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Editorial
Some Questions about Microfinance and Self-Help Groups
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The self-help group (SHG) and microfinance are concepts that promised much to the poor in India. The concept began initially in Bangladesh under the Grameen Bank but has made huge inroads in India largely through the efforts of NGOs. The system works roughly like this:
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  1. A group of 15 to 20 people get together and form a ‘self-help group’. They contribute small amounts to a pool periodically with the understanding that they will have access to money in times of crisis.
  2. The group must be homogeneous so that they are not dominated by one or more individuals. A popular model is for the SHG to be only of women with no man allowed as a member.
  3. A literate member of the SHG maintains accounts, usually as taught by the NGO to which the SHG is affiliated.
  4. The money in the pool is kept in a bank, which may also lend money on occasion to the SHG.
  5. Periodically, as per a common understanding, one or more needy members is allowed to borrow money out of the pool. The borrower will pay interest at the rate fixed by the SHG (usually over a period of no more than one year).
  6. The money borrowed by the member is repaid in periodical installments.
  7. Since the members of the SHG are all known to each other, money is almost entirely recovered because of peer pressure. The recovery rates often range between 99% and 100%.
  8. Members are encouraged to take loans for productive purposes but this is not insisted upon. Loans are usually also be obtained for consumption purposes, marriages, education, medical treatment etc.
  9. There are microfinance institutions which lend money to SHGs or individuals on interest. The SHG is liable for the money it has borrowed and it uses the borrowed money to lend to one or more of its members. The members owe money to the SHG.
Contrary to popular belief, the poor in India are not people without savings but tend to save even it means cutting down on essentials like food. But, by and large, the membership of SHGs actually excludes the poorest, because to have the ability to put away some fixed amount of cash periodically draws the line between those who can and those who can’t. Rural economies in India are usually very much shorter on cash, especially at the household level, than urban ones. So the SHG concept does not actually serve the poorest, since they have nothing to offer as leverage. In fact, highly monetized rural economies see much greater incidence of household indebtedness than those which are closer to the barter levels. Taking loans indiscriminately becomes easy and people often bet wrong about how much they can repay in any given period in the immediate future. One bad monsoon or failed crop can send them into a debt trap spiral, seen often. Andhra is a prime example of this. Providing ‘easy’ access to cash in a largely low cash economy creates peculiar problems. SHG members are not salaried employees. Rural, agricultural or otherwise, incomes are bunched with most cash earning happening in a couple of spans of 2-3 months during the year. The expenses of the entire year have to be carefully planned and managed from these amounts. There is no certainty of how much income is actually going to be available, and such planning is quite tentative. In such situations, to come up with cash on a regular basis is extremely difficult.
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But SHGs always have money regardless of how poor its members are, individually. SHGs, consequently, only provide funds in times of emergency and microfinance is not really a poverty alleviation scheme. Still, the availability of funds at crisis moments provides reassurance and the idea of microfinance is catching on. There are, however, some aspects that are disquieting:
  1. Microfinance institutions have sprung up around the world after the market sensed that helping the poor could be profitable. Some of them in places like Mexico charge interest at over 100% per annum. The global average in interest and fees is apparently 37% p.a. Earning huge profits from microfinance is not illegal. CARE, the Atlanta-based humanitarian organization, was the force behind a microfinance institution it started in Peru in 1997. The initial investment was around $3.5 million, including $450,000 of taxpayer money. But recently, Banco de Credito, one of Peru's largest banks, bought the business for $96 million, of which CARE pocketed $74 million, which shows how profitable lending money to the poor can be.
  2. SHGs are encouraged to fix their own rates of interest on loans to their members in India. Usually, this means that the rate of interest is high rather than low. A fairly common rate fixed by SHG in India is around 24% p.a.
  3. The interest earned on loaded funds goes back into the pool of the SHG. The SHG becomes richer but, by and large, it does not pay out dividends to its members on its earnings. In effect, therefore, it has the disadvantages of a chit fund without its advantages.
  4. Members who put money into the SHG pool are only eligible for loans against it but are not allowed to draw it out. This means that they are often paying high rates of interest on their own money.
  5. For some reason, SHGs are never closed – as chits are closed, for instance. The NGOs to which SHGs are affiliated discourage them from closing and paying off their members. Why this happens is not clear but NGOs are evaluated by donor agencies and having functioning SHGs with sizeable funds under their umbrella looks better when they are evaluated.
  6. If no dividends are paid by SHGs and they never reach a stage when they pay off their members out of the pool, what happens when a member dies or leaves the place? Given that they are not powerful enough to demand back the money they have paid into the pool, they will probably lose it.
  7. Leaving an SHG is not an option. If a member falls into poverty some time after joining the SHG and can no longer pay regular contributions, she is ejected from the group and she forfeits her existing savings as well. There is tremendous pressure in such cases to continue to pay by some means or the other and many take loans to pay their contributions, usually from fellow members of the same SHG. The same is true of loans. If after taking the loan, the member’s economic condition worsens for some reason, his/her position is terrible. There are many instances of debt traps where people have taken loans from moneylenders to pay off SHG loans.
  8. SHGs can take on the characteristics of usurious moneylenders even if the moneylenders are not real but virtual and the creations of the poor.
  9. In order to defeat the insistence that loans be taken only for productive purposes, the poor frequently ‘employ’ each other and pay ‘wages’ to each other out of money often borrowed at 25-30% p.a.
  10. Promoters of institutions in India extending microfinance try to extract political mileage from their ‘charity’ despite earning huge profits from their funds lent out. Considering that recovery is close to 100%, interest rates charged by institutions should not exceed 12-13% but all these institutions charge much higher rates of interest as do the SHGs themselves. Given that they pay no dividends and one is in perpetual risk of losing one’s entire savings, or falling into poverty with the inability to repay loans, the larger risk is of the individual member and not the group or the microfinance institution. The interest rates, as a result should be lower than, say, urban housing loans.
Overall, SHGs and microfinance have apparently created a situation in which the poor, while having timely access to money, earn nothing on their own savings and perhaps even lose the savings – on their deaths or departures from the locality in which the SHG is functioning or if they are ejected from the SHG. The SHG system in India therefore appears badly in need of regulation of some kind, at least to ensure that microfinance does not defraud the poor.
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