1.

1 Background The age old saying India is a rich country where poor people live, still holds good. Since the early national plans, successive governments in independent India have emphasized the link between improving access to finance and reducing poverty, a stand that has had influence globally. 1 The need to improve financial access for Indias rural poor motivated the establishment of a vast network of rural cooperative credit banks in the 1950s, followed by nationalization of commercial banks in 1969.This led to thousands of new bank branches in rural areas across the country. Also an apex bank for agriculture and rural development (NABARD) was set up at national level. The strategy during the 1970s and 1980s gave the lead role to the nationalized commercial banks, who were asked to loosen the tight grip of traditional informal sector moneylenders through the use of targeted lowpriced loans. The 1990s witnessed the partial deregulation of interest rates and increased competition in the banking sector. This development resulted in new microfinance approaches pioneered by non governmental organizations (NGOs) and now supported by the state government to create links among commercial banks, NGOs, and informal local groups or Self-Help Groups (SHGs). However, informal sector money lenders still remain a strong presence in rural India as many of the rural masses do not have access to microfinance services to meet their varied financial needs like savings, credit, insurance against unexpected events etc. In the present era there is a need for practical, workable solutions to improve the socio-economic conditions of the rural poor in India, thereby helping in wiping out the deep-rooted problem of poverty. Microfinance seems to provide such a solution. However scaling-up access to microfinance for

The focus on poverty and finance was articulated most famously in the 1954 Reserve Bank of India (RBI) report on the All-India Rural Credit Survey of 1951-52(RBI, 1954).

Indias rural poor, through flexible products at competitive prices, imposes a real challenge for a vast and diverse country like India. But the opportunities too are abundant, and there is a huge scope for designing a flexible framework for effective implementation of microfinance in India. A recent survey conducted jointly by the World Bank and the National Council of Applied Economic Research, India (NCAER) - the Rural Finance Access Survey, 2003(RFAS-2003) highlights inadequacies in rural access to formal finance and the extortionary terms of informal finance. This provides a strong need and ample space for innovative micro finance approaches to serve the financial needs of Indias rural poor. Over the last decade, micro finance approaches have been designed to combine the safety and reliability of formal finance with the convenience and flexibility that are typically associated with informal finance. They typically involve providing thrift, credit and other financial services and products of very small amounts to the poor, with the aim to raise income levels and improve living standards.

However, micro finance still plays a modest role in India .At the AllIndia level, less than 5% of poor rural households have access to microfinance (as compared to 65% in Bangladesh) but significant variations exist across states. The southern states in particular, account for almost 75% of funds flowing under microfinance programs. Eastern states like Jharkhand are lagging far behind in terms of micro financial services being offered to their poor rural masses. The tribal population in Jharkhand is very high (7.5 million) contributing to 28 % of the total population. Agriculture is the primary occupation of all the rural communities in Jharkhand with paddy being the staple crop, which is cultivated during the Kharif season. Due to lack of rainfall and alternative irrigation facilities during Rabi and summer, most of the poor tribal communities undertake dry land crop cultivation during this period besides non-timber forest produce collection, labor and migration. The advanced tribal communities like Oraons undertake cash crop cultivation with
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the help of irrigation pump sets. Many Non-Government Organizations are involved in community mobilization, motivation, education, information dissemination, setting up of delivery systems for input facilitation, market linkage and formation of social institutions like Self Help Groups (SHGs) etc .In the existing scenario Microfinance Institutions (MFIs) are also considered to be a viable option for providing financial support to the farmers through loans to purchase inputs like seeds, fertilizers and irrigation equipments. Hence this project makes an attempt to evaluate the effectiveness of microfinance with special emphasis on the state of Jharkhand. But, microfinance in India has emerged as a narrow concept, which excludes all other factors and emphasizes only one input, credit, as an agent for development. There is a need to examine whether such a minimalist approach has the intended impact of reducing poverty and aid socioeconomic development. The traditional supply perspective views the transfer and use of money, and the impact of such use. However, money is just one of the many resources that poor people use creatively to improve their livelihoods, which consists of several complex factors, not only income generating activities. A good view of impact can only be obtained by understanding the individual, social, economic and learning processes that cause impact. This calls for a study of the impact of microfinance on the lives of poor at household, community and regional level.

1.2 Objectives of the study The primary objective of the project is to assess and understand the impact of microfinance in overall socioeconomic development in the state of Jharkhand. This study provides a new perspective on social performance, which is wider than impact, but at the same time practical.

The specific objectives of the study are as follows: 1. To develop a framework for social rating and social performance in microfinance. 2. To assess the impact of SHG-Bank linkage programme on household consumption and investment of the poor in select region of Jharkhand. 1.3 Research Methodology The scope of the present study is restricted to Ranchi District of Jharkhand state only. The study is carried out in two broad phases: First, the assessment of social performance of a particular Microfinance Institution (MFI) situated in Ranchi District is done. Second the impact assessment of SHG-Bank linkage programme promoted by NABARD is done.

1.3.1 Social Performance of Microfinance Institution (MFI) The study makes an attempt to gather some empirical evidence, by assessing the social performance of a particular Microfinance Institution (MFI) situated in Ranchi District of Jharkhand state, using the social rating methodology developed by M-CRIL. The study is based on both primary and secondary data. Secondary data on micro credit services provided to clients is collected from the selected Microfinance Institution (MFI) situated in Ranchi District of Jharkhand. Some other related information is derived from journals, published reports, district credit plan reports and a detailed review of literature. This MFI follow the SHG model and has 4272 clients (SHG groups) as of March 2008. A small field
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survey has been carried out to obtain direct client level information about outreach and also to obtain feedback on services provided. A sample of 130 clients of the MFI is considered for the field survey. Data on various economic aspects and various social aspects has been collected to assess the performance of the MFI. Some parameters on which information is collected are listed below: Basic socioeconomic characteristic Asset ownership and purchase pattern Consumption pattern Borrowing and saving pattern Banking pattern

Thereafter quality checks of primary data collected are done followed by data entry, submission of clean data sets and data analysis. 1.3.2 Impact assessment of SHG-Bank linkage programme The study is based on information obtained from a primary survey conducted at two different levels: the SHGs as a group, the individual members of the SHGs. Multistage random sampling method was adopted for selecting the sample members. In the first stage, one district from the state of Jharkhand, i.e. Ranchi District, representing maximum number of SHGs linked with the banks was selected purposively. In the second stage, 15 SHGs linked with the banks as on 31 March 2007 in the selected district were chosen at random for the study. The list of SHGs was obtained from NABARD, Ranchi Regional Office. SHGs having completed at least one year of bank linkage were selected for the study assuming that the benefits from the SHG bank linkage programme would have fairly well stabilized. In the final stage, a sample of 90 SHG members was selected at random from the selected district. The sample of SHGs and members are also shown in Table 1.1.

Selected State Jharkhand

Table 1.1 Sample of SHGs and Members Selected District SHGs selected Ranchi 15

SHG Selected 90

Members

In order to assess the economic and social impact of the programme over SHGs of different ages, the sample SHGs were -stratified into three categories, i.e. (i) Up to 2 years, (ii) 3 to 4 years and (iii) 5years and above. The sample SHGs was also stratified under two different models in order to analyze the difference in impact of the programme model wise. (i) NGO promoted groups and (ii) BANK promoted groups. The stratification of the sample according to the model and age of SHGs are presented in Table 1.2.
Table 1.2 Stratification of the Sample according to Model of SHGs Category NGO groups Bank Groups Total Sample SHGs 8 7 15 Percentage 53.33% 46.66% 100% Sample SHGs Percentage Members 45 45 90 50% 50% 100%

Table 1.3 Stratification of the Sample according to Age of SHGs Category Upto 2 years 3 to 4 years 5 years & above Total Sample SHGs 6 5 4 15 Percentage 40% 33.33% 26.66% 100% Sample SHGs Percentage Members 36 30 24 90 40% 33.33% 26.66% 100%

The study is based on primary data collected from the SHG members with the help of structured questionnaires. Different methods like verifying the consistency of the data collected from the primary sources using repeated questions and assessing the validity of the information with the NGOs was attempted to get reliable information. Data on various economic aspects like asset structure, net income, savings, loaning and investment patterns, employment patterns and social aspects such as improvements in self confidence, communication skills, behavioral changes, etc., were collected to assess the impact of the programme. 1.4. Organization of the Report The layout of the report is structured in five chapters. Chapter 1 being the introductory chapter provides the background of the study by discussing the importance of microfinance in improving the living conditions of the poor. It also proposes the objectives of the study with an outline of the data collection and methodology used in the study. Chapter 2 discuses the important microfinance models prevalent globally along with an overview of the models existing in India. It also includes a brief review of empirical literature in the context of India. The assessment of social performance of a particular Microfinance Institution situated in Jharkhand is presented in Chapter 3. Chapter 4 provides the detailed impact assessment of SHG-Bank linkage programme, by studying the SHG groups situated in Ranchi district of Jharkhand. Chapter 5 summarizes the major findings of the study along with its implication. The chapter identifies the limitations of the study and proposes the scope for further research work in this area.

2.1 Evolution of Microfinance The Task Force on Supportive policy and Regulatory framework for Micro Finance constituted by NABARD defines Micro Finance as the provision of thrift, saving credit and financial services and products of very small amount to the poor in rural, semi urban and urban areas for enabling them to raise their income levels and improve their standard of living. In other words Micro Finance is provision of financial services to the poor including credit, saving, insurance remittance and pension who are excluded from formal financial system. The definition given by M S Robinson elaborates on the type of clients who can be served through micro finance and defines it as, Micro finance refers to small scale financial services provided to people who farm or fish; who operates small enterprises or micro entrepreneurs where goods are produced, recycled, repaired or sold: who provide services; who work for wages or commission; who gain income from renting out small amount of land, vehicles draft animals or machinery and tools; and to other individuals and groups at the local levels of developing countries, rural and urban. In India micro finance started with SHG bank linkage programme of the NABARD on a pilot project basis in 1992-95 where in SHGs were set up by MYRADA (Mysore Resettlement and Development Agency). After its success the programme passed through the stages of pilot (1992-1995), mainstreaming (1995-98), and expansion phase (1998 onwards) and emerged as the worlds biggest micro finance programme in terms of outreach covering 2.3 million groups to whom banks provided loans Rs. 1139740 million in the year 2006 (EDA, 2006). This programme has been designed on the basis of combining the collective wisdom of the poor, the organizational capabilities of the social intermediary and the financial strength of the banks. The recovery rate of this programme has been 95% for loans provided by banks to the SHGs.
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2.2 Models of Microfinance in International Context There are various delivery models of microfinance existing worldwide as per the geographical setting and country-specific environment, for example, Badan Kredit Desa (BKD) village banks and the Bank Dagang Bali in Indonesia, SEWA in India, the Bangladesh Grameen Bank in Bangladesh , microfinance experience of Philippines, the early ACCION affiliates in Latin America, the Brazils Banking Bolivias Banco solidario (Bank for solidarity groups) ,

correspondents model and South Africa Teba Bank. This section provides an overview of some of the most popular and widely prevalent microfinance models in the world. 2.2.1 Grameen Bank Model It was developed in Bangladesh in 1976 by Muhammad Yunus which is well known and the most admired model in the world. In this model the prospective clients are required to form a group of five members who create in turn centers of around five to seven such groups. The group members make regular savings with the MFO as per affixed compulsory amount and take regular loans. All the members have individual savings and loan accounts with the Micro Finance organizations (MFO) and the main function of each group and centers is facilitating the financial intermediation process through performing the following functions: i) Holding regular weekly meeting supervised by the staff of MFO where savings and repayments are collected and given to the staffs who maintains the record. ii) Organizing contribution to group savings fund with the consent of the MFO maintaining the group account. iii) Guaranteeing loans to their individual members by undertaking group/ joint liability and by accepting that no member of the group would be able to take a new loan if any members are in arrears.

iv) Appraising fellow members loan application and ensuring that they maintain regular savings contribution and loan repayments [Harper, M. (2002)]. Core Features of Grameen Model i. ii. iii. iv. v. vi. vii. viii. ix. x. It is based on mutual trust, social collateral and group moral pressure. Credit is provided for self-employment generation and raising income level and housing facility not for consumption. Provide services at the doorstep of clients. For getting loan a borrower must be the member of group of borrowers. Loans are provided on continuous basis and new loan is given when previous loan is repaid. All loans are to be repaid in weekly or biweekly installments. Simultaneously more than one loan can be given to a borrower. Borrowers make mandatory and voluntary savings. Loans are provided through non-profit organization/ institution owned by borrowers. Grameen credit is promoted through group and centre formation electing its leader. The essential elements of the model are homogeneous group of 5 members, Six to eight groups form a center, weekly meetings of members, regular savings, loan is approved in meeting, loan is directly provided to individuals, loan has to be repaid within 50 installments. This model is a cost intensive model as selection of group members is strongly vetted by bank; their capacity building is given much emphasis. It is meeting intensive also and its main benefits are that it focuses on the poorest, selection of members is strongly vetted by the bank and delivery and product design is simple, there is very strict and disciplined approach for organizing group meeting and the recovery of loans.

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However some doubts are raised about the assumptions of this model. First this model assumes that all poor need loan for self employment purpose and based on this assumption loan is given only for self employment purpose however practically the poor need loan not only for self employment purpose but for various other purposes like simple household consumption purpose Second, in this model borrower are required to start the repayment of the loan installments just after disbursal of loan as it is assumed here that they can repay from their ex-ante income however it is not always possible. Third it follows a very much strict and disciplined approach in repayment, which causes many times great group pressure leading to even suicides of the members. 2.2.2 Teba Bank of South Africa Originally Teba Bank started its operations in mining industry. The bank previously operated as the Teba Savings Fund, and provided basic banking services as entry level player mineworkers on gold and platinum mines since 1976.Thereafter it started to target low income households in urban and rural areas as a wing of the bank. In 2000 it was granted license to operate as a micro finance bank. . It is a niche bank, aiming to provide affordable micro-financial services to the under-banked in non-metropolitan South Africa. Here bank provides financial services (micro savings, micro credit and insurance for the funeral purposes) to the low-income households in small town and rural areas through agents who uses mobile point of sale (POS) devices in the form of hand held mobile phone. The customer uses their debit card at the terminal to deposit and withdraw cash, make balance inquiry, and transfer funds. In this system agents can accept cash from the clients and disburse cash physically. Typical agents here are the neighborhood grocery stores, and their accounts at the bank are instantaneously debited and credited as per case (RBI, 2005).

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2.2.3. Banking correspondent Model in Brazil Brazil as a country has several similarities with India mainly huge demographic area. Even six years before, 1700 municipalities out of 5500 municipalities were lacking a single branch of bank. The rural people had no option to deposit their money, no access to credit except informal sources say family and no chances of building their credit history. In 1997, Banking Correspondents (BC) which are small outlets with extended working hours offered basic banking services (RBI, 2005). BCs are full service retail channel that Brazil Banks have developed using technology (POS devices and communication network) and business arrangements with grocery stores , medical stores, post offices , lottery outlet s and other retail shops. The BC offer many services including deposits, withdrawals, fund transfer, bill payments, new account opening, insurance etc. BC model is highly technology intensive wherein a combination of devices like EFTROS device, a bar scanner, POS, PC and sort of teller machine is used at retail stores, post offices or other retail outlets. The retail outlets provide a staff person to man the device and handle the transactions for clients. Clients are given bank cards which in some cases are debit card. POS device is connected by VSAT to the central server that store account information. In the case of post office the post offices themselves identify retail outlets and handle all equipments, training, contracting etc. These banks use the services of management companies for managing the BCs These companies manage the BCs on behalf of banks (Ivatuary, 2006). 2.2.4. ACCIONs Service Company Model In Latin America the commercial banks have been a significant player in providing micro finance services during last few years Entry of commercial bank is said to be good as customers would get full range of services and as a whole it would be a very cost effective system for micro finance as it has a strong base of physical, financial and human resources. In the light of specific
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potential that a commercial bank has, ACCION international (a micro finance resource institution based in USA and working in American continent) has developed relationship with some commercial banks to start and expand micro finance operations. In this respect ACCION and its partners are using an approach known as service company model. A Microfinance service company is a non-financial company that provides the loan origination and credit management services to the bank. The service company does all the work of promoting, evaluating, appraising, tracking and collecting loans but loan sit in the books of the bank and not of the service company. In return of these services the company gets a fee. The service company employs the loan officer and micro finance programme staff while the bank furnishes services to the service company. This could include human resource, teller support or information technology support. The service company can be a wholly owned subsidiary of bank or it can involve other institution. The main features of the above discussed models have been summarized in Table 2.1.
Table 2.1 Summary of the main features of the global models Operational Features Grameen Bank Model Brazil Banking ACCION Correspondents Service Model Company Model and Technology e.g. Bank POS, Kiosk Partnership South Africa Teba Bank Model

Basis/Orientation Group Social collateral Linkage with No linkage Commercial Bank with commercial bank Service focus Appropriate client Credit

Clients from rural or urban area and usually women from low income groups

Technology e.g. POS, Kiosk Linkage with Linkage Service is between bank provided as a commercial banks as BCs and service wing of bank are appointed co. as partners by Banks Full Banking Credit Full Banking services services People having Mostly urban Poor people no access to including in rural and banking both men and small towns services/ bank women both branches having small employed and including both and medium self employed poor and non incomes 13

Group Repayment

pursuing income generating activities Group Group responsibility

poor

Individual Group Joint between Bank Banks and the responsibility retails outlets.

Individual Bank responsibility

2.3. Existing Microfinance Models in India It is important to understand the traditional financing approaches for microfinance in India. There are five widely used microfinance models followed in Indian context for providing microfinance services in India. 2.3.1. SHG- Bank Linkage Model This is the oldest and most popular model in India. NABARD initiated the "SHG - Bank Linkage Programme" in 1992 as a pilot project and mainstreamed in 1996. The objective of the programme is to enable formal banking services to provide financial services to the rural poor through the process of savings and credit linkage of Self Help Groups (SHGs). A Self Help Group (SHG) has an average size of about 15 people from a homogeneous class. They come together for addressing their common problems. They are encouraged to make voluntary thrift on a regular basis. They use this pooled resource to make small interest bearing loans to their members. The process helps them imbibe the essentials of financial intermediation including prioritization of needs, setting terms and conditions, and accounts keeping. This gradually builds financial discipline in all of them. They also learn to handle resources of a size that is much beyond individual capacities of any of them. The SHG members begin to appreciate the fact that resources are limited and have a cost. Once the groups show this mature financial behavior, banks are encouraged to make loans to the SHG in certain multiples of the accumulated savings of the SHG. The bank loans are given against group dynamics without any collateral and at market interest rates. The groups
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continue to decide the terms of loans to their own members. Since the groups own accumulated savings are part and parcel of the aggregate loans made by the groups to their members, peer pressure ensures timely repayments. Apart from financial help at the time of need, the group provides social security to its members. Three distinct models can be observed in linkage programmes between banks and low-income groups. SHGs formed and financed by banks: In this model besides financing the groups the banks themselves form, organize, nurture and monitor the groups and train the members on record keeping, thrift, utilizing credit amount etc in addition banks also supervise the groups. As per March 2008, 20 percent of SHG are financed through this model. Figure 2.1 SHGS formed and financed by banks

BANKS

Formation, nurturing Credit Savings

SHGs

Source: (NABARD Report, 2004-2005)

SHG formed by formal agencies other than banks and financed directly by banks: In this model NGOs, farmers clubs, individual volunteers other than banks in the field of microfinance act as facilitators. They facilitate organizing nurturing, monitoring and training the groups. Banks give directly loans to these SHGs. This model has major share with 72 percentage of total SHGs financed up to March, 2008.

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Figure 2.2 SHG formed by formal agencies other than banks and financed directly by banks Formation, nurturing, Monitoring
NGOs, Vas, IRVs, FCs

Savings
BANKs

Credit

SHGs

Source: (NABARD Report, 2004-2005)

SHG financed by banks through NGOs and other agencies as financial intermediaries : In this model the SHG federation NGOs acts as a financial intermediary between banks and these SHGs. The NGOs are encouraged to approach a suitable bank for loan in bulk which gives loans to the SHGs. In area where a very large number of SHGs have been in operation intermediary agencies like SHG federation are acting as link between bank branch and member. Under this category total 8 percent SHG have been financed up to March 2008. Figure 2.3 SHG financed by banks through NGOs and other agencies as financial intermediaries Formation, nurturing, Monitoring Credit
NGOs, Federations BANKs

savings
SHGs

Source: ( Credit

Source: (NABARD Report, 2004-2005)

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2.3.2. Grameen Model The Grameen model of Bangladesh has been replicated in India by some two dozen MFIs. Its features and methodology has been discussed in the earlier section on international models. In India the major MFIs which are using this replicated model are SHARE in Andhra Pradesh, ASA in Tamilnadu and CASHPOR in eastern Uttar Pradesh. 2.3.3. Individual Banking Programmes (IBPs) In this model microfinance services are provided by MFIs to individual who do not belong to any group means not the member of any group but sometimes they may be associated with a particular group like SHG, JLG or cooperative society group. This method is famous and popular in the case of microfinance through cooperatives and commercial banks and basically suitable for larger clients in urban areas who are engaged in their own enterprise or running such enterprises that provide self employment to the other poor. In the case of cooperatives all borrowers are members of the cooperatives organization and their creditworthiness and loan security depends on the cooperative memberships. Here members savings in cooperatives and pressure of fellow members are key factors. Here loan is given after careful analysis and knowing the character of individuals so it is basically character based lending. Loan is made at branch office and a visit by the credit officer is made at the place of the business of client to verify that the loan has been used for the same purpose as specified in the loan contract. Here periodic payment is made but for availing the loan facility it not essential to save compulsorily. Most MFIs require some collateral or cosignatories. Here credit officer usually develop close and long term relationship with the clients. The main features of this model are: i) Here the individual borrower is required to provide collateral/cosigner for getting a loan and the collateral are non

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conventional like driving license, degree certificate, or other such documents as collaterals. ii) It requires a careful analysis on the part of the lender of loan proposal defining all the terms of loan clearly and examining the character of the individual borrower before sanctioning the loan to him. iii) iv) v) The size of the loan is per the business requirements of the individual. Frequent and close contact with the individual client. Checking the utilization of loan by going to the place of business that whether the loan has been used for the same purpose as specified in the loan contract. As per survey conducted by SADHAN (Industry Association of Community Development Finance Institutions in India) the contribution of individual banking model to the microfinance sector in India is only 7 percent. (Babu and Singh, 2007). Some of the major users of this model are SEWA bank in Ahmedabad, the Annapurna Mahila Cooperative Credit Society in Mumbai, Pushtikar Samiti- a cooperative bank in Jodhpur. 2.3.4. ICICI-Bank Partnership Model This model has been used and popularized by the private bank and said to be pioneered by ICICI bank. In this model the MFI originates the loan, evaluates, recommends, tracks and collects the loan but the loan appear in the books of the Bank and not of the MFIs books. For the credit management services that the MFI provides to the bank MFI charges a service fee from the borrowers. With this partnership structure ICICI is working with more than 30 MFIs in India accounting for loans outstanding of approximately $55 million in December 2004.The main features of this model are:

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i) Loan contract is directly between borrower and the bank so loan does not appear in the books of the MFI but it appears in the books of the bank ii) MFI gives a first loss guarantee to the bank whereby the bank shares the risk of the portfolio with the MFI up to a certain specified limit in the form of a security deposit and for this service the MFI collects a fee from the borrowers. iii) This model utilizes effectively the benefits of both the partners as financial intermediation remains fully with the bank and social intermediation remains with the MFI so both organization uses their core competence/main strengths and provides best result. iv) Transfer of implicit capital from the bank to the MFI through an overdraft facility wherein the bank gives an overdraft facility to the MFI which is equivalent to the amount of first loss guarantee structure. This overdraft amount is used by the bank only in the event of default by the borrower and in that situation the MFI is liable to pay a penalty amount on the amount withdrawn. v) Partnership Model financing separates the risk of the MFI from the risk of microfinance loans which makes this model a precursor for securitizing microfinance loans (Ananth , March 2005). One of the examples of this model is CASHPOR in eastern Uttar Pradesh.

2.3.5. Mixed Model Some MFIs uses mixed model wherein the elements of grameen model and SHG bank are mixed. The no. of such type of MFIs are relatively less but their numbers are growing. Another prominent example of this model is SPANDANA in the Guntur region of Andhra Pradesh which has larger JLGs of around 10 members. Another examples are Cashpor, a Varanasi based MFI ,
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Indian Association of Savings and credit (IASC) a section 25 company promoted by the HDFC bank gives individual as well as group loans. The main features of the above discussed models have been summarized in Table 2.2.
Table 2.2 Summary of the operational features of microfinance models in India ICICI Bank Operational features SHG Grameen IB partnership model Primarily Clients of intermediary MFIs, Clients Primarily Women Primarily Women Primarily Men both men and women The poor (Defined in Poor and Criteria for targeting The Poor(defined in terms of Housing, Basically Poor and Non poor unbanked the client terms of BPL) other assets, types of (unbanked) employment) Usually 5 clients per 15 to 20 clients per Individual Individual Groups group(organized into group clients Clients centers of 4-6 groups) Service focus Meetings Savings Deposit Interest on savings Initial loan size Effective interest rate Savings and credit Credit Credit Daily Flexible 6%+ Rs. 5-15000 23-38% Credit Flexible 6%+ Rs. 1000-25000 24 -30% Insurance is Bundled with the credit to cover borrower serious disease, death, accident, & rainfall failure Research, enterprise and other social support

Monthly Weekly Rs. 20-100/Month Rs. 5-25/Week Bank Rate (4.25%)+profit share 6-9% Rs. 5-10000 Rs.2-5000 24-28% 32-38%

Insurance

At a very preliminary stage

Development services

Some associated A few small social Enterprise Programmes projects support

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2.4. Selective Review of Literature The importance of microfinance in the field of development was reinforced with the launch of Microcredit summit in 1997 and 2005. Recently the UN declared the year 2005 as the international year of Microcredit. In December, 2006 Muhammad Yunus and the Grameen Bank he founded received the Nobel Peace Prize for their pioneering contributions to the development of microfinance. Thus there are many stories of the transformative effect of microfinance on individual borrowers but until recently there has been little rigorous research that attempts to segregate the impact of microfinance from other factors and to identify how different approaches to microfinance change results. There is substantial amount of literature available on impact of microfinance on socioeconomic development outside India. Impact assessments provide evidence of the positive effects of micro-finance on the livelihood of poor, especially in Asia. The Indian MFIs, on which studies have been conducted by external agencies or themselves include, SEWA Bank in Ahmedabad, ASA in Tiruchirapalli, DHAN in Madurai, SHARE in Andhra Pradesh and PRADAN in Delhi (Chen and Snodgrass, 2001). Some of these have taken steps to build internal processes to also assess impact. In India, the first survey on SHGs was undertaken by NABARD, along with other Indian members of the Asian and Pacific Regional Agricultural Credit Association (APRACA). They conducted an action research on linking SHGs with the concept of savings and credit in 1987 and published the outcome of the research in the form of a survey report in 1989. The survey was carried out in the form of case studies of 46 SHGs spread over 11 states and associated with 20 SHPIs. Of all the SHGs sampled, 17 had savings collection and credit provision as a major activity. Another 13 were engaged in farming or farmbased activities, five were into social forestry and afforestation, eight were engaged in non-farm activities and three were occupied in diverse occupations. Based on the case studies on savings and credit of 17 SHGs, the
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study reported that when a SHG was promoted by a SHPI, it generally comprised only members of the weaker sections. The first impact study of NABARD on SHG-bank linkage programme was carried out by Puhazhendhi and Satyasai for NABARD in 2000. The study assessed the impact of microfinance on socio-economic conditions of 560 household members from 223 SHGs located in 10 states; Rajasthan (Northern region), Orissa and West Bengal (Eastern region), Madhya Pradesh and Utter Pradesh (Central region), Gujarat and Maharashtra (Western region), and Andhra Pradesh, Karnataka and Tamil Nadu (Southern region). A study by Chakrabarti (2004) reassessed the microfinance scenario in India and the impact of microfinance programme on poverty eradication. It also discussed the role of banking sector in outreaching and financial sustainability. In order to keep some balance between outreach and profitability, the study suggested that microfinance provides an important way to banking sector to operate in the rural areas. Nair (2005) examined the potential of SHG federations in providing sustainability to SHGs through financial and organisational support. It is now acknowledged that limited evidence exists in India, about impact of microcredit, and that the evidence available is mixed, ranging from significantly positive outcomes to almost no change at all (Fisher and Sriram, 2006). The present study differs from earlier studies in many aspects. First, it covers a wide range of socioeconomic impact issues on the level of SHG members and not only at the level of a SHG. Second the work is carried out in the state of Jharkhand, where hardly any impact studies of similar nature exists. The study helps in learning several valuable lessons about how impact of microfinance takes place, and thereby incorporating these lessons in the design of microfinance programmes in particular, and development programmes in general.

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3.1 The Concept of Social Performance The microfinance industry has finally reached a consensus on the definition of social performance. Social performance in microfinance is defined as the translation of mission into practice in line with accepted goals. Under this definition, social performance is not only the end result (or change), but also the entire process of achieving the result. So, to assess social performance, we move away from focusing exclusively on trying to prove an end result (impact assessment) to looking at how to get there, and reporting on those steps that are likely to lead to positive social outcomes. These steps follow a logical organizational path, from intent/governance, through management/ systems, to results. Figure 3.1 outlines the different steps involved in this process. Figure 3.1 Dimensions of Social Performance

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3. 2 Managing and Measuring Social Performance by MFIs MFIs can more successfully achieve social goals if they can assess, monitor and manage progress towards them. Social performance should be managed and reported as systematically as is MFIs financial performance. There have been important but separate attempts over the last few years to integrate the assessment of social performance into the regular management systems of financial institutions. In 2005, the Argidius Foundation, CGAP, and the Ford Foundation brought together more than 30 leaders from various social performance initiatives in microfinance to share their experiences. In the following two years, the work on social performance gained momentum, leading to the formation of the Social Performance Task Force. Its membership now includes over 150 leading microfinance networks, financial service providers, rating agencies, donors, and social investors (CGAP, 2007). These members are committed to regularly assessing, reporting on, and improving the social performance management of their organizations and the organizations they support. The Task Force is promoting a stronger industry focus on social performance through adopting a common definition, coordinating different initiatives, and creating a common reporting format. In microfinance, the process of measuring and managing organizational progress toward social objectives is known collectively as social performance management (SPM). The issue of SPM is growing in importance in the Indian microfinance industry. Although relatively recent to the microfinance agenda, SPM has a long history outside of microfinance. Ironically, perhaps much of the activity and progress in SPM is taking place in the private sector with initiatives such as the Global Reporting Initiatives and the Balanced Scorecard. SPM recognizes that to be useful, social performance information must be integrated into the MFIs work and operational routines and into its value system. It must, in other words, be institutionalized. Social performance Assessment (SPA) goes beyond the broader social performance management. It identifies the relevant dimensions of social
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performance and different tools to measure social performance. For example, many MFIs mention the poor as their target group but fail to define poor and measure poverty levels. Similarly many MFIs fail to track the drop-out rate, even if their clients are leaving. There is thus a need for storing, analyzing, reporting, and using social performance information by MFIs. 3.3 Social Metrics Social metrics refer to social measures related to program operations and serve as distinct links in a social impact casual chain. There are four principal social metrics (links) in the social impact causal chain: inputs, outputs, outcomes, and impacts. The causal chain begins with inputs, which are transformed through internal processes into outputs. Outputs in turn produce outcomes. Finally, outcomes produce impacts. The further one moves to the left on the causal chain, the weaker the causal relationship with program impacts. Inputs consist of the resources used to run the program, including money, people, time, physical facilities, and equipment. Outputs are the direct and measurable products of program activity, including, for example, the number of loans made, lessons given, persons trained, or clients served. Outcomes are observed changes in the well being of clients at the individual, household, enterprise, and community levels. Common measures of social outcomes include household income and expenditures; asset ownership; housing conditions; access to basic services; food security; school attendance; female participation in decision-making, leadership roles, social organizations and the political process; and enterprise growth, profits and employment. Impacts are outcomes caused by the MFI above and beyond what would have happened without the MFI. Impacts represent the achievement of social goals. 3.4 Social Performance Assessment Tools For many MFIs, the common reporting format will serve as a starting point for developing social performance management systems. While some

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will just integrate additional indicators into their Management Information System (MIS), others will require new tools to assess performance. There are a variety of tools that are now available, some of them are mentioned below: CERISE SPI MFC Social Audit ACCION SOCIAL USAID SPA Audit M-CRIL Microfinanza Rating Micro Rate (SPA) SEEP/AIMS tools CGAP-Grameen-Ford Progress out of Poverty Index (PPI) Most of these tools, such as the USAID Social Performance Assessment Tool and the CERISE Social Performance Indicators Initiative, focus on internal processes (e.g. mission statements, codes of conduct, strategic alignment, etc). This focus away from the results level was due to the difficulty in developing rigorous tools to report on results indicators (on economic levels of clients and changes they experience). However after intense research, we now have two such tools, the IRIS Poverty Assessment Tool and the Progress out of Poverty Index (PPI). Both the IRIS tool (developed by IRIS for USAID) and PPI (developed by Mark Schreiner for Grameen Foundation, CGAP and Ford) utilize household survey data to estimate the economic levels of clients. 3.4.1 Social rating tools A part of this new field of social assessment is social rating. A major development in the microfinance sector has been the introduction of social rating tools to complement credit ratings. Social rating uses information available with the MFI to the extent possible drawing on available data and discussions with staff at all levels .It covers both the process (intent, policies, design, system) and part of the results (outreach and appropriate services)
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along the dimensions of social performance as presented in Figure 3.2. Social ratings will assist donors, investors and MFI managers to make effective use of micro finance resources to achieve social goals. Figure 3.2 Assessing Social Performance

There is a lot of interesting work relating to social rating going on in India as well. Some organizations like M-CRIL and Microfinanza offer social ratings that assess institutional mission, intent, design and systems as well as client level information at economic levels, appropriateness of financial services and outcomes. M-CRILs tool for social rating provides an assessment of MFIs social performance. So far, M-CRILs has undertaken seven social ratings in India supported by Friends of Womens World Banking and the Ford Foundation, and also nine poverty audits supported by SIDBI (Sinha, 2007). 3.5. Case Study This section discusses the case study of a MFI situated in the state of Jharkhand. An attempt was made to help the MFI assess their social performance by using the social rating methodology developed by M-CRIL. This MFI follow the SHG model and has 4272 clients (SHG groups) as of March 2007.
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A small field survey was carried out to obtain direct client level information about outreach and also to obtain feedback on services provided. A sample of 130 clients of the MFI was considered for the field survey. The sample size taken into consideration was in consonance with the social rating methodology by M-CRIL sand the questionnaire also includes the same questions used by them (India Microfinance Review, 2007) 2. 3.5.1 Findings The findings of the study are discussed following the same dimensions of M-CRIL social rating methodology (as shown in Figure 3.2); starting from process (intent and design, systems) and results (outputs measuring outreach and appropriate services). Intent and Design The mission of this MFI is to promote sustainable livelihoods to the rural poor. Through focus group discussion with managers and field staff, it is observed that the MFI had clear definition of the key term used in its mission, i.e. improved livelihoods and poor, which definitely helps in translating its mission into practice. However the reporting of the organization remains financial, both within the organization and also externally in annual reports. Service and Access The MFI provide credit to the rural poor, particularly the landless and women to promote self-employment. It also lends money to rural commercial farmers and non-farm enterprises. A flexible system of micro credit is offered through direct and indirect loans. It also offers non-financial services like technical assistance and support services for livelihood promotion, directly or through other rural actors.

127 is the minimum sample size at a confidence level of 95% and precision of +/- 10%.Also, see EDA Technical note: Estimating Sample Size which explains the sampling formula.

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Internal systems The MFI targets poor clients, both men and women in rural areas of the state. This also includes cotton and lac farmers in the rural regions of the state. 40% of the total clients in the MFI at present are women. In terms of human resources, the mission and values are usually a part of the staff training during induction. However, it is observed that the staffs of the MFI emphasize more on growth in number of clients (22% increase in growth from the previous year) and timely repayments (83% on time repayment). The focus for covering the poorest of the poor in a village is lacking among the staffs. In terms of MIS and monitoring, there was hardly any information available to understand the social performance of the MFI. However, there is a considerable scope for the MFI to collect portfolio information from a social perspective. Information on the dropout rate, repeat customers, and identifying reasons behind leaving or coming back may be useful. Also, segregating these information on the basis of men and women clients, or rural and urban will also throw some light on the social performance of the MFI. Results Outreach The majority of the clients in this MFI are rural poor. 78% of the MFI clients are from rural villages and 18% are from semi-urban areas, while the remaining 4% are from urban areas. Hence the outreach of the MFI is mostly rural. Now to understand whether the MFI is serving the poor and excluded, we analyze whether clients are from vulnerable communities (such as SC/ ST) or from households without alternative access to formal finance. As shown in Table 3.1, we find that the MFI have a good proportion of SC/ST client households (38%), which is above the national average, reflecting substantial outreach to these communities. It is also observed that not all client households are excluded from financial services. However, only 18% have a post office savings account, which is much below the national figure. 15% of client households have members in another MFI.

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Table 3.1 Financial Inclusion (reaching the unreached) Parameters SC/ST With Savings in bank or post office With client in other MFI % of client households 38 18 15 All India population* 25% 36%

* Census of India, 2001

However, the MFI had no idea of the poverty level of their clients and were not even aware of the need to measure the poverty status of their clients for understanding the depth of their outreach. The fight against poverty is serious business. For the MFI to realize its full potential and make a substantial contribution to achieving the Million Development Goals, all MFIs have to equip themselves with the instruments to evaluate performance and results. Hence, the poverty outreach of the MFI was also measured as per the poverty scorecard developed for India. 3.Very surprisingly, it is observed that only 26% of its clients are below the poverty line. The misfortune is that even in All Indian population, the person living below poverty line is 39%, which is much more than the outreach of this MFI. This definitely calls for a strategic review by the MFI, so as to align its operation with a deeper poverty focus. In terms of client awareness of financial services, it is seen that 73% of the clients were aware of the notional interest on loans and interest receivable on savings deposit. However, only 32% are aware of the details of costs like break up of loan fees, declining interest etc.

Schreiner, Mark (2007).The scorecard has 10 relatively simple questions which can be simply answered/ observed about a household without much calculation or judgement. The scores calculated can be linked to any poverty line. For India, they are linked to the international poverty lines- $1 per day and at present it is Rs. 395/person/month rural and Rs 454/person/month urban)

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4.1 Status of SHGs in Jharkhand In Jharkhand (earlier Bihar) SHG have started in 1988, Hazaribagh through Holy Cross Sister at Tilhara village of Ichhak block. Simultaneously, SHG system was spread with Pradhan of its Hazaribagh unit. Gradually, NGOs who used to work in the state, started forming SHG in several districts. In 1993, a meeting with RBI team was held in Patna Secretariat on the microcredit issue. In this regard, it was discussed, whether the loaners should get subsidy. In this same year, banks started giving loans to SHGs without any guarantee. Bank of Maharastra & Canara Bank were the first two banks to bring out their guidelines for SHGs. After that, DUE to the pressure of RBI and NABARD, different nationalized banks started opening accounts & lending loans to the SHG groups. Self Help initiatives in Jharkhand have gained roots and with passage of time the number of actors facilitating the promotion of self-help groups has increased. Government departments, banks, NGOs all are engaged in their promotion. Promotion of Micro enterprises and various income generation activities is an important thrust area of SHGs. Micro credit through SHG has proved to be one of the most effective modes of making available credit to the rural poor. Mr. A.P. Das, AGM, NABARD spoke on 'Micro Finance-status, issues and challenges in Jharkhand. He presented an overview of Micro-credit in the state. Micro credit through SHG-Bank linkage programme has gained acceptance in last 2-3 years. However the present level of coverage under NABARD of the estimated poor families is only about 15%. He stressed that in such a scenario the scope for expansion of the micro credit is still untapped to a large extent. NABARD has all along advocated financing SHG as a sound business proposition for Banking sector, a process of grass root level institution building

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for NGOs and future multi-delivery platform for development initiatives by the Government.

4.2 Impact Assessment An attempt has been made in this section to assess the impact of micro finance through the programme on living standards of SHG member at Ranchi district in Jharkhand. The programme brings in its wake various economic benefits to SHG members in terms of increased asset creation, enhanced saving and borrowing habits, increased income and higher employment, improved social lives, etc. Firstly, the socio-economic profile of the sample SHG households has been studied. The distribution of households according to level of economic activity, level of literacy, family size, age profile, etc., is presented both model wise and age of SHGs. After that the survey tries to assess how far the programme succeeds in terms of its coverage of the weaker sections in the rural segment of the population. Thereby, the impact of the programme on economic conditions of SHG members in terms of asset creation, saving and borrowing patterns, income and employment, etc is discussed. 4.2.1 Socio-Economic Profile Economic Activity Farm activity constituted the major share accounting for 42 per cent of the sample households. About 16 per cent of the sample households depended exclusively on agricultural labour. This was followed by non-farm activity (13%) and off-farm activity (11%). Mixed activity was observed in 13 per cent of the sample households. The share of farm, non-farm and mixed activity was relatively more in NGO groups (73%) compared to BANK groups (59%). This might be the result of adequate thrust on capacity building and training on income generating activities (IGA) by various NGOs.

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Older groups were engaged in mixed activities in large number (36%) compared to recently formed groups (9% for 2 year old SHGs). The share of agriculture laborers was significantly higher for groups of 3-4 years. The distribution of households as per activities is shown in Table 4.1. Table 4.1 Distribution of Households according to Economic Activities (%)

Level of Literacy The weaker sections that are the focus of the SHG Bank Linkage programme are generally characterized by high levels of illiteracy without any formal education. An analysis of the educational status of the sample households revealed that about 31 per cent of them were illiterate. About 55 per cent of the sample households could only sign. Members who studied up to primary and secondary levels were reported at 10 per cent and 4 per cent respectively. Members without any formal education or who were illiterate were observed to be relatively more in NGO groups (32.4%) than in Bank groups (29.3%). This might be due to the fact that NGOs in the study region were mostly working in hilly terrains and other inaccessible areas where literacy levels were significantly lower. Members who could only sign were observed to be relatively more in NGO groups (58%) than in BANK groups (49%). Joining SHGs also made them realize the importance of education, which resulted in increased number of members being able to sign. It is also interesting to observe that the share of members without any formal education was observed to be more in the newly formed groups (90.5%) than the older groups of five years and above (81.8%). This suggests that there
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is a group effort made to improve literacy levels of its members through informal education. The distribution of households as per literacy level is presented in Table 4.2. Table 4.2 Distribution of Households according to Level of literacy (%)

Family size Nearly 59 per cent of the sample households had family sizes ranging between 4-6 members and 21 per cent reported a family size of more than 6 members. Among different models, the share of family size of more than 6 members was higher in NGO groups (24%) compared to BANK- groups (14%) as NGO promoted groups were mostly in inaccessible, tribal dominated areas where the family size was large. Households with large sized families (> 6 members) constituted 27 per cent in older groups of 5 years and above as compared to 24 per cent for 2-year-old SHGs and 15 per cent for SHGs of 3-4 years, respectively. Age of Members The major proportion of the sample SHG members (51%) was in the age group of 26-35 years followed by the members in the age group of 36-55 years (33%) and 18-25 years (12%). A similar distribution pattern was observed across NGO groups and BANK- groups and across different ages of SHGs. The proportion of members in the age between 26-35 was 47 per cent in up to 2year-old SHGs, 57 per cent for 3-4 year old SHGs and 50 per cent for SHG of 5 years and above. An interesting observation was that the proportion of SHG

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members in the age group of 55 and above was reported at only 4 per cent, which indicates that SHGs did not prefer aged members. Figure 4.1 Distribution of SHG members according to age

SHG Members (%)

4 33

12 18-25 years 26-35 years 36-55 years 51 above 55 years

4.2.2. Programme Coverage Social Group The programme envisaged the covering of socially and economically weaker sections, particularly social groups like SCs/STs and Backward Classes (BCs). The distribution of sample households according to social groups revealed that the proportion of members belonging to SCs/STs accounted for 44 per cent followed by backward classes at 39 per cent. Among the sample SHG members (115) only 17 per cent belonged to forward castes. The highest proportion (49%) of SC/ST members was observed in the case of bank- groups compared to NGO groups (41%). As against this, the highest proportion of backward class members was reported in NGO groups (47%) compared to bank- groups (24%). Considering the SC/ST and backward class as weaker sections, based on social classification, its share to the total number of members

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worked out to 83 per cent. This category was observed to be more in NGO groups (88%) than bank- groups (73%). The coverage of weaker sections in groups of different ages revealed that over the years there was an increasing tendency towards covering weaker sections in the programme. The coverage of weaker sections in older groups of 5 years and above was 72 per cent whereas it had increased to 81 per cent in the recently formed groups. Table 4.3 Distribution of Households according to Social Group (%)

Figure 4.2 Distribution of Households according to Social Group (%)

17.4 43.5

39.1

SCs/STs

Backward Castes

Forward Castes

4.2.3. Asset Structure Asset Holding Pattern Poor are characterized by low asset base. Therefore, any programme targeting the poor should strengthen their asset holding pattern. Increase in asset base strengthens the financial position of the household and also
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improves its shock absorbing capacity. The SHG Bank Linkage programme through micro Finance interventions increases the productive asset of households like milch cattle, work animals and various consumer durables such as transistor, cycle, etc. The field study revealed that asset structure had increased in about 45 per cent of the sample households. While about 52 per cent sample households reported no change in their asset holding pattern, about 3 per cent reported decrease in their asset size. The decrease in asset size was a result of selling of milch animal/work animal due to fodder problem, death of poultry birds due to poultry related diseases, etc. While the increase in asset base was marginally higher for NGO groups (46%) compared to the BANK- groups (44%), the decrease in asset base was more for BANK- groups compared to NGO groups. The proportion of households reporting increased asset size showed positive correlation with the age of the SHGs. Similarly, the proportion of sample SHG members reporting no change in asset base was more for recently formed SHGs(66% for 2 year old SHGs, 57% for SHGs of 3-4 years) compared to older SHGs (14% for SHGs of 5 years and above). Table 4.4 Change in Value of Assets of SHG Members

Value of Assets The value of assets owned by the sample households during post SHG situation was worth Rs.5, 827 whereas it was Rs.4, 498 during the pre-SHG situation. Thus there was an average increase of 30 per cent in the value of assets after joining the SHG. The milch cattle/poultry reported highest increase (67%) in asset value in the post-SHG situations followed by consumer durables (21%) and work animals (16%). After joining the group, some members purchased milch cattle, poultry, goats, sheep, etc., which they did not have
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earlier, to diversify their income sources. This resulted in increased average value of assets held by the members under these heads. Across the models the increase in the average value of assets was higher for NGO groups (35%) compared to BANK- groups (19%). However, the average level of assets was higher for members in BANK groups in both pre and post-SHG situations. Table 4.5 Average Value of Assets possessed by SHG Members-Model wise

Figures within Bracket indicate % of increase

Figure 4.3 Average Asset Value in Pre and Post SHG situations: Model wise

Members of SHGs of 5 years and above had reported impressive increase in average value of assets (95%) between pre and post-SHG situations
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followed by members of 3-4 years old SHGs (19%) and upto 2 year old SHGs (10%). However, the average level of assets was higher for members in newly formed groups in both pre- and post-SHG situations. The average value of assets was relatively more for the members in the older groups of five years and above than the members in the newly formed groups. This trend was due to the economic empowerment of members in the older groups compared to recently formed groups. As far as the immovable assets such as land and dwellings are concerned, the number of landless as well as land holding of sample SHG members remained the same during pre-and post-SHG situations. Similarly, no sample SHG member reported opting for a new dwelling unit nor did anyone report a change in their dwelling type such as from kutchha to semi pucca or pucca. Increase in value of these two forms of assets cannot be expected from micro-Finance interventions over a short span of time. However, some of the unirrigated holdings of the members had been provided with irrigation facilities from traditional sources like wells, ponds and rivers after installing lift irrigation points out of loans from SHGs. Similarly, some members had repaired their dwelling units after availing loans from SHGs. Table 4.6 Average Value of Assets possessed by SHG Members-Age wise

Figures within Bracket indicate % of increase

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Figure 4.4 Average Asset Value in Pre and Post SHG situations: Age wise

4.2.4. Savings Pattern The SHG Bank Linkage programme distinctly differs from other micro Finance programme across the world mainly in terms of its greater emphasis on savings. The basic philosophy of saving first and credit next is assumed to be one of the strengths of the programme. The programme rests on the premise that members will develop the habit of thrift so that during post-SHG phase they can avail of loan. This, besides increasing their self-reliance in meeting the credit needs of the group members will also help in efficient deployment of credit among the members as their own money is at stake. The existing savings and lending products mainly from institutional sources were not adaptable to the rural poor. Keeping this in view, the programme has shifted the entire responsibility of innovating the saving and lending products to SHGs with a broader framework suggested in its guidelines.

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Average Level of Savings The estimated mean annual savings was worked out to Rs. 952 during the pre-SHG situations which were increased to Rs. 2,103 during post SHG situations. The incremental saving was worked out to Rs.911, which is about 96 per cent increase between pre and post-SHG situations. The percentage of incremental savings was significantly higher in NGO-groups (145%) than BANK groups (50%) which might partly be due to greater emphasis on savings by NGOs and partly due to the higher degree of incremental net income generated by NGO groups. Low incremental savings in BANK- groups might also be due to the fact that its members were having higher level of savings (Rs. 1,384) during pre-SHG situation than the NGO groups (Rs.713). There was an increasing trend of incremental savings corresponding to the age of the groups. This was expected, since over the years the members recognized the need for savings and had the tendency to increase the rate in correspond to loan amount. Table 4.7 Mean annual Savings by SHG Members-Model wise/Age wise

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Figure 4.5 Average Savings by SHG Members

4.2.5. Borrowing Pattern Easy access of credit mainly from institutional sources is one of the major objectives of the programme and thus it aims at strengthening credit widening (expanding the clientele base) and credit deepening (enhancing quantum of loan per borrower). The results presented in this section showed that the programme has contributed both in credit widening as well as credit deepening. Average Loan Amount On an average, the loan amount received by the member during the post SHG situation worked out to Rs.5122 which was about 123 per cent more than the pre-SHG situation (Rs.2301). The increase in quantum of loan between pre and post-SHG situations was observed to be more or less the same among NGO groups and BANK groups. On the other hand, the incremental borrowing
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registered an increasing trend along with an increase in the age of the groups. Therefore, the programme had a significant impact on borrowing patterns of sample SHG members both in terms of strengthening credit widening and credit deepening. Table 4.8 Incremental Borrowings by SHG Members-Model wise/Age wise

Figure 4.6 Average Borrowings by SHG Members

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Activity-wise Share of Borrowings The study reported that there was significant increase in loans for production purposes from 56 per cent to72 per cent between pre and post-SHG situations. Corresponding to this, the loan amount for consumption purposes came down from 44 per cent to 28 per cent during these periods. Within production purpose loans, the loan for Industry, Services, and Business (ISB) and loan for crop cultivation and investment in agriculture received top priority. The incremental shares for cultivation purposes and for ISB were worked out to 11.5 and 5 percentage points respectively. The distribution of loan amount according to purpose of loan is presented in the Table 4.9. Table 4.9 Purpose wise Distribution of Loan Amount

Interest Rates Interest rate is one of the basic issues being debated while assessing the programme. The average annual interest rate paid by the sample members worked out to 81.0 per cent during pre-SHG situation and it had significantly reduced to 31 per cent during post-SHG situation. While major share of loan accounts (66%) and loan amount (41%) were contracted at the interest rate of more than 60 per cent during pre-SHG situation, the interest rate got converged at the level of 12 to 24 per cent during post-SHG situations. This analysis provided evidences for the positive impact of the programme in reducing the

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interest burden of the members and avoiding the exploitation of the poor by informal agencies, particularly money lenders, commission agents, etc. Table 4.10 Distribution of Loan Accounts and Loan Amounts Interest Rate wise (%)

Loan Periods One of the basic practices followed by SHGs is a frequent loan with shorter periods. Most of the loans were contracted for a period of less than 12 months both in terms of number of accounts (93%) and loan amount (78%). However, there was a tendency to converge towards 6 to 12 month period during post-SHG situation. For 6-12 months range of loan period, the number of accounts and loan amount was 57 per cent and 37 per cent during pre-SHG situation, which had increased to 80 per cent and 74 per cent during post-SHG situation. Further the option of loan period of more than 2 years was not preferred by the members during post- SHG situation. Table 4.11 Distribution of Loan Accounts and Loan Amounts Loan Period wise (%)

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Repayment Performance The repayment percentage among the sample households from all the sources was 94.9 per cent in post-SHG situation compared to 86.5 per cent in pre-SHG situation, registering an increase of just 8.4 per cent. In general, there was not much improvement in the repayment percentage as it was already at a higher level in pre-SHG situation. However, significant improvement in the repayment percentage of bank loans of the order of 21.8 per cent points was noteworthy. During pre- SHG situation, repayment performance was high for all loans from informal agencies because these loans carried higher rates of interest and borrowers also had to face harassment in terms of unscrupulous recovery practices by these agencies. The sample households were mostly dependent on informal sources such as moneylenders for their credit needs during the pre-SHG situation. They were availing of loans at higher rates of interest for shorter period of less than 12 months. These informal agencies recovered their loans unscrupulously and borrowers were also giving priority to repayment of these loans as they carry higher rates of interest and would ensure loans in future. Further there would have been an entry barrier for those members with poor repayment of earlier loans from any source into the SHGs. As a result, the pre SHG situation repayment was also higher. Table 4.12 Repayment Performance of SHG Members Agency wise (%)

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4.2.6. Income Generation The SHG Bank Linkage programme with better access to credit brings in its wake increased income to the SHG members. The average net income in pre-SHG and post-SHG situations worked out to Rs.12,319 and Rs. 15,184 respectively. The incremental net income was worked out to Rs.2,865, which accounted for 23 per cent increase of the net income between pre and postSHG situations (Fig. 6). NGO groups registered higher increase in average incremental net income both in absolute (Rs.3,172) as well as percentage terms (27%). The age of SHGs also had a positive impact on the incremental net income. The average incremental net income increased from Rs.1,739 in respect of SHGs of 2 years to Rs.2.098 for 3-4 year old SHGs and further to Rs.6,769 for SHGs of 5 years and above. In terms of percentage, the increase was 14 per cent, 19 per cent and 46 per cent for all the three categories of SHGs respectively. Table 4.13 Incremental Income by SHG Members-Model wise/Age wise

47

Figure 4.7 Average Household Income of SHG Members

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5.1 Conclusion The present study attempts to assess the impact of microfinance channelized through SHG Bank Linkage programme implemented by NABARD since 1992 in Jharkhand and to assess the social performance of Microfinance Institutions in Jharkhand. The study is based on primary details collected from 90members in 15 SHGs. The socio-economic conditions of the members were compared between pre and post-SHG situations to quantify the impact. The major findings of the study are summarized and issues for policy are presented in this section. 5.2 Major Findings of the Study 5.2.1 Economic Impact Based on social classification, the coverage of weaker sections (SC/ST and backward class) worked out to 83 per cent. This category was observed to be more in NGO groups (88%) than BANK- groups (73%). Marginal farmers constituted the major share of 44 per cent followed by small farmers (27%) and agricultural labourers (17%). While the proportion of marginal and small farmers was higher for NGO groups (73%) compared to BANK- groups (66%), the proportion of agricultural labourers was relatively more in BANKgroups (22%) followed by NGO groups (15%). While asset structure had increased for about 45 per cent of the sample households, about 52 per cent sample households reported no change in their asset holding pattern. The average value of assets worked out to Rs.5,827 during the post-SHG situation compared to Rs.4,498 during pre-SHG situation, an increase by 30 per cent. Across the models of SHG linkage, the increase in the average value of assets was higher for NGO groups (35%) compared to BANK- groups (19%). The average value of assets was considerably more for the members in the older groups of five years and above than the members in the newly formed groups. The mean annual savings per household was
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worked out to Rs.952 during the pre-SHG situation, which increased by about 96 per cent to Rs.2103 during post SHG situation. The percentage of incremental savings was significantly higher in NGO-groups (145%) than BANK- groups (50 %). There was an increasing trend of incremental savings corresponding to the age of the groups. The incremental savings was highest (156%) for banks (commercial banks, RRBs and cooperatives) followed by SHGs (85%) and other agencies (62%) like, LIC and insurance agencies, chit funds, etc. The average loan amount during the post SHG situation was worked out to Rs. 5,122, which was about 123 per cent more than the pre-SHG situation (Rs. 2,301). The increase in quantum of loan between pre and post-SHG situations was observed to be more or less same among NGO groups and BANK- groups. On the other hand, the incremental borrowing registered an increasing trend alongwith the increase in the age of the groups. The moneylenders accounted for a major source of borrowing during pre-SHG situation (66%) followed by banks (27%). However, after the intervention of SHG Bank Linkage programme about 82 per cent of the loan was received from SHGs. The position of money lenders came down to only 15 per cent. There was significant increase in the proportion of loan amount for production purposes from 56 per cent during pre-SHG situation to about 72 per cent during post-SHG situation. To that extent the loan amount for consumption purposes came down from 44 per cent to 28 per cent between pre and post-SHG situations. The share of increase in production loans and reduction in consumption loans was relatively more in NGO groups than the BANK- groups. About 51 per cent of the members were non-borrowers during pre-SHG situation whereas it was only 10 per cent during the post-SHG situation. There was a perceptible increase in the members (30%) availing small loan amounts of up to Rs.5000 than the large loans (11%) of above Rs.5000. The
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average annual interest rate paid by the sample members worked out to 81 per cent during pre- SHG situation and it had significantly reduced to 31 per cent during post-SHG situation. While major share of loan accounts (66%) and loan amount (41%) were contracted at the interest rate of more than 60 per cent during pre-SHG situation, the interest rate got converged at the level of 12 to 24 per cent during post-SHG situation. The repayment percentage among the sample households from all the sources was 94.9 per cent in post-SHG situation compared to 86.5 per cent in pre-SHG situation, registering an increase of just 8.4 per cent. However, significant improvement in the repayment percentage of bank loans of the order of 21.8 per cent points was reported. The average net income in pre and post-SHG situations worked out to Rs.12,319 and Rs.15184 with an increase of 23 per cent. The NGO groups registered maximum increase in average incremental net income both in absolute (Rs.3,172) as well as percentage increase (27%). The age of SHGs also had a positive impact on the incremental net income. About 70 per cent of the households were having an income of less than Rs.12,500 in the pre-SHG situation. The proportion declined to 49 per cent in the post-SHG situation indicating shift in the income distribution to higher slabs. About 54 per cent of the incremental income generated was from farmsector activities followed by the non-farm sector activities (36%). Out of those below poverty line in the pre-SHG situation, 15 per cent have moved above poverty line. While about 16 per cent crossed poverty line from NGO groups, about 14 per cent moved above poverty line from BANK groups. Similarly, SHG age-wise 2 year old groups showed relatively poor performance (14%) compared to the 5 year and above SHGs (21%).

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The estimated employment days per household worked out to 405 person days during post-SHG situation that had registered an increase of 34 percent between pre and post SHG situations. Activity-wise the percent increase was highest for non-farm activities (121%) followed by off-farm activities (21%) and farm activities (19%). Employment generation for NGO promoted groups (66%) was higher compared to BANK- groups (20%). 5.2.2 Social Impact The social empowerment of sample SHG members improved in a significant way. Only 21 percent of the sample households exuded confidence during pre-SHG situation, which improved to about 78 percent during postSHG situation. While about 40 percent of them experienced better treatment from family members in the pre-SHG situation, about 89 percent experienced similar improved treatment during post-SHG situation. While about 39 percent members were jointly taking decisions in the household economic matters in the pre-SHG situation, it improved to about 74 percent in the post-SHG situation. The level of communication also improved in the post-SHG situations. While members freely talking in the pre-SHG situations were 23 per cent, about 65 percent of them expressed their desire towards freely talking to others during post-SHG situation. About 37 percent of members were protesting against drinking, gambling during the pre-SHG situation, whereas it increased to about 81% in the post-SHG situation. Similarly, about 78 percent members registered strong protest against the husband beating the wife, which was relatively less during the pre-SHG situation. About 45 percent of members were not coming out or moving out freely before joining SHG. However, the situation improved significantly as about 75 percent of the members reported their improved mobility during the post SHG situation.

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5.3 Limitations of the Study The limitations of the study confine mainly to the primary source of the study. While all possible efforts have been made to collect appropriate and adequate data from the right sources but as respondents were under no obligation to provide correct information to the researcher, in many instances they have given evasive replies. The study is restricted to only Ranchi District of Jharkhand region and findings may only be generalized exercising sufficient caution. The social performance assessment is confined only to a single MFI of Ranchi.

5.4 Concluding remarks To conclude it can be said that the challenge lies in finding the level of flexibility in the credit instrument that could make it match the multiple credit requirements of the low income borrowers without imposing high monitoring cost by the lenders on their end users. A promising solution is to provide multipurpose loans or composite credit for income generation, housing improvement and consumption support. Consumption loan is found to be especially important during the gestation period between commencing a new economic activity and deriving positive income. In order to be sustainable, microfinance lending should be grounded on market principles because large scale lending cannot be accomplished through subsidies. Eventually it would be ideal to enhance the creditworthiness of the poor and to make them more "bankable" to financial institutions and enable them to qualify for long-term credit from the formal sector. There should be prudent regulatory support for the microfinance providers which will provide an enabling environment for microfinance to achieve its goal of overall socio economic development of the poor.

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Through defining different dimensions of social performance, the MFIs can themselves manage their social performance, and identify the indicators that are relevant to social reporting. It is a process which is much cheaper and faster than impact; and also practical for an MFI to implement. Institutionalizing social performance requires MFIs to have clear idea about their social performance objectives and also the process to achieve them. But for that to happen, the prevailing mindset of MFIs needs to be changed and an incentive system introduced that supports this change. The investors and donors need to mention explicitly to the MFIs about their requirement of information that goes beyond financial performance ratios, some subjective evidence of positive change, and number of clients reached. For objective assessment of performance against social objectives, there is a need for social rating products linked with financial rating, which will objectively evaluate how well organizations are set up to accomplish their stated goals.

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