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Credit
to Weaker Sections
In the modern world of competition and globalization, the policies concerning rural credit are, by and large, based on certain assumptions. These include the reluctance of commercial banks to provide credit to the rural poor, inability of the poor to save; requirement of credit by the poor at concessionary rates of interest and their limited success in income generating activities. Based on these assumptions, the policy makers set up credit oriented development banks and developed special credit programmes and generous credit guarantee schemes that would induce banks to enlarge their lending operations, achieve targets of credit dispensation or loans to be disbursed to rural borrowers at subsidized interest rates and easy terms of lending (like very low or nil down payment, long maturity period, long grace period and relegation of savings as a source of funds). This was envisaged to increase reliance on the rural credit system and to gradually replace the non-formal banking intermediaries, dominant in rural India. Despite the policies made with the best of intentions it is well known that rural credit system is poor in its discipline. This is because subsidies and concessions involved in rural credit are more often availed by the not so poor while a majority of the very poor are unable to benefit from the systems prevailing. Further, the rural credit delivery system in most regions, is weakened by poor credit discipline among the borrowers resulting in low recovery of dues, high operating (intermediation) costs, burden of subsidized interest rates, non-viability of operations and heavy dependence on concessionary outside funding or refinance support. These holistically constrain development of self-sustaining systems. Such problems were overcome by mediating through formation of community institutions and have yielded phenomenal results as captured in this article. Means of Resolve The core problem of rural finance is high transaction costs to the banks in financing a large number of small borrowers who require credit frequently and in small quantities. The same holds true of costs involved in providing saving facilities to small, scattered savers in rural areas. On the other side of the coin, the rural savers and borrowers also face high transaction costs while dealing with banks due to distances, small value of financial transactions and so on. Besides high transaction costs, another major constraint which restricts the outreach of the formal banking system for the poor, is perception of risks in financing small borrowers who are unable to offer physical collateral, articulate their case or submit proper loan proposals, do not have urban orientation and the lack of flexibility in their operations. As against credit from formal finance institutions which are subject to several ifs and buts, credit in the informal system is usually available immediately, whenever and where ever required, often without any collateral and without lengthy documentation formalities. This is because in case of the latter, the lender usually relies on personal knowledge about borrowers and their circumstances. Recognizing the limitations of formal finance institutions as well as that of individual borrowers of rural India, a third mechanism which bridges the gap was found. This was to lend to a group and not to an individual. Hence to cater to the credit needs of the rural poor for meeting their social and economic aspirations, formation of Self Help Groups (SHGs) were encouraged. The state governments also viewed these groups as agencies of development in rural India. Self Help Groups
Self-Help Groups (SHGs) or Thrift and Credit Groups are mostly informal
groups whose members pool savings and thereafter Financial Institutions and SHGs: The linkages of SHGs with banks aim at intermediation. It cuts down transaction costs for both banks and their rural clients. The objective of the linkage programme is meant to evolve supplementary credit strategies for meeting the credit needs of the poor by combining the flexibility, sensitivity and responsiveness of the informal credit system with the technical expertise, administrative capability and financial resources of formal financial institutions. By this process the poor people and financial institutions build mutual trust and confidence for supporting livelihoods and enhancing banking habits. Case Study The Potters of Niwari
Development Alternatives today takes pride in calling itself a veteran
in formation and nurturing of Self Help Groups and The Prajapati Samuh was formed in 2001 when the strength of SHGs was not as widely recognized in the area as it is today. A group of 10 ladies all belonging to the Below Poverty Line category were somehow enthused by the lecture delivered to them by Suresh Ahirwar, an experienced field worker of the organization. Listening to the financial advantages that were likely to accrue after formation of SHG, this group decided to create such a group. Immediately each contributed Rs 100 and in no time the group had a bank account opened in their name with a savings of mere 1000 rupees. This process continued for quite a while. According to the norms of the Bank, an SHG can avail cash credit up to four times of its savings which implied that after 6 months the group with a savings of Rs 6000 could withdraw money up to Rs 24,000 without any collateral. The Prajapati group members were however bears rather than bulls. Hence they preferred inter-loaning over borrowing from the Bank. Formation of SHG enabled these potters to withdraw money from their own kitty whenever the need was felt. Some borrowed to expand their business, some to get their children married off and some to relieve themselves of the debts pending with the moneylender. Formation of SHG indeed meant more to the group than inter-loaning and easy availability of finance. The enthusiastic lot learnt more about their traditional art by virtue of uniting into a SHG. This happened when the Ambedkar Hast Shilp Yojana approached Development Alternatives with the proposal that they could finance skill upgradation training of crafts to community institutions that exist. Taking advantage of this opportunity, the organization proposed the name of the potters group. The potters of Niwari thus received intensive training on diversification of products for a six month long period from the famous Chhote Lal of Chhatarpur who creates wonder models of clay for the international tourists visiting Khajuraho. This training not only widened the knowledge of products and craftsmanship of the potters but opened new avenues of sale for them. It also enabled them to muster the courage to produce articles different from the run of the mill matka and to carry them to the craft fair in Bhopal. Earnings increased and so did group dynamics. Usha Khatik, the president of the group became the president of the Dastkar Manch, which raised her status within her group. Expansion of activities and increase in earnings had the group borrow Rs 65,000 from the bank but the “risk averse” homemakers soon repaid back the credit taken. Formation of SHG gave more exposure to the group. They got a chance to use the electric potters wheel, make holi colours and earn Rs 1200 each. They also became the backend suppliers of diyas to a candle making group during Diwali in 2004.
Financing Principles Financial schemes under the Linkage Programme are based on the following broad principles: Savings first. No credit without saving Saving as partial collateral Bank lends to the group who in turn lend to members Credit decisions for lending to members be taken by the group Interest rates and other terms and conditions for loans to members are decided by group Joint liability serves as a substitute for physical collateral Ratio between savings and credit is contingent upon credit worthiness of the group Credit limit of the group increases with its good repayment record
Opportunity was thus knocking at their doors in myriad forms. This increased their income and broadened their mindset. It also brought in sly thoughts to a few. This led to the emergence of differences within the group. The controversies were dormant for a long while until one day six members of the group went up to the Manager of State Bank of India in Niwari and complained of financial anomalies being practiced by the president which led to the group being dissolved. But that was not the end of the story. Nine members of the group excluded Usha and promptly included a tenth member to form a SHG once again. This they named the Prajapati Mahila Samuh. When, an intern studying the significance of forming SHGs went to interview the group on why they formed a SHG a second time, their reply was firm “a toddler doesn’t stop walking if he falls once”. The group which resolved the previous dispute judiciously by evenly distributing the savings of Rs 75,000 they had accumulated now has a nascent account with savings of Rs 11,400. They are more cautious now with regard to inter-loaning and group dynamics but nevertheless are determined to remain as a group for they know an SHG is not only about financial help it is about expansion of choices in life. q
Dr.
S.N. Pandey and Sudeshna Chatterjee schatterjee@devalt.org |
lend out the same within the group on rotational or on need basis. These
groups have a common perception of need and impulse towards collective
action. Many of these groups get formed around specific production
activity. They promote savings among members and use the pooled
resources to meet emergent needs of members, including consumption
needs. Involvement of SHGs with banks helps in overcoming the problem of
high transaction costs in providing credit to the poor, by passing on
some banking responsibilities regarding loan appraisal, follow-up and
recovery on the poor themselves. In addition, the distinctive character
of SHGs and the relations of the members offer ways of overcoming
problems related to collateral, excessive documentation and physical
access which usually limit the capacity of formal institutions of
serving the poor. 
facilitating not only finance but a wide variety of choices before them
in the form of livelihood opportunities, natural resource management and
so on. The sailing however, is not as smooth as it may seem. Learning
from the experiences of the first Self Help Group formed by Development
Alternatives in Niwari, one can gauge the dynamics involved in
facilitating finance and increasing choices.