Welingkar Institute of Management Development and Research
Despite the depth of the Indian financial system, and the country’s wide network of rural banks, India’s poor households, who are concentrated in rural areas, still have very little access to formal finance. A recent World Bank-NCAER Survey on rural access to finance (the Rural Finance Access Survey-RFAS, 2003) indicates that 70% of the rural poor do not have a bank account and 87% have no access to credit from a formal source. Informal sector lenders remain a strong presence in rural India, delivering finance to the poor: the RFAS, 2003 finds that 48% of landless and marginal farmers borrowed from an informal source at least once in the past 12 months, at rates averaging 48% per year. But new approaches designed to deliver finance to the poor have emerged in India over the past decade, involving the provision of thrift, credit and other financial services and products of very small amounts, with the aim to raise income levels and improve living standards. Most notable among these microfinance approaches is a nationwide attempt, pioneered by non-governmental organizations, and now supported by the state, to create links between commercial banks, NGOs, and informal local groups (‘self-help groups’, or SHGs). Better known as ‘SHG Bank Linkage’, evidence suggests that the model has effectively targeted poorer segments of the rural population and helped reduce the vulnerability of its clients. The growth of SHG bank Linkage has been truly remarkable, particularly since the late 1990s. In 2003, the number of SHGs linked to banks were close to 800,000, compared to just 33,000 in 1999. SHG Bank Linkage reaches some 12 million women and their households. But outreach is still modest in terms of the proportion of poor households served, covering less than 5% of India’s rural poor. SHG Bank Linkage seems to have all the right ingredients for scale-up. This paper argues that the success achieved so far by SHG Bank Linkage is attributable to the following key factors, that may also be relevant to other microfinance models in India and elsewhere. First, is the fact that SHG Bank Linkage is well aligned with Indian history and circumstances, and capitalizes on the country’s vast network of rural (formal) bank branches, while building in the convenience and flexibility of informal finance. Second, is the importance of good policy, and skillful and committed leadership. Government established the necessary policy framework for SHG Bank Linkage very early on in the process, introduced a range of measures to encourage banks to lend to SHGs, and assigned NABARD with the task of leading and coordinating SHG Bank Linkage—a task which NABARD has assumed with exemplary diligence. Third, is the need for a conducive legal and regulatory framework; Government implemented a ‘hands-off’ regulatory policy for SHG Bank Linkage. Fourth, is the emphasis on quality; during the early phase of SHG Bank Linkage, a strong emphasis was placed on ensuring that high quality SHGs were promoted and maintained. Going forward, if the SHG movement is to be scaled-up to offer mass access to finance for the rural poor, NABARD and its partners face several challenges in increasing outreach while maintaining and improving sustainability. At the same time, in an economy as vast and varied as India’s, there is considerable scope for new and diverse approaches to coexist. Improving access to finance for the rural poor will require multiple approaches to meet the diverse financial needs (savings, credit, insurance against unexpected events, etc.) of India’s rural poor through flexible products and services at competitive prices. Government has a critical role to play in creating an enabling and flexible architecture for innovations. In particular, the paper argues that scaling-up access to...