Designing and managing the world··s largest and fastest growing microFinance program


The old logic of poverty alleviation 


Who are the poor ?  Those with incomes below a cut off level ! Why do they have poor incomes ?  Poor resources at command to do business or to produce (income) ! What do we do ?  Provide resources ² support self employment thru· mEs ! Can they pay ?  No, so give them capital ! Since the government doesn·t have enough money, add bank loans with capital and interest subsidies !

Banking system - 1969
Commercial banks
Number of banks Total Branches Rural Branches (% to total branches) Total Credit (Rs. bil) % share of Priority Sector in total credit % share of agriculture in total credit

8 6,596 1,504 (22.8) 30 15 2.2

81* 1,666 329 (19.7) 6 10

89 8,262 1,833 (22.2) 36 14

negligible 2.2

+ about 340 cooperative banks with 100,000 primary societies for giving crop loans thru¶ refinance from the Central Bank


Measures for increasing rural outreach . . .
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80% population lived in rural areas, and 40% of GDP was contributed by agriculture BUT, ONLY 2% OF BANK CREDIT WENT TO AGRICULTURE The Cooperative Banks catered primarily to only the medium and big farmers There were serious food shortages Therefore, credit to rural India HAD to increase. This led to : Nationalization of 14 Private Banks in 1969 (6 more in 1980) with mandate of widening branch network particularly in rural & remote areas Introduction of Priority Sector concept for focused lending to core areas - ushering in the concept of mass banking Introduction of programs focusing on self-employment for the poor


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10. rural branches of commercial banks were perhaps not the ideal solution Therefore. .000) ‡ ownership with government and a sponsoring commercial bank (all public banks ! ) ‡ top management from commercial bank ‡ all other staff local.5 m or $ 250. Regional Rural Banks (RRBs) were established in 1975 ‡ as properly regulated & supervised mFIs. . By 1975. qualified ‡ small area of operation ² 1 to 3 districts (serving 4 mil people) Presently 14.Measures for increasing rural outreach contd.882 rural and semi urban branches of commercial banks had been opened But. with low capital (Rs. 2.000 branches of 196 RRBs in 500 of 600+ districts 5 . .

Measures for increasing rural outreach contd. . . NABARD set up in 1982 as an Apex Development Bank for accelerating private investments in agri and rural sectors RBI & GOI as shareholders since private capital would not have flown (recent Act amendment allows even pvt equity) NABARD·s functions relating to credit outreach :  Providing liquidity support to banks for financing production and investment activities in rural areas  Providing technical support for building sustainable rural banking system  Undertaking development activities for enhancing the outreach & credit absorption capacity 6 . .

118 Government of India RRBs (196) 12.438 8.555 66.169 + the cooperative banks 7 .473 Private Banks (31) 1.473 14.203 46.322 1.737 7.376 Foreign Banks (41) 0 2 20 180 202 TOTAL 32.155 5.703 10.903 8.Bank network for rural credit June 2002 Reserve Bank of India NABARD Public Sector Banks (27) Rural Semi-urban Urban Metro Total 19.138 1.060 2.761 1.275 10.037 359 17 14.

recurring. 40 million small loans of < $ 500 at an average of $ 200 millions of larger loans also provided  8 . farm machinery.. horticulture. etc. flexible ««. storage and marketing of agri produce. fisheries. purchase of animals. artisans. term.  Credit products ² 3 months to 15 years loans ««  Loans for self-employment in rural areas cover a wide range «« crop production.  Millions of such loans ! e. in 2002. transport vehicles. tiny and village industries.What did this bank network do ? Savings products ² savings.g. land development. plantations. small business.

a. . . interest rates of 10% to 15% p. assets. hypothecation of even standing crops 9 . on reducing balance method proposals appraised for their technical and financial feasibility expected incremental incomes formed the basis of most credit decisions no collateral for small loans ‡ larger loans collateralized through mortgages of land. . sureties. .What did this bank network do ? ‡ ‡ ‡ ‡ contd.

families with credit worth $ 10 bil over 20 yrs. but ‡ Almost one third of population continued to be ´poorµ  a common view that the poor are not bankable !!!! 10 . ‡ Banks cut down on appraisal and monitoring costs ‡ High defaults ‡ Leakages of subsidised resources  Tremendous outreach was achieved. with average per family outlays of about $ 800 BUT  Due to fixed margins and high transaction costs.Poverty alleviation programs through banks A variety of credit programs for creating self-employment  IRDP and other client-group programs covered nearly 100 mil.

The Dilemma of «.. the Debt and Investment survey (1981) showed 40% rural indebtedness from informal sources The smaller the households¶ assets. the Inverted Pyramid Rural branches Rural population  Even after years of branch expansion and policies directing credit to the rural areas. the smaller the share of the banks ! What really was the reason ? What were the mismatches ?? 11  .

Research and action research in mid ¶80s Who was involved ? the stakeholders ! ² NABARD. and time consuming The poor also have tiny surpluses that get ´lostµ The dividing line between consumption and production is too thin ! The system did NOT provide anything to fall back on Savings and credit products did NOT meet the needs of the poor 12 . NGOs. academics funded out of R & D Fund of NABARD Learning ? The systems and procedures are complicated. costly. banks.

Transaction costs of the poor are high ! Transaction costs of the banks are also high ! The poor have little to offer as collateral collective wisdom. .Research and action research in mid ¶80s contd. peer pressure and community appraisal are a strong collateral substitute and monitoring mechanisms Resources put in the hands of the poor were larger than their capacity to handle Capacity to handle larger resources grows very gradually ! Others decided everything ! The poor had no say in designing and managing what they needed 13 .

and NOT credit-led 14 .Savings ? Are we sure ? Past savings Future savings Relation between savings and credit Programs with the poor will have to be Savings-led.

Use the existing bank network OR Create or encourage an alternate network Continue with existing products and systems and increase the interest spread of banks by . with the banks !! 15 .What were the options ? 1. 2. . . the resources are .charging extremely high interest rates on loans. Whatever we do.paying low or no interest on deposits (or. . and . may be even charging the poor for this service !) OR Design new products and delivery mechanisms that can be used by the poor and by the banking system 3.

What do we do ? Design Savings and credit products.Bank Linkage 16 . and Delivery mechanisms and systems to improve the access of the poor to financial services which reduce transaction costs of the poor reduce transaction costs of the financing agencies enhance participation by poor in decision making Build up handling capacities of the agencies who can provide these services Identify new partners Work out roles for different partners Integrate peoples· participation with formal banking system to ensure sustainability  Dominant Strategy : Self Help Groups .

common problems. . . incomes.all resources have a cost.What are SHGs ? Homogeneous Small . monitoring . participative. mutual trust. meeting frequently. affinity. prioritisation. transparent decisions . pooled thrift can be used to give loans for meeting emergent needs . neighbourhood. accounting 17 Encourage thrift Poor learn .appraisal. appreciation of others· view. livelihoods . all needs cannot be discipline.10 to 20.simple accounting.handling larger resources. handling resources NOT their own. pooled thrift is bankable.

. on reducing balance) 18 . builds up capacities.What are SHGs ? Infuse bank loan gradually contd.a. .pooled credit needs are bankable. and sets its own terms and conditions Collateral free loan from bank at commercial rates of interest (presently around 9% to 13% p. . needs of more people met Relationship with banks Open savings account in the name of the informal entity called ´SHGµ Bank loans to the SHG as multiples of pooled thrift after 6 to 12 months after rating ² the weak SHGs will have to wait ! SHG decides on how to use the loan. larger needs met.

loans. record of decisions taken) Roles of two major players SHG promoter ² bring people together. financial intermediation (regularity in savings. . governance (transparent decisions). regular monitoring 19 . fines). repayments). attendance. build book keeping and help in bank linkage Financial service provider ² ensure proper appraisal of SHG. instill a feeling of solidarity. help evolving leadership.What are SHGs ? contd. provide access to savings and credit services. . facilitate evolution of norms. management (quality of accounts. . Rating of SHGs to appraise group dynamics (meetings.




How did NABARD go about ? Step 1 : Designing a Pilot Project for linking 500 SHGs with banks Creating a policy framework ² Opening of savings account of informal groups in formal banks ² Financing with an intangible collateral substitute ² Rating system for financing SHGs ² Documentation with banks ² MIS Sensitising the banks and other partners about the new product Learning and documenting Playing the facilitator·s role 23 .

no targets  Allowing partners to talk  Building own capabilities and skills  Creating a cadre of trainers  Creating handling capacities of the partner agencies  Gaining own conviction about the policy and operations ‡ Encouraging banks with incentivised refinance ‡ Initiating experiments on NGOs as financial intermediaries ‡ Learning the implications on financing. regulation and supervision ‡ Building awareness among policymakers and CEOs of banks 24 .Step 2 : Gearing up for mainstreaming of SHG banking ‡ Nurturing natural growth of the programme  Not pushing hard.

Step 3 : Mainstreaming SHG banking with regular banking Training and Sensitisation ² building human capital Of Bankers Government NGOs Watchman to CEO Village worker to Chief Minister Field-worker to CEO hold training consultations and need assessment design training modules design training methodologies and tools develop course materials identify training partners and develop new partners The numbers are in thousands ! 25 .

750 419.748 5.Capacity building in partners done and supported by NABARD No of participants Bankers NGOs Government officials SHG members Others Total 2002-03 31.216 140.237 270.044 19.815 26 .005 19.422 199.2003 82.03.256 3.763 33.686 Cumulative as on 31.060 14.

Step 4 : Graduating into a people·s movement ² the ´ + mFµ approach ! Flooding the rural areas with quality SHGs !  Search for new partners for organising the poor into SHGs ‡ Small social sector NGOs ‡ Branch staff of banks ‡ Farmers· clubs ‡ Field staff of government agencies ‡ Individual rural volunteers and Village local bodies Convergence of resources ² Do what you do best ! We will add microFinance ! Large scale capacity building and selective incentive mechanism Facilitating evolution of Federations of SHGs 27 .

360 90 11.61.««.800 SHGs credit linked 255 % women·s groups 70 Families 5. towards the Empowerment of Women As at« ‡ ‡ ‡ ‡ ‡ ‡ Mar 93 Mar 96 4.100 Banks 14 Bank Branches SHPI Partners 32 ‡ ‡ ‡ ‡ Aggregate bank loans to SHGs Estimated savings of SHGs Average bank loan per SHG NPAs : > $ 400 mil : > $ 130 mil : $ 625 : near Zero Mission 2007 : 1.6 mil 504 31.17.000 2.478 90 8 mil 444 2.100 Mar 03 7. or 20 million families.25 million SHGs.000 95 127 Mar 02 4.757 74 80. or 100 million poor people 28 .

of Households in Million .Outreach of the SHG Bank Linkage Program No of Households in Thousands 12 11 10 9 8 7 6 5 4 3 2 1 0 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99 1999-00 2000-01 2001-02 2002-03 800 No of SHGs in Thousands 29 700 600 500 400 300 200 100 0 No. of SHGs in Thousands No.

.What would this need additionally ? . and 11 commercial banks ! $ 3 billion microCredit to 20 million poor households by 2007 ! Targeting the ´generation nextµ ! 30 . . . . And what would it result in . . RBI. Loan funds of about $ 400 million for refinance support in the next three years Expendable funds of about $ 25 million for capacity building of all stakeholders works out to just $ 3 per family covered under the program a $ 25 million microFinance Development Fund (mFDF) already set up in NABARD Contributed by NABARD. .

What do the partners gain ? The Poor Hassle-free. door step. social. self managed access to mF Cost-effective access to formal banks ² the built-in sustainability ! Reduced dependence on usurious informal markets Deepening the impact of social sector interventions Process of empowerment ² economic. and political ! Banks Access to untapped savings and credit business Quality business ² no NPAs Sustainable expansion of outreach and business Goodwill. leading to repayments of other past dues 31 .

. Contd. . Sustained outreach Impact of social sector interventions more sustainable Support to poverty alleviation initiatives No drain on budgetary resources ! 32 .What do the partners gain ? NGOs Social sector interventions more cost effective Impact of social sector interventions enhanced Governments .

but a necessity ! 33 . ´rural development tourismµ is not a fancy.rather than what is most fashionable For major impact. do NOT rush to complete the ´Projectµ Supported what is most suitable in a country setting .never ¶ran· the ¶project· Encouraged and invested in exchange of ideas and visits .What did donors and funding agencies do ? . always took along the ¶Policy Guys· .seeing is believing. many thanks to the Swiss and the Germans Encouraged and recognised local innovations .finding them may take a while. . .didn·t just pump money in unreplicable ´islands of successµ Gave full operational freedom to partners .

where were you ten years ago ? . . . .What keeps us going . . .µ . ? ´.An SHG member to a NABARD officer while receiving her first bank loan 34 . . I would have sent my daughter to school . . . . . . .

2653 9272 Fax : (91) (22) 2652 8141 We make banking possible with the last. Mumbai. and the least 35 . the lost.Thank You Looking forward to continuing this dialogue ! microCredit Innovations Department (mCID) Tel : (91) (22) 2653 0084. India email : nabmcid@vsnl.

793 59 per cent of the sample households reported increase in assets.3 % from Rs. (Results from some independent studies) Average value of assets (livestock. 6.843 (pre-SHG) to Rs.Impact of participation of women in SHGs after two to three years «. Housing conditions improved All members developed saving habit as against only 23% of households earlier 36 . 11. etc. consumer durables.) per household increased by 72..

contd.444 Average borrowings per year per household increased from Rs. Average annual savings per household registered over threefold increase from Rs. Share of consumption loans declined from 50% to 25%. 70% of loans taken in post-SHG situation were for income generating purposes. 1. 460 to Rs.341. 26. Average net income per household increased by 33% from Rs.889 37 .282 to Rs.177 to Rs.Impact of participation of women in SHGs . 8. 4. . 20. .

now read forms in banks read newspapers regularly or occasionally more confident in taking decisions on their own 100 42 41 66 38 .Impact on Empowerment Groups > 3 years Related to Economic Issues % members contributing to family income 65 % share of contribution to family income 40 feeling improvement in financial status 89 feel enhanced contribution to household income after joining the group 74 feeling consulted in finance related decisions 60 Related to Self Development (of those) earlier unable to but now able to write their names (after joining the group not formally educated.

.Impact on Empowerment . . Contd. Interactions with Others and Local Level Decision Making % members feel recognised in family 59 feel being increasingly consulted by other women 44 feel more confident in dealing with people 75 feel more confident in dealing with various institutions with which they interact regularly 59 regularly attend Village Meetings 41 cast their votes in last local elections 96 39 . .

. 69 more convinced about home toilets 61 aware of the need to include fruits and vegetables in the diet of pregnant women 68 have a say in where and how to educate their children 31 40 . % members more aware about family planning methods 54 more aware about clean cooking and eating habits 71 more aware about vaccination schedules for children.Impact on Empowerment Related to Family Well-being . . Contd. etc. .

. . Related to Technical and Managerial Skills have acquired new skills after joining SHG confident in moderating group meetings Acquired confidence to moderate conflicts within SHG confident of handling any bank work of SHG % members 45 57 43 77 41 .Impact on Empowerment . . Contd.