Microfinance is the latest buzzword in the developmental circles. Inspired by the success and its extensive documentation of Grameen Bank experience of Bangladesh, there are several experiments being carried out in India as well. Obviously it is mandatory for literature about these experiments to follow. Rural Credit and Savings has been one sector which has been almost damaged beyond repair due to the excessive intervention of the State and therefore now people are trying to look at solutions which are not conventional. In the light of immense action happening in the microfinance sector, Karmakar’s book is not only timely but also important addition to the existing literature.
Unlike many books focussed on microfinance, Karmakar goes much beyond what is narrowly defined as “microfinance” and looks at the issues related to rural credit in general. There is an extensive commentary on how the sector of rural credit has evolved over a period of time in India and how the State’s attitude has been changing in the form of policy interventions. In fact the first half of the book does not even mention “microfinance” but exclusively deals with the state of affairs of rural credit.
That the author has extensive experience in the area of rural credit is evident throughout the book. However, what seems to be lacking is a coherent theme in the book – it tries to be everything to everybody. The contents are as diverse as the title itself and one gets a feel that there is no core issue that the author is trying to address. So the book turns out to be a documentation and critique of the State policy on rural credit in the first half and a description of self-help groups and microfinance experiments in the second half. Of course, there is a mandatory wrapping up of the exercise with some recommendatory chapters on revival of credit delivery systems and developing appropriate systems for microfinance institutions.
It is evident that the entire problem of rural credit is looked at from the supply side point of view, throughout the book. The first and the strongest self-help groups were built on an initial concept of thrift and savings and lending of money pooled from savings, rather than pumping in money from outside. It is therefore surprising that there is little discussion on the thrift aspect and its importance in changing the approach to rural credit in India. This has been a major paradigm shift between the NABARD sponsored rural credit and the microfinance sector. The author fails to capture this very important link effectively.
The significant points made by the first half of book are:
- Formal rural credit system has, over the years failed to deliver. This is evident by the fact that the formal and informal sectors exist despite the interest rates of the formal sector being low (p.43)
- Instead of addressing the basic problems with the rural credit delivery systems, we have been creating new institutional structures, which continue to have the old problems (p.51)
- The transaction costs of the rural credit systems are very high and the system is plagued by non-performing assets
- Rural Credit needs to be restructured (p.107)
One might have problems in the way transaction costs are calculated (p.122, 123) and the two significant recommendations that the RRBs should be merged with commercial banks and Long Term rural Credit Structure should be merged with the Short Term structure (p.107). But still it can be generally agreed that the above points are not only valid, but have been repeated by several studies that have been undertaken in the past. Now the recommendation of restructuring the rural credit system has two problems. One - because of the heavy accumulated losses and NPAs of one wing to be merged (RRBs, Long Term Institutions) and the - none too impressive profitability track record of the other, it would leave the rural credit sector with a larger sick institution. The second problem is that this militates against Karmakar’s own stand that we are creating new/different institutional forms instead of looking at alternative forms (p.51).
The next part of the book looks and analyses the credit needs of different segments of the people in the rural economy – tribals, women, micro-entrepreneurs, non-farm sector. It gives some case studies of self-help groups and microfinance institutions. It then jumps to a chapter which talks of revival of rural credit “delivery” in India – thereby not recognizing the paradigm shift that is happening in the sector. What could be culled out of the series of chapters in the second half is:
- The transaction costs being high in rural credit is a fact to be recognised and addressed.
- Self-help groups represent a methodology where the transaction costs are either reduced or transferred away from the banking system (formation of SHGs enable banks to save on expenditure for appraisal costs, because first level screening is done by the group; and reduce cost on loan monitoring – which is done by NGOs - p.359)
- There have been successful experiments of rural banking using the concepts of self-help groups – both within India and in Asia and therefore evidence that this alternative works. (Experiments in Orissa, Karnataka, Andhra Pradesh, Bangladesh, Thailand etc.,)
- There needs to be an analysis of even these experiments to increase their impact. There are a series of recommendations for each of the experiments studied and for systems and procedures in general.
The most important point that could have been made by the book – with all its data could have been the highlighting of transfer of transaction costs and increasing the overall efficiency of the system, which is bound to lead to a revival of the rural banking sector. Firstly, because most microfinance experiments are based on concepts of thrift and then credit, the basic exchange needs are addressed within the smaller unit. The collective approaches the bank or other formal institutions for the residual needs – both savings and credit. So the transaction costs of the banking sector is tremendously reduced – instead of dealing in large number of small transactions, they are now dealing with wholesale transactions. The risk of NPAs is also reduced because there is peer pressure and any individual NPA within the group is absorbed within the group and does not affect the financial institution. Of course there is an increased risk to the institution if the group as a collective goes sick!
While the book has a wealth of information on rural credit and is an excellent source book for a great policy review including a critical analysis of various committees that looked into the aspects of rural credit, it still does not give the macro effect it could have given. This is certainly not to undermine the importance of this book or the immense amount of work that must have gone into getting the book in its current form. With a little bit of editorial support and some inputs on the centrality of the theme of the book, what is now a good book could have been an excellent source of reference. This is particularly true because we need some good quality analysis and reporting on the microfinance sector in India.
Finally some smaller points:
- The vicious cycle of inefficient functioning (p.103) looks strikingly similar to Dependence Trap laid out by Seetaraman and Mohanan in 1985 in their analysis of the co-operative system. Was it inspired? In any case, this proves the point that the vicious cycle is not limited to co-operatives alone.
- The draft guidelines for Small Credit Associations indicate that “the savings contribution could be in the form of cash or kind (which has immediate market value). The group would convert the kind into cash – in order to maintain uniform accounting system” – What do we call this? Backward Linkages, Barter or say that monetary units are used only for accounting systems?
- The registration options for SHGs indicate the following:
- Trusts – but members cannot derive any income from the activities
- Partnership – but they might attract the provisions of Companies Act if they are more than 20.
- Society – They cannot declare dividend. Common property cannot be distributed amongst members in case of dissolution. Members stand to lose the savings money kept in the corpus
- Co-op – Too much of control of the registrar and regulation over functional autonomy
- Company – Registration procedures are lengthy and time consuming.
Rural Credit And Self-Help Groups
Micro-finance Needs and Concepts in India
By K G Karmakar
Sage Publications, New Delhi 1999
Price: Rs.465 (Cloth)