Conditions in Which Microfinance has Emerged in Certain Regions and Consequent Policy Implications M.S.SriramRadha Kumar Indian Institute of Management Ahmedabad
Background India has two strands of MF: • The mutuals – including SHGs, co-ops, thrift and credit groups • The providers – where the institution is externally owned and managed, but focus on low income clients. For the purpose of this presentation we focus only on SHGs.
What are mutuals? • The mutuals have 10 to 20 members. • All mutuals meet regularly – weekly fortnightly or monthly. • The mutuals start with savings. Some pay interest, some dividends & some accumulate group funds. • The mutuals borrow from banks after a few cycles of group fund rotation. The banks lend a multiple of the group fund. • In areas of multiple SHGs, they may form federations. These deal with the bank on behalf of mutuals. • Mutuals are more liberal than the “providers” in terms of discipline. Repayment terms are more friendly.
Assumptions to be tested There are certain conditions under which mutuals may work. • The “promoters” would go to areas having low economic growth • Areas that have good connectivity are likely to have better access to formal finance, therefore alternative finance will emerge in other areas. • To be cost effective, microfinance would work in areas having relatively dense populations • Microfinance would emerge where formal finance has failed
Data Data were examined from two regions: • South: Karnataka, Kerala, Tamilnadu and Andhra Pradesh • West: Gujarat, Maharashtra and Rajasthan • North and North-East were not considered because of difficulty in comparison
Interpretation • Macro data does not indicate that there is causality between some indicators and growth of SHGs • Microfinance is too small in terms of amounts for such relationships to emerge • Anecdotal evidence suggest a policy push might help
Policy Initiatives • Anecdotal evidence suggests that the push by state (AP) helps not only in SHG movement growing, but with that environment, other models also growing • If the banks focus on the model, they could do wonders (Karnataka) • The power of reach is tremendous (one SHG per 50 HHs in AP) The potential that can be unleashed is significant • The reach has to be leveraged to provide greater variety and quantum of financial services
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