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Page 1: Microcredit - Universität zu Köln
Page 2: Microcredit - Universität zu Köln

Microcreditworld recordThanks to a Large network of diverse institutions, the microcredit programme ofIndia's Nat ional Bank for Agricul ture and Rurat Development reaches almost 25 mi l-Lion poor households. The concept bui lds on the experience in other Asian countr iesand is implemented aLL over the country.

I By stefan Karduck ]

' Linking banks and self-help groups' is the nameof a fast-growing programme run by the Na-tional BankforAgriculture and Rural Develop-

ment (NABARD) in India. It started out in1992 as a pi-lot scheme with 500 self-help groups (SHGs) and hassince grown and become the world's biggest initiativeof its kind. NABARD reports that the programme wasproviding 24.3 million poor households with access tothe formal banking system last year. Moreover, 90 per-cent of the SHGs had an all-female membership (seenext page), which in itself amounted to a maior successin normally male-dominated India.

Informal self-help groups have a long tradition inIndia. The basic idea of the NABARD programme is tooffer such initiatives formal banking services. As mostSHG members have large families to feed, NABARDnow reaches more than 100 million people - at least aquarter of those living in absolute poverty in rural In-dia. By the beginning of2004, banks had granted a to-tal of more than $870 million in SHG loans, and $470million of the total sum was refinanced by NABARD.SHG savings were estimated at $130 million. At thetime, the programme operated through some 36,000branch oflices of hundreds of banks.

There are practically no repayment problems. There-fore, the'linkage business' is financially attractive.This fact ensures the sustainability desperately neededto have an impact on the dismal deprivation still foundin rural India. Today, the programme operates all overthe country, but the density of the branch-oflice net-work varies considerably from one region to another.India's North-East, in particular, is still undersupplied.

I Necessarythrust

Government-run agricultural banks are not generallynoted for successfully reducing poverty. They have areputation of being unwieldy institutions with little

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concern for results and effi ciency. Nonetheless, NABARDhas developed the necessary dynamism thanks to a hostofdifferent factors. The deregulation drive ofthe earlyg0striggered a burst ofeconomic growth that helps smallbusinesses to expand. By liberalising the financial sec-tor, India'scentralbank, the Reserve Bankoflndia (RBI),created scope for action, which the NABARD manage-ment - most notably Chairman Y.C. Nanda - have takenadvantage of. NABARD assumed the role of a facilita-tor, providing refinance funds for the retail banks it isworking with. NABARD is drawing on India's massivenetwork of (mostly state-owned) commercial banks, re-gional rural banks and cooperative banks.

The poor used to be practically excluded from theformal finance system in India. Four-fifths ofthe popu-lation live in rural areas and generate 40 percent ofGNP. But only two percent of bank loans flow into agri-culture. Consequently, the maiority of the populationdepend on informal money lenders - despite the gov-ernment's long-standing commitment to improvingcredit provision in rural India.

In 1969, Prime Minister Indira Gandhi nationalised14 private banks. That step gave the government totalcontrol over the formal finance sector. In the mid-1970s, seeking to promote branch-office development,the government set up regional rural banks to providesubsidised loans to a growing number of clients. In1982, the government spun offthe NABARD from theReserve Bank of India - again with a view to improvingthe provision ofcredit for farm regions.

However, state intervention proved problemati-cal. Many recipients of loans regarded credits as gifts.Loan repayments are still outstanding today - and ona massive scale. In 1983, a NABARD conducted studyfound that India had an exceptionally well-developedfinancial infrastructure for a developing country.However, it was not run according to normal bankingconventions, because it was state-directed. Unsur-

Page 3: Microcredit - Universität zu Köln

Self-help groups are activethroughout India - in

Rajasthan in the North'West just as well as in

Andhra Pradesh in theSouth- East ( next p ag e ).

Dr. Stefan Karduck

is a social scientist atCologne

universitys Development

Research Center. Hewas in-

volved in afield studyon the

NABARD programme assigned

by German Technical Coopera-

tion (G12. Thisagency has been

advising NABARD on microfi-

nance issues since'1998.

Stef o n. Ko rd u c l(@ u n i - k@ I n. d e

prisingly, the rural financial sector was in dire eco-nomic straits by the late 80s.

In the early 1990s, the country plunged into theworst financial crisis in its history. Under pressure fromthe World Bank and the International Monetary Fund,the government started to liberalise the economy. Eventhough banks were not immediately privatised, theirmanagements won back the right to make business de-cisions - for instance, on how much interest to charqefor loans.

I Asian models

New micro finance projects were developing at the timein Asia - and particularly so in Indonesia. The newmodels showed that linking self-help groups to finan-cial institutions was an effective way to provide thepoor with long-term access to financial services. Aftera workshop in 1986 in Naniing, the umbrella organisa-tion APRACA (Asia - Pacific Rural and AgriculturalCredit Association) made this strategy its main pro-gramme.

NABARD managers participated in the workshop.In itswake, thebank conducted itsown feasibilitystudyand scrutinised the successful example ofBank RakyatIndonesia. Nandawenttherehimself in 1989 and 1990.As a member of NABARD's Development Policy De-partment, he had a crucial influence on defining thestrategy.

In contrast to the much applauded Grameen ap-proach in Bangladesh, the Indian management decid-ed to rely on the locally prevalent savings potential aswell as on regular bank loans instead of on loans or

grants from donor countries. The conditions for doingso seemed propitious. In India, plenty of financial insti-tutions, non-governmental initiatives and financialsellhelp groups were already active. All that was need-ed, was a way to network the various actors.

The pilot scheme mentioned above showed the po-tential for success. The repayment rate was excellent -

nearly 100 percent. Normally, the repayment rates forrural credit vary between only 50olo and 60"/o in India. Ina paper written in the mid-1990s, Nanda mentioned637 SHGs working with 28 banking institutions at theend of June 1994. He forecast that there would be10,000 such groups by March 1997.ln line with hismotto 'Either we do it with full force or not at all', thegoal was set in 1999 to service 100 million poor througha million bank-linked SHGsby 2008. When thatthresh-old was crossed as early as 2004, the management seta new target, aiming to more than treble the total vol-ume of micro-loans to $3 billion by 2007.

Fromthe presentvantage, that goal seems realistic.The programme will keep on growing because all par-ties involved benefit. The SHG business is profitable forthe banks. It also sustainably improves the living stan-dards of the SHG members and their families. So far,there was an emphasis on establishing new SHGs. It islikely to shift, however, to more intensive advice for ex-isting groups. The reason is that many SHGs - espe-cially those that have been around for a long time -

have built up such considerable funds that they needprofessional accounting services. €

L ink :NABARDh ttp : //www n 0 b o rd.o I g / ro I es/ m ci d / i n trod u ction. h tn

16 D+C Vo1.33.2006:1

Page 4: Microcredit - Universität zu Köln

SociaL contnoL and orouD so l idar i tv'And then we adopted a child," theinterpreter says, translating thewords of the older woman sittingwith the self-help group in the onlyroom of a village school in BangaloreRural District. 'A group memberadopted a child?," l ask. "No, not oneof the group - the group itself adopt-ed a child," is the reply. I amimpressed by the civic commitmentofthese poor people in the State ofKarnataka. They have also painted theschool building and made a donationfor earthquake victims in 2001.

The social side-effects of manymicrofinance programmes are nowwidely known. They essentially resultfrom the empowerment of groupmembers - especially of women. Suc-cess breeds confidence, helping peo-ple act more assertively as a groupand also as individuals. They negoti-ate with banks, take charge of familyfinances, and even get the districtauthority to close down local liquor

shops because men squander toomuch money there. Some womeneven save for their own dowry andthus get a say in the choice of theirhusband.

The self-help groups start out with-out bank loans, col lect ing small butregular sums of money saved bymembers. The average amount is 40rupees (roughly €0,80) per memberand month. In manycases, groupsare established by NCos or even gov-ernment agencies. only around aquarter are formed at the direct orindirect instigation of a bank. At theoutset, the groups need support -

not least because of widespread illit-eracy. But once a group has gainedsome ground f inancial ly, i t is l ikelytoeven need an accountantto keeotrack of its caoital.

The money saved is lent to memberson terms the group determines itself.Between two and three oercent inter-

est a month is payable and used toaugment the group's asset base. Inthis phase, groups learn the funda-mental rules of lending and recover-ing money. At the same time, themembers learn to handle, investandrepay borrowed funds.

The bank that will later oartner theinitiative observes the group from anearly stage. lf after six to 'l B months itis convinced that the group is sound,it tops up the group's capital fundwith a loan. To this end, the groupformally opens an account with thebank, i ts members accepting joint l ia-bility for all debt.

The banks normally set interest atbetween eight and 1 5 percent a year.In the world of microfinance banking,that level is very low. lt is due partly toIndia's long tradition of "social bank-ing" but also to the near-'100% repay-ment rates achieved, which makecross-financing unnecessary as ahedge against default. The freshmoney from the bank is lent to mem-bers at the interest rates normallycharged by the group. The group'spotential is thus strengthened andindividuals can take up bigger loans.

Social control and group solidaritytake the place of the collateral banksnormally require. The groups chosetheir membership according to per-sonal trustworthi ness. Accord i ngly,personal acquaintanceship renderscheckin g credit - a cost-generati ngactivity - unnecessary. In the eyes ofthose lending the money (banks,

NCos or government bodies), thispractice means more creditvolumeand low transaction costs.

Of course, not all groups are equallysuccessful. For the cermanresearcher, some of them seemedrather artificial entities formed forthe personal benefit of the two chair-Dersons. Sometimes ambition wouldalso seem directed at getting accessto governmental support. Most ofthe self-help groups we studied,however, were obviously workingwell and enjoying the respect of theirentire villages because of their

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achievements. Stefon Korduck

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