Taking Banks to Villagers’ Door Steps

The suave ambiance of big-city banks and their clientele are out of tune with the credit needs of rural farmers, daily laborers and petty traders who are often also illiterate. Unaccustomed to systems and procedures, they fall an easy prey to money lenders who charge exorbitant interest rates. The truant rain gods, unpredictable agricultural prices and greedy marketing middle men combine to play such a deadly role that farmers are driven more and more into debilitating debts. In many cases, the innate financial acumen and thriftily saved secret reserves of their wives save the day.

We are not talking of huge savings by women here. It might be just a couple of hundred Rupees — a few dollars — while their most pressing credit needs might be a few thousand Rupees. For a traditional bank to operate in remote areas and meet such needs, the high cost of operation for the low quantum of transactions is a deterrent.

This is where intermediaries are needed between the rural borrower and the financial institutions willing to extend micro-finance. The concept of micro-finance as a tool for rural development was made popular by well-known economist Muhammad Yunus when he started the Grameen (meaning, village) Bank, a micro-finance community development bank in Bangladesh that gave micro-credits to the poor without requiring collateral to engage in small business. It was Yunus’ firm conviction that women would be reliable borrowers, successful entrepreneurs if trained, and family benefactors. Muhammad Yunus and the organization he worked for were jointly awarded the Nobel Peace Prize in 2006.

In the micro-finance model, the bank does not deal with individuals but with a group, popularly called self help groups (SHGs). The loan is given to the group and the individuals in turn borrow from the group at a slightly higher rate. Helping the SHGs are several non-government organizations (NGOs) that organize and train the members.

This model has worked around the limitations of traditional banking. For the bank, the aggregation of individual savings into a single deposit minimizes its transaction costs. For the socially and economically disadvantaged individual, being part of a group boosts the confidence levels and slashes down expenditures incurred on travel, paperwork and loss of work-days.

How Self Help Groups Work

Self-help groups are started by NGOs that have several social welfare agenda such as empowering women, increasing school enrolments, and improving child nutrition, etc. After enrollment of the group, say 10-20 women from similar backgrounds, the members are encouraged to save each week a small amount of money in a group account. The group leader, who is educated enough to read and write, collects the members’ savings and records it in registers. The members can borrow from the pool and pay back through regular, periodic payments and keep a record of the transactions. They can use this to pay back high interest loans or start their own small business — buying a cow, a sewing machine or an autorickshaw to start a new business or expand an existing one. The women can also start group enterprises such as making pickles, candles, soaps and handicrafts. Working in a group helps them to share knowledge and provide mutual support when facing problems.

Supervisors from NGOs ensure that the women have the means and the discipline to repay the loans and more importantly, can conduct the transactions independently. Once the savings grows and the supervisor has endorsed the group’s reliability and credit worthiness, the bank grants them loans. These rural banks avail 100 per cent refinance from National Bank for Agriculture and Rural Development (NABARD) at 6. 5 per cent per annum and lend to self-help groups at about 12.5 per cent. The SHGs are free to charge their members any amount of interest acceptable to everyone. These interest rates are much lower than what the private money lenders charge.

The concept of microfinance banking has caught on now, and is popular across Asia. Today, it is estimated that there are at least over 2 million SHGs in India and they have availed cumulative loans of Rs.69 billion.