The institutionalised origins of rural credit in particular and credit in general go back to the 1970s when the welfare state took the initiative in expanding the outreach and intensity of credit as a source of rural development. A mandate for all nationalised banks to expand operations at least by 25 per cent in rural areas helped to meet the first characteristic, where as devising the concept of priority sector helped the banking industry to mould its orientations into social banking.
Put together, nationalised banks are mandated to lend 40 per cent of their total lending to these sections/sectors and, out of that, 25 per cent must be disbursed to individuals belonging to weaker sections. The newly conceived programme of Integrated Rural Development Programme (IRDP) became the policy vehicle to redirect credit to the priority sector. Out of total bank lending, priority sector lending reached nearest to its target only in 1987 and from then onwards witnessed a gradual decline. Particularly with the beginning of the restructuring of the Indian economy, total lending to priority sectors came down to nearly half of the '87 peak.
This deterioration is linked to the change in RBI outlook about social banking as a result of the government accepting the Narasimham Committee recommendations. In policy terms, it implied that the government agreed to direct lending initiatives based on need, business prospects, profitability and financial viability, minimising operations cost. In the post-1991 period, National Sample Survey Organisation surveys in two rounds – 1993 and 1999 – showed that 72 per cent of rural households were indebted to informal sources of lending. Out of that 72 per cent, loans raised through informal money lenders stood at 22 per cent and pawn brokers stood at 21 per cent.
This was exactly the time when chit fund companies flourished across the country. These concentrated on individual clients rather than groups. Some of them took even the shape of private banks which collected thousands of crores in deposits and disappeared overnight. At the same time, influenced by changes in the international policy scenario, governments both at the Centre and in states, adopted the concept of microcredit modelled around self-help groups (SHGs).
Nabard championed this concept in India. The implementation is more or less fashioned along the lines of the Grameen Bank in Bangladesh. Gradually, the Central government stepped in to promote DWACRA (development of women and children in rural areas) groups under the Ministry of Women and Child Development. In certain parts, they roped in NGOs and in some others political field workers, as it had happened in Andhra Pradesh.
In all these efforts, women stand out as the key focused section. Millions of people were mobilised in these structures across the country with more than six million self-help groups (each group contains 10-20 members) with Rs 5,447 crore worth of deposits as of March, 2009.
Institutionalised money lending in the form of MFIs entered the scene after realising the potential of this sector. They replaced SHGs with joint lending groups (JLGs). In case of SHGs, there is no need of collateral, but they have to run around the banks for loans. In case of MFIs, different types of collateral – starting with ration cards, gas connections to valuable items at home – are initiated. As MFIs are in the business of advancing capital for profit, they hunt around for needy JLGs.
Thus, in India, currently two streams of microcredit structures are under operation.
As of August this year, India was abuzz with 3,000 MFIs lending Rs 20,000 crore to 28 million borrowers, experiencing a compounded annual growth rate of 105 per cent. The returns on equity in MFIs increased from 5.1 per cent in 2008 to 18.3 per cent in 2009. With assured interest rates varied from a minimum of 30 per cent to a maximum of 60 per cent with which profit is certain, private equity portfolios are eager to enter this sector.
(Excerpts from the first part of an article in People's Democracy, dated October 31, called The Stranglehold of Microfinance by K Veeraiah)
