The Hindu Business Line : The magic of micro-credit

The Reserve Bank of India has found a gap in the demand and supply of credit to the poor, and suggested that the scope, outreach and scale of financial services be widened to cover the unreached. The RBI, in its Report on Trend and Progress of Banking in India 2006-07, observed that the system faced certain challenges such as regional imbalances, quality of self-help groups (SHGs), high cost of delivery, emergence of SHG federations, etc.

There is a need to encourage SHGs to graduate to more mature levels of enterprise, livelihood diversification, and access to supply chains, linkages to the capital market and appropriate production and processing technologies.

Micro-credit has come a long way in addressing rural problems. Its epic journey started with the ancient hundi system, when villagers used to float a common fund or grain bank for exigencies. Those ingenious methods were the brainchild of simple rural folk, who had the forethought to plan for their needs, especially at times of crisis. Today, the journey of micro-credit has reached a landmark point.

As on March 31, 2007, 25.5 lakh SHGs had taken bank credit of Rs 14,320 crore across the country, bringing four crore families under the banking umbrella. The journey was made possible with the long and enduring work of the banking sector in rural India.

Banking facilities for simple village folk was unimaginable some 25 years back. Today, millions of villagers have access to bank credit and they are able to protect and preserve their traditional skills to earn their livelihood.

They also add new livelihood skills to substantiate their farm incomes. The MNCs’ entry in retail chains in India could help millions of poor SHG members, provided the organised retail chains across the country source products from SHG members. This could also develop the SHG products into brands.

Self Help Groups could be the most effective tool to make financial inclusion a reality. A healthy SHG channels idle energy into entrepreneurship. The beginning is made with each member of the group depositing regularly sums form Rs 5 to Rs 50, as per their capacity, into a common pool. The group, which generally comprises 15-20 members, later opens a bank account to deposit the entire amount, against which the bank provides loan of up to four times the deposit amount after a certain period.

The loan is utilised to fund the entrepreneurship projects of the members. The group members take the responsibility of recovering the loan and depositing it in the bank. In the process, the members learn to save from their income and develop credit utilisation skills.

Gradually, the money in the SHG account in the bank swells and the bankers provide more credit for bigger enterprises. In the process, SHGs becomes invisible agents of socio-economic change, which takes shape with the people’s full participation.

The SHG movement slowly quarantines the villages from caste and communal divides, political polarisation, backwardness and illiteracy, since economic development becomes the main common objective. Groups formed on the basis of economic status with common objectives tend to cement social divides. The RBI concern for maturing SHGs into entrepreneurship groups can happen if banks hone their skills of relationship-banking, which can help expand their productivity while boosting rural growth.

(The author is a Pune-based freelance writer.)

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