Micro-finance In Far East India

Microfinance Drive: Where does the North East India stand? Debabrata Das Reader, Department of Commerce Gauhati University Guwahati-781014 Email: [email protected] Cell 9435015074 1. The Context Asian Development Bank’s recent estimates indicate that Asia is still home to the majority of the worlds poor. Despite significant progress in poverty reduction during last decade, about 2 billion ‘poor’ people (380 million households) live in the region which includes 690 millions ‘extremely poor’1 people (138 million Households). The World Summit on Micro Enterprises (2001) and Consultative Group to Assist the Poorest (CGAP)2 highlighted the serious concern of the international community to reduce the levels of poverty, both in terms of income levels and deprivation of basics needs for a decent living. It was broadly accepted that ‘robust economic growth that is labourintensive and equitable, combined with larger outlays of social expenditures, especially directed towards the poor (estimated at 1. 3 billion people), are a winning combination in the fight against poverty’ (UN, 2007). In this context, Micro finance has been recognized and accepted as one of the new development paradigms for alleviating poverty through social and economic development of the poor in general and women in particular. The idea of micro credit was inculcated by Nobel Laureate Prof. Muhammad Yunus who initiated imagining the poorest of the poor in to self-help groups and makes them realize the very basic theory of survival way back in 1976. The inability of formal financial institutional set-up to deal with the credit requirements of the poorest class effectively has led to the emergence of micro credit system. Micro credit is developed to be an alternative credit delivery system, which can cater to the needs of the poor locally involving them in the system itself3. The micro credit approach received increased attention in the mid 1990 after the World Summit for Social Development held at Copenhagen in March 1995.4 Emphasizing the

importance of easy access to credit for the poorest section, the Summit urged governments of nations to give a new thought to their legal, regulatory and institutional frameworks in order to make credit easily accessible to the poor. Subsequently, in 1997 the World Micro Credit Summit at Washington DC announced a global target of ensuring delivery of credit to 100 million of the world’s poorest families, especially the woman of these families by 2005 which was achieved well ahead in time. Since the launch of the Millennium Development Goals (MDGs)5 at the Millennium Summit in New York in September 2000, the MDGs have become a widely accepted yardstick of development efforts. The first and foremost goal, among others, is to eradicate extreme poverty and hunger. This goal targeted to halve the proportion of people whose income is less then US$ 1 a day and the proportion of people who suffer from hunger between 1990 and 2015(UN,2001). Almost all the countries in the world, including India have committed themselves to attaining the targets by 2015 as embodied in the Millennium Declaration. Resorting to these resolutions, many developing countries have put micro finance in their agenda as a tool of reaching the MGDs. 2. Best Practices Over the past decade, microfinance institutions have adopted innovative ways of providing credit and savings services to the entrepreneurial poor. An innovative approach that has been used successfully by Grameen Bank's credit-delivery system is "peer-group monitoring" to reduce lending risk, although some studies have suggested that the reason for the Grameen Bank's high repayment rates is also partly due to the practice of weekly meetings - at which attendance is compulsory - for the repayment of loan installments and the collection of savings. It is reported that the meetings reinforce a culture of discipline, routine repayments and accountability. Not all microfinance institutions use peer-group monitoring. Other institutions such as the Bank Rakyat of Indonesia, which serves 2.5 million clients and 12 million small savers, rely on character references and locally recruited lending agents in place of physical collateral. Thailand's Bank of Agriculture and Agricultural Cooperatives serves approximately 1 million microborrowers and 3.6 million micro-savers. Newcomers such as the Association for Social Advancement of Bangladesh, with half a million clients, and the People's Credit Funds of Vietnam with more than 200,000 members or clients, are other examples of the potential

for growth in the industry. Other institutions such as the Association of Cambodia Local Economic Development Agencies, Buro-Tangail of Bangladesh, the Self-Employed Women's Association Bank of India, and Amanah Ikhtiar Malaysia are also reported to be making good progress (UN, 2007). The microfinance institutions ‘revolutionalized’ traditional views by showing that the poor are bankable and it is only because of the conventional banking practices they were categorized as non-bankable (Nagarajan and Meyer, 2005). 3. India’s Microfinance Experiment In early 1990, NABARD started an experiment with MYRADA-NGO in Karnataka by promoting groups, mobilizing their savings and linking them with banks for credit support. In fact, linking self help group6 with banks was started as pilot project by AsiaPacific Rural and Agricultural Credit Association (APRACA) with technical support from German Technical Cooperation (GTZ) in several countries in Asia during early 90’s.Later on NABARD replicated this project all over India under the SHGs Bank Linkage Programme in 1992 and many NGO’s came forward to implement this project with the co-operation of banks. In 1994 following the success of NABARD, Small Industries Development Bank of India (SIDBI) also came forward to provide bulk lending to NGO’s for on-lending to groups/ individuals. Ministry of Human Resource Development, Govt. of India established Rashtriya Mahila Kosh (RMK) for providing loan to NGO’s to on lend to poor women. Other National and State financial Corporations also entered in to the micro finance sector. International funding agencies also started micro-finance services in India through their projects. Making a modest beginning in the year 1992 by linking 255 SHGs with banks and disbursing credit of Rs. 29 lakhs the programme has showed a great success. The number of SHGs linked to bank rose to 50 lakhs with bank loan of Rs. 17000 corers as on 31 st March 2008, which covered over 7 crores poor households. State like Andhra Pradesh, Tamil Nadu, Karnataka, Orissa, Uttar Pradesh, Maharastra and West Bengal remained in the forefront followed by other states such by Rajasthan, Kerala and Madhya Pradesh with encouraging trend. Performance is excellent, and impact is deeply felt by the

members, the vast majority of them women (Seibal, 2005). The SHG banking model evolved into one of the rural microfinance models with widest outreach in the world (Yedra, 2007). Institutions involved in the delivery of microfinance services are commercial banks, rural banks, cooperative institutions, credit unions and nongovernmental organizations, NBFCs under Section 25 of Indian companies act and NBFCs registered under Indian companies act and RBI. 4. Women Empowerment Majority of world’s poor (70%) are women. Women, especially in the rural areas have fewer opportunities than men due to gender biases in their societies, unequal opportunities of access to education, employment and asset ownership.7 They have less occupational mobility, weaker skills and less access to training. Many micro-credit programmes have targeted one of the most vulnerable groups in society - women who live in households that own little or no assets. By providing opportunities for selfemployment, many studies have concluded that microfinance have significantly increased women's security, autonomy, self-confidence and status within the household. Linda Mayoux (1999) identified three paradigms on microfinance and women empowerment. Firstly, the Financial Sustainability Programme which focuses on the cost effective functioning of the credit operation in order to ensure financial sustainability. This results in greater outreach to the financially excluded and the poor. Women are targeted because of their high recovery rate. Secondly, Poverty alleviation Programme which is implemented through women because they are believed to be responsible for wellbeing of the household. Further additional income with women brings in ‘multiplier effect’ to multiple generations. Thirdly, Feminist Empowerment Programme aiming at bringing about ‘change in the lives of women’ focusing gender equity and human rights. This is reflected in increased income, skills and self confidence and mobility (Bali, 2006)8. 5. Microfinance in North East India Although lately, microfinance has took its place in the north eastern states. The self-help group (SHG) model is the predominant one in the region. The progress of microfinance service delivery

under the SBLP and the NGO-MFIs in the region in recent years is

observed better. The data showed the number of SHGs linked under SBLP went up by

more than 80% between March 2005-2006 and that there was an almost 62% increase in the number of loans disbursed during the period. Additionally several NGO-MFIs are operating in the region. As on 31st March, 2008, little over 2 lakhs SHGs have been linked with the banking system and Rs 8633 lakhs have been collected as savings. The loan outstanding amount is Rs. 35,563 lakhs for entire region. Assam is in the forefront of the intervention with more the three forth of the SHGs linked and absorbing over 80 percent of loan. The Nagaland, Sikkim Mizoram and Arunachal Pradesh has shown a legged growth. The share of spread of microfinance of the North Eastern Region is still negligible in comparison of other region. North Eastern Region shares 4% SHGs linked, 2.28% of savings and 2% of loan of all India figures (NABARD,2008). It is indeed commendable that the Micro Finance (MFI) sector in the region has been perhaps one of the few sectors, which can claim to have grown indigenously and with very little external support. Today, it has offered employment to more than 5500 people besides servicing 110000 individual clients and more than 60000 SHGs (which means 600000 clients) besides facilitating an equal number for bank linkage. It is perhaps one of the few demand led services to have evolved and grown despite many constraints and problems. It is a tribute to the innumerable microfinance institutions (MFIs) across the regions, which have shown that growth can happen from within rather than emanating from outside. A few of other microfinance providers in the north east region are: Rashtriya Gramin Vikas Nidhi, Guwahati Non-profit organization providing financial and capacity building support to NGO-MFIs especially in northeast and eastern India for expansion of microfinance. Under its arm RGVN-CSP it is offering microfinance under JLG models in Assam and Meghalaya. Asomi, Guwahati Asomi is an MFI in Guwahati providing micro-finance to the poor in many districts of Assam. It begged funds from international donor like UNITAS for on-lending under microfinance drive. National Bank for Agriculture and Rural Development, Guwahati Under its SHG-Bank Linkage Program, provides refinancing and technical assistance to banks and NGOs involved in SHG promotion and lending, also from northeast India. International Fund for Agricultural Development (IFAD), Italy

IFAD is providing funding support to Government of India and NGOs for promotion of microfinance and livelihoods programs in the northeast. It ran an eight-year Women’s Development project (January 1990-December 1998). The project was implemented in six districts with the poor women as target group. More than 87,000 women received institutional credit worth Rs. 753 million with a recovery rate of more than 80%. Loans taken for income generating activities accounted for more than 75% of the total loans. North Eastern Region Community Resource Management Project for Upland Areas, Shillong It is a joint project of IFAD and Govt. of India, to improve the livelihoods of vulnerable people in the northeast region through building SHGs and Natural Resource Management Groups. Industrial Credit and Investment Centre of India (ICICI) Bank Bank is providing market loans and capacity building support to NGO-MFIs from NorthEast India and is developing a strategy to expand operations in North East. Small Industries Development Bank of India (SIDBI), Guwahati SIDBI Foundation for Micro Credit (SFMC) provides bulk loans and technical support to Microfinance Institutions in the northeast region of India. North Eastern Development Finance Corporation Limited, Guwahati Providing financial support to MFIs based in northeast India for the development of animal husbandry, agri-horticulture plantation, medicinal plantation and micro-insurance. Nedan Foundation, Kokrajhar Nedan Foundation is an NGO working in the villages of the northeast particularly in the Bodoland Territorial Council dominated by Bodos community. It is trying to strengthen existing livelihoods opportunities in this region through forming groups of weavers in Kokrajhar district. Presently, it is working with 65 home-based weavers and 3 clusterbased weaving centres. With resources and time at their disposal, a weaver is able to earn up to Rs. 1,800-2,000 per month .Working in the northeast region particularly at Bodo Territorial Council for alternative livelihoods promotion in weaving sector and helping weavers to get loans from MFIs.

Manab Sewa Sangha, Guwahati An NGO working in northeast India, providing microfinance services to the poor organized into groups. A development organization involved in microfinance activities, is presently working in three districts of Assam- Kamrup, Nalbari and Barpeta. Following the “group methodology,” it is organizing poor women into SHGs and Joint Liability Groups (JLGs). Youth Volunteers Union, Manipur A Microfinance organization imparting microfinance services to the poor based in northeast India. Youth Volunteers Union is providing microfinance services to rural and urban poor in the six districts. Presently it is working with 189 Self-Help Groups. It has 4,100 borrowers with a loan portfolio of Rs. 3.9 crores. In this coming financial year, it plans to expand microfinance operations in urban areas of Guwahati city in Assam. Agricultural and Processed Food Products Export Development Authority, New Delhi Develops agricultural commodities and promotes their exports in the northeast region with financial assistance for market, infrastructure and quality development. It extend financial assistance through the group model. Bandhan,Kolkata Bandhan is an MFI working with the poor women through community participation initiatives. Presently it is working in 29 districts of five states. As of February 2007, it has more than four lakhs active borrowers with Rs. 1168 million loans outstanding. After looking at the demand potential of MF in northeast, it has now expanded its operations to Tripura, Assam and Meghalaya. Presently it has more than 13,000 active borrowers with Rs. 41.17 million loans outstanding. These apart, diverse nature of civil society organizations present in the region such as youth clubs and missionaries, which have ,over time, moved into the social sector and are working as Self-Help Promoting Institutions (SHPI). However, few of these social institutions, have entered the microfinance business. 6. Challenges Ahead: The micro-finance movement in northeast mainly consists of Self Help Groups (SHGs)bank linkage. Banks are thinly spread in the region and are to be found mainly

concentrated in urban clusters in the valleys. They have not been able to extend their outreach the remote rural areas of the region. Banks are not only few, they often claim to be understaffed. Most of the rural branches of banks have two or three employees and they are not equipped to handle many SHGs that could be spread over several kilometers. The cost of promoting SHGs in the virtually roadless hilly regions is prohibitive. Looking at the differences in the socio-cultural and political conditions and infrastructure provisions, the following challenges to the growth of microfinance in the northeast are thought of9: •

Absence of an enabling environment, social investments and proper infrastructure

•

Perceived security problem in the region

•

Lack of appropriate institutional structures

•

Shortage of professionals with financial and social educational background

•

High subsidy dependency on government aid

•

Weak socio-economic and political bodies (Cooperatives, panchayats etc).

7. Conclusion Despite having limiting factors, there are huge opportunities for scaling up MF services in the region. The socio-cultural environment in the northeast, the diversity of people, culture, flora, fauna and topography in the region, needs using different approaches in different areas. Identification of suitable institutional structures and building innovative service delivery models and products based on the specificities of the region is an urgent need. Following steps may be helpful for the scaling up of the microfinance in the region. •

Finding appropriate institutional structures and creating innovative microfinance models and products

•

Strengthening livelihoods through innovative approaches like contract farming and warehouse receipts

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Training and capacity building for MFIs in developing systems and process for effective delivery of MF services.

•

Start-up funds for institutions that want to scale up their operations quickly be provided for.

•

Making sound strategic business plans for better management of microfinance operations

•

Strengthening the linkages with the technology partners and adoption of technology to cut down the transactional and operational costs due to scanty bank branches in the region. SBI has recently started such an initiative called SBI Tiny in Mizoram. It was started as a pilot and it seems to have met with initial success. They are therefore rolling this out in Arunachal Pradesh and also the toughest terrain in Garo Hills. A new generation of local (North East-based) technical assistance and capacity development providers required to be promoted.

For scaling-up microfinance in the NE must include livelihoods financing. Looking at the large number of low-income people depending on agriculture and allied activities for their livelihoods, respondents apprehended that the scope of consumption financing is less likely and may not be a desirable strategy. Thus, there is huge opportunity for MFIs to get into livelihood financing, through public-privatepartnership including banks. Other potential areas for livelihood financing in the NE, such as in rubber and spices; post-harvest management; Jatropha/bio-diesel, floriculture, medicinal and aromatic plants; warehouse financing; contract farming; and cash flow based financing. What is required is a multi-pronged strategy to overcome the many challenges the region poses. Banks, policymakers and NGOs the major actors in the field of micro-finance - must come together to think through suitable modifications in policy. Banks may have to change their system of assessing risks. There is need for capacity building and expansion of infrastructure. In some cases, the SHG model may have to be replaced by other models.

Notes:

1

World development report 1990 defined the “extremely poor” as those who are living on no more than $1 per day per person measured in terms of 1985 purchasing power parity. The term “poor” includes those who are living on no more than $2 per person per day. In 1993, the poverty line was updated to $1.08 per person per day at the 1993 PPP exchange rate. 2 CGAP-the World Bank led unit, which comprises 25 members, including United Nations bodies, is a multi-donor effort for development and dissemination of best practices of microfinance and to address the problems faced by microfinance. 3 Micro-credit may be understood as the narrow concept of microfinance .Micro-credit primarily deals with small lending to the poor while microfinance make the provision of multiple financial services like savings services, lending ,insurance and other financial services . However, often the terms micro-credit and micro-finance are used interchangeably (as used in this article). 4 See Report of the World Summit for Social Development, Copenhagen 6-12 March 1995 in United Nations publication,Salcs NO. E.96.IV.8 5 The MDGs are a set of numerical and time bound targets developed by UN related to key achievements in human development to be reached by 2015, from their levels of 1990.They include: 1) Eradicate extreme poverty and hunger, 2) Achieve universal primary education 3) Promote gender equity and empower women, 4) Reduce child mortality 5) Improve maternal health 6) Combate HIV/AIDS, malaria and other diseases 7) Ensure environmental sustainability 8) Develop a global partnership for development. 6

A Self-Help Group (SHG) is a registered or unregistered group of micro entrepreneurs having homogenous social and economic background, voluntarily coming together to save small amounts regularly, to mutually agree to contribute to a common fund and to meet their emergency needs on mutual help basis. The group members (usually 10-20) use collective wisdom and peer pressure to ensure proper end-use of credit and timely repayment thereof. In fact, peer pressure has been recognized as an effective substitute for collaterals.

(NABARD,2000). 7

In Bangladesh and Nepal, literacy rates of women fall far below than men,29% for women compared to 45% men in Bangladesh(1999) and 17% women compared to 51% men in Nepal(1995) 8

Swain Ranjula Bali’s study on SHG women and micro credit across five states in India observed that women participated in SHGs had experienced better access to resources, freer mobility, self-confidence, social recognition and participation reducing their dependence on local money lenders and brining about many benefits to women. 9

Cited in www.solution exchange-un.net.in

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