pooja Colony 10 9 1 NA NA Wilful Hindu CL Non-poor
Albi Nagar 10 8 2 3 49 Wilful, Muslim CL Closed,
Ran away reopened
Budh Nagar 10 5 5 NA NA Wilful, Muslim CL, Closed,
ran off Members reopened
Baheta Hajipur 10 7 3 NA NA Wilful Hindu Members Closed,
reopened
Baheta Hajipur 10 8 2 NA NA Wilful, Economic Muslim CL, Member Poor, Closed
Khari Kuan 15 9 6 NA NA Collective, More Muslim, CL, Closed
Aggressive, few Hindu Members
Lakshmi Garden 9 8 1 45 7 Ran away Hindu Member -
Lakshmi Garden 10 9 1 14 38 Moved Muslim Member Group refused,
brother filled
Lakshmi Garden 15 14 1 32 20 Ran off Hindu Member Non poor
Lakshmi Garden 15 14 1 35 17 Wilful Hindu Member Non poor
Ambica vihar 10 9 1 NA NA Wilful Hindu Member Well off
Toli Mohalla 20 19 1 13 39 Remarried/ Muslim Member -
Kin relation
Saraswati Vihar 10 9 1 30 22 Moved Hindu Member Well off
Total 27 Centres 334 274 60 463 577
Source: Based on Field work
174 THE MICROFINANCE REVIEW  •  Volume VII(2)  July - December 2015

repayment schedule. This was in spite of efforts by the groups in a Centre to make these
to fulfill the loan obligation. Consequently, the burden of repayment of the unpaid EMIs
of the defaulting client/s fell compulsorily on the ­remaining members. All members
who had to compulsorily repay the share of delinquent clients are defined as ‘repayment
clients’ in a Centre. This phenomenon of ­delinquency is distinct from the ­difficulties of
repayment experienced by few clients due to personal shocks or irregularity of income;
and where such difficulties were ­experienced by a member in a group, a peer group
member volunteered to repay the distressed member’s pending share of EMI/s.
Table 2 outlines details about the number of default clients to repayment clients;
number of unpaid EMIs, reasons for default, nature of the group, client status (whether
group or centre leader or member) and economic status of the defaulter.
Findings in Table 2 portray the existence of hidden delinquency in 27 Centres over a
period of a year since the MFI began its operations in this area. It was found that among
the 69 groups (with a total of 334 active clients) in the 27 ­Centres, 274 members were
repayment clients and 60 were default clients. One third of the default clients belonging
to 16 Centres were found to have repaid 45% of the loan EMIs but failed to repay 55% of
the loan overdue. On an average, the number of loan EMIs repaid by the default clients
were 23 EMIs and the loan instalments that remained unpaid were 29 EMIs. It may be
noted that the number of EMIs that were repaid by the default clients was as low as 4
EMIs and as high as 49 EMIs.
The background profile of default clients indicated that only 5% defaulters were poor;
14% of defaulters were non-poor and nearly an equal% (15%) were either group or ­centre
leaders. Noticeably, better off among the group members were more likely to ­default than
the poor members who diligently made all efforts to repay their loan installments. Many
among the sample respondents reiterated a common refrain that “it is not that the (bet-
ter off) defaulter/s cannot
Figure 1: Who were the Defaulters? (in %)
repay the loan ­installments
but they do not want to 4
14
­repay; in comparison (3)
(10)
however, poor members Better off

make ­every effort to ­repay Leaders (GL/CL)

at the ­expense of even 15
Members
great ­personal ­hardships” (11)

­(Figure 1). Poor

Among the reasons for

­default, 45% of clients
wilfully defaulted includ- 67
(49) Note: Figures within
ing 7% of defaulters who brackets are number
were indulging in ‘collusive of defaulters
Repayment Performance and Costs of Defaults in a Group Lending Programme– A Case Study....... 175

practices’, 28% refused to ­repay

and 10 per cent ran away. If re- Figure 2: Reasons for Defaults (in %)
fused and ran away categories are
­combined into a single category to 10
Wilful and
define it as a wilful practice, then (6)
Collusion
the percent of wilful defaults rises 12
Refused /
(7) 43
to 83% (Figure 2). It may be per- (27)
Aggression

tinent to observe that the wilful Ran away

10
defaulters exhibited three kinds (6) Moved
of behaviour: default by ­design,
default by ­collusion and ­default by Economic
27
­aggression. Those who ­‘defaulted (17)
by design’ did so by ­gauging the
­repayment and recovery proc-
Note: Figures in brackets are number of Defaulters
ess of the MFI and, defaulted
­intentionally in the second loan
­cycle period. ­Intriguingly, this category had several Centre Leaders who ran away after
­repaying a few EMIs only.
Arguably, an issue of concern is that as groups enter the second phase of loan cycle,
those members who understand the mechanics of the repayment process show ­ingenuity
in their repayment behaviour and default at an opportune time leaving other group
members to bear their share of loan repayment burden. Demonstrably, the incidence of
increasing defaults in the second loan cycle of the MFI, as a result, is a real one. A second
set of default clients did so by ‘collective aggression’ where a few rogue members either
collectively or individually, ­reneged on their repayment obligation by a daring attitude
of indiscipline.
In this respect, the study found that non-poor members fearlessly indulged in this
behaviour despite group pressure unlike the poor members who struggled diligently to
Case Study 1
Default by Aggression
Vikas Nagar Centre started with 2 groups of poor households. Shanti , a well off client was instrumental in the
group formation and was chosen as the Centre Leader (CL). After repaying the first two loan instalments of
Rs.227 per month, Shanti abruptly left Loni. In the meanwhile, the remaining members of in the Centre were
initially sharing the EMI share of Shanti presuming that she would refund the money on her return. When the
group pressurised her husband’s family, Shanti sent another two instalments in small amounts. But as weeks
went by, there was neither any further repayment by her nor sign of her return to Loni. When the group found out
that she had left her husband’s marital home and was at her parental home in Gurgaon, they tried various ways
to contact her – including spending on a tempo to visit Gurgaon to meet her personally but all in vain because
she proved a hard nut to crack. Despite the group’s persuasive as well as coercive tactics she refused outright to
repay her remaining 44 instalments. Rather, she was abusive, nasty and filthy in her language with the group
members when they met her. The group members (with a new Centre Leader Kunti Devi) struggled and repaid
the rogue defaulter’s (the group termed her ‘badmash” – rogue) 44 instalments totalling Rs. 9,988 by sharing the
burden among the remaining 9 poor members in their weekly repayments.
176 THE MICROFINANCE REVIEW  •  Volume VII(2)  July - December 2015

repay their loan instalments. Poorer members’ continual dependence on microcredit

loans ensured their regularity in repayment by comparison to non-poor members (Refer
Case Study 1).
A third type of willful defaults was found in the sampled centres when a non-­negligible
percent (7%) of clients defaulted through collusive practices. This is termed as ‘mili-
bhagat’ phenomenon. Default by collusion took two forms. In the first form, a member
acted as a conduit for obtaining membership for new ­clients for a monetary consid-
eration, receiving either a onetime fee or a part of the loan amount. Some field staff
described this phenomenon as ‘mili bhagat’ ­(meaning collusion) resulting in delayed
repayments or defaults in a few Centres. Another form of ‘default by collusion’ that was
prevalent was through mobilisation of members for forming groups by ‘dalals’ (agents or
ringleaders), who received money for their services (Refer Case Study 2). This dishonest
practice evidently encouraged group indiscipline and defaults by those members who
bought group membership by rent payment. Besides, in those groups formed by ‘dalals’,
it was found that many of the new recruits held multiple membership of other MFIs in
the study area; additionally, they had a track record of delayed repayments or willful
Case Study 2
Default by Collusion
In Lakshmi Garden Centre with 10 members, only two members were present for the meeting during the author’s
visit. Both the Centre Leader and Group Leader were not present though the former was found available at her
house next door. The group discipline was found to be weak in this Centre. It transpired that many members
were acquired by another Centre Leader in the area by taking a group initiation fee of Rs. 100 per member.
So there were problems of delayed repayments, absenteeism and default in this Centre because there was an
attitude of ‘I paid for my membership to the ‘dalal’ (broker) who recruited me’ resulting in defiance on the
part of many a member. Ultimately, when one such member defaulted, other repayment clients had to shell
out the defaulter’s share of loan amount overdue. As the group discipline had disintegrated, it was learnt from
the Centre Manager that this Centre would be closed down once the MFI recovered the final 52nd week’s loan
installments from the group members in the Centre including the defaulter’s share from them.

defaults.
One more category of defaulters were those who ran away (10%) or moved to another
location (12%) leaving no trace of their whereabouts. The peer group members of such
default clients had enormous difficulties in attempting to trace them with little help
forthcoming from default clients’ social circle (family or friends), forcing them to repay
all the outstanding dues of their fellow members who had absconded without fulfilling
the loan obligations. Economic hardships (health shocks, death of earning member) that
forced some of the members to default were found to be 10%.18

Proportion of Default Clients to Repayment Clients

The study looked at the proportion of default clients to repayment clients in the
­sample groups. Figure 3 presents the number of instalments that were left unpaid by
default clients.
Repayment Performance and Costs of Defaults in a Group Lending Programme– A Case Study....... 177

Figure 3 highlights that

Figure 3: Number of Unpaid Installments
40% of defaulters had failed
45
to repay between 37 to 50 loan
40
instalments, ­followed by 25%
who failed to repay between 21 35
to 36 loan instalments. In com- 30

Percentages
parison, while 25% had failed 25
to repay up to 10 loan instal- 20
ments, 10% of defaulter clients
15
had failed to repay between
11 to 20 loan instalments. The 10
study found that there were 5
a total of 60 defaulter clients 0
and 274 repayment clients in Up to 10 11 to 20 21 to 25 26 to 36 37 to 50
LI LI LI LI LI
the 27 Centres. Hence, the pro-
portion of defaulter clients to Note: LI = Loan Installments
repayment clients was found
to be 22%19 in the 27 centres in the sample.

Costs of Defaults
Hidden delinquency has its ramifications in terms of costs that are borne by the play-
ers in the group lending programme. Who are these players? What are the costs of hid-
den delinquency? In short, who pays for whom?
The study found that there are financial and non-financial costs that are imposed
as a consequence of default clients who violate both group norms and loan repayment
obligations at the expense of repayment clients who were disciplined in their loan re-
payment obligations. The sampled MFI remains unscathed with a record 100% on time
repayment record (OTRR) due to its recovery design mechanism. However, against this
fantastic repayment performance of the MFI, there are costs that reveal another side to
the repayment performance narrative. The costs of hidden delinquency are discussed
below from a dual perspective.

Financial Costs: Two Sides to the Story

Does the Lender Pay for Default Clients? Lender’s Side
Normally the lender faces a credit risk that a borrower is likely to default by failing
to make required payments. The risk is primarily that of the lender and includes lost
principal and interest, disruption to cash flows, and increased collection costs. The loss
may be either partial or complete. The moot question is did the MFI face any partial or
complete losses due to hidden delinquency in 27 centres that were sampled?
178 THE MICROFINANCE REVIEW  •  Volume VII(2)  July - December 2015

Findings reveal that no financial losses are incurred by the MFI due to a ­water tight
loan collection and recovery procedures followed at the field level. MFI’s procedures for
the field staff ensures that the Centre Manager collects the ­total weekly loan install-
ments owed by centre’s group members from the Group ­Leaders/Center Leaders during
each scheduled group meeting.20 This system of loan repayment collection is clearly
spelt out by the MFI’s procedures to the field level and branch office personnel to ensure
a 100% on time repayment rate (OTRR). It was observed by the author that there was
no divergence between the stated procedures and field practices.
How does the MFI achieve 100% OTRR? The process of collection is detailed below:
For example, assume there are two groups at a centre and each group consists of 5
members. Each member has to pay Rs. 227/per week as EMI for a loan of Rs.10, 000;
and the total collection from centre is Rs. 2,270 per week. If one ­client defaults, the other
nine members from both groups in the centre are required to repay that member’s share
(INR 227). Thus, the total amount of loan dues ­collected from the specific centre by the
CM remains intact at Rs. 2,270 per week. The joint centre liability feature enables the
field staff to use different strategies (when soft persuasion to the non-compliant member
fails, CM and BM issue point blank instructions to all the centre members) to ensure that
other repayment clients share the defaulting member’s EMI. In case of resistance from
the groups, the Centre Manager can resort to stronger methods, like refusing to sign the
attendance register or loan cards of individual members; and ultimately giving them
a time deadline on the same day to ensure that the total loan amount from the centre
is handed over to him. This loan recovery process of the MFI results in a 100% OTRR;
understandably, these practices guarantee that the MFI incurs no financial costs due to
defaulting. Who then bears the credit risk of MFI’s lending? The credit risk is transferred
to all the repayment clients in a centre.

Costs of Hidden Delinquency: Repayment Clients’ Side

Under the group lending programme of the MFI studied, when a group client ­defaults
either willfully or otherwise, it imposes an additional monetary ­burden on the ­regularly
repaying group members. In other words, loan delinquency manifests in terms of
­unexpected financial costs to the repayment clients. This is demonstrated below:
In a normal scenario, when all members of say 2 groups (Group A and Group B) in a
centre repay regularly. For each individual client, if the principal amount ­borrowed is
Rs. 10,000, then the total repayment amount to be paid by her over 52 weeks will be
equal to principal (Rs. 10,000) + interest (Rs. 1,800) = Rs.11,800; and the weekly EMI
to be paid by each member is Rs. 227.
However, if one member of Group A at the Centre were to default say after repaying 4
EMIs, then the financial cost for each individual member in her group as well as for the
other 5 members in Group B at the Centre would be costlier than what each client would
Repayment Performance and Costs of Defaults in a Group Lending Programme– A Case Study....... 179

have repaid if all members repaid regularly. This is due to a method followed by the MFI
in its recovery policy which involves a ­combination of Joint Group Liability and Joint
Centre Liability. In other words, this implies that the 4 remaining members of Group A
and the 5 members of Group B of the centre are held jointly liable to repay the defaulting
client’s unpaid loan dues for 48 weeks.
Therefore, when in one centre at Vikas Nagar with 2 groups, one member from group
A defaulted and the remaining 9 members of the centre (including 5 ­members of group
B) were held jointly liable and had repaid the defaulting client’s unpaid loan dues for 48
weeks. Translated in financial terms, the cost of borrowing per member for 9 repayment
clients in this Centre goes up from 18% to 30% as shown below.

Costs for Repayment Clients at the Centre Level

• Unpaid loan installments of one defaulter for 48 weeks = Rs. 227 x 48 = Rs.
10,896
• Unpaid share of default client to be contributed by each of the 9 repayment cli-
ents at Vikas Nagar Centre = Rs. 1,210.67 paise over 48 weeks, Or,
Weekly share to be contributed by each of the 9 repayment clients = Rs.25.22
paise per week.
• Total amount repaid by each repayment client over 52 weeks=Principal amount
+ interest amount for her loan + share of defaulting client’s ­unpaid dues. That
is: Rs. 10,000 + Rs. 1,800 + Rs. 1,210.6 paise = Rs. 13,010.6 paise.
In effect, the cost of loan per each of the repayment client increases from a flat 18% to
30%. The implication is that the design of the JLG programme adapted by the lending
MFI is loaded against poor members of the other group/s in a Centre as well because
they are also held jointly responsible and are required to repay the loan overdue arrears
of a defaulting client who was not part of their group.

Costs for Repayment Clients at the Group Level

Normally, as per the group lending mechanism, the repayment clients/­members be-
longing to Group A in Vikas Nagar would be required to repay the ­defaulter’s share of
loan overdue. Consequently, they would have paid a higher price than what was repaid
by them as shown above because the non-group (Group B) ­members in Vikas Nagar Cen-
tre were compulsorily required to contribute the defaulter’s share as well.
If only the four members of Group A (whose 5th member defaulted) were ­required to
repay the defaulter’s loan arrears, the financial cost arising out of defaulter’s behaviour
in their group would have been as follows:

• Unpaid loan installments of the defaulter for 48 weeks = Rs. 10,896

• Unpaid share of defaulter to be contributed by each of the 4 repayment ­clients of
180 THE MICROFINANCE REVIEW  •  Volume VII(2)  July - December 2015

Group A at Vikas Nagar Centre = Rs. 10,896/ 4

= Rs. 2,724 per each of the 4 repayment clients over 48 weeks. Or,
= Rs. 56.75 paise per week for each of the four repayment clients in Group-A
• Total amount repaid by each repayment client of Group A over 52 weeks = ­Principal
amount + interest amount of her share of loan + share of
­ defaulting client’s unpaid loan dues. That is,
= Rs. 10,000 + Rs. 1,800 + Rs. 2,724
= Rs. 14,524
In other words, the cost of borrowing Rs. 10,000 for each repaying client of Group A
would have risen from 18% to 45% in a scenario if all the repayment ­clients of Group
B were not compulsorily made to bear the cost of the defaulting client from Group A.
By comparison, the JLG methodology adopted by the ­studied MFI reduces the cost of
defaulting for each repayment client.

Average Cost for Repayment Clients

In the present sample, there were a total of 60 defaulting clients and 274 ­repayment
clients; and the average unpaid weekly instalments were 29. Assuming if they were
in the first loan cycle, the average EMI per week per client would have been Rs. 227.
Therefore, the total amount of unpaid EMIs that would have been shelled out by 274
repayment clients would have been:
Total EMI amount to be shared by 274 repayment clients = Rs. 227X29X60/274
= Rs. 1,441.521 paise per repayment client, Or,
= Rs. 49.70 paise per week, which is the Average Cost faced by each repayment
client for shelling out the loan dues that were unpaid by the default clients.

Non-Financial Costs
When some members of group credit programme abdicate their repayment
­responsibility, it affects not only their cost of borrowing but also leads to a number of
dysfunctional consequences both at the individual level and group level. At the ­individual
level, as evidenced in various extant research, there are extreme personal hardships for
the poor members in pulling together a certain sum of money (to contribute the share
of defaulters’ EMIs) at the cost of welfare of family (for instance, reduction of basic
­expenses especially on food by poor clients) or borrowing from someone or somewhere
to stand by the group liability condition.
At the group level, another negative spillover that was observed was in terms
of ­acrimonious exchanges between members when faced with the reality of being
­compelled to contribute the defaulters’ unpaid loan amount. Consequently, the posi-
tive spill over of group dynamics, normally seen in terms of group cohesiveness and
­bonding amongst members disintegrated, resulting in fragile trust among the members
Repayment Performance and Costs of Defaults in a Group Lending Programme– A Case Study....... 181

at the Centre. ­Another dysfunctional effect was increased transaction cost in terms of
the hours of time, energy and work hours lost for those repayment clients who had
to struggle unsuccessfully in tracking down wilful clients who ran away, or to exert
­pressure on defaulters/ their families to make them to repay the overdue loan amount
of default clients. Last, but not the least fall out of defaulting clients’ behaviour is the
­“demonstration effect’ that was seemingly leading to growing incidence of audacious
defaults in the second cycle of loan in some of the Centres.

What Are the Missing Links?

In this final section, the paper examines certain factors that throw insights into the
plausible factors – the missing links in the repayment performance story of MFI - that
could have played a role in the hidden loan delinquency amongst ­borrowers of the
sampled MFI. These factors are viewed from group-specific and programme specific
­perspectives.
In any group lending methodology, group cohesion plays a significant role in under­
standing between the group members and nurturing relationships that would lead the
peer group members to help members experiencing difficulties in repayment, thus ­aiding
the repayment performance of the group. Among some factors, two factors that aid group
members’ understanding, trust and group cohesion relate to: a) the amount of time the
members of a group get to spend with each other at least during the group ­meeting, and
b) whether they share similar socio-economic characteristics (ethnicity, ­income, sharing
of similar social/­ economic activities, living in the same ­neighbourhood, etc).
While group meetings were held at an appointed venue and time by the ­Centre
­Managers in all the Centres, it was observed that in some of the disturbed ­Centres,
peer members’ complete knowledge about personal information or ­family ­details about
each other was weak and fragile. Information that would normally be known to group
members who meet regularly at meetings was observed to be unexpectedly low.22 This
arose from lack of time and low attendance. Though many members in each Centre
were present for the weekly meetings on time, the scheduled half hour was found to be
spent in getting the money collected by the CL/GL and to hand over the weekly EMIs to
the Centre Manager.
Moreover, the weekly meetings were treated as ‘repayment day’ for the ­weekly EMI,
as was witnessed by the author. For instance, it was observed that in two Centre group
meetings, majority of members sent in their weekly loan EMI through a relative or a
child and neither the Centre Leader was present. ­Reportedly, this was normally the
case, rather than an exception. Ostensibly, there was neither time nor inclination for any
meaningful personal interaction between group members. Though the scheduled meet-
ings were held, the missing element was the group cohesion, which arose due to group
indiscipline in some of the (disturbed) Centres. In one Centre, where only two members
182 THE MICROFINANCE REVIEW  •  Volume VII(2)  July - December 2015

were present, their awareness about peer members was not sufficient enough to indicate
about the prevalence of cohesion in their group.
Secondly, in a group lending programme, the socio-economic profile of the entire
group can also affect repayment. Though, in general, members were from similar
­community, age and neighbourhood reflecting the presence of ­social ­homogeneity in
Centres; however, the process of conducting these meetings ­indicated that members
seemed to attend the meetings to fulfill certain basic and routine requirements such as
to record attendance, to repay the weekly loan EMI and to leave after the group took the
mandatory pledge of joint liability. Social bonding normally seen in members of a group
which meets every week was a missing element.
Though there was general amity within the groups, the group members in general
exhibited neither any orientation nor had time to build mutual understanding, trust and
social ties, which play a significant role in group cohesion. Under such circumstances,
lack of social connectedness would not aid repayment performance. Repayment clients
did exert group pressure on defiant member/s, but their ability to do so was limited
­because of tenuous group cohesion.
One important reason many women joined the JLGs was because they knew it was
easy to access loans via the group; besides, it was cheaper to obtain credit from a group
lending programme than from informal channels. Many candidly admitted that they
formed groups for accessing loans by virtue of knowing each other as neighbours. This
was partially one of the reasons for them to join the group lending method, and of
course, it was found to be a convenient means of borrowing easily.

Concluding Observations
In theory, the effectiveness of group-lending is based on mutual ties – of ­social fabric
binding the women in lending groups together. In this case, the ­theories about group
­selection seem not to imply; women choose groups based on ­convenience, rather than
intimate knowledge about one another’s circumstances. Furthermore, while group meet-
ings are designed to enhance group social ­connectedness, when they don’t take place –
as was the case with this MFI – it becomes harder for groups to enforce loan repayment
through social means.
An interesting aspect of the MFI’s lending strategy for ensuring 100% repayment
­performance record is in built in its lending model, where the Joint Group Liability of
members in a group is accompanied with the Joint Centre Liability. This is implemented
by its field personnel, who earnestly adhere to the established loan collection ­processes
at the field level, which permit it to maintain a 100% on time repayment rate by ­shifting
the burden of credit risk of defaulters onto all the group members of the entire ­centre.
However, its 100% repayment performance is at the expense of poor and regularly
­repayment clients. This is demonstrated by the fact that a non-negligible number of
Repayment Performance and Costs of Defaults in a Group Lending Programme– A Case Study....... 183

members (60) or 22% of clients – nearly a quarter – defaulted in the 27 centres studied.
These defaults, despite being hidden, present real problems that can greatly hinder the
effectiveness of group lending programmes. The outcome of the hidden delinquency
is reflected in the unforeseen costs for the repayment clients. Unfairly, the regularly
repaying poor and needy clients had to carry the financial burden, compelling them to
pay back much more than they would otherwise have repaid. They also imposed other,
non-financial costs, including strained social ties between the group members in the
centre, as well as increased transaction costs borne by the repayment clients in terms
of spending valuable time and effort in paying back the additional funds imposed due
to delinquent members. Though the MFI’s repayment performance record is high, the
humane angle of ‘poor’ and ‘regular’ repayment clients’ interests have been seemingly
uncared for in the process.
In seeking to set a benchmark of very high repayment performance (as high as 100%
like the sampled MFI), an area of concern is whether the credit risk of the MFI as the
lender that was shifted to the needy poor borrowers in the garb of ‘joint group cum
joint centre liability’ is consumer centric approach? The findings pose a number of
­questions that need the attention of grassroots practitioners and academics alike. Is
it not against the tenets of consumer protection? What is the protection mechanism
devised for ­safeguarding the interests of the poor regularly repaying clients? What are
the basics that need to be remembered by the practitioners to balance the interests
of ­sustainability, outreach and targeting? What are the challenges and tensions faced
by the field level staff in fulfilling the MFI’s targets and goals set versus the need for
­empathetic understanding of the ‘good’ (and needy) borrowers as against the ‘bad’
(and wilful) borrowers? In the process of helping the poor to obtain credit, the role of
­microfinance institutions is not limited to their financial report claiming that a large
number of poor women have benefitted through their door step and easy disbursement
of credit to a segment that remains largely outside the mainstream of formal credit.
What is needed is ‘poor sensitive approach’ to ensure that the really needy poor and
regularly repaying client is not penalised for the intentional practices of ‘bad’ borrowers
as well as due to the hardnosed business strategy camouflaged as a ‘joint group cum
joint centre liability’. Another related area of concern is the challenges faced by the field
level personnel in ensuring MFI’s record of 100% OTRR is maintained. However, it is to
be understood that the role of field personnel is to be viewed against the fact that they
function under ­particular pressures to secure high rates of repayment as their employing
MFI seeks financial sustainability and are evaluated primarily on the basis of their loan
disbursement and collection performance. As a result, the field personnel with varied23
roles faced the rival demands between fulfilling given targets from client acquisition to
ensuring 100% OTRR by comparison with borrowers requirements. A disturbing issue
in this catch twenty two situation was the presence of a number of clients with multiple
184 THE MICROFINANCE REVIEW  •  Volume VII(2)  July - December 2015

borrowings from other MFIs operating in the area, which was faintly observed, though
not surfaced openly, during the field interactions. This could perhaps ­offer one more
insight into the nature of wilful defaults that happen ­because the ‘shared clients, shared
JLGs – multiple MFIs’ syndrome is not a remote possibility. This phenomenon needs
probing in future to understand the triggers of hidden delinquency for any growing MFI
seeking to offer helping hand to large segments of poor women and their families in
need of credit.

acknowledgement

[I am thankful to a small field grant from the Center for Microfinance, Chennai
under the Microfinance Researchers Alliance Programme. I am grateful to Deepti,
K C, Programme Coordinator, MRAP for providing support and encouragement at
all stages of the study. My special thanks to N.Srinivasan, Bindu Ananth and other
participants for their ­suggestions on the preliminary findings at a MRAP workshop at
Chennai in August 2010.]

disclaimer

[The author alone is responsible for the views expressed.]

Notes
1. The Domino effect is a negative externality associated with group lending.
2. Group solidarity refers to the willingness of the lending group to repay for one of its
group members when repayment difficulty is experienced due to personal shocks.
3. Loni is a peri-urban located on the border of Delhi and Uttar Pradesh and has a
large number of small enterprises like garments making, embroidery, accessories
like cosmetic jewelry, paper plates, dona (moulded leave plates) making, garments
making, etc. Products manufactured in this area are largely marketed in Delhi and
NCR region.
4. Though the name of the MFI is withheld, it is suffice to state here that it is a
­professionally managed and public listed NBFC since 1990. It has grown ­impressively
since 2005. Its customer base has increased by over 1080% and though it has a
dominant urban presence, its rural operations began in the second half of 2008 and
it had reached 70,000 loan clients and INR 44 crore outstanding portfolio in less than
18 months. Its disbursement increased from 19.93 crore in 2005-2006 to 74.6 crore in
April - September 2009.
5. No specific records on default rates or defaulting clients are maintained by the
sampled MFI. Available records pertain to scheduled loan collection ­details for each
centre and as per the records, recovery of weekly installments for every centre is
available and the loan collection is 100% by the field staff.
6. Number of kin relations in a centre is equal to number of groups minus one. i.e., if
the centre has five groups then it can have at the most four kin ­relations.
7. This feature implies that if there are 4 groups with five members in each group, then
20 members in a Centre are held jointly liable to repay the overdue loan installments
of a defaulting member of any group in the Centre.
8. Every group is headed by group leaders (GL), who nominate a Centre ­Leader.
Repayment Performance and Costs of Defaults in a Group Lending Programme– A Case Study....... 185

9. Centre manager is MFI’s loan officer.

10. The Centre Leader is responsible (along with the Group Leader) for ensuring 100%
attendance, 100% repayment and loan utilisation in her Centre.
11. No individual group meetings are held formally at the centre; but if a group wants to
meet, it can do so informally.
12. This implies that in case a group member had defaulted on some ­installments,
the Centre manager recovers the money of defaulter’s installment from all the
group members at the Centre on the day when the loan EMI is due to be paid. No
­deviation in this established practice of recovery is permissible, notwithstanding any
­inconvenience or hardship – physical or emotional to the group members in any
Centre.
13. Rs. 5,000, Rs. 8,000 and Rs. 10,000 is provided in the first cycle loans; ­second cycle
loans are Rs. 12,000 and Rs. 14,000. Repayment schedule is weekly with fixed EMIs
for 52 weeks.
14. In less than 18 months since it began its rural operations, this MFI has reached
70,000 borrowers and INR 44 crore portfolios with 100% on time repayment rate
(OTRR) as on December 2009. It aims to reach 10,00,000 borrowers by March 2013.
15. Heterogeneous refer to groups with women from different religious and ­social
backgrounds. Homogeneous refer to groups with women drawn from only one
religious background/community.
16. Active clients refer to those who had borrowed during the loan cycle.
17. The total number of clients on MFI’s enrollment during the survey period was roughly
4174 and 4,000 were active clients. 835 groups in 298 Centres were ­functioning
during the survey period.
18. Percent in Figure 2 is >100% due to overlapping of categories.
19. =60 / 274 * 100
= 21.89 or 22 % in 27 Centers.
20. Group Leaders and Cenre Leaders are held responsible for collection of ­weekly EMIs
from all the members.
21. Rs. 1,441.5/29 = 49.70 paise
22. For instance, knowledge about peer group members like the number of ­family
­members in the household was unknown to members in groups, and a ­sizeable
number of group members admitted that they do not know such family details or
personal information (like the village they come from) about each other ­because they
come to the group meeting to repay their weekly EMI and to mark their ­attendance,
as required by their loan contract.
23. Field personnel perform diverse set of roles from getting new clients, new centres, to
client training etc.

References

Besley, T and S Coate (1995): “Group Lending, Repayment Incentives and Social
­Collateral”, Journal of Development Economics, No. 46, pp. 1-18.
Huppi, M and G Feder (1990): “The Role of Groups and Credit Cooperatives in Rural
Lending”, World Bank Research Observer 5, No. 2, pp. 187-204.
Microfinance Information Exchange (MIX), Retrieved from http://www.mix­market.org
Sa-Dhan (2008): “The Bharat Microfinance Report: Quick Data 2008”, Retrieved from
http://www.mixmarket.org
Wenner, M (1995): “Group Credit: A Means to Improve Information Transfer and Loan
­Repayment Performance”, Journal of Development Studies, Vol. 32, No. 2, pp. 263-81.
 Community Based
­Microfinance: A Study with
Reference to Urban Women
Self-Help Groups in Andhra
Pradesh and ­Telangana
K. Raja Reddy*, TCS Reddy**, S. Prahalladaiah***

Abstract
The study is aimed During the past decade, the SHG movement gained an
to understand the i­mpetus not only in rural area but also in the urban ­areas of
­microfinance activities India. As the Government of Andhra Pradesh (AP) realised that
of the SHGs promoted SHGs and its federations are the best tools for poverty ­reduction
in the urban areas of and empowerment of rural women-folk, it has started similar
AP and Telangana kind of programme in the ­urban areas known as Mission for
State (TS) such as Elimination of Poverty in Municipal Areas ­(MEPMA). It has
­various financial ­facilitated about 3 lakh self-help groups (SHGs) covering 32 lakh
services provided to women in 189 municipalities and 19 municipal ­corporations in
their members and the the undivided state of AP. About 80% of SHGs availed credit
issues and ­challenges in linkage with banks at least once since inception. Besides, SHGs
providing the financial disbursed loans to their members from group ­corpus as well
services. as external credit sources - slum level federations (SLFs) and
Sthree Nidhi Credit Cooperative Federation Ltd.
In this context, the present study is aimed to understand
the microfinance activities of SHGs promoted in the urban
­areas of AP and Telangana state (TS). The study has covered
2,000 SHGs in 40 towns in 10 districts of AP and Telangana.
The study finds that though there are some serious issues like
* Director (i) impounding of large funds in SHG SB accounts, (ii) poor
Research and Advocacy,
APMAS, Hyderabad.
credit linkages with slum level federations and Sthree Nidhi,
Mail: krajareddy@apmas.org (iii) ­distribution of member savings/ group funds and revolv-
** CEO and MD ing fund and (iv) defaulting to banks. A large number of SHGs
APMAS, Hyderabad.
Mail: creddy@apmas.org and SHG members have however benefited with microfinance
*** Manager services, especially savings and credit services.
Research and Advocacy,
AAPMAS, Hyderabad.
E-Mail: prahallada2009@
gmail.com Key Words: Community Based Microfinance, Slum and Town Level Federation
Community Based ­Microfinance: A Study with Reference to Urban Women SHGs ...... 187

Introduction
According to Tendulkar Methodology, 29.8% of people are living below poverty line
in India, whereas in AP, it is 21.1%. In urban areas, the percentage of people ­below
­poverty line in India is 20.9% and 17.7% in AP (Planning Commission, 2012). The urban
­poverty in India is 21.7%, whereas it is 20.7% in AP. There are 22.15% people living un-
der the ­poverty line in India according to 2004-05 survey by ­National Sample Survey
­Organization (NSSO). During the last decade urban ­poverty has increased due to high
rate of rural-urban ­migration, speedy ­urbanisation, lack of opportunity to quality health
and educational ­services, ­restricted access to employment opportunities, income, etc. As
a result, there are many issues in urban areas such as over population, increase of slums,
lack of proper housing facilities, unhygienic environment, no suitable social security
schemes, inadequate provision of ‘public’ infrastructure and services (piped ­water, sani-
tation, drainage, health care, schools, emergency services, etc.), ­­inadequate protection
by the law, exploitation, discrimination, etc.
Both the state and central governments have implemented many programmes for
the benefit of urban poor such as Nehru Rozgar Yojana (NRY), Urban ­Basic ­Services for
the Poor (UBSP), Prime Minister’s Integrated Urban Poverty ­Eradication Programme
(PMIUPEP), Swarna Jayanti Shahari Rozgar Yojana (SJSRY), Urban Self ­Employment
Programme (USEP) to provide employment to the urban unemployed poor and to
achieve social sector goals. Besides, the Government of AP has implemented many
­programmes for urban poverty ­reduction such as ­Abhayahatham, Jansri Bhima Yojana,
Urban Women ­Empowerment ­Programme, Urban Women Self-Help Programme, Urban
Street Vendors ­Programme, AASARA Programme, Urban Health Programme, ­Integrated
Low Cost Sanitation Scheme, Sustainable Training and Employment Programme, Rajeev
Yuva Kiranalu, etc.
The AP Urban Services for the Poor (APUSP) was implemented by the ­erstwhile
­Government of AP in 31 Class-I Towns to improve the urban poor’s ­accessibility
to ­sustainable ­services with the financial support of Department for International
­Development (DFID). It aimed at achieving a sustained reduction in the vulnerability
and poverty of the urban poor in AP. It began in mid 1999. During the past decade, the
SHG movement gained an impetus not only in rural but also in urban areas of ­India.
As the Government of AP realised that SHGs and its federations are the best tools for
­poverty reduction and empowerment of rural women-folk, it has started similar kind of
programme in the urban areas known as Mission for Elimination of Poverty in ­Municipal
Areas (MEPMA).
About 65% of SHGs became members in SLFs and TLFs. The SHGs have a total ­corpus
of Rs. 471.3 crore with an average of Rs. 17,383 per SHG. About one-third of SHGs have
a norm of holding weekly meeting and two-third have either fortnightly or monthly
­meetings; and more than three-fourth of SHGs have their own book-writers. About 88%
188 THE MICROFINANCE REVIEW  •  Volume VII(2)  July - December 2015

of SHGs were credit linked to bank; of which, 35% were SHGs bank linked twice followed
by once (27%) and thrice (17%). During the year 2010-11, a total loan of Rs. 165,803 lakh
were disbursed to 95,653 SHGs; and 1.4 lakh SHGs got Pavalavaddi of Rs. 87.93 crore.
The SHGs have got an interest subsidy (Pavalavaddi) of Rs. 213.13 crore on SHG-bank
linkage loans. Besides SHG-Bank linkage, about 76.7% of SHG members availed loan of
Rs. 4,739 crore from microfinance institutions (www.mepma.org)

Objectives and Methodology of the Study

Objectives: The present study is aimed to understand the microfinance activities of
the SHGs promoted in the urban areas of AP and Telangana State (TS). The specific
­objectives of the study is (i) to understand various financial services provided by the
SHGs to their members; and (ii) to know the issues and challenges in providing various
financial services to the SHG members.
Sampling Frame: The universe of the study was all the SHGs in the urban local ­bodies
of AP and TS. In AP, both Coastal Andhra and Rayalaseema regions were ­covered.
All the districts in TS have treated as one region known as Telangana. Based on the
number of districts in a region, four districts from Coastal Andhra, two districts from
­Rayalaseema and four districts from Telangana were selected by applying ­Probability
Proportionate to Size (PPS) sampling method. It was also applied for the selection of
towns within the district, slums within the towns and SHGs within the slums. Totally,
the study has ­covered 2,000 SHGs in 400 slums in 40 towns of 10 districts in AP and
TS (Table 1).
Table 1: Sate-wise Details of Sampling Units, Size and Methods
Sampling Units Sample Size Sampling Method
AP TS Total
1. Districts 6 4 10 Covering all the regions in AP and TS
2. Towns / ULBs 24 16 40 Two to five towns per district were identified based on the
number of towns in a district. If the number of towns are less than
five, two towns were selected; If the number of towns are five to
ten –four towns were selected depending on the geographical
area; If the number of towns are more than 10, five towns were
selected; Totally, 40 towns were selected for the study
3. Slums 240 160 400 Probability Proportionate to Size sampling method
4. SHGs 1200 800 2000 Probability Proportionate to Size sampling method

Data Collection Tools and Period of Fieldwork: An interview schedule was ­developed,
pre-tested and administered to get information from the SHGs. It mainly focuses on
the profile of SHGs and SHG members, savings, loans, insurance and issues faced by
the SHGs. Fieldwork was carried out for a period of three months in three phases from
November 2013 to February 2014.
Community Based ­Microfinance: A Study with Reference to Urban Women SHGs ...... 189

Findings of the Study

Profile of Sample SHGs and SHG Members
a) SHGs: Of the sample SHGs, majority of the groups were formed by the ­government
(69%) followed by community (24%) and slum level federations (8%). The SHG size is
between 10 and 20 with an average of 10.6 members. However, majority of the SHGs
formed with 10 (74%) and more than 10 members (22%). The SHG size is big in TS
(on an average 10.8 members) as compared to AP (10.4 members). The average age
of SHGs indicates that SHGs in AP (6.7 years) are older than TS (6.1 years). It could
be because the SHG ­promotion was started little early in AP. Out of 2,000 SHGs, 86%
have ­membership in slum level federations (SLF) as the promoters are very much
keen in promotion of SHG federations at slum and town levels.
To understand the quality of SHGs, the sample SHGs were graded by ­administering the
Critical Rating Index (CRI) tool developed by NABARD. It mainly covers (i) ­solidarity
among the members, (ii) members’ awareness on group norms, (iii) ­periodicity of
meetings and member attendance, (iv) financial transactions within or outside the
meetings, (v) regularity of savings, (vi) velocity of lending, (vii) mode of repayment,
(viii) defaulting and (ix) book keeping. Each variable has its weightage of marks in a
3 or 4 point scale. Based on the total number of marks obtained, all the groups were
graded as A, B and C. If a group scores 70 and above marks then it was graded as ‘A’,
between 50 and 69 marks then it was graded as ‘B’ and less than 50 marks then it
was graded as ‘C’. The grades of SHGs show that about one half of the SHGs are in A
(17%) and B (37%) grades and another half of SHGs are in C-grade. Similar trends are
found between states (A-grade: AP-18%, TS-17%; B-grade: AP-35%, TS-39%; ­C-grade:
AP-49%, TS-43%). It indicates that the quality of urban SHGs is poor in both the states.
b) SHG Members: The social category of sample SHG members shows that majority of
them are BCs (54%) followed by SCs (16%), Minorities (14%), OCs (14%) and STs
(2%). The literacy levels of SHG members designates that majority of them are ­literate
(59%). The age and marital status shows that most of the SHG women are between
18 and 60 years (96%) and married (83%); however, about 15% of the members are
widowed and separated. About 70% of the SHG members have own house and the
remaining 30% of the members are in ­rented houses. Of the total SHG ­members, 24%
of the members were engaged in labour, 22% in business and 23% in self ­employment
including tailoring (16%), jobs (5%) and the others such as domestic servants,
­agriculture and service providing caste activities.

Promotion of Savings
Promotion of savings is one, of all the six important components of SHGs - ­savings,
meetings, lending, book keeping and accounting, leadership and participatory decision
190 THE MICROFINANCE REVIEW  •  Volume VII(2)  July - December 2015

making. The SHGs encourage both mandatory as well as voluntary savings. The SHGs
not only mobilize savings from their members, they also ­promote savings with their
federations and Sthree Nidhi Credit Cooperative Federation Ltd., as members of them.
a) Purpose of Savings: During focus group discussions, the SHGs have reported the
­purpose of savings as (i) savings is compulsory in SHGs (88%), (ii) it is a group
­decision to promote savings (82%) and iii) to avail loans from external credit
­agencies (100%) like banks, SLFs and Sthree Nidhi. It shows that the SHG members
­considering savings as collateral to get loans rather than looking it as social risk
mitigation means at old age and to address the future needs like children education,
marriages, asset creation, etc.
b) Periodicity and Amount of Savings: Of the 2,000 SHGs, majority of the SHGs have
the practice of monthly meetings and savings (96%). However, a small number of
SHGs have reported no schedule/ no regularity (4%). The amount of savings they do
vary from group to group, but all the members in a group save equally. There is no
practice of voluntary savings in the SHGs of both the sample states. The amount of
savings per month and member varies between Rs. 20 and Rs. 200 with an average
of Rs. 89. The data shows that majority of the SHGs save an amount of Rs. 100 (69%)
per month and member followed by Rs. 50 (27%), less than Rs. 50 (4%), more than
Rs. 100 (3%) and between Rs. 51-99 (0.9%). It shows that most of the SHG members
save either Rs. 50 or Rs. 100 per month.
The percentage of SHGs saving Rs. 50 per month and member is more than double
in AP (35%) when compared to TS (15%). But the percentage of SHGs saving Rs. 100
is high in TS with 80% as compared to AP (61%). Of all the age groups of SHGs, the
percentage of SHGs saving up to Rs. 50 is low in < 3 year old groups with 17% when
compared to other age groups (3-6 years – 28%; 6-9 years – 29%; 9-12 years 27%; and >
12 years – 29%). Similarly, the ­percentage of SHGs saving up to Rs. 50 is double in non-
mission towns with 30% when compared to mission cities (15%). Further, the data in
figure 1 shows that there is a difference in the average amount of savings per month and
member ­between the status of ULBs - Mission and non-mission cities, age of ULBs - old
and new, between districts and age and grades of SHGs. The ­average monthly savings
per member and month is high in urban SHGs (Rs. 89) as ­compared to SHGs in rural AP
(Rs. 69) and in India (Rs. 53).
c) Members’ Savings with SHGs: All the 21,092 members of 2,000 sample SHGs have a
total savings of Rs. 9.43 crore with an average of Rs. 47,139 per SHG and Rs.4,470 per
member. Table 2 shows that many SHGs have a total savings of Rs. 26-50 ­thousands
followed by Rs. 51-75 thousands (27%), less than Rs. 25,000 (17%), Rs. 75,000-1,00,000
(8%) and more than Rs. 1 lakh (3%). The percentage of SHGs that have savings less
than Rs. 50,000 is high in AP (65%) when compared to TS (57%) as it is owing to
large amount of ­savings per member and month in TS when compared to AP.
Community Based ­Microfinance: A Study with Reference to Urban Women SHGs ...... 191

Figure 1:Average Amount of Savings per month and Member (in

103 99 100 Rupees)
94 95 94 93 97
100 89 92 88 89 88 88 89 86 92
87 85 87 84 83
76 77
80
65
60

40

20

0
KRN
EG

TG
VSP
ATP

GHMC

NZB

AP

Other

<3
PKM

KHM

6-9
Mission
KHN

3-6

9-12
>12
KNL

Old
New

A
B
C
Total Districts States Cities ULBs SHG Age in years Grades
There is a difference in the average amount of members’ savings between new
(Rs.56,121) and old (Rs. 46,410) ULBs. The grade of SHGs and the ­average total ­members’
savings are positively correlated (A-grade – Rs. 52,516; B-grade – Rs. 50,417 and C-grade
– Rs. 42,483). Similarly, the age of SHGs and the ­average total savings of members with
SHGs also positively correlated. It means the age of SHG increases, the average total
­savings of members with SHGs also increases (<3 year old SHGs – Rs. 21,169; 3-6 year
old SHGs – Rs. 42,311; 6-9 year old SHGs – Rs. 51,857; 9-12 year old SHGs – Rs. 61,518 and
>12 year old SHGs – Rs. 74,932). ­However, there are small amount of savings in some
old SHGs. The above ­discussion demonstrates that the amount of members’ ­savings with
SHGs ­depends on the amount of savings per month and member, age and size of SHG,
savings to repay loan installments, ­refunding at the time of membership withdrawal, etc.
d) SHG Savings with Federations: Besides savings from SHG members, the SHGs have
been saving with slum level federation and Sthree Nidhi Cooperative Society. The
SHGs that have membership with SLF have been saving at the rate of Rs. 10 per
member and month. The amount of ­savings depends on the number of members
in the group. For instance, if there are 12 ­members in a group, the total amount of
­savings of a group with SLF is Rs. 120 per month (12 members @ Rs. 10 per month).
Out of 86% of SHGs that have membership with SLF, 81% of SHGs have a total
savings of Rs. 68.61 lakh with an ­average of Rs. 4,219 per SHG. The average SHG
savings with SLFs varies between ­districts and states. It depends on the period of as-
Table 2: Members’ Savings
sociation with SLF, number of members S. Amount AP TS Total
in a group and the amount per month No Rs. in ‘000 F % F % F %
and member. During FGDs, the groups 1 < 25 212 17.7 127 15.9 339 17.0
2 26 - 50 561 46.8 331 41.4 892 44.6
have reported the purpose of savings 3 51 - 75 300 25.0 246 30.8 546 27.3
with SLFs as it is mandatory to be a 4 76 - 100 95 7.9 59 7.4 154 7.7
member of SLF and to avail loans from 5
> 100
Total
32
1200 100
2.7 37 4.6 69 3.4
800 100 2000 100.0
federation. Note: F refers Frequency
192 THE MICROFINANCE REVIEW  •  Volume VII(2)  July - December 2015

Credit Activities
The SHGs’ credit activities include mobilisation of funds from formal credit ­agencies,
disbursement of loans from group and external funds, repayment of loans to external
agencies, recovery of loans from members and default ­management.
a) Mobilisation of Credit: The SHGs mobilise funds from credit agencies such as SLFs,
banks, and microfinance institutions to provide credit services to their members.
Normally, the SHGs save with, and credit linked to banks, slum level federations
and Sthree Nidhi Credit Cooperative Federation Ltd. The data shows that at present,
majority of the SHGs have credit linked with only one agency (58%) followed by two
(24%) and three (2%) agencies. But, some of the SHGs (17%) don’t have credit link-
age with any agency. The percentage of SHGs credit linked with multiple agencies is
high in TS (32%) when compared to AP (22%).
Table 3 shows that majority of the sample SHGs (78%) have a loan outstanding of
Rs. 22.8 crore with banks; there are 27% and 7% of SHGs have loan outstanding of Rs.
54 lakh and Rs. 85 lakh with SLFs and Sthree Nidhi Credit ­Cooperative Society respec-
tively. It shows that Sthree Nidhi has more ­opportunities to credit link with SHGs in both
the states. There is no sig- Table 3: Details of Credit Linkages with External Agencies ( Amount Rs. in Lakh)
Particulars AP TS Total
nificant difference between Bank SLF SN Bank SLF SN Bank SLF SN
states in the percentage of 1. % of SHGs 79 22 6 75 35 9 78 27 7
SHGs credit linked to banks 2. Amount of loan 2,605 43 53 1,450 46 45 4,055 89 97
3. Avg. loan per SHG 2.7 0.2 0.8 2.4 0.2 0.6 2.6 0.2 0.7
and Sthree Nidhi. But the 4. Loan outstanding 1,446 26 46 834 28 38 2,280 54 85
percentage of SHGs credit
linked to SLFs is high in TS when compared to AP. However, there is no significant dif-
ference between the states in the average amount of loan per SHG from banks, SLF and
Sthree Nidhi.
b) Loan Outstanding with SHG Members: About 91% of SHGs have loan outstanding
with members of Rs. 28.82 crore with an average of Rs. 1.58 lakh. But, there are
about 9% of SHGs who don’t have any loan outstanding with the members. It is high
in < 3 year old SHGs (14%) when compared to other SHG age groups (3-6 year old
SHGs -9%; 6-9 year old SHGs -6%; 9-12 year old SHGs-7%; >12 year old SHGs-7%).
The SHGs, which do not have loan outstanding with the members is high in C-grade
SHGs when compared to A grade (4%) and B grade SHGs (4%). The average amount
of loan outstanding with the members also varies between mission (Rs. 1.02 lakh)
and other cities (Rs. 1.55 lakh), between old (Rs. 1.41 lakh) and new ULBs (Rs. 1.86
lakh) and between grades of SHGs (A grade – Rs.1.85 lakh; B grade – Rs. 1.65 lakh
and C grade – Rs. 1.12 lakh).
At present, about 9% of SHGs don’t have loans outstanding with the members. It
means that there is no lending from SHGs to members. It could be because of (i) delay
in getting repeat bank linkage, (ii) no on lending from SHG funds owing to impounding
Community Based ­Microfinance: A Study with Reference to Urban Women SHGs ...... 193

of SHG funds by the banks, (iii) other dynamics within the group such as distribution of
group funds once in a year/ along with SHG-bank linkage loan.
c) Loans from Group Funds: Total loan outstanding by the members to SHG is Rs. 2,883
lakh. The loan outstanding by the SHGs to banks and other external agencies is
Rs.2,455 lakh. If we assume that whatever the amount of loan repaid by the ­members
to SHGs, is paid by the SHGs to banks, then the share of SHGs to loan outstanding
with members is very minimal (16%) when compared to external credit agencies
includes banks, SLF and Sthree Nidhi Credit Cooperative Society (84%). Further, if
we assume that the total savings of members with SHGs is as total fund of SHGs of
Rs. 942.8 lakh, then the amount as loan outstanding with members is of Rs. 453.3
lakh (48%). It indicates two things. Firstly, the SHGs share in credit activities is very
minimal; secondly, poor utilisation of group funds by the SHGs.

Insurance Services
The SHGs have been providing insurance services to their members through the
i­nsurance schemes ‘Abhayahastam’ (ABH) and ‘Janashree Bhima Yojana’ (JBY) being
implemented by the Government About one half (51%) of the SHGs have covered 5,237
members with an average of five members, less than 50% of members in a group under
ABH scheme. On an average, each member has paid Rs. 720 as insurance premium.
Under JBY, about 60% of SHGs have covered 7,719 members with an average of 6.56
members per SHG. On an average each member has paid Rs. 14,621 as premium so far.
The coverage of members in a group varies from one SHG to the other. Besides some of
the SHG members have taken up life insurance policies from banks as the ­sanctioning
of repeat dose of loans linked with insurance policy by banks, particularly the State
Bank of Hyderabad (SBH), State Bank of India (SBI) and Andhra Bank (AB). Many SHG
members paid the premium amount either from their group savings or from the loan
­disbursed to SHGs by the banks.
During FGDs, the members have reported that many members are not aware of the
terms and conditions of insurance policies of banks. As a result, many ­policies are ­going
to lapse; losing benefits and it becoming a burden to the members. Of the total 86
­insurance claims, 78 were settled and benefited with the total amount of Rs. 18.58 lakh
with an average of Rs. 27,730 per claim.
During discussions, SHG members have reported many problems and issues in
­accessing insurance services. They are (i) banks inducing insurance ­policies on SHGs
at the time of SHG bank credit linkage; (ii) there is a confusion among the members
about who have and don’t have insurance in the group; ­whether it is ­renewed or not;
(iii) misuse of premium amount by the leaders and ­resource person – on and off the
leaders and Resource Persons (RPs) not paid the ­premium amount of insurance policies
with the amount paid by the ­members; (iv) ­insurance policy bonds not issued to the
194 THE MICROFINANCE REVIEW  •  Volume VII(2)  July - December 2015

members, even though the ­members have paid the ­premium regularly; (v) very poor
­awareness on ­insurance ­claiming ­procedures; most of the members including leaders
have low ­awareness on ­insurance ­procedures.

Major Issues and Challenges

At group level, there are some problems related to SHG functioning. They are
­irregularity of meetings & low member attendance, irregular savings, low ­incidence
of leadership rotation, leaders’ domination, etc. In addition, there are some serious
­issues and challenges that have negative implication on promotion of savings and credit
­activities of groups.
Large Funds in SHG SB Accounts
The sample SHGs has total funds of Rs. 588 lakh in their SB accounts with an ­average
of Rs. 29,377 which is more than the state and national averages of Rs. 17,882 and
Rs.11,230 respectively. The data shows that majority of the SHGs (53%) have more than
Rs. 20,000 funds in their SB accounts; interestingly, 12% of SHGs have funds more than
of Rs. 60,000. Figure 2 shows that the average fund in SHG SB account is high in AP
when compared to TS. Similarly, there is a difference between mission and non-mission
cities, between old and new ULBs, between districts and grades of SHGs. It is also
­observed that as age of SHGs ­increases, the average amount of funds in SHG SB account
also increases.
Large amount of idle funds is primarily because of two reasons – (i) banks not
­allowing SHGs to withdraw savings for internal lending and (ii) intentional ­delay in
sanctioning repeat linkage to mount large amount of funds in SB account by the time of
credit linkage. The other reasons that the SHGs reported during ­focus group ­discussions
are (i) withdrawals with the recommendation/signature of project staff, (ii) to build
faith among bankers by promoting regular savings to get large amount of loan in repeat
­linkages. During interactions, the bankers have reported that it is an informal collateral
to (i) ensure good repayment (ii) avoid risk in case of willful defaulting – ­migration,
­political promises on loan waiving. It reveals that the SHGs have (i) no control over group
funds for withdrawals, (ii) no internal lending, (iii) dependency on ­traditional credit
sources, (iv) low ­interest from banks rather than high interest from group ­members.
Redistribution of Savings and/or Group Funds to Members
Of the total SHGs, 36% have distributed funds to their members, the sum of Rs. 2.11
crore with an average of Rs. 28,920. Out of them, majority SHGs distributed once (24%)
followed by two and above times (13%). There is not much difference between the states
in the percentage of SHGs distributed savings/ group funds to the members. However,
the average amount of fund distributed by the SHG is high in TS (Rs. 35,536) when
compared to AP (Rs. 22,298).
Community Based ­Microfinance: A Study with Reference to Urban Women SHGs ...... 195

60
Figure 2: Average Amount of funds in SHG and Sb Accounts
50

40

30
Rs in'000

20

10

0
GHMC
VSP

New
PKM

KNL

KHM

Other
Mission

Old

<3

9-12
>12
NZB

B
C
ATP

AP
EG
KHN

KRN

TG

A
3-6
6-9
Total Districts States Cities ULBs SHG Age in years Grades

During focus group discussions, the SHG members have acknowledged variety of
reasons for the practice of distribution of group funds. They are : (i) at the time of pay-
ing the savings of dropouts (23%), (ii) As there is no practice of internal lending and
distribute funds once in a year (20%), (iii) to repay bank loan installment (19%), (iv) if
the group has more funds (17%), (v) there are difficulties in managing large amount of
group funds (11%), (vi) delay in getting bank linkage (10%), (vii) banks pay low rate of
interest on savings (7%), (viii) to provide large loans to members by distributing group
funds along with loan from banks (6%), (ix) avoid large amount of idle funds (3%), (x)
to procure useful assets (2%), (xi) as the credit is available from multiple sources there
is no point in promoting savings, hence the practice of distribution of group funds (3%)
and (xii) to avoid defaulting of loans from internal funds (1%). The above discussion
reveals that the SHGs have been using their group corpus to address various functional
issues for the smooth running of the group, which is inevitable for them to achieve the
larger interest i.e., access low cost loans from formal financial institutions and Govern-
ment programmes channeled through SHGs and their federations.
Distribution of Revolving Fund
Out of 286 SHGs got revolving fund of Rs. 28.2 lakh, 238 (83%) SHGs have distrib-
uted a total of 21.2 lakh (75%) with an average of Rs. 8,906. Out of 1,521 (76%) SHGs
benefited with ‘Pavalavaddi’/ interest subsidy of Rs. 2.4 crore, 1,059 (70%) SHGs have
distributed Rs. 1.75 crore (73%) with an average of Rs. 16,565 per SHGs to its members.
As a result, there is a negative impact on group corpus and low quantity and quality
196 THE MICROFINANCE REVIEW  •  Volume VII(2)  July - December 2015

credit services to members. During focus group discussion, the groups have said that as
the RF is from government, it should be distributed to all the members equally.
Defaulting to Banks and SLFs
The data in Table 4 shows that of the 1,554 SHGs that have loan outstanding with
banks, 15.71% have reported Table 4: SHGs’ Loan Defaulting to Banks and SLFS
S. Particulars SHGs to Banks SHGs to SLF
defaults, and have an over- No. AP TS Total AP TS Total
due of Rs. 66.3 lakhs. Simi- 1 % of SHGs have OD 18.38 11.46 15.71 18.25 14.44 16.29
larly, 16.29% of SHGs have 2 Amt. OD (Rs. in lakhs) 66.3 25.9 92.22 2.2 2.3 4.53
reported default to SLFs. 3 Avg. amount per SHG(Rs.) 37866 37566 37795 4516 5902 5147

The incidence of default to bank as well as to SLFs is high in AP when compared to TS.
However, there is no significant difference between states in the average amount of
overdue (OD) per SHG. But the average amount of OD to SLF is high in TS as compared
to AP. Out of 138 (7%) SHGs that have loan ­outstanding with Sthree Nidhi, only one SHG
in TS has reported default with an ­overdue of Rs. 6,575. It indicates good repayment or
low ­default to Sthree ­Nidhi when compared to bank and SLF. It is because (i) the project
made the staff primarily responsible for both sanctioning and recovery of loans; (ii)
repayment rate considered as one of the indicators while assessing staff performance;
(iii) regular online loan monitoring system at state level; (iv) top priority to Sthree Nidhi
loan recovery in SHG meeting agenda; and (v) monthly review on Sthree Nidhi loan
recovery with district level staff.
During individual interactions, the members have revealed the reasons for ­default as
(i) less availability of work, (ii) more medical expenses due to ill-health of household
members, (iii) household contingency expenses, (iv) groups decided to pay at the end,
instead of monthly loan schedule as per the inter-se-agreement with banks, (v) mul-
tiple loans and large amount of loan installments, (vi) all the available credit sources
­exhausted to get new loan, and to pay old loans, (vii) low income due to failure of crop,
(viii) ­migration, (ix) other members not repaid loan installment, (x) as the banks are
not positive in repeat linkages, some of the groups stopped repayment, (xi) in response
to the promises during election campaign made by the political parties about waiver of
SHG loans, some of the SHGs stopped repayment of loans to banks. It shows that there
are two types of defaults (i) genuine and (ii) willful - members don’t repay, even though
they have the ability to repay loan installment.

Conclusions
The social categories of SHG members are as similar to the State population. Majority
of the members are of below poverty line (BPL) category. However, there are non-poor
households in SHGs to avail low cost large loans from banks, SLFs and Sthree Nidhi.
Many households mainly engaged in business, self employment economic activities and
Community Based ­Microfinance: A Study with Reference to Urban Women SHGs ...... 197

service providing caste occupations, wherein there are regular cash-flows. Government
is the major Self-Help Promoting Institution (SHPI) of the other institutions such as
‘Community’ and ‘SHG federations’. ­Mostly, the sample SHGs federated as primary and
secondary level federations at slum and town levels. The quality of SHGs is poor in terms
of their grades. Compulsory savings are common and there are no voluntary savings.
The saving amount per month per member varies between districts, states, mission and
other cities, old and new ULBs, age of groups and the grades of SHGs.
The SHGs are saving and credit linked to multiple agencies such as banks, slum level
federations and Sthree Nidhi Credit Cooperative Society. Most of the SHGs credit linked
to banks; however, small percentage of SHGs credit linked to slum level federations and
Sthree Nidhi. Sthree Nidhi has more potential for the extension of their credit activities
to SHGs. The share of SHGs to the amount of loan outstanding with the members is
very minimal. Interestingly, there is no loan disbursement to members from some of the
SHGs’ internal funds due to varied reasons, especially impounding of group savings in
SHG SB account by the banks.
There is a low member access to insurance services, mostly imposed by the ­insurance
agencies. Consequentially, more burden on members than benefiting out of it. There are
some serious issues like i) impounding of large amount of funds in SHG SB account, ii)
poor credit linkages with slum level federations and Sthree Nidhi, distribution of mem-
ber savings/group funds and revolving fund and iii) defaulting to banks that have nega-
tive implications on the financial sustainability of groups. However, a large number of
SHGs and SHG members have benefited with microfinance services, especially savings
and credit ­services.

References

APMAS (2005): “A Study on SHG Bank Linkage in AP”, ­APMAS, Hyderabad.

------ (2007): “SHG-Bank Linkage Programme: A Recurrent Study in AP”, APMAS,
­Hyderabad.
------ (2013): “Credit Requirements of Tribal Households in Tribal Project ­Management
Units and Delivery Mechanisms in AP”, Sthree ­Nidhi Cooperative Federation,
­Hyderabad.
MEPMA (2013): Annual Report – 2012-13.
Myrada (2010): An Evaluation of Self-Help Affinity Groups Promoted by Myrada,
­Bangalore, Myrada Publication.
NABARD (2014): Status of Microfinance in India 2013-14, NABARD, Mumbai.
NCEAR (2008): Impact and Sustainability of SHG-Bank Linkage Program, National
Council for Applied Economic Research, New Delhi.
NSSO (2014): Key Indicators of Situation of Agricultural Households in India, Ministry of
Statistics and Programme Implementation, Government of India.
Planning Commission (2012): Press Note on “Poverty Estimates 2009-10”, Government
of India, New Delhi, March.
Raja Reddy, K and CS Reddy (2010): “What are SHG Members Doing with Large Loans?”,
198 THE MICROFINANCE REVIEW  •  Volume VII(2)  July - December 2015

The Indian Journal of Social Work, Vol. 71, No. 1, January.

_________ (2013): Self-Help Groups in India – A Study on Quality and ­Sustainability,
ENABLE Publication, APMAS, Hyderabad.
Raja Reddy, K and TCS Reddy (2013): “Indebtedness and Financial Inclusion among the
Tribals–An Experience of Woman Self-Help Group Member Households in AP”, paper
presented in 2nd International Workshop on “Inclusive Finance” XLRI, ­Jamshedpur.
Sthree Nidhi (2011-12): “A Study on Utilization of Sthree Nidhi Loans by the Self-Help
Group Members in AP”, Sthree Nidhi Cooperative Federation, Hyderabad.
www.mepma.org
 Determinants of Operating
Expense of Microfinance
Institutions: A Study on Select
MFIs in Assam
- Pinky Dutta* and Debabrata Das**

Microfinance is Abstract
defined as small
Operating expenses are the largest component of total cost
loans to low-income
of every Microfinance Institutions (MFI). It has direct impact
households for income
on the interest rate on microcredit extended by the MFIs.
generating activities,
This study examines the trend in operating expenses of seven
with a mission to
selected MFIs in Assam, for the period 2009-10 to 2013-14,
reduce poverty and to
based on the data collected from 46 NBFC branch offices and
empower the people to
15 branch offices of NGO-MFIs. It finds significant variation
help themselves.
in operating expenses of NGO-MFIs and NBFCs. Regression
analysis show that the type of MFI, lending model of the MFI,
number of active borrowers and number of borrower per staff
have significant impacts on the operating expenses of MFIs.

Introduction
Microfinance is defined as small loans to low-income
households for income generating activities, with a mission to
reduce poverty and to empower the people to help themselves
(Mershland and Storm, 2010). The average size of microfinance
loan is smaller than those provided by the formal financial
institutions and hence the operational cost tends to be higher
(Khan and Astha, 2012; Shankar, 2007). Inorder to cover their
costs and remain sustainable, MFIs charge higher interest rates
on microcredit, 28% on an average (Rosenberg, et al 2009).
* Doctoral Research Fellow,
Department of Business Determinants of the MFI interest rate are the cost of borrowing,
Administration, loan loss provisions, profits and to the largest extent operating
Tezpur University, Assam.
Email:pinky@tezu.ernet.in
expenses (Gonzalez, 2007). Operating expense is defined to
** Professor and Head, be the sum of personnel and administrative expenses, but
Department of Business excludes financial expenses and loan loss provision expenses
Administration,
Tezpur University, Assam. (CGAP, 2003). A natural question is what are the factors that
Email:ddas09@tezu.ernet.in Key Words: Microfinance Institutions, Operating Expenses
200 THE MICROFINANCE REVIEW • Volume VII(2) July - December 2015

contribute to the operating expense? Several methods of cost reduction and achieving
cost efficiency have been discussed in the literature. For instance, Khan and Ashta
(2012) suggested that by streamlining the operations, MFIs can reduce their costs.
SIDBI (2011) and Sa-Dhan (2004) advocated the use of technology such as management
information system (MIS), mobile banking and online lending to reduce cost.
This paper identifies the determinants of operating expense of the MFIs in Assam.
An attempt is made in this study to analyse the pattern of the operating expense of the
MFIs in Assam from 2009-10 to 2013-14. Identification of the determinants is expected
to help the MFIs to manage their operating cost efficiently.

Literature Review
For a MFI, the operating cost is incurred in delivering credit to the clients and
monitoring of disbursed loans. The operating expense happened to be a major
contributor to the total expense of the MFIs (Shankar 2007; Sa-Dhan 2004). Operating
expense consisted of personnel expense and administrative expense. Personnel expense
included staff salaries, bonus, benefits and taxes borne by the MFIs. Administrative
expense included all the non-financial expenses directly related to provision of
financial services by the MFI including the costs of travel, staff training, depreciation,
rent, utilities, advertisement and consulting fees (Sa-Dhan 2004; Fernando, 2006). The
personnel or staff cost appeared to be a major component of operating expense (Lui
et al., 2013). These factors differ from one organisation to another on account of their
genesis, age and nature of operations.
Determinants of operating expense and their influence in total cost is of paramount
importance for MFIs because they have direct bearings on the interest rates fixed for the
microfinance. Several empirical studies have identified the following factors impacting
operating expense, namely, number of active borrowers, lending procedure, average
loan size, area of operation, number of employees in the MFI branch and remuneration
of the field workers (Sa-Dhan, 2004; Shankar, 2007; SIDBI, 2011; Khan & Ashta, 2012).

Research Methodology
This study is based on primary data collected from seven leading microfinance
institutions (MFIs) operating in Assam. The MFIs in Assam satisfying criteria like more
than 5,000 active clients, more than three years of operation in Assam and operating
as Non-Banking Financial Companies (NBFCs)/Non-Government Organizations-
Microfinance Institutions (NGO-MFI) were considered for the study.
Based on the above criteria, audited reports of three NBFCs and four NGO-MFIs
for the period of five financial years viz. 2009-10 to 2013-14 were used to analyze the
pattern of operating expense of the MFIs. Data on various parameters were gathered
from 61 branch offices of the select MFIs (46 branch offices of NBFCs and 15 branch
Determinants of Operating Expense of Microfinance Institutions: A Study on Select MFIs in Assam 201

offices of NGO-MFIs) to study the impact of branch specific variables on the operating
expense of the MFIs (Annexure 1).
For the regression analysis, operating expense has been used as dependent variable
and variables like average loan size per borrower, number of active borrowers, number
of employees, age of the institution, legal status of the MFI, location of branch offices,
lending process (Self-Help Groups (SHGs) and Joint Liability Groups (JLGs) and
portfolio at risk as independent variables.

Analysis
Finance expense includes all interest, fees and commissions incurred on all liabilities,
commercial1 and concessional2 borrowings, mortgages, and other liabilities. The total
expense of these MFIs
Figure 1: Total Expenses of MFIs
increased substantially
from 2009-10 to 2012-13 500 463.6
(Figure 1). 445.2
400 395.6
Overall, the average
Rs million

operating expenses 300

253.1
seems to be decreasing 200 207.1
and financing expenses
seems to be increasing 100
for the MFIs in Assam
0
during 2009-10 to 2013- 2009-10 2010-11 2011-12 2012-13 2013-14
14 (Table 1). In case of
NBFCs, the average financing expenses and operating expenses represent almost equal
share in the total expenses in 2013-14. In 2013-14, the average operating expenses and
financing expenses of the MFIs in Assam stood at 48% and 50.8% respectively. The
financing expense of the NBFCs in Assam is higher than the national average (49%).
From 2009-10 to 2013-14, the operating expenses of the MFIs declined by 46%. During
the same period, the proportion of finance expenses increased by 50%. This is due to
the increase in expenses of the MFIs. The loan loss provision comprises very small share
of the total expenditure and it showed a decreasing trend. Except in 2011-12, provision
was higher in comparison to other financial years. In 2013-14, financing expenses seems
to be the major expense component for the selected MFIs in Assam. The same pattern
is observed for the NGO-MFIs as well. The operating expenses for NGO-MFIs decreased
from 83% in 2010-11 to 39% in 2013-14. In contrast, financing expenses increased by
147% from 2009-10 to 2013-14. This shows that the access to donated funds has reduced
to a large extent. The NGO-MFIs have started borrowing from commercial banks and
developmental institutions. Also for better access to commercial funds two NGO-MFIs,
namely, SATRA and NCS, transformed into NBFCs in 2013-14.
202 THE MICROFINANCE REVIEW • Volume VII(2) July - December 2015

Table 1: Expenditure Components of the MFIs

For All Selected MFIs
2009-10 2010-11 2011-12 2012-13 2013-14
Operating expense 68.3 61.4 58.4 51.1 47.7
Financing expense 30.9 36.5 39.4 47.1 51.3
Loan loss provision expense 0.9 2.1 2.2 1.8 1.0
For NBFCs
Operating expense 63.22 57.52 55.08 47.96 48.37
Financing expense 36.25 40.47 42.58 50.25 50.82
Loan loss provision expense 0.54 2.01 2.34 1.78 0.81
For NGO-MFIs
Operating expense 83.94 75.85 71.05 64.40 39.08
Financing expense 14.19 21.58 27.46 33.72 57.96
Loan loss provision expense 1.87 2.56 1.49 1.88 2.95
Source: Field Survey

The operating expense comprise of personnel expense and administrative expenses.

Salary and incentive of the staff comprises of 68 to 87% of the total personnel expense.
The major contributors of administrative expenses are office rent (15 to 32%) and
traveling (16 to 22%). The other expense components such as printing and stationery,
communication expenses, electricity charges and general expenses also contribute to
the administrative expense but in smaller proportion (Table 2).
Table 2: Major Components of Personnel and Administrative Expenses
Categories Components Minimum Percentage Maximum Percentage
Personnel expense Salary and incentive 68 87
Rent 15 32
Traveling and conveyance expenses 16 22
Printing and stationery 9 11
Administrative expense
Communication expenses 2 4
Electricity charges 2 3.2
General expenses 2 9.3
Source: Field Survey

It is observed from Table 2that the personnel expenses for the NBFCs comprises
of more than 60% of the total operating expense. In the case of NBFCs, personnel
expenses increased from 41% to 71% of the total operating expense in 2013-14. This
increase in salary expense is due to recruitment of additional staff. As per individual
NBFCs, the operating expense of the UFSPL and AFPL are increasing in a steady rate.
However, the operating expense of RGVN (NE) MFL has increased rapidly between
2010-11 and 2013-14 (Annexure 2). This is attributed due to rapid expansion of the
MFI. The RGVN (NE) MFL increased its number of branch offices from 67 in 2009-10 to
Determinants of Operating Expense of Microfinance Institutions: A Study on Select MFIs in Assam 203

107 in 2013-14 for which it recruited more employees to extend financial services. The
number of employees increased by 35% between 2009-10 and 2013-14.
However, the personnel expense for the NGO-MFIs increased from 61% in 2009-
10 to 63% in 2013-14. The number of employees hired by the NGO-MFIs in last five
financial years is showing a decreasing trend. In case of Prochesta in the year 2009-10,
the total employees were 40 which increased to 68 in 2010-11, reduced to 31 in 2013-14.
Similar, trend was observed in other NGO-MFIs.
The The Operating Ratio (OER) of the selected MFIs is decreasing over the years. This
shows that the efficiency of selected MFIs in Assam is increasing over time. OER has
decreased with increase in scale of operations. Differences in OER between the selected
NBFCs and NGO-MFIs in Assam was observed. The median OER of the NBFCs in 2009-
10 was 16% which decreased to 14% in 2013-14.This implied the impact of outreach
and high operational efficiency of the NBFCs. Though the ratio was decreasing, it was
significantly higher than that of the national average (11.7%) in the year 2013-14 (Sa-
dhan, 2014). This might be due to high operational expense of the MFIs operating
in north east. The tough geographical terrain, lack of infrastructure, high expense of
traveling and fuel resulted in high operational expense for the MFIs.
A similar decreasing trend was observed for NGO-MFIs, the median OER in the 2013-
14 was lower than the national OER (13.3%). Also the OER of NGO-MFIs was lower
than that of the NBFCs. The reason for lower OER was lower personnel expense of
the NGO-MFIs than that of the NBFCs. The NBFCs were known to have better staff
compensation levels than other MFIs (M-Cril, 2011). However, it did not contribute to
the efficiency of the NBFCs. From the survey it was observed that the average operating
expense of the NGO-MFI branch offices was only Rs 36,821, whereas for NBFCs was
Rs.50,208. Similarly, the personnel expense and administrative expenses of the NGO-
MFIs were much lower than that of NBFCs (Table 3).
Table 3: Operating Expenses of the MFI Branch Offices
Personnel Expense (in Rs) Administrative expense (in Rs) Operating expense (in Rs)
Forms of the MFIs A B C=A+B
Mean 40126.80 10081.91 50208.72
NBFC
Median 39927.00 8450.00 49395.50
Minimum 21900.00 5415.00 28547.00
Maximum 59566.00 23184.00 71784.00
Mean 30312.13 6509.04 36821.18
Median 27255.00 4400.00 36373.00
NGO-MFIs
Minimum 8500.00 1270.00 11166.67
Maximum 58108.00 15240.00 68325.00
Source: Field Survey
In addition, the outreach of the NGO-MFIs was limited to one to four districts
of Assam. The NBFCs were reaching to more remote areas which increased their
204 THE MICROFINANCE REVIEW • Volume VII(2) July - December 2015

operational expenses. Out of five NGO-MFIs studied, three were sharing their staff and
infrastructure with different programmes. After the new RBI regulation, the portfolio
management issues and client protection compliance has adversely impacted the
operating expense of the MFIs. The NBFCs were verifying their client’s credit history in
Credit Information Bureau, apart from charges by Sa-Dhan.

Regression Analysis
The regression model3 used to estimate the impact of the forms of the MFI (LS),
lending model (LM), location of the branch office (LOC), the portfolio at risk exceeding
30 days (PAR), the average loan size (ALS), the number of active borrowers (NAB),
number of borrowers per staff (BPS) and the years of operation of the MFI branch
office (AGE) on the operating cost of MFIs is expressed as -
Operating expense = 0 + 1 LS + 2LM + 3AGE+ 4 NAB+ 5BPS+ 6 PAR
+ 7LOC + 8ALS (I) (Estimates are presented in Annexure 3 and 4)
It is observed that the p-value of F statistics is less than 0.05. It means that the
variation in operating expense value explained by the model is not due to chance. The
value of R is high, indicating that the linear regression model can be used to predict
operating cost values of the MFIs based on the independent variables included in our
study. R2 represents the proportion of variation in the dependent variable which is
explained by the independent variables in the model. Thus, 66.9% of the variation in
operating expense is explained by the independent variables (Annexure 3).
Collinearity diagnostics like tolerance and variance inflation factor (VIF) depicted
multicollinearity among the independent variables. However, we observe that there is
no multicollinearity among the independent variables of our study (Annexure 4). As
the tolerance value for the independent variables is above 0.10 and the VIF is below 10
in all the cases (Marakkath, 2014).
It was observed that out of the eight variables, four variables have significant impact
on operating expense of the MFIs (Annexure 4). These variables are forms of the MFI
(LS), lending model (LM), number of active borrowers (NAB) and number of borrowers
per staff (BPS). However, we have not found any impact on location of the branch
office, average loan size, portfolio at risk greater than 30 days, and age of the branch
office on operating expense of the MFI in Assam.

Forms of the MFI

It was found that the operating expense of the sample MFI branch offices was
significantly effected by the legal status of the MFI. The legal status of the MFI was
significant with a negative beta coefficient (-0.540). For the present data the regression
result indicated that the operating cost was higher for NBFCs and lowers for NGO-
MFIs. SIDBI (2011) also reported similar results.
Determinants of Operating Expense of Microfinance Institutions: A Study on Select MFIs in Assam 205

Lending Model of the MFI

The microfinance delivery model influenced the operational costs of the MFIs. The
results of the regression analysis showed that SHG model experienced a negative
change in operating expense by -0.287. Similar results were reported by Crombrugghe
et al (2008), where it was shown that the cost of MFIs in serving SHG borrowers was
relatively less. The study reported that the SHG model compare to JLG has lowest
operating expenses, due to operational characteristics. It was found that the operating
expense for the MFIs with JLG model was 16% higher than the MFIs following SHG
model.
Table 4: Operating Expense as per Lending Model (in Rs)
Categories Cost components Mean Median Minimum Maximum
JLG Personnel cost 39887.3 39927 8500 59566
Administration cost 10091.6 9066.5 2666.67 23184
Total Operating expense 49978.9 51862 11166.7 71784
Lending methodology of MFIs
SHG Personnel cost 35286.8 37200 11200 66460
Administration cost 7511.48 7027 1270 16398
Total Operating expense 42798.3 44622 12470 72117
Source: Field Survey

Number of Active Borrowers

The regression coefficient corresponding to the number of active borrowers (NAB) in
model (I) is positive and the p-value indicates that it is significant. This indicates that
with the increase in the number of active borrowers operating expenses of the MFIs
increase. In contrast, Gonzalez (2007) reported that with the increase in the number
of borrowers, total operating cost goes down. The fixed or indirect (administrative)
expense of the MFIs branch offices in Assam account for only 16 to 25% of the total
expenditure. But the direct cost (personnel expense) accounts for 70 to 88% of the
total operating expense. The direct expense increases with an increase in the number
of employees. With the increase in the NAB, the number of employees of the MFIs
in Assam exhibits an increasing trend. Hence, the increase in number of employees
contributes to increase in operating expense of the MFIs. Consequently, with increase
in number of borrowers the operating expenses also increases.

Number of Borrowers per Staff (BPS)

The active borrower per staff is seen to significantly effect the operating expense
with a negative beta coefficient. It was observed that the operating expense decreases
with the increase in number of borrowers per staff. This may be due to the fact that
BPS is an indicator of productivity of the MFIs staff and with the increase in BPS the
operating expense per borrower decreases.
206 THE MICROFINANCE REVIEW • Volume VII(2) July - December 2015

Summary of Findings
There was a general trend of increase in total expenses of MFIs during the last five
financial years except 2013-14. Usually the operating expense of the MFIs constituted
the major component of total expense. The share of operating expense had come down
as against the share of financing expense. This change was more visible in case of NGO-
MFIs. Perhaps the high cost of fund and shrinking of donor funding contributed to the
increase in financing expense.
Among others, the personnel expense appeared to be the major component of
operating expense (sharing 63 to 71% of total operating expenses). The personnel
expense which consisted of staff salary and incentive is lower in case of NGO-MFIs vis-
a-vis NBFCs. This is due to better staff compensation levels of the NBFCs than the NGO-
MFIs (M-Cril, 2011). The NBFCs extend the housing allowance, medical benefit, traveling
allowance, dearness allowance, provident fund (PF), Employee State Insurance (ESI)
and loans to the employees in addition to salary. As against the fixed amount and
performance linked incentive received by the employees of NGO-MFIs.
Certain variables, namely, the legal structure of the MFI, lending model, number of
active borrowers and the number of borrowers per staff have significant impact on the
operating expense of the MFI in Assam. Between the two lending models, namely, Joint
Liability Groups (JLGs) and Self Help Groups (SHGs), operating expense is lower in
case of the latter, because of lower servicing cost as SHGs are generally bigger groups
than JLGs. The result suggests that the operating expense can be reduced either by
keeping the number of staff constant and increase in the number of active borrowers.
Hence, it is important for the MFIs to maintain a wholesome balance between number
of borrowers and number of staff.

Implication for MFIs

At branch level staff compensation comprises major part of total operating expense.
Salary for branch employees depends on prevailing market conditions. One important
way to reduce operating expense is to increase number of borrowers per staff. However,
this has to be done by considering several other important factors such as distance to
be covered by an employee, conveyance cost and so on. The conveyance cost could
be reduced by increasing number of groups per square kilometer. The conveyance
allowance should be linked to distance covered by a staff instead of fixed number of
borrowers visited per day. Moreover, out of 61 MFI branch units, only eight branch
units are able to minimise their operating expense by having 500-600 borrowers per
staff. The branch offices with 1501 to1800 active borrowers also reduced their operating
expense drastically. The MFIs where branch offices have 500 to 600 borrowers per staff
or 1500 to 1800 active borrowers are able to reduce their cost effectively. Thus, there
is a scope for the branch offices to increase their borrowers in order to reduce their
Determinants of Operating Expense of Microfinance Institutions: A Study on Select MFIs in Assam 207

operating expense.
These MFIs are NBFCs (or in process of transformation), following JLG lending
model and having four to five employees (on average). In branch offices, staffs can
be used more effectively. The field staff works effectively for couple of hours in the
morning for collection and couple of hours in the evening for group formation (not
regularly).They are supposed to perform administrative activities in office. In order
to increase productivity of the staff, incentives could be linked to profit earned by a
branch at the end of each month. This encourages employees to work effectively in
team and motivates them to put more conscious efforts.
Further, the MFIs are required to engage in product and process innovation, which
allows them to enhance productivity and thereby reduce their cost of operation.
For instance, MFIs can use credit scoring models in place of repeated home visits to
determine how much credit the borrower should get and what operational strategies
will enhance profitability of the lenders (Hug, 2014).In addition to credit and insurance
services, MFIs can extend micro pension services to their clients.

Conclusion
The operating expenses are a major factor considered while facing interest rates by
financial institutions and more so in case of MFIs. Higher interest rate on microfinance
loans is a result of higher operating expenses. Personnel expenses is the largest
contributor to the MFI’s operating expense. There are quite a few determinants of the
operating expense; out of which the form of the MFI, its lending model, number of
active borrowers and the number of borrowers per staff are the key determinants for
operating expense. The operating expense of NBFCs is much higher than that of the
NGO-MFIs, since most of the NBFCs are in growth phase and invested in their expansion.
Operating expense of the institutions following SHG model was low. The recent change
in the regulatory provisions giving birth to a new set of NBFCs for microfinance had
attributed to the higher personal expense of the NBFC form of MFIs.
The declining operating expense ratio (OER) of the MFIs in Assam indicated an
encouraging efficiency over the years. In order to further reduce the operating expense,
MFIs could increase the number of active borrowers, while keeping the staff strength
constant.
NOTES

1 Funds received by an MFI through a loan agreement or other contractual arrangement

that carry a market rate of interest.
2 Funds received by an MFI through a loan agreement or other contractual arrangement
that carry a below-market rate of interest.
3 While fitting the above regression model, we checked for collinearity or multi-
collinearity, which is a statistical phenomenon where two or more independent
variables in a multiple regression model are highly correlated. The presence of multi-
208 THE MICROFINANCE REVIEW • Volume VII(2) July - December 2015

collinearity does not reduce the predictive power or reliability of the fitted regression
model as a whole, but helps in model reduction (i.e. some of the highly correlated
independent variables in the model are removed without compromising the predictive
power of the model). We test the null hypothesis H0: The regression coefficients in
model (I) are equal to zero, against the two sided alternative H1: At least one of the
regression coefficients is different from zero. The value of the test statistics R2 and the
p-value of the F-test are obtained using SPSS software. In fact all the computations
in the sequel are done using the SPSS software. In Annexures 3 and 4, the values of
the F statistics, p-value of the F tests, and also the values of R and R2 (coefficient of
determination) for the regression models fitted to the data are reported.

REFERENCES

CGAP (2003): “Microfinance Consensus Guidelines - Definitions of Selected Financial

Terms, Ratios, and Adjustments for Microfinance”, Published by CGAP/The World
Bank Group, Washington, DC, September, pp. 1-36.
Fernando, N (2006): “Understanding and Dealing with High Interest Rates on Microcredit”
- A Note to Policy Makers in the Asia and Pacific Region, East Asia Department, ADB,
pp. 1-18.
Gonzalez, A (2007): “Efficiency Drivers of Microfinance Institutions (MFIs): The Case of
Operating Expenses”, Microbanking Bulletin, No. 15, Autumn.
Hug, C (2014): “Efficiency is the Key to Lower Interest Rates in Microfinance, Research
Insight, Responsibility Investments AG, 2014, pp. 1-8.
Khan S and A Astha (2012): “Cost Control in Microfinance: Lessons from ASA”, Cost
Management, January/February 2012, 5-22.
Lui C, I Sing and J Vong (2013): “Lower the Interest Burden for Microfinance”, in
Purnendu Mandal (Edn.), Proceedings of the International Conference on Managing
the Asian Century, ICMAC 2013, Springer Publication.
Marakkath, N (2014): “Sustainability of Indian Microfinance Institutions - A Mixed
Methods Approach”, Springer Publication, New Delhi.
Mershland, R and S R Oystein (2010). Microfinance Mission Drift?, World Development,
Vol. 38, No. 1, pp. 28–36.
Rosenberg, R, Gonzalez, A and Narain, S (2009): “Are Microcredit Interest Rates
Excessive?”, CGAP Brief, February 2009, CGAP, Washington, DC.
Sa-Dhan (2004): “Operating expense of Microfinance Services and its Impact on Interest
Rate Setting”, Sa-Dhan Discussion Paper Series, pp. 1-51.
Shankar, S (2007): “Transaction Costs in Group Micro-Credit in India”, Management
Decision, Vol. 45, No. 8, pp. 1331-1342.
SIDBI (2011): “Study on Interest Rates and Costs of Microfinance Institutions”, Published
by ACCESS Development Services, SIDBI, pp. 1-106.
Arunachalam, R (2006): Technical Note Compiled for Sa-Dhan, www.sa-dhan.org.
Determinants of Operating Expense of Microfinance Institutions: A Study on Select MFIs in Assam 209

Annexure 1: List of Selected MFIs

Legal Name of the MFI Name of the district Total
Sl. No.
status Kamrup Barpeta Sonitpur Jorhat Darrang Goalpara
RGVN (NE) Microfinance Private
1 12 3 4 4 0 0 23
Limited
2 ASOMI Finance Private Limited (AFPL) 3 6 4 4 0 0 17
UNACCO Financial Services Private
3 5 0 0 1 0 0 6
NBFCs Limited (UFSPL)
NightingleFinvest Services Private
4 4 1 0 0 0 0 5
Limited (NCS)
5 Prochesta 2 0 1 0 0 0 3
SATRA(Social Action for Appropriate
6 Transformation and Advancement in 0 0 0 0 4 0 4
Rural Areas
NGO-MFIs
7 Ajaghar Social Circle (ASC) 0 0 0 0 0 3 3
Total 26 10 9 9 4 3 61
Source: Primary data collected by authors

Annexure 2
Name of the Location Year of Number Average Portfolio at Direct cost Indirect Operating Borrowers
MFI operation of active loan size Risk greater cost expense per loan
borrowers than 30 officer
days
Urban 6 4536 4853.87 0.04 48600 23184 71784 756
Urban 1 852 8653.97 0.07 35700 13541 49241 213
Urban 7 1615 8002.38 0.24 43800 21298 65098 323
RGVN (NE) MFL Urban 1 703 8900.6 0 23900 11537 35437 234.33
Urban 3 1530 790.85 0 32000 17550 49550 382.5
Urban 4 1105 9513.08 0.08 36200 14866 51066 276.25
Urban 2 1500 8701 0.16 36500 16652 53152 300
Urban 5 2123 10706.59 0 37300 20257 57557 424.6
Urban 5 2481 7535.38 0.04 51200 16993 68193 413.5
Urban 4 2100 4790.48 0 45000 8400 53400 420
Urban 7 1658 2252.11 0.59 50211 11406 61617 331.6
Urban 4 2253 6380.53 0 40304 15350 55654 375.5
Urban 8 1192 6736.83 0 43013 10362 53375 298
Urban 16 1175 6362.61 0.03 39004 9133 48137 391.67
Rural 8 1996 9090.93 0 53055 9000 62055 399.2
Rural 3 1810 7101.09 0 51804 6495 58299 362
Rural 4 2432 2842.52 0 43756 6436 50192 608
Rural 7 2417 4205.05 0 37036 7238 44274 483.4
Rural 4 1353 7014.07 0.04 32726 5415 38141 270.6
Rural 4 2301 6302.44 0 56357 6500 62857 383.5
Rural 4 2674 710.55 0 46101 6852 52953 534.8
Rural 4 1361 6024.33 0 37484 10088 47572 340.25
Rural 7 917 6739.37 4.03 38835 11319 50154 229.25
210 THE MICROFINANCE REVIEW • Volume VII(2) July - December 2015

Urban 4 1515 6722.89 0 36000 16398 52398 303

Urban 4 1506 7642.62 0 34500 8500 43000 301.2
AFPL
Urban 6 2031 5130.67 0 32500 6000 38500 338.5
Rural 4 1477 6008.82 0 38622 6000 44622 295.4
Rural 4 1546 10349.29 0 42000 12000 54000 309.2
Rural 3 916 7558.09 0 21900 6647 28547 229
Rural 5 1253 5666.61 0 37200 5740 42940 313.25
Rural 4 1122 6804.3 0 22000 9000 31000 280.5
Rural 4 1507 5912.66 0 33000 5500 38500 301.4
Rural 5 1350 5149.71 0 33460 7148 40608 337.5
Rural 3 889 6428.59 0 30460 5657 36117 296.33
Rural 6 1068 6341 0 40541 7027 47568 500
Rural 6 1073 6343 0 40541 7027 47568 357.78
Rural 6 1070 6340 0 40541 7027 47568 357.78
Rural 6 1078 6343 0 40541 7027 47568 357.78
Rural 6 1065 6340 0 40541 7027 47568 268.33
Rural 6 1080 6340.93 0 40541 7027 47568 268.33
Urban 4 1224 4304.13 0.02 59566 9800 69366 244.8
UFSPL
Urban 4 1402 6024.19 0 48600 10000 58600 280.4
Urban 4 1400 6159.42 0 45158 7500 52658 280
Urban 4 2096 6274.71 0 38785 9940 48725 419.2
Urban 4 2225 4584.27 0 39550 7904 47454 445
Rural 2 1410 5876.114 0.09 49400 8000 57400 352.5
Urban 5 2635 11385.2 0 28885 8518 37403 527
NCS
Urban 11 3965 10088.27 0 53085 15240 68325 396.5
Urban 4 2015 9882.28 0 25285 12843 38128 503.75
Urban 4 1765 10501.54 0 23385 6893 30278 441.25
Rural 2 1970 7483.52 0 27059 9314 36373 492.5
PROCHESTA Urban 6 2000 934.1 0 29900 10000 39900 500
Urban 5 1800 6185.48 0 20200 4400 24600 257.14
Rural 4 1625 2170.55 0 11200 1270 12470 812.5
SATRA Rural 8 1840 5481.06 0 27255 3167 30422 460
Rural 4 2865 3968.92 0 23350 3467 26817 716.25
Rural 4 1930 5292.48 0 29400 3267 32667 482.5
Rural 1 1225 4466.51 0 8500 2667 11167 612.5
ASC Rural 6 1887 9978.47 0.39 45455 8527 53982 314.5
Rural 6 2418 9300.7 0.27 58108 4171 62279 302.25
Rural 6 1967 9599.95 0.24 43615 3893 47508 327.83
Determinants of Operating Expense of Microfinance Institutions: A Study on Select MFIs in Assam 211

Annexure 3: Model Summary

Model R R Square Std. Error of the Estimate
1 .818(a) .669 7907.37

Annexure 4: Regression Table

Model I Standardized t Sig. Collinearity Statistics
Coefficients -
Dependent Variable Independent Variable Beta ( ) Tolerance VIF
Operating expense (Constant) 1.288 .204
LS -.540 -5.698 .000 .708 1.412
LOC -.021 -.238 .813 .802 1.247
AGE -.145 -1.253 .216 .472 2.120
LM -.287 -2.980 .004 .686 1.457
NAB .592 4.865 .000 .430 2.326
ALS .058 .614 .542 .705 1.418
PAR .020 .179 .859 .534 1.872
BPS -.401 -3.179 .002 .399 2.507
 Transaction Costs of Lending
to Vulnerable People
- N Srinivasan*

The study revealed Abstract

that Indian MFIs Real cost of loans under microfinance from different sources
have been much more was a matter of discussion for long due to its variation across
efficient than the the agencies concerned. The factors underlying the debate
global counterparts on transaction costs of micro-credit have been analysed in
with their operating this paper to gain a clear understanding of issues involved.
expense ratios lower Components such as delivery mechanism, staff, scale of
business, size of loan, frequency of repayment, investment in
than the global levels.
technology used and infrastructure, etc. influenced the cost of
It suggests that the
loan in addition to cost of fund and risk cost involved. Studies
MFIs that seek to carried out to understand the cost structure in providing credit
maximise profits are to rural areas and microfinance clients observed that the cost
required to reduce their of public sector banks in providing small loans to customers
transaction costs and was much higher compared to private sector banks. Studies
widen the gap between also revealed that Indian MFIs have been much more efficient
operating costs ratio than the global counterparts with their operating expense
and the margin cap. ratios lower than the global levels. The paper suggest that the
MFIs that seek to maximise profits are required to reduce their
transaction costs and widen the gap between operating costs
ratio and the margin cap. The objective of delivering credit at
reasonable interest rates to vulnerable borrowers cannot be
achieved by managing transaction costs alone, finance costs
have to be reduced for which government may have to think
of providing targeted subsidies.

Introduction
Microfinance institutions (MFIs) have traditionally priced
their loans higher compared to the formal banking system.
The reasons adduced by MFIs have been the very small sized
loans, the doorstep delivery, higher cost of fund and the cost
of investments in the IT and monitoring systems, etc. Of all
the reasons, the doorstep delivery is the most compelling
argument as the other financial institutions deliver services
* Independent Consultant,
only at their branch, requiring the borrower to incur costs
Pune.
Email: shrin54@yahoo.co.in Key Words: Microfinance, Loan Repayment Problems
Transaction Costs of Lending to Vulnerable People 213

related to travel, time and other incidental aspects to avail the services.
The rates of interest charged by MFIs prior to 2010 were not under any sort of
regulation. Some MFIs charged high rates (with Microfinance Transparency working
out rates even higher than 50%, in some cases); while most MFIs were around the
level of 30% per annum. Institute for Financial Management and Research (IFMR,
2014) explains the high transaction costs of MFIs as follows “MFIs provide doorstep
service to borrowers at their residence or very close to their place of residence. This
involves high operational costs for staffing and travelling. Unlike regular bank loans
which are provided through cheque or bank transfers, microfinance loans involve cash
disbursements and cash payments. Cash aggregation and movement is a risky and
costly activity and since most MFIs link their branches to local bank branch accounts
for cash management, some bank charges are incurred for deposits, withdrawals, etc.”
The MFI related issues occurred in Andhra Pradesh were attributed among other
things to high interest rates. Malegam
Table 1: Malegam Committee Assumptions on Costs
committee set up Reserve Bank of India(RBI)
Sr. No. Particulars Rate(%)
went in to the question of interest rates and a. Staff Costs (say) 5.00
transaction costs before recommending an b. Overheads (other than staff costs) say 3.00
interest rate cap. Malegam committee c. Provision for loan losses, say 1.00
gathered information from both Sa-Dhan I Sub-total 9.00
and MFIN (MicroFinance Institutions Return on equity (say): 15% post tax i.e.
d. 3.39
Network) as also other industry stakeholders 22.6107% pre-tax on15% of Loan Portfolio
to calculate a reasonable price for II Total internal cost 12.39

microfinance loans. Based on its e.

Cost of Funds (say) 12% on borrowings i.e.
10.20
85% of 12% on Loan Portfolio
understanding of the sector, Malegam
III Total of internal and external costs(I+II) 22.59
Committee came to the conclusion that
IV Rounded off to 22.00
reasonable transaction costs of MFIs should Source : Report of Malegam Committee accessed from
be around 8% of loan portfolio (Table 1). www. rbi.org.in

Malegam Committee recommended that a

cap of 22% on interest rates should be prescribed for MFIs. RBI, after considering the
recommendation, prescribed an interest rate cap of 26% with a margin cap of 12%.
Subsequently RBI imposed a margin cap of 10% in case of large MFIs (loan portfolio of
Rs. 100 crore or more) and 12% in case of smaller MFIs.
However, the actual operating costs of MFIs was consistently above 8% in the last
nine year period. Specific MFIs have operated below 8% operating costs, but at sector
level MFIs have struggled to contain operating costs. The imposition of margin caps
has made MFIs to look inwards on how to contain operating costs. The operating costs
of MFIs are usually higher than other categories of financial institutions. This is on
account of small size of loans, regular frequent instalments of repayment, as also the
processes adopted for lending.
214 THE MICROFINANCE REVIEW • Volume VII(2) July - December 2015

Customer acquisition involves selection of eligible borrowers, verifying their identity,

mobilisation of borrowers in to compatible groups and training the groups on the MFIs
lending processes and good use of loans. Lending processes involve moving cash to
and from cluster centres, where borrowers are situated, weekly/fortnightly or monthly
meetings in which loan disbursements and repayments are done and tracking defaults.
Given the frequent visits to the borrowers locations, and handling small amounts of
repayment instalments the staff costs and logistics costs are high as a proportion of the
loan amounts.
Figure 1: Operating Costs (%)

ϮϬ
 ϭϰ͘ϯ
ϭϱ ϭϮ͘Ϭ ϭϮ͘Ϭ ϭϮ͘ϭ
ϭϭ͘ϴ ϭϭ͘ϯ
ϵ͘ϳ
ϴ͘ϱ
ϭϬ

Ϭ
ϮϬϬϲ ϮϬϬϳ ϮϬϬϴ ϮϬϬϵ ϮϬϭϬ ϮϬϭϭ ϮϬϭϮ ϮϬϭϯ ϮϬϭϰ

Source: Compiled from Bharat Microfinance Quick Reports of Sa-Dhan, Various years

The operating costs in microfinance were not a point of discussion when the lending
was done by NGOs as a part of projects and programmes. The costs were seen as cost of
delivery of development services. When the microfinance operations were transformed
in to commercial operations, the computation of costs, returns and profits commenced.
The comparisons were with existing mainstream financial institutions, though the
models of financial intermediation of other Financial Institutions were very different
from MFIs. The operating costs in the sector have stabilised around 12% over the last
four years. With more than 80% of the microfinance market in the hands of large
players, the operating costs should ideally decline to 10% (which is the maximum
margin allowed to large MFIs) over the current year. The absolute costs of staff cannot
be reduced, but their productivity can be increased.
A reduction in the frequency of repayment instalments will enable the field officer
to manage more groups. An increase in the loan size will reduce the operational cost
as a proportion of loan business. MFIs can also reduce operational costs by focusing
on customer retention and reducing attrition. Most MFIs have over the last two years
(after imposition of margin caps) tried out increasing the loan amounts, reducing the
frequency of staff visits to centres and raising staff productivity. MFIs, particularly the
larger ones have carried out process reengineering exercises to speed up processes and
thereby raise staff productivity with positive impact on transaction costs.
Transaction Costs of Lending to Vulnerable People 215

The regulatory guidelines on customer protection and the industry code of conduct
entailed additional measures being taken by MFIs. These measures relating to customer
selection, loan documentation, communication, field officer training, avoidance of
excessive debt, etc., have increased the costs of doing business for MFIs. While the costs
have remained somewhat static at the sector level, the yields have declined from the
high levels achieved in 2010. The data put out by Sa-dhan shows a sharp fall in yields
in 20121 and a smart recovery by 2014.
Figure 2: Costs and Yields of MFIs (%)

ϮϬ
 ϭϰ͘ϯ
ϭϱ ϭϮ͘Ϭ ϭϮ͘Ϭ ϭϮ͘ϭ
ϭϭ͘ϴ ϭϭ͘ϯ
ϵ͘ϳ
ϴ͘ϱ
ϭϬ

Ϭ
ϮϬϬϲ ϮϬϬϳ ϮϬϬϴ ϮϬϬϵ ϮϬϭϬ ϮϬϭϭ ϮϬϭϮ ϮϬϭϯ ϮϬϭϰ

Source : Compiled from Bharat Microfinance Quick Report of Sa-Dhan, Various years

There have been a few studies carried out to understand the cost structure in
providing credit to rural areas and microfinance clients. The study carried out by IFMR
(Sahasranaman and George (2013) calculated the costs of banks providing loans to
small borrowers as also to Self-Help Groups (SHGs) and compared the same with cost
of microfinance institutions. The study found that the cost of public sector banks in
providing small loans to customers was much higher at 32.4% compared to private
sector banks, which incurred a cost of 21.6%.
The cost of MFIs in providing loans to customers was 8.7% and in the case of self-
help groups it was 6.3%. But
Table 2: Comparison of Actual Costs in Small Loans3
the overall cost including the
Public Sector Banks Private Sector Banks
financial cost were the
Particulars True total Total loss of True total Total loss of
highest in the case of direct cost the channel cost the channel
loans by banks to customers Bank branch (direct loans) 41.53 29.53 32.07 20.07
at 41.5% and in the case SHG SHG Linkage 28.93 16.93 - -
loans by banks it was 28.9% MFI(rated BBB) 17.29 5.29 17.29 5.29
(Table 2). The banks did not MFI(rated A) 14.71 2.71 14.71 2.71
price their small loans fully MFI (rate AA) 13.75 1.75 13.75 1.75
with the result they actually Source : ‘Cost of Delivering Rural Credit in India’, A Sahasranaman and D George, 2013.
made losses which were cross
subsidised by the higher returns in other product lines. Public sector banks on an
216 THE MICROFINANCE REVIEW • Volume VII(2) July - December 2015

average made a loss of 29.5% and private sector banks made a loss of 20.7%2 lending
to microfinance institutions both public and private sector banks lost 1.8%, if the MFIs
were AA rated.
From Table 2 it is clear that borrowers incur more non-interest costs in formal
institutions and very little in case of informal loans. The transaction costs of the
borrower in group modes of financial access will always be high on account of the
periodic meetings. The frequency with which these meetings are held will determine
the extent of the costs. Apart from the opportunity cost of time, borrowers in some
cases also incur transport costs to be physically present in meetings. Many MFIs have
reduced the meeting frequency, going from weekly meetings to once in a fortnight
or even once a month. The reduced frequency of meetings has significantly reduced
borrower transaction costs.
Shukla, et al (2011) found that the borrower’s transaction costs were an important
aspect of the loan. The study
Table 3: Comparison of (Non-Interest?) Cost of Borrowing from
computed non-interest costs such as Different Sources -Rural
cost of travel to the lender, incidental (Rs. per loan of 1000)
expenses during travel, loss of Sr. No. Cluster (Rural) Formal SHG MFI Informal
wages in dealing with the lenders’ 1 Kolkata 21 22 8 2
requirements, documentation costs, 2 Chennai 24 12 31 5
bribes (if any) and other 3 Lucknow 47 35 25 9
miscellaneous costs incurred to 4 Hyderabad 43 31 23 3
secure the loan. The study quantified 5
Jaipur 24 7 14 3
the costs in five rural clusters
6 Total 30 24 13 6
according to the source of loans –
Source: Shukla, et al (2011)
Banks, SHGs, MFIs and informal
lenders.
One of the issues in some of the less informed comparisons has been the point at
which the cost is reckoned and compared. These comparisons tend to take the interest
paid by borrowers in the case of MFIs and direct borrowers of banks ignoring the vastly
different transaction costs at borrower level; in the case of SHGs the costs were taken
at group level and not at member level. The costs of the SHG in providing the loans
to its members and recovering the same were not reckoned and computed. Because of
the missing information superficial comparisons tend to lead one to believe that the
SHG model carries lower costs. This is an aspect that requires investigation. The gap
between effective costs of credit in the hands of the borrower taken from a bank and
a MFI or SHG seems to be much narrower than the nominal interest rate comparisons
suggest. Even in case of commercial an analysis of small loans (Up to Rs. 25,000)
outstanding as at end of December 2014 reveals that 34% of the loan accounts (8.2
million accounts) were priced at 18% or more4.
Transaction Costs of Lending to Vulnerable People 217

Factor Influencing Transaction Costs

The drivers of MFI transaction costs are mainly staff, systems, logistics and customer
training. The operating systems that were based on manual processes or antiquated IT
processes are giving way to fully integrated IT systems in a bid to drive down costs. But
the staff related issues have been difficult to deal with. Attrition levels among the entry-
level functionaries continue to be high in MFIs. The high attrition rates significantly
push up costs of recruitment, training and increase the time taken for the average
caseload per staff to build up to optimum levels. The increase in salary levels across the
industry on account of competing demands from other sectors has also been a factor
in high transaction costs. In the recent past MFIs have responded by raising their loan
size so that the costs as a proportion of business are contained.
Table 4: Average Outstanding MFI Loan per Account
Year 2007 2008 2009 2010 2011 2012 2013 2014
Amount(Rs.) 3442 4223 5192 6870 6779 7803 8123 10079
Source : Bharat Microfinance Quick Report of Sa-Dhan, Various years

International Comparison
The transaction costs of Indian MFIs seem to be high compared with the mainstream
financial institutions in India, the reasons for which have been discussed. A logical
question is whether Indian MFIs are inefficient in a global context and carry higher
transaction costs than warranted. The data of MFIs across the world was taken from
Mix Market database to carry out a comparison of the operating expenses ratio. Over
the last nine years, the data shows that Indian MFIs had been more efficient than
global MFIs except in two years. In 2006, Indian microfinance was mostly driven by
voluntary sector and carried higher operating expense ratio than the global median
value. Again in 2009 the Indian MFIs median operating expense ratio exceeded global
values marginally. Otherwise Indian MFIs have been much more efficient than the
global counterparts, with their operating expense ratios lower by about 200 basis
points than the global levels.
Figure 3: Operating Expenses - Comparison

ϭϰ͘ϰ ϭϰ͘Ϯ ϭϱ͘Ϭ ϭϰ͘ϯ

ϭϯ͘ϴ ϭϯ͘ϳ ϭϯ͘Ϭ
ϭϯ͘ϲ
ϭϱ͘Ϭ ϭϰ͘ϯ
ϭϭ͘ϴ ϭϭ͘ϯ ϭϮ͘Ϭ ϭϮ͘Ϭ ϭϮ͘ϭ
ϵ͘ϳ KƉĞƌĂƚŝŶŐĞdžƉĞŶƐĞƐͲŐůŽďĂů
ϴ͘ϱ
KƉĞdžƉ/ŶĚŝĂŶD&/Ɛ

ϮϬϬϲ ϮϬϬϳ ϮϬϬϴ ϮϬϬϵ ϮϬϭϬ ϮϬϭϭ ϮϬϭϮ ϮϬϭϯ ϮϬϭϰ

Source: MIX Market – Accessed from www.mixmarket.org, on 10 August, 2015

218 THE MICROFINANCE REVIEW • Volume VII(2) July - December 2015

Another question is whether regulation has an impact on operations, pricing and

costs. A paper by Rosenberg, et al (2013) analysed interest rates and costs found that
in markets that were regulated MFIs had lower operating costs. In the period between
2004 and 2011, there was a clear gap between operating expenses ratio of regulated
MFIs and unregulated MFIs. The gap between the two widened each year from 2006 to
2011. In the 2011 unregulated MFIs were found to carry operating expenses that were
about 7% higher than the regulated MFIs (see Figure 4).
Figure 4: Operating Expenses of Regulated and Non-Regulated MFIs

Source: Rosenberg, et al 2013.

It does seem that regulation has a sobering effect on costs and unregulated MFIs
turn more inefficient. But the authors of the paper warn that ‘It is common to equate
this kind of “efficiency” with the quality of management. But this can be seriously
misleading, especially in comparing different kinds of microlenders. Managers at the
low-end microlenders and the unregulated microlenders lend and collect much smaller
loans, which tend to cost more to administer than large loans do, when measured per
dollar lent”.
One can come to the conclusion that comparisons across different types of institutions
and geographies should be carried out with a great deal of care. No two institutions
offer similar terms on their loans to the customer. The customer experience also
differs. The transaction interface between the financial institution and the customer
determines the costs that both the financial institution and customer carry. It is easy
to compute the costs of the financial institution but the customer transaction costs are
not documented and hence by and large ignored. The institutions that seem efficient
at first sight based on the operating expense ratios pass on their costs to the customers,
thereby are able to price their loans lower. Financial institutions that prioritise effective
last mile delivery pay a high price for transactions and hence price their loans higher.
Hence, straightline comparisons do not result in qualitative insights in institutional
efficiency and customer comfort.
The factors underlying the debate on transaction costs and affordability of credit
have to be analysed to gain a clear understanding of issues involved. A differentiation
Transaction Costs of Lending to Vulnerable People 219

between the interest charged on loans and the cost of credit should be made. There
can be different views on whether a particular interest rate is high or low, whether it
is affordable for the intended use is determined by the rates of return in the enterprise
to which the credit is applied. A further aspect for consideration is whether the credit
institution is making profits out of its lending portfolio. Evidence from the field
suggests that most MFIs are just breaking even on their borrowed funds and any real
returns are achieved on the equity invested in business. Affordability of credit is an
issue that should be resolved at the borrower level, taking in to account the intended
use, alternative sources of credit and the returns from investment.

Suggestions
The regulatory cap on margin has made MFIs closely examine cost reduction measures
and implement the same. A reduction in financial costs in the current regulatory regime
automatically results in lower interest rates to customers.
MFIs that seek to maximise profits are required to reduce their transaction costs and
widen the gap between operating costs ratio and the margin cap. There are however
limits to reducing operational costs. Beyond a point the cost reduction results in loose
monitoring, lower standards of customer interaction and lead to low portfolio quality. Very
low transaction costs might be accompanied higher provisioning costs and higher risks.
The objective of delivering credit at reasonable interest rates to vulnerable borrowers
cannot be achieved by managing transaction costs alone; finance costs have to be
reduced. Government may provide targeted subsidies for lowering the finance costs as
in the case of farm loans and SHG loans.
NOTES

1 This might be on account of unrecognised income on defaulted portfolio in AP.

2 Public sector are unable to achieve full cost recovery in their small loans. On the other
hand, The private sector banks priced their small loans better, but had to be within a
reasonable range of the prices of their public sector competitors. The priority sector
lending has made banks exercise difficult choices on asset quality and profitability.
3 For details, see Sahasranaman A and D George (2013).
4 Computed by the author based on data sourced from Basic Statistical Returns,
accessed from www.rbi.org.in
REFERENCES

IFMR (2014): “Microfinance in India – Sector Overview, FY ended March 2014”, Institute
for Financial and Management Research, Chennai.
Sa-Dhan (2014): “Bharat Microfinance”, various issues.
Sahasranaman A and D George (2013): “Cost of Delivering Rural Credit in India”, IFMR, Chennai.
Shukla R, P K Ghosh and R Sharma (2011): “Assessing Effectiveness of Small Borrowing
in India”, National Council of Applied Economic Research, New Delhi.
Rosenberg R, S Gaul, W Ford and O Tomilova (2013): “Micro-credit Interest Rates and
Their Determinants”, Consultative Group to Assist the Poor (CGAP), Washington, DC.
 Outreach and Financial
Performance of Select MFIs in
India – An Empirical Analysis
- Narayan Chandra Pradhan* and Prabha V Jadav*

Abstract
As a means to provide The present paper has examined the recent developments
much needed capital in Microfinance Institutions (MFIs) from two standpoints:
to the poor, MFIs play (i) enlarged customer outreach, and (ii) financial viability
a significant role in for longer term sustainability. Both these issues are dealt
their upliftment. The analytically as well as empirically. For customer outreach, we
definition of financial denote that the central purpose of MFIs is to provide financial
sustainability embodies services to large numbers of poor, including the very poor and
the institutional women. The definition of financial sustainability embodies
capacity to become the institutional capacity to become independent of donor
independent of donor or government subsidies to carry out business in the long
or government subsidies run. The variable that captures financial aspects is Return on
to carry out business in Equity (ROE). There is highest concentration of Microfinance
the long run. usage in India with 18% of the total population are utilising
a loan from MFIs at present. In the wake of Andhra Pradesh
crisis in 2010, MFI segment has taken a severe beating with
rising delinquency ratios and downgrades by rating agencies.
Lenders have turned wary leading to drying up of funding
channels seriously impinging on the business. Debt is positively
related to ROE which implies that higher borrowing actually
encourages profitability for the MFIs as it allows them to
grow its assets and thereby see a larger return. The gross loan
portfolio variable indicates that the MFIs should continue to
grow and increase their size by increasing their loan portfolio.
While the provision of funds for potential loss is a good safety
measure, the generally high repayment rates by borrowers
* Assistant Adviser make the risks taken and the risk parameter not significant.
and Research Officer, Finally, the number of borrowers is negatively correlated with
respectively, in the
Monitoring and Research ROE indicating that goals of customer outreach and financial
Unit, Reserve Bank of sustainability are moving in opposite directions.
India, Regional Office,
Ahmedabad.
Email:ncpradhan@gmail.com Key Words: Microfinance Institutions, Sustainability
Outreach and Financial Performance of Select MFIs in India – An Empirical Analysis 221

Introduction
With a remarkable progress of MFIs1 as a tool to fight poverty and promote financial
inclusion, significant policy debates have arose in recent years (since Andhra Pradesh
crisis in 2010) over the appropriate role, objectives, and methods of microfinance
provisions to the poor. At the heart of the debate is a key disagreement over the nature
and scope of potential trade-offs between outreach and sustainability of MFIs in India.
The customer outreach is specifically denoted to the efforts by MFIs to extend loans
and financial services to ever-increasing customers (breadth of outreach) over a period
of time, and especially towards the poorest of the poor (depth of outreach) and its
impact on their incomes and welfare. Financial sustainability is assigned to mean full
cost recovery or profit making and is associated with the aim of building MFIs that can
continue to do the business without reliance on government subsidies or donor funds.
As a means to provide much needed capital to the poor, MFIs play a significant
role in their upliftment. They have the potential to fill the critical gap left by formal
financial institutions in providing financial services to low income groups unbanked
and/or under-banked areas where there is not enough scale of operations due to low
numbers and low value of transactions. However, their purpose is dualistic as they
must strive to maintain financial profitability, as well as maximise social outreach
to the poor. Microfinance attempts to provide impoverished people access to credit
for sustainable ventures like opening small businesses/entrepreneurship and thereby
achieve outreach goals. In cross-country comparison, it is already documented that the
goals of profitability have been more elusive for MFIs, with less than 5% being self-
sustainable. In other words, more than 95% of the MFIs still sustain themselves, at least
partially, on subsidies, grants andloans (Hudon and Traca, 2006). MFIs struggle to
reach a harmonic balance between profit maximisation and social outreach; however,
some MFIs achieve this goal more efficiently. In this context, evaluation of MFIs
efficiency at balancing their dual outputs of financial growth and financial service at
borrower levels is of critical importance.
As is evident in case of India, there is highest concentration of microfinance usage with
18% of the Indian population utilising a loan from MFIs (M-Cril, 2014). MFI operations
continued to be a significant component of the financial system in the country and its
contribution to financial inclusion is most important. Since Indian MFIs rely on loans
from commercial banks to finance most of their operations, any financial shocks or
crisis may cause disastrous effects to the MFI segment as was happened in October
2010 in the wake of Andhra Pradesh Microfinance Institutions (regulation of money
lending) Ordinance 2010. In response to the Ordinance, banks across India began to
slow, even stopped the flow of funds to MFIs. On the back of these developments, the
MFI segment has taken a severe beating with rising delinquency ratios and downgrades
by rating agencies. Lenders have turned wary leading to drying up of funding channels
222 THE MICROFINANCE REVIEW • Volume VII(2) July - December 2015

seriously impinging on the business (Sinha, 2012). After two years of decline, the
growth of the MFI sector picked up again in 2012-13 and accelerated in 2013-14 as
shown by CRILEX,M-CRIL’s Index of Indian Microfinance (Figure 1).

Figure 1: Growth in Index of MFIs

14,000
12,158
12,000

10,000 9,130
8,005
7,474
8,000
6,290
6,000 4,589

4,000
2,370
2,000 876 1,219
100 181 444
0
Mar-06
Mar-03

Mar-10
Mar-05

Mar-14
Mar-07

Mar-09

Mar-11

Mar-13
Mar-04

Mar-08

Mar-12
Source: CRILEX,M-CRIL’s Index of Indian Microfinance


This has flagged the issue that dependency of the microfinance industry on loans
from the banking system and brings into question whether the microfinance credit is
self-sustainable? The ordinance was in response to concerns that the outreach aspect
of MFIs had fallen by the wayside in pursuit of profitability; even the Reserve Bank
was concerned about nationalised banks providing subsidised loans (under priority
sector lending norms) to MFIs that was lending at higher interest rates and making
huge profits and suggested stringent regulatory requirements for MFIs. The analysts
attribute the current crisis to the irrational exuberance of some MFIs who entered the
segment with the sole emphasis on business growth. They perhaps did not consider the
vulnerability of the borrowers and the potential socio-political ramifications of their
aggressive approach.
The high growth rate of microfinance was fuelled by commercial bank funding which
gravitated towards ‘for profit’ institutional structures. As a result, there was a discernible
trend towards the transformation of MFIs into for-profit Non Bank Finance Companies
(NBFCs). While large numbers of low income families may have been reached to the
MFIs, the lack of commitment from either side led to substantial multiple lending and
created an environment of concern about the rights of clients that had been oversold
microcredit. Some clients became over indebted due to multi-agent finance to same
customer.
On the backdrop of this background, we have studied the analytical and empirical
aspects of outreach and financial sustainability of 50 selected MFIs in India (the list is
in Appendix 1).
Outreach and Financial Performance of Select MFIs in India – An Empirical Analysis 223

Literature Survey
The conventional view is that MFIs helps poor and therefore is a desirable
developmental activity but it cannot be financially viable. Micro-credit or finance are
simply too costly to administer and the profits from such lending is meager to permit
profitability in the long run (Armendariz and Morduch, 2005). However, an influential
study examining some of the best MFIs concludes that this conventional wisdom is quite
wrong (Banerjee et. al. 2009). MFIs can and indeed need to be self-sustaining if they
are to achieve their outreach potential providing rapid growth in access to financial
services by poor. The recent performance of ‘frontier’ microenterprise finance programs
demonstrates that some learning has taken place from the mistakes of subsidised
directed credit. MFIs are increasingly charging interest rates and fees that cover the
real cost of delivering financial services and are embracing financial self-sufficiency as
a primary organisational goal (Cull et. al. 2007). More and more MFIs have crossed
major hurdles in terms of outreach, raising resources from commercial markets, and
increasing services which is difficult to reach populations (Basu and Srivastava, 2005).
The controversy surrounding the financial performance of MFIs has led to a plethora
of literature on MFIs performance. A majority of the recent papers on the efficiency
of MFIs either utilise a financial efficiency approach (Hartarska et al., 2006) or an
outreach approach (Ahlin and Jiang, 2008). May be one can have a better view at MFI
efficiency technique papers (Gutierrez-Nieto et al., 2007).
The ‘institutionalist’ or ‘financial systems’ approach, which has become increasingly
dominant has stated that microfinance providers aggressively pursue sustainability
through raising interest rates and lowering costs. In this view, as MFIs begin to wean
themselves from a reliance on donor funds and subsidies and adopt the practices of
good banking and compelled to further innovate and lower costs. Profits are viewed
as being not only acceptable, but also quite essential because profits are expected to
attract private investment to the sector (Gabriel, 2011). This suggests that commercial
microfinance lenders ought to achieve much better leverage on their equity than
subsidized micro-lenders, allowing them to greatly multiply the scale of outreach
that is achieved from each extra dollar contributed by donors to equity in the sector.
The Consultative Group to Assist the Poor(CGAP), a donor consortium at the World
Bank, and the United States Agency for International Development (USAID)have been
particularly resolute in urging this approach in their guidelines and literature, and
increasingly, by conditioning further grants and loan guarantees on the attainment of
specific performance and sustainability targets (Dewez and Neisa, 2009).
Advocates of what has been labeled as the ‘poverty’ or ‘welfarist’ approach disagree
on the above views. They argue for a focus on targeted outreach rather than scale
or sustainability. They contend that a narrow insistence on cost recovery and the
elimination of subsidies would only force MFIs to shed the poorest from their portfolios
224 THE MICROFINANCE REVIEW • Volume VII(2) July - December 2015

of borrowers because they are precisely the most difficult and costly to attend (Hulme
and Mosley, 1996). Some argued that many micro-borrowers simply cannot repay at
the high interest rates often calculated for full cost recovery, yet argue that society
should nonetheless be willing to consider subsidizing MFIs because they can effectively
target and positively affect the livelihood of very poor households (Morduch, 1998).
Some NGOs also argue that adoption of a financial systems approach would divert
energy and attention away from other important social and political objectives such
as empowering the poorest and most vulnerable (Dichter, 1997). A small but growing
dissent movement has also argued that microfinance in general, and sustainable
microfinance in particular, may be doing more harm than good by increasing the
indebtedness and vulnerability of the poor (Dichter, 1997; Johnson and Rogaly, 1997).
The issue of contract design and the cost of providing incentives would seem to
lie at the heart of many of these policy debates, yet the topic is treated only lightly
in most policy discussions. Although a number of recent theoretical papers explain
the logic of incentives behind interesting contractual mechanisms in microfinance
lending, such as joint liability clauses, few studies have offered either clear guidance
for sorting through these policy debates or the question of financial leverage (Meyer,
2002).The cost of providing incentives for delegated monitors also clarifies the limits
of leverage for sustainable MFIs, and therefore the question of whether, and how fast,
the microfinance sector will be integrated into the larger network of financial markets
(Ledgerwood, 1999).

Data Analysis on Selected MFIs in India

Data used for the analysis is collected from (MixMarket.org) where 2015 MFIs are
reported (as on December 2014). Of all reported MFIs, we have chosen 50 having
sufficient information for analysis (whose detailed Annual Financial Statements were
available for end-March 2014, excluding MFIs with less than 20,000 borrowers and
other irregular data reporting).These MFIs are chosen based on their size, i.e., the
number of borrowers represent the size as this would be more relevant to study the
outreach. The number of active borrowers was chosen for the social outreach indicator
because MFIs are supposed to reach as many borrowers as possible. As a matter of
practice, assumption is made that MFIs only lend to borrowers that are near the poverty
line who satisfies the goal of social outreach (Field and Pande, 2008).
As MFIs in India grew towards maturity, many have spread their operations
geographically making it difficult to base analysis on operations by region. A number
of MFIs in the group are currently operating in 10 or more states and do not fall into
any regional category. This change also reflects the expansion of the sector having
outreach breadth that took place starting especially from 2005 onwards. Cooperatives
have been practicing microfinance business in India for long periods and the earliest
Outreach and Financial Performance of Select MFIs in India – An Empirical Analysis 225

MFIs in the country were cooperatives whereas NBFCs and Section 25 companies have
not been in the operation. However, with the commercialisation of the sector, there
has been a growing tendency for NGOs to transform to NBFCs. Despite having recent
setbacks in the sector, there are now even more transformations of NGOs to MFI-NBFCs
during 2010 and 2014. As a result, about 70% of all MFIs in the 2014 sample used in
this study is NBFCs.
The concerns about the commitment of MFIs to the fulfillment of their social mission
started in 2005 with the objectives of growth and financial sustainability of the sector. It
has been documented that, since then, the Mix Market database has developed a social
performance reporting platform and incorporated social index along with outreach and
financial performance indicators.
The disaggregated annual growth rates of borrowers and portfolio of Indian MFIs
that are included in this study are presented in Figure 2 showing that portfolio growth
was faster than real client acquisition. However, in 2010-11 growth rates of both has
declined to just over 7% and then became substantially negative in 2011-12 as the
nationwide impact of the Andhra Pradesh Microfinance Act became evident (as the
most of the MFIs are concentrated in Andhra Pradesh).

Figure 2:
2 Annual Growth Rates (in Per cent)
132
125
Borrowers Portfolio

76
66
59
52
43
2
25
7 7

-18
-27
2007-08 2008-09 2009-10 2010-11 2011-12 007-2012
20

As a result of the high growth of the largest Indian MFIs, there were 10 institutions
with portfolios in excess of Rs. 500 crore ($80 million approx.) at the end of March
2014 and 27 with portfolios in excess of Rs.100 crore ($16 million approx.). However,
with the collapse of portfolios in Andhra Pradesh and the overall decline in the sector,
there were 13 MFIs with portfolios in excess of Rs.100 crore as on March 31, 2014.
Since one of these is an NGO and another a ‘not for profit’ company, there are now just
12 MFIs that satisfy the Reserve Bank’s criterion for ‘systemically important NBFCs’.
226 THE MICROFINANCE REVIEW • Volume VII(2) July - December 2015

Such companies are generally subject to more stringent reporting and inspection
requirements than the smaller NBFCs. However, since the creation of the NBFC MFIs
as a separate category, all NBFCs have tended to converge and it has become apparent
that all such institutions will be treated equally in future.
The MFIs realised that the legal form of their institutions (as NBFCs) enabled better
access to commercial funds on the presumption (by commercial lenders) that such
an institutional form entailed better governance structures, greater management
oversight and more systematic planning leading to organisational efficiency. The rush
to transform from NGOs to NBFCs (regulated by the RBI) resulted from the experience
that commercial banks were more willing to provide large sums of money to NBFC-
MFIs than to NGOs. The NBFC was also seen to be the legal form most appropriate for
investment by private equity firms and, in the long run, for a public share offering.
The data on the 50 MFIs are an unbalanced panel data set with the years ranging
from 1996 to 2014. It may be mentioned that the selected MFIs are located all over India
with maximum coverage in the south and south-eastern regions, especially Andhra
Pradesh. Even with the reduction in number of total MFIs, we could able to maintain
a similar geographic coverage with sample containing most of the major states for
microfinance operations.
We use the return on equity (ROE2) as a financial indicator and number of active
borrowers as the social outreach indicator. The ROE is often used in financial efficiency
estimation (Girardone et al., 2004) as an output. The number of active borrowers was
chosen for the social outreach indicator because MFIs are required to reach as many
borrowers as possible. For the inputs, following Girardone et. al. (2004), we have used
variable assets, funding, risk and labour. For variable assets measure, we used the gross
loan portfolio (Crabb, 2008). The funding variable, debt, was calculated as Debt =
(Debt-to-Equity Ratio)*(Total Equity). The debt variable was chosen because it captures
how much MFIs rely on outside sources of funding and can help to determine how their
dualistic goals would suffer from a loss in funding. Risk was added to the equation
to ensure that the MFIs are willing take risk against poor repayment is considered.
For the risk measure, we use loan-loss provisions. The higher the loan-loss-provision,
the less confident the MFI is about their borrowers’ repaying capacity. The ‘labour’ is
included in large commercial bank financial estimations, and is still applicable to MFIs.
We included only those MFIs that reported all of the variables used in the analysis.

Econometric Model
For the purpose of analyzing data on MFIs, we have used a distance function
approach where the use of multiple outputs does not require pre-specified weights or
any other aggregation function, while still allowing for technical efficiency and random
error terms. The output distance function, holding the input vector fixed, finds the
Outreach and Financial Performance of Select MFIs in India – An Empirical Analysis 227

maximum expansion of the output vector that can be made while remaining in the
feasible production set. Following the study by Fare and Primont, 1994, an output
distance function for output vector Y and input vector X can be represented by the
equation as follows:
D0 ( X , Y ) = min {θ : (x , y / θ) ∈T}  ...(1)
where T = {(X,Y) : X can produce Y} D0(X, Y) is the inverse of the maximum
proportional expansion of outputs possible if the firm moved radically to the production
frontier. is the corresponding level of efficiency of firm i. A firm’s efficiency is bounded
between 0   1 and as the firm approaches 1, it is thought to perform more efficiently,
whereas as the firm moves further toward 0, it is thought to be less efficient. If a firm’s
efficiency is equal to 1, the firm is fully efficient (or is the most efficient firm observed
from the sample).
By using the trans-log functional form as in Equation 2 as is commonly used in
distance function estimation (O’Donnell and Coelli, 2005), we may write the equation
1 as follows.
௄
Ž ‫ܦ‬଴௜௧ ൌ  ߙ଴ ൅  σ௄ ௄ ௅
௞ୀଵ ߙ௞ Ž ‫ݕ‬௞௜௧ ൅ ͲǤͷ σ௞ୀଵ σ௝ୀଵ ߙ௞௝ Ž ‫ݕ‬௞௧ Ž›୨୧୲ σ௟ୀଵ ߱௟ Ž ‫ݔ‬௟௜௧ ൅

ͲǤͷ σ௅௟ୀଵ σ௅௠ୀଵ ߱௟௠ Ž ‫ݔ‬௟௧ Ž ‫ݔ‬௠௜௧ σ௅௟ୀଵ σ௄ ...(2)

௞ୀଵ ߛ௟௞ Ž ‫ݔ‬௟௜௧ Ž ‫ݕ‬௞௜௧ 

The trans-log functional form is often used as it allows for a second-order

approximation to an arbitrary functional form. There is no time trend included in
this study because many of the firms had only five years of data available. Symmetry
constraints require that kj = jk and lm = ml for l, m, j, k. The trans log distance
function is then normalised by one of the outputs and a stochastic term (vit) appendedto
represent random fluctuations.
With the normalisation to impose homogeneity and moving ui to the righthand side,
the final equation to be estimated is Equation 3.

െ Ž ‫ݕ‬ଵ௜௧ ൌ ܶ‫ܮ‬ሺܺ௜௧ ǡ ܻ௜௧ Ȁ‫ݕ‬ଵ௜௧ ǡ ߣሻ  ൅  ‫ݒ‬௜௧  െ  ‫ݑ‬௜  ...(3)

Equation 3 is the standard form for a distance function model. For vit and ui,
distributional assumptions need to be made to distinguish between the random and
technical effects (O’Donnell and Coelli, 2005; Koop, 2003).It is important to note that
in this paper, is assumed to be time invariant.
A Bayesian approach is undertaken for this distance function estimation because of its
ability to incorporate prior knowledge as well as non-linear functions for the unknown
distance function parameters, and still provide finite sample results (O’Donnelland
Coelli, 2005; Griffin and Steel, 2005). Using notation found in O’Donnell and Coelli
(2005), we can rewrite equation 3 with the complete NT observations as:
228 THE MICROFINANCE REVIEW • Volume VII(2) July - December 2015

െŽ› ൌ ȕ ൅  ൅ ሺ୒ ٔ  Œ୘ ሻ— … (4)

Where Xi is comprised of (jT, Zi) thereby making X = (X'1, ...., X'N) a (NT x (P + 1))
matrix, and u an N x 1 vector. In this paper, we assume the elements of u are drawn
from gamma distributions with a common unknown parameter, . Specifically, we
assume p(ui|-1) = fG(ui|1, -1). We need a proper prior for the parameter, , inorder to
obtain a proper posterior. Accordingly, we use the proper prior.

‫݌‬൫Ȝିଵ ൯ ൌ ݂ீ ቀȜିଵ ቚͳǡ െŽሺ‫ כ ݎ‬ሻቁ … (5)

where r*, is the prior median of the efficiency distribution. For estimation purpose,
we assume the elements of the vis are independent normal random variables with
zeromeans and constant variance, h-1 The probability density function (pdf) of vt is
written:

‫݌‬ሺ‫ݒ‬௜ ȁ݄ሻ ൌ ݂ே ሺ‫ݒ‬௜ ȁͲǡ ݄ିଵ ሻ … (6)

We assume the independent prior for h is: ‫݌‬ሺ݄ሻ ‫ି݄ ן‬ଵ  … (7)

The prior for ߚLVߚ̱ܰሺͲǡ Ȉሻ … (8)

Our joint prior pdf is:

‫݌‬ሺߚǡ ݄ǡ ‫ݑ‬ǡ ߣିଵ ሻ ൌ ‫݌‬ሺߚሻ ‫݌ כ‬ሺ݄ሻ ‫݌ כ‬ሺ‫ݑ‬௜ ȁߣିଵ ሻ ‫݌ כ‬ሺߣିଵ ሻ …(9)
The likelihood function is:

‫݌‬ሺ‫ݕ‬ȁߚǡ ݄ǡ ‫ݑ‬ǡ ߣିଵ ሻ ‫ି݄ ן‬ே்Ȁଶ ‫ ݌ݔ݁ כ‬ቄെቀ݄ൗʹቁሾെ݈݊‫ ݕ‬െ ܺߚ െ

ሺ୒ ٔ  Œ୘ ሻ—ሿƍ ሾെ݈݊‫ ݕ‬െ ܺߚ െ ሺ୒ ٔ  Œ୘ ሻ—ሿቅ … (10)

And using Bayes’ Theorem, and the posterior p(, h, u,-1 | y) is proportional to
the product of joint prior pdf (9) and likelihood function (10).To draw observations
from the posterior it is convenient to use a Gibbs sampler. The extensive use of Winbug
Manual is drawn from Spiegelhalter et. al. 2002.
We are interested in characteristics of the marginal pdf of functions of the
parameters, including measure of absolute technical efficiency which is derived using
the equation:
Di = TEi = exp (-ui)
Outreach and Financial Performance of Select MFIs in India – An Empirical Analysis 229

Analysis of Empirical Results

The empirical estimation based on Bayesian Distance Function model provides
some interesting results of not only the performance of MFIs, but also indicates which
inputs significantly affect the outputs return on equity and number of borrowers. For
the estimation, the multi-output production frontier was normalized by the number
of borrowers in order to impose the homogeneity constraints as discussed in Section
IV. Since ROE and Risk have negative values, the variables were shifted so that the
minimum value was slightly above zero to ensure all the data are strictly non-negative.
As per required priors, the model has used a r* of 0.5, a  of 25, and  of 1.0E-6. We
have used Winbugs statistical software (available at www.mrc-bsu.cam.ac.uk) that has
been designed to carry out Markov Chain Monte Carlo (MCMC) computation for a wide
variety of Bayesian Models.
To check for convergence, the 40,000 draws were broken into four sub-samples, nd
the means compared for the input parameter and efficiencies. The means of the four
sub-samples were all similar for the input parameters and efficiencies. Based on these
results, we feel confident of the convergence of the model. The suitability of the model
is tested with an R2, which is calculated to be 0.92 and the correlation between y and
ŷ is 0.96.
Table 1 presents the efficiency ranks, posterior mean efficiencies, and posterior
credible intervals for the 50 MFIs. While the least and most efficient firms are disparate,
the median efficient firm spans both of the others, although the majority of firms that
are highly efficient have very little spread. The posterior distribution shows that the
most efficient firm, MFI 20, has a 1.00 posterior probability of a higher efficiency score
than MFI 5, the median efficiency firm. Also, MFIs 20 and 5 have higher efficiency
scores than MFI 31 (the least efficient) with posterior probabilities of 1.00 and 0.999,
respectively.
Table 1: MFI Efficiencies
Rank Posterior Posterior Post PDF Percentiles MFI ID
Mean Standard Deviation 2.5 per cent Median 97.5 per cent
1 0.9655 0.0311 0.8844 0.9751 0.9990 20
2 0.9618 0.0343 0.8731 0.9717 0.9989 37
3 0.9449 0.0480 0.8221 0.9582 0.9983 48
4 0.7876 0.0914 0.6147 0.7865 0.9664 22
5 0.7758 0.1093 0.5674 0.7780 0.9777 14
6 0.7675 0.0822 0.6167 0.7644 0.9369 24
7 0.6889 0.0989 0.5127 0.6829 0.9014 2
8 0.6482 0.0631 0.5332 0.6456 0.7796 8
9 0.6407 0.1038 0.4591 0.6330 0.8659 33
10 0.6369 0.1297 0.4119 0.6273 0.9155 35
230 THE MICROFINANCE REVIEW • Volume VII(2) July - December 2015

11 0.5843 0.0646 0.4678 0.5807 0.7200 6

12 0.5794 0.0965 0.4143 0.5711 0.7887 32
13 0.5716 0.0941 0.4090 0.5642 0.7773 47
14 0.5535 0.0699 0.4285 0.5498 0.7004 26
15 0.5449 0.0716 0.4189 0.5402 0.6985 46
16 0.5429 0.0679 0.4207 0.5385 0.6852 42
17 0.5175 0.0546 0.4197 0.5153 0.6323 18
18 0.5152 0.0721 0.3883 0.5101 0.6699 45
19 0.5093 0.0850 0.3635 0.5027 0.6952 15
20 0.5085 0.0635 0.3940 0.5048 0.6421 30
21 0.5075 0.0602 0.3995 0.5036 0.6357 16
22 0.4989 0.0644 0.3843 0.4950 0.6352 28
23 0.4950 0.0624 0.3843 0.4912 0.6287 17
24 0.4674 0.0561 0.3671 0.4645 0.5862 36
25 0.4659 0.0679 0.3442 0.4587 0.6080 5
26 0.4572 0.0775 0.3247 0.4512 0.6265 10
27 0.4564 0.0573 0.3541 0.4531 0.5793 3
28 0.4558 0.0492 0.3667 0.4538 0.5587 40
29 0.4546 0.0564 0.3555 0.4515 0.5757 11
30 0.4529 0.0737 0.3251 0.4467 0.6143 21
31 0.4519 0.0490 0.3635 0.4494 0.5551 13
32 0.4493 0.0543 0.3513 0.4462 0.5645 44
33 0.4448 0.0568 0.3439 0.4412 0.5653 4
34 0.4417 0.0576 0.3393 0.4374 0.5645 39
35 0.4377 0.0552 0.3394 0.4342 0.5553 29
36 0.4256 0.0439 0.3460 0.4234 0.5169 38
37 0.3978 0.0446 0.3173 0.3957 0.4908 19
38 0.3929 0.0479 0.3070 0.3900 0.4951 9
39 0.3917 0.0403 0.3173 0.3892 0.4749 43
40 0.3901 0.0536 0.2952 0.3864 0.5050 27
41 0.3649 0.0427 0.2887 0.3626 0.4550 49
42 0.3485 0.0591 0.2464 0.3431 0.4771 12
43 0.3405 0.0483 0.2558 0.3371 0.4450 23
44 0.3309 0.0503 0.2431 0.3273 0.4404 25
45 0.3293 0.0441 0.2519 0.3267 0.4249 7
46 0.3282 0.0564 0.2312 0.3236 0.4519 41
47 0.3000 0.0549 0.2073 0.2951 0.4210 50
48 0.2740 0.0325 0.2154 0.2722 0.3427 34
49 0.2261 0.0328 0.1690 0.2236 0.2965 1
50 0.1786 0.0413 0.1115 0.1745 0.2722 31
Outreach and Financial Performance of Select MFIs in India – An Empirical Analysis 231

The average of all firm posterior mean efficiency scores is 0.582. The range for the
efficiency scores is from 0.1786 to 0.9655 with the median score being 0.4659. Clearly
MFIs widely vary in their efficiency and in aggregate they are only about half as efficient
as the most inefficient MFIs. Figure 4 shows a ranked box plot of the firms’ posterior
mean efficiency scores and credible intervals.
The column (7) on Table 2 shows the percent of the 40,000 draws for each elasticity
that had the same sign as the posterior mean, equivalent to a classical test for a
significant elasticity estimate. From these results we can see that debt is positively
related to ROE which implies that higher borrowing actually encourages profitability
for the MFI as it allows the MFI to grow its assets and thereby see a larger return. For
the effect of gross loan portfolio on ROE, we have a significant and positive coefficient.
This agrees with conventional theory as a larger investment in the gross loan portfolio
leads to an increase in profitability.
The repayment rates of the MFI’s borrowers are high enough that the behavior
associated with different risk-aversion does not affect an MFI’s ROE. And while the
provision of funds for potential loss is a good safety measure, the generally high
repayment rates by borrowers make the risks taken and the risk parameter not
significant.
Table 2: Percentage Change in ROE from a 1% Increase of a Variables Value
Standard Probability of
Particulars Mean 2.5 % Median 97.5 %
Deviation same sign (%)
Gross Loan Portfolio 0.0049 0.0018 0.0004 0.0048 0.0088 98.64
Debt 0.0012 0.0019 -0.0025 0.0019 0.0060 86.76
Staff 0.0013 0.0024 -0.004 0.0016 0.0068 78.12
Loan Loss Provision 0.0000 0.0026 -0.0056 0.0000 0.0061 47.32
Borrowers -0.0076 0.0035 -0.0152 -0.0079 -0.0011 95.64
Since we used a distance function for the estimation, it is possible to see what the
relationships between the outputs are. Table 2 shows that the numbers of borrowers
are negatively correlated with ROE. Thus, the two goals specified here are at odds with
each other. Since an increase in the number of borrowers means a decrease in the return
on equity, it is very important that MFIs choose their new borrowers very carefully. It
is also important for MFIs to have incentives for established borrowers to take out
subsequently larger loans. However, not encouraging an increase in the number of
borrowers, or even worse decreasing the number of borrowers, just to increase the ROE
would negate the outreach goal of MFIs.

Concluding Observations
In this paper, we studied the relationship between social and financial performance
by examining the question: “If an MFI improves its contribution to development and
poverty reduction, how does this impact its financial performance?” To answer this,
we used the empirical estimation based on Bayesian Distance Function model, because
232 THE MICROFINANCE REVIEW • Volume VII(2) July - December 2015

of its ability to incorporate prior knowledge as well as non-linear functions for the
unknown distance function parameters, and still provide finite sample results.
Since an increase in the number of borrowers means a decrease in the return on
equity, it is very important that MFIs choose their new borrowers very carefully. It
is also important for MFIs to have incentives for established borrowers to take out
subsequently larger loans. However, not encouraging an increase in the number of
borrowers, or even worse decreasing the number of borrowers, just to increase the ROE
would negate the outreach goal of MFIs.
The entry of private equity in the microfinance sector has resulted in a demand for
higher profits by MFIs with consequent high interest rates and the emergence of some
of the areas of concern like conflict between objectives of outreach and profitability.
The gross loan portfolio variable indicates that the MFIs should continue to grow and
increase their size by increasing their loan portfolio. Along with the growth provided
by an increase in funding and portfolio size, an increase in equally skilled labour will
improve the sustainability of an MFI.
The policy implication from the above analysis is that it is necessary to widen the
base from which MFIs are funded in respect of the Net Owned Funds needed for
capital adequacy. A budgetary provision for “Social Capital Fund” may be initiated
with the help of Government which can be directed for investment in MFIs with social
performance norms. Further, MFIs should restrict themselves from the risky lending
where the objectives of profit get precedence. The reliance on commercial borrowing
may be brought down to the bare minimum in the pursuit of more social funding.
The policymakers need to create environment that fully utilise microfinance as a
development tool for future poverty reduction.
Figure 3: Density plots for of borrowing groups 20 (Most Efficient), 5 (Median Efficient), and 25 (Least Efficient)
Outreach and Financial Performance of Select MFIs in India – An Empirical Analysis 233

Figure 4: Ranked Box Plot of 50 Chosen MFIs

DISCLAIMER

[The views expressed herein are those of authors and no way should be attributed
to the RBI or its Management. Any error remains are authors’ responsibility.
However, the usual disclaimer applies.]

NOTES

1. MFIs have various institutional frameworks ranging from not for profit Societies/
Trusts and Companies registered under Section 25 of the Companies Act to Non-
Banking Financial Companies (NBFCs) registered with and regulated by the Reserve
Bank of India.
2. Return on Equity is defined as Net Profits divided by Average Total Equity calculated
from the Balance Sheet of respective MFIs. The data on the same (on ratio basis) is
provided in database, www.Mixmarket.org.

REFERENCES

Ahlin, C, N Jiang (2008): ‘Can Micro-Credit Bring Development?’ Journal of Development

Economics, 86, 1-21.
Armendariz de Aghion, Beatriz and M Jonathan (2005): The Economics of Microfinance,
Cambridge, MA: MIT Press.
Banerjee, Abhijit, D Esther, G Rachel, K Cynthia (2009): “The Miracle of Microfinance?
Evidence from a Randomised Evaluation”, Working Paper, Massachusetts Institute of
Technology, USA.
Basu, Priya and S Pradeep (2005): “Exploring Possibilities: Microfinance and Rural
Credit Access for the Poor in India”, Economic and Political Weekly, Vol. 40, No. 17,
pp. 1747–56.
Crabb, P (2008): “Economic Freedom and the Success of Microfinance Institutions”,
Journal of Developmental Entrepreneurship, 13, pp. 205 - 219.
Cull R, A Demirguc-Kunt and J Morduch (2007): “Financial Performance and Outreach:
A Global Analysis of Leading Microbanks”, Economic Journal, Vol. 117, No. 517, pp.
F107-F133.
234 THE MICROFINANCE REVIEW • Volume VII(2) July - December 2015

Dewez, D and S Neisa (2009): MFI’s Social Performance Mapping and the Relationship
Between Financial and Social Performance, Evidences against the Trade-Off Theory,
Incofin, Wilrijk.
Dichter, T (1997): Appeasing the Gods of Sustainability: The Future of International NGOs
in Microfinance, In: Hulme, D, Edwards, M Eds., NGOs, States and Donors: Too Close
for Comfort? St. Martin’s Press, New York.
Fare, R., D Primont (1994): Multi-output Production and Duality: Theory and Applications,
Primont, Boston.
Field, E, R Pande (2008): “Repayment Frequency and Default in Microfinance: Evidence
from India”, Journal of the European Economic Association, 6, pp. 501-509.
Gabriel Di Bella (2011): Impact of Global Financial Crisis on Microfinance and Policy
Implications, IMF Working Paper, IMF, Washington D.C.
Girardone, C, P Molyneux, E P M Gardener (2004): “Analysing the Determinants of Bank
Efficiency: The Case of Italian Banks”, Applied Economics, 36, pp. 215-227.
Griffin, J E, M F J Steel (2005): Bayesian Stochastic Frontier Analysis Using Winbugs,
Technical Report, University of Warwick.
Gutierrez-Nieto, B, C Serrano-Cinc, C M Molinero (2007): “Microfinance Institutions and
Efficiency”, Omega 35, pp. 131-42.
Hartarska, V, S B Caudill, D M Gropper (2006): The Cost Structure of Microfinance
Institutions in Eastern Europe and Central Asia, Technical Report, University of
Michigan, Ross Business School.
Hudon, M and D Traca (2006): On the Efficiency Effects of Subsidies in Microfinance: An
Empirical Inquiry, Technical Report, University of Bruxelles, Solvay Business School.
Hulme, D and P Mosley (1996): Finance against Poverty, Volumes I and II, Routledge,
London.
Johnson, S, B Rogaly (1997): Microfinance and Poverty Reduction, Oxfam Actionaid,
Oxford, UK.
Koop, G (2003): Bayesian Econometrics John Wiley & Sons Ltd., West Sussex UK.
Ledgerwood, J (1999): Microfinance Handbook: An Institutional and Financial Perspective,
Washington, D.C: World Bank.
M CRIL (2012): Microfinance Review 2012: MFIs in a Regulated Environment – A Financial
and Social Analysis, Gurgaon: Micro Credit Ratings International Limited.
------ (2014): Microfinance Review 2014: Risk, Regulation and Reward – A Financial and
Social Analysis, Gurgaon: Micro Credit Ratings International Limited.
Meyer, R L (2002): Track Record of Financial Institutions in Assisting the Poor in Asia, ADB
Institute Research Paper, No. 49, December.
Morduch, J (1998): The Microfinance Schism, Harvard University (mimeograph).
O’Donnell, C J, T J Coelli (2005): “A Bayesian Approach to Imposing Curvature on
Distance Functions”, Journal of Econometrics, 126, pp. 493-523.
Sinha, Anand (2012): Strengthening Governance in Microfinance Institutions (MFIs): Some
Random Thoughts, Keynote address at FICCI’s Workshop on April 23, 2012, Mumbai.
Spiegelhalter, D, A Thomas, N Best and D Lunn (2002): WinBUGS User Manual Version
1.4, Cambridge, UK: MRC Biostatistics Unit.
Websites Accessed:
www.mixmarket.org/mfi/country/India
www.cgap.org
Outreach and Financial Performance of Select MFIs in India – An Empirical Analysis 235

Appendix 1: List of MFIs included in the Study

Name of MFIs Name of MFIs
Anjali Microfinance Ltd. Sarvodaya Nano Finance Ltd.
Asirvad Microfinance Private Ltd. Satin Creditcare Network Ltd.
Bandhan Financial Services Pvt. Ltd. Sewa Mutually Aided Cooperative Thrift Societies Federation Ltd.
Bharatiya Samruddhi Finance Limited (BASIX) Share Microfin Ltd.
Bharat Integrated Social Welfare Agency (BISWA) SKS Microfinance Pvt. Ltd.
BSS Microfin Pvt. Ltd. SMILE Microfinance Ltd.
BWDA Finance Limited Sonata Finance Pvt. Ltd
Cashpor Micro Credit Spandana Sphoorty Financial Ltd
Equitas Microfinance India (P) Ltd Sahara Utsarga
ESAF Microfinance And Investments Private Ltd. Swadhaar Fin Serve Pvt. Ltd
Future Financial Services Ltd SWAWS Credit Corporation Pvt. Ltd.
Grameen Financial Services Pvt. Ltd. Trident Microfin Pvt. Ltd.
GramaVidiyal Microfinance Ltd. Ujjivan Financial Services Private Limited
Gram Utthan Utkarsh Microfinance Private Limited
Indian Association for Savings for Savings & Credit (IASC) Village Financial Services Pvt. Ltd.
Janalakshmi Financial Services Pvt. Ltd. Shri Kshethra Dharmasthala Rural Development Project (SKDRDP)
Krishna BhimaSamruddhi Local Area Bank CReSA Financial Services Pvt. Ltd.
KotaliparaDevlopment Society Fullerton India Credit Company Ltd.
Liberal Association for Movement of People(LAMP) Growing Opportunity Finance (India ) Pvt. Ltd.
Mahasemam Credible Microfinance Pvt. Ltd.
Madura Microfinance Limited (MMFL) Action for Social Advancement
Rashtriya Seva Samithi (RASS) Capital Trust Ltd.
Rashtriya GraminVikas Nidhi (RGVN)-CSP Asomi Finance Pvt Ltd.
Saadhan Microfin Society IDF Financial Services Pvt. Ltd.
Sanghamithra Rural Financial Services Jagannatha Financial Services Ltd.
 Digitization of SHGs for a
Success of Microfinance in
India
- G R Chintala*

Digitization can Abstract

make the information SHG-Bank Linkage Programme has been pursued as a
easier to preserve, potential platform for poverty alleviation in the India. SHG-
access, analyze and BLP requires maintenance of a strong, transparent and up to
generate various date information system of SHGs on both financial and non-
reports, and share it financial parameters which could generate various returns
with stakeholders, and reports for information of its stakeholders. Digitization
financers, development can make the information easier to preserve, access, analyze
agents, researchers, and generate various reports, and share it with stakeholders,
policymakers, etc. financers, development agents, researchers, policymakers, etc.
This can reduce the This can reduce the transaction costs by minimising the need
transaction costs by for human resources for maintenance of volumes of physical
minimising the need records. NABARD has launched a pilot project for digitization
for human resources of SHG data base under project EShakti which envisages
for maintenance of mapping of the existing SHGs in the district (bank wise, branch
volumes of physical wise) by capturing of detailed financial and non-financial
records. information about the SHG and its members and uploading
them through a customised software. The paper is based on
analysis secondary data and field level experiences during the
implementation of the pilot project of EShakti in Dhule district
of Maharashtra and Ramgarh district of Jharkhand.

Introduction
Self-Help Groups-Bank Linkage Programme (SHG-BLP),
pioneered by NABARD a little more than two decades ago
from a pilot of 500 SHGs in 1992, covers about 7.4 million
SHGs and nearly 90 million poor families in the country. The
poor, postulated as unbankable prior to SHG-BLP epoch, has
* Chief General Manager, now a domain of more than four million SHGs having savings
Microcredit Innovations deposits with banks to the tune of Rs. 9,897 crore and credit
Department, NABARD,
HO Mumbai. Key Words: Digitization, EShakti
Digitization of SHGs for a Success of Microfinance in India 237

outstanding of more than Rs. 42,927 crore with the formal lending institutions. As
many as 1.4 lakh SHGs have received credit support to the tune of Rs. 24,017 crore
from various banks during the year 2013-14, at an average of Rs. 1.76 lakh per SHG
(NABARD 2014). The credit disbursement to SHGs during 2013-14 grew by Rs. 3,432
crore (16%) as compared to previous year confirming existence of strength in the
movement of SHG-BLP. Institutional credit support has not only enabled the rural
poor households to keep themselves away from the usurious informal lenders but also
facilitated the underprivileged communities in less developed regions with income
generating opportunities and contributed stemming rural poverty. Launched in 1999
with an objective to eradicate poverty from rural India, Swarnjayanti Gram Swarozgar
Yojana (SGSY) primarily targeted the SHGs with BPL members by providing activity
based subsidised credit support. SHG-BLP also initiated the microfinance movement in
the country and today it is the foremost tool of financial inclusion. Primarily being a
savings led model SHG-BLP contributed to augmenting financial inclusion and financial
literacy among the rural poor.

Prologue on SHG Movement in India

The phenomenal growth of SHG-BLP, deemed as world’s largest microfinance
programme, is the outcome of concerted efforts of various stakeholders under the
overall guidance and directions of NABARD and Reserve Bank of India (RBI). SHGs have
been thriving for income generating and livelihood activities banked upon with skill
building, entrepreneurship development and livelihood initiatives in a cross section of
farm as well as nonfarm activities. Promotional agencies like banks, Non-Government
Organisations (NGOs), government departments, etc. have been nurturing SHGs and
NABARD has been patronizing the graduating process of SHG-BLP over the years.
The rural poor have widely accepted the power of microfinance that allowed them
to access the basic financial services from institutional sources. The rural poor usually
preferred to stay away from institutional finance system, were empowered enough to
financially include themselves in the mainstream of banking network. SHG BLP was a
successful tool to bring rural women to frontline in the process of social and economic
wellbeing of the poor households individually and collectively. They were equipped
with thrift, investment, collective decision making, evolve as leaders in the social front
and take up economic activities to supplement the family income. SHGs have developed
the skill for voluntary savings, on lending, book keeping and financial management.
On the strength of their skill in discipline, group dynamics and financial management
the banks were motivated to extend credit support. The disciplined groups performed
well and succeeded to avail Revolving Fund Assistance from different sources and
subsidised loan support under government programmes like SGSY.
SHGs have become a familiar presence in the country side and have emerged as a
238 THE MICROFINANCE REVIEW • Volume VII(2) July - December 2015

significant part of the development infrastructure (Tankha 2012) in rural India. SHG-
BLP has continued to grow at a steady pace with support from promotional agencies,
capacity building programmes and microfinance support through institutional credit.
It got a fillip when Non-Banking Financial Companies (NBFCs) were liberated to act
as financial intermediaries. NBFCs could facilitate SHGs to avail credit at door steps,
easier lending norms and softer recovery terms. Moreover, SHG-BLP succeeded in
bringing millions of poor households under the banking fold and freeing them from
exploitation of informal lenders.
The growth of SHG BLP however has been eclipsed with certain limitations. First,
the success of SHG BLP could not spread evenly across all the regions and states. While
the southern states have excelled in savings and credit linkage of SHGs at a faster
rate, other states could not match this pace. It is heavily skewed towards the Southern
Region which has around half of the SHGs in the country while Northern Region (5%)
and North Eastern Region (4%) have fewer SHGs (Figure 1). There are also variations
in the intensities of SHG BLP across the states. Seven states viz. Andhra Pradesh,
Karnataka, Kerala, Maharashtra, Odisha, Tamil Nadu, and West Bengal have 75% of
the SHGs having savings linkage with Banks. Andhra Pradesh (1419k) alone has more
number of SHGs than the North, NE and Central Regions together do have.
Figure 1: No. of SHGs Having Savings with Banks
(as on 31.3.2014; No. in Thousand)

ϰϬϬϬ ϯϲϵϲ
ϯϱϬϬ
ϯϬϬϬ
ϮϱϬϬ
ϮϬϬϬ ϭϰϲϵ
ϭϱϬϬ ϴϵϳ
ϭϬϬϬ ϲϴϲ
ϯϭϲ ϯϲϱ
ϱϬϬ
Ϭ
EKZd,^dZE EKZd,ZE EdZ> t^dZE ^dZE ^Khd,ZE
Z'/KE Z'/KE Z'/KE Z'/KE Z'/KE Z'/KE

Source : NABARD: Status of Microfinance in India, 2013-14

Secondly, SHGs are inconsistent with operational issues and had poor interaction
with external agencies. SHG-BLP to a large extent remained more of a supply side
orientated. Most SHGs lack their own agenda as well as a clear future vision. The SHGs
seldom could pursue their own strength, rather they accepted whatever offered to them
by way of training, capacity building and financial assistance. Consequently, process
of graduating the SHGs remained rather slow and less effective. Reasons for this could
be many, prominent ones being little exposure of the members to entrepreneurship,
inadequate backward and forward linkages for profitable ventures, etc.
Thirdly, a large number of SHGs fail in regularly performing their most basic functions
like meeting regularly, internal lending, borrowing from bank and gainful uses of
Digitization of SHGs for a Success of Microfinance in India 239

bank credit, collective decision making, alternation of management, maintenance of

records and book keeping, etc. These are the core indicators for assessing the SHGs for
their eligibility for extending credit, RFA and other supports. SHGs were expected to
perform the basic functions on their own after the initial handholding by the Self-Help
Promoting Institutions (SHPI). In majority cases however the SHGs failed to do so.
Fourthly, increasing Non-performing Assets (NPAs) in SHG accounts is a major
concern in SHG BLP. Overall NPA to loan outstanding of bank loans to SHGs in India
has gone up to 6.8% as on 31.3.2014 from 2.9% in 2007-08 (Table 1). NPAs of bank
loan has gone up from Rs. 4,229 million to Rs. 29,327 million during the same period.
Though there was a marginal decline in the rate of NPA in 2013-14 to 6.8% from 7.1%
in the previous year, there had been steady increase in the absolute amount of NPA in
the loans to SHGs.
Table 1: Non-Performing Assets of SHG Loans
NPAs against other than NRLM/SGSY
NPA of Loans to All SHG NPAs against NRLM/SGSY & Others
& Others
Year
Amount of Gross NPAs Amount of Gross NPAs Amount of Gross NPAs
NPA % NPA % NPA %
(Rs. million) (Rs. million) (Rs. million)
2007-08 4229 2.86 2208 5.72 2021 1.85
2008-09 6259 2.90 2444 5.00 3815 2.29
2009-10 8230 2.94 3195 5.11 5035 2.32
2010-11 14741 4.72 5491 7.01 9250 3.95
2011-12 22127 6.09 6574 8.16 15553 5.50
2012-13 27869 7.08 8597 9.39 19272 6.38
2013-14 29327 6.83 9752 9.58 19575 5.98
Note: Others refer to the government sponsored programme
Source: Status of Microfinance in India, NABARD, various issues.

Interestingly, rate of NPA in the loans to SHGs under NRLM/SGSY and other
government sponsored programmes was much higher than that of others. Loans under
SGSY, NRLM and other government sponsored programmes are generally income
generating activity based loans and involve subsidies and revolving fund assistance. In
spite of this, the default and NPA rate remained higher than the normal loans to SHGs
over the years (Table 1). This needs in-depth examinations. However, preliminary
reason for higher NPA could be SHGs are dependent on Self-Help Group Promoting
Institutions (SHPIs) and other stakeholders for pursuing their savings, credit linkage,
income generating ventures, book keeping and repayment of loans. Banks, on the other
hand, cannot embark on to frequent interaction with SHGs and pepping them up for
a healthy banker client relationship. Again, lack of proper book keeping and financial
management by the SHGs is to certain extent responsible for the rising NPAs
Among various categories of banking institutions, rate of NPA in loans to SHGs was
maximum in Cooperative Banks whereas it was the lowest in case of RRBs (Table 2).
240 THE MICROFINANCE REVIEW • Volume VII(2) July - December 2015

Commercial Banks as usual have high volume of NPAs in loans outstanding to SHGs.
Perhaps the increasing NPAs in loans to SHGs may act as a deterrent for formal lending
institutions to lend to the economically vulnerable groups. This may again push a large
domain of poor households operating under SHG-BLP to a back foot.
Table 2: NPA of Bank Loans to SHGs: Agency-wise Position as on 31 March 2014 (Amount in Rs. million)
NPA of Bank loans to against NPAs against NRLM/SGSY & NPAs against other than NRLM/
Total Loans Outstanding to SHG Others* SGSY & Others*
Sl. No. Name of the Agency
Amount % of NPAs to Total Amount % of NPAs to Total Amount % of NPAs to Total
of NPAs loans Outstanding of NPAs loans Outstanding of NPAs loans Outstanding
1 Commercial Banks 20249 6.89 6135 9.66 14114 6.13
2 Regional Rural Banks 6919 6.26 3062 9.65 3857 4.90
3 Cooperative Banks 2159 8.67 555 8.54 1603 8.71
Total 29327 6.83 9752 9.58 19574 5.98
Note: Others refer to the government sponsored programme
Source: Same as Table 1

Fourthly, the potential of financing SHGs attracted more MFI players to microfinance.
Competition provoked the MFIs to lend the SHGs with least appraisals and without
proper assessment for the need for credit which ultimately led to multiple financing
to SHGs (Ghiyazuddin and Gupta 2013, Srinivasan 2009). The MFI sector had shown
a steady and fast growth in microfinance (Figure 2) until the “Andhra Pradesh
microfinance crisis” in 2010. Consequent upon the microfinance predicament, the Andhra
Pradesh Government stepped in with the Andhra Pradesh Micro Finance Institutions
(Regulation of Money Lending) Rules 2010 to restrict the MFI operations in the state.
Subsequently, there was a sudden dip in the growth rate following the MFI Rule and
only after a couple of years’ stagnation the MFI sector had picked up acceleration again
(M-CRIL 2014). The Andhra Pradesh crisis of multiple financing by MFIs to SHGs is a
lesson to learn in microfinance. Perhaps a strong database of the SHGs with ready to
access the updated information would have avoided such unwarranted instances. The
recent growth of MFIs again poses a doubt for another jeopardy. The MFI sector has
substantial impact in providing credit support to low income rural families and thus
actions of MFIs cannot be ruled out. Digitization of SHGs with strong financial data
may throw light on the moot point.
Last but not the least, over the years the group dynamics in SHG-BLP has got thinned.
As a result, many SHGs have gone defunct, remained dormant and inactive. The SHGs
in many cases could not propel their dynamics after withdrawing of supports from
SHPIs and development agencies. The financing banks could not make it possible to
meet regularly and interrelate financial and nonfinancial matters of SHGs. Moreover,
the orientation of bank officials, especially the new incumbents, remained away from
SHG-BLP. The SHGs lost the direction in the absence of an incessant mentoring.
Digitization of SHGs for a Success of Microfinance in India 241

Figure 2: Growth of MFIs in India

ϭϰϬϬϬ
ϭϮϬϬϬ ϭϮϭϱϴ
ϵϭϯϬ
ϭϬϬϬϬ
ϴϬϬϱ
ϴϬϬϬ ϳϰϳϰ
ϲϬϬϬ ϰϱϴϵ
ϲϮϵϬ
ϰϬϬϬ ϮϯϳϬ
ϭϮϭϵ
ϴϳϲ
ϮϬϬϬ ϭϬϬ ϭϴϭ ϰϰϰ
Ϭ
:ĂŶͲϬϯ

:ĂŶͲϬϰ

:ĂŶͲϬϱ

:ĂŶͲϬϲ

:ĂŶͲϬϳ

:ĂŶͲϬϴ

:ĂŶͲϬϵ

:ĂŶͲϭϬ

:ĂŶͲϭϭ

:ĂŶͲϭϮ

:ĂŶͲϭϯ

:ĂŶͲϭϰ
Source : M-CRIL, 2014

All the factors required for a sustainable and successful performance of SHGs hover
around governance and discipline related issues. SHG-BLP requires maintenance of
a strong, transparent and up to date information system of SHGs on both financial
and non-financial parameters which could generate various returns and reports by
the stakeholders. The information base available for a scrutiny can put timely checks
and balances for performance of an SHG. Systematic maintenance of nonfinancial
information, which may include training of members, social interaction of SHG,
collective decision making, regularity and attendance in meeting, etc. of its members
also reflect the trends and pattern on aspects sensitive to the performance of the group
of the SHG.
Financial accounting is crucial for smooth functioning of SHGs. Book keeping of
savings, internal lending, borrowing from banks and other sources, allocation of loans,
income from group activities, repayment of loan and interests, etc. are crucial for
performing the SHG for a long period. This forms a strong root for rating the SHG
on the basis of which the SHG is adjudged for financial and other supports from
various agencies. SHGs are required to systematically maintain the books of accounts
particularly when they do receive members’ regular and additional savings, revolving
fund assistance, credit form banks, loan support from MFI, etc. and also indulge in
internal lending, investments in group economic activities, etc. Though the SHGs are
not required to maintain the accounts in a proficient manner to generate the balance
sheets, profits and loss accounts, etc., the books of accounts need to speak the details of
receipts, disbursements, outstanding, up to date basis. SHGs in most cases are unable
to maintain the records on themselves and had to depend upon the SHPIs or others
for writing their books of accounts. On the other hand, in most cases of the records
maintained are not up to date. A study conducted by APMAS in Bihar and Odisha for
NABARD (NABARD 2014a) revealed that savings ledger, loan ledger and cashbooks
242 THE MICROFINANCE REVIEW • Volume VII(2) July - December 2015

were maintained by 66%, 58% and 48% of SHGs, respectively. Only 20% of the SHGs
had updated books. Members of the SHGs were able to maintain the books only in case
of 45% of SHGs while others depend on SHPI and others. In the absence of clear data
on financial transactions members tend to default, dissuade and the SHG goes into
defunct mode.
Further, maintaining a profile of SHG and its members pertaining to their personal
details, savings, borrowings and repayment, do help in enriching credentials of the
SHG as well as its members. Relevant information systematically recorded over a time
supplement the testimonials of a good SHG. Vitals available on line in a digitized mode
facilitates the SHGs to generate relevant MIS for scrutiny by banks, MFIs and other
stakeholders before a financial transaction.

Why Digitization of SHGs is Crucial

Digitization of SHGs is the process of maintaining financial and nonfinancial
information of SHGs and its members systematically in a digital format. It is the
arrangement of storing data in a specially structured computerized format designed
such that relevant information can be availed at any point of time. The need for
digitisation of records of SHGs has been felt for quite some time due to irregularities
and delay in maintenance of books of accounts by SHGs, low credit linkage of groups
and lack of a complete data base of SHGs pan India.
Transparent and proper maintenance of records of SHGs will facilitate in nurturing
and strengthening of SHGs. Digital empowerment will help in bringing SHGs on a
common web based e-platform by making book keeping easy for low literacy clients.
This will help in promoting national agenda of Financial Inclusion and pave the way of
credibility of SHG data which can later be used by Credit Bureaus to reduce the issues
related to multiple financing by banks. The benefits of digitization of SHGs are many.
First, it can replace the cumbersome manual and paper based data maintenance and
management information system of SHGs. Digitisation makes the information easier to
preserve, access, analyze and generate various reports, and share it with stakeholders,
financers, development agents, researchers, policymakers, etc. It makes voluminous
information in varied formats like scripts, audio, video, etc. store, process and access
easily. Digitization has become a core part in the process of MIS of a business in a
computerized environment around. This facilitates analyses of data to better understand
the process of performance, cost drivers and causes of risk. Real-time reports and
dashboards on digital-process performance permit the managers to address problems
before they become critical. Transparent and proper maintenance of records of SHGs
will facilitate proper nurturing and strengthening of SHGs, remove irregularities and
delays in maintenance of books of accounts and make book keeping easy for SHG
members who are not fully literate. As of now SHGs are informal bodies linked to
Digitization of SHGs for a Success of Microfinance in India 243

banks for getting non-collateralised loans varying from Rs. 20,000 to Rs. 300,000
depending on their savings corpus and linkage status. Presently very few groups are
getting linkages beyond second time mainly due to lack of proper data pertaining to
group loans (both internal and external) and also maintenance of records of meetings
etc., as banker is not posted with updated data on them. This will pave the way for
credibility of SHG data which can later be used by banks to promote and deepen credit
linkage. The data may also be made available to Credit Bureaus to reduce the issues
related to multiple financing by banks. Digitization of SHGs would expect the detailed
information available to the bankers for credit linkage of SHGs.
Second, digitisation can reduce the transaction costs by minimizing the need for
human resources for maintenance volumes of physical records, analyses of data, transfer
of information, conglomerate of aggregate data, etc. It simplifies generating reports
and takes minimum human resources. Markovitch and Wilmott (2014) underline that
digitizing information-intensive processes can reduce costs of a business house by up
to 90% and turnaround times can be improved by several times.
Third, digitization of SHGs pan India can give a complete picture of the SHGs in the
country. The vitals of SHGs and their members can be available for detailed analyses
from different points of view. Analyses of trends and progress of SHGs and the areas
of concern in SHG movement that entails a large section of rural poor can be well
studied with more precision for a policy orientation. At this point of time when SHGs
constitute a majority of people below poverty line and the development system is
seriously concerned about the complete eradication of poverty from India, digitization
of SHGs would be addressing the problem by providing the basic information of about
7.5 million SHGs at one place.
Fourth, the core benefit of digitization of SHGs is mainstreaming of SHG members
with financial inclusion agenda enabling the SHGs and its members’ access to wider
range of financial services. Digitization of SHG accounts will increase bankers’ comfort
in credit appraisal and loan linkage of SHGs. A well-documented and up to date
information base digitally available for ready reckoning may be appealing for the
financing institutions to extend business relation with the SHGs. The banks can assess
the financial health of an SHG in real time on the basis of data available on line and
rate the SHG for deciding a financial facility to be extended to the group. As such,
44% of SHGs are still out of the ambit of the credit linkage with institutional sources.
Want of adequate financial and managerial information about the SHGs perhaps had
restricted the banks to have a conclusive decision on financing them.
Fifth, digitization of SHGs can make available the basic information of its nearly 100
million SHG members. A broader benefit out of it could be mapping of persons whether
they covered under JAM trinity and how to bring them under its fold. It would ease the
transfer of social benefits and Direct Benefit Transfer through Aadhaar linked accounts
and convergence with other government benefits to SHG members. Digitization can
244 THE MICROFINANCE REVIEW • Volume VII(2) July - December 2015

develop a comprehensive information base and robust MIS about poor community,
which may facilitate suitable interventions and convergence of other programmes for
their social and financial empowerment. It will help in identifying suitable interventions
and support for proper nurturing and strengthening of SHGs.
Sixth, livelihood is a big challenge for the SHGs in contemporary India. Many SHGs
do take agriculture as oral lessees in leased in lands, panchayat lands, village commons,
etc. However, for want of proper documentation, sufficient credit was denied to such
groups in most cases. Digitization of SHGs in such cases would provide the information
on the financial parameters of the SHGs and facilitate decision making. Banks can
provide KCC or similar credit linkage to the SHGs working as oral lessees. In fact,
digitization would offer all the benefits that computerisation of land records would do
to the farmers.
Moreover, while SHGs and its members are the direct beneficiaries of digitization
process, other stakeholders like Self-Help Promoting Institutions, NGOs, banks,
NABARD, government development departments and agencies like National Rural
Livelihood Mission may derive immense benefit out of this exercise.

‘EShakti’: a NABARD Initiated Pilot Project

The initiative of digitization of SHG database through EShakti was kicked off by an
announcement made by NABARD in the presence of Raghuram Rajan, the Governor
of RBI during National Microfinance Conclave held on 13 November 2014. EShakti is
a specially designed project for e-book keeping of SHG records as well as accounts on
a real time basis. Keeping in view the need for digitization of SHG data as discussed
above and the government of Idia’GOI’s mission for creating a Digital India, NABARD
has launched a project for digitization of Self Help Groups (SHG) in the country. To
begin with, two districts Ramgarh (Jharkhand) and Dhule (Maharashtra) are being
covered in a pilot mode.
The EShakti project envisages mapping of the existing SHGs in the district (bank
wise, branch wise) by capturing of detailed financial and non-financial information
about the SHG and its members and uploading them through a customized software.
The digital data will be hosted under a dedicated website viz. www.eshakti.nabard.
org and generate a host of MIS. SHG members themselves can upload the latest data
directly by using a simple Android based App loaded on a hand held device (Tablet/
Mobile) with GPRS support.
Takeaways from EShakti
The project envisages to generate reports as well as consolidated data on the
following broad parameters:
➢ Member wise details of SHGs on saving, lending, attendance;
➢ Financial statement of SHGs – Balance sheet and Income and Expenditure;
Digitization of SHGs for a Success of Microfinance in India 245

➢ Grading chart of SHGs;

➢ Bank linkage details – savings and credit disbursement;
➢ Other periodical MIS on performance of SHGs.
➢ On line SMS alerts to members of their financial transactions in SHGs
Current Status and Challenges in the EShakti Project
Data have been captured for nearly 8.8k SHGs with more than 104k members in
the EShakti database from Ramgarh (Jharkhand) and Dhule (Maharashtra), the two
districts where piloting is being done. The SHGs are spread across 990 villages and
linked to 202 branches of various banks (Table 3). The data reveals that 54.5% members
are BPL.
Table 3: Status of EShakti Project – Basic Data
Dhule Ramgarh Total
Particulars
Maharashtra Jharkhand
Number of Villages covered (no.) 626 364 990
Number of Groups covered (no.) 4626 4151 8777
Number of SHG members covered (no.) 56631 48073 104704
Number of bank branches involved (no.) 125 77 202
Number of BPL members (no.) 26204 30841 57045
Total Savings by SHGs (Rs. ) 118439272 52344538 170783810
Outstanding of Internal Lending (Rs. ) 83440203 34259111 117699314
Bank Loan Availed (Rs.) 180783615 15727508 196511123
Bank Loan Outstanding (Rs.) 70556635 5492743 76049378
Average Savings by SHGs (Rs. 25603 12610 19458
Average Outstanding of Internal Lending (Rs.) 18037 8253 13410
Average Bank Loan Availed (Rs.) 39080 3789 22389
Average Bank Loan Outstanding (Rs. ) 15252 1323 8665
Source : https://eshakti.nabard.org (Decessed on 08 September 2015)

A first sight of the data reveals that the average savings, internal lending, bank loan
and bank loan outstanding of SHGs in Dhule districts are better than that in Ramgarh
district which indicates a better financial health of the SHGs in the former district. The
EShakti project is capable of generating varieties of MIS for information of various
stakeholders. Reports can be generated not only for the overall position of SHGs in a
district or a block but also bank-wise, SHG-wise detailed reports can also be generated
through the digitization exercise. Reports necessary to understand the financial health
and overall functioning of an SHG can also be generated which would be highly helpful
for a financing institution to take decision on credit linkage to a particular SHG. The
data is updated on real time basis facilitating the stakeholder to have an updated
status/MIS about the SHGs.
246 THE MICROFINANCE REVIEW • Volume VII(2) July - December 2015

Challenges in the Process

The SHGs in pilot districts are suffering from poor book keeping of their financial
transactions. Up-to-date data is seldom available with the SHGs as well as banks. Being
informal in their legal status, there is no homogeneity in maintaining the records.
Therefore, sourcing of detailed information from a poor database is posing a big
challenge before the EShakti project. Moreover, large numbers, spread far and wide
and some located in remote and inaccessible areas creating hurdles in hastening up
the process.
Once the pilot is successful, it is anticipated that development of a customized
software for data base, MIS and interface platform on Mobile/ Tablet App and its
periodic updates/ continued service by vendors/ training of the SHG members on
technology platform etc., would be owned by the SHGs /or Banks on a “pay and use’’
basis so that it will be a sustainable model.
A convergence between ‘project EShakti’ with NRLM initiative will be crucial as well
as helpful to broad base the exercise of digitization of SHGs. As the national roll out
of the programme shall entail huge expenditure, ways of meeting the same and roping
in new partners including banks, NRLM /SRLMs and Credit Information Companies
besides some other funding agencies would have to be explored.

Way Forward
Since Digitization is a new and exciting endeavor which would bring rationalization
to group numbers, their activities, democratic functioning and updated data base on
real time, there will be lot of scope for bankers to look into deepening their portfolios.
This would also help in curbing NPAs and also bring Hi-touch to the groups through
virtual experience and bankers would be able to take decisions fast. SHGs/ communities
derive immense benefit due to concurrent grading/ rating which in turn qualifies them
to get next higher linkage and also simultaneously create individual as well as group
credit history which will help them a lot in the long run. Convincing rural community,
stakeholders including full participation of financing institutions is crucial for success
of the project.
REFERENCES

Ghiyazuddin M A and G Shruti (2012): “Andhra Pradesh MFI Crisis and its Impact on
Clients”, Centre for Microfinance and MicroSave, India.
M-CRIL (2014): “M-CRIL Microfinance Review 2014: Risk, Regulation & Reward: A
Financial and Social Analysis”, Micro-Credit Rating International Limited, Gurgaon.
Markovitch S and P Willmott (2014): “Accelerating the Digitization of Business Processes”,
Insights & Publications, May 2014, Mckinsey & Company, http://www.mckinsey.com/
insights/business_technology/accelerating_the_digitization_of_business_processes
(viewed on 22 July 2015).
Digitization of SHGs for a Success of Microfinance in India 247

NABARD (2014): “Status of Microfinance in India 2013-14”, Micro-Credit Innovations

Department, NABARD, Mumbai.
NABARD (2014a): “Quality and Sustainability of Self-Help Groups in Bihar and Odisha”,
Study commissioned by NABARD 2013-14, NABARD, Mumbai https://www.nabard.org/
english/ShowPage.aspx?file=MTkx (viewed on 05.08.2015)
Srinivasan, N (2009): “State of the Sector Report 2008”, Sage Publications, London, UK.
Tankha A (2012): “Banking on Self-Help Groups: Twenty Years on”, Sage Publications,
New Delhi.
 Guidelines for submission of papers by authors

1. Objective of the Journal: To promote studies on issues related to the microfinance sector in India and abroad in
order to sensitise various stakeholders such as the policy makers, researchers, donors, institutions, civil society and
beneficiaries.
2. Paper: The length of papers should not exceed 6000 words including appendices. Abstracts not exceeding 200
words should be submitted along with the papers. Paper should be typed in MS Word. Title of the paper should be
followed by name, e-mail and affiliation of author(s). Use a single column layout with both left and right margins
justified. The paper should have font size (Main Body) of 12 pt.; Style: Times New Roman; and 1.5 line spacing.
Use double quotation marks for quotations, and single marks for quotations within quotations. Indent quotations
of more than four lines, without quotation marks. For quotations from other publications, always provide page
number(s) for the quotation.
3. Author’s Identification: Papers are processed through a blind referral system by experts in the subject areas. The
authors are advised to avoid disclosing their identity in the text and to attach a separate page showing the name(s)
and affiliation(s) along with any footnotes containing bibliographical information of acknowledgements.
4. Mathematical Notations, Tables and Footnotes: Only essential mathematical notations may be used. All statistical
formulae should be neatly typed. To the extent possible, tables and figures should appear in the document near/
after where they are referred in the text. Avoid the use of overly small type in tables. In no case should tables or
figures be in a separate document or file. Footnotes should be numbered consecutively in plain Arabic superscripts.
5. References and Citations: Only cited works should be included in the reference list. The citation of references
should be in the following order: author(s) name(s); year; title of article, name of journal; volume; number and
pages. Please follow the style of citations.
• Shetty, S L (2012): Microfinance in India Issues, Problems and Prospects: A Critical Review of Literature,
Academic Foundation, New Delhi.
• Adams, D W and V Robert (1986): “Rural Financial Markets in Low Income Countries: Recent
Controversies and Lessons”, World Development, Vol. 14, No. 4, pp. 477-487.
For reference materials from websites:
• Hubka, A and R Zaidi (2005), Impact of Government Regulation on Microfinance, Viewed on 09 April
2015 (http://siteresources.worldbank.org)
6. While sending papers the authors should state that the paper is the original work of the author(s) and the paper
has not been published elsewhere or is not being published or being considered for publication elsewhere.
7. All manuscripts should be in electronic form and sent to: The Editor, THE MICROFINANCE REVIEW Journal. Email
Id: birdjournal@yahoo.co.in ; bird@nabard.org
8. No correspondence will be entertained on the papers rejected by the Editorial Board.
9. Reprints: Five free reprints of the paper would be given to the author, additional reprints, if required, are supplied
at cost which may be ascertained from the Editor.
10. Author or one of the authors (in case of more than one authors) submitting papers have to subscribe to the journal.
11. The copyright and all rights of reproduction and translation of articles published in THE MICROFINANCE REVIEW
are reserved by the CMR, Bankers Institute of Rural Development. Application for permission to translate or
reproduce any material contained in it should be made to The Editor, THE MICROFINANCE REVIEW at the
following address:
The Editor, THE MICROFINANCE REVIEW, Centre for Microfinance Research (CMR), Bankers Institute of Rural
Development (BIRD), Sector-H, LDA Colony, Kanpur Road, Lucknow – 226 012
Email: birdjournal@yahoo.co.in / bird@nabard.org
Telephone: 0522-2421009/ 2425934/ 2421136