Small Bucks for Big Goals

AgricultureIn the year 2007, India experienced a commendable growth rate of over 9%, thus becoming fastest growing economy, second only to China. However, this growth has not translated into better standards of living for the poor. The trickle down strategy has failed to equally distribute the benefits of increased incomes. The fact that last year many Indians made it to the Forbes list of the world’s richest men seems commendable, however, the listing completely ignores the plight of the poor, which has also increased simultaneously. The growth experience has not been inclusive and is characterized by deep inequalities.

The reason behind the Indian success story is the high growth rate of the Indian services sector. However, the fact is often ignored largely because India is still mainly an agrarian economy, as far as the occupational structure goes. Although, there has been a considerable shift from agriculture to services, still a large part of the population, majority of which is rural, is employed in the agricultural sector. However, the monsoon failures, the ongoing sugar crisis, the high inflation rates, obsolete technology, lack of basic infrastructural facilities, unavailability of credit, and inaccessibility of markets have led to stagnancy in agriculture which has had an adverse affect on the lives of the poor, who are entirely dependent on agriculture for their sustenance. The Vidarbha crisis brought to the forefront the basic problems underlying the Indian agricultural sector. The farmer suicides were a reflection of the grave errors in the system. Thus, as agriculture forms the backbone of the rural economy, developments in this field have a major role to play in the poverty alleviation programmes, of which microfinance forms an integral part. Microfinance has, in the recent past, been recognized as an eminent tool for the empowerment of poor by providing them access to financial services and credit. Historically, credit to the poor in India was viewed as a government program that required large amounts of subsidy. However, over the years microfinance has grown out of this image and become more commercialized, involving public, private and community participation.Microfinance got its first official recognition after ex-prime minister Indira Gandhi’s bank nationalization drive launched in 1969 which required commercial banks to open rural branches to extend financial aid to the poor. The initiative was further extended through the Integrated Rural Development Program (IRDP) introduced in 1978. The main thrust of this program was to alleviate poverty through the provision of loans in the form of subsidized credit. However, both these measures were unable to fulfill their basic aim, as only the richer rural farmers were able to benefit through them. Thus, the final boost came in 1991 under the New Economic Policy which brought about the liberalization of India’s financial system. Liberalization was characterized by financial policy reforms and new microfinance approaches, the most notable being the self-help groups (SHGs). These were created to link informal local groups created by NGOs to commercial banks like the National Bank for Agriculture and Rural Development (NABARD), thus developing a partnership between SHGs, Banks and NGOs. The program was called the SHG Bank Linkage Model which provided credit to the marginalized groups, especially women. The loans were given to groups as a whole or the members of the group such that if a particular person defaulted, the entire group was held responsible for the payment. However, in certain cases like crop failures the defaults were written off.

Apart from the SHGs, Microfinance Institutions (MFIs) have also gained prominence in the recent years. MFIs work under various legal forms like cooperative societies, public trusts, non-profit companies, non banking financial companies, NGOs and local area banks. They track loans in the name of individual borrowers and have attained considerable success in their efforts. However, in spite of their extensive reach and initiatives, they have been criticized on account of the high rates of interest charged by them, zero tolerance of repayment defaults, inaccessibility and low coverage of the core poor. Three of the largest MFIs in India are: SHARE, BASIX and SKS which emphasize the delivery of financial services, technical assistance, agricultural development services, micro credit and empowerment of women. Thus, microfinance which began with a miniature frame involving only micro credit has extended enormously over the years to include savings and other services like insurance and money transfers.

Microfinance came into the limelight when Muhammad Yunus, founder of the Grameen Bank won the Nobel Peace Prize in 2006 for his development initiatives in extending small loans to the villagers in Bangladesh at reasonable rates, allowing them to buy materials for projects like weaving bamboo stools and making pots. These loans were extended to groups of poor households such that the groups as a whole were held responsible for loan repayments. The Grameen Bank was a major success and presently has over two million borrowers, 95 percent of whom are women, receiving loans that total $30–40 million per month. The Grameen Bank has also been set up in India and has witnessed enormous success. Several other microfinance programs have been introduced in India in the recent years including the Kissan Credit Card, General Credit Card (GCC), Financial Network and Operations (FINO), and the SEWA Bank.The Kissan Credit Card was introduced to enable farmers to purchase agricultural inputs and draw cash for their production needs. It provided credit and working capital for agriculture and allied activities.

The General Credit Card initiated provision of credit to customers without insistence on security or purpose of use. SEWA or the Self Employed Women’s Association provides banking services to poor, illiterate, self-employed women.

Another organization, Financial Network and Operations (FINO), an application service provider, plans to introduce Micro Deposit Machines (MDMs) to provide avenues to poor for depositing cash in small amounts and inculcate saving habits. These machines will accept currency, and also permit withdrawal of cash. Thus, the technological improvements in this field will be imperative in increasing the accessibility, pace and reach of these institutions. It will also lower the costs making the process more economical.

Thus, technology has the potential to open new markets for microfinance in hard-to reach areas. Although the work done by these institutions is truly commendable, they continue to face problems of social accountability, regional inequalities, high interest rates, accessibility and high transaction and administration costs. Moreover, its role in poverty alleviation will remain incomplete without the provision of employment opportunities. In rural areas, provision of modern technology, high-quality seeds and fertilizers, improved infrastructure facilities, irrigation, access to new markets and knowledge regarding modern techniques of farming can help improve the productivity of the rural farmers and help them to break free of the vicious cycle of poverty. The poor must also be given an opportunity to mediate their savings towards profitable investment that fetches them the highest rate of interest on their savings so that the poor are able to fulfill their repayment obligations and the financial viability of the institutions can also be maintained. Urban credit is also becoming a matter of serious concern due to the large scale migration of labor from rural to urban areas in search for employment.Thus, India cannot hope to achieve continued high rates of growth without development at the grassroots level. Empowerment of the marginalized sections of society is pivotal to attaining balanced growth. If the inequalities are not curtailed, it can lead to collapse of the entire structure. Consequently, microfinance is crucial to the process of poverty alleviation and economic and social development.The gateway has been opened, but there’s a long way to go. Sukanya Garg