Raghav Gaiha & Vani S Kulkarni: Microfinance and empowerment

The empowering and protective roles of microfinance reinforce the case for it.

The 1990s were marked by partial deregulation of interest rates, greater competition in the banking sector, and a new nationwide microfinance initiative linking banks, NGOs and informal local groups (self-help groups, or SHGs). However, informal/local moneylenders continue to have a strong presence in rural India, delivering finance to the poor, as a vast majority of them still lack access to formal sources of finance. A major challenge, therefore, is to widen access to finance of the rural poor "" especially women as a highly disadvantaged and deprived group "" to meet their diverse needs (for instance, savings, credit, insurance against unexpected events).

The progress of microfinance so far has been modest. A notional estimate of the poor benefiting from it is 5 per cent at the all-India level, as compared with 65 per cent in Bangladesh (Basu, P (ed.) (2005): India's Financial Sector: Recent Reforms).

A recent study (Gaiha, R and Mani Arul Nandhi (2005): Microfinance, Self-Help Groups and Empowerment in Maharashtra, Rome: PI, IFAD) assesses the benefits of microfinance through self-help groups through a specially designed survey in Maharashtra. While the benefits in terms of higher income, consumption, and savings matter for the poor, the focus here is broader as an attempt is made to also assess some key dimensions of empowerment of women and self-insurance against idiosyncratic and covariate shocks. Empowerment is defined as expansion of freedom of choice among them and action to shape their own lives.

While the targeting of microfinance through SHGs was unsatisfactory in terms of an income criterion (that is, based on a range of poverty cut-off points of Rs 2,800-5,600), it was better in terms of other indicators of deprivation such as caste, landlessness and illiteracy.

A majority of SHGs (about 60 per cent) were formed in less than or about two months, another 20 per cent in two to five months, and the remaining 20 per cent in more than or equal to five months. So there was considerable variation in the time taken to form SHGs.

Well over half the respondents confirmed that the formation of their SHGs was influenced by other successful groups. Also, among SHG members, a large majority (about 89 per cent) reported that they belonged to small and closely-knit groups. That such dynamic group network externalities reduce substantially the costs of channelling credit and other financial services through SHGs is often overlooked.

Not only does it take time to form an SHG but also for an SHG to interface with a bank to start borrowing. Some illustrative evidence on the latter is given, as variation in it depends on several factors: quality of leadership, financial discipline among SHG members, and attitude of bank officials. The average time for an interface was 16 months.

As a measure of financial discipline due to peer pressure, repayment rates were high-especially among the poor. It was almost 100 per cent among them, as compared with the average of 85 per cent in the complete sample.

The loans were used largely for health and education of children and for production-related expenses "" especially by the disadvantaged. What is, perhaps, also somewhat surprising is that both the poor and non-poor spent relatively low proportions on repayment of earlier loans.

The rates of return on such investments varied but the average was high (see graphic). Little, however, can be said about the sustainability of high rates of return over time.

Empowerment was corroborated by different sources and methods in varying degrees. Clearly, some response errors arising mainly from interpretational ambiguities and a general reluctance to appear to be negative about certain outcomes cannot be ruled out. So taking these responses at face value may be problematic. However, the consistency between different but related indices of empowerment cannot be overlooked.

But these indices of empowerment do not reveal the "costs". Higher incomes and a broadening of spheres of activities entail greater responsibilities for women and extra hours of work. Over 60 per cent of the respondents reported working over two hours a day in addition to their domestic chores. In fact, more than a quarter of the respondents reported working more than five extra hours a day. In the absence of reallocation of domestic responsibilities, some of the gains from extra incomes earned are likely to be at least partly offset by longer hours of work.

As savings are a mandatory feature of SHGs, it is not surprising that either all or a large majority of members reported regular savings. Among SC/ST/OBC members, about 82 per cent saved regularly.

Savings serve several purposes. These include meeting contingencies (illness, death and loss of income, for instance), buying of assets and meeting health and education expenses of children. A large fraction in each caste group "" and more than half of upper castes "" saved for contingencies. The proportion saving for buying assets was also highest among them. However, the proportion saving for investing in children's education and health was highest among SC/ST/OBC.

In the context of high vulnerability of large sections of the population to shocks such as illness, and loss of crops, and hardly any protection through any form of insurance "" a recent World Bank-NCAER survey, for instance, reports that 82 per cent of the rural households did not have any insurance and none of the poorest (Basu, op.cit.) "" self-insurance through savings, and diversification of sources of household income is of considerable importance in itself.

In conclusion, while targeting remains a concern, the empowering and protective roles of microfinance reinforce the case for it.

Raghav Gaiha is Visiting Professor of Economics, University of Rome "Tor Vergata", and Vani S Kulkarni is David Bell Fellow, Harvard University