Women SHGs and Micro-Finance: Robust Financial Lifeline Between Rich and Poor

An earlier article in Econintersect, “Chindia – A Story Of Contrasts. A Perspective View from India” briefly touched on the SHG’s. 

“..women self-help groups (SHGs) have become pervasive in rural and non-main urban centers. “Fueled by micro finance institutions, these groups have become extremely successful in becoming transformational agents.”

Successful Growing Model

SHGs are a fascinating phenomenon, particularly in India, that merit a close look.  They are fascinating both as a role model and as a significant business opportunity.  A back of the envelope calculation indicates this is a $30 billion opportunity in micro-financing.  This article examines the dynamics of women SHGs in India and the impact on the Indian economy.

An average SHG typically is comprised of 15-20 very poor women.  Most are started by a Non-Government Organization (NGO), as a platform to empower women, develop entrepreneurial capability, improve nutrition, promote use of birth control and to improve the health of women and children.  Over a period of time a typical SHG evolves as a financial intermediary for micro credit and saving.  The financial intermediary operation is modeled after the Grameen movement in Bangladesh.  Grameen is derived from “gram means”, which translates to village in Sanskrit.

Grameen Story, From Micro-Finance Movement to a Bank: Bangladesh

Muhammad Yunus started The Grameen Movement  experimentally in 1976 in Bangladesh.  It started as a linkage between main line banks and the traditionally unbankable poor.  From a very modest beginnings the movement went on to grow to a full fledged bank by 1985.  To quote from the web site of the bank:

“As of August, 2010, it has 8.30 million borrowers, 97 percent of whom are women. With 2,564 branches, GB provides services in 81,371 villages, covering more than 97 percent of the total villages in Bangladesh.”

Anecdotal stories about how a tentative, small movement evolved into a “bank for the poor” is captured in the book, “Banker To The Poor-The Story of Grameen Bank” by Muhammad Yunus.

From Bangladesh to India – Extending the Grameen Model

Other equally successful, validated models have emerged. According to Reserve Bank Of India [RBI] report:

“….. other models too have evolved as significant micro finance purveying channels:

(a) An Intermediate Model that works on banking principles with focus on both savings and credit activities and where banking services are provided to the clients either directly or through SHGs;

(b) There is also a Wholesale banking Model where the clients comprise NGOs, MFIs and SHG Federations. This Model involves a unique package of providing both loans and capacity building support to its partners; and

(c) Further, there is an Individual Banking-based Model that has its clients as individuals or joint liability groups. While program management and client appraisal in this Model may be a challenge, it is best suited to lending to enterprises.”

National Bank for Agriculture and Rural Development (NABARD) is an apex development bank in India.  Its model is equally fascinating.  By aggregating individual savings into a single deposit, a SHG minimizes the bank’s transaction costs and generates an attractive volume of deposits. The bank can serve small rural depositors and creditors at market interest rates.  From the RBI report:

NABARD is mandated to facilitate credit flow for promotion and development of agriculture, small-scale industries, cottage and village industries, handicrafts and other rural crafts. It also has the mandate to support all other allied economic activities in rural areas, promote integrated and sustainable rural development and secure prosperity of rural areas.”

Vibrancy and Professionalism – Gateway to Growth: Defaults Almost Non-Existent

SHG women living at poverty’s edge, ceaselessly explore entrepreneurial options and help each other by leveraging their collective wisdom.  They make the best out of any opportunity, howsoever tiny, and use micro-finance to progressively move away from subsistence.

Excerpting from Paul Maritz’s narration of his visit to Grameen Koota near Bangalore in a Forbes interview:

“ …a successful organization that today serves close to half a million poor women in the state of Karnataka in India…..I attended one of these village meetings. They’re held very early in the morning, around 6 a.m., because these are working women. They don’t have time to waste. I had expected a traditional gathering of women–you know, lots of chatter and reconnecting. Instead, I found this incredibly serious atmosphere. It was very well run, and really was one of the most profound business meetings I’d ever been to.

This was tremendously humbling to me….they were treating them much more seriously than I treated million-dollar or 10-million-dollar or billion-dollar deals in my life.”

Martiz is not alone. Duvvuri Subbarao, Governor of the Reserve Bank is equally enthused and impressed. In a RBI Report on Financial Inclusion he says:

In rural Maharashtra, where people, like everywhere else in the country, face the daily challenges of water, sanitation, electricity and transportation, a number of women have improved their lives, and the lives of their families, by becoming entrepreneurs, all because they could take a bank loan.

He adds anecdotal stories from his address at the Bankers’ Club in Kolkata on December 9, 2009 to illustrate his point:

Take Aruna a farm laborer, began selling excess produce at the local market. An astute observer of the laws of supply and demand when it came to pricing fruit and vegetables, she soon saw an uptick in business. To expand, she needed to borrow money so that she could build her own vegetable stand. The loan helped her establish a thriving vegetable vending business, allowing her to shift away from the back-breaking work tending other people’s fields.  Her former hand-to-mouth existence had given way to a new reality, one which includes savings and checking accounts at the bank, and the credit needed to keep her kids in school – a good fortune she herself never had.

And then there is Lakshmi Shellar. Widowed at 17, Lakshmi helped form a local self-help group. She spoke up and spoke out at meetings, and inspired other women in the group to take their future into their own hands. Meanwhile, she brought banking services to them. And she provided evening literacy classes. The 177 women of Lakshmi’s self-help group have all borrowed and repaid their loans.

Aruna and Lakshmi are just two of the millions of women across the country who have demonstrated what is possible if only rural women can have access to basic financial services. This is what financial inclusion is all about – giving people an opportunity to build better lives for themselves and their children.  That impulse, if given a chance, can contribute to sustained improvements in the quality of life at the community level and foster growth and poverty reduction at the national level.”

The Business Process

Anyone who comes in contact with a SHG is invariably impressed by the professionalism, adaptive vibrancy and resilience, typically of such groups. Simply put, failure is not an option.  NABARD estimates that there are 2.2 million SHGs in India, representing 33 million members, that have taken loans from banks under NABARD’s linkage program to date.  This does not include SHGs that have not borrowed.

Assume, for illustrative purposes, roughly 300 million rural poor women in India; then 33 million represents 11% of the total women poor being served by the micro-financed SHGs.

This is impressive.

Growth Opportunities for Financial Institutions and the Poor

Micro-financed women SHGs provide a validated approach for poverty alleviation and growth. The growth opportunities for financial sector are huge on two counts:

(1)  Micro-finance business is a profitable business opportunity based on successful and validated models. Current penetration is guesstimated at 11%. It therefore represents a vast untapped market.

(2)  As these women and their families move up the wealth chain, their dependency on micro-finance decreases and they become banks’ main stream customers.

These activities are win-win for all involved.

Economic Impact of Synergy Between Micro-Finance and SHGs

The synergy between micro-finance and SHGs is hard to ignore.  Firstly, the multiplier effect on job creation and economy cannot be underestimated. As these families move up the wealth ladder other sectors besides financial sectors experience growth, like education, telecommunications and consumer goods, to name a few.

As a case in point, consider the experience of telecommunications operators in urban India. Sarah Lacy in TechCrunch, writes effusively about the telecom revolution in India:

“ The amazing business model innovation has allowed telecom operators to make money on a paltry $6 a month per average user. The results have been phenomenal—550 million people in India have phones, and it has transformed the poorer service economy by giving them an affordable way to be reached and arrange jobs. Just last month, nearly 20 million new mobile accounts were opened. That’s more than double the people than have high speed Internet in the entire country. Even in slums where people live on less than $2 a day, everyone has a phone. ….India has one of the world’s best mobile infrastructures.

The figures that she has given are mainly derived from the idea of relatively “better off”; There is still a long way to go to truly elevate people from poverty.  However, the impact on the telecom market as more poorest of poor consumers are added is huge.

Secondly, this phenomenon is bottoms up. The growth is secular with depth and breadth. To quote Duvvuri Subbarao, Governor of the Reserve Bank of India, this is like “A Thousand Flowers Blooming”.

Lastly the economic development is decoupled from external factors such as exchange rate between nations, export markets and is largely based on local entrepreneurial energy, spontaneous job growth and domestic local consumption.

Fueled by micro-finance and fired by aspirational values of the women the growth engine seems almost non-stoppable for the next several years.

Financial Market Size: Back of Envelop Estimates

At $100 loan per women and assuming 300 million poor women, the total annual market size of micro-financing sector comes to a whopping $ 30 billion. In order to pay back the loan and go up the wealth chain the SHG juggernaut would generate a $ 100 billion revenue. (This assumes that the debt is 30 percent of their business revenue.)  And this is only for starters, as the multiplier effect comes in to effect other sectors will experience rapid growth. .

Something to Ponder On

Duvvuri Subbarao Governor RBI is right on.  In the RBI report on Financial Inclusion cited earlier he concludes:

“Let me conclude by reiterating, even at the cost of being clichéd, that banking on the poor can actually be a rich banking proposition. Financial inclusion is a win-win opportunity for the poor, for the banks and for the nation. Because of growing incomes, and improving awareness levels, aspirations of the poor are on the rise. We will not be forgiven if we do not rise up to meet these aspirations if only because of poverty of imagination. It is for the banks to convert what they see as a dead-weight obligation into an exciting opportunity and move on aggressively on financial inclusion.

Economics is about people.  Economic growth cannot be imputed externally.  Growth and sustainability is possible with the right mix of adequate capital, initiative, entrepreneurship, the will to change and adapt.

Above all it is about self confidence that circumstances can be changed.

The poorest of poor women in SHGs provide a role model which is truly inspirational.

Lastly can the SHG micro-finance business model be scaled up behaviorally and financially to bigger enterprises?

This is something to ponder on.

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