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1.1 Background

The age old saying “India is a rich country where poor people live”, still

holds good. Since the early national plans, successive governments in

independent India have emphasized the link between improving access to

finance and reducing poverty, a stand that has had influence globally.1

In the present era there is a need for practical, workable solutions to

improve the socio-economic conditions of the rural poor in India, thereby

helping in wiping out the deep-rooted problem of poverty. Microfinance seems

to provide such a solution. However scaling-up access to microfinance for

The

need to improve financial access for India’s rural poor motivated the

establishment of a vast network of rural cooperative credit banks in the 1950s,

followed by nationalization of commercial banks in 1969.This led to thousands

of new bank branches in rural areas across the country. Also an apex bank for

agriculture and rural development (NABARD) was set up at national level.

The strategy during the 1970s and 1980s gave the lead role to the

nationalized commercial banks, who were asked to loosen the tight grip of

traditional informal sector moneylenders through the use of targeted low-

priced loans. The 1990s witnessed the partial deregulation of interest rates and

increased competition in the banking sector. This development resulted in new

microfinance approaches pioneered by non governmental organizations

(NGOs) and now supported by the state government to create links among

commercial banks, NGOs, and informal local groups or Self-Help Groups

(SHGs). However, informal sector money lenders still remain a strong presence

in rural India as many of the rural masses do not have access to microfinance

services to meet their varied financial needs like savings, credit, insurance

against unexpected events etc.

1 The focus on poverty and finance was articulated most famously in the 1954 Reserve Bank of India (RBI) report on the All-India Rural Credit Survey of 1951-52(RBI, 1954).

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India’s rural poor, through flexible products at competitive prices, imposes a

real challenge for a vast and diverse country like India. But the opportunities

too are abundant, and there is a huge scope for designing a flexible framework

for effective implementation of microfinance in India. A recent survey

conducted jointly by the World Bank and the National Council of Applied

Economic Research, India (NCAER) - the Rural Finance Access Survey,

2003(RFAS-2003) highlights inadequacies in rural access to formal finance and

the extortionary terms of informal finance. This provides a strong need and

ample space for innovative micro finance approaches to serve the financial

needs of India’s rural poor. Over the last decade, micro finance approaches

have been designed to combine the safety and reliability of formal finance with

the convenience and flexibility that are typically associated with informal

finance. They typically involve providing thrift, credit and other financial

services and products of very small amounts to the poor, with the aim to raise

income levels and improve living standards.

However, micro finance still plays a modest role in India .At the All-

India level, less than 5% of poor rural households have access to microfinance

(as compared to 65% in Bangladesh) but significant variations exist across

states. The southern states in particular, account for almost 75% of funds

flowing under microfinance programs. Eastern states like Jharkhand are

lagging far behind in terms of micro financial services being offered to their

poor rural masses. The tribal population in Jharkhand is very high (7.5 million)

contributing to 28 % of the total population. Agriculture is the primary

occupation of all the rural communities in Jharkhand with paddy being the

staple crop, which is cultivated during the Kharif season. Due to lack of rainfall

and alternative irrigation facilities during Rabi and summer, most of the poor

tribal communities undertake dry land crop cultivation during this period

besides non-timber forest produce collection, labor and migration. The

advanced tribal communities like Oraons undertake cash crop cultivation with

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the help of irrigation pump sets. Many Non-Government Organizations are

involved in community mobilization, motivation, education, information

dissemination, setting up of delivery systems for input facilitation, market

linkage and formation of social institutions like Self Help Groups (SHGs) etc .In

the existing scenario Microfinance Institutions (MFIs) are also considered to be

a viable option for providing financial support to the farmers through loans to

purchase inputs like seeds, fertilizers and irrigation equipments.

Hence this project makes an attempt to evaluate the effectiveness of

microfinance with special emphasis on the state of Jharkhand. But,

microfinance in India has emerged as a narrow concept, which excludes all

other factors and emphasizes only one input, credit, as an agent for

development. There is a need to examine whether such a minimalist approach

has the intended impact of reducing poverty and aid socioeconomic

development. The traditional supply perspective views the transfer and use of

money, and the impact of such use. However, money is just one of the many

resources that poor people use creatively to improve their livelihoods, which

consists of several complex factors, not only income generating activities. A

good view of impact can only be obtained by understanding the individual,

social, economic and learning processes that cause impact. This calls for a study

of the impact of microfinance on the lives of poor at household, community

and regional level.

1.2 Objectives of the study

The primary objective of the project is to assess and understand the

impact of microfinance in overall socioeconomic development in the state of

Jharkhand. This study provides a new perspective on social performance,

which is wider than impact, but at the same time practical.

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The specific objectives of the study are as follows:

1. To develop a framework

for social rating and social performance in

microfinance.

2. To assess the impact of SHG-Bank linkage programme on household

consumption and investment of the poor in select region of Jharkhand.

1.3 Research Methodology

The scope of the present study is restricted to Ranchi District of

Jharkhand state only. The study is carried out in two broad phases:

First, the assessment of social performance of a particular Microfinance

Institution (MFI) situated in Ranchi District is done.

Second the impact assessment of SHG-Bank linkage programme

promoted by NABARD is done.

1.3.1 Social Performance of Microfinance Institution (MFI) The study makes an attempt to

The study is based on both primary and secondary data. Secondary data

on micro credit services provided to clients is collected from the selected

Microfinance Institution (MFI) situated in Ranchi District of Jharkhand. Some

other related information is derived from journals, published reports, district

credit plan reports and a detailed review of literature. This MFI follow the SHG

model and has 4272 clients (SHG groups) as of March 2008. A small field

gather some empirical evidence, by

assessing the social performance of a particular Microfinance Institution (MFI)

situated in Ranchi District of Jharkhand state, using the social rating

methodology developed by M-CRIL.

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survey has been carried out to obtain direct client level information about

outreach and also to obtain feedback on services provided. A sample of 130

clients of the MFI is considered for the field survey. Data on various economic

aspects and various social aspects has been collected to assess the performance

of the MFI.

Some parameters on which information is collected are listed below:

• Basic socioeconomic characteristic

• Asset ownership and purchase pattern

• Consumption pattern

• Borrowing and saving pattern

• Banking pattern

Thereafter quality checks of primary data collected are done followed by

data entry, submission of clean data sets and data analysis.

1.3.2 Impact assessment of SHG-Bank linkage programme

The study is based on information obtained from a primary survey

conducted at two different levels: the SHGs as a group, the individual members

of the SHGs. Multistage random sampling method was adopted for selecting

the sample members. In the first stage, one district from the state of Jharkhand,

i.e. Ranchi District, representing maximum number of SHGs linked with the

banks was selected purposively. In the second stage, 15 SHGs linked with the

banks as on 31 March 2007 in the selected district were chosen at random for

the study. The list of SHGs was obtained from NABARD, Ranchi Regional

Office.

SHGs having completed at least one year of bank linkage were selected for

the study assuming that the benefits from the SHG bank linkage programme

would have fairly well stabilized. In the final stage, a sample of 90 SHG

members was selected at random from the selected district. The sample of

SHGs and members are also shown in Table 1.1.

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Table 1.1 Sample of SHGs and Members

Selected State Selected District SHGs selected SHG Members Selected

Jharkhand Ranchi 15 90 In order to assess the economic and social impact of the programme over SHGs

of different ages, the sample SHGs were -stratified into three categories, i.e.

(i) Up to 2 years,

(ii) 3 to 4 years and

(iii) 5years and above.

The sample SHGs was also stratified under two different models in order to

analyze the difference in impact of the programme model wise.

(i) NGO promoted groups and

(ii) BANK promoted groups. The stratification of the sample according to the

model and age of SHGs are presented in Table 1.2.

Table 1.2

Stratification of the Sample according to Model of SHGs

Category Sample SHGs Percentage Sample SHGs Members

Percentage

NGO groups 8 53.33% 45 50%

Bank Groups 7 46.66% 45 50%

Total 15 100% 90 100%

Table 1.3

Stratification of the Sample according to Age of SHGs

Category Sample SHGs Percentage Sample SHGs Members

Percentage

Upto 2 years 6 40% 36 40%

3 to 4 years 5 33.33% 30 33.33%

5 years & above

4 26.66% 24 26.66%

Total 15 100% 90 100%

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The study is based on primary data collected from the SHG members

with the help of structured questionnaires. Different methods like verifying the

consistency of the data collected from the primary sources using repeated

questions and assessing the validity of the information with the NGOs was

attempted to get reliable information. Data on various economic aspects like

asset structure, net income, savings, loaning and investment patterns,

employment patterns and social aspects such as improvements in self

confidence, communication skills, behavioral changes, etc., were collected to

assess the impact of the programme.

1.4. Organization of the Report

The layout of the report is structured in five chapters.

Chapter 1 being the introductory chapter provides the background of

the study by discussing the importance of microfinance in improving the living

conditions of the poor. It also proposes the objectives of the study with an

outline of the data collection and methodology used in the study.

Chapter 2 discuses the important microfinance models prevalent

globally along with an overview of the models existing in India. It also includes

a brief review of empirical literature in the context of India.

The assessment of social performance of a particular Microfinance

Institution situated in Jharkhand is presented in Chapter 3.

Chapter 4 provides the detailed impact assessment of SHG-Bank linkage

programme, by studying the SHG groups situated in Ranchi district of

Jharkhand.

Chapter 5 summarizes the major findings of the study along with its

implication. The chapter identifies the limitations of the study and proposes

the scope for further research work in this area.

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2.1 Evolution of Microfinance

The Task Force on Supportive policy and Regulatory framework for

Micro Finance constituted by NABARD defines “Micro Finance as the

provision of thrift, saving credit and financial services and products of very

small amount to the poor in rural, semi urban and urban areas for enabling

them to raise their income levels and improve their standard of living.” In

other words Micro Finance is provision of financial services to the poor

including credit, saving, insurance remittance and pension who are excluded

from formal financial system.

The definition given by M S Robinson elaborates on the type of clients

who can be served through micro finance and defines it as, “Micro finance

refers to small scale financial services provided to people who farm or fish;

who operates small enterprises or micro entrepreneurs where goods are

produced, recycled, repaired or sold: who provide services; who work for

wages or commission; who gain income from renting out small amount of land,

vehicles draft animals or machinery and tools; and to other individuals and

groups at the local levels of developing countries, rural and urban.”

In India micro finance started with SHG bank linkage programme of the

NABARD on a pilot project basis in 1992-95 where in SHGs were set up by

MYRADA (Mysore Resettlement and Development Agency). After its success

the programme passed through the stages of pilot (1992-1995), mainstreaming

(1995-98), and expansion phase (1998 onwards) and emerged as the world’s

biggest micro finance programme in terms of outreach covering 2.3 million

groups to whom banks provided loans Rs. 1139740 million in the year 2006

(EDA, 2006). This programme has been designed on the basis of combining the

‘collective wisdom of the poor, the organizational capabilities of the social

intermediary and the financial strength of the banks’. The recovery rate of this

programme has been 95% for loans provided by banks to the SHGs.

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2.2 Models of Microfinance in International Context

There are various delivery models of microfinance existing worldwide

as per the geographical setting and country-specific environment, for example,

Badan Kredit Desa (BKD) village banks and the Bank Dagang Bali in Indonesia,

SEWA in India, the Bangladesh Grameen Bank in Bangladesh , microfinance

experience of Philippines, the early ACCION affiliates in Latin America, the

Bolivia’s Banco solidario (Bank for solidarity groups) , Brazil’s Banking

correspondents model and South Africa Teba Bank. This section provides an

overview of some of the most popular and widely prevalent microfinance

models in the world.

2.2.1 Grameen Bank Model

It was developed in Bangladesh in 1976 by Muhammad Yunus which is

well known and the most admired model in the world. In this model the

prospective clients are required to form a group of five members who create in

turn centers of around five to seven such groups. The group members make

regular savings with the MFO as per affixed compulsory amount and take

regular loans. All the members have individual savings and loan accounts with

the Micro Finance organizations (MFO) and the main function of each group

and centers is facilitating the financial intermediation process through

performing the following functions:

i) Holding regular weekly meeting supervised by the staff of MFO

where savings and repayments are collected and given to the staffs who

maintains the record.

ii) Organizing contribution to group savings fund with the consent of

the MFO maintaining the group account.

iii) Guaranteeing loans to their individual members by undertaking

group/ joint liability and by accepting that no member of the group

would be able to take a new loan if any members are in arrears.

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iv) Appraising fellow members’ loan application and ensuring that they

maintain regular savings contribution and loan repayments [Harper, M.

(2002)].

Core Features of Grameen Model

i. It is based on mutual trust, social collateral and group moral pressure.

ii. Credit is provided for self-employment generation and raising income

level and housing facility not for consumption.

iii. Provide services at the doorstep of clients.

iv. For getting loan a borrower must be the member of group of borrowers.

v. Loans are provided on continuous basis and new loan is given when

previous loan is repaid.

vi. All loans are to be repaid in weekly or biweekly installments.

vii. Simultaneously more than one loan can be given to a borrower.

viii. Borrowers make mandatory and voluntary savings.

ix. Loans are provided through non-profit organization/ institution owned

by borrowers.

x. Grameen credit is promoted through group and centre formation

electing its leader.

The essential elements of the model are homogeneous group of 5 members,

Six to eight groups form a center, weekly meetings of members, regular

savings, loan is approved in meeting, loan is directly provided to individuals,

loan has to be repaid within 50 installments. This model is a cost intensive

model as selection of group members is strongly vetted by bank; their capacity

building is given much emphasis. It is meeting intensive also and its main

benefits are that it focuses on the poorest, selection of members is strongly

vetted by the bank and delivery and product design is simple, there is very

strict and disciplined approach for organizing group meeting and the recovery

of loans.

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However some doubts are raised about the assumptions of this model. First

this model assumes that all poor need loan for self employment purpose and

based on this assumption loan is given only for self employment purpose

however practically the poor need loan not only for self employment purpose

but for various other purposes like simple household consumption purpose

Second, in this model borrower are required to start the repayment of the loan

installments just after disbursal of loan as it is assumed here that they can

repay from their ex-ante income however it is not always possible. Third it

follows a very much strict and disciplined approach in repayment, which

causes many times great group pressure leading to even suicides of the

members.

2.2.2 Teba Bank of South Africa

Originally Teba Bank started its operations in mining industry. The bank

previously operated as the Teba Savings Fund, and provided basic banking

services as entry level player mineworkers on gold and platinum mines since

1976.Thereafter it started to target low income households in urban and rural

areas as a wing of the bank. In 2000 it was granted license to operate as a micro

finance bank. . It is a niche bank, aiming to provide affordable micro-financial

services to the under-banked in non-metropolitan South Africa. Here bank

provides financial services (micro savings, micro credit and insurance for the

funeral purposes) to the low-income households in small town and rural areas

through agents who uses mobile point of sale (POS) devices in the form of

hand held mobile phone. The customer uses their debit card at the terminal to

deposit and withdraw cash, make balance inquiry, and transfer funds. In this

system agents can accept cash from the clients and disburse cash physically.

Typical agents here are the neighborhood grocery stores, and their accounts at

the bank are instantaneously debited and credited as per case (RBI, 2005).

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2.2.3. Banking correspondent Model in Brazil Brazil as a country has several similarities with India mainly huge

demographic area. Even six years before, 1700 municipalities out of 5500

municipalities were lacking a single branch of bank. The rural people had no

option to deposit their money, no access to credit except informal sources say

family and no chances of building their credit history. In 1997, Banking

Correspondents (BC) which are small outlets with extended working hours

offered basic banking services (RBI, 2005).

BCs are full service retail channel that Brazil’ Banks have developed

using technology (POS devices and communication network) and business

arrangements with grocery stores , medical stores, post offices , lottery outlet s

and other retail shops. The BC offer many services including deposits,

withdrawals, fund transfer, bill payments, new account opening, insurance etc.

BC model is highly technology intensive wherein a combination of devices like

EFTROS device, a bar scanner, POS, PC and sort of teller machine is used at

retail stores, post offices or other retail outlets. The retail outlets provide a staff

person to man the device and handle the transactions for clients. Clients are

given bank cards which in some cases are debit card. POS device is connected

by VSAT to the central server that store account information. In the case of post

office the post offices themselves identify retail outlets and handle all

equipments, training, contracting etc. These banks use the services of

management companies for managing the BCs These companies manage the

BCs on behalf of banks (Ivatuary, 2006).

2.2.4. ACCION’s Service Company Model

In Latin America the commercial banks have been a significant player in

providing micro finance services during last few years Entry of commercial

bank is said to be good as customers would get full range of services and as a

whole it would be a very cost effective system for micro finance as it has a

strong base of physical, financial and human resources. In the light of specific

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potential that a commercial bank has, ACCION international (a micro finance

resource institution based in USA and working in American continent) has

developed relationship with some commercial banks to start and expand micro

finance operations. In this respect ACCION and its partners are using an

approach known as service company model. A Microfinance service company

is a non-financial company that provides the loan origination and credit

management services to the bank. The service company does all the work of

promoting, evaluating, appraising, tracking and collecting loans but loan sit in

the books of the bank and not of the service company. In return of these

services the company gets a fee. The service company employs the loan officer

and micro finance programme staff while the bank furnishes services to the

service company. This could include human resource, teller support or

information technology support. The service company can be a wholly owned

subsidiary of bank or it can involve other institution. The main features of the

above discussed models have been summarized in Table 2.1.

Table 2.1

Summary of the main features of the global models Operational Features

Grameen Bank Model

Brazil Banking Correspondents Model

ACCION Service Company Model

South Africa Teba Bank Model

Basis/Orientation Group and Social collateral

Technology e.g. POS, Kiosk

Bank Partnership

Technology e.g. POS, Kiosk

Linkage with Commercial Bank

No linkage with commercial bank

Linkage with commercial banks as BCs are appointed by Banks

Linkage between bank and service co. as partners

Service is provided as a wing of bank

Service focus Credit Full Banking services

Credit Full Banking services

Appropriate client

Clients from rural or urban area and usually women from low income groups

People having no access to banking services/ bank branches including both poor and non

Mostly urban including both men and women having small and medium incomes

Poor people in rural and small towns both employed and self employed

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pursuing income generating activities

poor

Group Group Individual Group Individual Repayment Group

responsibility Joint between Banks and the retails outlets.

Bank responsibility

Bank responsibility

2.3. Existing Microfinance Models in India

It is important to understand the traditional financing approaches for

microfinance in India. There are five widely used microfinance models

followed in Indian context for providing microfinance services in India.

2.3.1. SHG- Bank Linkage Model This is the oldest and most popular model in India. NABARD initiated

the "SHG - Bank Linkage Programme" in 1992 as a pilot project and

mainstreamed in 1996. The objective of the programme is to enable formal

banking services to provide financial services to the rural poor through the

process of savings and credit linkage of Self Help Groups (SHGs). A Self Help

Group (SHG) has an average size of about 15 people from a homogeneous

class. They come together for addressing their common problems. They are

encouraged to make voluntary thrift on a regular basis. They use this pooled

resource to make small interest bearing loans to their members. The process

helps them imbibe the essentials of financial intermediation including

prioritization of needs, setting terms and conditions, and accounts keeping.

This gradually builds financial discipline in all of them. They also learn to

handle resources of a size that is much beyond individual capacities of any of

them. The SHG members begin to appreciate the fact that resources are limited

and have a cost. Once the groups show this mature financial behavior, banks

are encouraged to make loans to the SHG in certain multiples of the

accumulated savings of the SHG. The bank loans are given against group

dynamics without any collateral and at market interest rates. The groups

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continue to decide the terms of loans to their own members. Since the groups’

own accumulated savings are part and parcel of the aggregate loans made by

the groups to their members, peer pressure ensures timely repayments. Apart

from financial help at the time of need, the group provides social security to its

members.

Three distinct models can be observed in linkage programmes between

banks and low-income groups.

SHGs formed and financed by banks:

In this model besides financing the groups the banks themselves form,

organize, nurture and monitor the groups and train the members on record

keeping, thrift, utilizing credit amount etc in addition banks also supervise

the groups. As per March 2008, 20 percent of SHG are financed through this

model.

Figure 2.1

SHGS formed and financed by banks

Formation, nurturing Credit Savings Source: (NABARD Report, 2004-2005)

SHG formed by formal agencies other than banks and financed directly

by banks: In this model NGOs, farmer’s clubs, individual volunteers other than

banks in the field of microfinance act as facilitators. They facilitate

organizing nurturing, monitoring and training the groups. Banks give

directly loans to these SHGs. This model has major share with 72

percentage of total SHGs financed up to March, 2008.

BANKS

SHGs

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Figure 2.2 SHG formed by formal agencies other than banks and financed directly

by banks Formation, nurturing, Monitoring

Savings Credit Source: (NABARD Report, 2004-2005)

SHG financed by banks through NGOs and other agencies as financial intermediaries :

In this model the SHG federation NGOs acts as a financial intermediary

between banks and these SHGs. The NGOs are encouraged to approach

a suitable bank for loan in bulk which gives loans to the SHGs. In area

where a very large number of SHGs have been in operation

intermediary agencies like SHG federation are acting as link between

bank branch and member. Under this category total 8 percent SHG have

been financed up to March 2008.

Figure 2.3 SHG financed by banks through NGOs and other agencies as financial

intermediaries

Formation, nurturing, Monitoring

Credit savings Source: ( Credit Source: (NABARD Report, 2004-2005)

NGOs, Vas, IRVs, FCs

SHGs

BANKs

BANKs

SHGs

NGOs, Federations

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2.3.2. Grameen Model The Grameen model of Bangladesh has been replicated in India by some

two dozen MFIs. Its features and methodology has been discussed in the earlier

section on international models. In India the major MFIs which are using this

replicated model are SHARE in Andhra Pradesh, ASA in Tamilnadu and

CASHPOR in eastern Uttar Pradesh.

2.3.3. Individual Banking Programmes (IBPs)

In this model microfinance services are provided by MFIs to individual who

do not belong to any group means not the member of any group but sometimes

they may be associated with a particular group like SHG, JLG or cooperative

society group. This method is famous and popular in the case of microfinance

through cooperatives and commercial banks and basically suitable for larger

clients in urban areas who are engaged in their own enterprise or running such

enterprises that provide self employment to the other poor. In the case of

cooperatives all borrowers are members of the cooperatives organization and

their creditworthiness and loan security depends on the cooperative

memberships. Here member’s savings in cooperatives and pressure of fellow

members are key factors. Here loan is given after careful analysis and knowing

the character of individuals so it is basically character based lending. Loan is

made at branch office and a visit by the credit officer is made at the place of the

business of client to verify that the loan has been used for the same purpose as

specified in the loan contract. Here periodic payment is made but for availing

the loan facility it not essential to save compulsorily. Most MFIs require some

collateral or cosignatories. Here credit officer usually develop close and long

term relationship with the clients.

The main features of this model are:

i) Here the individual borrower is required to provide

collateral/cosigner for getting a loan and the collateral are non

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conventional like driving license, degree certificate, or other such

documents as collaterals.

ii) It requires a careful analysis on the part of the lender of loan

proposal defining all the terms of loan clearly and examining the

character of the individual borrower before sanctioning the loan to

him.

iii) The size of the loan is per the business requirements of the

individual.

iv) Frequent and close contact with the individual client.

v) Checking the utilization of loan by going to the place of business that

whether the loan has been used for the same purpose as specified in

the loan contract.

As per survey conducted by SADHAN (Industry Association of

Community Development Finance Institutions in India) the contribution of

individual banking model to the microfinance sector in India is only 7 percent.

(Babu and Singh, 2007). Some of the major users of this model are SEWA bank

in Ahmedabad, the Annapurna Mahila Cooperative Credit Society in Mumbai,

Pushtikar Samiti- a cooperative bank in Jodhpur.

2.3.4. ICICI-Bank Partnership Model

This model has been used and popularized by the private bank and said

to be pioneered by ICICI bank. In this model the MFI originates the loan,

evaluates, recommends, tracks and collects the loan but the loan appear in the

books of the Bank and not of the MFIs books. For the credit management

services that the MFI provides to the bank MFI charges a service fee from the

borrowers. With this partnership structure ICICI is working with more than 30

MFIs in India accounting for loans outstanding of approximately $55 million in

December 2004.The main features of this model are:

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i) Loan contract is directly between borrower and the bank so loan does not

appear in the books of the MFI but it appears in the books of the bank

ii) MFI gives a first loss guarantee to the bank whereby the bank shares the risk

of the portfolio with the MFI up to a certain specified limit in the form of a

security deposit and for this service the MFI collects a fee from the borrowers.

iii) This model utilizes effectively the benefits of both the partners as financial

intermediation remains fully with the bank and social intermediation remains

with the MFI so both organization uses their core competence/main strengths

and provides best result.

iv) Transfer of implicit capital from the bank to the MFI through an overdraft

facility wherein the bank gives an overdraft facility to the MFI which is

equivalent to the amount of first loss guarantee structure. This overdraft

amount is used by the bank only in the event of default by the borrower and in

that situation the MFI is liable to pay a penalty amount on the amount

withdrawn.

v) Partnership Model financing separates the risk of the MFI from the risk of

microfinance loans which makes this model a precursor for securitizing

microfinance loans (Ananth , March 2005). One of the examples of this model

is CASHPOR in eastern Uttar Pradesh.

2.3.5. Mixed Model Some MFIs uses mixed model wherein the elements of grameen model

and SHG bank are mixed. The no. of such type of MFIs are relatively less but

their numbers are growing. Another prominent example of this model is

SPANDANA in the Guntur region of Andhra Pradesh which has larger JLGs of

around 10 members. Another examples are Cashpor, a Varanasi based MFI ,

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Indian Association of Savings and credit (IASC) a section 25 company

promoted by the HDFC bank gives individual as well as group loans. The main

features of the above discussed models have been summarized in Table 2.2.

Table 2.2

Summary of the operational features of microfinance models in India

Operational features SHG Grameen IB ICICI Bank partnership model

Clients Primarily Women Primarily Women Primarily Men

Primarily Clients of intermediary MFIs, both men and women

Criteria for targeting the client

The Poor(defined in terms of BPL)

The poor (Defined in terms of Housing, other assets, types of employment)

Poor and Non poor (unbanked)

Basically Poor and unbanked

Groups 15 to 20 clients per group

Usually 5 clients per group(organized into centers of 4-6 groups)

Individual clients

Individual Clients

Service focus Savings and credit Credit

Credit

Credit

Meetings Monthly Weekly Daily - Savings Deposit Rs. 20-100/Month Rs. 5-25/Week Flexible Flexible

Interest on savings Bank Rate (4.25%)+profit share

6-9%

6%+ 6%+

Initial loan size Rs. 5-10000 Rs.2-5000 Rs. 5-15000 Rs. 1000-25000 Effective interest rate 24-28% 32-38% 23-38% 24 -30%

Insurance At a very preliminary stage

Insurance is Bundled with the credit to cover borrower’ serious disease, death, accident, & rainfall failure

Development services

Some associated Programmes

A few small social projects

Enterprise support

Research, enterprise and other social support

Source: Adapted from the SIDBI Report

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2.4. Selective Review of Literature

The importance of microfinance in the field of development was

reinforced with the launch of Microcredit summit in 1997 and 2005. Recently

the UN declared the year 2005 as the international year of Microcredit. In

December, 2006 Muhammad Yunus and the Grameen Bank he founded

received the Nobel Peace Prize for their pioneering contributions to the

development of microfinance. Thus there are many stories of the

transformative effect of microfinance on individual borrowers but until

recently there has been little rigorous research that attempts to segregate the

impact of microfinance from other factors and to identify how different

approaches to microfinance change results.

There is substantial amount of literature available on impact of

microfinance on socioeconomic development outside India. Impact

assessments provide evidence of the positive effects of micro-finance on the

livelihood of poor, especially in Asia.

In India, the first survey on SHGs was undertaken by NABARD, along

with other Indian members of the Asian and Pacific Regional Agricultural

Credit Association (APRACA). They conducted an action research on linking

SHGs with the concept of savings and credit in 1987 and published the

outcome of the research in the form of a survey report in 1989. The survey was

carried out in the form of case studies of 46 SHGs spread over 11 states and

associated with 20 SHPIs. Of all the SHGs sampled, 17 had savings collection

and credit provision as a major activity. Another 13 were engaged in farming

or farmbased activities, five were into social forestry and afforestation, eight

were engaged in non-farm activities and three were occupied in diverse

occupations. Based on the case studies on savings and credit of 17 SHGs, the

The Indian MFIs, on which studies have

been conducted by external agencies or themselves include, SEWA Bank in

Ahmedabad, ASA in Tiruchirapalli, DHAN in Madurai, SHARE in Andhra

Pradesh and PRADAN in Delhi (Chen and Snodgrass, 2001). Some of these

have taken steps to build internal processes to also assess impact.

22

study reported that when a SHG was promoted by a SHPI, it generally

comprised only members of the weaker sections.

The first impact study of NABARD on SHG-bank linkage programme

was carried out by Puhazhendhi and Satyasai for NABARD in 2000. The study

assessed the impact of microfinance on socio-economic conditions of 560

household members from 223 SHGs located in 10 states; Rajasthan (Northern

region), Orissa and West Bengal (Eastern region), Madhya Pradesh and Utter

Pradesh (Central region), Gujarat and Maharashtra (Western region), and

Andhra Pradesh, Karnataka and Tamil Nadu (Southern region).

A study by Chakrabarti (2004) reassessed the microfinance scenario in

India and the impact of microfinance programme on poverty eradication. It

also discussed the role of banking sector in outreaching and financial

sustainability. In order to keep some balance between outreach and

profitability, the study suggested that microfinance provides an important way

to banking sector to operate in the rural areas. Nair (2005) examined the

potential of SHG federations in providing sustainability to SHGs through

financial and organisational support. It is now acknowledged that limited

evidence exists in India, about impact of microcredit, and that the evidence

available is mixed, ranging “from significantly positive outcomes to almost no

change at all” (Fisher and Sriram, 2006).

The present study differs from earlier studies in many aspects. First, it

covers a wide range of socioeconomic impact issues on the level of SHG

members and not only at the level of a SHG. Second the work is carried out in

the state of Jharkhand, where hardly any impact studies of similar nature

exists. The study helps in learning several valuable lessons about how impact

of microfinance takes place, and thereby incorporating these lessons in the

design of microfinance programmes in particular, and development

programmes in general.

23

3.1 The Concept of Social Performance

The microfinance industry has finally reached a consensus on the

definition of social performance. Social performance in microfinance is defined

as “the translation of mission into practice in line with accepted goals.” Under

this definition, social performance is not only the end result (or change), but

also the entire process of achieving the result. So, to assess social performance,

we move away from focusing exclusively on trying to prove an end result

(impact assessment) to looking at how to get there, and reporting on those

steps that are likely to lead to positive social outcomes. These steps follow a

logical organizational path, from intent/governance, through management/

systems, to results. Figure 3.1 outlines the different steps involved in this

process.

Figure 3.1 Dimensions of Social Performance

24

3. 2 Managing and Measuring Social Performance by MFIs

MFIs can more successfully achieve social goals if they can assess,

monitor and manage progress towards them. Social performance should be

managed and reported as systematically as is MFIs’ financial performance.

There have been important but separate attempts over the last few years to

integrate the assessment of social performance into the regular management

systems of financial institutions. In 2005, the Argidius Foundation, CGAP, and

the Ford Foundation brought together more than 30 leaders from various social

performance initiatives in microfinance to share their experiences. In the

following two years, the work on social performance gained momentum,

leading to the formation of the Social Performance Task Force. Its membership

now includes over 150 leading microfinance networks, financial service

providers, rating agencies, donors, and social investors (CGAP, 2007).

These members are committed to regularly assessing, reporting on, and

improving the social performance management of their organizations and the

organizations they support. The Task Force is promoting a stronger industry

focus on social performance through adopting a common definition,

coordinating different initiatives, and creating a common reporting format.

In microfinance, the process of measuring and managing organizational

progress toward social objectives is known collectively as social performance

management (SPM). The issue of SPM is growing in importance in the Indian

microfinance industry. Although relatively recent to the microfinance agenda,

SPM has a long history outside of microfinance. Ironically, perhaps much of the

activity and progress in SPM is taking place in the private sector with

initiatives such as the Global Reporting Initiatives and the Balanced Scorecard.

SPM recognizes that to be useful, social performance information must be

integrated into the MFIs’ work and operational routines and into its value

system. It must, in other words, be institutionalized.

Social performance Assessment (SPA) goes beyond the broader social

performance management. It identifies the relevant dimensions of social

25

performance and different tools to measure social performance. For example,

many MFIs mention the ‘poor’ as their target group but fail to define poor and

measure poverty levels. Similarly many MFIs fail to track the drop-out rate,

even if their clients are leaving. There is thus a need for storing, analyzing,

reporting, and using social performance information by MFIs.

3.3 Social Metrics

Social metrics refer to social measures related to program operations and

serve as distinct links in a social impact casual chain. There are four principal

social metrics (links) in the social impact causal chain: inputs, outputs,

outcomes, and impacts.

The causal chain begins with inputs, which are transformed through

internal processes into outputs. Outputs in turn produce outcomes. Finally,

outcomes produce impacts. The further one moves to the left on the causal

chain, the weaker the causal relationship with program impacts. Inputs consist

of the resources used to run the program, including money, people, time,

physical facilities, and equipment. Outputs are the direct and measurable

products of program activity, including, for example, the number of loans

made, lessons given, persons trained, or clients served. Outcomes are observed

changes in the well being of clients at the individual, household, enterprise,

and community levels. Common measures of social outcomes include

household income and expenditures; asset ownership; housing conditions;

access to basic services; food security; school attendance; female participation

in decision-making, leadership roles, social organizations and the political

process; and enterprise growth, profits and employment. Impacts are outcomes

caused by the MFI above and beyond what would have happened without the

MFI. Impacts represent the achievement of social goals.

3.4

For many MFIs, the common reporting format will serve as a starting

point for developing social performance management systems. While some

Social Performance Assessment Tools

26

will just integrate additional indicators into their Management Information

System (MIS), others will require new tools to assess performance.

There are a variety of tools that are now available, some of them are mentioned

below:

CERISE SPI

MFC Social Audit

ACCION SOCIAL

USAID SPA Audit

M-CRIL

Microfinanza Rating

Micro Rate (SPA)

SEEP/AIMS tools

CGAP-Grameen-Ford Progress out of Poverty Index (PPI)

Most of these tools, such as the USAID Social Performance Assessment Tool

and the CERISE Social Performance Indicators Initiative, focus on internal

processes (e.g. mission statements, codes of conduct, strategic alignment, etc).

This focus away from the results level was due to the difficulty in developing

rigorous tools to report on results indicators (on economic levels of clients and

changes they experience). However after intense research, we now have two

such tools, the IRIS Poverty Assessment Tool and the Progress out of Poverty

Index (PPI). Both the IRIS tool (developed by IRIS for USAID) and PPI

(developed by Mark Schreiner for Grameen Foundation, CGAP and Ford)

utilize household survey data to estimate the economic levels of clients.

A part of this new field of social assessment is social rating. A major

development in the microfinance sector has been the introduction of social

rating tools to complement credit ratings. Social rating uses information

available with the MFI to the extent possible drawing on available data and

discussions with staff at all levels .It covers both the process (intent, policies,

design, system) and part of the results (outreach and appropriate services)

3.4.1 Social rating tools

27

along the dimensions of social performance as presented in Figure 3.2. Social

ratings will assist donors, investors and MFI managers to make effective use of

micro finance resources to achieve social goals.

Figure 3.2 Assessing Social Performance

There is a lot of interesting work relating to social rating going on in India as

well. Some organizations like M-CRIL and Microfinanza offer social ratings

that assess institutional mission, intent, design and systems as well as client

level information at economic levels, appropriateness of financial services and

outcomes. M-CRIL’s tool for social rating provides an assessment of MFI’s

social performance. So far, M-CRIL’s has undertaken seven social ratings in

India supported by Friend’s of Women’s World Banking and the Ford

Foundation, and also nine poverty audits supported by SIDBI (Sinha, 2007).

3.5. Case Study

This section discusses the case study of a MFI situated in the state of

Jharkhand. An attempt was made to help the MFI assess their social

performance by using the social rating methodology developed by M-CRIL.

This MFI follow the SHG model and has 4272 clients (SHG groups) as of March

2007.

28

A small field survey was carried out to obtain direct client level

information about outreach and also to obtain feedback on services provided.

A sample of 130 clients of the MFI was considered for the field survey. The

sample size taken into consideration was in consonance with the social rating

methodology by M-CRIL sand the questionnaire also includes the same

questions used by them (India Microfinance Review, 2007)2

3.5.1 Findings

.

The findings of the study are discussed following the same dimensions

of M-CRIL social rating methodology (as shown in Figure 3.2); starting from

process (intent and design, systems) and results (outputs measuring outreach

and appropriate services).

Intent and Design

The mission of this MFI is to promote sustainable livelihoods to the rural

poor. Through focus group discussion with managers and field staff, it is

observed that the MFI had clear definition of the key term used in its mission,

i.e. improved livelihoods and poor, which definitely helps in translating its

mission into practice. However the reporting of the organization remains

financial, both within the organization and also externally in annual reports.

Service and Access

The MFI provide credit to the rural poor, particularly the landless and

women to promote self-employment. It also lends money to rural commercial

farmers and non-farm enterprises. A flexible system of micro credit is offered

through direct and indirect loans. It also offers non-financial services like

technical assistance and support services for livelihood promotion, directly or

through other rural actors.

2 127 is the minimum sample size at a confidence level of 95% and precision of +/- 10%.Also, see EDA Technical note: Estimating Sample Size which explains the sampling formula.

29

Internal systems

The MFI targets poor clients, both men and women in rural areas of the

state. This also includes cotton and lac farmers in the rural regions of the state.

40% of the total clients in the MFI at present are women.

In terms of human resources, the mission and values are usually a part of

the staff training during induction. However, it is observed that the staffs of the

MFI emphasize more on growth in number of clients (22% increase in growth

from the previous year) and timely repayments (83% on time repayment). The

focus for covering the poorest of the poor in a village is lacking among the

staffs.

In terms of MIS and monitoring, there was hardly any information available

to understand the social performance of the MFI. However, there is a

considerable scope for the MFI to collect portfolio information from a social

perspective. Information on the dropout rate, repeat customers, and identifying

reasons behind leaving or coming back may be useful. Also, segregating these

information on the basis of men and women clients, or rural and urban will

also throw some light on the social performance of the MFI.

Results – Outreach

The majority of the clients in this MFI are rural poor. 78% of the MFI clients

are from rural villages and 18% are from semi-urban areas, while the remaining

4% are from urban areas. Hence the outreach of the MFI is mostly rural.

Now to understand whether the MFI is serving the poor and excluded, we

analyze whether clients are from vulnerable communities (such as SC/ ST) or

from households without alternative access to formal finance. As shown in

Table 3.1, we find that the MFI have a good proportion of SC/ST client

households (38%), which is above the national average, reflecting substantial

outreach to these communities. It is also observed that not all client households

are excluded from financial services. However, only 18% have a post office

savings account, which is much below the national figure. 15% of client

households have members in another MFI.

30

Table 3.1 Financial Inclusion (reaching the unreached)

Parameters % of client households All India population*

SC/ST 38 25% With Savings in bank or post office 18 36% With client in other MFI 15

* Census of India, 2001 However, the MFI had no idea of the poverty level of their clients and

were not even aware of the need to measure the poverty status of their clients

for understanding the depth of their outreach. The fight against poverty is

serious business. For the MFI to realize its full potential and make a substantial

contribution to achieving the Million Development Goals, all MFIs have to

equip themselves with the instruments to evaluate performance and results.

Hence, the poverty outreach of the MFI was also measured as per the poverty

scorecard developed for India.3

3 Schreiner, Mark (2007).The scorecard has 10 relatively simple questions which can be simply answered/ observed about a household without much calculation or judgement. The scores calculated can be linked to any poverty line. For India, they are linked to the international poverty lines- $1 per day and at present it is Rs. 395/person/month rural and Rs 454/person/month urban)

.Very surprisingly, it is observed that only 26%

of its clients are below the poverty line. The misfortune is that even in All

Indian population, the person living below poverty line is 39%, which is much

more than the outreach of this MFI. This definitely calls for a strategic review

by the MFI, so as to align its operation with a deeper poverty focus.

In terms of client awareness of financial services, it is seen that 73% of

the clients were aware of the notional interest on loans and interest receivable

on savings deposit. However, only 32% are aware of the details of costs like

break up of loan fees, declining interest etc.

31

4.1 Status of SHGs in Jharkhand

In Jharkhand (earlier Bihar) SHG have started in 1988, Hazaribagh

through Holy Cross Sister at Tilhara village of Ichhak block. Simultaneously,

SHG system was spread with Pradhan of its Hazaribagh unit. Gradually,

NGO’s who used to work in the state, started forming SHG in several districts.

In 1993, a meeting with RBI team was held in Patna Secretariat on the

microcredit issue. In this regard, it was discussed, whether the loaners should

get subsidy. In this same year, banks started giving loans to SHGs without any

guarantee. Bank of Maharastra & Canara Bank were the first two banks to

bring out their guidelines for SHGs. After that, DUE to the pressure of RBI and

NABARD, different nationalized banks started opening accounts & lending

loans to the SHG groups.

Self Help initiatives in Jharkhand have gained roots and with passage of

time the number of actors facilitating the promotion of self-help groups has

increased. Government departments, banks, NGOs all are engaged in their

promotion.

Promotion of Micro enterprises and various income generation activities

is an important thrust area of SHGs. Micro credit through SHG has proved to

be one of the most effective modes of making available credit to the rural poor.

Mr. A.P. Das, AGM, NABARD spoke on 'Micro Finance-status, issues and

challenges in Jharkhand. He presented an overview of Micro-credit in the state.

Micro credit through SHG-Bank linkage programme has gained acceptance in

last 2-3 years. However the present level of coverage under NABARD of the

estimated poor families is only about 15%. He stressed that in such a scenario

the scope for expansion of the micro credit is still untapped to a large extent.

NABARD has all along advocated financing SHG as a sound business

proposition for Banking sector, a process of grass root level institution building

32

for NGOs and future multi-delivery platform for development initiatives by

the Government.

4.2 Impact Assessment

An attempt has been made in this section to assess the impact of micro

finance through the programme on living standards of SHG member at Ranchi

district in Jharkhand. The programme brings in its wake various economic

benefits to SHG members in terms of increased asset creation, enhanced saving

and borrowing habits, increased income and higher employment, improved

social lives, etc.

Firstly, the socio-economic profile of the sample SHG households has

been studied. The distribution of households according to level of economic

activity, level of literacy, family size, age profile, etc., is presented both model

wise and age of SHGs. After that the survey tries to assess how far the

programme succeeds in terms of its coverage of the weaker sections in the rural

segment of the population. Thereby, the impact of the programme on economic

conditions of SHG members in terms of asset creation, saving and borrowing

patterns, income and employment, etc is discussed.

4.2.1 Socio-Economic Profile Economic Activity

Farm activity constituted the major share accounting for 42 per cent of

the sample households. About 16 per cent of the sample households depended

exclusively on agricultural labour. This was followed by non-farm activity

(13%) and off-farm activity (11%). Mixed activity was observed in 13 per cent of

the sample households. The share of farm, non-farm and mixed activity was

relatively more in NGO groups (73%) compared to BANK groups (59%). This

might be the result of adequate thrust on capacity building and training on

income generating activities (IGA) by various NGOs.

33

Older groups were engaged in mixed activities in large number (36%)

compared to recently formed groups (9% for 2 year old SHGs). The share of

agriculture laborers was significantly higher for groups of 3-4 years. The

distribution of households as per activities is shown in Table 4.1.

Table 4.1 Distribution of Households according to Economic Activities (%)

Level of Literacy

The weaker sections that are the focus of the SHG Bank Linkage

programme are generally characterized by high levels of illiteracy without any

formal education. An analysis of the educational status of the sample

households revealed that about 31 per cent of them were illiterate. About 55

per cent of the sample households could only sign. Members who studied up to

primary and secondary levels were reported at 10 per cent and 4 per cent

respectively. Members without any formal education or who were illiterate

were observed to be relatively more in NGO groups (32.4%) than in Bank

groups (29.3%). This might be due to the fact that NGOs in the study region

were mostly working in hilly terrains and other inaccessible areas where

literacy levels were significantly lower. Members who could only sign were

observed to be relatively more in NGO groups (58%) than in BANK groups

(49%). Joining SHGs also made them realize the importance of education,

which resulted in increased number of members being able to sign.

It is also interesting to observe that the share of members without any

formal education was observed to be more in the newly formed groups (90.5%)

than the older groups of five years and above (81.8%). This suggests that there

34

is a group effort made to improve literacy levels of its members through

informal education. The distribution of households as per literacy level is

presented in Table 4.2.

Table 4.2 Distribution of Households according to Level of literacy (%)

Family size

Nearly 59 per cent of the sample households had family sizes ranging

between 4-6 members and 21 per cent reported a family size of more than 6

members. Among different models, the share of family size of more than 6

members was higher in NGO groups (24%) compared to BANK- groups (14%)

as NGO promoted groups were mostly in inaccessible, tribal dominated areas

where the family size was large.

Households with large sized families (> 6 members) constituted 27 per cent in

older groups of 5 years and above as compared to 24 per cent for 2-year-old

SHGs and 15 per cent for SHGs of 3-4 years, respectively.

Age of Members

The major proportion of the sample SHG members (51%) was in the age

group of 26-35 years followed by the members in the age group of 36-55 years

(33%) and 18-25 years (12%). A similar distribution pattern was observed

across NGO groups and BANK- groups and across different ages of SHGs. The

proportion of members in the age between 26-35 was 47 per cent in up to 2-

year-old SHGs, 57 per cent for 3-4 year old SHGs and 50 per cent for SHG of 5

years and above. An interesting observation was that the proportion of SHG

35

members in the age group of 55 and above was reported at only 4 per cent,

which indicates that SHGs did not prefer aged members.

Figure 4.1 Distribution of SHG members according to age

SHG Members (%)

12

51

33

418-25 years26-35 years36-55 yearsabove 55 years

4.2.2. Programme Coverage

Social Group

The programme envisaged the covering of socially and economically

weaker sections, particularly social groups like SCs/STs and Backward Classes

(BCs). The distribution of sample households according to social groups

revealed that the proportion of members belonging to SCs/STs accounted for

44 per cent followed by backward classes at 39 per cent. Among the sample

SHG members (115) only 17 per cent belonged to forward castes. The highest

proportion (49%) of SC/ST members was observed in the case of bank- groups

compared to NGO groups (41%). As against this, the highest proportion of

backward class members was reported in NGO groups (47%) compared to

bank- groups (24%). Considering the SC/ST and backward class as weaker

sections, based on social classification, its share to the total number of members

36

worked out to 83 per cent. This category was observed to be more in NGO

groups (88%) than bank- groups (73%).

The coverage of weaker sections in groups of different ages revealed

that over the years there was an increasing tendency towards covering weaker

sections in the programme. The coverage of weaker sections in older groups of

5 years and above was 72 per cent whereas it had increased to 81 per cent in the

recently formed groups.

Table 4.3 Distribution of Households according to Social Group (%)

Figure 4.2 Distribution of Households according to Social Group (%)

Coverage of Weaker Sections (%)

43.5

39.1

17.4

SCs/STs Backward Castes Forward Castes

4.2.3. Asset Structure Asset Holding Pattern

Poor are characterized by low asset base. Therefore, any programme

targeting the poor should strengthen their asset holding pattern. Increase in

asset base strengthens the financial position of the household and also

37

improves its shock absorbing capacity. The SHG Bank Linkage programme

through micro Finance interventions increases the productive asset of

households like milch cattle, work animals and various consumer durables

such as transistor, cycle, etc. The field study revealed that asset structure had

increased in about 45 per cent of the sample households. While about 52 per

cent sample households reported no change in their asset holding pattern,

about 3 per cent reported decrease in their asset size. The decrease in asset size

was a result of selling of milch animal/work animal due to fodder problem,

death of poultry birds due to poultry related diseases, etc. While the increase in

asset base was marginally higher for NGO groups (46%) compared to the

BANK- groups (44%), the decrease in asset base was more for BANK- groups

compared to NGO groups. The proportion of households reporting increased

asset size showed positive correlation with the age of the SHGs. Similarly, the

proportion of sample SHG members reporting no change in asset base was

more for recently formed SHGs(66% for 2 year old SHGs, 57% for SHGs of 3-4

years) compared to older SHGs (14% for SHGs of 5 years and above).

Table 4.4 Change in Value of Assets of SHG Members

Value of Assets

The value of assets owned by the sample households during post SHG

situation was worth Rs.5, 827 whereas it was Rs.4, 498 during the pre-SHG

situation. Thus there was an average increase of 30 per cent in the value of

assets after joining the SHG. The milch cattle/poultry reported highest increase

(67%) in asset value in the post-SHG situations followed by consumer durables

(21%) and work animals (16%). After joining the group, some members

purchased milch cattle, poultry, goats, sheep, etc., which they did not have

38

earlier, to diversify their income sources. This resulted in increased average

value of assets held by the members under these heads. Across the models the

increase in the average value of assets was higher for NGO groups (35%)

compared to BANK- groups (19%). However, the average level of assets was

higher for members in BANK groups in both pre and post-SHG situations.

Table 4.5 Average Value of Assets possessed by SHG Members-Model wise

Figures within Bracket indicate % of increase

Figure 4.3 Average Asset Value in Pre and Post SHG situations: Model wise

Members of SHGs of 5 years and above had reported impressive

increase in average value of assets (95%) between pre and post-SHG situations

39

followed by members of 3-4 years old SHGs (19%) and upto 2 year old SHGs

(10%). However, the average level of assets was higher for members in newly

formed groups in both pre- and post-SHG situations. The average value of

assets was relatively more for the members in the older groups of five years

and above than the members in the newly formed groups. This trend was due

to the economic empowerment of members in the older groups compared to

recently formed groups.

As far as the immovable assets such as land and dwellings are

concerned, the number of landless as well as land holding of sample SHG

members remained the same during pre-and post-SHG situations. Similarly, no

sample SHG member reported opting for a new dwelling unit nor did anyone

report a change in their dwelling type such as from kutchha to semi pucca or

pucca. Increase in value of these two forms of assets cannot be expected from

micro-Finance interventions over a short span of time. However, some of the

unirrigated holdings of the members had been provided with irrigation

facilities from traditional sources like wells, ponds and rivers after installing lift

irrigation points out of loans from SHGs. Similarly, some members had

repaired their dwelling units after availing loans from SHGs.

Table 4.6 Average Value of Assets possessed by SHG Members-Age wise

Figures within Bracket indicate % of increase

40

Figure 4.4 Average Asset Value in Pre and Post SHG situations: Age wise

4.2.4. Savings Pattern

The SHG Bank Linkage programme distinctly differs from other micro

Finance programme across the world mainly in terms of its greater emphasis

on savings. The basic philosophy of saving first and credit next is assumed to

be one of the strengths of the programme. The programme rests on the premise

that members will develop the habit of thrift so that during post-SHG phase

they can avail of loan. This, besides increasing their self-reliance in meeting the

credit needs of the group members will also help in efficient deployment of

credit among the members as their own money is at stake. The existing savings

and lending products mainly from institutional sources were not adaptable to

the rural poor. Keeping this in view, the programme has shifted the entire

responsibility of innovating the saving and lending products to SHGs with a

broader framework suggested in its guidelines.

41

Average Level of Savings

The estimated mean annual savings was worked out to Rs. 952 during

the pre-SHG situations which were increased to Rs. 2,103 during post SHG

situations. The incremental saving was worked out to Rs.911, which is about 96

per cent increase between pre and post-SHG situations. The percentage of

incremental savings was significantly higher in NGO-groups (145%) than

BANK groups (50%) which might partly be due to greater emphasis on savings

by NGOs and partly due to the higher degree of incremental net income

generated by NGO groups. Low incremental savings in BANK- groups might

also be due to the fact that its members were having higher level of savings (Rs.

1,384) during pre-SHG situation than the NGO groups (Rs.713). There was an

increasing trend of incremental savings corresponding to the age of the groups.

This was expected, since over the years the members recognized the need for

savings and had the tendency to increase the rate in correspond to loan

amount.

Table 4.7 Mean annual Savings by SHG Members-Model wise/Age wise

42

Figure 4.5

Average Savings by SHG Members

4.2.5. Borrowing Pattern Easy access of credit mainly from institutional sources is one of the

major objectives of the programme and thus it aims at strengthening credit

widening (expanding the clientele base) and credit deepening (enhancing

quantum of loan per borrower). The results presented in this section showed

that the programme has contributed both in credit widening as well as credit

deepening.

Average Loan Amount

On an average, the loan amount received by the member during the post

SHG situation worked out to Rs.5122 which was about 123 per cent more than

the pre-SHG situation (Rs.2301). The increase in quantum of loan between pre

and post-SHG situations was observed to be more or less the same among

NGO groups and BANK groups. On the other hand, the incremental borrowing

43

registered an increasing trend along with an increase in the age of the groups.

Therefore, the programme had a significant impact on borrowing patterns of

sample SHG members both in terms of strengthening credit widening and

credit deepening.

Table 4.8 Incremental Borrowings by SHG Members-Model wise/Age wise

Figure 4.6

Average Borrowings by SHG Members

44

Activity-wise Share of Borrowings

The study reported that there was significant increase in loans for

production purposes from 56 per cent to72 per cent between pre and post-SHG

situations. Corresponding to this, the loan amount for consumption purposes

came down from 44 per cent to 28 per cent during these periods. Within

production purpose loans, the loan for Industry, Services, and Business (ISB)

and loan for crop cultivation and investment in agriculture received top

priority. The incremental shares for cultivation purposes and for ISB were

worked out to 11.5 and 5 percentage points respectively. The distribution of

loan amount according to purpose of loan is presented in the Table 4.9.

Table 4.9 Purpose wise Distribution of Loan Amount

Interest Rates

Interest rate is one of the basic issues being debated while assessing the

programme. The average annual interest rate paid by the sample members

worked out to 81.0 per cent during pre-SHG situation and it had significantly

reduced to 31 per cent during post-SHG situation. While major share of loan

accounts (66%) and loan amount (41%) were contracted at the interest rate of

more than 60 per cent during pre-SHG situation, the interest rate got converged

at the level of 12 to 24 per cent during post-SHG situations. This analysis

provided evidences for the positive impact of the programme in reducing the

45

interest burden of the members and avoiding the exploitation of the poor by

informal agencies, particularly money lenders, commission agents, etc.

Table 4.10 Distribution of Loan Accounts and Loan Amounts Interest Rate wise (%)

Loan Periods

One of the basic practices followed by SHGs is a frequent loan with

shorter periods. Most of the loans were contracted for a period of less than 12

months both in terms of number of accounts (93%) and loan amount (78%).

However, there was a tendency to converge towards 6 to 12 month period

during post-SHG situation. For 6-12 months range of loan period, the number

of accounts and loan amount was 57 per cent and 37 per cent during pre-SHG

situation, which had increased to 80 per cent and 74 per cent during post-SHG

situation. Further the option of loan period of more than 2 years was not

preferred by the members during post- SHG situation.

Table 4.11 Distribution of Loan Accounts and Loan Amounts Loan Period wise (%)

46

Repayment Performance

The repayment percentage among the sample households from all the

sources was 94.9 per cent in post-SHG situation compared to 86.5 per cent in

pre-SHG situation, registering an increase of just 8.4 per cent. In general, there

was not much improvement in the repayment percentage as it was already at a

higher level in pre-SHG situation. However, significant improvement in the

repayment percentage of bank loans of the order of 21.8 per cent points was

noteworthy. During pre- SHG situation, repayment performance was high for

all loans from informal agencies because these loans carried higher rates of

interest and borrowers also had to face harassment in terms of unscrupulous

recovery practices by these agencies.

The sample households were mostly dependent on informal sources

such as moneylenders for their credit needs during the pre-SHG situation.

They were availing of loans at higher rates of interest for shorter period of less

than 12 months. These informal agencies recovered their loans unscrupulously

and borrowers were also giving priority to repayment of these loans as they

carry higher rates of interest and would ensure loans in future. Further there

would have been an entry barrier for those members with poor repayment of

earlier loans from any source into the SHGs. As a result, the pre SHG situation

repayment was also higher.

Table 4.12 Repayment Performance of SHG Members Agency wise (%)

47

4.2.6. Income Generation The SHG Bank Linkage programme with better access to credit brings in

its wake increased income to the SHG members. The average net income in

pre-SHG and post-SHG situations worked out to Rs.12,319 and Rs. 15,184

respectively. The incremental net income was worked out to Rs.2,865, which

accounted for 23 per cent increase of the net income between pre and post-

SHG situations (Fig. 6). NGO groups registered higher increase in average

incremental net income both in absolute (Rs.3,172) as well as percentage terms

(27%).

The age of SHGs also had a positive impact on the incremental net

income. The average incremental net income increased from Rs.1,739 in respect

of SHGs of 2 years to Rs.2.098 for 3-4 year old SHGs and further to Rs.6,769 for

SHGs of 5 years and above. In terms of percentage, the increase was 14 per

cent, 19 per cent and 46 per cent for all the three categories of SHGs

respectively.

Table 4.13 Incremental Income by SHG Members-Model wise/Age wise

48

Figure 4.7

Average Household Income of SHG Members

49

5.1 Conclusion

The present study attempts to assess the impact of microfinance

channelized through SHG Bank Linkage programme implemented by

NABARD since 1992 in Jharkhand and to assess the social performance of

Microfinance Institutions in Jharkhand. The study is based on primary details

collected from 90members in 15 SHGs. The socio-economic conditions of the

members were compared between pre and post-SHG situations to quantify the

impact. The major findings of the study are summarized and issues for policy

are presented in this section.

5.2 Major Findings of the Study

5.2.1 Economic Impact Based on social classification, the coverage of weaker sections (SC/ST

and backward class) worked out to 83 per cent. This category was observed to

be more in NGO groups (88%) than BANK- groups (73%). Marginal farmers

constituted the major share of 44 per cent followed by small farmers (27%) and

agricultural labourers (17%). While the proportion of marginal and small

farmers was higher for NGO groups (73%) compared to BANK- groups

(66%), the proportion of agricultural labourers was relatively more in BANK-

groups (22%) followed by NGO groups (15%).

While asset structure had increased for about 45 per cent of the sample

households, about 52 per cent sample households reported no change in their

asset holding pattern. The average value of assets worked out to Rs.5,827

during the post-SHG situation compared to Rs.4,498 during pre-SHG situation,

an increase by 30 per cent. Across the models of SHG linkage, the increase in

the average value of assets was higher for NGO groups (35%) compared to

BANK- groups (19%). The average value of assets was considerably more for

the members in the older groups of five years and above than the members in

the newly formed groups. The mean annual savings per household was

50

worked out to Rs.952 during the pre-SHG situation, which increased by about

96 per cent to Rs.2103 during post SHG situation. The percentage of

incremental savings was significantly higher in NGO-groups (145%) than

BANK- groups (50 %). There was an increasing trend of incremental savings

corresponding to the age of the groups. The incremental savings was highest

(156%) for banks (commercial banks, RRBs and cooperatives) followed by

SHGs (85%) and other agencies (62%) like, LIC and insurance agencies, chit

funds, etc.

The average loan amount during the post SHG situation was worked

out to Rs. 5,122, which was about 123 per cent more than the pre-SHG situation

(Rs. 2,301). The increase in quantum of loan between pre and post-SHG

situations was observed to be more or less same among NGO groups and

BANK- groups. On the other hand, the incremental borrowing registered an

increasing trend alongwith the increase in the age of the groups. The

moneylenders accounted for a major source of borrowing during pre-SHG

situation (66%) followed by banks (27%). However, after the intervention of

SHG Bank Linkage programme about 82 per cent of the loan was received from

SHGs. The position of money lenders came down to only 15 per cent.

There was significant increase in the proportion of loan amount for

production purposes from 56 per cent during pre-SHG situation to about 72 per

cent during post-SHG situation. To that extent the loan amount for

consumption purposes came down from 44 per cent to 28 per cent between pre

and post-SHG situations. The share of increase in production loans and

reduction in consumption loans was relatively more in NGO groups than the

BANK- groups. About 51 per cent of the members were non-borrowers during

pre-SHG situation whereas it was only 10 per cent during the post-SHG

situation. There was a perceptible increase in the members (30%) availing small

loan amounts of up to Rs.5000 than the large loans (11%) of above Rs.5000. The

51

average annual interest rate paid by the sample members worked out to 81 per

cent during pre- SHG situation and it had significantly reduced to 31 per cent

during post-SHG situation. While major share of loan accounts (66%) and loan

amount (41%) were contracted at the interest rate of more than 60 per cent

during pre-SHG situation, the interest rate got converged at the level of 12 to 24

per cent during post-SHG situation.

The repayment percentage among the sample households from all the

sources was 94.9 per cent in post-SHG situation compared to 86.5 per cent in

pre-SHG situation, registering an increase of just 8.4 per cent. However,

significant improvement in the repayment percentage of bank loans of the

order of 21.8 per cent points was reported. The average net income in pre and

post-SHG situations worked out to Rs.12,319 and Rs.15184 with an increase of

23 per cent. The NGO groups registered maximum increase in average

incremental net income both in absolute (Rs.3,172) as well as percentage

increase (27%).

The age of SHGs also had a positive impact on the incremental net

income. About 70 per cent of the households were having an income of less

than Rs.12,500 in the pre-SHG situation. The proportion declined to 49 per cent

in the post-SHG situation indicating shift in the income distribution to higher

slabs. About 54 per cent of the incremental income generated was from farm-

sector activities followed by the non-farm sector activities (36%).

Out of those below poverty line in the pre-SHG situation, 15 per cent

have moved above poverty line. While about 16 per cent crossed poverty line

from NGO groups, about 14 per cent moved above poverty line from BANK

groups. Similarly, SHG age-wise 2 year old groups showed relatively poor

performance (14%) compared to the 5 year and above SHGs (21%).

52

The estimated employment days per household worked out to 405

person days during post-SHG situation that had registered an increase of 34

percent between pre and post SHG situations. Activity-wise the percent

increase was highest for non-farm activities (121%) followed by off-farm

activities (21%) and farm activities (19%). Employment generation for NGO

promoted groups (66%) was higher compared to BANK- groups (20%).

5.2.2 Social Impact

The social empowerment of sample SHG members improved in a

significant way. Only 21 percent of the sample households exuded confidence

during pre-SHG situation, which improved to about 78 percent during post-

SHG situation. While about 40 percent of them experienced better treatment

from family members in the pre-SHG situation, about 89 percent experienced

similar improved treatment during post-SHG situation. While about 39 percent

members were jointly taking decisions in the household economic matters in

the pre-SHG situation, it improved to about 74 percent in the post-SHG

situation. The level of communication also improved in the post-SHG

situations. While members freely talking in the pre-SHG situations were 23 per

cent, about 65 percent of them expressed their desire towards freely talking to

others during post-SHG situation. About 37 percent of members were

protesting against drinking, gambling during the pre-SHG situation, whereas it

increased to about 81% in the post-SHG situation. Similarly, about 78 percent

members registered strong protest against the husband beating the wife, which

was relatively less during the pre-SHG situation. About 45 percent of members

were not coming out or moving out freely before joining SHG. However, the

situation improved significantly as about 75 percent of the members reported

their improved mobility during the post SHG situation.

53

5.3 Limitations of the Study

The limitations of the study confine mainly to the primary source of the

study. While all possible efforts have been made to collect appropriate and

adequate data from the right sources but as respondents were under no

obligation to provide correct information to the researcher, in many instances

they have given evasive replies. The study is restricted to only Ranchi District

of Jharkhand region and findings may only be generalized exercising sufficient

caution. The social performance assessment is confined only to a single MFI of

Ranchi.

5.4 Concluding remarks

To conclude it can be said that the challenge lies in finding the level of

flexibility in the credit instrument that could make it match the multiple credit

requirements of the low income borrowers without imposing high monitoring

cost by the lenders on their end users. A promising solution is to provide multi-

purpose loans or composite credit for income generation, housing

improvement and consumption support. Consumption loan is found to be

especially important during the gestation period between commencing a new

economic activity and deriving positive income. In order to be sustainable,

microfinance lending should be grounded on market principles because large

scale lending cannot be accomplished through subsidies. Eventually it would

be ideal to enhance the creditworthiness of the poor and to make them more

"bankable" to financial institutions and enable them to qualify for long-term

credit from the formal sector. There should be prudent regulatory support for

the microfinance providers which will provide an enabling environment for

microfinance to achieve its goal of overall socio economic development of the

poor.

54

Through defining different dimensions of social performance, the MFIs

can themselves manage their social performance, and identify the indicators

that are relevant to social reporting. It is a process which is much cheaper and

faster than impact; and also practical for an MFI to implement.

Institutionalizing social performance requires MFIs to have clear idea about

their social performance objectives and also the process to achieve them. But

for that to happen, the prevailing mindset of MFIs needs to be changed and an

incentive system introduced that supports this change. The investors and

donors need to mention explicitly to the MFIs about their requirement of

information that goes beyond financial performance ratios, some subjective

evidence of positive change, and number of clients reached. For objective

assessment of performance against social objectives, there is a need for social

rating products linked with financial rating, which will objectively evaluate

how well organizations are set up to accomplish their stated goals.

55

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