Financial inclusion and self help groups' bank linkage

Recognising the importance of financial inclusion as one of the crucial factors in inclusive growth, steps are being taken by the financial regulators, governments and banking industry to make the financial system more inclusive.

Under the Jan Dhan Yojana, a large number of citizens have been brought under the banking network. The fact that this initiative is emphasised by the prime minister in his “Mann Ki Baat” highlights the importance it has received in policy making.

While a large number of accounts have been opened under the drive, these are now primarily used to transfer cash benefits under various welfare schemes. This undoubtedly helps reduce leakage of funds and thereby performs an important enabling function.

However, the most significant function of a financial intermediary in a nation where population is largely self-employed is providing access to credit, which should be considered as one of the main purposes of financial inclusion.

A survey carried out by the Institute for Social and Economic Change (ISEC), Bengaluru, on the subject has revealed that access to credit still remains low especially among the poorer sections. The farming community which ought to have got priority attention for credit gets only limited access, with small and marginal farmers facing immense problems in accessing credit.

One of the major reasons for the dismal situation is lack of land records in the name of the farmer as mutations do not readily reflect in land records. Indeed, lack of security is the major hurdle for the self-employed poor to access financial resources for investment.
In this backdrop, the self help group (SHG) model, especially formulated under the SHG bank linkage programme (SBLP) of National Bank for Agriculture and Rural Development (Nabard), has been of great use as it allows group members to borrow without any collateral security.

Most importantly, this model helps members to access formal financial institutions directly and therefore has great potential for making the financial inclusion drive meaningful and sustainable.

When SHGs are directly linked to the banks through SBLP, many argue that the effective cost of borrowing can be quite high for the group members due to transaction costs involved in borrowing. This makes the (private) microfinance institutions (MFIs) that provide loan at the doorstep look like a better solution.

Only limited studies have actually attempted to estimate transaction costs in an SHG model. The study carried out by ISEC on SBLP in Karnataka estimates the transactions and opportunity costs of borrowing exclusively for comparison purpose. Data for this exercise were meticulously collected from the SHGs in the State.

Two types of cost components are considered here. First is the opportunity cost of time (in terms of wages foregone), based on the number of visits to the banks. Second component includes transaction costs consisting of (a) transportation cost (b) food and other incidental costs (c) the lump-sum fee charged by banks for processing and (d) costs incurred for providing records.

Inadequacy of loan amount

The general conclusion is that addition of transaction and other costs may increase the effective cost of borrowing at most by 3 per cent. Thus, the formal banking sector still remains more attractive than the other lenders.

It is to be noted that while the groups borrow from banks at around 12 per cent rate of interest, they in turn lend to the members usually at around 24 per cent.

However, there is a large difference bet-ween this interest rate and the one charged by the private lenders, including MFIs, primarily because the interest income becomes income of the group subsequently. 

Why then would one observe presence of informal lenders where SBLP is functioning well? As revealed by this survey, one of the major reasons for the presence of other lenders is the inadequacy of the loan amount from SBLP. Policy makers need to take note of this for taking necessary corrective actions.

For example, in Mysuru and Tumakuru districts of Karnataka, more than 80 per cent of borrowers reported that only about half of the resources required by them are met by the banks through their lending to the SHGs. Only around 5 per cent members are able to access more than three quarter of their loan demand.

Fall out of this is that they are not able to take full advantage of the income generating activities. Private lenders often grow taking advantage of this problem. The rate of interest charged by a majority of money lenders (around 66.67 per cent) is around 5 per cent a month. Around 22 per cent of moneylenders charge 3 per cent rate of interest per month, while only 11 per cent charge 1.5 per cent interest.

Thus, given the immense economic and social benefits to the SHG members, efforts must be made to make the programme a success by addressing the lacunae. First, while the programme is quite well developed in the southern part of the country, other regions, especially eastern and north-eastern regions lag behind considerably. Secondly, even in the regions where the programme is well developed, dissolution rate of the groups still remains high.

Thirdly, the SHG programme, till today, has been primarily women-based. Joint liability group programmes should become equally prevalent amongst men as well, especially amongst the farmer class, whose problems are discussed above. There can also be mixed groups with both men and women members working together.

A well-developed SHG programme which ensures credit without collateral directly from the formal banking sector can be a great boon to all such members and thereby make financial inclusion drive more meaningful and sustainable.

(The writer is professor, Institute for Social and Economic Change, Bengaluru)