Microfinance and Small Farmers in India

Today the world is reeling under the sub-prime crisis and the impact of so-called innovative finance derivative products. What has this got to do with small farmers in India? First, we are having farmers suicides, the main cause of which is high debt. And since these farmers don’t have protection under any « limited liability » laws, nor are their bonuses protected, they stand to loose their land, and pass on their liability to their helpless children.

Yet the clammer is to reach credit in different ways to this group of people. Microfinance Institutions (MFIs) or many of the rural NBFC (Non Banking Financial Institutions) starting with the earliest chit fund variety, have long been discredited as millions of small savers had been defrauded of their savings. Now however there is a new breed of MFIs making a massive re-entry into the country-side by offering innovative products and schemes. They style themselves on the more successful SHG (Self-Help Groups) model.

The Case of Andhra Pradesh

Andhra Pradesh has a large number of micro finance institutions. Traditionally this referred to local “chitty groups” and small thrift groups of women. These type of groups was first popularised, particularly in Andhra, by the so called Naxalites, a radical left set of groups and parties. They would start the local thrift groups, after they declared a moratorium on repayment of all debt to the local money lenders. For a long time the entire local credit needs was taken care of by the savings of the tribals themselves, who were used to paying usurious rates of interest to the local moneylenders. It was therefore realised that poor people found normally high rates of interest of around 30 percent easy to manage, as they were used to paying something like 120% per annum for short terms quickly processed promissories. Enter the NGOs and the government, and a new category – the SHG – Self-Help-Group was born.

Andhra Pradesh (AP) has been the leader in microfinance movements especially in the SHG–bank-linkage model. A strong state government support and a willing banking system with a large network have played a significant part in this. More than 708,000 groups have been formed in the state as of March 2008. The number of members that had been enrolled in the SHGs exceeded 8.8 million. The state not only did the mobilisation of people into groups but has also gone about setting up higher level institutions that could provide umbrella support for the SHGs. The typical higher level organisation that exists in the SHGs sphere in AP is mostly state-governed. The SHGs within a village are federated into a village organisation. In turn, village organisations within a mandal are part of a federation named Mandal Samakhya. The Mandal Samakhyas in a district are again federated at the district level under a Jilha Samakhya. The mandal and district-level federations, which are larger, and higher level federations are supported by the staff of the state government, appointed under the The Society for Elimination of Rural Poverty (SERP).

The CED spoke to Mr. T. Vijay Kumar who is the man behind Society for Elimination of Rural Poverty (SERP), Hyderabad. He said:

“SERP is funded by the World Bank and is backed by the state government and chaired by the Chief Minister of Andhra Pradesh in India. Its goal is to improve livelihoods through its poverty alleviation strategies that work via empowerment of women self-help groups. It is also involved in microfinance under the Self Help Group model. In Andhra Pradesh, about 10 million rural households are covered under its Self Help Group network. The Self Help Group movement of women in Andhra Pradesh tackled the credit issues of the poor to a great extent. Once the credit issues were resolved or at least the situation improved it was important to figure out how they could get better incomes from their livelihoods. After all the credit needs to be applied somewhere and the returns should contribute in the improvement the livelihoods of the household.

“Agriculture provides the principal means of livelihoods for over 80-85% of the rural population. For the poor, the dependence on agriculture and allied sectors is even more. So when we built and nurtured the women’s networks, the first intervention was basically to enable them to sell their produce on better terms - by aggregating the produce, understanding the markets and by avoiding the usual village level intermediaries who were exploiting them.

“The first step was therefore to enable them to get better prices from the market. When we assessed the results we found they were very happy that they got better returns. Then they shared that they were spending a lot of money on seeds, fertilizers and pesticides. That is when Dr. Sanghi of WASSAN (Watershed Support Services and Activities Network) and CSA (Centre for Sustainable Agriculture) came up with the pesticide-free agriculture concept. We tried it out in a limited area where social mobilization has already taken place.

“So in the same place where the women had achieved success in breaking from the shackles of money lenders and traders, this intervention was launched - that of reducing the cost of cultivation by improving their knowledge about local resources and knowledge about pests. The management and the ownership of this whole program were with the Mandal Samakhyas, at the Mandal level, the SHG Federation, and at the village level with the Gramakhya Sangam or the village organization.

“So first, the institutions of the poor, the institutions of women farmers were the managers of this process. Second, the system that we adopted for expanding this knowledge is also unique.”

The value added services model

One of the issues that has come up is with the strong state government support is whether the prevalence of subsidy pushes up the demand for microfinance. The average loan amount per group has gone up by almost 4 times in a 3-year period. A level of Rs 0.13 million per SHG is the present average lending to SHGs. This argument is generally advanced by those who believe that the government should withdraw from the social sector, and leave it to the market forces. This is now seen as possible as suddenly the unbankable became the eminently bankable, and a new breed of MFIs started channelizing money from the mainstream and also providing value added services.

Basix India is a typical MFI. At a workshop on market access for small farmers, Amarnath, an officer of Basix in Anantapur District, speaks of the structure of Basix, and its intervention.

“Basix is into microfinance through its subsidiary, Indian Grameen Services, through which we give total support services to our borrowers and non-borrowers. We intervened because the market yards in Anantapur were not functioning. Farmers invariably depend on the middleman. With regard to groundnut, we first did an action research to determine where exactly intervention is needed. One area is in the product enhancement and the other was market linkages.

“In product enhancement, we started a centralised unit for de-poding (separating the shell from the kernel which used to be done by the middlemen). After initial resistance of 5-6 months, we now process the produce of 250 farmers raising their income by 15 to 20 %. Anticipating shortage of good sowing seeds after a drought year in 2002, we facilitated the supply of credit and identify the good pods (seeds). We worked with the SHG and the women’s federation which are very strong in Andhra Pradesh, particularly in Anantpur district. With another NGO, we promoted the minimum irrigation support programme, which consists of making pits for storage of 25,000 litres of water, which is sufficient to cultivate one hectare of land.”

In 2005-06, a major controversy broke out when there were reports of farmers’ suicides related to debt to micro-finance institutions. The AP government had registered criminal cases against those MFIs who were using ‘arm twisting methods’ to recover loans from the rural poor leading to some committing suicides.

Then Special Chief Secretary (Revenue), AP, V.P. Jauhari, told reporters that he had learnt from the District Collector that 10 persons had committed suicide, as they were unable to repay the loans borrowed from the MFIs. “The MFIs are providing loans to those in dire need of finances by taking their consent on a ‘white paper’ and later incorporating the interest rates as high as 40 to 50%”. There was no transparency in the process of issuing loans and the money recovery mode.

Chief Minister Y. S. Rajasekhara Reddy ordered a one man inquiry headed by Mr. Jauhari, into the affairs of the micro-finance agencies in Guntur, Krishna and Nalgonda districts and issued directions that the matter be taken up with the Reserve Bank of India (RBI) too.

While the state government wants the MFIs to reduce the interest rate to the minimum possible, MFIs claim they cannot do so. RBI officials feel that their role would be very minimal as they cannot direct the MFIs on what interest rate they should charge as it is in the free-interest regime. They also feel that any disturbance in the MFI operations would influence the financial conditions of commercial banks who are lending them (1).

In his report after the inquiry, Jauhari recommended that the state government crack the whip on the MFIs for grossly violating the human rights of the poor borrowers in the name of recovery of loans. He also stressed the need for expediting the enactment of Money-lenders’ Act to rein in the MFIs. Also, they should not be allowed to operate without a valid license. Significant among the recommendations made by Jauhari is that lending should be henceforth confined only to the women self-help groups and not individual members.

Arguing the case of higher interest rates at the market access workshop, Amarnath of Basix had said: “Money lenders charge 36-48%. We charge 25% which is maybe high compared to the Bank rate, but we provide service like sub-sector intervention and market linkages. Also we don’t take any collateral security. We have a joint liability group (JLG) of around 5-6 members. That group is responsible to see that each one pays. If one person from the group does not pay all the other five are responsible for that. For SHG Federations, the interest rate is 15% and individual members of SHGs, the rate is 18%.”

The Timbaktu SHG model

The issue still remains that concessional credit, like many of the other schemes like concessional housing, tends to breed its own sub-market, and/or corruption. There are instances of the loans being used by the members for lending to non-members at higher rates of interest.

This is where local interest, peer stake in the capital is of vital importance. Too many SHG are flooded with too much of credit, as banks seek to dump credit through these SHGs. The other issue is whether a sufficient percentage of these loans go into projects, enterprises in the livelihood development sector.

A good model is that of the SHGs promoted by the Timbaktu collective. These SHGs themselves have developed several livelihood projects, starting from an eating house run by the women serving only local, minor millet food, to a processing centre, and a proposed dairy unit. A lot of the money for these has been raised through small low interest loans from friends and sympathisers.