A point of view by Indian comrades

From, october 2005

{Given the vast and growing network of SHGs in the countryside, particularly in the areas of revolutionary struggles, and the importance being given to microfinance by the establishment, this article is an eye-opener on the real role of microfinance and its actual impact — or lack of it — on people’s lives. Interestingly one of the first visits of the new World Bank President, Paul Wolfowitz (an extreme right-wing neo-conservative from the USA), was to AP, where after a discussion with rural women from some SHGs he granted assistance of a massive $260 million for these SHG movement up to 2008 — coincidentally this took place a day after a ban was imposed on the Maoists in AP……… Editor}

The Year 2005 has been declared as the international year of microfinance by the United Nations. In India too, it was stated clearly in the budget of 2005-06 that the government intends to promote micro-finance institutions in a big way. This is nothing but one more mechanism to entrap the rural poor in the vicious cycle of debt and keep them from challenging the system responsible for their woes.

Bhagvathy, treasurer of a few Malar Self Help Groups in Kanyakumari district and her co-members were ecstatic when they received the keys to the harvester, sanctioned under the Swaran Jayanti Gram Swarojgar Yojna (SGSY) loan scheme, from the chief minister, no less, at a public function, only to be disillusioned when they saw that it came without the engine! In the event, the additional Rs 18,000 for the engine had to be mobilised from the private credit market at a usurious interest rate.

The women of a neighbouring Self Help Group (SHG) were not much happier either. Their SGSY enterprise loan that was sanctioned by the bank at a public function, with disbursement promised within two weeks, did not materialize at all as the concerned field officer was transferred. The women who had paid an advance for the purchase of cows, anticipating a quick loan disbursement; started paying 60% p.a. interest on the private loan they were forced to take, to retain the cows.

These are not isolated incidents. The much propagated new panacea for eradicat-ing poverty, generating employment and empowering women, the ‘magic wand’ of microfinance or microcredit is a well thought out conspiracy by imperialists to leave people with a fewer crumbs of bread than they deserve.

The network of SHGs spans virtually all the states of the country. The debate on the issue has become even more pertinent in the light of the fact that the present year, 2005, has been declared as the international year of microfinance by the United Nations. Stanly Fischer, vice-chair of Citigroup and chair of the advisors’ group for the International year of micro-credit says, "Today the world’s stock markets are focusing on the people to whom this year is dedicated: microfinance clients". A consensus was reached at the micro-credit summit at Washington DC in 1997, to reach credit assistance to the 100 million of the world’s poorest families by the year 2005. Even in India, the Union Budget of 2005-06 gave special focus to mcirofinance and the corpus fund for microfinance was raised to Rs. 200 crores by the Reserve Bank of India. The ‘Microfinance Development Fund’ was re-designated as the "Microfinance Development & Equity Fund".

Micro-credit is being proposed as the magic wand that can wish away poverty without having to address the uncomfort-able issue of inequitable ownership of wealth and resources.

What is Microfinance

According to the Asian Development Bank, one of the biggest donors for micro-finance, the provision of financial services, such as deposits, loans, payment services, money transfers & insurance to the poor and low-income households and their micro-enter-prises are broadly called ‘micro-financing’. The term micro-finance came into greater currency since the early 1990s and has largely supplanted the term ‘micro-credit’.

A microfinance institution (MFI) is a financial intermediary, which provides credit to the rural populace. This most often are NGOs, but can also be some other bodies like the panchayats, anganwadi teachers, etc. This MFI then sets up Self-help Groups (SHGs) which comprise about 20 people (mostly women) who deposit (save) a certain amount each week/month. Then the MFI puts in an equal amount (or upto four times the amount) and the loan is given to individual members of the SHGs. The loans are given individually but the liability is the collective responsibility of the SHG. In turn, the MFIs are re-financed by commercial banks.

Today, there are 800 plus MFIs who lend to the poor in India. The SHG or the self-help groups are formed extensively with the help of NGOs. SHG–bank linkage model is the indigenous model of micro-credit that has evolved in India. At the present, there are 3000-plus NGOs with the SHG–bank linkage programme and other models of bank – MFI linkages by the NABARD. The SHG–bank linkage programme covers over 14 lakh groups, involving a cumulative credit flow of Rs. 6,300 crores at the end of March, 2005 from the banking system. Each SHG is supposed to have around 20 members with relatively similar incomes. Their primary principle is the lending of member’s savings but SHGs also seek external funding. World Bank and ADB are the biggest donors to MFIs. Typically, SHGs are promoted and supported by NGOs, with some acting as financial inter-mediaries for SHGs, while others acting as ‘social’ intermediaries, seeking to facilitate linkages of SHGs with various funding agencies. International institutions like OXFAM and Action Aid organise SHGs either directly or with help from local NGOs. Later, these SHGs are linked to various foreign banks. This is known as ‘bank-linkage’. Being a savings-first model, banks have a corporate policy to expand micro-credit operations under the SHG-bank linkage mode.

The origin of SHGs can be traced to 1976, when Professor Mohammud Yunus of Bangladesh started women’s group in Bangladesh. This group later developed into the Bangladesh Grameen Bank. In India, the pioneer in this field was Self Employed Women’s Association (SEWA). Although it started as a trade union for women in the unorganised sector almost 40 years ago, today it boasts of running the first women’s bank in the country. In southern India, organisations like Pradan, Myrada, Asseefa, Malar etc. have entered this rural credit system. All these are high-profile NGOs getting vast funds from the imperialist countries.

In fact, there is a diversity of approa-ches to microfinance involving banks, NGOs and co-operatives. In each of these models, the group usually assumes joint liability for loans taken by its members. SHGs of 15-20 members, for instance, may rotate their savings as internal loans within the group as well as access loans from the MFI or from a bank. The group usually has weekly, fortnightly or monthly meetings, in which the members deposit a regular savings amount and make any loan repayments. In these meetings, a definite sum of Rs. 10, Rs. 20 etc is deposited by each member and these deposits are used for internal loans. After being satisfied about savings and repayments, banks give loans to the groups.

NABARD (National Bank for Agriculture and Rural Development) which came into existence in 1981, refinances the banks, which in turn lend to the SHGs.

Microfinance has come a long way from linking a few SHGs in the early 90s and launching of the NABARD’s SHG–bank linkage programme. Microfinance services now cover approximately 28 lakh poor households with the SHG model account-ing for 64% of MFI clients. There is a pronounced regional tilt with 90% of the clients in the South and Western parts of India. Also, nearly 93% of SHG clients are women, and therefore, the talk of empower-ment of women. One major aim of these schemes is to seek to draw away the oppressed masses from the new power being established in the villages by the Maoists and replace it by the so-called em-powerment of the SHGs. For this vast sums are being spent by the imperialists and their institutions like the World Bank, ADB, etc.

Repayment rates range, on an average, from 87% to 97% of all loans! NABARD had already given loans of Rs. 1,192 crore to 11 lakh SHGs till March 2004. The finance minister, in his budget speech this year has asked NABARD and SIDBI to increase the number of SHGs in India significantly.

SHGs have also been institutionalised within the state’s anti-poverty programmes through the Swarn Jayanti Gram Swarojgar Yojna (SGSY), a self-employment promotion scheme, which claims to provide loan cum subsidy to the rural poor, officially certified as below the poverty line (BPL). The SGSY was launched after the scrapping of the IRDP (Integrated Rural Development Programme) in 1999-2000.

NGOs are the backbone of this system of rural credit. In many places, they are being encouraged to form SHGs, and remunerated by the donor banks. Today, NABARD gives Rs 2000 to an NGO for bank–linkage with a SHG, since NGOs can assure the payback and recovery of loans. Womens’ SHGs and micro-credit organisa-tions are being seen as roads to poverty alleviation and emancipation of women. Govts have also jumped on to bandwagon by forming lakhs of such groups.

World Outreach of Micro-credit

Date             Programmes         Clients (No.)

End 1997       618                    13.5 million
End 2000       1567                   30.7 million

The new money-lender: Abdication of state responsibility

The SHG member may be charged between 24% and 36% or even 48% on the loan that they receive from the MFI! The norm is about 3% per month which is itself usurious compared to what banks charge. In some cases, the NGOs involved charge an additional sum for its services which is added to the interest rates. The RBI, in a draft report has stated that MFIs could determine their own rates of interest. These loans are meant for the BPL households, who are also charged interest rate for other agricultural loans (against land or crop or Kisan Credit Card) — between 8 to 12% p.a. So, even here the BPL households are being charged a higher rate of interest than other sections (car or housing loans are now available for 7%). Earlier, there were cooperative credit institutions, followed by nationalisation of major domestic banks in 1969, and later, the creation of rural banks.

However, the scheduled commercial banks have covered only 18.4% of the rural population. But since the early 1990s, with liberalisation swallowing the banking sector as well, increasing attention is being given to recovery and profitability of banks. The bank sector, in turn, has started showing lack of interest in small accounts. The number of loan accounts of small borrowers with a credit limit range of less than Rs 25,000 has decreased from 5.88 crore in 1991 to 3.69 crore in 2003. There was a drop of 41% in the number of small loan accounts in merely 10 years. While the government is withdrawing from its responsibility of providing loans to the poor, the alternative being presented is microfinance services.

If microfinance could meet the credit requirements of the poor, then why is the entire country rocked by debt-related suicides? What credibility does Andhra Pradesh’s micro-credit ‘success story’ have if it is the state with the highest number of debt-related suicides? A report compiled at the request of Bombay High Court about farmer’s suicides in Maharashtra, states that corporate globalisation and ruling indebt-edness are the reasons, for suicides care not restricted to one income level or land-holding category. Accordingly, private lend-ing accounts for 50% of the total lending.

It is quite obvious that micro-finance has not reduced the business or the terms of the moneylenders. Also, microfinance does not factor in the fact that even today, a large part of the rural loans are required for consumption purposes and not income-generating activities. In fact, there is evidence to show that microfinance clients often need to borrow from other sources to meet their repayment schedules, especially of the SHGs. Field reports of SHGs describe the strategies women deploy to keep up with the repayment schedules. These range from pledging jewellery, reducing food intake, selling personal assets and borrowing from informal moneylenders. No surprises here. Because in microfinance, the ‘ability to repay’ is more important than the credit requirement of the needy. In fact, the simultaneous withdrawal of the state from rural credit and the entry of microfinance is pushing the poor into the clutches of the moneylenders!

Actually, the lucrative ‘commercial’ business of microfinance is shifting from the local money-lenders’ hands to men who are suave and come with a tag of a social missionary! Said a micro-credit activist of Karnataka, "If the women had lent their savings to the market, they would have earned more than what they are earning through SHGs. Both MFIs and NGOs, who receive money from NABARD and banks at low interest rates have become commercial organisations, profiting at the cost of poor women, who continue to pay high interest rates of about 24% on the loans they receive from the MFIs ".

The microfinance system is actually becoming a way of mobilizing rural savings as well, e.g., the credit/deposit ratio in Uttar Pradesh is 33% implying that only Rs. 33 out of Rs. 100 of deposits is going back to the people in the form of loans. In the backward districts, this ratio is even lower ranging from 16 to 21% implying that although savings are mobilized from these predominantly agricultural areas, only 16 to 21% of peoples’ own savings go back to them in the form of credit. The SHG model of microfinance, in real sense, sucks the poor people of their meagre savings, rather than providing them credit!

The Corporate Interest

Of late, the big corporate sector and the multinationals firms are exhibiting an increasing interest in microfinance. The impressive roll-call of corporates in funding SHGs, directly or by partnerships, and supporting NGOs, includes, ICICI, Citibank ABN Amro, Hindustan Lever Ltd. (Stree-Shakti project), ITC (e-chaupal), Mahindra & Mahindra (Subha Labh), Tata Group (Kisan Sansar), HDFC, Max New Life Insurance, etc. In fact, ICICI is aggressively moving both by setting up a network of SHGs like in Tamilnadu or in partnership with local NGOs to form the SHGs. While it lent out at least Rs 240 crores to the SHGs in the first case, in the second, at least 40 NGOs are in partnership with it in Kerala, AP, Karnataka, Orissa, WB, Jharkhand, UP & Rajasthan.

Cashphor India is into microfinance in Gazipur, Mirzapur, Chandauli, Mau, Balia (all in UP). Registered in 1996, Cashphor Financial & Technical Services (CFTS), ended up near areas bordering the eastern UP and western Bihar, for these regions had the highest number of poor households. This MFI is based on the model of Grameen Bank, where a group of 5-6 members is made and loans are given to individual members but the liability to repay is still collective. CFTS has taken financial help from NABARD, ICICI, UCO bank, UTI Bank, Deutsche Bank, Mumbai, Grameen Foundation USA etc. at 6 to 12% interest rate and disbursed loans to villagers at 20% interest rate. It disbursed its first loan in Mirzapur in September 1997. What started as a company with small funds of approxi-mately 4 lakhs in 1997, grew to a big enter-prise with funds of 16 crore Rs by Novem-ber 2003. On 1 December 2003, micro-credit business of CFTS Ltd. was sold to CMC. Indeed, microfinance has become a profitable business!

MNCs are getting interested in SHGs as consumers of their products. They are doing marketing surveys through SHGs. In 2001, FMCG major, Hindustan Lever Ltd. (HLL) launched ‘Project Shakti’, a rural direct to home distributor model, which utilizes networks of women from SHGs as rural direct-to-home distributors. It claims to provide economic opportunities to the poor women but the fact is that its real interest lies in creating a distribution and communication channels for HLL’s brands to access the untapped rural markets with a consumer base of 100 million rural Indians.

In September 2004, Grameen Bank in Bangladesh went a step further in its endeavour to ‘reduce poverty’ through micro-credit, by equipping beggars on the city streets with mobile phones! The plan was that the beggars would offer the phone to the passers–by to make calls for a fee. Each mobile phone would cost the beggars 8,500 taka repayable over two years in interest free instalments The corporate interest clearly lies in penetrating the vast and hitherto inaccessible rural market.

Myth of employment generation

The SGSY, modeled on the lines of the SHG, claims to provide self-employment opportunities to those below the poverty line, especially women. This is again a hoax. In the first place, the eligibility criteria for accessing the SGSY scheme is the repayment of earlier loans taken (primarily the IRDP) by the male relatives of women SHG members.

Secondly, several SHGs complain of imposing on them some enterprise activity by block and bank officials, such as toy-making, embroidery, candle-making etc. but without any guarantee of market support. SHGs that bought milk cattle in several parts of Tamil Nadu under the SGSY scheme said the milk co-operative societies usually transfer their working capital liability onto the shoulders of the poor by delaying payments for the milk by over a month!

A SHG named Jai Bajrang operating in Jasra block near Allahabad in UP, was formed 4 years back with 12 members. The members began by depositing Rs. 60 per month. After 1½ years, they received a loan of Rs. 1½ lakh. 12 buffalos were bought with this. Over time, the cattle started giving reduced milk but the loan installment had to go on. In a period of three years Rs. 80,000 could be paid back. The cattle has grown thin, milk has reduced but the debt is still there.

More or less, this is the tale of Majority of SHGs. The reality is that in a globalised world, it is near impossible for small-scale enterprises to sustain themselves faced with competition from global corps. What with the small-scale industry being in a dismal shape, can such enterprises generate employment in a world where the market has been monopolised by MNCs & TNCs. All claims of employment generation through rearing cattle, making papad, candles, pickles etc. are nothing but sick jokes in a situation where people are getting displaced continuously. We all know stories of farmers’ suicides are no longer confined to being mere statistics.

Micro-credit schemes cannot alleviate poverty because they are intended to bypass the actual reason of poverty – the inequitable social relations.

The real interest

The actual reason underlying the microfinance programmes is the reform programme being pushed by imperialists, and their local cronies, to divert the people from class struggle. It is not unintended that the largest recipient of such finance in India, is Andhra Pradesh and the largest in Maharashtra is Gadchiroli district. In UP, most of the microfinance is going to Mirzapur district. All these are regions of intense revolutionary struggles led by the Maoists. Again, it is not unintended that NGOs are being involved in this programme in such big way.

The state well understands that the situation is becoming explosive, with massive unemployment as a result of the policies of LPG. In such a situation, if people have to be prevented from entering revolu-tionary class struggles, they need to be given some sops in the form of employment generating activities. Besides, all talk of empowerment is a political ruse to divert the masses from the people’s power evolv-ing in embryonic form in the guerrilla zones and areas of intense peasant struggles.

As early as 1948, America helped launch a project for 64 villages in Itawah district of UP. Described by Nehru as an ‘ideal weapon’ to deal with revolutionary threats to basic land-reforms, it soon became an all India programme. The US provided financial and technical assistance. It was claimed that such community development programmes would lead to all-round development of the Indian countryside through mutual cooperation & self help of the villagers. Just before the inauguration of these programmes by Nehru in October 1952, an ‘operational agreement’ was signed by the US & Indian governments on 31 May 1952 which gave the organisa-tional details of community development.

The same story and same interests prevail today – forms may vary and one of the forms is microfinances. With continuo-us shrinking of employment opportunities and abdication of the state’s responsibility in the social sector in accordance with the policies of LPG, a safety valve is required to prevent the people from rising up against these policies. Microfinance, with the help of NGOs, is one such programme. On top of it, it provides inroads for the corporate sector into the hitherto vast unexplored rural market. It also helps tap some of the rural savings. The government is happy that the responsibility of providing credit to the needy is no longer there. Banks are happy that SHGs, are able to ensure repayments. And, imperialists are happy that the magic bullet of microfinance is weaning away people and funds from revolutionary struggles.

The only victims are the people, prey to a new, suave and dangerous moneylender.