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Asia Pacific Region Microcredit Summit Presentation of Institutional Action Plans by Practitioner Organizations

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Asia Pacific Region Microcredit Summit (APRMS) Presentation of Institutional Action Plans by Practitioner Organizations
Original transcription by Barbara Cannas

Introduction by Kate McKee, Presentation by Prakash Bakshi, and following questions and answers

Ms. McKee: …I'd like to invite Mr. Bakshi, the Chief General Manager of the Microcredit Innovations department at NABARD in India, to present his institution's action plan.

Mr. Bakshi: Namaskar and good morning. It is a great honor for me to be representing twelve million poor women who are part of a unique program in India called the self-help banking program. It is also a great honor for me to be here before this august audience, because I, being someone involved with microfinance, would have perhaps thought that I would able to interact with many of the delegates here, but let me confess that in my most wildest dream, I would not have expected her majesty the Queen of Spain, or her excellency the First Lady of South Africa to be listening to me, including of course, respected Sharad Pawar, one of the most senior political leaders of India, who is also here today in the audience.

…The self-help group banking program is only about 12 years old. So what has been happening in these 12 years, and why did this not happen earlier—I think there is some reason that we should spend a little time on that, because if we understand that logic, we will understand what we are doing now a little better.

India, as you all know, is a large country. We have one billion people. 70% of them live in villages... 70% of the rural people are small and marginal farmers. That means they own less than 2 hectares of land, or perhaps nothing at all...

Now if you want to provide microfinance, or I would just say rural finance to these people, this huge category of 70% of one billion people, the first thing that you need to do is, you have to be there. Because unless you are there, you can't provide. You can't be sitting in the national capital and imagine providing rural finance in some remote villages. So the political and financial leadership of India…created a huge rural banking infrastructure in India today. We have about 153,000 retail outlets of the formal banking infrastructure—commercial banks…There are about 33,000 banks in rural areas. We have a special category of banks called regional rural banks, in the abbreviated form, RRBs. There are about 14,500 branches and the cooperatives…The cooperatives—about 100,000 retail outlets…the population for the regional outlet comes down to as low as 4,700. This is as dense, or as deep financial infrastructure that anybody can imagine. And as I said the 70% people live in rural areas and depends mainly on agriculture then agriculture credit is very important. At any point of time, the Indian banking system has more than $10 billion dollars of agriculture loans outstanding…

…But we enter the dilemma of the inverted pyramid. As the banking infrastructure tried to go deeper and deeper into the rural economy, we found that it was not reaching the poorest. Yes it was reaching the poor people, but we have been also talking of the poorest. So it was not getting to the bottom…The poorest are there at the bottom, in largest number. Then the slightly better off in a slightly lesser number. The most prosperous—very few villagers are very prosperous, an even lesser number. So you are penetrating the poor, but not reaching the poorest…The debt and investment summary that our central bank carries out every 10 years. The 1981 that is showed to us that almost 40% of rural indebtedness came still from informal sources…

And then we launched a series of research and action research studies in the mid-1980s. And what did we find? We first found that savings and credit products did not suit the needs of the poor…And I'll give you a simple example…The banks have savings accounts. But the system is such…if you need a photograph for savings—now a photograph costs something like 30 rupees in India—a passport size photograph. And if I have to make a saving of only 30 rupees, my entire savings will go for a photograph. I would prefer not to open a savings bank account, even though theoretically, the banking system allows you to open a savings bank account. Procedures were complicated and cumbersome. You enter into any bank anywhere and try to take a loan, you'll get application forms that look like a telephone directory. You have to get so many certificates from here and there. You are not talking about poor people who are mostly illiterate, the forms can be in [a] language which they can't read and write—but these are things which add to what we call non-interest transaction costs of the poor. The poor not only pay interest on loans, they have showed non-interest transaction costs. And if you have a system where the non-interest costs are very high, even if you give loans at [a] low rate of interest, the poor are actually paying a very high rate of interest. So the systems and procedures were adding to that transaction cost and therefore the poor were not accepting credit.

…. In our effort to remove poverty, we were always talking about production…So any loan that is given for consumption is disaster—"no, no, you cannot eat away the bank's money." Now what was happening was that these poor people have very fragile economies. Their own small, tiny economies on which they work are very fragile—there are ups and downs. Now there is a down and the down can be as simple as this. That suppose I am a worker and I fall sick. Unless I get well I can't go back to work and I need pay—50 rupees—that's just one dollar in India—to buy medicine. Now if I don't get that one dollar from somewhere—there are only two ways I can do it…[Either] I withdraw 50 rupees and thereby kill my production economy to buy medicine or I go to a moneylender to borrow that money…the production economy is always going to be susceptible to ups and downs that the poor often face…

Even special poverty alleviation programs that we had, as I mentioned, in the last fifty years…more than 50 million households were reached under the President's poverty alleviation programs. More than twenty billion dollars of loans were given by banking systems to the poor for poverty alleviation programs and still—we were having more than 30% of people who were poor. So…even these special programs did not recognize the importance of savings—savings is something which is extremely critical to the poor because they save for the rainy day. The next finding—resources handled were often larger than the poor could even handle…[If] a very poor person is given a very large amount in our attempt to remove poverty—only disaster can take place. And this is always what we were trying to do. For thirty to forty years we did just that. Because what happened is that our poverty line anywhere in the world—whether you make one dollar a day or in India we say—[the] income required to provide the minimum caloric requirement of about 2,400 calories per day. Ultimately, it all boils down to income…

…Resources handled were often larger than the poor's capacity to handle. That is why despite giving twenty billion dollars loans to poverty alleviation program, we were not able to remove poverty in a very significant measure. The last finding was, it was others who decided everything. We never asked the poor…They had no decision making capacity even under poverty alleviation programs. These research studies led us to the simple finding that the poor just wanted first…. a mechanism to keep safe their limited resources. Second, credit to meet emergencies which I mentioned, are very frequent. They may have daily emergencies, they may have weekly emergencies, it is unpredictable. But unless credit for emergencies is there, as I mentioned, credit for production does not take us very far. Third, they need capacity to make use of managed large credit.

…In other words, they just need hassle-free financial services…so that their non-interest transaction costs come down. So we were looking for solutions to these problems which we still face despite doing banking for hundreds of years. So what we were looking for was where to have a large outreach—India being a large country, and an institution like NABARD which works at the national level, you can't have small islands of successes. You need a program which will really reach out to the people. You must have a large outreach on a sustainable basis because you can't have an outreach one day and have the next day nothing, no. This will not do. Therefore you need to create products and systems which are in-tune with the needs and capacities of the poor and create a delivery mechanism which reduces transaction costs. Transaction costs of the delivery mechanism and transaction cost of the poor….

So if you reduce transaction cost, and as the chairman of PKSF said yesterday—not load inefficiency of the system on the poor in the name of market interest rates. He mentioned we need to improve our efficiency—that is something we wanted to build. So there were two possible approaches, one was: identify the poor and provide these services. Now identify in whatever manner you want—income definition is one. There could be many transparent proxy measures of identifying the poor, for example: the kind of house one lives in. There are many other things for example—at the level of poverty, it is sometimes very difficult to distinguish between the cause of poverty and the effect of poverty. They almost look to be similar. For example, somebody is sick—somebody is sick because he is not getting enough food and health services which is there because one doesn't have income. So you don't have income and that is why you are sick. And because you are sick, you can't work and that is why you have low income. So its kind of a cycle….

…Poverty is not just related to income, it is deprivation socially, politically, psychologically, economic issues, health, illiteracy, unemployment, very frequent employment and unemployment. These are all indicators of poverty in one way or another. A huge issue for us is that—we thought, ultimately, perhaps this will not take us anywhere. So we decided to have another way. Can we design products which only the poor will take? The poorest will take? If you have such products which are in-tune with only the poor, they will perhaps automatically dissuade the non-poor from taking it. Can this work? This was a challenge and we decided to adopt this challenge. And we came to what we now know as the self-help group. What is the self-help group? A self-help group is a homogenous group of about 15-20 persons. [The] word homogenous is extremely important because non-homogenous people are not a group. They are just numbers…. And once this group is formed, every member is encouraged to save some amount regularly.

We started with a savings-led approach rather than a credit-led approach. And why?….Every member is encouraged to save an amount, some very small amount—this is where I'm trying to say that design a product that will exclude the non-poor—For example, in the group we decide, okay we pay only one taka every week—those who will find that every week for one taka I have to go to a group meeting, [will say] "no, I'm rich enough to save ten takas, why only one taka? For a period of time, I would like to disassociate from that group that saves only one taka." So design a product which dissuades the non-poor from joining….And pool savings are kept in a savings bank account in the name of the self-help group…

This is the innovation that came in. In fact, I will say that history was created when the central bank of the country chooses exceptions to the banking system—[for example,] please open accounts in the name of these informal entities called self-help groups. These are not registered bodies. They are just called "Muhammad Yunus Self-Help Group" [for example]. Now "Muhammad Yunus Self Help Group" has twenty members, but the savings account is opened in the name of "Muhammad Yunus Self Help Group" to be operated by two or three group members. Now what have we done? The banking system that may have found it extremely impossible to have twenty small accounts of the members is now having only one account but providing savings services to twenty people. It has reduced its transaction costs by twenty times straight away. These poor people, these twenty people don't have to go to the bank branch to open the savings account because the group will maintain the account. So I am getting…savings services without going to the bank, only one person will go to the bank and deposit the money. So the transaction cost of the poor gets reduced, the transaction cost of the service provider gets reduced.

Third, use these poor savings to give small interest-bearing loans to members, especially for meeting emergencies. Now, suppose there are twenty members and everyone saves one taka a week. There will be twenty taka in one week, in one month there will be approximately a hundred taka, in one year there will be more than one thousand taka. Now this is small, as we say, drops of water make the ocean. This is becoming an ocean. Now one taka was almost meaningless for giving loans. But in six months time, if a group has 500 taka of their own savings. Well, we can meet the emergency [of] just three or four members. The moment this meeting takes place, somebody will say okay—I need a one dollar loan, that is 50 or 60 taka to buy books for my daughter who is going to school.

Now the issue was, can we scale down the financial operations to such a level that such a small loan can also be given? Now that is what we call efficiency. Can we scale down the savings to such a level where this becomes feasible?…. And while [linking] to the banking system….because that is where the money is. When we come later, we'll know how many billions of dollars will be required to provide microfinance to these millions in India. Now we were sure right from the beginning that although donors can help us start, donors will not be able to meet the entire requirement. Ultimately you must link with the banking system if you want to be sustainable. Let us move away from donor dependence.

Now, this tiny loan which is given by self-help group members from their own savings to meet emergencies or maybe tiny enterprises which means buying 10 goats, these are also economic enterprises for the poor. So this teaches the poor two important things—one is, all the poor in their group meetings start deciding, if Muhammad Yunus says in the group meeting "I want to keep a goat," one of members will immediately ask, "have you ever kept a goat? Do you know how many legs a goat has?" This is an appraisal of an economic enterprise. Every member starts, even if I don't want to keep a goat but Professor Yunus has said "I want to keep a goat" in the discussion, I will start thinking. Well, if I have to keep a goat, will I be able to do it? Now this question is answering the issue…[of] the graduation process. I have started thinking about a larger enterprise which I would perhaps like to take up on a later date…. Tomorrow, perhaps I will be ready for that. So every member…learns prioritization and financial discipline. Financial discipline because it is our money which is involved—we will take it back…

So the huge problem of loan default, which our banking system used to have, could perhaps be contained. Depending on the SHGs maturity, banks then give loans to the self-help groups, not to individual members. The loans are given to the groups as multiple [of] pooled savings…. Every week, every month, the bank manager will see if the savings are regular or not—how many loans have been given from the savings to the members. Are the members paying it back or not. Once the bank manager realizes, this is a group that knows financial discipline then I can put in my money also and I can be very safe about it. I can be very confident that my money will be safe because they have learned how to use the money properly. When the money is given to the self-help group, again the same thing happens. By giving a loan to the self-help groups—the transaction cost of the bank has drastically come down…

The product therefore [links] formal and informal banks and groups, the financial capital of the banks and the social capital of the groups, the system and procedures of the banks…with the flexibility of the group. The group can decide to meet in the morning or to meet in the evening. The group can have 15 members or 20 members. The group can decide what to do. This kind of flexibility is available to you.

[Another convergence is] professionalism of the bank and the local knowledge and group wisdom. Group wisdom is a tremendous capital on which we must capitalize. This is the convergence of resources—of professionalism, of formal institutions, and informal institutions that are brought in.

…In the first year of the program we had only 255 groups across the country—a drop in the ocean. By March 2003, we had more than 700,000 groups covering about 12 million families, 90% of them were women…There are 500 banks participating , so the normal banking system [is] participating. There are NGO partners, there are government agencies working with the social sector who are our partners. We have covered almost the entire country. Not uniformly— there are ups and downs, there are concentrations, there are pockets where practically nothing is happening right now…By March 2003, more than US$625 million [has been lent] at commercial interest rates, which banks charge to any other client.

The building of social capital [is an important question]. Who forms these groups? There are SHGPIs which stands for Self-Help Group Promoting Institutions, there are large number of partners, NGOs, socially committed volunteers, farmers clubs—because 70% of the people in any case are from a farming community. There are government agencies working with health, working with literacy, and of course there is the staff of the bank. So almost anybody who would like to form a group for this purpose is encouraged to form a group. And what is the impact? I'm quoting from a study which is about 4 years old for the simple reason that this was an all India study. We keep doing studies which are much more region-specific. Membership: agricultural labor was 31%, farmers with less than 2 hectares of land was 53%; 50% of members were illiterate—so we now know that we are really talking about reasonably poor people. Increase in savings from 9 dollars to 29 dollars in three years. We studied only those groups which completed at least three years. So after three years into the program the savings rate was still only 29 dollars in a year. Now we know we are really talking about very, very poor people…Average borrowing per year per household increased from about 86 dollars to 167 dollars—we are still talking about very small loans. Level of graduation: 60% of members cleared their whole debt in three years—[previously] they had huge informal debt.

…Now, all this depends on a huge amount of training and capacity building of partners. You have to train bankers, you have to train NGOs, you have to train government functionaries and of course you have to train the SHG members…The biggest problem of training is not funding—this is one thing which we learned very quickly. Money always comes, what you need is trainers. How do you create hundreds of thousands of trainers?….Even if you are talking about thirty thousand branches, and in each branch you want to train two people, you are talking about training 60,000 bank officers…I would also like to mention a partnership we have entered into with Indira Gandhi National Open University, which runs a distance education program on empowerment of women through self-help groups…[we have] different types of training programs for bankers—when you talk to the CEO of the bank, it is not the same as talking to the messenger or the driver of the bank, but even he needs training…When you talk to the CEO of the NGO, it is not the same thing as talking to the field worker of the NGO, so [you need] a range of training programs. So what have we done?

…By March 2003 we had trained 90,000 bankers and more than 16,000 NGO workers. We have created about 2,500 trainers, and trained more than 20,000 government officials, 350,000 SHG members, etc. All I'm trying to show [is] that the entire program is a huge program of training and capacity building, [which] uses a variety of training methods, training modules, etc.

Now how does it get funded? Well, this is investment in human capital and somebody has to fund it. We tried to be inclusive in our approach…let us all pool together to create our training programs. But, since the banking system is the ultimate beneficiary of the entire program…[A] twenty million dollar microfinance development fund was set up in NABARD three years back, with contributions from the banking system itself. Now, why does the banking system contribute this money? Because it knows that it is going to make a profits. Because unless it is a business proposition, a bank would not be doing it. So this is investment in current business and future business.

So what are we doing this year? Organizing more than 3,000 training programs, enlisting the support of at least 300 small NGOs across the country for SHG promotion and building their capacity, enrolling at least 100 new NGOs in the distance education program of the Indira Gandhi National Open University, and involving more and more regional rural banks and cooperatives. As I said, there are already 500 banks that are partners of the program, we expect another 70 banks to join us in this and at least 1,000 branches of commercial banks—there are already about 30,000—we would like to add one more thousand. Our simple strategy is to continue to invest in development of human capital, intensify diverse training and sensitized approaches, selectively meet implemental costs of SHG promotion, use information technology and microfinance systems to enhance efficiency and diffuse learnings….

All this would result in…the formation of about 150,000 new SHGs, financing about 150,000 these new SHGs and 700,000 already formed SHGs will get bank loans of more than $450 million. By 2007, we believe we will be serving more than 20 million very poor families who will be annually accessing more than $1 billion in loans... This is just two or three years away from us and we will find that this is happening. Thank you very much.

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