The Microcredit Alternative?

Author(s): Madhura Swaminathan

Source: Economic and Political Weekly, Vol. 42, No. 13, Money, Banking and Finance (Mar. 31
- Apr. 6, 2007), pp. 1171-1175
Published by: Economic and Political Weekly
Stable URL: http://www.jstor.org/stable/4419416 .
Accessed: 06/02/2015 00:34
Your use of the JSTOR archive indicates your acceptance of the Terms & Conditions of Use, available at .
http://www.jstor.org/page/info/about/policies/terms.jsp

.
JSTOR is a not-for-profit service that helps scholars, researchers, and students discover, use, and build upon a wide range of
content in a trusted digital archive. We use information technology and tools to increase productivity and facilitate new forms
of scholarship. For more information about JSTOR, please contact support@jstor.org.

Economic and Political Weekly is collaborating with JSTOR to digitize, preserve and extend access to
Economic and Political Weekly.

http://www.jstor.org

This content downloaded from 119.148.3.126 on Fri, 6 Feb 2015 00:34:03 AM

All use subject to JSTOR Terms and Conditions

Microfinance
The

Alternative?
Microcredit

Microcredit has been receiving a significant amount of attention all over the world,
especially in developing countries. It is felt that by providing microcredit to the
"poorest of the poor", the gap in the formal rural credit sector can be filled. A majority of
such projects are now being controlled by non-governmentorganisations in the hope
that they will be able to overcome the weaknesses in the banking system. However, while
small-scale rural credit is necessary, overall credit policy must build on the
strengthsof the banking system in India as its mainstay.
MADHURA SWAMINATHAN

the 1920s, Malcolm Darling remarkedthat the "Indian In 2000-01, the total lendingunderthe self-helpgroup(SHG)
peasantis bornin debt,lives in debtanddies in debt"[Darling banklinkageprogrammewas "less thanhalf of one per cent of
1925]. Sixty yearsafterindependence,this is still true.The the total amountthat was disbursedfor agricultureand allied
NationalSampleSurvey(NSS) on the situationalassessmentof activitiesby the bankingsystem"[Kalpana2004]. Accordingto
farmersundertakenin 2003 reportedthat on an average48.6 the National Bank for Agricultureand Rural Development
percentof farmerhouseholdsin thecountrywereindebted,with (NABARD) annualreportfor 2005-06, startingin 1992, by
the percentagebeing as high as 82 per cent in AndhraPradesh March2006, therewere2.2 millionSHGscovering32.98 million
households. Total credit disbursementby these SHGs was
[NSSO 2005].
forms
Rs 1,13,980millioncomparedto the annualestimateddemand
in
institutions
and
credit
structural
changes
Despitemajor
of ruralcreditin the post-independence
period,the exploitation of Rs 1,00,000 crore [NABARD2006].
Microcreditis not as widespreada policy as it is, say, in
of theruralmassesin thecreditmarketis oneof themostpervasive
and persistentfeaturesof rurallife in India. There is a vast Bangladesh;nevertheless,it is importantto evaluatethe scope
literature
documentingtheimperfectionsof theruralcreditmarket for microcreditgiven its ascendancyin official discussionson
and its impacton access to credit,particularlyamongthe more ruralcredit.
Thecreditneedsof ruralhouseholdsaremultiple,
disadvantaged.
andincludecreditfor productivepurposes,both shorttermand
DefiningMicrocredit
long term,creditas insuranceagainstrisk,andcreditformeeting
The termsmicrocreditandmicrofinancehave risenspectacubasic consumptionneeds includingfood, housing, health and
education.
larly to fame in developmentliteraturein the last decade and
Therehave been majorpolicy changesin the sphereof rural a half.
Thedeclarationof themicrocreditsummitheldin Washington
bankingsincetheinitiationof liberalisationin 1991.Specifically,
as those"extending
the policy of "socialand developmentbanking",which sought DC in 1997definedmicrocreditprogrammes
to extendbankingto unbankedruralareas,unreachedactivities, small loans to poor people for self-employmentprojectsthat
and disadvantagedgroups has been jettisoned in favour of generateincome,allowingthemto carefor themselvesandtheir
banking.The consequenceshave been families". The declarationalso stated that, "in most cases,
commercially-oriented
directand dramatic:ruralbranchesof commercialbankshave microcredit
projectsoffera combinationof servicesandresources
in additionto creditfor self-employment.These
to
their
clients
rural
areas
ratio
for
the
closed down,
aggregatecredit-deposit
hasfallen,shareof creditto prioritysectorsincludingagriculture often include savings facilities, training,networkingand peer
hasdeclined,andso on. Gainsmadeduringthe periodof social support"[MicrocreditSummit1997].In India,the taskforceon
formicrofinance
framework
andregulatory
[NABARD
anddevelopmentbankingby regionsthatwere underdeveloped supportive
of
as
the
microfinance
defined
in termsof bankingsuch as east andnorth-eastIndiahave since 2000]
"provision thrift,creditand
and
services
financial
other
a
in
the
face
of
In
few
the
last
lost
been
productsof very small amountsto
[Chavan2005].
years,
or urbanareasenablingthem to
in
semi-urban
the
made
rural,
have
been
some
statements
poor
crisis,
widespread
agrarian
policy
and
income
levels
their
raise
its
intenAlliance
the
United
improve living standards."The
declaring
Progressive
government
by
tionto increasetheflow of ruralcredit.However,in policyterms, ReserveBankof India(RBI)usesthesamedefinition[RBI1999].
itappearsthatthegovernment
envisagesonlyonepolicy instrument While microcreditloans are generally advancedfor selfto fill the gap left by the formalcreditsectorin the countryside: employmentprojects,theyaresometimesadvancedforconsumption as well. A distinctionbetweenconsumptionandproduction
the establishmentof microcreditprojectsin ruralIndia.
Althoughmicrocredithas expandedin a big way over the last is, of course,difficultto draw,bothon accountof thefungibility
few years,it is still a minusculeplayerin the ruralcreditscene. of cash and the organic links between consumption and
In

Economic and Political Weekly

March 31, 2007

This content downloaded from 119.148.3.126 on Fri, 6 Feb 2015 00:34:03 AM

All use subject to JSTOR Terms and Conditions

1171

Nevertheless,the advocatesof microcreditdo conproduction.2

sider it necessaryfor microcreditinstitutionsto get borrowers
tomakethetransitionfromconsumptionloanstoproductionloans
(or loans for income-bearingprojects)[Rangarajan1997: 71].
The characteristic
featuresof microcreditoperationsthen,are
small loans to poor householdsin ruraland urbanareas for
income generation through self-employment. Microcredit
institutionsmay also provide facilities for savings and other
financialservices.
The following are some of the recurringempiricalfeatures
of microcredit: first, microcredit involves loans without
collateral.3Intheabsenceof specificpolicyintervention,
landless
and asset-poorhouseholdsare deemed to be not creditworthy
by formalsectorlendinginstitutionssince they cannotprovide
collateralthat is deemed to be appropriate.
Second, NGO-controlledmicrocredit loans are generally
advancedto individualswho aremembersof groups.The group
(or SHG)is, in fact, viewedas standingin the placeof collateral
[HashemiandMorshed1997:217]. The presenceof a grouphas
been called a form of "socialcollateral"[Johnsonand Rogaly
1997]. The formationof groups, it is argued,has the double
advantageof loweringtransactionscosts and improvingrepayment. The NABARD task force, for instance,identifiesthree
ways of bankingwith the poor:by meansof conventionalbank
lending,linkingSHGs with banklending,andbankslendingto
microcredit
andmicrofinance
institutionsforon-lendingtogroups
or individuals.The taskforcegoes on to say thatthe secondand
thirdmethods"arecharacterisedby low transactionscosts and
high repayments"[NABARD 2000].
Third,microcreditis viewed as a way of promotingmarketled growthor in thewordsof MohammedYunus,of "privatising
theeconomy"[Yunus1997].Thisobjectivewas statedin another
way by WorldBankpresidentJamesWolfensohnin his speech
atthemicrocredit
havebrought
summit,"Microcredit
programmes
the vibrancyof the marketeconomyto the poorestvillages and
peoples of the world"[MicrocreditSummit 1997].
Fourth,themaintargetgroupof microcreditprojectsconstitute
a fractionof thosein needof credit:this targetgroupis generally
onlyatbelowa lineof absolutepovertyas determinedby national
estimates.
Fifth,while all definitionsconcuron microcreditas the provision of "smallloans",the scale of "smallness"of loans varies
and has to be identifiedempirically.Loans from the Grameen
Bankhadan upperlimitof 5,000 takaor around$ 100 [Hossain
1993].In a samplesurveyconductedin 1985,however,Hossain
foundthatthe loans averagedTk 3,040 (Tk 3,279 for men and
Tk 2,843 for women) (ibid). The scale is similarin otherdevelopingcountries;the averageloan size was $ 88 in Mexico
and $157 in Pakistan[Johnsonand Rogaly 1997: 88-89]. The
NABARDtaskforceestimatedthecreditrequirement
perfamily
as Rs 6,000 in rural areas and Rs 9,000 in urbanareas but
recommendedthatthe averageloan given to membersof SHGs
be aroundRs 1,000 [NABARD2000]. The microcreditcell of
the RBI, however, has proposeda ceiling of Rs 25,000 for
microfinance,and suggeststhat the ceiling may be raised,say
to Rs 40,000, for borrowerswith a track record of regular
repaymentover two to three years [RBI 1999].
Finally,whilethesearethegeneralcharacteristics
ofmicrocredit,
a greatdeal of discussionof the "microcreditalternative"has
beenon institutionalmechanismsfor thedeliveryof microcredit.
A very importantcomponentof the argumentin favourof a

1172

large-scalemicrocrediteffort is thatcommercialbankscannot
andshouldnotbe directlyresponsiblefordisbursingmicrocredit
loans (becauseof high transactionscosts and poor recovery).
The microcreditcell of the RBI, for instance,clearlystatesthat
"NGOs have widespread appeal as microfinance delivery
vehicles"[RBI 1999]. In the plan of actionof the microcredit
summit,the responsibilityfor achievingthe goals of the summit
was placedclearly on "the thousandsof existing microcredit
NGOs, cooperatives, credit unions, grassroots groups, and
povertybanksthat at presentcomprisethe microcreditmovement"[MicrocreditSummit1997].Thus,theterm"microcredit"
commonlyusedmeansmicrocreditmainlyby the privatesector,
including NGOs,where the private sector not only controls
disbursementbut also determinesthe terms and conditions
attachedto each loan.4
To summarise,microcreditis usuallyassociatedwith:(a) very
small loans, (b) no collateral,(c) the formationof borrower
groups, (d) borrowersfrom among the ruraland urbanpoor,
(e) loans for incomegenerationthroughmarket-basedself-employment,and(f) privatisation,
generallythroughthemechanism
of NGOcontroloverdisbursement
anddetermination
of theterms
and conditionsattachedto each loan.

NGO-Controlled
Microcredit:
Evaluation
Inofficialstatements,themoveto handoverbankingfunctions
in ruralareasto NGOsis motivatedby weaknessesin thebanking
systemitself, most notablythe "twinproblemsof non-viability
and poor recoveryperformance"of existing ruralcredit institutions[Rangarajan
1996:68].Thefailureof financialinstitutions
to deal with income-poorborrowersin an imaginativeand
sustainableway and the inaccessibilityof these institutionsto
the poor are statedto be majordisadvantagesof the existing
system.Microcreditinstitutionsareseen as beingable to rectify
these weaknesses;accordingto the governorof the RBI, "the
mainadvantageto the banksof theirlinks with the SHGs and
NGOs is the externalisationof a partof the work items of the
creditcycle, viz, assessmentof creditneeds,appraisal,disbursal,
supervisionandrepayment,reductionin the formalpaperwork
involved and a consequentreductionin the transactioncosts"
(ibid: 70).
Thus, microcreditis the favouredalternativeto the present
systembecausefirst, it is assumedthatthe transactioncosts of
banksandotherfinancialinstitutionscanbe loweredsignificantly
if thesecostsarepassedontoNGOsorSHGs,andsecond,because
NGOs are expectedto performbetterthanformal-sectorcredit
institutionsin respectof recoveryof loans.Do NGO-controlled
microcreditinstitutionsincurlower transactionscosts thanformal-sectorfinancialinstitutions?Is theirrecordwith respectto
therepaymentof loanssuperiorto thatof formal-sectorfinancial
institutions?We examine the evidence below.
Transactions

Costs

Transactionscosts includethe costs of informationcollection,

screeningof borrowersandprojects(by meansof projectevaluation),monitoringandsupervision,coordinationandfinally,the
enforcementof contractsand collection of dues.
To begin with, it should come as no surprise - despite
suggestions to the contrary- that the administrativecosts of
NGOs (and such costs are, of course,the majorcomponentof

Economic and Political Weekly

This content downloaded from 119.148.3.126 on Fri, 6 Feb 2015 00:34:03 AM

All use subject to JSTOR Terms and Conditions

March 31, 2007

total transactionscosts) are relatively higher than those of lendto SHGsat 12-24percent andthe groupslendto individual
commercialbanks.NGOscannotmatchtheeconomiesof scaleof membersat 24 to 36 per cent (ibid).
a comprehensive
systemof banking(in thecase of India,perhaps While annualinterestratesin the rangeof 24 to 36 per cent
the best networkof ruralbanks in the less developedworld). arecommon,it is not unknownfor microcreditSHGsto charge
For the period 1988-92, the costs of administrationof the even 50 or 60 percentperannum[Harper1998,citedin Chavan
GrameenBank constituted12.3 per cent of the bank's total and Ramakumar2005]. In fact, the literaturenotes that in the
NGOsare"freeto chargewhatever
of theBangladeshrural eraof financialliberalisation,
portfolio,andthecostsof administration
advancementcommittee constituted40 per cent of its total interestrates they wish in orderto cover the (at presentvery
portfolio [Hulme and Mosley 1996, cited in Chavan and considerable)costs of institutionbuilding,supervision,experiRamakumar
2002]. An importantfindingof HulmeandMosley mentationandinsurance"[Mosley1999:377]. Sinceproponents
is that,in a cross-countrystudyof ruralcreditinstitutions,the of microcreditdo view it as providingcredit for productive
fundedby high cost
lowestcosts of administration,
8.1 percentof the totalportfolio, activities,it follows thatmicro-enterprises
microcreditwill haveto generatea veryhigh rateof return(say,
were incurredby regionalruralbanks in India (ibid).
Second, the costs of administrationof NGO-controlled 24 to 36 per cent annually)to be profitableand sustainablefor
microcredithaveactuallyrisenwhenNGOactivityis scaledup. the borrower.
As the GrameenBank expandedits activities, administrative To conclude,thetransferof thetaskof servingthecreditneeds
costs rosefrom8.6 percentof liabilitiesin 1988to 18.1percent of ruralborrowersfromthe bankingsystemto NGO-controlled
of liabilities in 1992 [Hossain 1988, cited in Chavan and microcreditprojectsdoes not reducetransactionscosts but in
Ramakumar2002].
effect, transferstransactionscosts - highertransactionscosts microcreditprojects to donorsas well as borrowers.
Third,repaymentratesin NGO-controlled
are directly related to the level of administrativecosts and
mobilisationefforts[Rahman1999andBhatandTang1998,cited
Repayments and Overdue Loans
in Chavanand Ramakumar2002]. Organisationssuch as the
GrameenBank need large numbersof employees for regular A recordof near 100 per cent repaymentis a majorsuccess
monitoringandassessment,to conductweekly visits andmeet- of NGO-controlledmicrocredit.Repaymentrates are reported
ings andto collectdues.MahabubHossainnotesthat,in thecase to be over95 percentin manymicrocreditprogrammes[Hossain
of the GrameenBank, "the paperworkand the staff time for 1988,HulmeandMosley 1998,citedin ChavanandRamakumar
servicinga givenamountof loanarehigherthanthatfora normal 2002, Johnsonand Rogaly 1997]. This achievement,however,
ruralcreditprogramme",
andthat"thebenefitsof this intensive is notcostless.A systembasedon quickrepaymentof verysmall
creditprogramme...needto be evaluatedagainstthe high costs loansdoesnotallowforfundsto go intoincome-bearing
activities
of operation"[Hossain 1993: 119-20].
thathave a gestationperiodof any significance.Only projects
How do NGO-controlledmicrocreditprojectsfinance their with very quick and high rates of returnrelativeto the tiny
high-costoperations?The evidence on this seems clear. They investmentcan meet existing repaymentschedules.The first
do so by turningto donorsfor fundsor by raisinginterestrates paymenton a microcreditloanis generallyto be madein a very
to levels higherthanthose offeredby the bankingsystemor by shorttime afterthe loan is given. It has been arguedthatthis
doing both. In his review of the performanceof the Grameen canputthepoorestoutof thepailof microcredit,sincetheability
Bank in 1984-86, MahabubHossain found that althoughthe to pay the first few instalmentsdependson the initialresource
annualreportsof the bankreporteda small profit,his scrutiny base of the borrower.5
of the accountbooks showed that"thecreditoperationsof the
Therepaymentrecordof NGO-controlled
microcreditprojects
bank involve losses that are compensatedfor by profitsfrom slackensas the size of the loan increasesand as the frequency
depositsin otherbanksof a substantialamountof low-costfunds of borrowingrises. To take the exampleof the GrameenBank
availablefrom internationaldonors"(ibid: 120). It is widely oncd again,the defaultrate was 0.4 per cent amongfirst-time
1.2percentamongsecond-timeborrowers,
6.6 percent
acknowledged that interest rates charged by microcredit borrowers,
the
rates
third-time
are
than
borrowers
and
9.5
cent
fourth-time
corresponding chargedby among
organisations higher
per
among
commercialbanksor otherfinancialinstitutions.Real interest borrowers[Hossain1988,citedinChavanandRamakumar
2002].
ratesin 1992 variedfrom 15 per cent per annumin Bangladesh Further,whenthe pressureto repayis as overbearingas it often
for GrameenBankto 45 per cent in Bolivia for loans advanced is, borrowershave had to borrowfrom moneylendersin order
by Banco Sol, and60 per cent in Indonesiafor loans advanced to repayNGO-advancedloans [Rahman1999, cited in Chavan
2002]. High repaymentis dependenton high
by BadanKreditKecamatan[HulmeandMosley 1998, cited in and Ramakumar
transactionscosts. As alreadymentioned,NGOsinvest heavily
Chavanand Ramakumar2002].
When
projectsinIndia,Pallavi in supervising,monitoringandenforcingloanrepayments.
Examininginterestratesonmicrocredit
ChavanandRRamakumar
(2005)findthatthecostsof microcredit the activitiesof NGO-controlledmicrocreditprojectsarescaled
are high. They point out that NABARD has three variantsof up, the relativeburdenof administrative
costs tendsto increase.
the
In
two
One
of
bank-SHG
route.
the
criticisms
of
of
microcredit
rural
delivery
through
banking,both commercialand
variants,bankslend directlyto SHGs who on-lendto members cooperative,has been the problemof overdues.While thereis
andin thethirdvariant,NGOsareintermediaries
betweenbanks no large-scalestudy of overdues in independentmicrocredit
andSHGs.Intermsof interestcharges,asChavanandRamakumar agencies,tworecentanalysespublishedby theRBI[Ghosh2001,
point out, the final interestrate includesa marginchargedby RBI 2001] permitsome observationson the issue of overdues
each"particular
linkin thecreditchain".Forexample,NABARD in microcredit-oriented
organisations.
In 1974, the Self-EmployedWomen'sAssociation(SEWA),
provides refinanceto commercialbanks at 7.5 per cent per
annum,bankson-lendto NGOs at 10-15 per cent, NGOs then an organisationof workingwomenthathas long been involved

Economic and Political Weekly

March 31, 2007

This content downloaded from 119.148.3.126 on Fri, 6 Feb 2015 00:34:03 AM

All use subject to JSTOR Terms and Conditions

1173

in disbursingmicrocredit,establisheda bank- the SEWAbank,

whichnow advancesover Rs 100 millionannually.Most of the
workingcapitalof the bankcomes from members'savings.A
borrower'srepaymentrecordis used,in lieuof collateral,toassess
her creditworthiness.A study of the financialperformanceof
SEWAbankhas foundthat,at present,"overduesarethe major
areaof concern"[Ghosh2001]. In the financialyears 1996-97,
1997-98 and 1998-99, non-performingadvances (NPAs or
overdues)amountedto 28 per cent, 20 per cent and27 per cent
respectivelyof total loans and advances [ibid, Table 1]. For
roughlythesameperiod,1995-96,1996-97and1997-98,theRBI
estimatesthat gross NPAs as a shareof the total advancesof
all public-sectorbankstogetheramountedto 17.3 per cent, 18
per cent and 16 per cent [RBI 2001]. If only prioritysector
advancesof publicsectorbanksareconsidered,theratioof NPAs
to totaladvanceswas 27 per cent, 26 per cent and 23 per cent,
respectivelyin each of the three referenceyears.
The data thus show that the proportionof overduesto total
advances of an independentmicrocredit-orientedbank was
ratioforpublic
actuallymarginallyhigherthanthecorresponding
sectorbanks.Scaling-upNGO-controlled
microcredit,it appears,
can generateproblems similar to those faced by traditional
bankinginstitutions.The correctivemeasuresbeing taken by
SEWA bankto addressthe problemof overdueloans involve
greatersupervisionand monitoring[Ghosh2001].6
In short,higherand betterrepaymentrequiresmorestaff and
closermonitoring.Thisis astrue,of course,forcommercialbanks
as it is for SEWAbank.In fact, it may well be arguedthatone
reasonfor the unsatisfactory
performanceof ruralbanksin India
(bothin termsof advancesand in termsof recovery)is understaffingin ruralbankbranches.In an early assessmentof the
performanceof banksafternationalisation,S L Shettypointed
out that rural and semi-urbanbank branchesare "generally
starvedof staffinputsandhencehavenotfaredwell in business"
[Shetty 1978: 1417].7

of ruralcreditmarkets.NGO-controlledmicrocreditprojectsin
Indiacannothope to achieve the spreadand reachof the rural
bankingsystem. Thereare also problemsof accountabilityinvolved here:NGO-controlledmicrocreditorganisationsare not
accountableto public scrutinyor to local governments.Being
theironlyformal
essentiallyprivate,market-oriented
organisations,
responsibilityis to their donors.
Microcreditis neithera successfulanti-povertystrategynor
is it an adequateresponseto the huge unmetcreditneedsof the
ruralpopulation.This is not to deny that microcreditloans to
ruralworkinghouseholdscanserveas a kindof palliativereform
in thecountryside.Forall the weaknessesin its implementation,
the IntegratedRuralDevelopmentProgrammeplayedan importantrole in the 1980s in thatit gave new access to millions of
ruralhouseholdsto the formal bankingsystem and increased
levels of purchasingpower in ruralIndia.
Small-scalecreditschemeshavealso beenthe basisfor useful
andsociallyprogressiveexperimentsin social mobilisation.The
of womenin SHGshas been viewedas
large-scaleparticipation
a meansof women's empowerment.This is an areafor further
researchbut case study evidence warnsagainstrelying solely
on microcreditto alleviatepovertyand empowerwomen. For
example, in a detailed study of SHGs in two villages of the
Telanganaregionof AndhraPradesh,SmritiRao foundthatthe
groupsexcludedthe poorestandperpetuatedexistingcaste and
class hierarchies[Rao 2005].

ConcludingRemarks

This paper showed that NGO-controlled microcredit

organisationsdo not incurlower transactionscosts thanbanks
but they are able to transferthese costs to others- donorsand
borrowers.We alsoarguedthatone importantcomponentof high
administrative
costs was the cost of monitoringso as to ensure
regularrepayment.
The lessonfromthe microcreditexperienceis thatsmall-scale
ruralcreditis indeednecessary.However,ruralcreditpolicymust
OtherAspectsof Microcredit
build on the strengthsof the bankingsystem in India as its
NGO-controlledmicrocreditdoes not offer a solutiontd the mainstay.8Bankshavemanyadvantagesoverprivatemicrocredit
generalproblemsof ruralcredit. It is not an instrumentfor organisationsas providersof small-scale loans. They have
mobilisinglarge-scalefunds for technologicalchange in the advantagesof scale; the bankingsystem in Indiahas a reach
countryside,and it does not and cannotsupplantthe informal andspreadthat NGO-controlledmicrocreditcannot begin to
sectoror overcomehistoricalimperfectionsand fragmentation match;bankscan cross-subsidiseloans;banksarebetterplaced
SPECIAL ISSUE

ASPECTS OF SOCIAL HISTORYOF MEDICINE

January 13, 2007
PoliticalCultureof Healthin India:A HistoricalPerspective
Mal-areasof Health:DispersedHistoriesof a DiagnosticCategory
'ParasitesLost and Parasites Regained':
RockefellerFoundation'sAnti-Hookworm
Campaignin MadrasPresidency
MaternalHealthin EarlyTwentiethCenturyBombay
For copies writeto: Circulation
Manager
Economic and Political Weekly,
HitkariHouse, 6th Floor,284, ShahidBhagatsinghRoad, Mumbai400 001.
email:circulationepw.org.in

1174

- SunilAmrith
- Rohan Deb Roy
- Shirish N Kavadi
- MridulaRamanna

Economicand PoliticalWeekly March31, 2007

This content downloaded from 119.148.3.126 on Fri, 6 Feb 2015 00:34:03 AM

All use subject to JSTOR Terms and Conditions

to providespecialisedtrainingto theiremployeesin development

banking; banks are better placed to coordinate banking
activitywithdevelopmentadministrations,local governments
andSHGs;and banksare betterable than privatemicrocredit
organisationsto offer a wide range of financial services to
borrowers.For the state to withdrawfrom the field and hand
over small-scale credit to NGO-controlled microcredit
organisationsis, in effect, to undermineand weaken a major
nationalasset, the widespreadruralbankingsystem.
TheIndianbankingsystemhasmanyweaknesses,andin many
ways,hasfailedto fulfiltheobjectivesof socialanddevelopment
bankingin ruralIndia.Thepresentreversalof policy in theeraof
financialliberalisationis a furthersetbackto the expansionof
ruralcredit. The banking system can and must improve its
andlocalvoluntary
byworkingwithlocalgovernments
functioning
organisations.Some of the transactionscosts of loans,costs for
banksas well as for borrowerscanbe loweredwhenbankswork
in an innovativeway with panchayatsand SHGs.11
Email:madhura@isical.ac.in

Notes
[This note draws heavily on earlier work with V K Ramachandran,in
particular,Ramachandranand Swaminathan(2002, 2003). For a detailed
analysis of the crisis in rural credit, including issues of microcredit,see
Ramachandranand Swaminathan(eds), Financial Liberalisationand Rural
Credit in India, Tulika Books, New Delhi, 2005.]
1 See, for example, Shetty (1997), Chavan (2005).
2 For example, it is not entirely accurateto classify an educationalloan or
a loan taken to meet medical expenses as purely a consumptionloan;
medical care and education contributeto productivityas well.
3 In his opening speech at the microcreditsummit, MuhammedYunus,
founderof GrameenBank,Bangladesh,said thatby meansof microcredit,
"we are celebratingthe freeing of credit of the bondage of collateral"
[Yunus 1997].
4 In a useful review of the literatureon microfinance,K Kalpanahighlights
two featuresof microcredit[Kalpana2004]. The first is the practiceof
lendingto groupsandrepaymentin small,frequentinstalments.The second
is that microcreditassumes market-basedlending (or lending without
subsidies) by private and NGO sectors.
5 See, for instance,Zaman(1997, 247). For a list of the design featuresthat
ensure high repayment,see Hulme and Mosley (1996), cited in Johnson
and Rogaly (1997).
6 For example, daily targets for collection are being set and monitored,
leadersfromall areasarebeing called for weekly meetings,a special team
of field workershas bees createdto regularlyvisit borrowers,and so on
[Ghosh 2001].
7 Forinstance,in 1974,ruralareasaccountedfor36 percent of bankbranches
but only 10 per cent of bank employees [Shetty 1978].
8 This is now recognised in some official reports.The expert committee
on ruralcredit set up by NABARD in its reportstates that "commercial
bankscannotbe allowedto withdrawfromruralcredit"andthatcooperative
credit institutionsneed to be strengthenedto meet the huge unmet needs
of ruralcredit in India [NABARD 2001].

References
Bhat, N and Shui-Yang Tang (1998): 'The Problem of TransactionCosts
in Group-Based Microlending: An Institutional Perspective', World
Development,Vol 26, No 4, pp 623-37.
Chavan,P (2005): 'BankingSectorLiberalisationandtheGrowthandRegional
Distributionof RuralBanking'in RamachandranandSwaminathan(eds),
Financial Liberalisation and Rural Credit in India, Tulika Books,
New Delhi.
Chavan, P and R Ramakumar(2002): 'Microcredit and Rural Poverty;
Analysisof EmpiricalEvidence',Economicand Political Weekly,Vol 37,
No 10.

Economic and Political Weekly

andMadhura
- (2005): 'InterestRateson Microcredit'in V K Ramachandran
Swaminathan(eds), Financial Liberalisationand Rural Creditin India,
Tulika Books, New Delhi.
Darling,M L (1925): ThePunjabPeasant in Prosperityand Debt, University
Press, Oxford.
Ghosh,S (2001): 'Design Issues in Microcredit'.availableat www.rbi.org.in/
rbisitemap.htm.
Harper,M(1998):'WhyAreCommercialBanksNotEnteringtheMicrofinance
Market?',available at www.alternative-finance.org.uk.
Hashemi, S M and L Morshed (1997): 'GrameenBank: A Case Study' in
Wood and Sharif (eds).
Hossain, M (1988): 'Creditfor Alleviation of RuralPoverty:The Grameen
Bank in Bangladesh', Research Report 55, IFPRI, WashingtonDC.
- (1993): 'Creditfor Alleviation of Rural Poverty: The GrameenBank in
Bangladesh', Tropicultura,Vol 11, No 3, pp 115-21.
Hulme,D andP Mosley (1996): Financeagainst Poverty,Routledge,London
(cited in Chavan and Ramakumar2002).
- (1997): 'Finance for the Poor or Poorest? FinancialInnovation,Poverty
and Vulnerability'in Wood and Sharif (eds).
- (1998): 'MicroenterpriseFinance: Is There a Conflict between Growth
and PovertyAlleviation?',WorldDevelopment,Vol 26, No 5, pp783-90.
Johnson, S and B Rogaly (1997): Microfiinanceand Poverty Reduction,
Oxfam (UK and Ireland)and ActionAid (UK).
Kalpana,K (2004): 'The Shifting Trajectoriesin MicrofinanceDiscourse;
A Critical Reading of the Anti-Poverty Dimensions of Microfinance
Programmes',MIDS Working Paper No 189, Chennai.
MicrocreditSummit (1997): 'Declarationand Plan of Action', available at
www.microcreditsummit.org/decalaration.htm.
Mosley, P (1999): 'Micro-MacroLinkagesin FinancialMarkets:The Impact
of FinancialLiberalisationon Access to Rural Credit in Four African
Countries',Journal of InternationalDevelopnent, Vol 11, pp 367.84.
NABARD(2000): 'SummaryandRecommendations',reportby thetaskforce
on supportivepolicy andregulatoryframeworkfor microfinancein India,
available at www.nabard.org/whats/whats.htm.
- (2001): 'Executive Summaryand Core Recommendations',reportby the
expert committee on ruralcredit, available at www.nabard.org/whats/
whats.htm.
- (2006): Annual Report 2005-06, available at www.nabard.org.
NSSO (2005): SituationalAssessmentSurvey of Farmers, Indebtednessof
FarmerHouseholds,NSS 59th round,January-December
2003, National
Sample Survey Organisation(available at www.mospi.nic.in).
Rahman,A (1999): 'MicrocreditInitiatives for Equitableand Sustainable
Development:Who Pays?', WorldDevelopment,Vol 27, No 1, pp 67-82.
Ramachandran,V K and MadhuraSwaminathan (2002): 'RuralBanking
and LandlessLabourHouseholds:InstitutionalReformand RuralCredit
Markets'in India', Journal of Agrarian Change, Vol 2, No 4.
- (2003): 'RuralCreditin India:The Impacton LandlessLabourHouseholds'
in JayatiGhosh and C P Chandrasekhar(eds), Workand Well-Beingin
the Age of Finance, Tulika Books, New Delhi.
- (eds) (2005): Financial Liberalisationand Rural Credit in India, Tulika
Books, New Delhi.
Rangarajan,C (1996): 'Rural India, the Role of Credit', Reserve Bank of
India Bulletin, Reserve Bank of India, Mumbai.
- (1997): 'Role of Non-GovernmentalOrganisationsin RuralCreditDelivery
System', ReserveBankofIndia Bulletin,ReserveBankof India,Mumbai.
Rao, Smriti (2005): 'Women's Self-help Groups and Credit for the Poor:
andMadhura
A Case StudyfromAndhraPradesh'in V K Ramachandran
Swaminathan(eds), Financial Liberalisationand Rural Creditin India,
Tulika Books, New Delhi.
RBI (1999): 'Microcredit Special Cell', Report on Microcredit, Central
Office, Mumbai.
-(2001): 'Some AspectsandIssues Relatingto NPAs in CommercialBanks',
Reserve Bank of India, available at www.rbi.org.in/rbisitemap.htm.
Shetty,S L (1978): 'Performanceof CommercialBankssince Nationalisation
of MajorBanks', Economic and Political Weekly,Vol 13, Nos 31, 32
and 33.
- (1997): 'Financial Sector Reforms in India: An Evaluation', Prajnan,
Vol 25, Nos 3-4, Pune.
Sobhan,R (1997): 'ThePoliticalEconomyof Microcredit'in WoodandSharif
(eds).
Wood, G D and I A Sharif (eds) (1997): WhoNeeds Credit? Poverty and
Finance in Bangladesh, Zed Books, London.
Yunus,M ( 1997):availableatwww.microcreditsummit.org/decalaration.htm.
Zaman, H (1997): 'MicrocreditProgrammes:Who Participatesand What
Does it Matter?' in Wood and Sharif (eds).

March 31, 2007

This content downloaded from 119.148.3.126 on Fri, 6 Feb 2015 00:34:03 AM

All use subject to JSTOR Terms and Conditions

1175