THE JOURNEY – FROM INSTITUTUIONAL EMPOWERMENT OF THE POOR TO PROVISION OF MICRO FINANCE

THE JOURNEY – FROM INSTITUTUIONAL EMPOWERMENT OF THE POOR TO PROVISION OF MICRO FINANCE.

Aloysius P. Fernandez
(Dec. 2013)

This is not a technical or “professional” paper – I’m not equipped to write one. It is the story of one who has travelled a road filled with potholes and obstacles (many laid by well-meaning people and institutions).A traveller whose tunnel vision of the critical role of civil society institutions, particularly the Self Help Affinity groups of the poor (SAGs) has dominated his interventions for 25years. I make no apologies for this bias.

My story of actively promoting poor peoples institutions as a basis for the sustained growth of the members started in 1982 with Myrada – though preparation started several years earlier. I was inspired by my experience with the role played by the Cooperative movement in Canada to which I was exposed thanks to my work with Canadian International Development Agency between 1976-81. On returning to Bangalore and Myrada, I was exposed to the Primary Agricultural Producers societies( PACs). I soon discovered that they were very different from the institutions in Canada. They were dominated by a few powerful families who used the PACS to strengthen their hold on the poor and manipulated all low cost credit in their favour. With some encouragement from Myrada staff, the poor broke way and formed their own groups in 1985;the members self selected themselves on the basis of affinity. Myrada called them Credit Management Groups (CMGs)with the stress on Management of savings and later of credit from their savings. SHGs therefore originated from a conflict with the powerful, a conflict that was managed by poor people. In 1987 when NABARD (Shri P.R. Nayak Chairman) gave a grant of Rs 1 million to Myrada to match the savings of these groups and to train them in Institutional capacity Building (ICB), the name was changed to Self Help Groups (SHGs). By 2002 when SHGs had become a Government driven program as a result of which they were promoted overnight and members selected on the basis of criteria set by Govt. and funds were transferred to them without any institutional capacity building, Myrada changed the name of groups (which self-selected their members on the basis of affinity, which started with regular weekly savings – and which were exposed to institutional capacity building)to Self Hep Affinity groups or SAGs.

Between 1990 and 1992 three policy decisions were taken by RBI/NABARD: i) to allow Banks to extend a bulk loan to SAGs allowing them to decide on loans to individuals, ii) to allow Banks to lend to unregistered SAGs provided they kept records of decisions taken at meetings and other relevant books, iii ) to lend without physical collateral. The underlying philosophy was to promote a parallel or complementary financial model which did not follow the standardised list of purposes and sizes of loans and repayment schedules. The responsibility of financing institutions was to visit and assess the groups performance as an institution and to extend a bulk loan if it met with assessment indicators. It was clearly accepted by RBI/NABARD that the SHGs would not be mainstreamed –in other words –not forced to comply with existing practices and that the assets purchased by members of SHGs would not be subsidised. These policy decisions were the basis of the SHG-BANK Linkage program launched by Nabard in 1992. All went well as long as NABARD took the lead till 2000.The SAG program then became a national one .Targets were set, ICB training neglected or reduced to information about the programme with no interest in building civil society institutions of the poor. By the beginning of 2002, fatigue emerged in the Banks vis-a vis SGH-Bank Linkage Program. By then Banks had their own problems resulting from shortage of field staff, pressure to achieve targets, mounting NPAs. By this time Myrada had launched Sangamithra- a Section 25 Company to promote the SHG bank Linkage Program in areas where the Banks had not met with credit requirements. Sangamithra’s objective was to ensure that the SHGs had access to credit. It filled in the increasing gaps left by banks . Sangamithra still continues to operate. It provides loans to groups like devadasis, sex workers, watershed management groups who have taken up livelihood activities, for purposes like sanitation etc. But it is inhibited in several ways due to it’s not for profit status.

I resigned as Director of Myrada in 2009 and a few months later took up the responsibility of building a NBFC called Nabard Financial Services which continued the SHG-Bank Linkage model/program and brought in the Business Correspondents (BCs). In its third year of operation 2012-2013 NABFINS partnered with 103 BCs to promote its mission, namely: “Balancing Business with Inclusion in Growth”. It has operations in 4 States. On March 31,2013 its outstanding loan portfolio was Rs. 377 crores; it promotes and extends credit not only to SAGs but also to Second level institutions like Producer Collectives/companies/cooperatives and for training in skills .

The common thread throughout this journey was the focus on building civil society institutions which in the context of a poverty alleviation strategy focused on self help affinity groups of the poor. From its experience with the PACS, Myrada’s strategy factored in the role that unequal power relations played in keeping people poor. After a year or so of SAG functioning, it became clear that the last mile had to be an institution managed and owned by the poor. This ensured that they do not fall back into dependence since this institution could cope with the basic credit needs as well as support them when they lobbied for change. The SAGs were able to cope with the variety in the purposes and sizes of loans and finally with the repayment schedules which in the rural areas were lumpy since they were conditioned by returns on crops of various durations. Decisions on these matters could only taken by a peoples institutions which managed the last mile.

My learning’s throughout this journey are briefly recorded below.

• “POWER”—more specifically oppressive power relations- plays a critical role in making poverty “sustainable”. In the early eighties, I discovered that it is not enough to teach people to fish when they cannot reach the river due to hurdles erected by the powerful based on tradition, politics, caste and community. And when they manage to reach the river, they find that the rights to fishing are already captured by the powerful. Myrada’s strategy to deal with unequal power relations was to promote self-help affinity groups, where the members self-selected themselves on the basis of existing relations of trust and mutual support –which was called affinity and which is very similar to traditional social capital. Affinity is like a diamond in the mud. It existed before Myrada stumbled on it and then polished it through Institutional Capacity Building (ICB) . This was required since the SAG had taken on new roles. The SAGs now began to provide the social space for the poor to grow in confidence, management skills and to build their own resources primarily through regular weekly savings (amount decided by each group). It was the management of savings and later of credit that was important –as it taught people skills, not so much the provision of credit. As the SAGs grew in confidence, they took on new roles; for example, they emerged as the source for urgent loans thus reducing the power of the large farmers who provided these traditionally, they linked up with outside markets and technical support institutions, they bypassed local social traditions which marginalised them ( for example they organised their own festivals), they exerted pressure to change biased gender relations in the home. They then federated into Community Managed Resource Centres (CMRCs) comprising 100-120 SAGs which play a major role in influencing the local Gram Panchayats to install and maintain sanitation and drinking water systems as well as to maintain proper accounts.It is to the credit of RBI/NABARD that this independence of SAGs was institutionalised. RBI/NABARD made two policy changes to preserve the independence of SAGs and thus support their empowerment. One: SAGs did not have to be registered to receive loans from a bank but had to maintain books of accounts, attendance etc. and be audited. The SAGs refused to be registered since they said that once registered they would be vulnerable to some petty Government officers interventions. This gave them freedom from Government. Two: SAGs received a bulk loan from the banks and could decide on purpose, size, etc. of loans to members. This freed the SAGs from the standardisation imposed by official banking norms and guidelines. This led to the launching of the SHG-Bank Linkage Program in 1992 which preserved the DNA of the SAGs until it became a Central Government program supported by the budget in 2000.

  Since then, SAGs have been reduced to a link in the delivery chain, largely to transmit grants , subsidies, entitlements and to operate as ration shops Their role in changing oppressive power relations has been completely marginalised, as Govt. insisted on financial inclusion( which boiled down to opening no frills accounts) and demanded that money be transferred not to the group but to each member. The MFI onslaught further weakened the SAG movement by breaking up SAGs and forming Joint Liability groups overnight and extending loans to individuals, expecting the JLGs to exert pressure for repayment ; it did not work out, forcing the MFI-NBFC staff to personally go to the borrowers house for repayment.

  Power as a critical factor does not figure in the strategy adopted by Government in any anti poverty scheme. Both eminent economists Drs.Bhagwati and Sen, whatever their differences in the pre-1991 era, now seem to be converging –but neither of them factor power exercised by institutions of the poor as critical to planning and implementation of anti-poverty measures. Dr.Senstands for growth alongside investment in education, subsidised food and health, but civil society institutions of the poor find no place.

• Power needs to be institutionalised for its impact to be effective and sustainable. Here comes the critical role of civil society institutions. SAGs are civil society institutions of the poor. But to play their role as agents of change, both to support sustained livelihoods and to deal with unequal power relations, they need to become organisationally and financially sustainable. To achieve this, training in institutional capacity building (ICB)is required. Myrada brought out a training Manual in the early 90s with 24 modules –which could be compressed into 14- which the SAG must be exposed to over a period of 1-2 years. Savings start from the beginning and are made weekly at meetings to create a savings habit. Loans from savings are given after 4-6 months; loans from banks are taken after 9-12 months.Unfortunately ICB is considered time consuming by NBFC-MFIs and Govt. who prefer to reduce the role of SAGs and to provide loans directly to individual members often after a week of their formation. Both focus on dealing with individuals not institutions which take time to build. Even in the so-called Joint Liability groups the funds are given to individuals unlike in the SHG-Bank Linkage Program where a bulk loan is given to the SAG which then decides on the loans to individual members. Government insists on extending funds (including loans), to individuals; different rates of subsidies for SCs, STs etc. strengthen this focus. Many SAGs which had SCs, STs and OBCs were forced to break up. The model to manage Direct Benefit Transfers is based on a one way system and will stabilise once the software platform and technology is in place. But loans are a different proposition. The last mile requires a two way transfer system to manage loans and repayment, as well as personal contact between lender and borrower. In the case of micro or small loans where this personal contact raises transaction costs greatly, institutions like the SAGs plays a major role as they reduce the high cost of managing small loans .

• An institution has to be appropriate to the resource to be managed or the objective to be achieved. A milk Society needs to have large suppliers who make the milk route viable; the small producer takes a ride on the back of the big one. In a Cooperative society managing credit, however, the powerful who are usually elected as President, Secretary and Treasurer of the Cooperative use the society to strengthen their exploitative control over the small person; hence a credit society needs to have members who are all poor, if it has the objective of reducing poverty. The SAG is the appropriate civil society institution to help the poor to gain confidence and skills, and to support their existing livelihood strategy which comprises several activities. It provides capital at low cost not in standardised sizes but according to each ones requirement and for a variety of purposes decided by the group; it adjusts repayment schedules in response to sudden fall in incomes. It is appropriate to manage a savings and loan portfolio as it related directly with the borrower in a situation well known to all the members. A SAG is not the appropriate institution to become a ration shop as part of PDS, it is not an appropriate institution to manage commodities on a large scale through aggregation of small surpluses ,value addition and marketing. Yet they are often asked to take up the functions.

• Credit alone will not suffice to reduce poverty: In fact my experience shows that deeper the poverty the less does credit alone play a role in mitigating it; other support is required including confidence building (which develops as the SAG meets, saves regularly, draws up an agenda, promotes participation of all ), skills in management (which grows as the SAG manages savings, credit and repayments and other issues affecting them), analytical skills (as ICB helps them to analyse the structural reasons why they are poor).The SAG helps the poor to take the first step to free themselves to a large extent from landlords on whom they depend for jobs, on money lenders and others who extract capital. After a year or two, they are able to accumulate some assets which give them a base to take up livelihood activities which are larger and involve higher risk. The over stress on Financial Inclusion as the first step in mitigating poverty therefore is misplaced. The focus on anti-poverty strategy should be on “inclusion in Growth” which is a much broader strategy.Some years ago I attended a SAG meeting where two women decided to return Rs 25,000/- which they had borrowed the previous month to set up a unit to mix the ingredients for idli/dosa to cope with demand from families. They explained that they could not up this unit because to get a electric power connection they had to pay a bribe of Rs 25,000/;the erratic power supply also added to their problems. They were excluded from “growth” due to shortage of supply which promoted corruption. Unfortunately the focus of Govt. seems to be entirely on expanding the banking network on the assumption that this will help the “excluded” to obtain credit and rise above poverty line. This focus on finance as the trigger of poverty alleviation is part of the macro policy which focuses on monetary policy as a panacea for the country’s economic decline in growth. Growth requires structural changes and good governance to make the economy more productive; this is the responsibility of Governments –both at the Centre and States.

• The poor must be good managers since they have survived in a situation of scarce resources but they are not all entrepreneurs. If the poor have survived they must be good managers. Therefore they have strengths. Affinity based on relations of mutual trust and support among 10-15 families who self-select themselves as members of a SAG, is a strength. Interveners must build on it. The development theory that starts with identifying needs (like needs assessment) ends up in a strategy that creates dependency on the intervener. Myrada’s intervention strategy was built on the strengths of the poor who were assisted to promote their own institutions to plan and implement the intervention and to continue the impact.Entrepreneurship implies investment in some new and at times in a traditional activity on a large scale where others are employed. The livelihood strategy of a poor family on the contrary shows that they prefer to diversify their risks in several small income generating activities (some traditional, some new). Some loans are taken from the SAG to repay high cost loans from moneylenders (even the Government does this); other loans are for education which is not “consumption” but a long term investment; others for health needs. In the first few years of SAG membership they expand some of their traditional activities, drop others, and then gradually take on new ones but usually those which are known to them. Only a few take on one large livelihood activity in the first 3-5 years which is a feature of an “entrepreneur”.

  The Micro Finance strategy of NBFC-MFIs and even of Banks on the other hand is based on the neo liberal policy which gave centrality to individual entrepreneurship as a recipe for growth for all the group members from the first year. This resulted in many cell phone services operators in a village, several shops in a small area thereby reducing the profits of all; many closed down. Government programs focus on one or two large loans which are considered viable though they are often not manageable. Several studies show that the major chunk of micro loans did not go to support entrepreneurship but consumption; a recent study shows that consumption in Andhra fell by about 20% after the crisis. This strategy with a focus on the individual entrepreneur derived from the neo liberal ideology which had no place for civil society institutions or social and political mobilisation. This policy was aggressively promoted by ACCION, blessed by CGAP of the World Bank and ended in ensuring that the micro finance model extracted capital from the bottom of the pyramid (maximised profits/profiteered)to pay high incentives and salaries)rather than promote growth and reduce poverty. Individual greed ,more than the common good emerged as the driving factor. The impact? Not financial inclusion but financial extraction from the bottom of the pyramid.

• The poor are good managers— which can have both positive and negative impacts. NBFC-MFI strategy based on frequent loans (topping up) and frequent repayments, created the largest number of Ponzi borrowers who managed their dues by borrowing from one and repaying the other. The aggressive focus on speed to achieve expansion of clients in a short time which was the strategy that drove the MFIs resulted in creating thousands of Ponzis who had no choice but to borrow from several MFIs. Around 1999-2000 in Andhra, each borrower had taken on an average 9 microloans. It made eminent sense for those families who live from day to day to have multiple loan providers who were aggressively marketing their products. Myrada’s experience show clearly that the poor will invest in growth at a time they find appropriate, and at their pace ; their decisions are based on the human resources available and willing in the family to undertake a particular activity apart from other factors.

• High Interest rates do not promote suicides. After the so-called AP crisis I interviewed over a 100 borrowers to assess their reaction to the high interest rates levied by MFI-NBFCs. No one mentioned high interest rates as a problem. Their major problems were: i) How much did they have to repay this week – and when they borrowed from several MFIs, the amount grew quite large, ii)the period of recovery was too short- recovery instalments started after a week or month. This effectively excluded recovery from any activity in agriculture. Milk producers could repay if they received payments from the Union in time. The majority therefore opted for small businesses where turnover was rapid and for consumption when they had other sources of income from which to repay. In the case of cotton farmers in distress , the causes were high cost of seeds and inputs (often spurious), erratic rainfall and drought and the cessation of Govt. subsidies for production and in purchasing the product, leaving the producer especially in Maharashtra to cope with the open market which he had no experience of. Repeated yearly loans –first from banks, then from relatives, Cooperatives and finally from private money lenders were not repaid as the cotton crop failed or prices fell. The problem therefore was inability to repay capital. The proportion of cost of credit to total cost of inputs in cotton never exceeded 7%except where loans were taken from private money lenders.Does this give a free hand to MFIs to charge rates even up to the permitted 26% ?I do not think so especially if the borrowers are small and marginal farmers investing in agriculture and on farm activities which do not have a high rate of return. The average rate set by SAGs which receive bulk loans for onward lending to members gives an indication of what this sector can sustain. Initially, in the 80s, the SAGs extended loans at differential rates depending on the purpose. Loans for health related needs attracted a rate as low 1%month while small businesses were round 2%.But due to requirements for reports from banks and MFIs which demanded standardisation, this good practice was set aside. After about 3 years when the SAGs feel that they have a comfortable common fund, the interest rates average between 14%-16%.

• Standardisation of purposes of loans, sizes and repayment periods together with speed to achieve scale serves to increase profits of the MFI but do not support diversity of demands due to different local situations -thereby raising risk and reducing output. There are three major obstacles for credit to support growth and alleviate poverty i) Greed and ii)Speed –which we have mentioned earlier and iii) Standardisation which is dealt with below. Two loan profiles over a period of time bring out this diversity clearly.
  

  Chikkajajur, Holalkere Taluk, Chitradurga dist.
  Nagarathnamma			Kausar Banu
  Year of Borrowing	Amount (Rs.)	Purpose	Year of Borrowing	Amount(Rs.)	Purpose
  1997	2,000	Education	1996	1000	Trading
  1997	500	Education	1996	3000	Trading
  1997	2,000	Education	1997	5000	Trading
  1998	4,000	LPG for home use	1997	500	Education
  1998	5,000	Education	1997	5000	Health
  1998	5,000	Vehicle loan repayment	1997	300	Health
  1999	7,100	House repair	1998	4000	Trading
  1999	8,000	Vehicle loan repayment	1998	5000	Trading
  2000	8,000	Vehicle loan repayment	1998	5000	Trading
  2000	15,000	Vehicle loan repayment	1999	5000	Trading
  2000	325	To purchase SHG uniform	1999	12000	Trading
  2001	18,000	Business	2000	25000	To release house
  2002	30,000	Vehicle repairs	2000	325	Purchase uniform
  2003	28,000	Vehicle loan repayment	2001	2000	Education
  2003	8,325	Sewing machine (SGSY)	2003	40000	Purchase House
  2004	2,300	LPG for home use	2003	325	House expenses
  2005	40,000	Vehicle repairs	2003	8325	Sewing  machine
  2005	1,000	Jewellery loan	2004	50000	Agri. Land
  2006	2,000	Jewellery loan	2005	2300	LPG
  2007	62,000	Tempo purchase and gold	2005	58,000	To release agri. land
  2008	22,820	Tempo repair and insurance	2005	6,000	House repair
  2009	11,000	Tempo repair	2006	1,000	Jewellery
  2010	40,500	House repair and gold	2007	2,000	Jewellery
  			2008	2,000	Gold
  			2009	53,820	Business/Gold
  			2010	500	Gold
  Total	322,870		Total	2,97,395
  			Note : Before SAG no land, after SAG 3 acres of irrigated land. Continuing in SAG.

  In case of Nagarathnamma, the family owned dry land but decided not to invest in agriculture. Instead it opted to invest in education. Prior to joining the SAG, the family took a loan from relatives to purchase a second hand vehicle to carry goods. She then took loans from the SAG to repay this loan. Finally the tempo was sold and another loan (Rs 62,000) taken from the SAG which was added to the sales proceeds to buy a better one. She also purchased gold. The total investment in family livelihood strategy – Rs.3.2 Lakhs.

  In case of Kausar Banu, the major traditional activity of the family’s livelihood strategy was trading; their land had been mortgaged before the SAG was formed for capital to do trading; later several loans were taken from the SAG for trading. As income from trading increased, the family reclaimed the mortgaged land and purchased land and dug a well. Income generating activities increased to three: i) trading ii) cycle shop iii) agriculture and long term investment education. They took only one small loan for household expenses. Finally loan were taken for gold and jewellery – a sign that they are now confident. The total investment was Rs.4.5 lakhs.

• The loan culture has been severely undermined by Government policy and schemes. This has affected the SHG-Bank Linkage program especially where the SAGs have not been given Institutional Capacity Building and treated as part of the delivery system. Several years ago I was invited to be present at a Loan “MELA” where several beneficiaries were assembled to meet the Chief Guest .He asked a women – who was introduced by the bank manager as one who had purchased two buffaloes from the loan cum subsidy : “Did you get a SALA” (Salain kannada is translated as loan.)She stoutly denied receiving a “sala”. Annoyed the Chief Guest confronted the Bank manager who turned to the woman and asked:”Did you receive a LOAN?” She promptly replied “YES..but not a SALA”. The Chief Guest was quite perplexed. I explained that “SALA” meant a loan that has to be repaid whereas its translation “LOAN means that it does not have to be repaid. The traditional culture of paying loans has been severely undermined by short term populist measures which have not benefitted the poor as much as the middle and upper classes in the rural areas and certain sections of the cities and towns.

• Loans are two way transactions which are based on a relationship. Technology cannot create this relationship; it is, however, eminently useful in one way transfers of grants. The recent implementation of Direct Benefit Transfer (which has been long delayed) is appropriate in schemes where there are only grants such as pensions, scholarships. Technology plays the dominant role in the delivery system in this sector. But in the case of loans where there is a two way operation –outward and inward-, a great deal depends on building relations between the lender and the borrower. The money lender understands this perfectly. In this case technology can only play a supporting role. Unfortunately the over emphasis on Direct Benefit Transfer and the emphasis on technology to implement this model has further undermined the loan culture. The image of Banks as lending institutions will be further undermined as they are expected to handle DBT. It is high time that Government separate these two functions (grants and loans) and set up a separate institution to handle the grants. Managing loans is similar to canvassing for votes. The candidate has to go around with folded hands to establish a personal relationship with the voter…twitter is still a long, long way ahead.