Where microfinance decline really hurts

India is home to over 7.43 million financial collectives. Some 84 per cent of them are owned by women and nurtured on the principles of self-help; they are spread over 97 million households, with over 1,78,000 of them representing second-level institutions built upwards.

These mushrooming collectives are a modern version of ROSCAs (Rotation of Savings and Credit Associations). They are called ‘kitty parties’ or ‘merry-go-rounds’ but with improved systems, recognition and tie-ups with formal financial systems demonstrating participatory democracy and inclusive governance.

Anecdotal evidence suggests that together they sport over ₹33,000 crore savings as thrift, with 4.2 million of the collectives leveraging ₹43,000 crore as loans from formal banks, and each collective handling on an average ₹1.02 lakh.

The origin of collectives dates back to the late 1970s when the people’s movement in Andhra Pradesh, originally called Pothuppu Lakshmi (meaning ‘savings God’), gained credence to challenge illicit liquor flowing freely in the streets of Nellore, robbing women and children of their basic familial rights.

The growth and evolution of collectives have been gradual and incremental; indeed, of late, collectives have had a patchy ride.

There have been many instances of States taking over the reins of promotion and regulation primarily to route welfare programmes which, over a period, influenced the the objectives. By virtue of their strong roots in participatory governance, collectives deserve to enjoy autonomy. The threat of loan waiver has not spared the credit compliant financial collectives which are nurtured on zero tolerance to default.

Mixing subsidy with credit and interest subvention causes distortion in the credit market. Most collectives, since they are groomed on the principle of ‘savings-first’, are unable to withstand the shock of poaching of clients by big sharks from a completely different setup, using the credit-first model. The overleveraging of clients beyond their capacity has put them in financial duress; this has invited strong-arm tactics, the social ramifications of which include mass migration and suicide.

Thanks to the euphoria, banks have chosen to move away from the path of wholesale funding to retailing for individuals within collectives, resulting in dislocation of collectives. The sub-group methodology, popularly called joint liability groups (JLG), was adopted by banks which were superimposed on larger groups. While these may be suitable in the urban context, they may not always be the right solution in the context of livelihood.

There are over 6.72 lakh such sub-groups which had ₹6,776 crore as loan as of March 2014. The inability to raise funds, not enjoying refinance support, difficulties in lending outside and exposure to financial risks are some of the challenges that have put collectives in a spot, despite their being informal in character. Often, the identity of collectives is under threat due to their loose nature, which ideally should gives them a sharper edge over formal banks.

Adding to the woes of banks

Banks, initially swayed by the opportunity of collectives being cost-efficient demand aggregators, well-behaved loan candidates, and gaining both from business and social equity prospects, are at the cross roads with mounting NPAs. From 2.9 per cent of the outstanding in 2010, NPAs have piled up to 6.83 per cent, with the absolute figure of ₹2,933 crore in March 2014. The declining repayment performance of collectives cannot be attributed to the model. It is more due to the pressure of invasion of other approaches. That most financial collectives took more time than what was acceptable to graduate from their subsistence-based existence does not just the JLG intrusion. JLGs are still to be studied for efficacy and impact. The fact thatcollectives absorbed over ₹21,038 crore as loans across the country in 2013-14, with positive growth over 2012-13, is an indication of their doing well.

State-sponsored benefits being tied to collectives provides a free ride for fly-by-night operators. Anecdotal evidence suggests that over 15 per cent of the collectives that exist on paper are becoming active all of a sudden to attract entitlements; over 10 per cent of them do not pass the test of surviving for a year, over 12 per cent vanish after 3-5 years, and 5 per cent report embezzlements with increased turnover and transactions.

It must be noted that the Andhra Pradesh micro-finance crisis was born out of this indiscriminate shift from a savings-oriented to a credit push model. It is another matter that the shock of 2012 has been largely weathered. However, peoples’ collectives may need to be extricated from the quagmire of inequity, vested interests, uneven level playing fields and slipshod treatment in order to galvanise the service delivery apparatus with a rights perspective.

A multi-pronged strategy is called for to end the threat to this homegrown movement which holds promise for gender transformative changes in particular.

The writer is the regional programme director of CARE India. The views are personal

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