An Evaluation of Financial Inclusion through SHG Bank Linkage Programme with reference to Kerala

Mr.Paul Jose P.1

Dr. Vasanthakumari P2 ABSTRACT

Timely provision for finance for the financially excluded rural mass is a major concern for all the nations in the world. Of the two models of financial inclusion - MFI Model and SBLP Model - adopted in India under the patronage of NABARD, the later proved to be more effective and popular. The progress of SBLP was spectacular since its inception in 1992. The policy objectives of NABARD have been achieved by far more than the visualized target. The present paper has been undertaken with a view to assessing the impact of SBLP in achieving financial inclusion in Kerala. The study was undertaken after selecting a sample of 100 beneficiaries from 20 SHGs from Palakkad district which has the largest number of SHGs linked. Both primary data and secondary data were collected. Primary data were collected by administering a schedule. The study revealed that the progress of the programme in general was in tune with the all India progress. As far as the beneficiaries are concerned the programme has resulted in many benefits like improvement in economic conditions and other variables of empowerment like self confidence, communication skills, entrepreneurship development etc.

Associate Professor in Commerce, (Research Scholar), St.Thomas College, Thrissur-1. Email: jose_paul09@yahoo.co.in. 2 Associate Professor in Commerce, ( Research Guide), N.S.S College, Ottappalam , Kerala. Email: drvasanthakumari@yahoo.com.

An Evaluation of Financial Inclusion through SHG Bank Linkage Programme with reference to Kerala Part 1 Introduction
Indian economy has made rapid strides in recent decades. Banking sector was leading the pace of growth. However, a sizable section, particularly the weaker section and low income group, continued to remain outside the purview of formal banking sector, or in other words, were excluded from formal financial sector. Addressing this major problem involves providing banking services which include enabling operation of bank account, a savings

product suitable to the rather low cash flows of the rural poor, money transfer facilities, small loans and overdrafts for productive as well as personal purposes and micro insurance. Financial inclusion has been recognized world over by both developed and developing countries as an important part of financial sector development and as a pre requisite for poverty alleviation and economic growth. The Committee on Financial Inclusion under the chairmanship of Dr. C. Rangarajan, in its final report (2008), defined financial inclusion as the process of ensuring access to financial services and timely and adequate credit where needed by vulnerable groups such as weaker sections and low income groups at an affordable cost. Financial exclusion, on the other hand, is defined as the inability to access necessary financial services in an appropriate form due to problems associated with access, conditions, prices, marketing or self-exclusion in response to discouraging experiences or perceptions of individuals or entities (RBI 2008).Apart from reasons from demand side, supply side also constitutes reasons for exclusion, viz., distance from branch, branch timings, cumbersome documentation and procedures, unsuitable products, language, attitude of the personnel etc. The cumulative effect of the factors is increased transaction cost to the financial institutions. NSSO data reveal that 45.9 million farmer households in the country (51.4%), out of a total of 89.3 million households do not access credit, either from institutional or from non institutional sources. Further, despite the vast network of bank branches, only 27% of total farm

households are indebted to formal sources (of which one-third also borrow from informal sources).The most acute exclusion is seen in the Central, Eastern and Northern regions. Sixty four percent of the excluded farmer households are from these regions. Speaking in terms of social groups excluded, it is clear that 36% of ST Farmer households are indebted to informal sources. (Committee on Financial Inclusion, January 2008). The former view of policy

makers that providing credit to the rural sector at concessional rates will necessarily imply more development has been disproved. 1.2 SHG Bank Linkage Programme As is evident from the above, the non availability of credit facilities to the poor has been an engaging problem in India for long. The first step towards financial inclusion was initiated with the nationalization of banks in the year 1964 followed by priority lending norms , introduction of concessional interest rates to the weaker sections etc. Those steps culminated in the adoption of a policy of financial inclusion based on micro finance in the 1990s. At present, there are two models of micro finance delivery in India: The SHG Bank Linkage Programme Model and Micro Finance Institutions (MFI) Model. Of these, the SBLP model has emerged as the dominant model in terms of number of borrowers and loans outstanding. In terms of coverage, this model is considered to be the largest micro finance programme in the world. The Reserve Bank Of India, National Bank for Agriculture and Rural Development (NABARD) which is the apex bank for agricultural refinance, and Small Industries Development Bank of India (SIDBI) have also taken a host of initiatives to provide a momentum to the micro finance movement in India. Both the models are different from each other with regard to the methodologies of outreach adopted and legal forms of the institutions taking up the delivery of services. SBLP is run by government while the MFI model is privately managed by institutions which are being regulated by the RBI. One of the major recommendations of The Committee on Financial Inclusion was deepening the outreach of micro finance programme through financing of SHGs. The recommendation has to be viewed against the backdrop of the fact that the Indian rural masses need finance both for consumption and for productive purposes for which they cannot offer any collateral. The result is two-pronged; the rural mass fall into the tentacles of informal sources of finance on the one hand, and on the other, they are sidelined from contributing and participating in the development process of the economy as a whole. Enabling the rural masses access credit facilities through micro credit vehicles has raised the question has participation in the SHG enhanced the economic and social status of the poor and there by contributed to the national poverty alleviation effort? For example, Bezabih Tolosa (2007) has come out with positive answers to both the queries through the study undertaken in Ethiopia. Other empirical studies in developing countries like Bangladesh, India, Ghana, El Salvadore, Indonesia and Vietnam have supported the fact that those who access to financial services through participating in micro finance programmes were able to

enjoy increased income, higher social recognition and freedom from food deficits. The findings of the study commissioned by Asia Technical Department of the World Bank (1995) revealed that the rural mass required financial resources for consumption credit, production credit savings and insurance. While about 75% of production credit was met by financial sector like banks and cooperatives, consumption credit requirements were met by informal sector at a very high rate of interest. According to the findings of the All India Debt and Investment Survey , 1992, the share of the non institutional agencies in the cash outstanding of the rural poor stood at 36% .Making micro credit facilities available to them through alternative vehicles has significant role in changing the scenario. A comparative analysis of various financial services accessed by the poor makes the supremacy of Micro Financial Institutions in terms of various parameters clear: Table No: 1 Comparative Analysis of Micro Finance Offered To The Poor Parameter Money Lender High Low Commercial Banks Low Very High Extremely Long Fixed and Easy Low and very affordable None Govt. Sponsored Programmes Low Very High Extremely Long Fixed and Easy Low, affordable and subsidized None Financial products of MFIs High Low-medium Short Flexible Reasonable and affordable Repeat and larger loans, interest rebates Stream of credit is assured Simple and quick

Ease of Access Transaction cost of access Lead Time for Very Short Loans Repayment Fixed and Terms Rigid Interest rates Exorbitantly high Incentives None

Repeat borrowing Loan access procedure

Possible Very quick

Loan Informal Simple and application but informal procedure exploitative Collateral and Mandatory Required but Not required Not requireddemand hypothecation although a charge on social collateral is promissory of asset may the asset becomes used for physical note suffice automatic collateral Source: R. Arunachalem-Alternative Technologies in the Indian Micro Finance Industry

Possible but not likely Extremely time consuming and complicated Exhaustive and complex

Possible but not likely Extremely time consuming and complicated Exhaustive and complex

It is clear from the above table that credit from micro finance institutions is better in terms of all the parameters employed here. 1.3 Financial Inclusion Through SBLP A series of studies undertaken by NABARD in the early eighties showed that in spite of the initiatives for widening the coverage of banking in rural areas, the poor remained outside the scope of banking programmes for reasons like shortage of staff, cumbersome procedures, higher costs of dealing with small accounts of the poor etc. In pursuance of the decision taken in the Sixth Asian and Pacific Regional Agricultural Credit Association (APRACA) in December 1986, NABARD, in association with other member associations of APRACA initiated a study to understand more about SHG linkage to banks as a channel for delivery of micro finance. Based on the positive findings of the above studies, NABARD, in consultation with RBI, launched the Pilot Project in 1992 linking 500 SHGs with the banks with a view to meeting credit needs of the poor combining the benefits of informal sector, building mutual trust between the bank and the poor and to encouraging banking activity among the poor who are usually left uncovered by formal sector. Human beings have an intrinsic quality that makes them achieve better when they work in small groups because small groups offer those more chances for interaction. SHGs are voluntary organizations of about 15 people each belonging to a homogeneous class who have come together for the purpose of solving their common problems through self help and mutual help. SHGs are one of the endeavors of various agencies engaged in reaching out to the poor at their doorsteps with desired banking products at reasonable prices. The origin of SHGs may be traced to the failure of various programmes implemented by formal credit institutions to reach backward areas and the rural poor. SHGs, originally the brain child of Gramin Bank of Bangladesh founded by Prof. Unis in 1975, were started in India by NABARD in 1992.The SHG Bank Linkage Programme (SBLP) pioneered by NABARD with the support of policy thrust of Government of India and RBI and built upon the existing banking infrastructure has proved that making micro credit facilities available to the rural poor has significant role in solving the issues faced by them in getting credit and thereby achieving financial inclusion. The microfinance services provided through SHG-bank

linkage has so far been the most successful initiative in financial inclusion. (Report on Financial Inclusion 2008)

The vision of NABARD is to reach banking services to about 100million unreached and under-served rural poor by 2008 and thus widen the net of financial inclusion .This is sought to be achieved through SHG-Bank Linkage Programme targeting 20 million poor families covered by 1 million Self Help Groups. It is only quite appropriate to asses how far this target has been achieved so far. 1.4Objectives of the Study 1 To examine the progress of SHG Bank Linkage Programme in India and in Kerala. 2. To examine the role of NABARD 3. To asses the impact of the programme on beneficiaries. 1.5 Methodology The study has been based on secondary data and primary data. Primary data were collected by administering a schedule. A sample of 100 beneficiaries from 20 SHGs has been selected from Palakkad based on random sampling methods. For analyzing secondary data, compound annual growth rate has been employed. Part 2 2.1 Progress of SHG Bank Linkage in India NGOs, Government Departments and Banks are the main promoters of SHGs in India. Three models of SHGs bank linkage have been tried, viz., Model I (Bank-SHG), where NGOs have no role in credit linking, Model II (Bank-SHG-NGO), where NGOs act as facilitators and Model III (Bank-NGO-SHG) where NGOs act as intermediaries taking loans from banks, lending to SHGs and passing on the recoveries to banks. The role of NABARD becomes all the more important when providing refinancing. The performance of SHG bank linkage has shown tremendous progress during the period 1992-2010 (Table 2). It has shown an annual growth of 57.42% in number of SHGs linked and financed whereas the annual growth rate of bank loans outstanding during the same period registered 75.6%.Apart from the cumulative growth of SBLP there are other aspects involved in the growth viz., the progress of the models of SHGs formed, the involvement of the different agencies connected with the programme and region wise spread. The following part examines the various aspects of the progress of the SBLP

Table No: 2 SHG Bank Linkage Progress (1992-2008) Cumulative No. of Cumulative Bank SHGs financed Loan (Rs. during the year Millions) 1992-99 32,995 571 1999-00 114,775 1,930 2000-01 263,825 4,809 2001-02 461,478 10,263 2002-03 717,360 20,487 2003-04 1,079,091 39,042 2004-05 1,618,456 68,985 2005-06 2,238,565 113,975 2006-07 2894505 123664.9 2007-08 3625941 169999.1 2008-09 4224338 226798.4 2009-10 4854356 280382.8 Annual growth rate 57.42% 75.6% Source : Status Of Micro Finance In India :by NABARD various issues 2.2 Model wise Progress of SBLP in India Of the three models of SHGs, the most popular in India is Model II (formed and financed by formal agencies and NGOs but directly financed by bank).Table no.3 exhibits the model wise progress of SBLP in India throughout the period from 2003-04 to 2005-06.It testifies to the unique role of NGOs in extending the arm of financial inclusion through SBLP. Table No:3 SHG Bank Linkage Model wise Cumulative Position
Model I(formed and financed by banks Year (Upto) 31-03-04 Percentage 31-03-05 Percentage 31-03-06 Percentage No. of Bank SHGS Loan 217624 549.87 21 15 343371 1012620 21 15 449438 16367.15 20 14

Year

(in core)

Model II(formed by Model III formal agencies and (financed by NGOs but financed banks through Total by banks) NGOs ) No. of Bank No. of Bank No. of Bank Loan SHGS Loan SHGS Loan SHGS 777326 3164.72 84141 189.62 1079091 3904.21 72 80 07 05 100 100 1158249 55293.54 116836 3564.86 1618456 68984.50 72 80 7 5 100 100 1646070 92000.65 143057 5607.63 2238565 113975.43 74 81 6 5 100 100

Source : Status Of Micro Finance In India: by NABARD various issues

2.3 Spread of SBLP throughout India A detailed survey of the spread of the programme throughout India reveals that the development has been unquestionably imbalanced in favour of the southern region. Almost three fourth of the SHGs financed through loan is from the southern region in India. The acute imbalance in the spread of the programme has to be addressed. Table No: 4 Region wise progress of SBLP Bank Loan Sanctioned (in crore) During the year 2007-08 Northern 2008-09 2009-10 2007-08 North Eastern Eastern 2008-09 2009-10 2007-08 2008-09 2009-10 2007-08 Central 2008-09 2009-10 2007-08 Western 2008-09 2009-10 2007-08 Southern 2008-09 2009-10 2007-08 Total 2008-09 No. of SHGs 33680 42688 37375 29119 35506 49307 224937 236789 277446 72747 101060 77846 90441 125173 149130 776847 1068370 995718 1227770 1609586 % to total 2.74 2.65 2.35 2.37 2.21 3.11 18.32 14.71 17.48 5.93 6.28 4.91 7.37 7.77 9.40 63.27 66.38 62.75 100 100 Total loan amount 191.47 302.43 306.33 148.71 246.42 287.17 1045.84 1237.67 1540.19 487.97 781.41 632.10 423.29 583.93 646.98 6551.98 9101.66 11040.54 8849.26 12253.51 % to total 2.16 2.47 2.12 1.68 2.02 1.99 11.82 10.10 10.66 5.51 6.38 4.37 4.78 4.77 4.47 74.05 74.28 76.39 100 100 Average Loan per SHGs 56850 70847 81961 51070 69402 58239 46495 52269 55513 67078 77321 81200 46803 46650 43384 84341 85192 110880 72076 76128

Region

2009-10 1586822 100 14453.31 100 91083 Source : Status Of Micro Finance In India :by NABARD various issues There are three main agencies engaged in financing the SHGs. They are Commercial Banks, Regional Rural Banks and Cooperative Banks. It is interesting that it is Commercial Banks

that share the highest in financing SHGs as is evident in the table no. 5. However, the other agencies are catching up with a higher annual growth rate. Table no: 5 Agency wise Distribution of SHGs Financed (Rs in crores) Agency During the year 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 No. of SHGs % share 177361 305051 344567 571636 735119 1004587 977521 32.9% 128658 157843 176178 381199 327650 405569 376797 26.88% 55712 76466 99364 152914 165001 199430 232504 34.98% 49 57 55.6 51.7 59.9 62.4 61.6 Amount of Bank loan 1105.30 19042 2828.40 3918.94 54039 806053 9780.18 19.6% 551.10 8213 1222.60 2052.73 2651.84 3193.49 3333.20 43.82% 199.10 268.70 448.10 598.72 739.52 999.49 1339.92 37.40% %share 60 64 62.87 59.7 61 65.8 67.7

Commercial Banks

Annual Growth Rate 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10

RRBs

36 29 28.4 34.5 26.7 25.2 23.7

30 27 27017 31.20 30 26.1 23.1

Annual Growth Rate 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10

Cooperative Banks

15 14 16 13.8 13.4 12.4 14.7

10 10 9.36 9.1 9 8.2 9.3

Annual Growth Rate

2003-04 361731 100 1855.50 100 2004-05 539365 100 2994.20 100 2005-06 620109 100 4499.10 100 Total 2006-07 1105749 100 6570.39 100 2007-08 1227770 100 8849.26 100 2008-09 1609586 100 12253.51 100 2009-10 1586822 100 14453.30 100 Source : Status Of Micro Finance In India: by NABARD various issues

2.4 Progress of SHG Bank Linkage in Kerala. The SHG programme was launched in Kerala in 1994-95 with 352 groups, and by the end of 2008-2009, the cumulative total of SHGs bank linked has become 108032 with cumulative bank loan of Rs. 8055.00 million. The compound annual growth rate of number of SHGs linked is 42.55% whereas the same is in respect of bank loans is 70.42% which signifies a remarkable progress with respect to the SBLP in Kerala also. With this backdrop in view one has undertaken the assessment of impact on the beneficiaries. TableNo: 6 Cumulative Position of the Number of SHGs Linked with Banks and Bank loan disbursed in Kerala. Bank Loan (Rs. Million) 1998-99 3,117 38.99 1999-00 5,551 95.54 2000-01 9,625 191.72 2001-02 14,759 340.02 2002-03 21,694 370.51 2003-04 38,649 428.93 2004-05 48,319 555.58 2005-06 52,798 788.10 2006-07 86,805 4838.598 2007-08 83608 5891.9 Upto sept 2009 108032 8055.00 Annual growth rate 42.55% 70.42% Source: Economic Review by State Planning Board, Thiruvananthapuram - Various Issues Year No. of SHGs linked Part 3 3.1 The Role Of NABARD As is stated elsewhere earlier, the steps initiated by NABARD in outreaching the poor through the micro finance programme named SHG Bank Linkage is unparalleled and outstanding. However, an enquiry into the details reveals more. NABARD provides refinancing, and undertakes various capacity building and training programmes for Bankers, NGOs, Trainers, Government Officials, SHG leaders and members, and Micro enterprises Promotion Agencies. Besides it organizes various meets for Bankers and NGOs and conducts

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field visits. The involvement of NABARD is evident from the table no.6. By the end of March 2010, NABARD trained about 2.5 million participants throughout India. Table No:7 NABARD Support for Training and Capacity Building No. of Participants Year 2004-05 2005-06 2006-07 2007-08 2008-09 During the Year Cumulative 3,29,943 2,83,825 2,68,078 3,71,398 2,83,998 10,16,682 12,99,423 15,67,095 19,39,303 22,23,348

2009=10 2,53,868 24,55,120 Source : Status Of Micro Finance In India: by NABARD various issues Apart from undertaking programmes for capacity building and training people connected with micro finance, NABARD supports the SHG Bank Linkage Programme by extending grant support to various SHPIs like NGOs, RRBs, Cooperative Banks and Individual Rural Volunteers (IRVs).Table No.7 exhibits the pattern of change of the amount of grant sanctioned during the years from 2004-05 to 2009-10. The largest amount of grant support during the period goes to NGOs as SHPIs. The total grant has increased by almost five times (4.97) during the period whereas its support to NGOs increased by 5.74 times. Table No: 8 Progress of SBLP- Grant Support by NABARD to SHPI s (Rs. In Lakhs) Year NGOs 2004-05 2005-06 2006-07 2007-08 2008-09 1570.46 2564.99 3675.29 4841.67 6405.71 Total credit Sanctioned to SHPIs RRBs 305.54 330.35 346.25 286.41 389.30 Cooperative banks 230.37 316.42 380.52 426.22 563.13 IRVs 59.68 130.65 347.54 483.14 529.76 2166.05 3342.41 4749.6 6037.44 7887.9 Total

2009-10 9025.81 429.44 626.36 681.01 10762.62 Source : Status Of Micro Finance In India by NABARD various issues

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Part 4 4.1 Conclusions

The enquiry into whether SBLP has resulted in the outreach of financial services to the poor and excluded has led to the following conclusions: The programme of SBLP has been of enormous progress both at all India level and in the state of Kerala. The SBLP has registered an annual growth of 57.42% and 75.6% in terms of number of SHGs linked and cumulative bank loans sanctioned respectively at all India level since its inception till the end of 2009-10. Of the three models of SBLP, the most favoured by Indians is the model II of form of SHGs which are initiated and formed by NGOs but are directly financed by banks. Data show that during the period from 2003-04 to 2005-06, 72% -74% of the total SHGs and four fifth of the total loans sanctioned were through this model. The progress of SBLP is heavily skewed in favour of the southern region. More than three fifth of the total SHGs formed and about three fourth of the bank loans sanctioned concentrated in this region during the last three years. Besides, the most neglected or least attended regions were Northern region and Northeastern region. Of the three agencies involved in financing SHGs, the predominant role is being played by Commercial Banks, which share more than three fifth of the loans granted to SHGs throughout India. The progress of SBLP in Kerala is in tune with the trend in the whole of India. The programme has registered an annual growth of 425.55% and 70.42% in terms of number of SHGs linked and cumulative bank loan sanctioned respectively. NABARD has offered a commendable support to the programme of financial inclusion since its inception. The cumulative number of participants offered training grew to 24.55lakh by the end of 2009-10. Speaking in terms of support in the form of grant, total grant sanctioned has grown fivefold during the period. Impact of the Programme The survey revealed the following socio economic profile of the beneficiaries. The majority of them were Hindus in the age group of 30-35.While 40.25 % belonged to backward community, 47.65 % were from forward community. All of them joined the group with economic motive in view and they belonged to rural areas. Majority were

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married All were occupied with low paid jobs like cleaning, waste removing, selling vegetables, etc. The number of family members of beneficiaries was 4 to 7.A majority (82 %) had only school education. Apart from the above the survey revealed the following: Financial assistance received by the Groups from NABARD varied from Rs. 3,000 to Rs. 50,000. 12 Units invested a portion of it for income generating activities. Of the 20 groups, 18 groups had participated in various social activities like adult education, liquor prohibiting activities, cleaning the city etc. There is significant increase in the monthly income of members. Before becoming a member of the group, 79.7% had an income of less than Rs. 1,000. But after

becoming a member, 93.2% have income above Rs. 1,000. This would enable them to be economically independent and to contribute to their household income. A comparison of monthly expenditure before and after becoming a member of SHG has revealed that before becoming a member 81.4% of beneficiaries had expenditure below Rs. 1,000. After becoming a member the highest percentage (78.6%) of the beneficiaries monthly expenditure was between Rs.2000 and Rs. 4,000. This implies increase in the standard of living of the families of members of SHGs. A Discussion with the respondents has revealed tremendous achievement in empowerment in terms of self confidence, communication skills, entrepreneurship development, etc. . If viewed against the vision of NABARD to reach banking services to about 100million unreached and under-served rural poor by 2008 through SHG-Bank Linkage Programme, it can be concluded that Kerala has succeeded. However, one would like to emphasis the fact that not in term of number but in terms of quality that the success has to be evaluated. * **** References 1. Banking with the Poor, NABARD, 2007. 2. Evaluation Study of SHGs in Tamil Nadu, V. Puhazhendi, 2000. 3. Economic Review (State Planning Board, Thiruvananthapuram) Various Issues 4. Banking With the Poor SHG Bank Linkage Programme in Andhra Pradesh, NABARD, Andhra Pradesh Regional Office.

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5. Socio-Economic Impact of Self Help Groups, Bezabih Tolosa, Unpublished thesis submitted to Addis Ababa University, 2007. 6. Micro Finance in India, K.G. Karmakar (Ed.), Sage Publications, New Delhi, 2008. 7. S.H.G. Bank Linkage Programme in India: Progress and Impact, Vasanthakumari P., Finance and Banking: A Collective of Contemporary Research, Excel India Publishers, 2009. 8. The SHG Bank Linkage Programme : An Assessment and Future Strategies, H.S. Shylendra, Working Paper 170, IRMA, 2002. 9. Promotion of SHGs under the SBLP in India, Harper Malcom, NABARD.