What is the role of NABARD in agricultural credit?
It is an apex institution handling matters concerning policy, planning and operations in the field of credit for agriculture and for other economic and developmental activities in rural areas.
Essentially, it is a refinancing agency for financial institutions offering production credit and investment credit for promoting agriculture and developmental activities in rural areas. It coordinates the rural financing activities of all the institutions engaged in developmental work at the field level and maintains liaison with the government of India, State governments, the Reserve Bank of India and other national level institutions concerned with policy formulation. It functions as a regulatory authority, supervising, monitoring and guiding cooperative banks and regional rural banks.
In Karnataka, NABARD has been playing the role of ensuring adequate credit flows to farmers, rural groups and enterprises, to scale up production or activity. These include means and instruments like providing additional financial resources, refinancing etc.
What have been the ways of reaching the small holders with credit?
We have been following two models in reaching the unreached. One is the SHG – Bank Linkage Model wherein the SHGs are financed directly by the banks. The other is the – JLG – Bank Linkage Model wherein the JLGs are financed by banks.
For NABARD, financial inclusion means credit and other financial services, building skills of these organized groups like SHGs, farmer clubs in handling technologies as well as markets. Besides facilitating training programmes to organize themselves to avail credit, help potential individuals to become entrepreneurs in association with institutes like RUDSETI. Also, the trainings are not only focused on recipients but also banking staff dealing with communities.
It is also believed that bank loans are always packages, not giving need based flexibility to the borrower?
It is not entirely true. Kisan credit cards were meant for that purpose. They combined agricultural loan, personal accident cover as well as consumer loan, with a certain cash credit limit. However, instead of using them judiciously as an after thought, they are being used for borrowing the total amount. In fact, payment in time is encouraged by certain states to charge zero percent (Tamil Nadu) when repayment is done in time.
What has been the most effective way of reaching the poor and why?
It is definitely through the SHGs. SHGs are small, cohesive and participative groups of the poor, who pool their thrift regularly and use it to make small interest bearing loans to members and in the process learn the nuances of financial discipline. Subsequently they graduate to access bank credit to augment their resources for lending to their members in need of financial assistance for meeting their credit needs. Over the years the pooled resources of the SHGs become a sizeable corpus, which complimented by higher volume of bank loan enables them to take up livelihood activities which results in improving their standard of living.
Self Help Groups (SHGs) have become the common vehicle of development process, converging all development programmes. SHG–Bank Linkage Programme launched by NABARD way back in 1992 envisaging synthesis of formal financial system and informal sector has become a movement throughout the country. According to the Status of Micro Finance in India 2009-2010 released recently by National Bank for Agriculture and Rural Development (NABARD) there are 69,53,000 SHGs in the country whose savings are linked with banks. The estimated number of families covered under this model is about 970 lakhs. The total savings amount of all the SHGs with banks as on 31 March 2010 amounts to Rs.6198.71 crore and the total amount of loans outstanding against SHGs as on 31 March 2010 is Rs.28038.28 crore.
NABARD has also been bringing out simple guidelines for NGOs as well as involving in street plays, ‘Yaksha Gana’ in building awareness. IT enabled services have helped simple transactions at their door step like withdrawals and deposits while bringing down the transaction costs. Business Correspondents (BCs) and Business Facilitators (BFs) were instruments created to strengthen financial inclusion processes. With advancement in technologies, the transaction costs would come down further.
What has the above model achieved?
The SHG-Bank Linkage Model is the largest financial inclusion programme in the world. It is considered as the largest microfinance programme in terms of outreach in the world and many other countries are keen to replicate this model. This programme is also the main contributor towards the Financial Inclusion process in the country. This model pioneered by NABARD was not just meant for financial inclusion for rural poor women who usually belong to backward classes, scheduled castes and tribes. It had an holistic approach, i.e. besides financial inclusion, economic and social empowerment of poor women.
Overall findings indicate that the decision making capacity of women members with various SHG activities has improved from pre-SHG situation. SHG members were part of the decision making process in children’s education, purchase of assets, marriage of their daughters, etc. Members also reported in changing undesirable habits of their husbands.
Therefore, it is apparent that over the years, the SHG-Bank Linkage Model has invested sufficiently in building social capital in the countryside. This investment in the form of training and capacity building has enabled the rural poor woman to undertake responsibilities which she was not capable of taking up in preSHG situation.
Will credit not become expensive to the small holders with high interest rates being levied in a SHG?
Money saved by the members are lent internally among the needy members of the group and the interest charged vary between 12-24-36%. Some might say the interest rates or high. But one has to understand that the interest rates are decided by members and not by any outsider. Further, the interest earned on internal loans remains within the group and becomes part of its corpus. It is not sucked out.
Moreover, SHGs work out Differential Rates of Interest. These rates are worked very well by the group members. While for health loans no interest is charged, for education it is a small percentage and higher rates are charged for economic purposes. Farmer is seen as a productive asset. Therefore, loans taken for health and education are also considered to increase his productivity.
How does MFI – bank linkage model differ from SHG-bank linkage model?
SHG-bank linkage is still in operation. However, loans to MFI was considered as lending to priority sector and from 2005-06, MFIs started lending credit to the poor in a big way.
It is given that MFIs are not the pioneers in microfinance. They have come into existence only after the SHG-Bank Linkage Model proved that poor are bankable. Most of the MFIs are operating in places where the banking density is quite high in the country and credit to deposit ratio is satisfactory. MFIs are focussing more in irrigated areas of Andhra Pradesh, Tamil Nadu and Karnataka for their lending activities rather than reaching out to the poor in other regions of the country.
MFIs do not spend time and resources in formation of groups and their capacity building. They usually poach members from established SHGs and form groups only to lend and recover loans. There is no capacity building to make them aware about the benefits of savings, smart borrowings, intelligent investments and financial discipline. In this method, the MFIs do not incur any cost in formation and capacity building of groups. Therefore, the high rates of interest charged by MFIs even to these groups is totally unjustified. In the SHG-Bank Linkage Model, capacity building gains precedence over credit. This has resulted in strengthening communities through investments in social capital.
The biggest bane in MFI model is transparency in interest rates. Borrowers are not aware of the actual rate of interest they pay to the MFIs on their loans. Apart from the interest, which is often at a flat rate, there are other charges like document charges, upfront fees, etc. MFIs and their defenders argue that a member of SHG may be charged an interest rate of 12-24-36% on the loans taken from SHGs. But what they miss to see is that the interest paid by the members only accrues to the corpus of the group. Whereas, the high interests paid by the rural poor on loans from MFIs, do not stay within the group as in SHG-Bank Linkage model, but enriches the bottom line of the MFIs.
Micro finance institutions, by targeting individuals weakened the existing social cohesion. Greed replaced need, a sense of ‘give and take’ compromised which has caused the precarious situation – thus, ‘biting the hand which feeds you’.
How could credit access made easier for small holders?
Credit agencies have a great responsibility in making a genuine credit access to the small holders. If you don’t make genuine credit access then people are forced to go to MFI. For example in Karnataka out of 576000 SHGs around one-third have loans outstanding while the two-thirds are the potential customers of MFI. In 2009-10 in Karnataka alone around 2700 crores has been disbursed through MFIs. Earlier it was a money lender…and now it is MFIs. When the poor are unable to repay this leads to suicides. Banks assessment should be made strong. Infact banks never went back to those SHGs which received loans once.
Though majority of MFI have become profit making forgetting the small holders, there are still MFI’s like SKDRDP, IDF who help borrowers to generate income by diversifying livelihoods. Banks need to play an active role in neutralizing MFI’s.
Empowering women groups is the key to successful micro financing. SHG-bank linkage programme enabled this. It was like being with the communities…building relationships. Entry of divisive forces within the community in the form of MFIs dismantled the SHGs. Social cohesion went for a toss. Moreover if SHG are federated, people are empowered to jointly manage the finance and the activities. Federations like Mandal Samakhya in AP is a fine example where members directly started accessing timely credit and doing financial services. Only such strong institutions can deal with the threat from larger corporations like Walmarts.
Community owned enterprises are the future in managing credit. They ensure ownership, manage economies of scale and enable efficient delivery of services. In short, empower communities to avail technologies, credit and markets through financial services. Strength lies in building such empowered communities.
Micro finance institutions, by targeting individuals weakened the existing social cohesion. Greed replaced need, a sense of ‘give and take’
compromised which has caused the precarious situation – thus, ‘biting the hand which feeds you’
NABARD is set up by the Government of India as a development bank with the mandate of facilitating credit flow for promotion and development of agriculture and integrated rural development. The mandate also covers supporting all other allied economic activities in rural areas, promoting sustainable rural development and ushering in prosperity in the rural areas.
The above interview appeared in the LEISA India magazine and has been reproduced with their permission.