India has one of the largest networks of bank branches in the world, but the hundreds of millions of poor in the country are largely out of it. Banks were nationalised three decades ago with the hope - and promise - that their services would reach the poor. But that goal is not even close to being met today. With 52,000 commercial bank branches, 14,522 branches of regional rural banks and 100,000 cooperative bank branches, the country is teeming with institutions that should be able to meet the credit needs of the people. But if you are poor, you're also probably out of luck with the banks; it is tough persuading them to even let you open a bank account.

The consequences have been devastating. Consider these numbers: 75 million households in India depend on moneylenders to meet financial needs; almost 90 per cent of people in rural India have no access to insurance; 50 million households are landless and need small credit to start some economic activity. And even families earning Rs.4000-5000 a month in urban areas spend huge portions of their earnings to service debt.

But out of necessity and enterprise, those locked out of the banking world have found a way out. It is called micro credit - the extension of small loans to individuals who are too poor to qualify for traditional bank loans, as they have no assets to be offered as guarantee. In India, micro credit has worked largely through self-help groups. Predominated by women, these are formed with simple rules - save, accumulate and give loans to each other. Globally, it is slowly proving one of the most effective strategies to neutralise poverty. Micro credit lending institutions are currently estimated to reach some two million households in India.

Catching on, and empowering women

Is the rural household any better off, by gaining access to micro finance? A study by National Bank for Agriculture and Rural Development, which covered 560 SHG member households from 223 self-help groups, spread over 11 states showed these positive results:

Average value of assets increased by 72%, from Rs 6,843 to Rs 11,793.

Average annual savings per household registered over threefold increase from Rs 460 to Rs 1444.

The average borrowing per year per household increased from Rs 4,282 to Rs 8,341. Nearly 70% of loans taken were used for income-generating activities.

Average net income increased per household increased by about 33%.

Can a mere five hundred rupees change a life? This sounds implausible, as prices spiral by the day. But in numerous villages in India, this miracle is quite real; millions of poor women are today using small loans to rewrite their present and future. Many of them have not ever seen the corridors of a high school, but are using common sense to propel their entrepreneurship and group business activities. Dr. C. Rangarajan, Chairman, Economic Advisory Council of the Government of India, points out, "Micro credit can aid employment and sustain households giving them opportunities they never had before." It is called micro credit with good reason. The size of the loan is typically small. The borrower is usually battling against poverty. The repayment schedule is simple and short. And, the activity for which the loan is taken is often of a small nature. But poor women, who are in the forefront of the micro credit movement, use the small loans to jumpstart a long chain of economic activity from this small beginning. As they have enormous pride in their integrity, they repay quickly and reliably, not wanting to be seen as defaulters. Then, they begin again, this time with a bigger loan - and keep expanding their profit base until they do not need the loans any longer.

Micro credit has given women in India an opportunity to become agents of change. The movement has made them more confident than ever helping them to explore new horizons, new dreams. The most active states are Andhra Pradesh and Tamilnadu. Other states where such self-help groups are making a dramatic difference are Karnataka, Himachal Pradesh and Uttaranchal. Sheila Dikshit, Chief Minister of Delhi, says: "Micro finance will be the future mantra for alleviation of poverty. I have met women who say that 500 to 800 rupees makes all the difference as it dramatically changes their standard of life."

A late start, and a long way to go

That is the positive side of the story. The negative one is that India's demand for micro credit is Rs.500 billion, and only Rs.18 billion of this amount has been generated so far; there is still a long way to go. Nearly 7.5 million poor households in India desperately want access to financial services to meet immediate needs. Almost 36 per cent of the country's rural households have to look for credit outside the formal sector. A World Bank study of over 6000 families in Andhra Pradesh and Uttar Pradesh, two of India's largest states, shows that 87 per cent of them have no access to credit, 85 per cent had no access to insurance and 56 per cent borrow from moneylenders. The poor need banking services more than credit, as they need to safely secure their little savings or remittances coming from their men folk who migrated in search of work.

The chief culprits are the banks, who continue to see the poor women - rural as well as urban - as unworthy of credit, and is only slowly awakening to the possibilities. Points out Jayshree Vyas, Managing Director of the SEWA Bank at Ahmedabad which mainly has self employed street vendors as account holders: "We started a bank as the women demanded it. They wanted a place to put their savings. The banking sector earlier never respected self-employed women." Today, the SEWA bank in Ahmedabad is a model for others to replicate. It has deposits of over Rs.100 crores got from nearly 250,000 women. It is the biggest poor women's bank in the world.

It is estimated that worldwide it would require US $21.6 billion to provide micro finance to 100 million of the world's poorest families. Ironically, if the world's seven richest men got together; they could wipe out global poverty with their combined wealth.

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Even the few banks who now belatedly recognise the potential in rural banking lack the capability to serve this market, which has been neglected for so long, and need intermediaries to help build their capacity to do business with small borrowers. V.K. Chopra, Chairman and Managing Director, Corporation Bank, admits, "Lending without any collateral for commercial banks to the poorest of the poor in rural areas is very difficult as banks do not have the expertise or facilities in these areas. That is why micro finance institutions should step in. Today's banks are flush with money. If micro finance institutions are strong, banks will readily lend to them."

That there are significant opportunities for banks in micro credit is now unquestioned. Banks like ICICI are exploring how it could reap the benefits from the micro finance revolution. Nachiket Mor, Executive Director, ICICI says: "A lot has been done in Andhra Pradesh, but we want to build 250 micro finance institutions to build a network in 600 other districts each one serving a million households. It will involve around Rs. 200,000 crores and it is not an unreasonable dream." Mor feels that the micro credit movement must now move beyond their members and look at financing for roads and water.

The larger banks also need the micro credit institutions for other reasons, besides expanding their opportunities. The micro credit institutions have considerable experience in dealing with the cultural realities of life for the rural poor. Every self-help group and micro financing institution in India has been through a great learning experience in the last few years. Every day has been an experience. Women need to guard their savings even in a bank fighting off pressures from the family. Says SEWA Bank's Vyas: "We found women begging us not to send them any letters or bank statements. They even asked us to keep their passbooks, as they did not want their husbands to know they had money, as then they would be pressurized to withdraw it. More often than not, it would be spent frivolously on gambling or alcohol." Large banks are wary of this cultural minefield, and will look to their micro credit partners for help in steering the course.

Micro credit has greatly expanded the livelihood options accessible to the rural poor. (Picture Credit: CARE India)

Without significant participation from large lending institutions, although micro finance in India has been growing, millions of poor people both in rural and urban areas are yet to be touched by its magic. Politicians too have yet to see its potential fully. But social workers and social engineers have seen what it can do. Points out Vijay Mahajan, Managing Director, BASIX, a NGO in Hyderabad that works in the area of micro finance for women: "The real innovation in the financial sector will come from micro finance institutions. It is an early phase, but it is a very exciting phase." Adds Dr. Rangarajan, "The challenge is to organize self help groups and organize the poor. Funds are not a problem. Funds are available with the banking system."

Organizing the poor certainly is one challenge, but additionally women have to be put into the loop of a sustainable livelihood through micro credit, or the benefits won't arrive. Also, micro credit is not a panacea by itself; it could help eradicate poverty only if it is complemented with other measures like health care, literacy, women's rights and micro-enterprise management. Points out Vyas: "We have to reach out to 370 million workers but we have reached just five million. We have to link micro credit activity with sustainable livelihood levels and we need to build an integrated approach weaving in vocational training, health care and capacity building."

The need for breadth is urgent. In areas where micro credit has picked up like Mehboobnagar in Andhra Pradesh, women have collected over four crore rupees. Despite this, men migrate to cities like Mumbai for livelihood options. So, the need is to invest in land, water, livestock, infrastructure and human development. That is why micro credit in India will ultimately have to graduate to livelihood financing.

As the anecdotal evidence supporting micro credit grows, there is now mounting hope that it can be a large scale poverty alleviation tool. Says Vipin Sharma, Programme Officer, Microfinance, CARE India: "The big challenge for the micro finance sector in India, is to scale microfinance up, as it is an integral part of the strategy for poverty alleviation." There is also fresh political will to see this happen. Vinod Rai, Additional Secretary, Finance, points out: "The Finance Minister in his last budget statement said that Rs.200 crores would be given to the National Bank for Agriculture and Rural Development for capacity building of micro finance institutions as the government was keen to encourage them and help them grow. As many as 40 million households could be assisted with amounts of around Rs.30,000 crores." Mathew Titus, Executive Director, SA-DHAN, a NGO based in New Delhi feels that a fund of Rs.200 crores could provide equity support for development of micro finance institutions all over India.

Women's Empowerment

Micro credit seems to work best with women! Women take financial help more seriously. They utilize money much more carefully and credit groups find them more conscious of repayment obligations. But in many ways, women end up as losers despite being in the thick of the micro finance movement. Points out Smita Premchander, Chief Executive, Sampark, a NGO which works with micro finance and women in Hyderabad: "Women value the habit of savings. But how is the money is being managed is the question. Micro finance can become meaningful only if social empowerment happens and realities like the caste divide collapses. Women ultimately need to have control over their money and not let other relatives or men folk decide on what should be done with it."

By joining hands, women are finding greater freedoms. Picutre Credit: CARE India

As the micro finance movement grows, can it protect women from being exploited after they have been empowered? Points out Neera Burra, Assistant Resident Representative, United Nations Development Programme, New Delhi: "It is pointless to call women empowered just because they have money. But has the money stopped domestic violence? Do they get equal remuneration?" As women take loans to conduct economic activity, their work burdens have enormously increased. So, girls are pulled out of school to do some of the housework. Unless men share the burden, women will have a hard time. Many of them take loans, as the men want the money. Then, they walk out on her leaving the woman to pay back the loan."

It was not easy getting small groups of women to overcome typical resistance and struggle against stereotypes in rural India. But, gradually, the movement has created a sense of belonging among the women members, a sense of purpose and a new determination. They see the benefits of good communication, cohesion and cooperation. There is a sense of pride through decision-making and problem solving. Actually, problem solving has become fun, as there is room for creativity.

Looking ahead

What will it take for micro credit to become a mainstream mode for lending? One option is to provide other financial services similarly built around small amounts of money, such as micro insurance. There is tremendous scope to design well-adapted insurance products for the poor in the insurance sector as well; this will reduce their vulnerability to environmental influences - weather and pests - as well as diminish the risk should they - or their livestock - become ill unexpectedly. Such additional products will expand the micro finance platform, and even encourage more new directions. Credit schemes specifically tailored for urban areas can also help; urban micro finance, unlike its rural counterpart, has not mushroomed despite the rising numbers of urban poor.

The potential of micro credit to tackle poverty should not blind us to the fact that lending to the poor has to be regulated just like other lending, perhaps even more carefully considering their already weak economic standing. Some experts believe that as the movement spreads and grows, it will be apt to have a regulator in place. Titus says: "We need some ground rules. The movement must not be allowed to degenerate as it expands." Mahajan says that unless a responsible regulator is in place, very little will happen with savings. But many others are wary of regulation, and remind us that micro finance must be allowed to blossom without any interference that could choke off its potential. Malcom Harper, Professor Emeritus, Cranfield Inenstitute of Management, is of the view that the greatest challenge is to keep politicians out of the way as the movement grows, as they will just see it as a way to distribute money and not empower people.

But regulation is likely sooner or later. Self help groups today handle Rs.5,600 crores of disbursement. Just four micro finance institutions in Hyderabad alone have disbursed Rs.1400 crores. The National Bank for Agriculture and Rural Development forecasts that by 2008, about one million self-help groups would be taking loans from the bank, with a total membership of around 17 million people. Over a quarter of poor Indian households will by 2009 likely have access to formal financial services if current trends continue. With such large amounts and widespread participation comes inevitable government responsibilities to check unethical practices.