India: Microfinance

1. FIN 680V/ FIN 360 India: Microfinance P.V. Viswanath

2. Microfinance • Lack of rural development was thought to be due to lack of production assets and credit. • The government introduced easy credit programs through Regional Rural Banks. • These banks improved access to credit of better-off farmers, but failed to reach the vast numbers of landless people, microentrepreneurs, agricultural labourers and illiterate women. • Cheap credit skewed development to richer farmers.

3. Microfinance • Early Rural Credit programs failed because: • procedures of rural banks were unduly complicated and costly • the sole emphasis on production loans was ill-guided • the poor were able to save, but had no opportunity of depositing their savings • transaction costs were prohibitive • financial products were unsuitable

4. Microfinance in India • National Bank for Agriculture and Rural Development (NABARD) concluded from a study that: • Microfinance programs have to be savings-led, not credit-driven. • The poor have to have a say in their design. • The NABARD program with the help of the RBI based itself on the work of self-help groups (SHGs).

5. SHGs • SHGs are successful because they are self-directed, • largely homogeneous in terms of caste and activity, • build a common fund from very small regular savings and interest income • lend to their members for periods of 1-3 months at an interest rate of 2-3% per month.

6. SHG Banking • The NABARD program piggy-backs on the work of established SHGs by providing them refinance. • This program works because India already has in place a network of rural banks. • By March 2005 SHG banking reached 1.6 million savings-based groups with 24 million members, covering over 120 million people from the lowest strata of the rural population. • The program is in the hands of local agencies, driven by local SHG ownership.

7. Microfinance • Why does it work? • Incentives • Group Monitoring