Friday, October 28, 2011

MFIs and Self-Help Groups - Part of the reality

For most of us, a self help group brings to our mind two words, Micro Finance. Which is a pretty good starting point. A self-help group is essentially a set of people from the same community (not village, notions of unit of analysis) who are working together for some common goal. In the context of micro-finance, it is a group that is lent money by the Micro Fin Institute (MFI), and it is the responsibility of this group to further distribute these loans, keep track of them and ensure timely payment of interest. This is managed through , first, a hand-holding by the MFI & local bodies teaching them book-keeping, basic accounting and other fundamental basics. The Self-Help Group (SHG) then manages timely repayment through the social pressure it exerts on every borrower. These communities are almost always close knit, and public defamation acts as  a very severe deterrent to villagers from defaulting. Defaults could lead to being ostracized by the community and consequently, everyone pays up and slowly but steadily a strong sense of social responsibility builds up. What also builds up is the economy of the village through the small loans that were not available earlier due to poor credit ratings of such people with no or little collateral.

This model is a modification of the Grameen model which, as we all know, was propounded by Professor Muhammad Yunus in Bangladesh. The self-help group model worked well, at first. It worked for the villages and it worked for the banks.

But greed soon set in. And banks desired to lend out as much micro-credit as possible as soon as possible to get ahead in the gold rush. But they hit a road-block. Developing a self help group takes time. Initial members have to be selected carefully through local bodies that know and understand the community. The members then have to be trained. And time has to be given to allow a web of social & communal responsibility to develop, which is what ensures effective disbursal of loans to deserving parties and timely repayments. But this takes almost 9-12 months to happen. At the minimum. But the banks wanted a quicker way. And in their haste they ignored what they had learnt over the previous 5-10 years or so.

They created groups of 5-8 people, without much hand-holding and started giving loans within a month of forming the group and expected the same high rate of repayments. But the default rate shot up! And the reason was simple. With no social structure in place, there was little chance of social castigation of defaulters. And everybody started defaulting. Also, the oversupply caused loans being taken for consumptive rather than productive uses. This started off the collapse of the MFI industry in Andhra Pradesh. This is but a small part of the story, which a colleague and I have tried to capture in this very primitive and sketchy report written almost 9 months back. (Refer to it for more details if you like.)

But there is another very important lesson yet to be learnt by governments of different states in India. The SHGs are useful not just for the micro-finance industry. They become a tool to bind the community together, push reforms and development activities and kick-off employment in villages (especially for women). And what is probably the most important impact is that it empowers women and provides them some footing from where they can stake the claim for a say in the way the community and the village works. And it is these intangible benefits that many state governments, blinded by the money that MFIs bring to their states, are turning a blind eye to! But there is hope, as I will explain in a later post.