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

Growth

Growth in Net State Domestic Product (per cent)

State

1961-62 to

1970-71

1971-72 to

1980-81

1981-82 to

1990-91

1991-92 to

2000-01

Andhra Pradesh 3.11 3.46 6.58 5.52

Karnataka 4.36 3.38 5.09 7.51

Kerala 4 2.3 3.34 5.74

Tamil Nadu 2.59 2.1 5.71 6.25

Gujarat 4.83 4.31 5.99 6.34

Maharashtra 2.95 4.51 6.12 5.74

Rajasthan Rajasthan 5.785.78 4.14.1 4.354.35 4.474.47Source: Bureau of Applied Economics and Statistics,

Government of India

Connectivity

State

Road Length (Kms) Connectivity May 2001

Per 100

Sq Km.Area

PerLakh

Popln

No. of Ha

bitations

No of Conn

ected Habit

ations

Percent

A.Pradesh 65.2 2396750

5 60681 89.90%

Karnataka 79.2 294.45668

2 45167 79.70%

Kerala 381.7 462.11082

0 6928 64.00%

Tamil Nadu 117.7 249.37792

3 72411 92.90%

Gujarat 47.6 195.32310

4 19734 85.40%

Maharashtra 124.1 422.3

40412 38245 94.60%

Rajasthan 41.2 266.33788

9 15903 42.00%

Source: www.indiastat.com

Population Density and Incidence of Poverty

State

Population density

(per sq km - 2001)

Rural Poverty

Ratio (1999-2000)

Andhra Pradesh 275 11.05

Karnataka 275 17.38

Kerala 819 9.38

Tamil Nadu 478 20.55

Gujarat 258 13.17

Maharashtra 314 23.72

Rajasthan 165 13.74Source: Population Density from www.indiastat.com

Poverty Ratio from Planning Commission, Government of India

Formal Sector outlets: Number

  No of Households to be serviced

per outlet

 State

Bank Branches

PACSs

PNACSs *

Formal Sector SHGs

AP 3474 3090 3374 1101 52

Karnataka 1915 1332 2452 595 167

Kerala 1823 2618 4926 882 339

Tamil Nadu 2759 2294 4734 991 132

Gujarat 2484 867 1363 436 619

Maharashtra 3294 542 547 252 569

Rajasthan 2682 1475 9792 867 561

Formal Sector outlets: Amounts outstanding (Rs)

State

 Amount outstanding per Household

Bank Branc

hesPAC

SsPNACSs

*

Formal

Sources

SHGs

AP 1167 3921 326 5419 411

Karnataka 1856 3734 1318 6908 115

Kerala 26141464

8 723 17985 68

Tamil Nadu 1514 5848 619 7981 245

Gujarat 1177 4314 462 5952 14

Maharashtra 1030 5358 4695 11082 38

Rajasthan 902 1400 14 2316 33

CD Ratios

Year 2000 2004

State

Rural branch

es

Semi Urban branches

Rural branch

es

Semi Urban branches

A Pradesh 76 52.2 84.3 54.7

Karnataka 69 55.1 74.6 61.7

Kerala 54.7 34.3 58.1 37.8

Tamilnadu 61.9 51.3 61.6 55.2

Gujarat 43.8 31.4 32 26.3

Maharashtra 58.4 43.3 76.5 43.6

Rajasthan 45.7 32.9 54.6 39.8

Source: Banking Statistics of RBI.  

Post Offices (for savings, the figure is small)

State

Population in

VillagesNo of Post Offices

Poplation serv

ed by a PO

Andhra Pradesh 55.22 14857 3717

Karnataka 34.81 8569 4062

Kerala 23.60 4195 5626

Tamil Nadu 34.87 10205 3417

Gujarat 31.98 8234 3884

Maharashtra 55.73 11270 4945

Rajasthan 43.27 9648 4485

Source: www.indiastat.com

Summary

State

Growth

of Net GDP

Connec

tivity

Inciden

ce ofpover

ty

Populatn

Density

No of FormalSector outlets

AmtO/s

per

HH

Post Office

s

A Pradesh         √ √  

Karnataka           √

Kerala     √ √   √ 

Tamil Nadu     √ √ √    

Gujarat           √  

Maharashtra     √       √

Rajasthan √ √     √ √  

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

Parentage?

State

% of SHGs

formed & financed by banks

% SHGs formed

bySHPIsFinancedby banks

% SHGs financed by banks through NGOs

Andhra Pradesh 1% 98% 1%

Karnataka 33% 38% 29%

Kerala 15% 26% 59%

Tamil Nadu 7% 81% 12%

Gujarat 7% 90% 2.50%

Maharashtra 51% 49% 0%

Rajasthan 40% 60% 0%Source: Micro Credit Innovation Department, NABARD

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

Thankyou

www.iimahd.ernet.in/~mssrirammssriram@iimahd.ernet.in

079-26324855