Micro Finance and Collective Action

MICRO-FINANCE AND COLLECTIVE ACTION:
A STUDY OF SELF-HELP GROUPS IN KERALA

A THESIS SUBMITTED TO THE UNIVERSITY OF MYSORE,
THROUGH THE DEPARTMENT OF ECONOMICS,
UNIVERSITY OF MYSORE, MYSORE.
FOR THE DEGREE OF
DOCTOR OF PHILOSOPHY IN ECONOMICS
CENTRE FOR DECENTRALISATION AND DEVELOPMENT
INSTITUTE FOR SOCIAL AND ECONOMIC CHANGE
BANGALORE-S60 072
MAY 2006
INSTITUTE FOR SOCIAL CHANGE
Dr V K R V Road, Nagarabhavi P.O., Bangalore - 560072
Phone: 91 080-23215468/5592/5519
E-mail: admn@isec.ac.in
Fax: 080-23217008
website: www.isec.ac.in
An all India Institute for inter-disciplinary research and training in the Social Sciences
DECLARA TION
I declare that this thesis entitled "MICRO-FINANCE AND COLLECTIVE
ACTION: A STUDY OF SELFHELP GROUPS IN KERALA" has been
revised on the basis of the evaluation report extract provided to me by the
University and the same is submitted herewith.
c ('
J
Emil Mathew
Dr V K R V Road, Nagarabhavi P.O., Bangalore - 560072
Phone: 91080-23215468/5592/5519
E-mail: admn@isec.ac.in
Fax: 080-23217008
website: www_isec.ac.in
An all India Institute for inter-disciplinary research and training in the Social Sciences
CERTIFICATE
This is to certify that this thesis entitled, "MICRO-FINANCE AND
COLLECTIVE ACTION: A STUDY OF SELF-HELP GROUPS IN
KERALA", has been revised on the basis of the evaluation report extract
provided by the University of Mysore and it has been revised by Ms. Emil
Mathew under my guidance and supervision.
I also certify that this thesis is now fit for the award of the degree of Doctor of
Philosophy of the University of Mysore.
Date: .2.::' \' t D IS
1J. ~ ~ . : u 4
D Rajasekhar
Professor and Head
Centre for Decentralisation
and Development
DECLARA TION
I declare that the thesis entitled "MICRO-FINANCE AND COLLECTIVE
ACTION: A STUDY OF SELF-HELP GROUPS IN KERALA" is the result of
my own work carried out at the Institute for Social and Economic Change,
Bangalore, and that it has not either wholly or in part, been submitted for any other
degree or diploma. Due acknowledgements have been made wherever anything has
been borrowed from other sources.
Nagarabhavi po: BANGALORE-560 072
o
Phone: 3215468,3215519,3215592 GRAMS: ECOSOCI BANGALORE - 560040
FAX: 9\-0803217008 INDIA E-mail :admn@isec.ac.in
An all India institute for inlerdisciplinary research & training in the social sciences
CERTIFICATE
This is to certify that this thesis entitled, "MICRO-FINANCE AND
COLLECTIVE ACTION: A STUDY OF SELF-HELP GROUPS IN
KERALA", is a bonafide research work carried out by Ms. Emil Mathew
independently under my guidance and supervision.
I also certify that this thesis has not been previously submitted for the award of any
degree or diploma or associateship to any other University or Institution .
.b .
D Rajasekhar
Professor and Head
Centre for Decentralisation and
Development
ACKNOWLEDGEMENTS
Finally, I have reached the stage of completion of my doctoral thesis. I am extremely
happy to recollect and express my gratitude to those who helped me in the study,
hoth academically and non academically. First of all, my supervisor, Prof. D.
Rajasekhar, without whom this work would not have been materialised. He was a
constant source of encouragement and inspiration right from the beginning till the
end of this study. I thank him wholeheartedly for all the support. I express my
gratitude to my doctoral committee members, Prof. V.M. Rao and Dr. M.J. Bhende
for giving adequate attention to my work and for their useful comments and
suggestions.
It was indeed ISEC which provided me the opportunity to complete this doctoral
programme and I am thankful to Prof. Govinda Rao, former Director of ISEC and
Prof G.K. Kadekodi, the present Director. I also thank ICSSR for the financial
assistance, which was a crucial element in completing this study.
I am very much thankful to my permanent panel member, Prof. R.S. Deshpande, for
the critical and creative comments from the very heginning of my study. This helped
me enormously in the design of the study, methodology and for relating theoretical
issues to the empirical ones. I am also indebted to Dr. Madheswaran, Dr. Gayathri
Devi, Dr. Ninan and Prof. Ravi Kanbur for helping me by giving useful comments
and suggestions in the ISEC hi annual seminar series. I express my gratitude to Prof.
D. Narayana and Prof. Dinkar Rao for providing me with useful comments.
The help provided hy variou\ Ph. D coordinators such as Drs. G S Sastri, Usha Devi,
and Anand Inhanathan are fondly rememhered. I also thank ISEC Registrar,
administr.llive staff and lihrary staff c\pecially, Mr. Kalyanappa, Mr. Venkatesh, Ms
Leela, Ms. Naz, Mr. Rajanna, Mr. Suresh, and Mr. Rudresh. Special thanks are due
to \'Ir. K. S. Narayana, Mr. Krishna Chandran, Ms. Margret and Shanta Ma'am for
all the help rendered during the course of my study. I am also thankful to each and
every members of Centre for Decentrali\ation and Development, especially Dr. Anil,
Manjula and Suchitra.
I am grateful to Mr. Vijayanand lAS and Mr. T.K. Jose lAS for spending time with
me for valuable discussions on the micro-finance programme in Kerala. I also thank
Mr. Krishnakumar and other members of KlIdumhashree, Thiruvananthapuram. It
was because of the help given hy Mr. N.J. Varghese, Thiruvananthapuram that I
could get in touch with NGOs working in Wayanad district.
I have received help from Mr. C.J. Jose, KlIdllmhashree Co-ordinator, Wayanad for
getting introduccd to co-ordinators and memhers of government programme at the
panchayat level. Special thanks are due to Presidents of Sulthan Bathery and
Noolpuzha panchayats for introducing me to the CDS presidents and SHG members
and for giving me an opportunity to participate in their meetings. The help and the
assistance provided by NGOs such as RAST A, Shreyas, WSSM and Hi Ida are
noteworthy. It was because of their support that I could complete my fieldwork at the
earliest. I also recollect the time spared by NABARD Co-ordinator of Wayanad
district for the insightful discussions which became useful while writing my thesis.
Moreover, I received good cooperation from SBI, Indian Bank, Sulthan Bathery Co-
operative Bank for discussions on banking aspects of micro-finance group members.
It was because of the help and cooperation rendered by SHG and NHG members of
Sulthan Bathery and Noolpuzha panchayats that I could collect adequate information
for the present study. I thank them for spending adequate time for conducting the
group meetings and interviews, many a times even forgoing their daily jobs. I thank
Usha chechi and family for the support, encouragement and special care during my
fieldwork days, the memories of which I cherish even now. I am grateful to DIET,
Sulthan Bathery for the pleasant stay during my fieldwork.
In the course of my studies, I received help from different faculty members of at
different stages. Among them, Drs. Sivakami, Vani, Meenashi Rajiv, Brinda,
Ramachandran, Ajit Menon, Jose Chathukulam, Priya are noteworthy. I am thankful
to my senior friends, Viswanathan, Jeena, Jyothis, Kannan, Amal, Gagan, and
Binitha for spending time to discuss my research topic at different stages. Thanks are
due to my batch mates Anand, Prathiba, Venu, Satya for the special company from
the very beginning. Even now, I recollect the help given by other ISEC friends like
Praveen, Kiran, Kshama, Dukhi, Ashish, Mahesh, Lija, Nisha, Poulomi, Badri,
Tunga, Sarala and Subir. I thank Mr. Parthasarathy for the editing work.
It would have been impossible to complete PhD on time, had I not received support
and assistance from my family. I am very much indcbted to them for my studies and
it is because of their prayers that believe I could reach this stage. I am very much
thankful to Ichachan, my late Ammachi, Pappa, Mummy, Chettai, Vimal, Seena and
Kuttan. Now, they would be really happy to know that I have completed my work.
I am not venturing into the formality of thanking my husband Santhosh, but only
remembering lovingly that he stood with me all along, giving me the much needed
emotional and academic support whenever I needed them. It is that support which
helped me to finally reach this point of relief.
Declaration
Certificate
Acknowledgments
CONTENTS
List of Tables .......................................................................... .iv
List of Figures .......................................................................... vii
List of Boxes ........................................................................... vii
List of Annexes ........................................................................ vii
List of Abbreviations ................................................................ viii
Chapter 1 .................................................................................... 1-14
Introduction
1.1 Introduction
1.2. Rural Credit Markets in Developing Countries
1.3. The Research Problem
1.4. Micro-Finance Programmes in India
1.5. Objectives
1.6. Hypotheses
1.7. Methodology
1.8. Org.misation of the Study
4
6
8
10
10
10
12
Chapter 2 ....................................................................... ~ .......... 15-38
Institutional Dimensions of Micro-Finance Groups
2.1 Introduction 15
2.2. Imperfections in the Rural Credit Market 16
2.3. Innovations in the Rural Credit Market 19
2.4. Micro-Finance as an Innovation in the Credit Market 22
2.5. Concept of Collective Action 25
2.6. Factors Facilitating Collective Action 27
2.7. Micro-Finance Groups as Institutions of Collective Action 29
2.8. Challenges before Micro-Finance Groups 33
2.9. Research Gaps 36
2.10. Summary 37
Chapter 3 .................................................................................. 39-62
Micro-Finance Developments in India and Kerala
3.1. Introduction 39
3.2. Fulfilling the Credit Demands of Rural India Over the Years 39
3.3. Self-Help Groups in India 44
3.4. Role of NGOs in the Promotion of SHGs 48
3.5. Major Challenges in the Growth of Micro-Finance Programmes in
India 50
3.6. Evolution of NHGs in the Kerala Scenario 52
3.7. Summary 61
Chapter 4 ............................................................................ 63-82
Methodology of the Study
4.2 Indicators and Variables of the Study 64
4.3 Methods and Instruments Used for Data Collection 69
4.4 Sampling Framework
4.5 Procedures Adopted for Data Collection
4.6 How Objectivity in the Data was Cross-checked?
4.7 Summary
74
76
78
81
Chapter 5 ................................................................................ 83-114
Sample Area, Micro-Finance Groups and Member Households: A Profile
5.1 . Introduction 83
5.2. Profile of Wayan ad District 84
5.3. Micro-Finance Programmes of Wayanad 89
5.4. Sample Design and Size 93
5.5. Profile of Selected Gram Panchayaths 94
5.6. Information Pertaining to the Selected Micro-Finance Groups 96
5.7. Socia-Economic Profile of the Micro-Finance Group Members 102
5.8. Participation of Members in Group Meetings 104
5.9. Savings Behaviour of the Members 108
5.10. Summary 112
Chapter 6 .............................................................................. 115-142
Collective Action in the Selection of Borrowers
6.2. Credit Operations in the Sample Groups 116
6.3. Mechanisms and Incentives Followed for the Selection of Borrowers 119
6.3.1. Duration of Membership 119
6.3.2. Attendance in Meetings 120
6.3.3. The Ratio of Savings to Loans 121
6.3.4. Repayment Norm 121
6.4. Factors Determining the Loan Amount Obtained by the Members 122
6.4.1. Number and Amount of Loans 123
6.4.2. Factors Influencing the Loan Amount Obtained by the Members 124
6.4.3. Factors Determining the Selection Procedure 128
6.5 Did Incentives for the Selection of Borrowers Work') 133
6.6. Summary 141
Chapter 7 ................................................................................ 143-171
Monitoring the Utilisation of Loans
II
7.2. Monitoring Status in the Sample Groups 143
7.2.1. Types of Monitoring 144
7.2.2. Incentives for Monitoring 145
7.2.3. Group Meetings, Discussion and Monitoring 146
7.3. Monitoring the Loan Utilisation 149
7.3.1. Purpose-wise Distribution of Credit Provided by the Sample
Groups 150
7.4. What Factors Influenced Undertaking of IGAs by the Members? 154
7.4.1. Did the Sample Groups Monitor IGAs? 158
7.5. Collective Action in Monitoring the Utilisation of Loans 164
7.6. Summary 170
Chapter 8 .......................................................................... 172-193
Enforcing Repayment of Loans
8.1 . Introduction 172
8.2. Mechanisms of Repayment 173
8.3. Delay in Repayment 177
8.4. Factors Influencing the Delay in Repayment of Loans 180
8.5. Incentives for Repayment of thc Loans 185
8.6. Repayment Behaviour of the Members 185
8.7. How Do Members Repay the Loans, When a Majority of Them
Had Not Undertaken IGAs? 187
8.8. Summary 192
Chapter 9 .............................................................. 194-21 0
Summary and Conclusions
9.2. Methodology of the Study 196
9.3. The Context 197
9.4. Findings of the Study 199
9.4.1. Selection of Borrowers 199
9.4.2. Monitoring the Utilisation of Loans 203
9.4.3. Repayment of Loans 206
9.5. Conclusions 208
References .............................................................................. 211-220
Annexes .......................... 0 221-237
111
LIST OF TABLES
Table
No.s
Page no.s
3.1 Distribution of NHGs across Districts
3.2 District-wise Distribution of Households Covered under
Kudlllnhashree Programme
5.1
5.2
5.3
5.4
5.5
5.6
5.7
5.8
5.9
5.10
5. I I
5.12
5.13
5.14
6.1
6.2
6.3
6.4
Distribution of Households in Micro-Finance Groups in Wayan ad
District
Distribution of Sample NHGs and SHGs (%) by Year of Formation
Distribution of Sample Members by their Familiarity before Joining
the Group
Distribution of Sample Groups (%) by the Number of Members
Leaving the Groups
Distribution of Sample Groups by Their Social Status Category
across Panchayats
Results of the Difference of Means Test between NHGs and
SHGs for Group Variables
Distribution of Sample Members (%) by their
Socio-Economic Characteristics and Nature of the Group
Results of the Difference of Means Test Between NHG
Members and SHG Members for Socio-Economic Variables
Distribution of Sample Groups (%) by Duration of Meetings
Results of the Difference of Means Test Between NHGs and
SHGs for Attendance in Meetings
Distribution of Sample Groups (%) by Monthly Savings (Rs.)
by the Members and Ethnic Status
Distribution of Sample Members (%) by Their Statements on
Reasons for Making Saving Contributions
Distribution of Sample NHG and SHG Members (%) by
Sources of Savings
Results of the Difference of Means Test Between NHGs and
SHGs for Savings
Norms Adopted by the Sample Groups in the Selection of
Borrowers
Proportion of Members (%) Following the Mechanisms in the Sample
Micro-Finance Groups
Distribution of Members by Number of Loans Received from
Groups Since Inception
Difference of Means Test for Number and Amount of Loans
58
59
92
97
97
98
101
102
103
104
105
lOS
109
I I I
I 12
112
120
121
123
124
IV
6.5 Description of the Variables and Their Expected Sign for
Amount of Loans 125
6.6 Determinants of the Amount of Loans Received by the
Members 126
6.7 Distribution of Members by Their Perception on the Selection
Procedure Followed in the Group 129
6.8 Description of Independent Variables and Expected Sign for
Perception of the Members on Selection Characteristic 130
6.9 Results of Logit Regression Model on Perception of the
Members on Selection 131
6.10 Distribution of Respondents by Reasons for Obtaining Loans 134
6.11 Distribution of Members by Their Statements on Response
Towards Those Not Complying with the Norms 135
6.12 Distribution of Respondents by Reasons for Obtaining Loans and
Their Possible Reactions to Those Who Did Not Fulfil the Attendance
Norm 136
6.13 Distribution of Respondents by Reasons for Obtaining Loans and
Their Possible Reactions to Those Who Did Not Fulfil Saving Linked
to Credit Norms 137
6.14 Distribution of Respondents by Reasons for Obtaining Loans
and Their Possible Reactions to Those Who Did Not Fulfil the
Repayment Norm 138
7.1 Distribution of Groups by Types of Monitoring 144
7.2 Distribution of Micro-Finance Groups by Training Programmes
Received 145
7.3 Responses of Members (%) on the Extent to Which Monitoring
Incentives were Present in Groups 146
7.4 Distribution of Members (%) by their Responses on the
Frequency of Their Participation in the Group Discussion Relating to
Monitoring and the Reasons for Such Response 147
7.5 Status of Monitoring in the Sample Groups 148
7.6 Purpose-wise Distribution of the Loan Amount 151
7.7 Distribution of Members by Income Generation Activities
Undertaken with Loan Received from the Groups 153
7.8 Description of the Variables and Their Expected Sign on IGAs
Undertaken by the Members 155
7.9 Determinants of IGAs Undertaken by the Members 157
7.10 Contribution of SHG/NHG Loan to Total Investment 159
7.1 I Amount of Loan Mobilised from Sources Other Than
Groups for Investment 161
7.12 Social Category-wise Distribution (%) of Amount of Loan
Mobilised from Sources Other than NHGISHG 162
7.13 Contribution of the IGA (%) to the Annual Income of the Household 164
v
7.14 Distribution of the Statements of the Members on
Monitoring Characteristics and the Reasons Behind That 166
7.15 Description of the Variable and the Expected Signs for
Monitoring Characteristics 168
7.16 Determinants of Monitoring Characteristics 169
8.1 Distribution of Groups by Duration of Repayment 174
8.2 Distrihution of the Loan Amount (Rs.) Borrowed by the Members
by their Average Duration of Repayment and their Proponion 175
8.3 Distribution of Members by Their Fulfilment of the
Instalment Repayment Pattern for the Last Loan 176
8.4 Distribution Members by their Delinquency of the Loans Taken 177
8.5 Distribution of Members by Number of Loans Received and
Average Number of Days of Delay in Repayment 178
8.6 Results of the Difference of Means Test Between NHGs and
SHGs for Average Number of Days of Delay in Repayment 179
8.7 Descriptive Statistics with Respect to Average Number of Days
of Delay in Repayment 182
8.8 Determinants of Average Number of Days of Delay in Repayment 183
8.9 Distribution of Members by their Statements 011 Repayment
Behaviour 185
8.10 Distribution of the Reasons Stated by the Members for Repayment 186
8.11 Distribution of the Members by their Source-wise Repayment 186
8.12 Distribution of Members by the Number of Days Taken Between
Issue of Last Loan and Repayment of Previous Loan Across Purposes of
Uti lisation 189
8.13 Distribution of Members by Their Time Gap Between the Issue
of Loans <lnd Repayment of Previous Loans over a Period of
Membership in the Programme 191
VI
Figure
No.s
5 1
5.2
5.3
5.4
5.5
5.6
LIST OF FIGURES
Factors Influencing the Members to Join the Programme
Factors Contributing to the Members to Leave the Programme
Distribution of Groups by Their Size
Distribution of Groups (%) by their Homogeneity
Distribution of Sample Groups (%) by Ethnic Status and No. of
Meetings Held in the Last Year
Distribution of Members (%) by Frequency in Attending the
Meetings
Page no.s
98
99
100
101
106
5.7
6.1
Distribution of Members (%) by Regularity in Saving Contributions
Distribution of Members by the Amount of Loans Received
107
110
Since Inception
LIST OF BOXES
Box
No.s
3.1
6.1
6.2
71
7.2
7.3
8.1
Coverage of SHGs under NABARD
Small Groups Need Not Necessarily be Cohesive
Relaxation in the Repayment Norm
Preference for the Traditional Income Generation Activities
Difficulties of Sustaining Group Enterprise
Marketing Problems
. Adjustment' at the Time of Repayment
List of Annexes
Annex
No.s
I. Group Interview Schedule
2. Format to Collect the Group Information
3. Household Interview Schedule
4. Interview Schedule for Bank Managers
5. Interview Schedule for NGO/GO Staff
123
Page no.s
46
132
134
154
157
158
190
Page no.s
221
225
226
234
236
VII
ADS
APL
BPL
CBNP
CDS
CPM
DWACRA
Hilda
IGAs
IRDP
LSGI
MFI
MYRADA
NABARD
NGO
NHGs
P/SLDBs
PACs
RF
ROSCAS
RPW
SCBs
SCs
SGSY
SHGs
SHPI
STs
TRYSEM
UNICEF
UPAP
WSSM
LIST OF ABBREVIATIONS
Area Development Society
Above Poverty Line
Below Poverty Line
Community Based Nutrition Programme
Community Development Society
Communist Party of India, Marxist
Development for Women and Children in Rural Areas
High Land Development Agency
Income Generating Activities
Integrated Rural Development Programme
Local Self-Governing Institution
Micro-Fi nance Institution
Mysore Resettlement and Development Agency
National Bank for Agriculture and Rural Development
Non Governmental Organisation
Neighbourhood Groups
Primary or State Land Development Banks
Primary Agricultural Credit Societies
Revolving Fund
Rotating Savings and Credit Association
Rural Public Works
Scheduled Commercial Banks
Scheduled Castes
SlI'anlll;aWlllti Gram Swarojgar Yojll/Ill
Self-Help Groups
Self-Help Promoting Institution
Scheduled Tribes
Training of Rural Youth for Self Employment
United Nations International Children's Emergency Fund
Urban Poverty Alleviation Programme
Wa)'(lilail San'a Sel'{l Mal/iIal
Vlll
CHAPTER!
INTRODUCTION
1.1. Introduction
In the course of development, socio-political and econonuc systems undergo
changes in their institutional structures at different points of time. But, the pace
and course of these changes may vary from one system to another. There are
marked differences between developed and developing countries in their
economic organisations, interactions of the individuals and the institutions
mediating interactions. Both institutions and market play the role of mediation,
which facilitates transactions. Under many circumstances, actual functions of the
markets, however, deviate from the neo-classical position of perfect information
with cost-less transactions (Stiglitz 1989, 1990; North 1989).
As individuals have bounded rationality, it is necessary to have human co-
operation and co-ordination. Since such co-operation is often missing, the
transactions become costly and hence, the institutions matter (North 1990).
Generally, market transactions have uncertainties arising from incomplete
information on the individual behaviour in the process of interactions. Institutions
play an important role! in reducing the adverse impact of imperfect information,
and transaction costs that emerge from pervasive risks, incomplete markets,
information asymmetry and the moral hazard (Bardhan 1989). Institutional
innovations reduce transaction costs by lowering the costs of information and
spread of risk. They also transfer uncertainty into ascertainable risks and develop
contractual enforcement mechanisms.
Transaction costs incurred in operationalising economic systems act as a
hindrance to economic growth as the costs involved in measuring performance,
fulfilling contracts and enforcing agreement are likely to be high (North 1992).
I History has witnessed changes in the institutional structure and its resulting impact on the costs of
transactions and production. [n the primitive society. with dense social network and division of labour
and specialisation, c o ~ t of transaction was low whereas the production costs were very high. But, as
trade expanded and personal transactions gave way to impersonal exchanges. property rights and
enforcement of contracts were developed to reduce market imperfections.
Therefore, the transactions of such kind which extend to the future with
uncertainty impose transaction costs. Generally, transaction costs imply those
costs incurred in organising, monitoring and enforcing rules of institutional
arrangement. They consist of ex-ante and ex-post costs. The former relate to the
costs on adverse selection of a risky member, whereas the latter relate to the
incomplete enforcement of the contract due to moral hazard such as dispute
resolution, renegotiations, monitoring the contract, bonding the contractual
parties to continue work together. Generally, an efficient economic system with
inter-linkages brings down these costs. On the other hand, in less developed
countries with market failures, transaction costs tend to be quite high. Thus, in
those economic systems with costly information and asymmetry of knowledge,
the market imperfections due to cheating, shirking and free riding, etc., are very
high (North 1992). Effective institutions raise the benefits of co-operative
solution by reducing the costs of defection and hence, the potential gains of trade
are realisable (North 1991). Efficiency of an institution depends upon how well it
copes with opportunism, the existence and the strengths of surrounding auxiliary
institutions and how well it exercises penalty on those who break the rule (Lin
and Nugent 1995).
The institutions prevalent in less developed countries are not advanced enough to
accommodate changes easily and hence, they arc characterised by institutional
imperfections. The institutional framework for dealing with these imperfections
is also less effective. In these countries, market failures are quite common and
non-market ameliorating institutions are meagre (Stiglitz 1989). Thus, high
transaction costs prevent the economies to grow and societies to develop in those
countries. Moreover, informal institutions like customs, caste and social sanctions
influence market outcomes and lead to low level equilibrium trap or barriers to
entry for some members (8asu 1984). Social institutions provide certain kinds of
economic systems to prevail and the costs of making changes in the informal
institutions are costly compared to formal ones. These propositions are well
2
supported by empirical studies
2
, which have brought out the significant role
played by the socio-political institutions in the economic development of
countrics.
As the institutions in less developed countries are not well developed,
enforcement of contracts tends to be ineffective. Inability of the society to
de\'elop effective and low cost enforcement of contracts results in stagnation and
underdevelopment (North 1990). Therefore, enforcement is costly as it is
expensive to find out that a contract has been violated, and it is also expensive to
measure its violation and impose penalties. In a world of impersonal exchange
and incomplete information. co-operative behaviour breaks down unless
institutions are created to provide information. Under such situations repeated
interactions and knowledge about each other reduce the costs of enforcement.
But. once the society develops. thcre is a necessity for greater specialisation and
the number and variabi lity of valuahle attributes. Here. reliable institutions arc
needed to enable individuals to enter into complex contracts with minimum
uncertainty about whether the terms of contract can be realised (North 1990).
The appropriate forms of contract between parties to a transaction help in
overcoming the problems of market failure due to adverse selection and moral
hazard. It is easier to enforce contracts in a group having members with common
interests. Collective action among the members in a group with common interests
reduces the costs of contracting and free riding. once they find it profitable to act
collectively rather than individually (Olson 1965). When any group finds the
existing contractual alternatives inefficient, inequitable or both, transaction costs
may go up and it engages in collective action to change the contracts so as to
reach a cheaper outcome (Nabli and Nugent 1989). The costs of transacting can
be minimised through cooperative action among the members with repeated
: A 'tudy of over J(XJ years of comparative development experience in 40 less developed countries
, h o w ~ thai a single rno"t' impOr1anl explanatory v:..Iriahk was the institutions, namely, political and
admini'tralive organi"tions (Reynolds t9X3). The significance of the institutions was clearly exposed
hy anolher study conducted in 1961 hy Adelman and Taft (t 9(7) in 74 countries. It reveals Ihat 24
"",inpolitical variahles related to institulional peri(lrmanCe accounted for 70 per cent of the variation
in the per capita im:omc of these counlrics.
number of dealings for the partners with lesser number of players or with perfect
information about each other. In the real world, these may not be possible due to
increased transactions with imperfect information and impersonal exchange, but
the repetitive nature of the transaction can bring a co-operative solution.
In the static equilibrium model developed by Olson (1965), defection is the
dominant strategy. On the other hand, in the dynamic interactions of Prisoners
Dilemma game, tit for tat is the dominant strategy (North 1990; Young 1998).
Thus, on occasions where interactions that are going to happen in the future are
expected to be less, non co-operative behaviour is the dominant strategy for
members entering into collective agreement. But, repeated interactions and their
expenence with others develop expectations which lead to actions and
precedents, leading to a co-operative solution. The co-operative outcome or
collective action that emerge from the repeated interactions is aided by selective
incentives (Olson 1965). These incentives can be both positive and negative.
Positive incentives encourage active participation and leadership, whereas
negative incentives prevent members from violating group rules and decisions.
Mechanisms need to be In place for the group members to have repeated
interactions. The extent to which the mechanisms and incentives work in
collective action groups is, however, not adequately analysed in the existing
literature. This study seeks to probe whether mechanisms and incentives work in
collective action groups formed to address imperfections in the rural credit
market.
1.2. Rural Credit Markets in Developing Countries
Unlike the market for goods and services, credit market dealings have future
implications. A credit market transaction is said to be complete only when the
amount borrowed is repaid on time. Generally, the duty of the lenders is to ensure
that borrowers are creditworthy, utilise the loans for low risk productive activities
and make timely repayment (Huppi and Feder 1990). In order to ensure that the
transactions are completed, the lenders have to bear the costs involved in
screening, monitoring and enforcing repayment of the loans. These costs
represent the transaction costs of credit market dealings incurred by the lenders.
In the real world, the transaction costs in the credit market are positive. In other
words, a party to a credit transaction does not have perfect information about the
other party'. Moreover, there are imperfections due to concealment of
information on creditworthiness on the part of the borrowers, which relate to the
issue of moral hazard
4
Therefore, the difficulty to get information about
uncertainties imposes another constraint for both lenders and borrowers (Hoff
and Stiglitz 1993). Similarly, borrowers have to bear costs of transacting due to
imperfections in the formal credit market. The transaction costs are likely to go
up on account of complicated procedures, political interference, distant location,
cultural gap between the officials and borrowers, short banking hours etc.
(Rajasekhar and Vyasulu 1990). Such imperfections leading to the problems of
adverse selectionS and moral hazard restrict the access to credit for the poor.
Costly transactions result in a Pareto inefficient level of outcome and result in
welfare loss, which gets reflected partly in the resources absorbed by transactions
and partly in the suppression of exchanges that would otherwise have been
mutually beneficial to the lenders and borrowers.
Several innovations in the credit market were made to reduce transaction costs
arising from information asymmetry. The targeting and sustainability were the
guidelines of institutional innovations in the credit market for a long time (Hulme
and Mosley 1996). As the informal credit institutions of the developing countries
could not meet all the credit needs of the rural poor, institutional changes were
made and subsidised credit programmes were introduced. However, the proposed
objective of improving the access of credit to the poor could not be realised. On
the contrary, these programmes resulted in a more unequal distribution of credit
leading to the rich cornering the benefits. Recognising the problems of the credit
-. Since transactions in (he real world are incomplete and involve costs. the neo-c1assical model with
coslless transactions is unrealistic.
~ Moral hal.:ard arises when an individual takes an action to maximise his own welfare to the detriment
of others in a situation where informational prohlems prevent the assignment to the individual of the
full damage caused hy his action.
, Adverse selection arises when commodities are distinguished on the one side of the market (usually,
the sellers) but are treated as identical hy the other side of the market (the buycrs). In such a case. the
sellers (here, lenders) may withdraw from the market (credit market) and this results in zero trade (no
credit transaction).
5
market, the Ohio School (Adams et al 1984) advocated free play of the market
forces and argued for the following. First, the sustainability of the institution,
was possible only when the financial institutions functioned independently.
Second, targeting of the poor should not be at the cost of financial sustainability
of the institutions. Third, the interest rate ceilings imposed by these specialised
banks sidelined the capacity of the poor to contribute savings, which had the
potential to ensure good loan recoveries (Braverman and Gusach 1986). There
were some criticisms on this School also. First, the free play of market forces in
the credit market would lead to an unequal distribution of credit. Second, the
School had not given due importance to the social rate of return and poverty
impact of these institutions.
1.3. The Research Problem
Combining the merits of both sustainability and targeting of the credit
institutions, a new financial institution, called micro-finance group, emerged not
only to address the imperfection in the rural credit markets but also the concerns
relating to poverty alleviation and women empowerment. In these groups, the
transaction costs arising out of the credit market dealings could be reduced
through repeated interactions, familiarity of the members and small size of these
groups. Since these were small groups and members of such groups belong to
similar socio-economic background, they could undertake collective action in the
selection of the creditworthy borrowers, monitor the utilisation of the loan and
ensure the timely repayment of loans. This allowed the lenders to shift a part of
the burden associated with borrower selection, loan administration and repayment
enforcement onto the borrowers. Similarly, borrowers would be able to save
transaction costs by not having to undergo the cumbersome procedure of filling
out lengthy applications, and undergoing project and collateral appraisal (Bhatt
and Tang 1998). Under micro-finance groups, large number of poor people
without adequate individual physical collateral could access credit based on the
social collateral. The peer pressure was the main force behind continued
existence of the group. The joint liability provided incentives to (and/or compels)
the group members to undertake those actions, which reduced uncertainty in the
credit market (Ghatak and Guinnane 1999; Bhatt and Tang 1998; Morduch
1999b). Thus, collective action within the group was the key aspect of micro-
finance groups. The reliability and the sustainability of micro-finance institutions,
however, depended on how well it could enforce the contract among the
members. Micro-finance groups arrive at certain rules and regulations to ensure
that the mechanisms concerning the contractual relations were in operation.
Similarly, the members were provided with adequate incentives to promote co-
operation or to avoid the emergence of non-eo-operative outcome.
Institutional mechanisms and incentives involved in the selection of borrowers,
monitoring the utilisation of the loans and ensuring repayment of the loans were,
thus, important in micro-finance programmes. The incentives and mechanisms
for the selection of borrowers aimed to rectify the problems of adverse selection,
whereas, monitoring of the utilisation of loans looks into moral hazard problems
and enforcing repayment tried to avoid the chances of free rider problems.
Therefore, the incentives of carrots and sticks (Lin and Nugent 1995) - positive
and negative- for the repayment of the loan needed to be provided. The chance of
getting a next and bigger loan could be considered as a positive incentive whereas
punishment in case of default could be considered as a negative incentive to
reduce free rider problems. Since the members dynamically interacted at different
points of time, incentives are to be directed to the members to avoid chances of
free riding. The mechanisms like compulsory weekly savings contributions,
familiarity among the members, provision of loans based on their need,
repayment of loan in various instalments etc., were built into the system to ensure
collective responsibility among the members and ensure timely repayment of the
loan (Patten et aI2001).
The theoretical foundations for micro-finance (i.e., institutional economics) and
collective action for good outcomes in micro-finance group state that institutional
regulations play a major role in the reduction of information asymmetry and
incentive problems. It is in this context that a study on the incentives for and
processes of collective action in different types micro-finance groups, the impact
7
of mechanisms and incentives in undertaking collective action and the pattern of
selection, monitoring and repayment become important. Some of the questions
that can be raised in this context are as follows. What have been the institutional
mechanisms and incentives provided to the members in selection, monitoring and
repayment? Do micro-finance programmes select the most needy? Or, do they
select memberslborrowers on the basis of risk bearing capacity? How is the
monitoring and supervision pattern of the borrowers? Does this make any
difference to the selection of activities for which loans have been taken? What
kind of training programmes have been organised for the poor and what impact
does this have? What types of economic activities have the micro-finance group
members undertaken? What has been the repayment pattern among different
types of groups and members? How are the members repaying the loans? What
have been the institutional regulations and incentives for all the above? Do they
work? If yes, how? If not, why? This study seeks to address these questions in the
specific context of micro-finance programmes of Kerala state.
1.4. Micro-Finance Programmes in India
In India, micro-finance programmes have heen promoted hoth by the government
and the non-governmental organisations. India joins hands with other developing
countries like Bangladesh, Sri Lanka and Indonesia in this regard. These are
small groups of poor women engaging in activities of savings and lending
operations. Such groups are called Self-Help Groups (SHGs) in India. The
concept of SHG
6
is wider, and is not the same as the micro-finance group. In the
context of micro-finance, a SHG consists of 10-15 members. SHG members can
be both men and women. However, 90 per cent of the SHGs in India have only
women as their members (NABARD 2004), who periodically contribute a fixed
amount of savings and borrow from the savings fund thus created. In most of the
cases, the formation of SHGs has been facilitated by the NGOs, although the
government has also been an active player. Southern states of the country have a
(, SHG is defIned as a democratic and viable entity at the grassroots level which involves all members
in the formation. implementation and monitoring of their programmes meant ror their development and
empowerment through the resources raised on their own strength. (This dellnition was provided by the
panicipants in a workshop on SelfHelp Promotion organised by GTLlSHF at (SEc' Bangalore)
8
strong presence of SHG, whcreas northcrn states like Bihar and Madhya Pradesh
are relatively SHG backward in so far as the presence of SHGs is concerned
(Dasgupta 2005).
It is assumed that the groups of poor women members with similar SOCIO-
economic conditions have better access to information about the creditworthiness
of the members. This, in tum, reduces the transaction costs of selection,
monitoring and repayment (Namhoodiri and Shiyani 200 I). The programme has
received wider appreciation and support from government, multilateral agencies
etc. The initiatives from the National Bank for Agriculture and Rural
Development (NABARD). in the form of SHG-Bank linkage programme, have
provided good boost to the SHG movement in the country. SHG-Bank linking
through SHGs and the existing decentralised formal bank network have been
extended to the outreach of micro-finance scrvices to the poor in India.
By March 2004, 6 lakh SHGs and 16.7 million poor families had been linked to
the formal banking system of the country. This unprecedented growth of savings
and lending operations among the poor changed the hitherto notion that the
poorest cannot save and are not creditworthy (Rutherford 200 I). Over time, the
Indian banks have been lending to the group as a unit, without collateral, relying
on self-monitoring and peer pressure within the group for repayment of these
loans. The bankers are ready to lend to these poor women groups as they exhibit
a high repayment rate of more than 95 per cent (NABARD 2004) and also they
are instructed from the central bank to earmark a certain proportion of their
lending to SHGs. Thus, the major bottleneck faced by the poorest, i.e., lack of
access to credit to make investment, is sought to be resolved through the
establishment of micro-finance groups. In recent years, development programmcs
of the government have also sought to target the poor through the SHGs. Starting
with the Rashtriya Mahila Kosh and the Indira Mahila Yojana, the government
has used the SHG approach in many of its anti-poverty projects. The most
important of the government programmes using the SHG approach is the
SlI"llnllljayallli Gram S\varojf!,lIr Yojlllla (SGSY) launched in I Y9Y.
9
1.5. Objectives
The objectives of the study were to:
I) understand the existence and the nature of collective action among micro-
finance group members;
2) examine the mechanisms and incentives incorporated for collective action
among micro-finance group members while selecting the borrowers,
monitoring the utilisation of the loans and enforcing repayment; and,
3) analyse the impact of mechanisms and incentives for collective action
monitoring the utilisation of loan and enforcing repayment.
1.6. Hypotheses
I) Appropriate mechanisms and incentives have not been incorporated in
micro-finance groups for collective action in the selection of borrowers,
monitoring and enforcing repayment of loans;
2) Micro-finance groups do not select creditworthy borrowers, monitor the
utilisation of the loan and enforce loan repayment; and,
3) There are no differences between government and NGO initiated micro-
finance group members in terms of their socio-economic profile and their
performance in terms of selection, monitoring and repaymcnt.
1. 7. Methodology
This study was undertaken in the specific context of Kerala because the micro-
finance developments in the state offered scope for comparing the fUnctioning of
institutional mechanisms and incentives in government and NGO micro-finance
programmes. In Kerala, micro-finance programmes have been promoted both by
the government and NGOs. But the interventions of NGOs in micro-finance were
prior to those of the government. Many NGOs made attempts to alleviate poverty
and empower the poor through micro-finance in socially and economically
hack ward regions of the state. Some of these NGOs had promoted credit unions,
which, however, had problems of free riding due to their large size. The SHG
movement in the other states inspired the NGOs in Kerala to form small micro-
10
finance groups (consisting of about 15 women) for socia-political and economic
empowerment (Rajasekhar 2(00).
The state government also took keen interest in micro-finance groups after the
successful implementation of the Community Development Society of
Alapuzha
1
organised as part of the decentralisation efforts in the I 990s. In 1999,
the Government of Kerala, in collaboration with NABARD and Government of
India, had set up Klldumhashree - State poverty Eradication Mission of the
Government of Kerala. This programme, which was part of the peoples' planning
campaign of the state, introduced Neighbourhood Groups (NHGs) involved in
micro-finance at the grassroots level through local self-governing institutions all
O\'er the statc and aimed at women empowerment and wiping out absolute
poverty from the state within a period of ten years. This programme, proposed by
the Left Democratic Front (LDF) government, mainly aimed to strengthen xrama
l(/hIIllS' introduced at the grassroots level, sInce gram panchayaths in the state
wcre very large in terms of popUlation sIze. It was assumed that women
participating in NHGs could bring their local issues to the xrama .whhas held at
thc \\ ani bel. The mobilisation of savings, and labour could be undertaken
through NHGs" organised and promoted during the Peoples' Planning Campaign
pI' dcccntralisation III programme of the state. This was considered to be essential
gl\'cn the precanou, ,ituation of revenues in the state. NHGs received wide
p()pularity. ,inee the government had decided to direct 10 per cent of the plan
fund for women through them.
7 Urban poveny alleviation programme introduced in 1992 in the Alapulha municipality was
Community Development Society which developed a nine point criteria for the identification of the
~ r .
Grama .fUbha is the assembly of the ward level memhers of a panchayath where they discus> issues
relating to their priorities. execution. implementation and assessment of the programmes .
. , The purpo'\C and the functions of the NHGs are the same as that of the SHGs. though NHGs are
lfltroduced and promoted by the government of Kerala through the state poveny eradication mi"ion.
I" Democratic decentralisation of planning implies that people can be involved not merely in numbe".
hut in taking decisions on how to improve their lives and their communities while planning.
lfnplcmentation and evaluation of projects suitahle to the local conditions.
II
Wayanad district of Kerala was selected for the study, as this d i ~ t r i c t was not only
poor in relative!! terms but also provided an opportunity to make comparison
between the government and NGO micro-finance groups. The prop0l1ion of
tribals in the district was the highest in the state. The incidence of SHGs was also
the highest. In the district, the micro-finance groups were being promoted both
by the government and the NGOs.
Two panchayaths - Sulthan Bathery and Noolpuzha - were randomly selected
from Sulthan Bathery block, where micro-finance programmes were flourishing.
Since the total number of NHGs and SHGs (initiated by NGOs) or the universe
was not available due to problems of dual!2 membership, we selected an equal
number of groups from these panchayaths. Moreover, equal number of groups
were selected based on the assumption that both the categories of groups
performed more or less equally. Accordingly, 8 NHGs and 8 SHGs were selected
from each of these panchayaths and a total of 32 NHG/SHGs were selected
randomly. From each of these groups, 6 members were randomly selected and
thus, a total of 192 members were selected for the study. Interview schedule was
used for collccting information from the sample member households. The
information collected included demographic profile, access to loans, utilisation
and repayment of loans, the use of mechanisms and incentives in the selection,
monitoring and repayment of loans. A group questionnaire was used to conduct
focus group discussions at the group level, and a format was obtained to collect
the quantitative data on the micro-finance operations at the group level.
Checklists were prepared to gather information about the groups from bank
officials, NGO and government personnel.
1.8. Organisation of the Study
This study has been presented In moe chapters, including the introductory
chapter.
11 In absolute tenTIS the per capita income of Wayanad was the highest in the state due to lower level of
population. But, considering the socioeconomic conditions of the marginalized sections which
constitute the majority of the district. deprivation of the people were more.
" Dual membership and multiple memberships arise as some members maintain membership in more
than one organisation at a time.
12
The second chapter discusses the theoretical and empirical literature peltaining to
the institutional dimensions of the credit market with special reference to micro-
finance programmes. Micro-finance programmes have been introduced by the
developing countries to address rural credit market imperfections. Under these
programmes, the principle of joint liability shifts the responsibility of ensuring
repayment from the lenders to the borrowers. As incentives and mechanisms play
a significant role in facilitating the collective action, these have been discussed.
The chapter also brings out the group and member specific factors contributing
towards collective action among micro-finance group members. The challenges
before the growth of micro-finance groups have also been discussed.
The third chapter explains the emergence and growth of micro-finance
programmes in India and Kerala. As in the case of other developing countries,
group-lending programmes have been adopted to improve access to credit for the
rural poor in India since 1990s. In India, both the government and non
government institutions have played significant roles in the promotion of micro-
finance groups. In this chapter, we have discussed how SHG bank linkage
programme facilitated the spread of micro-finance groups. The challenges before
the growth of micro-finance groups in India have also been discussed. The
evolution and the growth of government and NGO initiated micro-finance
programme in the Kerala scenario has also been provided.
The fourth chapter discusses the various ways in which data for the present study
were collected and examines how the objectivity of the study was ascertained
with help of various methods and instruments of data collection.
The fifth chapter discusses the factors contributing towards the growth of both
NGO initiated and government initiated micro-finance programmes in Wayanad
district of Kerala state. The significance of micro-finance programmes in this
district has been explained in terms of socia-economic composition of the people.
Cross tabulation and means test have been carried out to analyse the differences
between the NGO and government initiated groups in terms of group and
member specific variables that have a bearing on collective action.
The sixth chapter discusses collective action in the selection of borrowers. After
discussing the mechanisms and incentives adopted by the groups, collective
action in the selection of borrowers have been examined in terms of the amount
of loans received by the memhers and the selection procedure followed in the
groups.
The seventh chapter examines the issue of monitoring in the utilisation of loans.
The various types of monitoring prevalent at the group level and the incentives of
the members for monitoring have been discussed. Monitoring has been examined
in terms of various income generating activities undertaken by the members.
Finally. the chapter analyses the various factors, which have played significant
roles toward the perception of the members regarding their monitoring
characteristic.
The eighth chapter analyses the issue of enforcing repayment of the loans
horrowed. This has been examined in terms of the various repayment
mechanisms and incentives followed across the groups. The chapter also deals
with different repayment sources. It has examined the various factors, have which
played significant roles toward delay in repayment. Finally, the chapter discusses
the issue of how memhers make repayments in the absence of IGAs adopted by a
majority of the members.
The ninth chapter provides the conclusion of the study, where we discuss the
major findings of the study and put forth their implications on theory and policy.
14
CHAPTER 2
INSTITUTIONAL DIMENSIONS OF
MICRO-FINANCE GROUPS
2.1. Introduction
Credit is important for the poor to bridge the gap between income and
expenditure. The poor do not have sufficient and reliable access to credit from the
formal banking system for a number of reasons, which illustrates the risks and
uncertainties in the credit market. These relate to the inability of the poor to
provide adequate physical collateral and transaction costs due to cumbersome
banking procedures while dealing with large number of small borrowers and risk
costs of lending institutions associated with timely repayment of the loans. The
risks or uncertainties in the credit market often arise from the problem of
asymmetry of information. As it is difticult to gather information in advance
about the transactions which are going to happen in future, there are problems of
adverse selection and moral hazard, which ultimately reduce the volume of
transactions and hence, result in welfare loss. The problem of information
asymmetry can be solved; but, it is costly for the lending institutions. The micro-
finance groups, based on the principle of joint liability, have the potential to solve
the problem of information asymmetry and improve access to credit for the poor.
In this context the following questions become relevant: How do imperfections
emerge in the rural credit markets? How can these imperfections be reduced in
micro-finance groups? What factors play an important role in ensuring collective
action at the group level while selecting the creditworthy borrowers, monitoring
the utilisation of the loan and ensuring repayment under micro-finance groups?
What are the different mechanisms and incentives incorporated to bring about
collective action among micro-finance group members? An attempt has been
made in this chapter to review the theoretical and empirical literature to answer
these questions.
15
The section relating to imperfect information in the rural credit market explains
the asymmetry of imperfections experienced by both the lenders and borrowers at
various levels of credit transactions. As imperfections act as a hurdle for the
members to access credit, the governments of developing countries have
introduced specialised poverty alleviation programmes and banking reforms.
Instead of improving the availability of credit, they have widened the existing
inequality in the distribution of credit. In this context, the group approach of
micro-finance groups assumes significance. Under them, members access credit
based on the principle of joint liability and the group guarantees the repayment of
the loans. Since collective responsibility is a public good, it is quite possible that
the members may free ride. Therefore. members should be provided with
adequate incentives and mechanisms, which constitute the major focus of the
present study.
2.2. Imperfections in the Rural Credit Market
Unlike market for goods and services, credit market transactions have future
implications. A credit transaction involves a relationship between the lender and
the borrower in time and hence, in the context of uncertainty. A credit transaction
is said to be complete only when the borrower repays the amount borrowed and
there is no certainty about this repayment" (Bhatt 1987). This implies that both
lenders and borrowers face risks about the completion of a credit transaction.
Borrowers face the risk that the expected increase in income from an investment
project for repayment mayor may not materialise. On the other hand, lenders'
risks have two clements: one relates to the same risks which the borrowers face,
and the other relates to the borrowers' commitment to repay; even if she/ he is
able to repay, she/ he may not be willing to repay (Hoff and Stiglitz 1990).
ASYl11lnetry of information in the rural credit market results in a situation similar
to Akerlofs (1970) market for lemons. In these markets, the sellers of good
quality products withdraw from the sale as their products are ranked equivalent to
bad quality products. Therefore, the difficulty to gather information on risks that
are faced hy the borrowers forces the lenders not to extend credit to large number
If>
of borrowers with varied risks. When the lenders cannot obtain information on
risks of the borrowers and assume that they are all the same in terms of risks,
adverse selection arises. The second prohlem of information relates to the
difficulty in gathering information regarding the utilisation of the money
borrowed. The lenders have to monitor the purposes for which the borrowers
have invested and hence, it examines whether the investment leads to repayment.
In short, the information problems in the credit market impose certain costs on
the lenders and they are ex-ante costs of adverse selection and ex-post costs of
moral hazard (Lin and Nugent 1995). The former relates to the imperfections on
the information regarding the creditworthiness of the borrower or his/her
willingness to make repayment, whereas the latter relates to his/her ability to
make repayments. As it is costly to gather information on these two major aspects
of credit transactions, the rural credit markets deviatc from the classical
assumption of perfect competition and therefore, these markets are imperfect.
The imperfect credit markets bring down the total volume of the loanable funds
transacted. The costs involved in acquiring information about these two aspects
often lead to a market failurc and constrained Pareto efficiency" (Besiey 1994).
However, credit market failure of such kind in the institutional sources of credit
can be brought down once information about the transactions is obtained.
As it IS difficult to gather infomlation on creditworthiness of large number of
small borrowers without adequate collateral, formal lenders find it difficult to
lend in the rural areas. Moreover, the credit markets of these rural areas are
characterised by covariant risks, especially in the absence of portfolio
diversification and segmented markets (Besley 1994). As in the case of lenders,
the borrowers too face problems in rural credit markets. The poor lack adequate
physical capital to provide as collateral. Moreover, they face certain
imperfcctions In the banking system such as complicated procedures,
unimaginative lending policies and procedures, absence of provision for
I . ~ Credit market imperfection occurs due to costs on infonnation and enforcement. and it results in an
outcome where inefficiency exerts the lender 10 reduce the amount lent to the borrower. II has
efllciency cOSIS 10 the sociely. but from an operalional poin! of view such co,ts have no relevance.
Market failure is laken to mean Ihe inability of Ihe free market 10 bring about a constrained ParolO
efficient allocation of credit (Besley 1994).
17
consumption credit, political interference, distant location, cultural gap between
the officials and borrowers and short banking hours etc., which restrict their
access to credit (Rajasekhar 1996).
According to Hoff and Stiglitz (1990), lenders are entrusted to examine imperfect
information problems of three kinds in the rural credit markets. They are
problems of screening, incentive and enforcement. The first one relates to the
problem of ensuring the likelihood of default of the borrowers and it looks into
the willingness of the borrowers to make repayment. The incentive problem
relates to the problem of borrowers to take actions, which makes repayment more
likely. The third problem relates to the problem of ensuring repayment. The
information costs involved for both lenders and borrowers for bringing about the
transactions are called transaction costs. As a result, the availability of credit to
the rural poor from formal banking institutions has always remained as an
outstanding issue.
For a long time, the rural credit demands of the poor arc being met by informal
sources of credit. The poor borrowed from these informal sources, even at higher
rates of interests charged by these lenders. But, their higher rates of interests can
be justified in terms of the transaction costs for gathering information about the
creditworthiness of the borrowers. According to Braverman and Gusach (1986),
the informal sources of credit were better in reaching the poor through their
informal linkages to output market and also through the information acquired
about the creditworthiness of the borrowers through their prior credit dealings.
With this objective, the lenders generally lend to those borrowers with whom
they have a longer duration of credit dealings. Besides, in these informal credit
markets, the administrative costs of the credit dealings on account of complicated
procedures for bringing about credit transactions have been observed to be zero.
In short, the imperfections or market failures in the rural credit market impose
costs for both lenders and borrowers. The explicit transaction costs experienced
by the rural poor from the formal credit market and the implicit transaction costs
18
in terms of higher rates of interests charged by the informal sources of credit put
a stumbling block on the rural poor to access credit.
2.3. Innovations in the Rural Credit Market
Realising the problem of inadequate access to credit to the rural poor,
governments in the developing countries have been introducing specialised banks
and rural development programmes from time to time. Without giving due
attention to the costs of administration and default risks in the credit market,
these specialised banks were instructed to impose interest rate ceilings for their
transactions. But, such an action resulted in an increased demand for credit and
led to credit rationing, whereby non-rationed rich borrowers received larger
amounts of the loan (Vega 1984; Adams et. al 1984; Sahu and Rajasekhar 2005).
Consequently, the rich received higher amounts and larger number of loans at the
cost of the poor. Thus interest rate ceilings also widened the already existing
inequality in the distribution of wealth.
The policies of administered interest rates were criticised by the economists of
Ohio School (Adams et al 1984; Vega 1984; Cuevas and Douglas 1984). These
economists were of the opinion that the market forces of demand and supply
should be left free in determining the interest rates in the credit market. The rate
of interest determined by the market should cover the costs of administration, in
addition to the risks of default. According to the proponents of Ohio School, the
rate of interest charged by the informal sources of credit are market determined as
it covers the transaction costs of acquiring information about the creditworthiness
of the borrowers.
As the interest rate ceilings widened the already existing inequality in the
distribution of wealth, the Ohio School criticised the professed objective of
outreach of the specialised banks. Because, instead of reaching the needy, these
deliberately constituted institutional credit mechanisms taxed the poor while
subsidising the rich (Vega 1984). Subsidised credit programmes encouraged
corruption, capital flight and unproductive investment. Many of the financial
lY
institutions created to channel and allocate credit to the rural sector lacked
accountability, fostered arbitrary practices and allocated credit more on political
rather than on economic grounds (Braverman and Gusach 1993).
Another significant criticism levelled against the interest rate ceilings of the
specialised banks relates to the long run sustainability of the financial institutions.
The proponents of the Ohio School questioned the financial sustainability of the
lending institutions in the context of subsidised rates of interests and they argued
that institutional sustainability could not be realised under interest rate ceilings.
The lower interest rates could not only not cover the costs of administration and
risks of default but also failed to stimulate savings of the rural poor. According to
Vega (1984), interest rate ceilings had three aggregate and distributive effects on
the portfolio of formal financial institutions. Firstly, it reduced the ability of the
financial institutions to attract savings. Secondly, it brought down the relative
profitability of lending. Finally. ceilings altered the composition of the loan
portfolio of the financial institutions and hence, relative profitability of loans to
different borrower classes.
In the regime of administered rates of interest the propensity to save was low or
the people were tempted to utilise their small savings on dead investments.
Moreover, lending institutions assumed that the poor were unhankable as they
could not make regular saving contributions due to their fluctuating income.
However, the Ohio School strongly recommended that savings contributed by the
poor, even if they were small, gave information about their creditworthiness,
provided continual flow of resources for lending and acted as an incentive to
repay lenders' money (Vogel 1984). Inability of the formal institutions to
mobilise savings in the context of interest ceilings leads to inadequate loanable
funds. In the absence of adequate loanable funds, banks wcre forced to depend on
internal and external sources of funds for lending and it created dependency.
Thus, the proponents of Ohio School argued that the specialised banks with their
government imposed restrictions could not achieve the twin objectives of
20
financial sustainability of the lending institution and the targeting of the
programme to the most desirable.
Moreover, the poverty alleviation programmes introduced in these developing
countries suffered from problems of targeting, poor utilisation of loans,
misappropriation of funds and poor recovery (Gaiha et aI2001). As noted earlier,
informal lending agencies were observed to be better in bringing down the costs
of interest rate ceilings, as they had good information about the credit dealings of
their clients. They could charge differential rates of interest. Moreover, they
reduced the risk by inter-linkages or by diversifying into product, input and
processing markets (Bouman 1984). Even though the arguments put forth by the
Ohio School are worthwhile, it should be noted that the School has not given
adequate attention to the implicit gains, which the specialised development banks
could generate. The Ohio School giving emphasis on the financial viability of the
lending institution was criticised for its idealisation of informal financial sector,
ignoring externalities, failing to produce data conceming social rate of return and
poverty impact of these institutions (Hulme and Mosley 1996).
However, it IS essential to look into the points raised by the Ohio school,
especially those relating to the sustainability of the financial institution. It is
significant to note that the savings on the part of the members provided
information about the creditworthiness of the borrowers and capital for lending
(Desai 1983; Vogel 1984; Rutherford 2001; Adams et al 1984). A freely
determined market rate of interest is viable to cover the transaction costs of the
lenders. But, a higher rate of interest charged by the moneylenders, even though
justifiable from the point of acquiring information on creditworthiness of the
borrowers, is not desirable. Therefore, both the formal and informal lending
institutions have merits and defects. This necessitated the creation of a new crcdit
institution, which combined good features of formal and informal institutions.
21
2.4. Micro-Finance as an Innovation in the Credit Market
Developing countries have adopted micro-finance programmes as financial
innovations aimed at poverty alleviation. In general, women participate in these
programmes. They access credit for Income Generating Activities (IGAs) and
thereby, improving their standard of living. Various scholars (Mayoux 1998,
200 I; Hashemi et al 1996; Khandker 1998) have stated that the participation in
the micro-finance programmes empowered the women socially, politically and
economically and hence, improved their status within the household and outside.
What advantages do micro-finance groups have? These are small sized groups of
poor women engaged in activities of lending and savings besides engaging in
matters of social significance. These groups incorporate good features of reduced
transaction costs and improved targeting. Under these groups. large number of
small borrowers without adequate collateral can access credit by using social
collateral.
Generally, the members of these groups are familiar with each other and belong
to similar socio-economic characteristics. Under them, lenders issue loans to
groups rather than to individuals and the group undertakes the responsibility of
repaying back the loan. Thus the transaction costs of the lenders while exercising
the functions of selecting, monitoring and enforcing repayment are brought
down. Since the individual borrowers find it difficult to access credit from formal
institutions, they can make use of the social networks, social connections and
mutual trust for bringing down the asymmetry of information and achieve a better
outcome (Reinke 1998). Besides providing information to the lenders about the
creditworthiness of the borrowers, Okten and Osili (2004) have stated that family
and community networks provide information to the borrowers about the place to
borrow and improve borrowers' access to credit institutions. Therefore, social
networks and the mutual trust among the members of the groups bring down
transaction costs of both the lenders and borrowers. As against formal
institutions, these groups do not require physical collateral from the poor
borrowers and hence, a large number of small borrowers without physical
22
collateral can access credit (Huppi and Feder 1990; Godquin 2004) and therefore,
increase the outreach.
Lenders self-select group members, based on their familiarity and personal
contacts. Self-selection of the members into the group has the advantage that it
exploits local information about the borrowers. By making use of this intangible
resource, that is, information about creditworthiness of the members through
social networks, they can alleviate credit market failures (Ghatak 1999). Intimate
knowledge of each other's activities facilitates mutual monitoring and joint
liability principle creates peer pressure for repayment. Besides ensuring
repayment of the co-partners, the principle of joint liability influences the
members to undertake the responsibility to repay the share of the loan of their
partners in case of their default.
Since the members are familiar to each other, the applicatjon of other social
control mechanisms based on custom and social norms are effective (Schneider
1996). While formal lenders have only limited options to compel repayment from
delinquent borrowers, group members can employ social sanctions (Sharma and
Zeller 1997). According to Reinke (1998), solidaristic structure imposes high
costs on the group members in terms of costs of formation of the groups,
obligations for fortnightly meetings and mutual screening and risks of joint
liability. However, such costs arc observed to be less in rural areas where social
stability and flow of information are more as members interact in small numbers
and often, they belong to similar socio-economic charactcristics (Braverman and
Gusach 1993).
Unlike the earlier subsidised credit programmes that neglected the capacity of the
poor to make savings, the savings contributed by the members under micro-
finance programmes has many advantages. The regular saving contributions
made by the members to the group strengthens the perceptions that members
have a stake in the institution. Groups rely on such savings of members as a
reliable source of loanable fund. Such savings also help to know the
their performance. Those members who demand further loans from the group
through repeated interactions try to abide by the rules of the group.
As the poor borrowers without physical collateral are finding it difficult to access
credit from the formal institutions, the social collateral offered by the group of
members has the potential to access credit. The principle of joint liability enables
the members to exercise the functions collectively. Collective action is the force
behind the success of micro-finance groups while bringing down transaction
costs. Thus, it is pertinent to examine the conccpt of collective action and how it
is applicable among the micro-finance group members.
2.5. Concept of Collective Action
The concept of collective action has been taken from New Institutional
Economics to understand the sharing of collecti ve responsibility and the exercise
of peer pressure among the micro-finance group members. Collective action
represents the group of individuals with common interest tending to act to further
those common interests. If rational and self-interested individuals realise that they
gained from particular collective action, then they could be expected to engage in
such an action (Olson, 1965). Buchanan and Tullock (1965) have supported the
same argument by stating that a group would choose a collective mode of action,
when each of its individual members found it profitable to act collectively rather
than individually. But, those individuals with higher perceived private costs of
co-operating over the perceived private benefit of co-operating might not attempt
for collective action. This raises a question of what incentives were provided to
group members to participate in collective action. The Prisoner's Dilemma game
of Campbell (1985) reveals the benefits from collective action by the members in
a group. If two persons with opposing interest were having a chance of getting an
equal outcome, it was advantageous for them to co-operate; otherwise, if the
people were not having any communication or information, resultant outcome
would be sub optimal.
25
Since collective sharing of responsibility brings down transaction costs, there
should be free flow of infonnation so that there should not be any free riding on
the part of the members. Moreover, there should he a norm that one should forgo
self-interest and act according to the collective interest of the group (Coleman
1988). But, the problem of tending to under supply or free ride the efforts
towards collective interest on the part of an individual is also there because of
non-excludability characteristic of such an effort. In other words, the actors who
generate the collective responsibility capture only a small part of its benefit.
There are various circumstances under which the members come for collective
action, which may reduce occurrences of non-eo-operative behaviour. Most
important aspect is that the members should feel the significance of acting
collectively rather than individually.
The game theorists have proposed varIOUS conditions under which collective
action will become a workable solution. In Olson's (1965) static analysis, non-co-
operative outcome is the equilibrium solution. But, the repetition of the game into
the future brings out a co-operative solution. Under situations of repetitive game,
the fear of non-co-operative action from the participants of the game in future and
the introduction of penalties for violating arrangements can be a powerful
incentive for collective behaviour. If the players in a Prisoners Dilemma know
that the game will be played repeatedly, the chances are that they will co-operate
today in the hope that others will then do so are much higher than where the
game is played only once (Axelord 1981). If we assume that players can alter
their own choice before the pay-offs of each round are received, then the rational
strategy is one of conditional co-operation or co-operate first, defect if the other
defects, or simply put 'no first cheat'. If we assume that the players are able to
negotiate changes in the rules of the game among themselves, then one likely
change is the introduction of penalties for violating agreements. The effect of
such penalties is to reinforce the tendency towards co-operation. Generally, if the
individuals in a group share a common interest, the furtherance of common
interest will automatically benefit each individual in the group, whether or not
he/she has borne any of the costs of collective action to further the common
26
interest. It is here the principle of joint liability becomes significant as members
in a group have to bear the costs arising from non-eo-operative action of an
individual member.
2.6. Factors Facilitating Collective Action
Even though the members interacting in a group aim at a common objective,
there are circumstances that the interests of some members may contradict with
that of others. In most of the studies, it is argued that certain preconditions are
necessary for the collective enforcement of group norms, while in some other
studies it is argued that these conditions can be developed in due course of time
through their interactions.
According to Olson (1965), two conditions were required to make collective
action possible. One condition was that the number of individuals acting
collectively to further their common interest should be sufficiently small. The
other condition was that the groups should have access to 'selective incentives'.
The number of members in a group was an important factor determining the
incentive for collective action. For him, larger groups had a lower incentive for
collective action, as an additional member added heterogeneity to the group in
some or the other dimension and hence, the chances of free riding. Small groups
might prevent the incentives for cooperation getting diluted. He has stated that
partnership could be a workable solution, when the number of partners was quite
small. When the number of partners increased, the incentive for each partner to
work for the welfare of the enterprise lessened. Moreover, small group was more
durable and the degree of consensus was easily workable as they had close and
continuous interactions.
Various scholars have looked into the issue of number of members involved in a
cooperative effort. According to Stiglitz (1990), small size increased the risk
from a single member's default but increased the incentive for peer monitoring.
The gains from the latter were likely to exceed the losses from the former. Larger
groups had free rider problems, as each would expect others to expend the energy
27
The effectiveness of the cooperative outcome depends to a large extent on the
effectiveness of the repeated interactions with lower alternative opportunities and
effective implementation of the incentives in the cooperatives. In order to
stimulate cooperative action or to avoid non-cooperative outcome, the members
in a group should be provided with both the positive and negative incentives
(Olson 1965). Social sanction or social ostracism was often used as the negative
incentive or sticks 14 for the members to avoid non-eo-operative behaviour.
Moreover carrots or positive incentives like higher amounts of loans in
successive lending were provided to the members to encourage co-operation.
Young (1998) has argued that expectation of the gains from repeated interactions
into the future could be considered as an incentive for co-operation. The patterns
of interaction, presence or absence of reciprocity among the members and
decision-making arrangements determined whether a group would succeed or not
(Oakerson 1986). Reciprocity required that members of the group contributed
positively to each other's welfare. But, generally, they co-operated and helped the
other member in the hope that shelhe would help them in future, in return. Here,
rules, procedures, norms, customs, traditions could influence individual and
collective decisions.
2.7. Micro-Finance Groups as Institutions of Collective Action
Various scholars (Huppi and Feder 1990; Stiglitz 1990; Morduch 1999b; Floro
and Yotopolous 1991) have advocated the significance of group lending
programmes In bringing down the transaction costs. These studies have
highlighted the welfare enhancing features of group lending programmes, either
for the borrowers or for the lenders or for both. The linkage between formal
banking institutions and micro-finance groups leads to improved access to bank
credit and financial discipline among borrowers. This is made possible by way of
generating information about the bankability of the rural borrowers, providing a
guarantee cover to loans in order to encourage rural lending and allocating
resources to upgrade the creditworthiness of the rural borrowers (L1anto 1990).
1..1 The ~ t j ( . ; k is a negative incentive which prevents the mcmbcrs from a non-co-operative hehaviour:
whereas carrol is a positive incentive. which stimubles the mcmhcrs in a group for collective
hehaviour.
29
Under group lending mechanisms, welfare could be improved by transferring the
risks from the lenders on to the borrowers (Stiglitz 1990). Varian (1990) has
stated that if group members insured against one another across states of nature, it
was advantageous for the lender. Some of the studies have emphasised the
significance of the process through which group lending attained efficiency.
These studies have brought out the significance of joint liability under group
lending and how it enforced successful repayment of the loans borrowed through
social ties among members (Floro and Yotopolous 1991; 8esley and Coate 1995;
Wydick 1999). Some of them were of the opinion that the pressure of social
sanction and penalties against defaulters ensured repayment.
In order to ensure bonding and timely repayment of loans, group lending needs to
promote certain rules and at the same time, it should provide incentives to the
members. The social ties among members in a group have the potential to
promote solidarity in the group. Here, the interactions among the group members
are structured within the lending group. The social relations among the
individuals can help the entire group rather than a single individual. Without high
degree of trustworthiness among the members in a group, the institution cannot
exist. Thus, social relations among the group members can provide information,
which facilitate collective action. The acquisition of information about the
potential behaviour of the players in a group is a necessary condition for a group
to succeed. Here, the social relations established and maintained for some or the
other purpose can be utilised.
While group borrowing is advantageous on account of its capacity to reduce
transaction costs, it has disadvantages on account of the common ownership and
team production. It is likely to emerge as a non-co-operative outcome, as the
liability is fully shared among members under group lending. Huppi and Feder
have stated that under the joint liability "the risk is borne by the group, whereas
the benefit is reaped by individual. .. Group members have little incentive to
repay if the majority of their peers default" (1990: 191). A non-eo-operative
outcome leads to over-borrowing and under-supply of effort or of other
,0
individually costly production activities. In order to control the occurrences of
such unhealthy practices, the members have to be provided with a system of
incentives and rules (Braverman and Gusach 1993).
As the joint liability insists on the members to share the responsibility
collectively with all the members, there are chances to free ride. According to
Besley and Coate (1995), group lending generated both positive and negative
incentives. Positive incentive resulted the successful group members had an
incentive to repay the loans of group members whose projects had yielded
insufficient return to make repayment worthwhile. On the other hand, negative
incentives emerged in those circumstances where the entire group defaulted,
when some members would have repaid but not repaid due to the liability of their
partners' loans.
According to Huppi and Feder (1990), group lending had both advantages as well
as disadvantages. On the one hand, they brought down the transaction costs of
credit market dealings by providing information about the creditworthiness of the
borrowers, ensured timely repayment of the borrowers and improved their
bargaining position. On the other hand, these programmes suffered from portfolio
diversification and reduced the incentives of the members to make repayment if a
majority of the members were found defaulted. It had the disadvantage of
successful borrowers to default because of the burden of repaying for their
partners. According to Devereux and Fishe (1993), joint liability was a useful
solution under group lending, if the members of the group gained individually by
the misfortune of another member or if the other members avoided the costs from
repaying another member's loan. The element of individual gain or cost
avoidance was the external factor exploited by the joint liability clause. When
this element was not present, the default of one member tended to encourage the
group as a whole to default, thus, exacerbating the delinquency problem.
The social sanction ensured through joint liability could be misguided in societies
where homogeneous group members with covariate risks faced adversities
~ I
(Braverman and Gusach 1993). During good harvest, group lending worked.
Group lending failed during poor harvests when the successful members did not
show any interest in repaying their co-partners as a majority of them were
defaulting and the gains from repaying were less (Bratton 1986). Another
problem which might emerge in these collective entities was that the members
would have the incentive to undertake risky project. Since the group was liable to
repay for the share of the defaulters, it would generate a negative incentive
among the members to undertake risky projects and ultimately this might increase
the probability of default (Sharma and Zeller 1997). But, such things could be
circumvented, if the group cohesion was strong and the members felt responsible
for the effect of the actions of others (Huppi and Feder 1990). However, in these
groups with high social connectedness or social cohesion or social capital
15
repayment could be ensured through the use of negative incentives of loss of
social reputation. Jain and Mansuri (2002) have gone beyond the discussion on
the negative incentives and hence, have argued that it might result in the failure
of the group unless adequate social connectedness was developed to mitigate
these negative effects. However, if the members were unwilling to put pressure
on delinquent borrowers and to sanction those who defaulted, it was difficult to
ensure joint liability (Ghatak and Guinnane 1999).
The social pressure among members had its own place in micro-finance
programmes (Hulme and Mosley 1996). If the social penalty of not repaying the
loans was greater than the value of financial penalty imposed for non-repayment,
peer pressure would be effective. Greater the homogeneity, stronger was the
social pressure to repay. On the other hand, Ghatak and Guinnane (1999) have
argued that the availability of alternative sources of credit determined the success
of group lending. The competition among various joint liability institutions
excluded people from the threat of denial of credit, since they had alternative
credit institutions. Moreover, the existence and the cost of dynamic incentives
decided whether joint liability would work or not. If a group was having
" Social connectedness. social cohesion and social capital are Ihe words used hy different scholars
(Besley and Coate 1995; Bhall and Tang 199X; Wydick 1999) to ensure repayment of the loans
hOTTowed through social sanction.
12
heterogeneous characteristics, the burden of group formation and solidarity
would be high. Similarly, if the social ties were weak, or, if there was
unwillingness to sanction one another, the mechanism of joint liability would not
work.
The costs of solidarity are likely to differ between countries and locations. By
giving an example of the group credit programme in Africa, Reinke (1996) has
argued that the costs of creating an environment suitable for group lending were
high and hence, the individualistic credit was more efficient in making loans to
poor entrepreneurs than solidarity groups. According to him, the solidarity was
not easily achieved in a volatile and competitive environment where poor
Africans were forced to live in and higher administrative costs related to the
management of group worked. Even though the impact of the programme was
difficult to measure in micro-finance groups in this study area, the social return in
terms of decrease in poverty, unemployment and associated social evils exceeded
private returns of lending.
2.S. Challenges before Micro-Finance Groups
Various studies (Wydick 1999; Bhatt and Tang 1998; Godquin 2004; Sharma and
Zeller 1997; Mosley and Dhal 1986; Stiglitz 1990; Jain and Mansuri 2002; Zeller
1994 and 1998; Besley and Coate 1995; Huppi and Feder 1990; Schaefer-Kehnert
1983; Desai 1983; Wenner 1995) on micro-finance programmes have looked into
the ability of the institutions to reduce asymmetry of information and its capacity
to ensure access to credit for the rural poor based on the principle of joint
liability. All these studies have considered repayment achieved by the groups as a
measure of success. This was because timely repayment of the loans reduced
their dependence on subsidies and improved institutional sustainability. In other
words, these studies were of the opinion that higher repayment ensured financial
sustainahility of the credit institution. But, they had not considered the problem
of borrowers at the time of repayment and the processes behind repayment of the
loans.
An impol1ant mechanism for ensuring loan repayment was the presence of tightly
structured instalment repayments, which enabled micro-finance groups to
overcome informational hurdles they faced while enforcing repayment and also
reduced the burden of repayment on a lump sum basis (Hulme and Mosley 1996).
But, such a repayment pattern imposed certain costs onto the borrowers. Since
members were required to make repayment immediately after their borrowing, it
was difficult for them to repay the loan from the income generated from the
investment made on the project. Moreover, they had to limit the type of projects
they financed and there were transaction costs of making regular instalment
repayments. A study by Jain and Mansuri (2002) has brought out that this
mechanism of instalments repayment constituted by social sanction created
dependence on informal credit markets at times of repayment by borrowers.
According to them, dependence on informal sources of credit was more among
micro-finance group members than non-members.
As the principle of joint liability was strictly followed by the members to ensure
repayment, the strong social pressure and the fear of social ostracism from the
community associated with the peer pressure forced members to borrow from
moneylenders at times of repayment (Chavan and Ramakumar 2002). If members
were repaying the loans from the income generated from the activities undertaken
with the micro-finance loans, the risks of inability to make repayment and
unwillingness to repay would have been brought down or would be made
negligible. But, if the members in a group were very poor to make investments in
productive projects or could not generate remunerative income from the invested
activity, micro-finance programmes, in fact, worsened the financial conditions of
the poor women. Because of factors relating to the structure 16, crises 17 and life-
cycle
l8
, which were external to the system, members experienced negative shocks
at the time of repayment (Ahmed 1999). Under such a system, periodic
instalment repayments increased the likely default. So, payment of small periodic
" Markel relaled. like low demand for labour, goods or services.
17 Natural and climatic factors including seasonality, or due to family emergencies like death of a
family member or marriage. .
" Related to demographic changes in Ihe family.
34
instalment appeared not to be a good method of collecting loans from the poor
experiencing persistent negative shocks, as it might probably deplete the profit.
savings and thereby, the input use of the mcmbers. Similarly, thc bcnefits of
groups in terms of repayment of loans existed only if the members in a group did
not experience the same shock (Bratton 1986).
Women-oriented micro-finance programmes have the public transcript
l9
that they
improve women's contribution to family welfare and assist poor women through
their socio-economic empowerment. The idea of giving loans to women who do
not have physical collateral may seem attractive. But, it has a hidden transcript
20
that since women have limited physical mobility and culturally imposed
restrictions, often, the positional vulnerability of women is used at times of
repayment (Rahman 1999). The bank workers select women borrowers, as it is
easier for them to ensure repayment. But, often, their husbands and other family
members put pressure on them to join the programme to get loans for their own
use. Rahman's study (1999) on Grameen Bank model of micro-finance
programme in Bangladesh reveals that at the time of repayment women
experienced tensions and violence from within the household and from the
members in a group and also from the bank workers. Moreover, the undue
importance given to the credit performance measured in terms of repayment gave
over-weight to dispensing and recovery of loans rather than the issue of whether
women developed meaningful control over their investment activities (Goetz and
Gupta 1996). It is significant to note that often their male relatives controlled a
large proportion of the women's loans.
According to' Floro and Dymski (2000), credit programmes were directed to
encourage women's participation in the credit market and hence, employment
sector at times of financial crisis had thc costs of greater household risks at times
of repayment. It had the costs of greater cash flow dependence and financial
,. Public transcript here refers to the philosophy and ohjectives of the Grameen Bank and the official
view of its operation (Rahman 1999).
2u Hidden transcript is the "covert discourse" of the informants ahOUl credit operations in the village
(Rahman 1999).
~ 5
fragility and the women were forced to bear these costs and their conditions
became evcn more vulnerable. Thc financial vulnerability reduced their earned
income, assets they controlled and their voices in the household decision-making
with the result that women bore a disproportionate share of the adjustment costs.
The peer pressure exerted by micro-finance programmes at times of repayment,
often strained the social relation between group members and the staff (Woolcock
1999). Woolcock's (1999) study reveals that in Bangladesh, the country where
the programme had received wide popularity, the poorest members were forced
to leave the programme and the attitude of the officials pressurising the members
to make timely repayments forced them to borrow money from the
moneylenders. The principle of joint liability forced those members who repaid
on time to bear the burden of wilful default of their counterparts. Thus, he brings
out the point that even in the case of programmes which achieved succcsscs,
there were areas, branches, centres, groups, where some individuals suffered at
times of repayment.
2.9. Research Gaps
Micro-finance groups bring down the transaction costs by providing information
about the creditworthiness of the borrowers. They bring down the asymmetric
infomlation through social collateral offered by the members and improve access
to credit to the poor who do not have any physical collateral. The principle of
joint liability ensures repayment of the loans borrowed.
As memhers in a group are equally responsible while ensuring the completion of
the credit transaction, there are chances that the members may under-supply thcir
effort. The group specific factors such as group size and the homogeneity among
memhers facilitate the emergence of collective outcome. It is expected that in
small sized groups having homogeneous mcmbers, the solidarity among the
members would be more and hence, gathering information would be easy. In
order to stimulate or motivate the members to contribute to a collective outcome,
the institution needs to providc certain incentives. These incentives can be either
36
positive or negative. While positive incentives lead to the emergence of a
collective outcome, the negative incentives prevent the emergence of non co-
operative outcome. Certain studies (Godquin 2004, Mosley and Dhal 1985) have
brought out that the dynamic incentives of obtaining further and higher amounts
of loans in future could be an incentive for them to ensure repayment. But,
Wydick (1999) is of the opinion that the peer pressure among members mitigated
the problems of ensuring timely repayment.
The members in a group collectively enforce certain mechanisms to be followed
by them. Various mechanisms have been incorporated for the selection of the
creditworthy borrowers or to avoid the problem of adverse selection for
monitoring the utilisation of the loan or to avoid the emergence of moral hazard;
and to ensure timely repayment or to avoid the problem of default in repayment.
They relate to the participation of members in the group meetings, contribution of
savings, issue loans as a proportion of member contributions, repayment of the
loans immediately after borrowing from the group and repayment in various
instalments etc.
In this context, the present study looks into the nature and extent of collective
action among the members while improving their access to credit. It examines the
various incentives and mechanisms incorporated in micro-finance groups and
their impact while bringing about collective action among the members while
selecting the borrowers, monitoring the utilisation of the loan and enforcing
repayment.
2.10. Summary
The rural credit markets are imperfect as it is difficult for the lenders to gather
information about the creditworthiness of the borrowers. The imperfect
information about credit transactions imposes transaction costs for both the
lenders and borrowers and thereby, it brings down the volume of the goods
transacted. However, the asymmetry of information can be brought down through
group based micro-finance programmes. Under these groups, the poor who do not
have any physical collateral can access credit through social collateral. It is
observed that the costs of fonnation of groups would be less in rural areas where
members have close contact and interact quite often. The principle of joint
liability gives an assurance to lenders that the members are equally responsible
for the repayment of the loan. As collective responsibility is a public good, there
is a tendency for the members to under supply their effort. In order to prevent the
emergence of such free riding on the part of the members, they should be
provided with adequate incentives and mechanisms.
In this present chapter, we have discussed thc issue of collective action in terms
of the micro-finance groups. It is observed that the group specific factors such as
number of members and homogeneity of the members can contribute towards
collective action. The repeated interactions of the members provide incentives to
the members for cooperation. We have discussed both the positive and negative
incentives, which play major roles while ensuring collective action among the
members. Before going into the details of these issues, it is relevant to examine
the evolution and growth of micro-finance programmes in India and Kerala. This
has been discussed in the third chapter.
38
CHAPTER 3
MICRO-FINANCE DEVELOPMENTS IN INDIA AND
KERALA
3.1. Introduction
In the recent times, micro-finance programmes have been playing significant
roles in poverty alleviation and women empowerment. Like other developing
countries, in India, the programme was introduced as a part of the poverty
alleviation measures, and micro-finance was introduced in a major way in the
19905. It was implemented mainly through the NABARD Bank linkage
programme and a number of government and NGOs. Several studies (Rajakutty
1997 and Puhazhendhi and Satyasai 2000) have pointed out that compared to
direct lending programmes, micro-finance approach was more successful with
respect to reaching the poor, attaining socia-economic well being of the
participants etc.
Kerala is one of the first states in India that adopted micro-finance programmes
as a part of the state poverty eradication mission. As the Kudumbashree
programme of the government was introduced in 1999 under local self-governing
institutions (LSGls), the programme received a wider coverage in the state.
Generally, micro-finance groups initiated by them acted as economic institutions
of local governance. Moreover, NGO initiated micro-finance programmes have
been working in the state, especially in the backward regions from mid I 990s. In
this chapter, we discuss the emergence and growth of micro-finance programmes
in India with special reference to Kerala, which constitutes the background for
the present study.
3.2. Fulfilling the Credit Demands of Rural India Over the Years
Financial institutions in India can broadly be classified into two categories;
formal and informal. For a long time, the formal banking institutions could not
meet the ever-increasing credit requirements of the vast section of the rural poor
39
having no access to adequate physical collateral. The credit requirements of the
rural poor fluctuated with respect to the seasonal agricultural demands of the
rural areas. It was assumed that the agricultural output of marginal and small
farmers depended on the availability of credit, which was considered to be one of
the significant inputs enabling these farmers to access other inputs. They required
credit for a large number of reasons such as emergency needs, life-cycle needs
and production needs (Rutherford 2(01). From time to time
21
the Government of
India introduced banking sector reforms to reach out to the rural poor. The most
important step taken by the government in realising this goal was the
nationalisation of commercial banks in 1969 and 1980.
The effects of nationalisation of banks on poverty alleviation can be examined in
two phases, before and after liberalisation. According to Radhakrishna and Ray
(2005: 109-115), although the banking sector reforms increased the number of
hank branches, narrowed the regional disparities in rural credit deposit ratio and
improved the share of credit to agriculture, such results had not continued after
1991. They have stated that the micro analysis on credit disbursal to the poor
indicating the small borrowal accounts, the advances to weaker sections,
advances under differential interest rate schemes, advances by the size of
landholdings and credit flows under various poverty alleviation programmes had
not succeeded in reaching the poor. In short, the initial benefits under the banking
,ector reforms had not continued to ensure support to the poor, especially after
liheralisation.
" The Go,emment of India appointed various commillees from time to time to review the credit
demands of the rural poor. In 1954. All India Rural Credit Survey Committee was appointed and which
gave more scope to cooperati'es for rural hanking. In t 963. Agricultural Refinance Corporation was
formed in the RBI to emure the supply of long term resources to credit institutions. In 1906. the All
India Rural Credit Review Commillee gave suggestions on the numher of banks. signif.cance of
savings mohili"tion and recovery of loans. The Government of India nationalised 20 commercial
banks in 1%9 and 19XO. In 1975. the Regional Rural Banks were set up to target the 'weaker' sections
of the society. the small and marginal farmers. agricultural lahourers and ani,ans. In t 981. the
Committee to review Arrangements for Institutional Credit for Agriculture and Rurat Credit was set up
and the National Bank for Agriculture and Rural Development was set up in 1<)82. In 1991. M.
Nara.simham was appointed as the Chairman of a committee on the banking sector and it came up with
the conclusion that the hanking policy should he guided hy market forces than hy regutations of puolic
authority. Gupta Comminee was appointed in 1998 and it gave imponance to the quality of credit
delivered by the hanking system.
40
As in the case of other developing countries, the rural poor in India have been
depending on informal credit sources such as moneylenders and landlords for
quite some time. The access to credit for the poor from the formal sources were
negligible due to the problems existing within the banking system such as
complicated procedures, unimaginative lending policies and procedures, absence
of provision for consumption credit, political interference, distant location,
cultural gap between the officials and borrowers, and short banking hours
(Rajasekhar 1996). Moreover, formal banks found the lending to the poor to be
risky due to two important reasons. Firstly, it was vcry difficult for the banks to
obtain information about the creditworthiness of a large number of small
borrowers. Secondly, it was costly to reach a large number of small clients
without adequate collateral. Therefore, transaction costs for both lenders and
borrowers were high and often, these costs reduced the total volume of credit
transactcd. A deliberate intervention in the credit market by the State had
produced the opposite result. Instead of improving the credit availability for the
rural poor, the State intervention in the credit market with the policy of
administered rdtes of interest increased inequality in the distribution of credit.
This happened because the rich cornered the benefits of low rates of interest
C2

The Government of India had introduced various poverty alleviation programmes
as a part of the Five-year Plans. These programmes differed widely in terms of
their operations. Some of them were area specific programmes, whereas some
others were targeted to certain sections of the society like unemployed, youth,
mothers etc. However, these programmes too could not achieve the desired
objective of reaching out to the most needy. This was quite evident in the case of
poverty alleviation programmes such as Rural Public Works (RPW) and
Integrated Rural Development Programme (IRDP). Wastage and diversion of
funds were unavoidable in the context of corrupt bureaucracy and capture of
locally elected bodies such as panchayaths by a few influential persons. The
" This can he atlrihuled 10 Ihe efleelS of nedil ralioning (see, Adams et a119M: Sahu and Rajasekhar
2(05).
41
shortfalls in the programme could be attributed to their poor design and
implementation (Gaisha et aI2001).
Both social banking and specialised poverty alleviation programmes failed to
achieve the objectives of sustainability of the financing institutions, besides
. h '3 h
targeting t e poor- . T e banks were unable to reach a large number of poor
borrowers due to mounting transaction costs. This resulted in poor access of
credit by the rural poor. The difficultly of obtaining information on
creditworthiness of the borrowers resulted in overdues which started to
accumulate by the end of 1980s. As the supply side problems of the formal
institutions were totally neglected, the sustainability of formal hanking
institutions was under threat. Thus, a large number of poor remained outside the
formal banking system.
According to Rajasekhar (2004), the developments in the formal banking system
had five major consequences. Firstly, Narasimhan Committee of 1991 was
appointed to undertake financial sector reforms. As lending to the priority sector
was not profitable, it recommended a gradual reduction in the priority sector
lending and diversion of bank credit to more profitable areas. Secondly, Indian
hanks showed considerable interest in group based programmes like DWCRA as
loan assistance to women in groups was found to be relatively more productive
than the other social banking programmes. Further, repayment rates in these
groups were better. Thirdly. from 1999 to 2000 onwards, group lending
methodology was adopted in the case of poverty alleviation programmes. SGSY
programme was initiated to combine the existing poverty alleviation programmes
of IRDP. TRYSEM and DWCRA. The new programme channelled assistance to
the poor through SHGs. Fourthly, it led to the entry of NABARD in the credit
market through the provision of refinance to engage the commercial banks to
provide credit to the poor under the SHG Bank linkage programme. Fifthly. it led
are the two concepts in the hanking system ano are considered to he the two
of the same coin. A deliberative intervention in the credit market through low rates of interest has
hrought down the savings of the clicl1t!-t. on the one hand. and increased the inequality in the
distrioution of credit. on the other. Thus. it could not achieve the two oojeetives of sustainaoility and
targeting.
42
to the increased participation of the NGOs in the expansion of micro-finance
programmes. It is significant to note that the poverty alleviation programmes and
the banking sector had realised the henefits of group lending such as the
sustainability of the institution and in reaching out to the poor.
Even though the growth of micro-finance groups was rapid after 1990s, there
were many forerunners for these institutions. Many formal and informal small
groups existed in different parts of the country to meet the credit needs of the
localised people. These informal groups are known by different names in
different parts of the country. The basic idea of these groups has been to make
credit available to the participants on easy terms from the small amounts
contributed by them. They are Rotating Savings and Credit Associations
(ROSCAS), which are called as chit funds. These institutions provided credit to
the people and got dissolved once all the members received benefits from the
group. But, the micro-finance groups address the socio-economie concerns of the
members and continue to function even after the credit needs of the members are
met once. The concept of micro-finance rests on the premise that (a) self
employmentl enterprise formation is a viable alternative means of alleviating
poverty, (b) lack of access to capital assets/ credit acts as constraint to existing
and potential micro enterprises, and (c) the poor are able to save despite their low
level of income.
Under micro-finance groups, the savmg contributions made by the members
formed the capital to be lent among the members. Earlier, the poor had been
considered as unbankable, but the spread and popularity of the micro-finance
programmes through the savings mobilised by them and the success in terms of
their improved recovery rate changed such a view (Rutherford 2001). Satish
(2004) has stated that giving due attention to the supply side of the credit market
with saving mobilisation under group credit programmes in countries like
Indonesia, Malaysia and Thailand and the replications of the same in India under
commercial banks prospered the growth of savings and the promotion of credit.
This contributed elaborately towards sustainability of the institution and outreach.
43
According to him, the micro-finance institutions can play a crucial role in
bringing about revitalisation of the institutions without any wholesale structural
and ownership change.
3.3. Self-Help Groups in India
Generally, micro-finance groups in India are called Self-Help Groups (SHGs). In
addition to the usual functions of micro-finance groups such as savings, credit
and insurance, SHGs engage in issues of social significance. These are small
groups of 10-20 members. In India, almost 90 per cent of the groups comprise of
only women. The SHG provides the poor with alternative means of obtaining
economic and social entitlement to resources through their active participation.
SHGs are formed on voluntary basis, perceived appropriately as people's
institution, providing the poor with the space and support necessary to take
effective steps towards greater control over their lives in private and in society.
Each group acts like a bank, and decides the internal operations of the group in
the distribution of loans, monitors the utilisation of loan amount and enforces
repayment. Generally, the group disburses the loan amount among the members
according to the criteria arrived at by the members. The members borrow both for
consumption and productive purposes. As the group attains maturity in due
course of time and the common pool of resources of the group, i.e., savings
become insufficient for meeting the varied credit demands of the members, the
group applies for external assistance mostly from banks under the NABARD
bank linkage programme although other avenues are also emerging of late.
There are differences between Grameen Bank model of Bangladesh and SHGs
established and spread throughout India. Grameen groups are relatively smaller in
size as they consist of five members whereas membership of SHGs is 10 to 20.
Unlike Grameen Bank of Bangladesh, SHG has its own credit fund for relending
and the initial lendings are made through internal savings contributed by the
members. Moreover, SHG is considered as the ultimate lender and can be
pcrccived as a micro-finance Institution, whereas Grameen Bank groups do not
normally have resources at their disposal. Members' thrift is deposited in the
44
financial institution which has a federating structure and which is lent to the
members of Grameen Banks. As a result, after some time, SHG may have enough
capital to meet the financial requirements of its members and may not require any
borrowing from financial institutions. Therefore, SHGs can be considered as
independent institutions, if they mobilise sufficient funds for disbursal among
members. On the other hand, Grameen Bank group members have to depend on
an outside financial institution for credit, as long as they maintain thrift in the
federation.
In India, SHGs are more prominent among the south Indian states like Andhra
Pradesh, Tamil Nadu, Kamataka and Kerala. Each of these states has its own
government programme for the promotion of micro-finance and it is called by
different names, even though the internal operations of these groups are the same.
Some of these SHGs coming under each of the state programmes have linked
themselves to the banks under NABARD and it is this programme which gave
wide popularity to micro-finance in the country. The bank linkage programmes
under NABARD enables credit to the groups under three different types of
lending. NABARD, the apex bank in the promotion of agricultural and rural
development, is involved in the programme through the provision of refinancing
of loans to those commercial banks, which lend to the primary sector. In 1992,
nationwide project linking of 500 SHGs with nationalised commercial banks was
established. Later, in 1996, SHG bank linkage became the mainstreaming of
corporate strategy of banks and now, it has grown into one of the largest micro-
finance programmes of the world.
Bank linkage is prominent in terms of outreach, recovery and meeting the credit
needs of the rural poor. There are three models of SHG bank linkage. In the first
model, banks themselves take up the work of forming and nurturing the groups,
opening their saving accounts and providing them with bank loans. Up to March
2005,21 per cent of the total number of SHGs financed was from this category.
In the model 2, SHGs are formed by agencies such as NGOs, government, etc.,
but directly financed by the banks. About 72 per cent of the total number of
45
SHGs financed up to March 2005 belonged to this category. These organisations
facilitate organising, forming and nurturing groups and train them in thrift and
credit management, whereas the banks give loans directly to these SHGs. In the
third model, SHGs are financed by banks through NGOs and other agencies and
they act as financial intennediaries. In areas where formal banking system faces
constraints, the NGOs are encouraged to approach a suitable bank for loan
assistance.
The facts and figures given in Box 3.1 indicate the importance of micro-finance
programmes under SHG bank linkage programme of NABARD in India.
Box 3.1 Coverage of SHGs under NABARD
Number of states and union territories covered: 31
Number of districts covered: 572
No. ofSHGs linked: 1,618,456
No. of participating banks: 573
Bank branches participating: 41,082
Bank loans: Rs. 69.98 billion
No. of poor households assisted: 24.25 million
Source: As on Mrch 31 ",2005 (NABARD 2005)
SHGs can he linked to all India Scheduled Commercial Banks (SCBs) including
Regional Rural Banks, credit cooperatives comprIsIng Primary Agricultural
Credit Societies (pACS) and Primary or State Land Development Banks
(P/SLDBs) at the grassroots level. Banks lend the groups through SHG-bank
linkage programme and it acts as a mechanism for lending to the poor on a
sustainable hasis. The most outstanding impact of the linkage programme could
be the socia-economic empowerment of the poor, especially the women (Nanda
1998). A study on the SHG bank linkage programme across the country by
Puhazhendhi and Satyasai (2000) reached the conclusion that the economic
conditions of the poor SHG members improved in terms of lifting the poor ahove
the poverty line and improved their access to assets in the post SHG scenario.
Moreover, in the social sphere, the programme improved the self-confidence of
the memhers and their attitude towards society.
46
Box 3.1 brings out the coverage of micro-finance programme in India under the
NABARD SHG bank linkage programme. The active role-played by the public
sector formal banking institutions had led to widc popularity and spread of micro-
finance progranlmes in India. The linkage and refinance programme was made
available through the nationalised commercial banking structure and it played an
important role in the establishment and expansion of the financial intermediation
through SHGs (Harper 2(02).
It is presumed that in groups with homogeneity in socio-economic characteristics,
risks of the members will be the same. While extending external loans through
linkage programme. NABARD requests the groups to follow certain criteria.
The,e relate to the homogeneity of the group, small size, internal credit
performance in terms of good repayment and lending. Even though these are
necessary. they are not sufficient to indicate the performance of the group.
According to Rajasekhar ( 1<)96). e\en groups with heterogeneous features or
large size can he provided with credit under group lending principles. This is
Illade pos,ibJc through the saving mobilised by the members, provision of
support to income generating programmes, insistence on collateral requirements
and gl\lng emphasis to short term ncdit.
Gener;]lIy. SHC,s arc formcd. nurturcd and devcloped by outside agencies which
arc (;]lIed Self-Help Promoting Institutions (SHPls). These include Non
(i()\ernmcnt;]l OrganIsations (NGO'l. formal financial institutions or
(,overnment in,titutions. Earh of these promoting institutions may have different
pcr'pective, towards SHC,s. An NGO m;]y be basically interested in
empowerment and development. and micro-finance groups formed by them act as
a channel for achieving this. For a formal financial institution, the objective
hehind providing financial assistance to SHGs through linkage programme may
he to create creditworthy horrowers, who can absorb higher amount of credit.
(iovernment institution" on the other hand, may be interested in achieving
guvernment targets. There may sOllletimes be conflict among these different
47
promoting agencies in terms of their differing philosophies (Dasgupta and Rao
2(03).
3.4. Role of NGOs in the Promotion of SHGs
NGOs have a role in bringing about the collaborative linkage between banks and
groups. They act as both facilitators and micro-finance institutions. As facilitating
institutions. NGOs organise the poor into groups, undertake training for them,
help in arranging inputs, extension and marketing, introduce saving and internal
lending. help in the maintenance of accounts, link them with the banks for credit
requirements. Here. banks directly provide credit to the SHGs with the NGOs'
recommendations. In the second case, where the NGOs work as MFI (Micro-
Finance Institution), they have to undertake some additional functions besides
undertaking the function as a facilitator. Here, the loan is given to the NGOs, for
on-lending to the SHGs/ individual poor. The NGOs will be legally responsible
for repayment to the banks and will be bearing the risk in cases of non-payment.
The experiences of hoth NGOs and hanks show that micro-finance groups have
two distinct phases, n<lmcly. pre-formation and post-formation. Pre-formation
phase include, identific<ltion of the \illage and target group. providing awareness
to the memhers identified on the importance of groups and motivating them to
come together. There arc chances that the interests of the individuals may go
<lgain\t th<lt of the group. In the post-formation phase, conflicts between
individu<ll intcre,(s and the group interests are resolved. The set of procedures to
he followed by the group, rules to he adhered to by the members and the roles to
he lead by the le<lders arc arrived at by intense discussion among the members in
the,e groups. Even though the basic steps in the pre-formation and post-
formation st<lge, <lre similar to hoth the NGOs and banks, NGOs seem to be
belief equipped to undertake SHG formation due to their nearness to the people
and flexibility of operations
24
.
:. Even though the NGCh played a prominent role in the promotion of SHGs. often the poorest were
finding it difficult to gain IIlcmhcrship in the programme. They were not comfortable to the ngld
disciplinc insisted hy the NGOs as they were nol confidcnt of their capacity to save regularly .. The
initial resistance to SHG formation could be due 10 those encountered frolll WIthin and also lrom
ouL,ider.
It is observed that the NGOs, which obtained better understanding of the situation
of the area in which they were working, did well in the formation of micro-
iinance groups. On many occasions, they had easily converted the groups formed
for some or the other purpose into micro-finance groups and channelled the
resources and training opportunities through them. A comprehensive study by
Satish (2001) into the problems and complexities faced by the NGOs and the
hanks in the pre-formation and post-formation stages of SHGs in three states of
Karnataka. Maharastra and U.P has revealed that almost 30 per cent of the SHGs
coyered under the study had evolved from pre-existing groups such as affinity
groups which maintained a common economic activity. These groups enjoyed
economies of scale in the procurement of raw material and marketing of the
finished products by joining together as a group. Similarly. some of the NGOs
could succeed in utilising the collective efforts of the informal institutions of chit
funds hy conyerting them into SHGs. But, the organisational skills in terms of
maintaining di,cipline at meetings, interactions and participation in chit funds
were less as compared to SHGs, which were considered essential for the success
"f SHGs. With a little effort. the spirit of cohesiveness could be inculcated among
the former by the NGOs \v ith the help of the animators appointed by them.
Some of the ,tudies reveal that the NGO formed SHGs performed better in terms
of targeting and recovery of loan as compared to DWCRA groups formed by the
government. Rapkutty's (1997) study conducted in Tamil Nadu and Andaman
Nicobar Island" critically has examined the implementation and status of the
groups organi,ed under DWCRA. The programme had succeeded in establishing
groups and it had recorded 140 per cent growth in the number of groups by the
end of the Eighth Plan. More than one third of the government groups formed
under DWCRA had become defunct, where the revolving credit fund had not
heen used. Non posting of officials, inadequate supervision and follow up,
utili,ation of loans for comumption purposes, lack of effort to revive defunct
loans, lack of recovery of the loans were the main problems faced. Cohesive
groups and the collective action, which were central to micro-finance groups, had
largely been missing In these programmes. A comparison of the DWCRA
programme to that of the NGO aided programme brought out that because of the
NGOs' support right from the group formation till the repayment and even after
that enabled the groups to attain better results. The NGOs actively participated in
the identification of the groups, initiation of training programmes, encouragement
of training programmes and monitoring, whereby it succeeded in instilling group
consciousness among the participants.
3.5. Major Challenges in the Growth of Micro-Finance Programmes in India
In India, more than 90 per cent of the micro-finance group members are women
and their participation in those programmes improved their socio-economic
standing in the society. Micro-finance programme is not fully devoid of defects.
It has certain problems and challenges in the course of its development.
Often. the horrowers face prohlems of identifying those economic activities that
yield a rate of profit necessary to cover the interest rate on loans. Even though the
programme is meant for the promotion of income generating activities through
the provision of loans, members are finding it difficult to find economically
remunerative productive activities. A risk aversive character is quite observable
among the members, where they restrict themselves to non-farm activities, which
are traditional and less remunerative (Rajasekhar 2005). Moreover, there are
prohlems of getting loans on time, difficulty of getting raw materials. skilled
lahour and marketing opportunities. Thus. the members are finding it difficult to
venture into those activities, which are diversified and remunerative (Nirmala et
III 2004). Their problems continue even after producing output, especially while
finding a marketing outlet for their produce (Madheswaran and Dharmadhikari
200 I).
Generally, the programme IS targeted to women as their contribution to the
household income enable all the household members to receive the benefits of
credit. This is because women contribute a larger proportion of their income to
the welfare of the household as compared to men, and this throws light on the
50
self-consumption nature of the men (Mencher 1 9 8 ~ ) . A '>Iudy hy Raja>ckhar
(2002) on the poverty alleviation programme of one south Indian NGO called
SHARE has brought out the idea that participation of women In InCllllle
generating activity contributed a higher proportion to household Income.
However, it had negative impact on the sharing of household responsibilities. It
resulted in a situation where the male members withdrew from the labour market
by transferring the household responsibilities entirely on to women. He suggests.
therefore, that men too should be brought under the purview of development
intervention, if women are to be empowered.
Various studies (Rajakutty 1997; Namboodiri and Shiyani 200 I; Satish 200 I;
Madheswaran and Dharmadhikari 2001) on the performance of SHGs have
brought out the idea that SHGs performed well in terms of recovery of loans.
These studies are of the opinion that this was made possible because of the self-
sustainable system of community organisations. constant and regular assistance
from promoting agencies, social cohesion among group members and lower
transaction costs. But, such a measurement only on the repayment capacity of the
groups had not looked into the sources from where the members made
repayments or the problems faced by the members at the time of repayment.
According to Chavan and Ramakumar (2002). group pressure sometimes. forced
the members to borrow from moneylenders at the time of repayment and hence, it
created dependency.
Another problem cited by the development scholars relate to the neglect of the
poorest of the poor by the programme. According to Madheswaran and
Dharmadhikari (200 I). the exclusion of the poorest could be attributed to the less
targeting on the poorest as compared to moderately poor. This was because the
financial institutions presumed that the promotion of the poorest might hinder the
sustainability of the programme. Their study has brought out that lack of
awareness, social exclusion to join with other group members. improper
identification techniques, difficulties faced at the time of appraisal and follow up
and strict discipline in repayment requirements and penalties for delays acted as
'il
hindrances for the poorest to participate In the Maharashtra Rural Credit
Programme.
3.6. Evolution of NHGs in the Kerala Scenario
The present study has been carried out in Kerala. a South Indian state where
government and NGOs have been actively involved in the promotion of micro-
finance groups. NGOs are concentrating in the state on the socio-economic
promotion of the backward and weaker sections of the society. They had
channelled their assistance to them through SHGs even before the entry of the
government in the programme. As in the case of other states in India, locally
based informal credit groups had received popularity before the emergence of
SHGs. However, later, the micro-finance programmes received wider
appreciation with the establishment of SHGs under Local Self Governing
Institutions (LSGIs) and their emergence can be traced back to the Kerala model
of development.
Kerala occupies a unique place among the states of India, as it is considered a
paradox of development. This state has attracted the attention of various scholars
for its remarkable achievements in social development indicators, in the absence
of economic growth. As a state in a third world country like India, the
attainments are comparable to that of the developed countries of the world.
Kerala's accomplishments reveal that the well-being of the people can be
improved and social, political and cultural conditions can be transformed even at
low levels of income, when there is appropriate public action (Ramachandran
1996; Parayil 2000; Kannan 2000). Some scholars argue that the achievements in
social development indicators could be realised mostly through the active
participation of the civil society and the responsiveness of the government to the
demands of the people (Blomkvist 2003; Tornqusit 2000; Heller 1996). To them,
the active participation of the masses and the consequent positive responsiveness
of the state could be traced back to the land redistribution reforms, and other
social measures undertaken by the state. On the other hand, economic
accomplishments of the state in terms of employment generation, per capita
52
income and growth rate of the productive sectors of the economy are very poor.
High unemployment coupled with low productivity of the state forces large
segments of the people to depend on remittances from Gulf countries. There was
a growing debate on this aspect of perverted growth of Kerala, as the state stood
out as an alternative to the neo-liberal idea of economic growth (Tharamangalam
1988; George 1997). These scholars are of the opinion that the growing fiscal
deficit, lack of additional employment opportunities and low growth rate of the
economy might undermine the very existence of this model of development.
The sustainability of Kerala model of development has been debated and
discussed by many scholars, as the economic achievements of the state are very
marginal. Meanwhile, in 1992, the Government of India introduced the 73
rd
and
7 ~ ' h constitutional amendments. As per these amendments, the states were
required to devolve twenty-nine administrative functions to local elected bodies.
The Left Democratic Government had taken the initiative for the decentralisation
of power to the local bodies under the People's Planning Campaign. It received
wide popular attention through the enormous participation of the masses in the
local level resource mapping and the preparation of local level development
projects. According to the Veteran CPM leader EMS Namboodiripad (1995), the
Campaign had envisaged to accelerate economic growth without sacrificing the
welfare and democratic achievements of the past. Realising the shortcomings of
the state on economic grounds, the advocates of the campaign have argued that
the economy could be recovered from stagnation in the productive sectors mainly
through the mobilisation of the funds from voluntary services, beneficiary
contributions in development projects, small savings through SHGs of women
and loans from financial institutions (Mohanakumar 2002; Tharakan and Rawal
200 I; Isaac er.(I/ 200 I). Thus, they have expressed their hope in the newly
emerging democratic decentralisation and its potentialities of accomplishing
development from the locally initiated development plans. Moreover, they argue
that the devolution of powers and the financial resources to LSGIs ensure mass
participation of the people and they have expressed their hope that it could
overcome the drawbacks of centralised planning.
53
In 1996, the sLate under the LDF government had devolved 35 to 40 per cent of
the state plan fund to the LSGls for the formulation and the impicIllL'ntati(ln of
thc Ninth Plan (Isaac 1'1 II 2(01). It was a process of dcvohing fUllctJ(lll' and
resources of the state from the centre to the elected representatives at lower levcls
so as to facilitate greater direct participation by citizens in governance. Thc main
idea behind devolution was to ensure that what could be done at a particular Inel
should be done at that level and not at higher levels. Under the LSGIs.
comprehensive area development plans were prepared through participation of
the masses n micro level planning.
There are three tiers of LSGIs in the state: Grama Panchayath at the lowcst level,
Block Panchayath at the block level and Zilla Panchayath at the district level.
Ward level meetings, called the grama sablzas, were conducted below the grama
panchayaths to identify local development problems, analyse factors responsible
and put forward suggestions for solutions. Neighbourhood groups (NHGs)
consisting of 40 to 50 familics were constituted below each r,rama slIhhll. These
groups acted as grassroots fora for direct participation of citizens in governance.
Even though the prescribed membership of NHGs was 40 to 50, these were
groups of 10 to 20 women generally engaged in discussions of the local plan.
review of plan implementation, and general administration, and selection of
beneficiaries. These institutions were also involved in the settlement of family
disputes, health and educational programmes of their families, cultural activities,
thrift schemes and project implementation (Tharakan and Rawat 200 I; Isaac et III
200 I). NHGs acted as a supplement to grama sabhas and in most of the cases
Lhey acted as executive committee to grama sablzas and hence, they should be
viewed as democratic institutions of general governance. The significance of
these grassroots organisations was quite observable from the role that they played
in the promotion of economic devclopment of the state through the creation of
local area specific plans. Generally, they were engaged in the promotion of
income generating activities suitable to the area of their operation, which was
collectively suggested by them. These NHGs working at the grassroots level
5-1
formed the basis of micro-finance progranunes organised and promoted by the
government.
In 1999, the Government of Kerala implemented a State Poverty Eradication
Mission called Kudumbashree
25
under the LSGIs and brought NHGs under this
organisation. The Kudumbashree mission launched by the state government with
the active support of the Government of India and NABARD had adopted a
group approach for wiping out absolute poverty through conununity-based
organisations. It had a three-tier structure with NHGs at the grassroots level, Area
Development Society (ADS) at the ward level and Community Development
Society (CDS) at the panchayath level. Those women who participated in the
NHGs at the grassroots level discussed their local issues in the grama sabhas
held at the ward [evel. NHGs received wider popularity since the government
decided to earmark 10 per cent of the Plan fund for women through these groups.
By 200[, the programme was implemented in all 991 panchayaths of Kerala
state. Other than considering the usual practice of taking income as the indicator
of BPL families, it adopted a nine-point criteria developed by the Alapuzha
model
26
of community development organisation for the identification of
beneficiary fami! ics. These are as follows:
I. Kutcha house
2. No access to safe drinking water
3. No access to sanitary latrine
4. Illiterate adult in the family
5. Fami[y having not more than one earning member
6. Fami[y getting barely two meals a day or less
7. Presence of children below the age of 5 in the family
8. Alcoholic or drug addict in the family
9. Scheduled caste or scheduled tribe family
" The genesis of KIIJWllhllshret' can he seen from the Alapuzha Community Development Society of
1993. It had identified risky families below poverty line on a nllle-polllt entena and the programme
was successful in achieving poverty alleviation targds. Later. the programme was introduced III all the
panehayats of Malappuram. On 26" December 1994. the state government through a speCIal order
directed all Urban Local Bodies in the stale 10 set up Urban Poverty AlleViatHln Cells and to Implement
eoverty alleviation programmes with community participation as done Alapuzha and .
_f' 1he SHG programme was introduced III Alapuzha III 1993. under collaboratl\c efforts 01
Community Based Nutrition Programme and Urban Poverty AlleVIation ProJecl (CBNP and UPAP) of
the Government of India and UNICEF.
55
If any four or more of the above risk factors are positive in a family, such a
family is treated as 'risky family' (Isaac et at 2002), and targeted for government
assistance,
Even though NHGs are engaged in issues of social significance through the
participation of women in grama sabhas, they give equal importance to the
promotion of thrift and credit to facilitate the poor to save and to provide them
cost effective and easy credit. Thus, the thrift and credit enable the poorest
without collateral to acquire loans from small savings contributed by them who
had been considered for a long time as unbankable. The loans obtained from
these groups provide an opportunity for them to initiate small income generating
activities. and thereby improve their income and living standards.
The NHGs are similar to SHGs in terms of their day-to-day operations. The
newly emerged NHGs hold meetings on a weekly basis and discuss issues of
,ocial and economic relevance. NHGs are involved in a wide range of functions
like making weekly contributions to the common fund, identifying beneficiaries
of various ,chemes under the poverty alleviation programme of the government,
developing and implementing projects suitable to the local needs, etc. Since the
NHG programme has a three tier structure, the representatives of the NHGs meet
at the ward level meeting of the ADS where they discuss issues pertaining to their
area and the CDS meetings are held once in a month at the panchayath level to
discuss hroader issues. Panchayath level CDS is a registered hody under the
Charitahle Societies Act. Other than the representatives from various ADS
committees, the representatives from the LSGIs too participate in these meetings
at the panchayath level.
The women participating 111 these agencies bring forth area specific project
propo,als at the group level meetings. The area specific projects
27
formulated by
the NHGs form the micro plans from an area which will be scrutinized and
" According 10 KudumhuJhree programme. projecls fomlulaled by various NHGs are called micro
plans; Ihe consolidalcd projecls of Ihe wards are called mini plans: and Ihe ward level plans arc called
Ihe communily dcvciopmcnl sociely (CDS) plan.
56
prioritised to fonn a mini-plan at the ward level of ADS. After mini plan are
consolidated as CDS plan, it becomes the antipoverty sub-plan of the local self-
government. Preparation of micro, mini and CDS plans facilitate the poor to
participate in the planning process as major stakeholders. The local body
monitors the implementation of the plan and thereby, the proper linkage and
autonomy are ensured under the CDS system.
Even though the programme was meant for the BPL families, membership was
open to APL families too. Generally, three reasons have been cited for the
inclusion of APL families (Isaac et al 2(02). Firstly, it was difficult to make a
clear demarcation between these two categories of BPL and APL and often, there
were not many differences between the two categories. Secondly, in those cases
where there were pre-existing groups consisting of members of both the
categories, a division based on such issues might result in the failure of the group.
Finally. the members belonging to the APL families were able to manage the
day-ta-day affairs of the group. as mostly these women were literate enough with
experiences of dealing issues of both the internal and external management of the
group.
The KII,}lIl11ha.lhree programme in Kerala was introduced in all the 14 districts of
the ,tate in both nJral as well as urban areas and in each of these areas it was
brought under the LSGIs. The data on spread of NHGs across districts of Kerala
have been provided in Table 3.1.
57
Table 3 I' Distribution of NHGs across Districts .. ..
District No. of
No.ofNHGs Average number of
panchayath
formed
NHGs per
s
panchayath
Kasargod 39 5,017 129
Kannur 81 8,957 1 I 1
Wayanad 25 6,665 267
Kozhikode 77 12,272 159
Malappuram 100
9,990 100
Palakkad 90 16,641 185
Thrissur 92 13,836 150
Ernakulam 88 10,428 119
1dukki 51 8,177 160
Kottavam 74 8,683 117
Alapuzha 73 10,567 145
Pathanamthitta 54 5,584 103
Kollam 69 11,606 168
Thiruvanathapuram 78 14,797 190
Total 991 143,220 145
.
Source. Compiled from the status report of NHGs under Kudlllnbashree as on 28-
02-2005
Table 3.1 \hows that the number of NHGs was the highest in Palakkad, followed
by ThiruvJvanthapuram and Thrissur, while it was the least in Kasargod district.
The demity of NHGs in each of the districts can be examined from the average
number of NHG\ per panchayath in each of these districts. The number of NHGs
per panchayath was the highest In Wayanad district followed by
Thiruvanathapuram and \ignificantly, the difference in the average number was
marked between these two districts.
The programme envisaged that at least one person from each household should
participate in the programme. so that all the households participate in matters of
socia-economic under the panchayath micro-finance programme.
The number of NHGs formed all over the state varied from one district to
another. However. the number of households in a district was a limiting factor for
the coverage as membership was normally limited to one member from each
household. So, the spread and the growth of NHGs in a district can be captured
from the proportion of the households covered under NHGs in a district as a
58
proportion of the total households of that district. This has been given in Table
3.2.
Table
Kd
3.2:
b h u urn as ree
District
Kasargod
Kannur
Wayanad
Kozhikode
Malappuram
Palakkad
Thrissur
Ernakulam
Idukki
Kottayam
Alapuzha
Pathanarnthitta
Kollam
District-wise
Distribution
P rogramme
No. of households
in the district
225,252
457,368
166,763
567,658
612,413
536,216
639,871
693,161
265,344
434,520
483,960
297,134
593,314
Thiruvanathapuram 759,382
Total 6,732,356
of Households Covered under
No. of Households
households covered under
covered under NHGsas % to
NHGs total households
108,477 48.16
188,676 41.25
105,176 63.07
260,502 45.89
238,106 38.88
288,800 54.47
251,876 39.36
182,782 26.37
147,397 55.55
185,768 42.75
215,216 44.47
116,970 36.37
220,460 37.16
310,874 40.94
2,821,080 41.90
Source: Complied from the Census of IndIa 2001 and KudulIlhashree data 28-2-
2005
Table 3.2 shows that Thiruvanathapuram had the highest number of households
covered under NHGs and it was the least in Wayan ad district. However, the
number of households indicates that the former had the highest number of
households whereas the latter had the least. The proportion of the households
covered under the NHGs indicates that Wayan ad had the highest proportion of
households under the Kudumbashree programme. The wider coverage of NHGs
in Wayanad district could be attributed to the presence of NGOs where many
NGO initiated groups got registered in the government programme. The number
and the proportion of micro-finance groups covered in Wayanad district would be
even more as there exist some SHGs initiated by the NGOs having membership
only in SHGs. In other words, there were some SHGs not registered under the
Kudumhashree programme. The present study is set in Wayanad district because,
59
as has been explained In the following section, both the NGO organized and
government promoted micro-finance programmes exist side by side in this
district.
In Kerala, most of the NGOs concentrated in those regions where the socially and
economically deprived sections existed. Even before the emergence of NHGs and
SHGs. the state had many informal group based credit institutions. Since the
fom1al bank finance was inadequate to meet the credit requirements of the poor,
informal lending institutions, chit funds and merry-go-rounds had received wider
popularity among the poor (Isaac et (/1 2(02). The existence and the operations of
these informal community based savings and credit institutions could be traced
back to the traditional societies. For example, merry-go-rounds or similar systems
of rotating savings and credit associations were prevalent in the traditional
system. Under them. regular periodic contributions made by the members were
lent to those member\ who were selected by the group collectively. In some parts
of Kerala. c()c()nut trees were provided as the basis of common fund. A fixed
number of el>conut trees of every parti<.:ip,mt was set aside for the common fund
from when: the memhers were selected on a lottery basis (Isaac et 1I12002).
Even hefore the cmergcnce and the popularisation of the government initiated
:-":HGs. NGO, h,ld adopted a group approach for women through micro-finance
programme,. They were introduced and promoted by various development-
oriented NGO, of the \tate. Some of the NCiOs had groups with a large number
of participants. ('enerally. the\e group, consisted of 150 to 200 members and
were called credit union, (Ralasekhar 2000). These groups aimed at the economic
development of the mcmher participanl\ through the provision of credit. These
large groups. which had the problems of coordination and co-operation. received
In'piration from small groups initiated hy other NGOs like SEW A of Ahmedabad
and MYRADA of Bangalore and hence. promoted such small sized groups.
60
3.7. Summary
A discussion on the credit market scenario l!1 India reveals that the formal
financial system was not adequately developed to meet the increased credit
demands of large number of small clients without adequate collateral. It had
inherent problems of asymmetry of information pertaining to the identification of
creditworthy borrowers, ensuring the utilisation of the loans for those purposes
for which they had borrowed and enforcing timely repayment. Since the
transaction costs of credit markl't dealings of informal system was relatively
cheaper. thl' needy relied on them, cycn though the interest rate was exorbitant.
:\lthnugh the poverty alleviatipn programmes and banking reforms were
Intrlxluccd fnlm tllne to time, a large section of the poor and the poorest remained
til credit. In this context, the group approach adopted by the micro-
finarlL'l' pnlgramme assumed a significant place in the rural credit market of the
(luntrY The gn)wth and the spread of micro-finance activities achieved a
progress after the extensive implementation of hank linkage
pnlgramml' pf the NABARD. Morcoyer, the r-.;C;O, also played significant roles
In POpubflslng the micro-finance through their devclopment-oriented schemes,
The pnlillinent among the South Indian states.
In the g()\nnlllent Intnlduced lllicro-financc as part of the
efforts !:\l'n hl'f,'rc the entry pf Ihe g()\"crnrnent III Ihc
programllll'. Ihl' :"oiGOs played a significant rok In Ihl' promotion of Ihe
l'Ct In. lmlLll1 \' s()(:iall\ had .. ward sccl j. HIs tlHl lugh llllcfll-linance programllles.
Thl' gm l'fIllllent abo contnhllled to Ihe popularity of the programme, However.
Ihl' dl'nSity of the sprcad of the g()\eflllllent programme varied across districts.
The" Idcspread presenu: of SltCis pronHlled hy the NGOs in certain regions even
helorl' the Kutilllllhll.llrrt'l' programme could he one of thl' n::asons behind this
\;lfInl gnmth. An analysis into the district-wise progress of Ihe growth of micro-
rlnancc prograllllllc in Kerala out Ihat WayanaJ had the highest
pro[,onion 01 Ihl' hOll,eholds c()\l'n:d ulldn Ihe Klldlllll/llIshrl'C programme.
\lorcmer. Ihc Iluillher of micro-linancl' groups per panchayath was also highest
III 1111\ ""Incl.
hi
the group approach is well appreciated and accepted as a poverty
alle\'lation strategy. it is not devoid of defects, At times. micro-finance groups
fac'cJ prublems of due to group and member specific
ch;lract.:ristics. The way in which the members in these groups undertake the
functions of selection. monitoring and repayment directly influence the collective
of responsihilities and the performance of the group, Therefore, the issues
pt'r1aining these aspech in the context of the selected groups have been discussed
in the ensuing chapter,
62
4.1 Introduction
CHAPTER 4
METHODOLOGY OF THE STUDY
In this chapter we present the methodology adopted for the study of collective
action among the micro-finance group members of Wayanad district. This
chapter provides an elaboration of the various ways in which data for the present
study were collected and examines how the objectivity of the study was
ascertained with the help of various methods and instruments of data collection.
While explaining each of the objectives and hypothesis adopted for the study, we
have made an attempt to answer the following questions. Which were the
different indicators and variables selected for studying the collective action
among micro-finance groups and their members? Which were the different kinds
of methods employed for data collection? Which instruments have been
administered while collecting the data? What was the sampling framework
adopted for the study? What procedure has been followed for data collection?
The chapter also provides an explanation on how the objectivity of data
collection was ensured.
The first section of this chapter looks at the various indicators and variables used
while addressing each of the objectives and hypothesis of the study. This is
followed by an ex planation of various data collection methods such as survey
method and secondary source review adopted. Five instruments of data collection
were used for the study. Of them, the survey method was administered with the
help of the following four instruments such as group interview schedule and
member/ household interview schedule, interview schedule for bank officials, a
common interview schedule for NGO and government officials dealing with
micro-finance groups. The fifth instrument used for data collection was
secondary source review and it was carried out with the help of a structured
format. The sampling framework adopted for the selection of panchayaths,
government supported and NGO supported micro-finance groups and the member
63
households have also been provided. This chapter also explains how the data
collected from various sources were cross-checked while ascertaining their
veracity and objectivity.
4.2 Indicators and Variables of the Study
The present study has been carried out with a broader objective of analysing the
existence and nature of collective action among micro-finance group members.
The study examines the mechanisms and incentives incorporated by micro-
finance group members and their impact on collective action while selecting the
borrowers, monitoring the utilisation of loans borrowed and enforcing the
repayment of loans.
In order to address the aforementioned objectives of the study, the following
hypotheses have been framed.
4) appropriate mechanisms and incentives have not been incorporated in
micro-finance groups for collective action in the selection of borrowers,
monitoring and enforcing repayment of loans;
5) micro-finance groups do not select creditworthy borrowers, monitor the
utilisation of the loan and enforce loan repayment; and,
6) there arc no differences between government and NGO initiated micro-
finance group members in terms of their socio-economic profile and their
performance in terms of selection, monitoring and repayment.
To understand collective action among micro-finance group members, the study
analysed the institutional aspects of selection, monitoring and repayment among
micro-finance groups and members. Group characteristics such as year of
formation of the group, number of members in a group or the size of the group
and its socio-economic characteristics have been collected at the group level.
Moreover, information relating to the number of members who left the group, the
factors contributed towards members to leavc the group, duration of meetings of
the groups, number of meetings conducted by the groups in the last year has also
been collected at the group level. The financial transactions of micro-finance
members such as savings contributions of the members, provIsIons of loans,
amount of loans received from various sources have been captured from records
maintained at the group level.
The variables pertaining to group level performance such as years of experience,
group size, attendance in group meetings and the amount of savings have also
been analysed with the help of means tests to examine whether there were
significant differences between SHGs and NHGs. Similarly, means tests have
been carried out with respect to member level characteristics such as education,
age and annual income of the household to examine the differences across the
members belonging to SHGs and NHGs.
Mechanisms adopted for collective action among members have been captured
with respect to the norms prevalent in the groups such as attendance in group
meetings, duration of membership in groups, presence of saving to loan ratio and
repayment norm. The fulfilment of each of these norms across various groups has
been considered as incentive for the members to get selected for loans. A member
is said to have been selected for loan, if she received at least one loan from the
group since her participation in the group and this information has been collected.
The financial burden of the members has been captured by way of information
related to external loans outstanding, besides the loans received from NHG or
SHG.
As the members received loans from the groups were considered as those
selected as borrowers, it is pertinent to examine which factors determined the
loan amount received by the members. The analysis has been carried out with an
econometric technique of ordinary least squares. The variables comprising of
group characteristics such as participation of the members in either NHG or SHG,
caste homogeneity of the group, and group size have been analysed. Group
discussion prevalent in the group at the time of disbursal of loans has been
captured as a mechanism for selection. Fultilment of each of the selection norms
have been considered as variables indicating incentives for selection. Household
65
characteristics pertaining to per capita Income of the household, member
characteristics pertaining to external debt, caste of the members, and their number
of years of membership in the group have been analysed in detail in the sixth
chapter.
With the objective of understanding the impact of collective action In the
selection of borrowers, the perceptions or the opinion of the members with
respect to the selection procedures followed in the groups were captured, The
factors that detennined a 'very good' selection procedure expressed by the
members have been analysed with the help of a logit model. The independent
variables selected for this analysis were group characteristics such as membership
in either NHG or SHG, size of the group, and homogeneity of the group in terms
of caste. The group level infonnation with respect to the number of meetings
conducted in the last year, savings contributed by the members, presence of
group level discussions were also used for the analysis. The fulfilment of each of
the group nonns with respect to selection were considered as important variables
indicating the incentives for selection. Besides these variables, member
characteristics such as per capita income of the household, educational attainment
of the members, amount of loans received by them and their years of experience
in the group were also considered as independent variables while analysing the
perception of the members regarding the selection procedure followed in the
group.
The responses of the members with respect to the issue of loans to those who did
not comply with the group nonns were also captured to understand whether the
non fulfilment of group norms by any member adversely affected the collective
action of the group. A descriptive analysis has been carried out in the fifth
chapter to understand how collective action had been understood and perceived
by the members, as a major portion of the members were not ready to reject
issuance of loans to their co-partners who did not comply with their group
instructed norms to avail loans.
66
It was expected that the group as well as the members would monitor the purpose
of loan utilisation in order to ensure that the members used their loans in such a
way that they repaid without any delay. The most important variables captured
with respect to monitoring were the purposes of utilisation of the loans, frequency
and amount of loans received by the members. The trainings imparted to the
members to improve their skills for undertaking IGA were also captured such as
the number of training programmes attended by the members and the type of
trainings received by them. At the group level, information pertaining to the
efficiency of the group in monitoring has been assessed in terms of the ability of
the group to ensure that the members had skills to undertake economic activities,
monitor the availability of raw materials for undertaking productive IGAs and
ensure that marketing opportunities were made available to the members to sell
their manufactured products.
The institutional dimensions of monitoring have been understood with respect to
both positive and negative incentives of monitoring. These incentives related to
the sharing of profits among the members in a group, liability to repay in case of
default by another member and ensuring that other members in the group too
received loans. An important variable used to measure the efficiency of collective
action in monitoring was the participation of the members in group discussions.
The factors that influenced the members to undertake IGAs have also been
examined with the purpose that a better monitoring would result in better
utilisation of the loans for IGAs. The factors have been analysed with the help of
econometric technique of logit model by considering whether the members had
undertaken IGAs or not and this analysis has been dealt in detail in chapter seven.
Variables pertaining to group characteristics such as group size and their
membership in either NHG or SHG have been considered as independent
variables for the analysis. The member characteristics such as caste, per capita
income, education, amount of loans received by the members and their
participation in training programmes have been taken as independent variables
having a bearing on the IGAs undertaken by the members.
67
The information pertaining to the total investment cost of IGA was collected and
additional amount of money realised, if any, from sources other than micro-
finance groups were also captured. The significance of the IGAs undertaken with
the help of the loans borrowed from micro-finance groups was discussed with
regard to the financial contribution of IGAs to the total income of the household.
The efficiency of the members in terms of monitoring has also been discussed. A
descriptive analysis was carried out to capture the reasons behind monitoring
undertaken by the members and their efficiency in monitoring. A logit model
with econometric analysis was carried out to examine the various factors which
determined the efficiency of the members in monitoring. The group
characteristics such as size of the group, membership in either NHG or SHG and
homogeneity of the group in terms of caste have been used for the analysis.
Fulfilment of norms with respect to monitoring has been considered as positive
incentive behind monitoring. The member characteristics such as per capita
income of the household. education and years of experience of members in the
group have been considered as important factors determining the efficiency of
monitoring undertaken by the members.
A detailed explanation on collective action among the micro-finance members in
case of repayment enforcement has been carried out in chapter eight. Stipulated
duration of repayments for both NHGs and SHGs for various sources of loans has
also been examined. Actual time taken by the members to make repayment of
different sources of loans has been collected and it was compared against the
amount of loans received by the members. As micro-finance groups insisted on
members making repayment on an instalment basis, the members were asked
whether they fulfilled the instalment pattern of repayment. The information
relating to the delay in the repayment of the loans was also been collected and the
same has heen used to make comparison across NHGs and SHGs.
68
The repayment has been examined in terms of the average number of days of
delay in the repayment of loans. An ordinary least squares method has been
employed to carry out this analysis. Group characteristics of the memhers such as
membership in either NHG or SHG, homogeneity of the group in terms of caste,
and group size have been discussed as independent variables detennining
repayment. The repayment duration stipulated by the groups has been taken as a
mechanism while analysing delay in repayment. Both positive and negative
incentives of repayment such as social pressure from the group and incentive to
receive further loans from the groups have been taken as other independent
variables. Besides this, member and household characteristics such as education
of the memhers, whether the members had undertaken IGAs or not, monitoring
characteristics of the members, number of loans received by the members since
inception, income of the household and debt of the household from sources other
than micro-finance group have been analysed as independent variables.
The perceptions of the members with respect to their repayment behaviour and
the reasons for making repayment have also been analysed. Besides this, the
members were enquired about their sources of repayment. The differences
hetween the day on which the members received loans and the day on which they
repaid their loans have been examined for all the loans received by the
memher, to find out \\hether any particular pattern could be observed.
-t3 Methods and Instrument,; lJsed for Data Collection
The pre\cnt ,tudy on cllilective action among the micro-finance group members
has been carried out primarily by using the survey method. The study also made
w,e of the secondary source reviewal' micro-finance group records. The survey
method ha, heen used to collect information from the micro-finance groups and
member,. It was also employed to collect information from the bank officials
dealing with micro-finance transactions, officers of NGO and government
supported micro-finance groups. The method of secondary source review of the
group records has also been administered mainly to collect information pertaining
to the financial transactions of the groups and their members.
The survey was carried out with the help of interview schedules. Structured
interview schedules were prepared for interviews with micro-finance groups and
members. These schedules captured issues with respect to collective action
among micro-finance groups in terms of selection, monitoring and repayment.
The interview schedules prepared for bank officials and for officials of micro-
finance groups were not structured in nature and the information provided by
them largely served as checklists.
The interview schedule administered at the member level was used mainly to
capture individual information and opinion of the members regarding selection,
monitoring and repayment. Group level interviews were carried out to gather
information pertaining to mechanisms and incentives prevalent at SHGsINHGs.
and the financial transactions of the groups. Moreover, unstructured interview
schedules prepared to the bank officials and to the NGO and government officials
served as checklists. In addition to the two types of aforementioned interview
schedules prepared. records maintained by the micro-finance groups such as
minutes of the meeting. books maintained by the micro-finance groups having
information on loan and saving transactions were also reviewed to cross check
the information provided by the members and groups and also to collect
information on group level financial transactions. This information was gathered
during the time of the group level meetings in a specific format and it is annexed
in the appcndix (Annex No.2).
The structured group level interview schedule contained questions relating to all
important parameters of group level activities such as mechanisms of selection.
monitoring and repayment prevalent at the group level. details regarding group
level meetings, year of formation of the group, changes of group size over a
period of time, meetings conducted in the previous year, loans issued from
sources such as banks, government and NGOs, saving contribution pattern etc.
Group interview schedule was administered at the group level during the time of
regular group meetings. It was the only forum which provided an opportunity to
70
interact with and gather information from all the members in a uniform manner
,
as the household level interviews with the members were restricted to only six
members selected on a random basis from the group. The questions were asked to
all the members of the group and most of the time the answers emerged after
discussions among the members. Attending these meetings and collecting
information from the groups provided inputs on how the discussions occurred at
the group level and also how many of them were aware of group mechanisms and
incentives. Often, the discussions took place at the group level provided some
inputs on collective action prevalent at the group and hence, it supported the
findings of the study.
Secondary source reviews of records were carried out with a format and it
contained data relating to socio-economic composition of the group, group size,
details regarding loan transactions such as purposes of utilisation, amount
borrowed and amount repaid along with dates of such transactions. Information
in this tabular format was recorded immediately after the execution of the group
level interview schedule and these data were recorded against the names of each
member in a group. The financial transactions of micro-finance members
including the amount of external loans received from banks, NGOs and the grant
from the revolving fund of the panchayath were collected at the group level in
this format. The information related to meetings conducted by the groups in the
previous year was collected at the group level and the same was cross-checked
from the book records maintained by the members, wherein they had written the
minutes of all the meetings conducted by the groups from their time of formation.
Certain aspects like the borrowing of the group from the external agencies like
hanks, revolving fund of the panchayath and NGO fund were also recorded in
these minutes and copied them in the above said format. Besides the minutes
maintained hy the groups, all NHGs/SHGs maintained a record on saving
contributions of the members and another record on credit transactions and
repayment pattern.
71
Besides collecting information at the group level, the study has extensively used
data at the member level. The present study used a structured interview schedule
for households for collecting member information such as household
characteristics and the individual opinion of the members regarding selection,
monitoring and repayment prevalent in the groups. The household interview
schedule included questions relating to the efficiency with which members
complied with mechanisms of selection, monitoring and repayment, and also
regarding the level of satisfaction experienced by the members with respect to
each of these aspects of collective action. The members were also asked about
their sources of loans other than micro-finance groups. This was collected mainly
to know the actual financial burden of each member in addition to the amount
they borrowed from micro-finance groups.
The questions relating to the utilisation of the loan were included in the
household inteniew schedule. Detailed information on IGAs undertaken by the
members with respect to their amount of investment, various sources from where
the imestment emt was met, income generated from the investment undertaken
ovcr the years, the profitability of the investment and the amount repaid were
collected. This schedule also included questions relating to the compliance of the
members with mechanisms of monitoring, and incentives behind monitoring their
co-partners in a group. The household level schedule included questions relating
to the repayment pattern of loans by the members. The repayment behaviour of
the mcmoers was captured in terms of their incentives behind repayment, the
<,ourees of repayment, and the individual responses on the level of satisfaction in
terms of repayment of loans.
Two interview schedules that served as checklists were also used for cross-
checking the information provided by micro-finance groups and members. First
among them was the interview schedule prepared for the staff of government and
NGO supported micro-finance groups. Since these officers were more involved in
terms of the internal day-to-day functioning of the group by providing guidelines
to the memoers, questions asked to them were mostly related to the internal
72
functioning of the groups with respect to selection, monitoring and repayment.
They were also enquired about the conflicts of interests among the members
during the time of selection of borrowers, monitoring the utilisation of the loan
and enforcing their repayment of loans. Moreover, these officials were asked
about the issue of grants from panchayath and other sources of funds channelled
to the groups.
Another interview schedule that served as a checklist was the one addressed
towards bank officers to capture banking transactions of the micro-finance group
members. Since all groups maintained their accounts with the banks, the officials
were approached and enquired about the regularity of keeping accounts with the
banks, amount of loans issued and repayment pattern of the groups. These two
checklists also helped in ensuring the veracity and objectivity of the information
provided by the group members.
In addition to the aforementioned survey instruments and tabular format used for
data collection, interviews were also conducted with the local panchayath leaders,
the heads of NGO and government supported micro-finance groups. Often, these
interviews did not follow any particular structure and hence, interview schedules
were not prepared well in advance. Generally, they were approached to collect
information based on the experience of these interviewees with respect to their
engagement in the field of micro-finance. They also helped in providing certain
in,ights into the basic functions of micro-finance groups in the study region and
their growth over the last five years, how they helped the women both socially
and economically, their loan utilisation pattern and repayment pattern. Moreover,
all these discussions threw light upon the significance of micro-finance groups in
the context of the financial situation of the region, especially the pattern of
multiple membership of women in various groups to meet their financial crisis,
and their problems at the time of making repayment. The deliberations and
dl\cu"ion, arrived at by these unstructured interviews were quite helpful in
<.,upporting the arguments and the findings of the analysis that emerged from the
,tudy.
4.4 Sampling Framework
Wayanad district of Kerala has been selected for understanding the institutional
dimensions of collective action among the micro-finance group members. As
mentioned in the first chapter, this study was undertaken in the specific context of
Kerala because the micro-finance developments in the state offered scope for
comparing the functioning of institutional mechanisms and incentives across
government and NGO micro-finance programmes. In Kerala, micro-finance
programmes have been promoted both by the government and NGOs.
Kerala is one of the first states which adopted micro-finance programmes as a
part of the state poverty alleviation strategy. Wayanad is one of the most
backward districts of Kerala with the highest proportion of tribal population.
Moreover. this district has the highest proportion of micro-finance groups
prevalent in the state. Even before the emergence and popularity of the micro-
finance programmes in Kerala through the implementation of the government
supported micro-finance programme under the state poverty alleviation
programme. the district has had the highest presence of micro-finance groups
compared to other districts of the state. A number of poverty alleviation
programmes supported and promoted by NGOs were working in this district
,ince the early eighties and it was mainly through these NGOs that the micro-
finance programmes were got introduced to this district. Though the genesis of
the micro-finance groups could be traced from the credit groups (generally the
memhership was as high as 200 to 400) which were initiated by the NGOs,
functioning and the effectiveness of these groups were relatively lower when
compared to micro-finance groups. In course of time, these credit groups got
transformed to micro-finance groups (mainly NGO supported SHGs) with lesser
numher of memhers having a better organised structure with more focus on the
socio-economic issues of the memhers.
After the introduction of the government supported micro-finance programme or
KlIdul1l!Ja.lhree programme and its implementation in this district, the presence of
74
government supported NHGs and NGO supported SHGs increased manifolds.
The present study makes a comparative analysis of the groups that were
promoted by the government and those which were promoted by the NGOs.
Out of the three Blocks
28
of Wayanad district, Sulthan Bathery block has the
highest number of micro-finance groups and the study selected micro-finance
groups from this Block. Two panchayaths - Sulthan Bathery and Noolpuzha _
were randomly selected from Sulthan Bathery Block. Since the data on the total
number of NHGs and SHGs or the universe were not available due to problems
l)f dual
c4
membership, an equal number of groups from these two panchayaths
\\':lS selected. An equal number of groups was selected based on the assumption
th:lt both the categories of groups performed more or less equally. Accordingly, 8
NHGs and 8 SHGs were sclected from each of these panchayaths and a total of
-'2 :--JHG/SHGs were selected randomly. From each of these groups, 6 members
\\cre randomly selected and thus, a total of 192 members were selected for the
studv.
Besides the member households being the basic sources of data, the study
collected information from the staff of NGOs and government micro-finance
gruups, the leading officials of the micro-finance promoting institutions, bank
officials and the local leaders ,uch as p.mchayath members who had a major role
m deciding the allocation of revolving fund from the government. In order to
.tnalyse information pertaining to the financial transactions of the members, the
study exten'lvely made use of the records maintained by the micro-finance
groups. The Information collected from the other agencies acted as a checklist to
crosscheck the re'ponses given by the micro-finance members.
" For adminislralive purposes. each ""ITlei of Ihe slalC has heen divided inlO hlm:k panchayalhs
or hlocks and Ihe hlocks arc further div.ded inlO gram panchayalh or panchayalh. ..
~ ' I Dual membership and multipk nll:mhl'r,hips arise as \Orne members malOt3m oll'mhcrshlp 11\ more
Ihan one organisalion al a lime.
75
4.5 Procedures Adopted for Data Collection
As both the NGO and government supported groups worked independently. the
members promoted by them were approached separately. In order to get
introduced to SHGs and to the members of SHGs, the NGOs actively involved in
the promotion of SHGs of Sulthan Bathery blocks such as Shreyas, WSSM. Hilda
were approached. Through these organisations, SHGs were got introduced at the
time of regular monthly meetings convened to discuss their overall performance.
In this manner, 8 SHGs from each of these panchayaths were selected randomly
for the study.
The data pertaining to the government supported NHGs were collected from
Klldllmbashree office functioning at the district level during regular monthly
meetings. Through them, the concerned officers of the two panchayaths-
Noolpuzha and Sulthan Bathery were approached. Moreover, the group
representatives of the Community Development Society (CDS'o) working in both
the panchayaths were interviewed during regular monthly meetings. Through
these NGO representatives, the representatives of Area Development Society
(ADS") functioning at the ward level were approached to get in touch with the
NHGs working at the grass root level. Thus, eight NHGs were selected randomly
from each of these two panchayaths.
A group level interview was conducted after holding regular meetings with the
groups. Generally, group level meetings comprised of taking attendance of
participants, and reading minutes of the previous meeting followed by a
presidential address by the President or Vice president of the group and a
discussion on socia-economic issues of the members. Often, regular financial
transactions of the groups were undertaken after this, where the group
representatives were entrusted with the task of collecting the savings contributed
by the members. They also discussed about the issue of loans, if any members
were in need of loans. The amount of loan along with the purpose of utilisation
10 Governing body of NHGs or government supported micro-finance groups working at the
~ a n c h a y a t h level. .
. I Governi ng body of NHGs working at the ward level IS called ADS.
76
was also discussed in these group meetings. The representatives of the groups
maintained regular records of the groups, which included an attendance book, a
book containing the minutes of the proceedings, on account book where the
details of the financial transactions were recorded. In addition to these records,
certain groups maintained another book which contained current events and
general know ledge and in the meeting these news items were read out for the
benefit of the group members. These records maintained by the secretary of the
group were made available to all the members for references and inspection. The
tabular formats prepared for collecting information on financial transactions were
filled with the help of these secondary sources of records. Whenever differences
existed in the information provided by the members to that of what was recorded
in the books, the information recorded in the books were considered as final, as
this information was made open to all the members.
The group level questions were asked mainly to understand various kinds of
mechanisms and incentives provided for the members at each group. The group
level information also gathered adequate information on whether the groups
received external aid from the government or whether they received loans from
either NGOs or banks. Later, the officials of these banks were approached and
enquired about their savings and credit transactions. Wherever the groups
received external help in maintaining their records, as in the case of tribal groups
where the tribal volunteer assisted groups in preparing records, the officers from
NGOs or government were contacted to verify the responses given by the groups.
After collecting the required information at the group level through the interview
schedules and from records, six members of each of the selected groups were
approached. The members were interviewed at their houses where questions were
posed to them about individual opinion about groups, especially about their
responses to work in a group. The individual members were asked more about
their responses regarding mechanisms and incentives of selection, monitoring and
repayment of loans. Moreover, the members were asked about the banks where
77
they maintained their accounts and the bank officers were contacted to cross-
check the information.
In order to ensure the objectivity on data collection with respect to important
information such as saving contributions, amount and frequency of loan, date of
issue of loans and repayment, instalments of repayment, number of meetings
conducted by the group in the previous years, group formation, purpose of
utilisation of the loan, types of training programs conducted and member
participation in them, different sources (micro-finance, grant from panchayath,
NGO loan, bank loan) from where the members received loans, days of delay in
repayment, repayment behaviour of the members, group records have been
considered as the basic source to cross-check information provided by the
members. Whenever differences were observed in the information provided by
the members in a group, the information recorded in the books was considered as
final.
4.6 How Objectivity in the Data was Cross-Checked?
As discussed earlier, information petiaining to the collective action among micro-
finance groups and their members was collected for the present study. It is
significant to note that a major portion of the analysis has been carried out with
data collected from the micro-finance members (Appendix: Annex No.3) and
groups (Appendix: Annex No. I). This has raised the following questions
regarding the reliability of the information provided by the members.
How was the objectivity of the data ensured when the study analysed different
kinds of information including the opinion of micro-finance members? Were
there enough sources to supplement the opinions provided by the members? Were
there properly maintained records to cross-check the information and if so, how
was such information captured? Whether the information provided by the micro-
finance groups had been cross-checked with reliable sources outside the groups?
This section elicits answers to the aforementioned questions and emphasizes that
78
the information collected from the micro-finance members and groups had been
cross-checked in an objective manner.
In order to ensure objectivity in the analysis, information provided by the
members with regard to variables such as number of loans, loan category, date of
borrowing, purpose of loans, amount of loans, when loan was to be repaid, date
of actual repayment, amount repaid so far, and balance amount to be repaid were
captured from the group records (the format used for capturing the group level
information has been given in the Appendix: Annex No.2). Thus, the information
provided by the members with respect to each of them was cross-checked with
the group level records. Whenever differences were observed in the information
provided by the members in a group and similarly, differences were observed in
the responses of the mcmbers with that of the group records, the information
recorded in the micro-finance group book was considered as final. These records
were made open to all the members in a group. Generally, the books were
maintained hy the Secretary of the group, who was elected by the members on a
democratic basis. Doubts may raise regarding the reliability of the hooks
maintained hy the tribal groups, as most of the members of these groups were
illiterates. The records of such groups had been entered hy trihal volunteers and
often, they were cross-checked by the NGO and government supported micro-
finance group representatives. In the interview schedules prepared for the
officials of NGO and government and hank officials, there were questions related
to the reliahility of the data entered in the records of micro-finance groups
(Appendix: Annex Nos. 4 and 5). It was informed that these records were
properly accounted by these officials on a regular basis.
It is significant to note that the fulfillment of norms pertaining to selection such
as attendance norm, saving to loan ratio norm, duration of membership in the
group, and maintaining saving to loan ratio were individual responses of the
members. Under such circumstances, how do we ensure that the responses given
by the members were correct and hence, final') There was no issue with regard to
them, as they had been cross-checked from the records maintained by the groups.
79
The information pertaining to the financial transactions of the members, their
attendance in the meetings, and the date of joining the groups were recorded in
the books on a day to day basis. There was question regarding the perception of
the members on selection procedures followed in the group. This, being an
important variable, indicated the collective action on the selection of borrowers,
the information provided by the members was carefully cross-checked with the
data given by the outside sources (see interview schedules for bank officials and
NGO and GO officials: Annex Nos. 4 and 5).
There were two descriptive questions posed to the members relating to the
selection of borrowers. They were: how did they obtain loans in the absence of
norm fulfillment? And what would be the response of the members to others who
did not follow the selection norms? The responses provided by the members gave
some insights on the selection procedures followed in the group, and such
responses had not been suhjected for detailed analysis and they had been used
mainly to supplement the quantitative data. Moreover, member-specific
responses on the selection of borrowers in this particular region had also been
cross-checked with the help of informal discussions with local leaders like
panchayath members and NGO representatives.
There were two opinion-based questions posed to the members with respect to
monitoring. How did members characterize their monitoring behaviour and what
was the influence of incentives for monitoring? (Appendix: Annex No.3). As in
the case of the selection, here too, the opinions of the members on incentives for
monitoring were supplemented with information given by the NGO and
government supported micro-finance group representatives (Appendix: Annex
Nos. 4 and 5). The information related to the participation of the members in the
training programmes were collected from the book records. Similarly, the
information relating to the utilization of the loan and the income generated from
the activity had been cross-checked with other members and outsider sources on
an informal basis.
HO
the objectives of the study was addressed by various data collection methods and
the instruments used. Sampling framework followed for data collection has also
been provided and it is followed by an understanding on the procedures followed
for data collection. In this chapter, we also explain how the objectivity of the
study was ensured by way of cross-checking the data.
82
Most of the important infonnation related to the repayment such as amOunt
repaid, date on which the amount to be repaid, balance amount to be repaid, etc.,
were captured with the help of a format prepared for recording group data (Annex
No.2). Such quantitative information also supported the analysis carried out with
respect to delay and delinquency in repayment. Besides this, the information
related to the date on which the members repaid their loan and the amount to be
repaid, etc, were used to capture the repayment pattern of the members. The
infonnation pertaining to the financial transactions of the members had always
been properly accounted in the group records. Their documents had been cross-
checked by the government officials during the time of application for
panchayath grants, and similar accounting had been carried out for loan
application to the NGOs and to the banks.
The information relating to the repayment behaviour of the members happened to
be opinions of the members and they were supported with quantitative data and
information collected from bank officials and officials of the group. There were
questions related to the incentives for repayment by the members. The response,
being the opinion of the members, had been cross-checked with respect to
information provided by the officials and group records. Moreover, information
pwvided by the local panchayath leaders and NGO leaders too supported the data
given by the members, especially with regard to repayment and its pattern in this
Thus, from all the above discussed facts, we can say without any hesitation that
the present study has used the data collected on an objective basis. Often, the data
were noss-checked with supported evidences from different sources, which
impro\ed the reliability of the analysis.
-t.7 Summary
This chapter examined th h d I
e met 0 oogy adopted for analysing the collective
actltln micro finance b
c- - group mcm crs. It discussed in detail the indicators
.Ifld \ Clrlahlcs used \\ hile add,,' h b' .
n:ssmg teo of the study, and how each of
81
CHAPTERS
SAMPLE AREA, MICRO-FINANCE GROUPS AND
MEMBER HOUSEHOLDS: A PROFILE
5.1. Introduction
It is significant to examine the contextual factors contributing towards collective
action among micro-finance group members. The emergence of collective action,
its nature and existence depends, to a large extent, on various external factors. In
the present study, the emergence and growth of micro-finance groups have been
analysed in the context of the regional factors pertaining to Wayanad district. A
detailed analysis has been carried out on the factors contributing towards the
coverage and spread of both government initiated and NGO initiated rnicro-
finance groups in this district. The group specific factors and the socio-economic
profile of the micro-finance members, which have a bearing on collective action,
have also been discussed.
While examining the socio-economic characteristics of the micro-finance group
mernbers of Wayanad district, the study seeks to answer the following questions.
Whether the members participated in the programme are the needy'2? What
factors have influenced them to join the programme? Whether the members who
joined the programme left the same? If so, what factors contributed to do such
What is the rationale behind the selection of the sample? What is the
socio-economic composition of the members of selected groups? How do groups
work in terms of conducting regular meetings and ensuring saving contributions
to the group? Arc there some differences hetween the government initiated and
NGO initiated groups in this This chapter examines each of these
questions in detail and tries to answer them in the context of the micro-finance
programmes of Wayan ad district.
" Needy represents the poor who are financially and socially deprived. II a:-sumed that participation
in the programme enables them to undertake [GAs and hence, poverty allevlatlOn.
83
5.2. Profile of Wayan ad District
Wayan ad, one of the backward districts of Kerala, was formed as the 12th district
of the state on November 1
st
1980. This district borders Karnataka and Tamil
Nadu states. It is a rural economy and has 25 panchayaths and one municipality.
Almost 37 per cent of its total geographical area is forest and about 54 per cent of
the land is used for cultivation.
According to the Census of India 200 I, the total population in the district was
780,619. The decadal growth rate of population during 1991-2001 was 16.14 per
cent. Even though Wayanad ranks the least among 14 districts of the state in
ternlS of population size, it occupies a special significance in terms of the high
presence of backward sections such as Scheduled Castes (SCs) and Scheduled
Tribes (STs). The SC population was 33,364, which formed about I per cent of
the total SC population of the state, and ST population was 1,36,062, which
formed about 37 per cent of the total ST population of the state. Of the total
population in the district, 4.3 per cent and 17.4 per cent belonged to SC and ST
communities respectively. The sex ratio had changed in favour of the women
during the last decade from 966 in 1991 to 1,000 in 200 I. The work participation
rate of the main and marginal workers of the district in 1991 was 38.8, while it
was 38.76 in 200 I. The primary sector consisting of agriculture, forest etc., is the
major employment providing sector of this district. According to 200 I census, the
literacy rate, which was 85.21 per cent for the district as a whole, was 89.8 per
cent for males and 80.7 per cent for females. The female literacy rate was less
than the state average.
The original inhabitants of the district were trihals. Though widely referred to as
'tribal population' they are not a homogeneous category. There are various
subdivisions in the tribal community of this region, viz., KlIrumars, KlIrichias,
Kaltllllaika, Palliya etc. The non tribals have migrated to this region from other
paris of the state. By 1950s and 1960s, people from the erstwhile state of
Travancore migrated to this district for cultivation of plantation crops. They
subsequently settled down in this district. A majority of the immigrants were
K4
Syrian Christians and the rest constituted Hindus and Muslims. They had taken
over the land of the tribals, which they were using for shifting cultivation. The
influx of the migrants gradually deprived the tribals from owning land, their only
means of subsistence. By 1976, about 60 per cent of the tribal households had
become landless with the remaining as landless field labourers in the Wayanad
region (Bijoy 2003). In due course of time, migration to this region gradually
reduced. According to the 1991 Census, 26 per cent of the population of this
district had migrated from other districts of Kerala.
The inhabitants of Wayanad district directly or indirectly depend on agriculture
for their livelihood. The major crops cultivated in this area are paddy, coconut,
tea, coffee, mbber, ginger, pepper, banana and tapioca. It is significant to make a
note that this district ranks first in the state in the production of these cash crops.
A majority of the mral people are small and marginal farmers, even though there
existed large estates of tea and coffee plantations.
For a majority of the people, agriculture constituted the major livelihood option,
and there was no secondary occupation to support themselves at times of agrarian
crisis. This can be aptly stated in the case of the agrarian scenario of the country
after Iiberalisation. Since the Iiberalisation and the opening up of the economy,
there has heen a drastic decline in the prices of the cash crops, which the people
of Wayanad had been cultivating. This corroborates side by side with the
tluctuations in the international prices of cash crops (Krishnaprasad 2004). The
farmers, especially small and marginal ones, were badly affected because the
price decline was associated with drought in this region and the diseases of the
cash crops, which eventually brought down the total agricultural production.
Even though this region had big plantations, a majority of the people were small
and marginal farmers and they depended on agriculture for their livelihood. As
the entire region had been experiencing agrarian crisis in the last five to eight
years, the people in this area were finding it difficult to survive. Some of them
even migrated to neighbouring states in search of jobs as agriculture was not
85
promISIng. Thus, the regIOn once known for inmigration is now facing the
problem of out-migration, and it is the category of small and marginal farmers
who have heen adversely affected (Sainath 2004a, 2004b, 2004c). Thus, the
drastic fall in the prices accompanied by the fall in agricultural production has
given a serious setback to these marginal and small farmers.
With the fall in the prices of agrarian products in the international markets, the
people of this district were adversely affected. Some of them borrowed from the
fonnal banking institutions by pledging their lands. As agriculture was not
remunerative, they could not generate adequate income to cover their
expenditure. Thus, the cost of agricultural production, including wages, became
very high. Because of the sticky nature of wages, it was difficult for them to bring
it down. This adversely affected the small and marginal farmers. Most of them
were forced to pledge their land, their only asset, hoping that they could repay.
But, the situation had not changed and had become even worse as they faced
severe drought and constant pest attack on their crops. Thus, those who borrowed
from the formal institutions by pledging land could not repay back their borrowed
amount and hence, they lost their claim to borrow for the second time. Even
moneylenders too reduced their loan amounts, as they were aware of the financial
situations of their clients. Thus, agrarian crisis stood out as a major bottleneck in
the financial conditions of those who settled there. In short, most of them found it
di fficult to repay the amount, which they had already borrowed, and at the same
time, it was difficult to get additional loan from those formal institutions
demanding collateral as they had already pledged their assets.
Thus, the district, once famous for the cultivation of profitable cash crops and a
region of hope for new settlers is going through a severe agrarian crisis. The
newspaper reports indicate that there were numerous instances of people
migrating to neighbouring states in search of agricultural jobs, business
enterprises reaching standstill, increasing number of unfinished houses, girls
remaining unmarried due to insufficient money to be given as dowry and for
conducting marriage and the like (Sainath 2005a and 2005b). In short, a severe
R6
set back to the agrarian economy adversely affected the socio-economic set up of
the district. Economic conditions became even worse as the money, which
farmers borrowed for agricultural purposes, could not be repaid. During the
period of three years, from June 200 I to June 2004, about 94 farmers had
committed suicide as they could not repay the bank loans (Krishnaprasad 2004).
A study on the farmer suicides in Wayanad district by Mohanakumar and Sharma
(2006) has brought out that the liberalisation policy adversely affected the
farming community of this district. The people depending on agriculture were as
high as 47 per cent in Wayanad. It is interesting to note that they were engaged in
the production of export-oriented cash crops such as pepper and coffee whose
prices have been fluctuating with the changes in the global market. Fall in the
prices of the crops along with the crop failure gave a severe blow to the financial
conditions of small and marginal farmers who did not have any other sources of
income. The study has reported that between January 2003 and October 2004,
about 36 farmers committed suicide which constituted almost 50 per cent of the
farmer suicide of Kerala during that time. The study has revealed that all these
farmers had borrowed from various financial sources such as nationalised banks,
cooperative societies, moneylenders and friends and relatives. This debt
accumulated was mainly to finance non-productive purposes such as repayment
of previous borrowings, treatment and conduct of marriages. The authors suggest
that unless farmers' conditions were addressed in terms of changing macro
policies, regulating taxes, prices and imports or through the provision of
institutional credit and some alleviating sops, the conditions of the farmers could
not be improved on a sustainable basis.
In addition to the current agrarian crisis and the resultant economic backwardness
of the district, the tribals of this district suffered from social deprivation. In
Kerala, tribals live in hilly regions of the districts like Palakkad, Idukki and
Wayan ad. The tribals are considered as the 'outliers' of the so-called Kerala
model of development (Kurien 2(00), as they have not benefited from the social
changes that had gone through the state. Economically too, they are the
X7
downtrodden community. A majority of them live in forests and depend on forest
products for their livelihood. Since they live and earn their livelihood from the
common property resources, i.e., forest, they do not have any legal entitlements
to the land. The new migrants from the southern districts exploited them and had
taken over the land which they were cultivating. Consequently, many tribals had
been working as bonded labourers of the tea and coffee estates (Panoor 1963 and
1989). The organisational strength is also not present among them. So, they
remain as the neglected segments or the 'outliers' of the Kerala model of
development.
From the above discussion, it emerges that the people of Wayan ad both tribals
and immigrants have been facing severe agrarian crisis. There was a great
demand for credit among them for repaying their old debt, for meeting the
consumption needs and make investment in agriculture. Some of them have
borrowed from the formal sources of credit, while others have depended on
informal credit sources. Those members or the immigrants having assets used
formal credit sources, whereas informal sources wcre utilised by those not having
adequate physical collateral and access to commercial banking. But, the tribal
members have been facing the problems of meeting their credit requirements
from both the formal and informal sources. Since these members do not possess
physical collateral, it is difficult for them to access credit from formal sources.
Similarly, the tribals could not approach informal credit institutions in the early
years due to lower monetary requirements. However, their changing life-style,:l
with higher credit absorptive capacity has forced them to access more credit.
Thus, both the tribals and the immigrants have been facing financial problems.
Therefore, it is pertinent for the present inhabitants of this region to depend on a
reliable financial institution which can meet their credit requirements without
loosing its sustainability:l4.
)) Some tribal members stated that they were educating their children. undergoing medical
treatment etc., and these new forms of expenditure were the results of the changing life-style.
" In order to ensure the sustainability of credit institution. the members should be encouraged to make
their small saving contributions.
5.3. Micro-Finance Programmes of Wayanad
Wayan ad has both NGO promoting SHGs and government supported
KI/(!lIl11haslzrec groups, i.e., NHGs. Kudlllllbashree programme was introduced in
this district through panchayaths in two phases: first one in 1999, and the second
one in 200 l. By 200 I, the programme was introduced in all the 25 panchayaths
of this district.
Prior to the introduction of Kudumbashree. varIOUS voluntary organisations
working III this region also started SHGs. Some of them were secular
organisations. while others were religious organisations engaged in the promotion
of economic and social upliftment of the people. Among religious organisations,
church based organisations were very active. One such church-based organisation
was Shreyas. This diocese based institution was established in the 19705. Much
before mo\ing on to the formation of SHGs, they had introduced community-
based organisations called credit unions. Primarily, they were engaged in savings
and credit operations. They were comparatively larger in size and had a
membership of 150 to 300 members and generally, men were the members.
These large sized groups had the inherent problems of management and peer
monitoring (Rajasckhar 2(00). In these groups, repayment was ensured mainly
through closely-knit networks based on religious grounds and since they were
church based. the parish priests had a higger say in these groups. The success of
smaller micro-finance groups in India and other developing countries inspired
them to initiate groups with similar features. They slowly moved on to the idea of
,mailer groups of 10 to 20 and gave more importance to the savings and credit
operations. As against giving membership to the male heads of the households in
the case of credit unions. they gave emphasis to women-under micro-finance
programmes. They thought that compared to men, women maintained good credit
and saving records and it was easy to reach every family through women.
In addition to the micro-finance groups formed by religious organisations, there
were some secular institutions which considered group approach of SHGs as a
ha.,is for development. Among them, NGOs like Wayanad Sarva Seva Mandai
(WSSM), High land Development Agency (Hilda) and RAST A came to the
forefront as far as self-help promotion was concemed. Often, SHGs were
considered as agencies for the identification of the beneficiaries of various
development programmes and participation in SHGs was a prerequisite to avail
benefit from such voluntary organisations. The identification of members,
formation of groups, management of the SHG operations, monitoring the day-to-
day functions, enabling the groups to obtain bank loans under the SHG bank
linkage programme, ensuring repayment of the loans borrowed etc., were
primarily executed with the assistance of NGOs. It was a great help for those
poor participants who had been depending on the banks for a long time, and did
not have reliable access to institutional credit for a variety of reasons including
lack of collateral.
As NGOs were actively participating In the SHG promoting operations, they
were not ready to welcome the newly introduced Kudumbashree programme of
the state government. According to the Kudumhashree programme
duplicated the existing ones and the work which they had been doing for a long
time. They thought the supervision extended by them might not be continued
under the new system. However, some NGO initiated SHG mcmbers expressed
their interest to take part in the government programme as the participants of the
government programme received monetary benefits:l6 from the panchayaths. Such
a shift in the attitude of the members gained momentum once the government
,tarted identifying the beneficiaries of the various developmental schemes based
on their participation in the KlIdulIlhllshree programme.
The participation of women in KlIdumbashree programme has been made as one
of the criterion for the identification of beneficiaries by the panchayath.
Consequently, members who had already joined the NGO initiated SHG
programmes started registering in the Kudumhashree programme. Once the
" The interviews with the chief executives of all the NGOs from where the data were collected
expn:...,...,ed su<.:h a viewpoint. . .
". According to the Ninth plan, to per cent of the Plan outlay ot the LSGIs was earmarked tor Women
Component Plan and it was channelled through NHGs.
90
NGOs realised that the financial needs of the members were of paramount
importance and it was impossible to continue their development efforts without
people having membership in NHGs, they changed their stance. Similarly, the
panchayaths too realised that the members could not be uprooted from the other
organisation and such uprooting would not help the people in the long run.
Gradually, the initial tussle between the membership in the NGO and
KlIdtlmbashrce programme got minimised. Therefore, the flexibility in keeping
members in both the programmes led to the emergence of dual membership in
NGO and government programmes. This was more predominant in case of those
groups which had already maintained membership with the NGO programme.
Similarly, the newly emerged government programme of Klldumbashree, because
of its wider popularity in ensuring services to the people from the government,
could start its operations in those places where the NGOs could not flourish their
operations. This led to two broad classifications of micro-finance groups in this
region. First. those SHGs with a dual membership in both the programmes.
Second, those groups with a single membership in government programme.
The NGO personnel played an active role in the groups which were initiated by
the NGOs. Various steps involved in the formation of NGO initiated groups were
as follows. The workers from the NGOs generally held an introductory class
about the socioeconomic significance of the micro-finance groups to the poor,
explained the day-to-day operations of the micro-finance groups, and helped
members in maintaining reports and bank accounts. They visited the groups once
in a month, monitored the performance of the group at every stage to assess
whether the group could be provided with external finance. They also strictly
monitored those groups which received bank loans and tried to ensure that the
groups repaid the loan instalments on time.
On the other hand, panchayath ward members established government initiated
KlIdllm!Ja.lhree groups and they instructed the members about the financial
benefits, which were likely to be obtained from poverty alleviation schemes of
the panchayath. Most of the NHGs had come into existence largely because of
9t
the interest and the initiative extended by the panchayath ward members. These
politically elected ward members considered NHGs as vote banks, as they
showed interest more in channelling financial assistance in the form of revolving
fund. The discussion in the field revealed that there were political biases while
establishing groups and disbursing the benefits.
Government initiated groups were supported through panchayaths. In order to
select the panchayath, we needed to select that block with the highest proportion
of households covered under the micro-finance programme. Moreover, the
selected block should have large number of SHG promoting NGOs. In Wayanad
district. there are three block panchayaths; Sulthan Bathery, Kalpetta and
Mananthavady. The participation of the households of these three blocks in
micro-finance programmes has been given in Table 5.1.
Table 5.1: Distribution of Households in Micro-Finance Groups III Wayanad
District
Name of the Total Number of Households (% )
Block number of households covered under micro-
households covered in micro- finance groups to total
finance j!roups households
Sliithan Batherv 64.047 31,4R2 49.15
Kalrctta 47,299 20.881 44.15
Mananthavadv 52.564 25.176 47.90
Distmt
.
1.63.910
77,539 47.31
Source: Data from BPL survey of 2002
From Table 5.1. it can be seen that compared to three blocks, the total number of
were highest in Sulthan Bathery block. As we stated earlier. since one
member from each household participated in micro-finance programmes, it is
necessary to look into the intensity of the programme in terms of the proportion
of households covcred under the programme. The proportion of households
covered was the highest in Sulthan Bathery block. This block could be attributed
to the presence of large numbcr of NGOs.
" The difference on Ihe IOlat numhcr of hou,chotd, and Ihe proponion of households covered in Ihe
co'e of Tohb 1.2 and 4.1 were due In Ihe difference in Ihe year from where Ihe daw were collecled.
'rne numher of SHG, hod increased in reccnl years and hence. figures given in Tahle 3.2. which was
the lalc,1 onc. were more. BUI, Tahle 4.1 shows Ihal Sullhan Balhery had Ihe highesl proponlon 01
SHG panicipalion compared 10 "lilhe hlocks of Wayanad.
92
5.4. Sample Design and Size
This study has made a comparative analysis of the collective action amono the
'"
micro-finance group members at various stages of credit disbursal, its utilisation
and repayment in NGO and government initiated programmes. Wayanad district
was selected for the study. as it had the highest proportion of households covered
under the micro-finance programme. It was also one of the backward districts of
the states. An interesting feature of the district was that it had both NGO initiated
and government initiated groups. Many NGOs supporting SHGs were actively
working in this district. Government programme was spread in all the
panchayaths of this district. Two panchayaths were randomly selected from
Sulthan Bathery block, where the proportion of households covered by micro-
finance programmes was the highest. Two panchayaths selected for the study
were Sulthan Bathery and Noolpuzha.
We selected an equal number of NHGs and SHGs from each of the GPs,B This
was under the assumption that each of these two categories performed more or
less equally. A dissimilar proportion might result in dissimilar results. Therefore,
from each of these GPs, 8 NHGs and 8 SHGs were randomly selected so that the
result would remain unbiased. From each of these groups, six members were
selected randomly. Thus, a total of 192 members were selected randomly from
the 32 micro-finance groups. The instruments used for the study were interview
schedule and checklists. The interview schedule was a major instrument with
largely close-ended questions for collecting information. The information about
the groups was gathered from the bank offiCials, NGO and government
personnel, and grassroots level micro-finance group promoters through the
checklists prepared. Moreover, secondary information about the socio-econornic
profile of all the members of these 32 groups, especially their savings and lending
operations since joining the group, purpose of utilisation of the loan and
repayment of the loans borrowed were also collected. This information was
collected from a total of 524 members.
" Even though KuJ,"nb(/.\hree maintains records about the number of NHGs in a panchayath. the data
cannot be taken as fully reliable as Ihere are chances of dual membershIp.
93
The household interview schedule collected information about the incentives and
mechanisms behind the selection of borrowers, monitoring the purpose for which
loans were issued and enforcing the repayment of the loans. The collective action
prevalent at the group level among the micro-finance group members was
captured through group discussions covering the aspects such as the selection of
borrowers, monitoring and ensuring repayment of the loans. From these
interviews, the perception of the members on the collective action was also
obtained.
5.5. Profile of Selected Gram Panchayaths
Two gral1lrl panchayaths selected from Sulthan Bathery block were Sulthan
Bathery and Noolpuzha. The former is a semi urban panchayath, covering three
villages, viz., Kidanganadu, Kuppadi and Sulthan Bathery. Most of the NGOs
like Shreyas, WSSM. Voice, Hilda have their head offices located in Sulthan
Bathery as it is semi urban. The latter is a rural panchayath, which is adjacent to
Kamataka and Tamil Nadu states. It spreads in three villages, namely,
Kidanganadu, Kuppadi and Noolpuzha. Two villages are common for both of
them as these are neighbouring panchayaths. Tribals, the original inhabitants of
the region, constituted 6 and 50 per cent of the total population of the Sulthan
Bathery and Noolpuzha panchayaths, respectively.
At the time of fieldwork, Sulthan Bathery panchayath was being ruled by the
United Democratic Front whereas Noolpuzha had Left Democratic Front'9. As
these GPs were required to reserve the position of President to women
candidates, women representatives came to power in both the panchayaths
4o
. An
informal interview (2004) with the panchayath presidents revealed that the
participation of the women in micro-finance programme was mainly to gain
.w In the recent etection to the LSGls conducted in September 200S, both the panchayaths were
occupied by LDF governments. . . .
'" As the gram panchayaths were ,upposed to allocate D per cent reservallon for women candIdates.
women representatives were as panchayath Presidents, once in. three ve AI
the time of interview bolh Ihe panchayaths were ruled by women preSIdents. But, II changed afler Ihe
elections conducted in Seplember 200S.
94
financial benefit as income from other sources was limited due to the area
specific problems pertaining to agrarian crisis.
As mentioned earlier, ADS is a coordinating body of NHGs at the ward level.
Since Sulthan Bathery has 18 wards, it had 18 ADS, whereas it was 13 for
Noolpuzha. Generally, NHG members were asked to participate in all panchayath
activities as such a participation enables the elected members to have contact
with the pUblic. The panchayath, however, insisted that SHG members should
participate in rallies and marches organised by the panchayath members to serve
their political interest. Thus, although NHGs were expected to bring socio-
economic empowerment among women, the indications were that they were
being utilised by the political parties to serve their interests. NGOs were against
this attitude of the panchayaths where they insisted that the SHG should aim at
social awareness and empowerment. Of course, the participation of women in
these public activities was good since some of the women panchayath members
hailed from these grassroots level community based organisations in which the
participation of the members in the political sphere improved their social
confidence.
Both panchayaths have Christian, Muslim and Hindu communities. This region
has high presence of tribals. Even though the term tribal is used to distinguish
between tribals and non tribals, tribals are not a homogeneous category. Tribals
consist of Kurumars, Paniya. Kattullaikka, Kurichiya and each of them has its
own separate clans and lives in its settlement. Kumars are the socially and
economically better off sections among the tribals as most of them own some
land. Other categories of tribals such as Palliyas and Kattunaikkas are landless
and they mostly reside in the forest.
The tribals have been neglected, socially and economically. They are the most
needy and hence. micro-finance programmes have a potential role to play while
uplifting the socially and economically backward sections. NGOs have been
promoting SHGs in this region; but a majority of the groups promoted by them
95
are non-tribal. It may be because of the higher costs of promoting tribal SHGs
that the NGOs are reluctant to promote SHGs among them. But, later, with the
government involvement and especially after the introduction of the
Kudumbashree programme, micro-finance groups were promoted and
popularised among the tribals. Generally, the tribal groups were initiated by the
panchayath members of the respective wards and were promoted by the tribal
volunteer. The most important reason behind their participation was to get
financial assistance. Funds under the Tribal Sub Plan were channelled through
these NHGs. Thus, one of the incentives for them to join government programme
was to gain financial benefit from panchayath. According to the Ninth Plan
guidelines, a revolving fund of Rs. 25,000 should be disbursed to tribals under
the Tribal Sub Plan and Rs.IO,OOO to the general category under Women
Component Plan.
5.6. Information Pertaining to the Selected Micro-Finance Groups
Even though the two terms SHGs and NHGs were used to make a distinction
between the government initiated and NGO initiated groups, there were not many
differences between them as far as their day-to-day internal operations were
concerned. Each group consisted of 10 to 20 women members. It was generally
through the government and NGO personnel that they came to know about the
micro-finance programme. The promoting agencies had been providing regular
guidance to the groups in matters such as writing reports, opening bank accounts,
assisting in maintaining savings and lending operations and for conducting
training programmes.
The year of formation of the groups varied from one type to the other. Higher the
number of years of membership in a group, the better was the experience of
members in the micro-finance programme. Based on the year of fonnation, the
groups were divided into three categories: those fonned during 1996 to 1998;
second category of groups were those fonned during 1999 to 2000; and those
fonned during 2001 to 2002 belonged to the third category. Since the
Kudumbashree programme was introduced in two stages of 1999 and 2001, there
96
were no better experienced among In general, the least
experienced groups were more among NHGs, while most of the SHGs were
formed well before the year 2000 (Table 5.2).
I 52 D b f
Tab e ..
(stn utlOn 0 Sample NHGs and SHGs (%) by Year of Formation
Year of formation of the
NHG (n=16)
SHG (n=16) Total (n=32)
j!roups
1996 to 1998 -
37.5 18.8
1999 to 2000
31.3 25.0 28.1
2001 to 2002
68.8
37.5 53.1
Total 100.0
100.0 100.0
Did women know each other before they became members of micro-finance
This question becomes important as past familiarity helps in the
collective action. The data collected from 192 members show that nearly 69 per
cent of the members were neighbours, while about 7 per cent of them were
members in the earlier organisation. Thus. about 75 per cent of the sample
members knew each other (Table 5.3) and this implied very good precondition
for collective action among members.
Table 5.3: Distribution of Sample Members by their Familiarity before Joining
the Group
Type of familiarity Percentage of members (n=192)
No familiarity before joining the group 24.5
Neighbours 68.8
Members of earlier organisation
0.7
Total
100.0
What motivated women to join in the micro-finance groups? An overwhelming
response to this question (Figure 5.1) was to meet the urgent financial needs. The
discussion with panchayath leaders also corroborated the above. This indicates
that people were economically needy and it was for this reason that they joined
the programme. This implies that there was homogeneity of interest among most
of the members who joined the micro-finance groups.
97
Figure 5.1: Factors Influencing the Members to
Join the Programme
2.1
.. To meet the urgent
financial needs
To have sa\ings
o To have cooperation with
others
o Need to have self-
employment
Panchayat rule insists
them to join
The promoting agencies expected that the women, who joined the micro-finance
groups, would continue to remain as members. At the same time, there was no
binding on the exit of the members. Table 5.4 shows that over 78 per cent of the
groups experienced one or more members leaving the group.
Table 5.4: Distribution of Sample Groups (%) by the Number of Members
Le' h G avmg t e roups
Number of NHG (n=16) SHG (n=16) Total (n=32)
members who left
the group
None 25.0 18.8 21.7
1-5 50.0 68.8 59.4
Above 5 25.0 12.5 18.8
Total 100.0 100.0 100.0
What factors contributed for the members to leave the groups? The factors could
be divided into three types: one programme-specific, two poverty-specific and
three poor governance within the groups. Financial problems contributing the
members to exit imply the inability of women to contribute regular savings to the
group. This could be interpreted as poor design of the programme. Since micro-
finance groups were expected to motivate women to contribute regular savings,
these programmes should have either convinced the members about the
98
significance of saving or changed the conditions relating to saving contributions
to suit the needs of the members (Figure 5.2).
About 41 per cent of the NHG members and 34 per cent of the SHG members
had left the groups on account of inability to contribute savings. This implies that
design specific problems were common to both the types of programmes. Poverty
related factors imply migration and financial problems. Given that the region has
been undergoing agrarian crisis, distress migration was an equally important
reason for members leaving the micro-finance groups. Finally conflicts within the
group resulting in the exit of members implied poor governance within the
groups. A larger proportion of NHG members left the groups due to governance
problem.
50
45
40
~ 5
S30
C:25
~ O
Gi15
1l.10
5
o
Figure 5.2: Factors Contributing Members to Leave
the Programme
40.7
Financial
problems
13
1.7
Lack of
cooperation
from family
members
Left the
place
Factors
25.9
.7
Physical Internal
illness dispute/
conflict
within the
group
[J NHG
.SHG
The group size in terms of the number of members in a group varied across two
types of programmes. We mentioned in the second chapter that small sized
groups were considered as an important determinant of collective action, as
higher number of members in the group might lead to the problem of free riding
in terms of sharing the responsibility and enjoying the benefits. A larger
proportion of the groups had more than 15 members. Interestingly, half of the
NHGs could be stated as large (Figure 5.3). This was because of the instructions
99
they received from the panchayath that there should be at least 10 BPL
b
41 . b
mem ers In a group to receive enefits from the panchayath.
Figure 5.3: Distribution of Groups by their Size
60
50 50
-I
50
I
37.5
I
GI 40
I
C)
$
\_NHG\
c
30
GI
...
18.8
_SHG
...
GI
20
D.
12.5
10
0
15 and less 16-18 Abo\ 18
Group Size
. ~ - - - - . - -
An important factor facilitating collective action among the members is the socio-
economic homogeneity. A classification in terms of social composition of the
group was done to examine whether the members belonged to homogeneous
groups or not. Most of the groups tried to maintain homogeneity in terms of
social categories such as castel tribe. Some of the groups maintained exclusivity
for certain social categories and this was applicable more in the case of tribals.
For the sake of analysis, we classified the groups into three categories; non-
homogeneous groups, medium homogeneous groups and highly homogeneous
groups. A group is said to be non homogeneous, if, at least, 50 per cent of the
members in that group, do not belong to a particular social category such as castel
tribe. A medium homogeneous group is one whcre 50 to 80 per cent of the
members belong to a particular social category. If more than 80 per cent of the
members in a group belong to a particular social category, that group is
considered as highly homogeneous. The classification of the groups in terms of
their homogeneity given in Figure 5.4 shows that a relatively high proportion of
41 The minimum number of memhers in NHGs is prescribed to them. even though the maximum is not
given.
100
NHGs belonged to high homogeneity category as most of these groups were
formed for tribals (Table 5.5).
70
60
CP
50
Q)
.l!I
40
c
CP
30 u
..
CP
a.
20
10
0
Figure 5.4: Distribution of Groups by their
Homogeneity
12.5 12.5
No homogeneity
- ~ - - - - -
37.5
25
Medium
homogeneity
62.5
High homogeneity
Homogeneity of the group
L-_____________ _
I.ONH.Gj
.SHG
Table 5.5: Distribution of Sample Groups by Their Social Status Category across
P h h 4'
anc avat
s -
Nature G P name Non-tribal Tribal Total (%)
of the groups groups
j!roups (%) (%)
NHG Nooll1uzha 37.5 62.5 100.0
Sulthan Bathery 62.5 37.5 100.0
Total (n-16) 50.0 50.0
[00.0
SHG Noolruzha 87.5 12.5
[00.0
Sulthan Bathery 87.5 12.5 100.0
Total (n= 16) 87.5 12.5 100.0
As noted earlier, Noolpuzha has relatively larger concentration of trihals.
Consequently, over 62 per cent of the NHGs in this gram panchayath were tribal
groups as against only 37.5 per cent of NHGs in Sulthan Bathery, considered to
be semi urhan area. SHGs were formed for non tribals even in tribal concentrated
gram panchayath of Noolpuzha. This could be attributed to the following. One
NGO personnel stated that the costs of promotion of the tribal groups were
relatively high as compared to the formation of non tribal groups. Hence, NGOs
"The source for this and the following tables is the primary data collected by the researcher. unless
,pecitied otherwise.
101
facing the problem of funding did not show much interest to include tribals in
micro-finance groups. However, some NGOs like Shreyas had a different
approach to tribals. This NGO had a separate programme targeted towards tribals
and the micro-finance programme came under their Tribal Development Plan.
To conclude, SHGs have been existing in the study area for relatively longer
period as compared to NHGs. This implies that SHGs were more experienced in
micro-finance operations. Further, the size of the SHGs was smaller as compared
to NHGs. These differences, which were confirmed by means test in Table 5.6,
imply that SHGs were better placed in so far as the collective action was
concerned.
Table 5.6: Results of the Difference of Means Test between NHGs and SHGs for
Grouo Variables
Types Years of experience Types Group size
Mean Mean T Mean Mean
difference value difference
NHG 2.313 NHG 17.063
(0.849) 1.063 4.604* (3.381) -1.500
SHG 3.375 SHG 15.563
(1.975) (2.952)
Note: The figures in the parenthesis indicate standard deViatIOn
* Indicates significant at I per cent level
5.7. Socio-Economic Profile of the Micro-Finance Group Members
T value
-3.434*
Table 5.7, which provides socia-economic profile of the 192 sample members
from NHGs and SHGs, ~ h o w s that there were the following differences between
NHG and SHG members.
50 per cent of the NHG memhers were tribals as compared to 18.8 per
cent in the case of SHGs.
Nearly one third of the NHG members belonged to the age group of 30
years and less as compared to 25 per cent among SHGs.
Over 55 per cent of the NHG members were illiterate or completed I to 7
years of schooling as compared to only 41 per cent of SHG members.
102
The proportion of members having agriculture and wage labour as
principal occupation was 76 per cent in NHGs while it was less than 70
per cent in SHGs.

Over two thirds of the NHG members were having annual income of less
than Rs 5,000 as compared to only 14.6 per cent SHG members.

Nearly 91 per cent NHG members belonged to BPL category as compared
to 78.1 per cent in the case of SHGs.
Table 5.7: Distribution of Sample Members (%) by their Socio-Economic
Ch d N f h G aractenstlCs an ature 0 t e roup
Characteristics Categories NHG SHG Total
of the members (0=96) (0-96) (0-192)
Tribe/non tribe Tribal member 50.0
18.8
4
<
34.4
Non tribal member 50.0 81.3 65.6
Age 30 and less 32.3 25.0 28.6
30-50 58.3 68.8 63.5
50 and above 9.4 6.3 7.8
Education Illiterate 27.1 5.2 16.1
1-7 schooling 27.1 36.5 31.8
High school & above 45.8 58.3 52.1
Occupation Agriculture 25.0 28.1 26.6
Wage labour 51.0 41.7 46.4
Others 24.0 30.2 27.1
Annual income Up to Rs. 5,000 64.6 40.6 52.6
Rs. 5.000-10,000 28.1 38.5 33.3
R,. 10,000-20,000 4.2 17.7 10.9
Above Rs. 20,000 3.1 3.1 3.1
Poverty status BPL
90.6 78.1 84.4
APL
9.4 21.9 15.6
Total
100.0 100.0 100.0
The profile indicates that NHG members were characterised by more deprivation
as compared to SHG members. This is further corroborated by difference of
means tests between NHG and SHG members (Table 5.8).
With regard lo the partil:ipalion of trihal in the micro-finance programme. we can observe
that there was a difference hetween Tahles 5.9 and 5.10. As in Table 5.9 there were only 12.5 per cent
of the trihal groups in SH(;s. whereas in the case of Table 5.10. there was an increase in the tribal
memhcrship to I R. I per cent. This was due to the panicipation of 5 tribal memhers in non tribal

Tabk 5.8: Results of the Difference of Means Test Between NHG Members and
SHG l\lemhcrs for Socia-Economic Variables
T
Education
T
Age
y Mean 'lean T "alue y Mean II.lean
T
p
dirre- p
dirre- value
e
("("nee e
renee
N
5.H N :17.-14
H
(-1.-1) ~ . ( ) . ~ IlJO*
H ( 1(0) oot>
0.W7
G G
S 7R S ~ 7 . - 1 . ~
H
(3-1 )
H (90)
G G
.. , , ,
. .
Not . The fifurcs m the p ." nih, 'IS md'cal< 'Iandard dn '.Ilion
Indicate, significant at I pn n.'nt level
Indicate, ,ignificant at -' per cent level
T
Annual income (Rs.)
y
Mean Mean T value
p
diffe-
e
renee
N 22.-1275
H (26.694.9) 7,748. 1.977**
G 7
S 30.17627
H (24.54I.h)
G
The results. which are stalistically significant show that SHG members had more
Ilumhc:r of years of edueatillO. They also had high annual income. Higher income
among SHG members might he allrihuted to relatively longer stay in micro-
finance groups and sunsequent ahllity til undertake IGAs, However, the presence
Ilf larger proportion "f Inha!> ill NHGs and more dependence on agriculture
suggests higher level (If dcprivalll'n among NHG members. Bettcr education
among SHG memhers InJil'alCd hdlcr "Kial capital and hence, more conducive
atmosphere for colleclive actillll alllllng SHG memners. L.Jrger proportion of
trihal members and relaIJ\'l'Iy morl' ,kpemJcnce on agriculture among NHG
memhc:rs implies thaI Ihl'fe werl' Im:lJh(lod rl'lated problems among them and
hence. pmhlems in IcrlllS (If their par1icipation in the group aelivities promoling
collect i \e act ion.
5.S. Participation of Members in Group Meetings
Generally. groups mel once in a week at a common place. In these meetings, they
not only \(xlk up acti\llle, rclalillg 10 IllllTo-finance hut also discussed social and
economic issues pertaining III IhclII. The presidenl of the group chaired the group
meetings and the ,ecn:lary mailltained the repor1s and accounts. The group
representatives were elecled Illll'(: in a year from among the group members. The
meetings acted as a forlllll for Ihe memhers to monitor and supervise the
functioning of the group The econolllie Illatters related to the issue of loans, its
utiliz<JtlOn and rcpayllle'1l1 we're' taken up in Ihese meetings and decisions were
IO.J
enforced mainly through these meetings. In certain groups, the members did not
discuss any financial matters outside the group mainly because of the view that
the financial dealings of the members were private matters and they should not be
divulged.
Generally, the meetings were held in each member's house on a rotational basis.
The meetings conducted in each member's house enabled the members to know
about the socio-economic conditions of the members and their households.
Almost 80 per cent of the groups conducted their meetings in each members'
house. The rest of the groups conducted theil meetings in a common place where
everybody could meet or in a single person' s house where it was convenient for
all the members to attend.
Weekly meetings were held in the case of sample micro-finance groups. In
addition. there could be special meetings on certain occasions like Gandhi
layanthi. independence day. annual day of the formation of the group etc. Since
meetings were important mechanisms for ensuring the m e m b e r ~ ' participation in
matters relating to collective action, there was a need to analyse the attendance
pattern of micro-finance group members.
Table 4.9 ,hows that about one third of the NHGs had meetings for less than one
and a half hours, while about 31 per cent of them had meetings for 2 to 2 and a
half hours. In contrast, a large proportion of SHGs held meetings for more than
one and a half hours. The short duration of meeting in the case of NHGs implies
that members' livelihood related problems came in the way of members attending
group meetings for long time.
Table 5.9: Distribution of Sample GrOlps ( c) )y uratlOn 0 '7< b D fM
eetl,!&'
Time taken NHG (n=16) SHG (n-16) Total (n-32)
(hrs)
Up to I 6.2 - 3.1
1-1.30 25.0 6.3 15.6
1.30 2 37.5 68.7 53.2
2- 2.30 3U 25.0 28.1
Total 100.0 100.0 100.0
105
Tribal groups also held less number of meetings in a year. Figure S.S shows that
while the number of meetings was more than SO in the case of over 77 per cent of
the non tribal groups. It was only 30 per cent in the case of tribal groups.
90
80
70
8,60

840
"-
If 30
20
-------
Figure 5.5: Distribution of Sample Groups (%) by
Ethnic Status and No. of Meetings Held in the Last
Year
40
30
10 4.5
o
35-45 45-50
Above 50
No. of Meetings
How can one interpret either short or long duration meetings in the case of tribal
and non tribal groups holding less than 50 mcetings in a year? This can be
interpreted from the perspective of poverty among tribals. Since tribals were poor
and had greater dependence on agriculture, the tribal might not bc in a
position to conduct all the meetings and for higher duration. Another way to
interpret this was illiteracy among tribals and their dependence on tribal
volunteers for thei r management of group affairs. It is learnt that tribal groups
excessively depended on volunteers for conducting the meetings. If, for some
reason, the volunteer did not tum up for the meetings, the tribal groups did not
hold meeting, until the alTival of the volunteer. This had two implications. First,
self-management capacity was not fully developed among NHGs. Second, the
initial condition, for collective action among NHGs were not fully developed.
When on the frequency in attending the meetings was posed to sample
members, a large proportion (68.7 per cent in the case of NHGs and 69.8 per cent
106
In the case of SHGs) stated that they regularly attended the meetings (Figure 5.6).
Interestingly. the proportion of members stating that they rarely attended the
mCdings was significant. 7.3 per cent in the case of NHGs. Regarding the
reasons for attending the meetings regularly, a significant proportion stated that
the rules insisted on their participation. It might be noted that the norm in this
group was that loan assistance was provided to those members who had attended
SO per cent and above meetings in a year.
80
70
60
..
50
CJ)
S
c
40
..
u
~
..
30 1
Q.
20
10
o ~
Figure 5.6: Distribution of Members (%) by
Frequency in Attending the Meetings
68.7
69.B
Regularly Occasionally Rarely
Attendance Characteristic
\_NHGI
_SHG
The response Ihat Ihe rules forced them to participate in meetings implies that the
r c a ~ o n for attending the meetings was not to actively participate in matters
relating to collective action. At the same time, nearly 38 per cent of those
attending the meelings regularly stated that they attended the meetings to know
about the discussions and for cooperation with other membcrs. This finally
Implies that while half of the members attended mectings because of compulsion,
the other half attcnded thc mcctings for collective action.
107
Table 5.10: Results of the Difference of Means Test Between NHGs and SHGs
. Ad' M .
tor tlen ance m eetmgs
Types
Attendance in meetinl s
Mean
Mean
difference
NHG 38.531
(8.608)
-3.125
SHG 41.656
(6.704)
Note: The figures In the parenthesIs mdlcate standard deViatIOn
*** Indicates significant at 10 per cent level
T value
-2.645***
The difference of means test between NHGs and SHGs given in Table 5.10
shows that there was a significant difference in the participation of NHG and
SHG members. A relatively higher number of meetings attended by the SHG
members have brought (lut the collecti ve action among the members of these
groups.
5.9. Sayings Beha\iour of the Members
Members were required to make weekly savings contributions to the group and
the amount was the same for all members in a particular group. Generally. the
amount was decided (m the basis of the amount that could be contributed by the
poorest membcr towards group fund. The members were required to make saving
contributions to the group immediately after joining the programme. The
accumulated saving' fund acted as a common pool from where the members
borrowed loans. Moreover. equality in saving contribution was aimed at treating
all the members in a group equally. It gave equal responsibility to all the
members while a\'(lJding the emergence of free riding problems. Besides, it
reduced the chance, of accounting problems that might emerge at the timc of
sharing profits alllong the members. Even though participation of the tribals in
the non tribal groups was rare, there were differences between tribal groups and
non tribal group, in terms of their ability to make saving contributions.
As the tribal members were economically backward, their capacity to make
contributions to their groups was relatively less as compared to members
belonging to non tflbal groups. It is significant to note that none of the members
lOR
belonging to tribal groups contributed more than RsAO. The principle of joint
liability could be enforced more effectively in non tribal groups, as the higher
amount of savings contributed by them could act as a mechanism while screening
members and ensuring timely repayment. Therefore, a higher saving contributed
by the members improved the cooperative outcome and brought down the failure
of collective action.
Table 5.11: Distribution of Sample Groups (%) by Monthly Savings (Rs.) by the
Members and Ethnic Status
Savings Non-tribal Tribal (n= I 0) Total (n=32)
(n=22)
Up to Rs. 40.9 100.0 59.4
Rs - 28.1
Abo\e 60 18.2 - 12.5
Total 100.0 100.0 100.0
As sa\lngs contributed by the members was an important mechanism for
screening the memhers while issuing loans, a large proportion of the members
made regular contrihutions to the group. It was strictly enforced in such a way
that in case the memher could not attend the meetings, she was requested to make
the contributions through other participants or was required to make her
contribution in the meeting. About 92 per cent of the SHG members
were regular in making contributions as compared to 78 per cent of the NHG
memhers. Moreovcr, the SHG members were more in regularly making their
saving contributions. the Internal conflicts, which might emerge while sharing
profits and issuing Inan, among the members, was observed to be less.
109
100
80
CIl
g'60
-
s::
CIl
40
CIl
a..
20
0

Figure 5.7: Distribution of Members (%) by Regularity in
Saving Contributions
78.1
Regular
I
DNHG]

13.6
I 5.2 8.3 3.1
__ J L __
Occasional
Saving Contributions
Rarely
-- - -- _ .. ---- -- --
What makes the members contribute savings to the group? The reasons varied
from one group of members to another (Table 5.12). Some of them gave
importance to immediate benefit, whereas others gave importance to future
benefits. The former were economically backward and hence, they stated that
getting loans from the group was the reason behind making savings. On the other
hand, the latter were economically better off and hence, they stated that getting
interest for their saving was the reason behind making savings. There were some
members who obliged the group norms to avoid the burden of making extra
contributions to the group in the subsequent meeting. It is significant to note that
a large proportion of both the NHG and SHG members gave importance to the
immediate benefits of getting loans from the group. This corroborates with
meeting financial needs as an important reason stated by the members behind
joining the programme (Figure 5.1). One per cent of the group members stated
that they could not make savings regularly due to financial problems. This
indicates that the probability of members leaving the groups due to financial
problems was less and hence, lowered the threat for collective action.
! 1 ()
Table 5.12: Distribution of Sample Members (%) by Their Statements on
R t: Mat" S easons or tng avrngs Contributions
Reasons
NHG SHG Total
(n-96) (n-96) (n 192)
To get loans at the time of need
54.2 51.1 52.6
To avoid extra contribution tn the 30.2 37.5 33.9
coming week
To get interest
14.6 10.4 12.5
Could not contribute regularly due to
1.0 1.0 1.0
financial problems
Total 100.0 100.0 100.0
It would be significant to examine from where the members made their saving
contributions (Table 5.13). The memhers made saving contrihutions from
different sources: one. from the IGA which they had been doing even before
joining the programme; second. from the IGA which they had undertaken after
joining the micro-finance group; third, from the wage labour; and fourth. from
male relatives in the household. The first three categories constituted self-
contribution on the part of the members and hence, it shows that the members
were financially independent. On the other hand. the last one represented that the
members were economic dependent on others in the household. Sometimes, the
members might make contributions from these two combinations of sources.
About one fourth of the SHG members and one third of the NHG members made
saving contributions from their own income. The higher presence of wage
labourers among the NHGs was one of the reasons behind more self-contribution
stated by NHG members. On the other hand, more than 50 per cent of the SHG
members depended on male relatives for making saving contributions.
Comhinations of self and male relatives were also less among the SHG members,
implying that there were complete financial dependencies on others by large
numher of SHG members. Therefore. the memhers within the household
indirectly influenced the mechanism of saving, which had a direct impact on joint
liahility and collective action.
I 11
Table 5.13: Distribution of Sample NHG and SHG Members (%) by Sources of
SaVIngs
Sources NHG (0=96) SHG (n=96) Total (0=192)
Self 30.2 25.0 27.6
Husband 37.5 54.2 45.8
Male relatives other than 3.1 6.2 4.6
husband
Self and husband! other 29.2 14.6 21.9
male relatives
Total 100.0 100.0 100.0
At this juncture, it is necessary to examine whether these differences between the
weekly savings contributed by the NHG and SHG members were significantly
different. The difference in the regularity of saving contributions by the members
and the presence of tribal groups in the NHGs discussed above indicate that the
ayerage amount of savings contributed bv the SHG members were more. The
means test shows the difference between NHG and SHG members in terms of
their saving contributions was significant at one per cent (Table 5.14).
Table 5.14: Results of the Difference of Means Test Between NHGs and SHGs
f S or aVIngs
Types
Amount of weekly savin
s (Rs.)
Mean
Mean difference
T value
NHG
1,337.02
(839.16) -673.17
-3.995*
SHG
2,010.19
(\ ,354.04)
Note: The figures In the parenthesIs Indicate standard deViation
* Indicates significant at I per cent level
5,10. Summary
Several factors have contributed to the promotion of the micro-finance
programme in Wayanad district. Many NGOs with development orientation have
been operating in this district even before the emergence of Kudumbushree
programme. While the former led to the formation of SHGs among the
economically backward sections, the latter led to the formation of NHGs
especially among the socially and economically deprived tribals, in addition to
112
other members. However, the government programme of channelling benefits to
the members of Kudllmbashree programme led to the issue of double
membership by bringing both the SHG and NHG membcrs under Kudumbashree.
It is significant to note that the people of this district were financially needy.
Agrarian crisis experienced by the members was one of the important contextual
factors contributing towards the spread of the programme.
Though the terms NHGs and SHGs were used to make a classification between
government initiated and NGO initiated groups, there were not many differences
between them as far as their internal operations in terms of their participation in
the group meetings, maintaining accounts, saving operations etc., were
concerned. Meeting financial needs constituted an important reason for a majority
of the members to join the programme and hence, there was homogeneity of their
interests in their participation. The familiarity among a majority of the members
even before joining the programme was a significant factor contributing towards
collective action. Of the two categories of SHGs and NHGs, the members
belonging to SHGs had higher experience, as most of them were formed prior to
NHGs. It is significant to note that some members left the programme after
Jommg the programme and financial problems stood out to be an important
reason behind this. The difference of means test for NHGs and SHGs for group
specific factors such as group size and experience of the groups indicate that
SHG members were lower in size and higher in experience and hence, higher
probability for collective action. It is observed that a majority of the members of
both the NHGs and SHGs were homogeneous in terms of caste and this
constituted an important precondition for collective action.
The socio-economic profile of the members indicates that even though a majority
of both NHG and SHG members were backward, NHG members were observed
to be relatively deprived. The need to be in the programme in the absence of
alternative credit sources by these members would bc more and hence, the
probability of getting collective outcome would be more. The mechanism of
savings contributed by the members indicates that SHG members wcre more
In
regular in making savings and making higher weekly contributions. Under such
situations, the principle of joint liability would be effective among the SHG
members, where the savings acted as a direct screening mechanism. The
regularity of meetings attended by the members and the number of meetings
conducted by the groups indicate that SHG members were better in conducting
the meetings and hence, they could influence the collective outcome.
In short, NHGs with large number of tribal members were socially and
economically deprived as compared to SHGs. The significant differences
between NHGs and SHGs in terms of group size, years of experience. attendance
at meetings and saving contributions indicate that SHG members were better in
determining the collective action. It is significant to examine how the borrowers
were screened while issuing loans and this constitutes the focus of the next
chapter.
114
CHAPTER 6
COLLECTIVE ACTION IN THE SELECTION OF
BORROWERS
6.1. Introduction
The selection of borrowers is an important problem in the credit market due to
imperfections that arise on account of asymmetric infonnation. Lenders do not
often have infonnation on borrowers - their nature, intentions and willingness to
repay the loans. If borrowers are selected on the basis of interest rate, there may
be problem of adverse selection. The micro-finance groups have the potential to
solve the problem of asymmetry of infonnation due to the following features.
First, since persons residing in small and contiguous geographical area are
brought together in a group, they are expected to have complete information on
each other. Such information helps the members to screen the members for
selection. This enables the members to screen the borrowers. Second, since
members in a group are jointly responsible for the repayment of loans, they are
compelled to ensure that only those members who can use the loan amount
properly and make prompt repayment are selected. Notwithstanding this
potential, mechanisms and incentives are provided to group members to
participate in the process relating to selection of borrowers.
In India, micro-finance groups also incorporate certain rules, which aim at the
selection of good borrowers. These norms relate to duration of membership,
attendance, savings and repayment.
,. A member will not be issued a loan unless she completes certain period
(usually 3-6 months) in the group. This period enables the group to obtain
knowledge about the nature and intentions of members, and such knowledge
will playa key role in the selection of borrowers.
,. Groups select only those members who fulfil attendance norm arrived at by
group members themselves. This norm not only ensures the participation of
115
members but also helps in the utilisation of collective wisdom of the group in
the selection of borrowers.
)0> Micro-finance groups stipulate that the loan amount requested by a member
should be in certain proportion of the savings amount contributed. This norm
helps the selection process in the following manner. First, the ratio ensures
that the members participate in the savings programme. Second, there will not
be any excessive demand for the credit. Third, saving contribution provides
necessary information to the group about the creditworthiness of members.
)0> The repayment norm stipulates that only those members who have repaid
their previous loans are eligible to receive the next loan. This norm provides
incentives to the members to make timely repayment and their
creditworthiness.
The micro-finance groups, thus, formulate rules to select good borrowers and
avoid the occurrence of adverse selection problem. Against this backdrop, this
chapter seeks to address the following questions.
What are the different mechanisms followed across the micro-finance groups to
select good borrowers? Do the members follow these mechanisms? Does the
evidence on the distribution of loan amount by the micro-finance members give
clues on the type of selection? What factors determine the amount of loans
received by the members'! What is the role of mechanisms and incentives in the
selection of the borrowers? What are the perceptions of the members regarding
the selection procedure followed in the group? We have tried to answer these
questions in this chapter.
6.2. Credit Operations in the Sample Groups
The sample micro-finance groups provide loans to members from savings fund or
external resources. Each member is expected to contribute periodic savings. The
accumulated savings fund is used to disburse loans to members for consumption
and short-term production activities. External loans are made available by
external funding sources and especially to those groups, which excel their
performance in internal credit transactions. In the sample area, external loans
116
were obtained from banks (under the NABARD's SHG Bank Linkage
Programme), gram panchayath (under Kudumbashree programme) and NGOs (in
the case of SHGs formed by NGOs).
The sample groups disbursed loans (both internal as well as external) on the basis
of discussion among members and their approval. Internal distribution of the
external loans was discussed and decided by the members. Loans were issued
from funds built with the help of both internal and external sources were subject
to close internal-decision making process. It should be noted that internal
revolving credit fund was important for all the groups. The groups were not
having access to external loans all the time as these loans were issued on the basis
of the performance of the group.
All the groups received revolving fund (RF) from the panchayath. The groups,
receiving RF from the gram panchayath, were instructed to use the same for
productive income generating activities. In some of the groups, the RF was added
to the group fund, whereas in others, all the members equally shared the amount.
Under SHG-Bank linkage programme, the groups received loans under direct
linkage or through NGO acting as a facilitating agency. About 44 per cent of the
sample groups received hank loans either directly or through NGOs. The size of
financial assistance provided by the banks and NGOs was usually larger as
compared to that of internal fund generated from the savings of the group and
revolving fund from the panchayath. Therefore, the duration of repayment of
loans from banks and NGOs was longer. Generally, the guidelines for these
external loans were issued by the promoting agencies at the time of disbursing
financial assistance. In the case of NGO loan, the members were required to
maintain a certain fixed amount of savings with the NGO. The distribution,
utilisation and repayment of NGO loans were strictly monitored through frequent
visits by the NGO personnel. Since access to second round of external loans of
the group depended entirely on its repayment performance during the first round,
all the group members had the incentive to participate in monitoring the
117
utilisation of external loans. This was because the default by one member
affected the chances of all the members in getting a higher amount of external
loan for the second time. Although such an incentive was available in the case of
internal loans also, incentives in the case of external loans worked more
effectively as these loans were larger in amount and hence, the liability was
higher.
All the applications for loans, whether for internal or external, were required to
be placed before the group. Generally, the members submitted signed application
form providing the details on the amount required and purpose of utilisation of
the loan. But, in certain groups, in addition to the letter with the signature from
the member, their husband's signature was also required as a guarantee. The
latter served as a mechanism while screening the borrowers. The group
guaranteed all the loans from external sources. The exact method followed to
operationalise the group guarantee was as follows. Tn addition to the applicant,
another member guaranteed loans up to Rs. 2,000, two persons for loans up to
Rs.5,OOO and three for more than Rs. 5,000. A member guaranteeing a loan could
not provide the guarantee to another member at a point in time. This method was
an internal arrangement, and the groups seldom revealed the same to the external
agencies. The logic for adopting such an elaborate system of guarantees was to
ensure the repayment of loans. In addition, this reduced the excess demand for
loans. It was only in one group that the members were required to submit one
rupee revenue stamp receipt for obtaining loans above Rs. 500.
Members usually received loans within a week, if funds were available in the
group or with the hank. Normally, the method of first-corne-first serve basis was
followed in all the groups. In cases where funds available were short of the
amount requested by the members, the lending decisions were based on the
urgency of the members. In a majority of the groups, the members themselves
borrowed the amount from the bank after receiving bank cheques which was
countersigned by the secretary and president of the group. It enabled the members
to get familiarised with the bank dealings. But, in certain groups, due to lack of
118
familiarity about the bank proceedings by a majority of the members, the bank
dealings were fully undertaken by their President and Secretary.
External agencies instructed the groups to follow the ideal condition of utilising
the loans for consumption purposes in the initial stages and this was followed by
utilisation for productive purposes. In the case of sample groups, consumption
purposes constituted major purposes of utilisation and they were for meeting
expenses towards education. health, etc. As the groups did not strictly follow the
instructions, the consumption purposes constituted a major purpose of utilisation
and this has been discussed in the seventh chapter. Therefore, the groups also did
not differentiate between various purposes of utilisation. The annual rates of
interest charged by the groups varied. The rate of interest was 24 per cent in 81
per cent of the groups, while it was 16 per cent for 12 per cent of the groups and
12 per cent for 3 per ccnt of the groups.
6.3. Mechanisms and Incentives Followed for the Selection of Borrowers
In addition to the elaborate procedure followed in the selection of borrowers, the
groups also followed certain mechanisms and incentives. In order to avail loan
from the group, the members were required to adhere to the following norms
relating to attendance, saving-linked credit, repayment and duration of
membership. The norms varied across groups; but, within a group, they were
uniformly applied to all the members.
6.3.1. Duration of Membership
The members in a group were not issued a loan until they completed certain
duration of member,hip. The norm stipulated by thc groups varied across groups
from as low as 2 months to as high as 12 months. In 19 out of the 32 groups, the
norm of 6 months of duration was stipulated as the minimum duration to receive
loans from the groups (Table 6.1). In the case of 9 groups, the norm was less than
five months. It needs to be, thus, noted that the members could not receive loans
before they completed the minimum period of stay within the group. The logic
for this norm was that the groups should have sufficient information on
119
creditworthiness of the members. About 96 per cent of the memhers that
they had fulfilled the norms regarding the duration of membership (Tahle I.
The proportion of members stating that they had fulfilled the norm \\ '" more in
the case of NHGs as compared to SHGs.
T bl 6 I N a e .. orms Ad opte db
)y the Sample Groups in the Selection of Borrowers
Norms Types of norms
No.ofNHGs No. of
following the SHGs
norm<; following
the norms
Attendance A member not attending the 15 l-l
group continuously for 3 weeks
should leave the group
90 per cent attendance IS I I
compulsory to avail the loan
80 per cent attendance IS 0 I
compulsory to avail the loan
Saving to 1:1 I 0
loan ratio 1:2 5 7
1:3 4 -l
1:4 6 5
-
Repayment No new loan will be sanctioned 16 16
Norm if the previous loan is not repaid
Duration of 2 months I I
membership 3 months I 2
in a group to 4 months
I 2
access loan
5 months
0 I
facility
6 months
10 9
12 months
3 0
Total
16 16
6.3.2. Attendance in Meetings
Sample groups formed by both government and NGO had formulated attendance
norms. The norm followed in 29 out of 32 groups was that a member
continuously abstaining from the group for three weeks and more could he
debarred. Although this norm was initially followed in NHGs. which were
formed under the KlIdwnbashree programme. the same had been made applicable
in the case of those groups obtaining membership in the KlIlilllll/JlJshree
programme largely because of dual membership. The norm followed in two
groups was that a member should attend 90 per cent of the group meetings to
I ell
hecome eligible for obtaining loans. In one of the groups, only 80 per cent
attendance was required to become eligible for ohtaining loans (Table 6.1).
Nearly three-fourths of the sample members stated that they fulfilled the
attendance norm. The proportion of members fulfilling the norm was 77.1 per
cent for NHGs, whereas the corresponding proportion was 70.8 per cent for
SHGs (Table 6.2).
6.3.3. The Ratio of Savings to Loans
In sample groups, the ratio of savings to loan amount ranged from I: I to I :4. In
general, the new groups had lower ratio as they were required to he conservative
not only because of lower size of the rcvolving fund, but also due to lack of
sufficient information on the creditworthiness of the members. The savings to
loan ratio in a majority of the groups (19 out of 32) ranged between 1:3 and 1:4
(Table 6.1). A large proportion of members (especially in the case of NHGs)
stated that thcy followed the savings to loan ratio (Table 6.2).
6.3.4. Repayment Norm
All the groups had uniform opinion with respect to complying of this norm.
Ahout 72 per cent of the members had followed this norm. It can be observed
from Table 6.2 that the proportion of memhers fulfilling this norm was higher in
NHGs as compared to SHGs.
Tahle 6.2: Proportion of Members (%) Following the Mechanisms in the Sample
M G icro-FlOance roups
Members fulfilling the norm NHG SHG (n=96) Total (n=192)
relating to: (n=96)
Attendance 77.1 70.8 74.0
Savings to loan ratio 90.6 78.1 84.4
Rcpayment 77.1 66.7 71.9
Duration of memhership 97.9 93.8 95.8
The foregoing discussion on mechanisms and incentives adopted by the sample
groups in the selection of horrowers showed that the micro-finance groups had
made elaborate arrangements to deal with the problem of adverse selection. A
121
large proportion of sample members also stated that they were complying with
the norms formulated to minimise the problems of adverse selection.
Nevertheless, an interesting feature was that some of the norms were difficult to
be complied, while others were easy to comply with. Because of this reason,
while nearly all the members followed duration norm, repayment norm was
followed by about 70 per cent of the members. This raises the question of why
there was variation across groups in the norms and what implications did these
variations have on the selection of borrowers.
Another issue was that the proportion of members complying with the norms
varied across the two types of groups. In general, the proportion of NHG
members following the nonn was high in the case of all four norms, as compared
to SHG members. Did this have any implications in so far as the selection of
borrowers and emcrgencc of tendencies relating to adverse selection were
concerned') This issue has been examined in the last section of this chapter.
6.4, Factors Determining the Loan Amount Obtained by the Members
In this section, we analyse the factors influencing the loan amount obtained by
the members. The total loan amount obtained by a member since inception
provides some clues on the selection procedure. In other words, larger loan
amount implies good selection procedure. This is because of the following.
First, over 75 per cent of the members stated that they joined the programme
mainly to receive financial assistance from the programme. Second, a majority of
the members, belonging to BPL category, required credit for both consumption
and productive purposes. Third, and more importantly, in the context of norms
formulated in the groups, larger loan amount obtained by a member implied that
she had fulfilled all the norms.
122
6.4.1. Number and Amount of Loans
The total number of loans received by the members across the sample groups
varied from zero to thirteen. Barring three members 44, who did not obtain any
loan, all others had borrowed at least once. Table 6.3 shows that 28.1 per cent of
the SHG members had received five or more loans. The corresponding proportion
in the case of NHGs was only 9.4 per cent. Figure 6.1 shows that as compared to
NHG members, a larger proportion of SHG members had received higher loan
amounts.
Table 6.3: Distribution of Members by Numher of Loans Received from Groups
S' In
mce ceptlOn
Number of loans SHG NHG Total
(0/0) (%) (%)
None
-
3.1 \.6
I to 5 71.9 87.5 79.7
5 to 10 24.0 9.4 16.7
Above 10 4.1 - 2.0
Total (numbers) 96 96
192
,....------ - ---- - - ---- - ---------;
70
60
10
o
Figure 6.1: Distribution of Members by the
Amount of Loans Received Since Inception
uplO Rs 2500 Rs 2501-As Rs 5001- As
5000 7500
Amount
60.4
Above Rs
7500
44 These three NHG members slaled that they had not experienced the urgency for loans so far_ One
member stated Ihat she was waiting for the time when she could borrow larger amount trom the group.
12:1
Table 6.3 and Figure 6.1 suggest that there were differences between NHG
members and SHG members in terms of the number of loans and the amount of
loans received from the group. Table 6.4 brings out that there were indeed
significant differences between NHGs and SHGs. Although these differences
could be attributed to the recent origin of the NHGs, there was need to explain
the factors contributing to the variation in the loan amounts received by the
members across sample groups.
Table 64' Difference of Means Test for Number and Amount of Loans .
Type Number of loans Type Amount of loans (Rs.)
Mean Mean T Mean Mean T value
differ- value
eRee
NHG 2.8 NHG 5,841.9
( 1.8) -1.52 -4.486' (5,956.4)
SHG 4.3 SHG 16,034.6
(2.9) (16,676.5)
Note: The figures In the parenthesIs indicate standard deViation
* Significance at I per ccnt level
difference
-10192.6 -5.997'
6.4.2, Factors Influencing the Loan Amount Obtained by the Members
It is expected that group characteristics, mechanisms and incentives prevalent in
the groups for ensuring good selection, and household and member
characteristics would have a significant impact on the loan amount received by
the members. The description of variables along with mean/proportion, standard
deviation and expected signs has been provided in Table 6.5.
Variables measunng group features are homogeneity, group size and type of
group (NHG or SHG). Homogeneity is a group specific variable. A group is
considered to be homogeneous if over 50 per cent of the members belong to one
caste or tribe. This is expected to have positive association with loan amount.
Group size, in terms of number of members, is expected to have negative
relationship as it is theoretically postulated that larger groups do not succeed in
collective action. A negative relationship between NHG and loan amount is
anticipated because, as discussed in Chapter 3, the quality of group formation is
somewhat inferior in government programmes as compared to that of NGOs.
124
Table 6.5: Description of the Variables and Their Expected Sign for Amount of
Loans ,
Dependent \ariable: amount (Rs) of loan obtained from the groups since inception
Indepcn- Description Expec- Proport- Stand-
dent ~ i ~ ard
"ariables
sign Average deviat-
ion
Group characteristics
NHGSHG Dummy I. if the programme is promoted - 50.00 0.50
by government initiated NHGs'
. , .
O. otherwise 50.00
HMTCAS Dummy-I. if the members in a group are
+
56.25 0.50
TE homogeneous in terms of castel tribe;
O. otherwise 43.75
GRPSIZE Number of members in a group - 16.31 3.25
Mechanisms
GRPDSC Dummy-I. discussions In the group and +
91.15 0.28
N approval oy all the memoers preceding the
,anctloning of loans:
O. otherwise 9.85
Incentives
ATNFlIL Dummy-I. if the membcr has fulfilled the +
73.96 0.44
attendance norm:
O. otherwise
16.04
SVGLNF Dummy-I. if the mcmber has fulfilled the +
84.38 0.36
UL
norm relating to sallngs to loan ratio:
O. otherwise
15.62
RPTFLIL Dummy=l. if thc mcmoer has fu lfilled +
71.88 0.45
repayment norm:
O. otherwise
28.11
Household characteristics
PCI
Per capita income (Rs.) +
6384.47 5876.1
I
EXTLDE Loan amount
(Rs) recei ycd from ,ourees +
15657.29 24227.
BT
(Rs.) other than micro-finance
98
CASTE
Dummy= I. if the memoer is trihal:
- 34.38 0.48
O. otherwise
65.62
Member characteristics
EXPYRS
Number of years ,ince ioining the group
+
2.84 1.61
Mechanisms and incentives considered in the model relate to group discussion
and norms relating to attendance. savings linked to credit and repayment. Both
mechanisms and incentives are expected to be positively associated with total
loan amount as these would help the groups to enable the members to participate
in the collective action leading to dishursal of loan amounts as per the needs of
members.
125
Household characteristics include caste, per capita income and loan amount
received from sources other than micro-finance groups. Caste is expected to have
negative relationship as tribals have been one of the most marginalised groups,
and that, they will be discriminated in the provision of credit. Per capita income
is expected to have positive relationship with loan amount. We anticipate positive
relationship between external debt and loan amount for the following reason.
Empirical studies show that members often borrow to repay the loans contracted
from other agencies including informal ones. Number of years of stay by a
member in a group will result in larger amount of savings. more frequency of
loan borrowing and higher amount of loan.
Since the dependant variable (i.e .. amount of loans received by the members) is a
continuous one, an ordinary least square regression has been estimated to analyse
the relation,hip between dependent and indcpendent variables. The results of the
l:stimation have hel:n given in Table 6.6.
I 66 D Tab e etermlnanh 0 f h A t e mount 0 fL oans R . db th M b ecelve )y
e em ers
Variables Coefficient T values
CONSTA:-.IT 9735.237** 2.324
NHGSHG -3061.846** -2.156
HMTCASTE -179.6399 -0.094
GRPSIZE 350.4802*** 1.732
GRPDSCN -6128.419** -2.571
ATNFUL 159.4166 0.133
SVGLNFUL -3828.378*** -1.782
RPTFUL -6595.675* -3.977
PCI -0.084561 0.995
EXTLDEBT 0.073911 * 2.802
CASTE
-6581.601* 4.064
EXPYRS
4369.961 * 7.122
F statistic 28.986
Significance level 0.0000
R square
0.6430
Adjusted R square 0.6208
No. of observations 192
*Slgmficant at I per cent, **slgmficant at 5 per cent,
cent
*** "
,
SIgnificant at 10 per
126
F statistic indicates that the OLS model is highly significant at one per cent.
Table 6.6 also shows that about 64 per cent of the variation in the loan amounts
received by the members is explained by independent variables incorporated in
the model. Eight out of II independent variables in the model are statistically
significant.
The variables caste, external debt, experience in the group and type of group were
not only significant but also received the expected signs. The results, thus,
suggest that non-tribals received higher loan amounts as compared to tribals as
the latter have less capacity to contribute higher amounts of savings in regular
manner. The credit absorption capacity among tribals was also perceived to be
low by group members. The positive relationship between external debt and loan
amounts confirm the observations by the earlier studies that the micro-finance
loans were being utilised for repaying past loans availed from informal agencies
at exorbitant interest rates. While such repayment relieved the poor households
from the high interest burden. the objectives of the micro-finance programmes,
namely. income generation and poverty alleviation were compromised in the
process. The fact that older members receive higher loan amounts called for
policy suggestion that micro-finance groups needed to be supported and sustained
in the long run. NHG members received lower loan amounts for understandahle
reasons that t h e ~ e groups were of recent origin and funds availability in these
groups had been less as compared to SHGs.
Surpri>ingly, although the variable of group size is statistically significant,
members in larger groups received larger loan amounts. This was against the
theoretical expectation that smaller groups were more efficient in terms of
meeting the needs of the members. The reasons for this unexpected relationship
were not far to seek. First, larger groups had larger amounts of accumulated
savings fund and this was helpful in obtaining larger loan amount from the banks.
It can be noted that the banks provided financial assistance to groups on the basis
of total amount of savings mobilised in the group. This might be an incentive for
larger groups to come into existence. Second, large-sized micro-finance groups
127
in Kerala context did not necessarily possess the disadvantages mentioned in the
literature. In the context of high population density and advantages of having
more number of members to avail bank loan, large groups (numbering around 20
members) might as well be cohesive and possess common interests. Third, the
smaller groups in the sample area did not come into existence because of the
virtues of smaIl size so eloquently stated in the literature. The focus group
discussions with members revealed that the present small groups were large to
begin with. However, the internal disputes resulted in some members leaving the
group. Consequently, the management of the groups was left to a few influential
elites. In such groups, only those who were loyal to the elite continued to remain.
This, however, did not mean that these groups were cohesive and that there was
trust among members (see, Box 6.1 for an illustration of this point).
As against the expectation, the variable on group discussion was negatively
associated with loan amount. This was surprising because one expected
discussions in the group before loan disbursal which would result in better
selection. The result, however, suggests that members from those groups, which
did not have discussions before loan disbursal, obtained larger amounts of loans.
The variables of savings linked to credit and repayment also indicate that those
members who did not fulfil the norms relating to savings linked to credit and
repayment were issued larger loan amounts. These findings indicate the
tendencies of adverse selection. This has been further discussed in the ensuing
sections.
6.4.3. Factors Determining the Selection Procedure
The regression results discussed in the previous section raise the following
questions. Why did members who gave importance to collective decision making
in the loan disbursal receive lower loan amounts? Why did members fulfilling the
norms receive lower amount of loans? Are the unexpected results due to
inappropriateness of dependent variable, namely. loan amount? Taking the
position that loan amount as the dependent variable may not be appropriate, we
have examined another variable, namely, the selection procedure.
12H
We asked the sample micro-finance group members on their views on the
selection procedure. The responses were three-fold; very good, good and not
good. An overwhelming majority of the members termed the selection procedure
to be either 'very good' or just 'good' (Table 6.7).
Table 6.7: Distribution of Members by Their Perception on the Selection
PdF 11 d' h G roce ure o owe In t e roup
Perception of the NHG SHG Total
members (%) (%) (%)
Very good 51.0 56.3
53.6
Good 45.8 39.6 42.7
Not good 3.1 4.2 3.6
Total (number) 96 96
192
In order to arrive at two variables amenable for estimating a logit model, the
responses of 'not good' and 'good' were combined into one category, whereas
the 'very good' responses as one category. This enabled us to have a
dichotomous variable on the perception of the members. The dependent variable
was the perception of the members on selection procedure. The description of the
variables along with their relationships has been given in Table 6.8.
129
Table 6.8: Description of Independent Variables and Expected Sign for
P f h M erceptlOn 0 t e
embers on Selection Characteristic
Dependent Variable: I - If the member perceives the selection procedure to be 'very good'
o = Otherwise
Variables Description
Expect- Proport- Standard
ed sign ion! deviation
averaee
NHGSHG Dummy-I, if the group is NHG; -
50.00 0.50
0, otherwise
50.00
GRPSIZE Number of members in a group
16.31 3.25
HMTCAS Dummy-I, if the group members are
+
56.25 0.50
TE homogeneous in terms of castel tribe;
0, otherwise
43.75
Mechanisms
METNG Total number of group meetings held in
+
50.03 4.62
the previous vear
MNTHSV Amount (Rs) of savings contributed to the
+
43.91 12.07
G group per month by each member
GRPDISC Dummy-I, if there exist group
+
91.15 0.28
N discussions and approval from the
members while issuing a loan;
0, otherwise 9.85
Incentives
ATNFUL Dummy= I, if the member has fulfilled the
+
73.96 0.44
attendance norm;
0, otherwise 26.04
SVGLNF Dummy= I, if the member has fulfilled the +
84.38 0.36
UL norm relating to savings to loan ratio;
0, otherwise
15.62
RPTFUL Dummy=l, if the member has fulfilled +
71.88 0.45
repayment norm;
0, otherwise
28.12
PCI Per capita income (Rs.) +
6,384.47 5,876.11
EDUCAT Number of years of schooling +
6.83
4.03
N
AMTLN
Loan amount (Rs.) received by members +
10,938.2 13,493.69
9
EXPYRS
Number of years since ioining the group +
2.84 1.61
The logic for expecting certain type of relationship between most of the
independent variables and the dependent variable is the same as has been
explained in Section 6.4.2. New variables introduced in the model are education,
amount of loan, number of meetings and savings amount. These are expected to
have positive relationship with the dependent variable for the following reasons.
1.10
Educated members ensure good discussion in the groups and follow good
selection procedure. Members receiving larger loan amounts are likely to
perceive that the selection procedure is good. Groups having a larger number of
meetings are likely to have good selection procedure. Higher the amount of
savings, more will be stakes of members in the group, and hence, incentive to
ensure good selection procedure.
The results of the regression model have been presented in Table 6.9. The Chi
square value indicates that the model is significant at I per cent level. Seven
variables are significant; but, only three of them received expected sIgns.
Members from groups conducting all the meetings and holding discussions prior
to the loan disbursal are likely to state that they have very good selection
procedure. Further, members of SHGs are more likely to state that the selection
procedure in their groups is very good.
Table 6.9: Results of Logit Regression Model on Perception of the Members on
Selection
Variables Coefficient T values Marginal effect
CONSTANT -3.40891 U2 -
NHGSHG -0.9976792** 2.13 -0.2430776**
GRPSIZE
0.1270991
1.84 0.0316018***
HMTCASTE 0.3220068 0.84 0.0800000
METNG 0.0925085'** 1.84 0.0230012***
MNTHSVG -0.062444*' 2.42 -0.0155261 .*
GRPDISCN 1.369747*** 1.77 0.317)905***
ATNFUL 0.1638104 0.39 0.040809
SVGLNFUL 0.1292298 0.27 0.03221
RPTFUL -0.4052634 0.98 -0.099593
AMTLN 0.00184 0.097 0.00000045
EDUCATN -0.907061** 2.08 -0.225531 **
PCI 0.0000291 0.001 0.00000073
EXPYRS -0.3669137' 2.61 -0.0912291*
Chi square 30.09
Significance level 0.0046
Log likelihood -116.903
Restricted log likelihood -131.948
Pseudo R square 0.1140
Degrees of freedom 13
'Slgnificant at I per cent **slgmficant at 5 per cent.
*** .
,
SIgnificant at 10 per cent
1:11
As in the case of regression with loan amount as dependent variable, members
from large groups are likely to state that the selection procedure in their groups is
very good. The reasons for this are the same as those explained in the previous
section. Two of the member characteristics (education and experience in years)
received signs opposite of a priori expectations. This implies that more educated
members and those having longer experience are likely to state that the selection
procedure in their groups is just' good' .
More importantly, the variable on savings amount received an opposite sign.
This implies that members having larger amounts of savings stated that the
selection procedure was only' good'. This can be interpreted as follows. Most of
the groups have received external loans. It is possible that members, with larger
amounts of savings, perceive that external financial assistance is not their own
money and hence, they need not show much interest in this.
Box 6.1: Small Groups Need Not Necessarily be Cohesive
When Cicily joined SHG in Sulthan Bathery, the group had 20 members. But the
number declined to 12 due to internal conflicts. Of these members, five were
relatives. The group representatives, with the support of their relatives, managed
the day-to-day affairs of the group including its financial mattcrs. It was easier
for them to pass a loan proposal. Often, there was no collective discussion
among the members while issuing loans. Cicily, coming from a poor background
and not having access to alternative credit institutions, has always been a credit
needy member. She, therefore, supported the management. Such support was
rewarded in the form loans at times of urgent financial needs. Although she was
against such manipulation, as a financially weaker member. the best option for
her was to support the group leaders. She has been contemplating to join some of
her co-partners, who were dissatisfied with the management style and planning
to initiate another SHG.
An interesting finding is that variables relating to incentives are not significant,
though two of them received expected sign. This implies that there is no
relationship between members' compliance with norms and their statements on
the selection process. Why is it that mechanisms and incentives do not explain
the selection procedure? This question is further examined in the ensuing section.
132
6.5 Did Incentives for the Selection of Borrowers Work?
The above analysis makes it important to have a close look at the mechanisms
and incentives prevalent in two types of micro-finance groups. Generally, groups
consisted of members who followed the norm and those who did not. But, a
failure to comply with the norms by a particular person did not mean that she had
not received any loan from the group. It is generally accepted that compliance of
the norm by a member leads to the strict enforcement of the norm in the entire
group. On the other hand, a failure on the part of a member results in the failure
of enforcement in the entire group because the members had no incentives to
follow the norm. In this context, game theorists state that in a small community
having close interactions, there are higher chances of complying the group norms.
Moreover, if the future chances of getting benefit from the collective action are
bright, the members may try to follow the norm at present, hoping that more can
be gained later. If a member presumes that all her co-partners are strictly
complying with the norm, she may not have the incentive to break the norm. But,
in a group with familiar members having diverse types of credit needs, strict
enforcement of the group norms is very difficult while selecting the borrowers,
because relaxations to the compliance of norms are given to the members based
on humanitarian considerations and expectations of future co-operation from their
partners. We, therefore, posed the following two questions to the sample
. members. First, whether they had followed the nonns? Second, what would be
their response on disbursal of loan to those members who did not comply with
norms? Though the second question was hypothetical, their responses were
shaped by their previous experiences in the group. These previous experiences at
the group level had taken place either at a time when they applied for group loans
or at a time when others had applied for loans.
Table 6. IO shows that a large proportion of the members, especially from sample
NHGs stated that they had complied with norms relating to attendance, savings
and repayment; the proportion being relatively higher in the case of norm relating
to savings to credit ratio. Despite the fact that some of the members did not
comply with the norms, they obtained loans because of the following reasons.
133
First, these members had urgent credit needs (such as Radha in Box 6.2). Second,
since the groups simultaneously disbursed both internal and external loans, the
norm relating to repayment could not be strictly enforced. Third, non-conduct of
regular meetings was the reason for not fulfilling the attendance norm by a few
SHG members. Fourth, since there was no other borrower and the group wanted
to disburse loans in any case, a few of the members obtained loans though they
did not comply with savings norm.
Box 6.2: Relaxation in the Repayment Norm
Radha. the president of ADS from Sulthan Bathery, stated that she was in urgent
need of loan to commence an enterprise (small electronics goodss shop) for her
son. Of the total investment of Rs 100,000, she mobilised Rs. 60,000 from the
sale of her land. She borrowed Rs 10,000 from the group fund. As she still
needed Rs 30,000, she placed the matter before the group. The group, after
discussing the pOssibility of obtaining bank loan, approached the bank for loan.
Since the group was functioning well in terms of maintaining the accounts and
repaying their loan dues on time, it could easily obtain assistance under the
SHG-bank linkage programme. Thus, although Radha did not follow the
repayment norm, she was sanctioned second loan as she was in urgent need and
the Efotp was confident about the repayment.
T bl 6 0 D'h .
a e . 1 )stn
utlOn a fR espon d b R ents )y easons ~ Obt" L or ammg oans
Reasons Attendance Saving to loan Repayment
norm ratio norm norm
NHG SHG NHG SHG NHG SHG
( %) (%) (%) (%) (%) (%)
Complied with the norm 73.9 70.8 87.5 78.1 74.0 66.7
Borrowed before becoming a 4.4 - 1.0 - -
-
defaulter
Loan was sanctioned as there was 16.6 19.8 6.3 17.7 9.4 14.5
urgent need
Member could not attend meetings, 2.0 3.1 -
-
-
as the member was working
outside
Groups did not conduct regular - 6.3 -
-
- -
meet i rIgs
Never borrowed, but fulfilled the 3.1 3.1 - 3.1 -
norm
No other borrower at that time - - 2.1 4.2
-
-
Obtained external and internal
.
- - 13.5 18.8
loans at a time
Total
100.0 100.0 100.0 100.0 100.0 100.0
What was the reaction of members to those who did not comply with the norms?
The responses presented in Table 6.11, show the fOllowing. First, the proportion
of members stating that they would reject the issue to loans to non-complying
members was high (well over 50 per cent) in the case of repayment norm. This
was because the repayment norm insisted that if a particular member was not
making timely repayments, others were liable to make repayment. Second,
among the members who stated that they would reject the disbursal of loans to
non-complying members. SHG members constituted a relatively larger
proportion in the case of all the three norms. Third, in the case of the norms
relating to attendance and savings-linked-to-credit, the dominant responses were
that these could be relaxed if the credit need was urgent or if the group was
confident of repayment. Fourth, a comparison of Tables 6.10 and 6.11 shows that
although the proportion of norm-complying members was high, the proportion of
those stating they would reject the proposals from those not complying the norm
was less. This difference could be attributed to humanitarian considerations
among members that urgent needs should be met regardless of whether members
complying with norms or not as well as weakening of institutional rules.
Table 6.11: Distribution of Members by Their Statements on Response Towards
Those Not Complying with t h e Norms
Reaction of the members Attendance Saving to loan Repayment
norm (%) ratio norm (%) norm (%)
Will not reject. if the loan i, 60...1 38.6 45.8 41.7 18.8 14.6
urgently needed
It IS alright. If there
"
15.6 28.1 29.2 28.2 13.5 6.3
prompt repayment
Will reject 24.0 33.3 25.0 30.1 54.2 58.3
Two loans can be issued. If
- -
-
-
13.5 20.8
the loan IS not sufficient
enough to meet their demand
Total 100.0 100.0 100.0 100.0 100.0 100.0
This has been further examined by working out cross-tabulations on members'
responses relating to attendance, savings and repayment norms. The distrihution
of sample micro-finance group members by their statements on compliance of
norms and their reactions if other members did not fulfil the attendance norm has
been given in Tahle 6.12.
\35
Table 6.12: Distribution of Respondents by Reasons for Obtaining Loan, and Their
Possible Reactions to Those Who Do Not Fulfil th Att d N
e
en ance orm
Compliance with no nos
Reaction towards loan applications from non-
complYing members
Will not
It is Will Total
reject if alright, if reject No ('7"
the loan is there is ('7c)
urgently prompt
needed repayment
(0/0 ) ( %)
NHG Complied with the norms
52.11 IIUI 2958
71
( 1(0)
Borrowed before becoming a 100 -
-
~ (100)
defaulter
Loan was sanctioned as the 9?J 6.7 -
15 (I(){),
need was urgent
The member could not attend 100
.
-
I 11(0)
meetings as she was a student
Permission was given as she 100 - -
I ( 1(0)
was working outside the village
So far not borrowed, but 33.3 33.3 3:1.3
:I ( 1(0)
fulfilled the norm
Total 60.4 15.63 23.96
96(100)
SHG Complied with the norm 30.9 26.5 42.6 6R 100)
Loan was sanctioned as the 68.4 15.8 15.8
19 (100)
need was urgent
Permission was given as she 100
- - :I ( 100)
was working outside the village
Group did not conduct regular
- - 100 61100)
meetings
Total 38.5 ~ 2 . 3 333
96 (100,
Note: Figures In the parentheses indicate percentages
Three key points emerge from Table 6.12. First, the members who had not
complied with the norms were likely to state that the norms should be relaxed in
cases of urgent credit needs and if the group had trust on repayment. Second, a
higher proportion of those complying with the norms was likely to state that
proposals from those not complying with the norms should be rejected. This was
especially the case among SHGs. Third, among those complying with the nom)s,
a larger proportion was likely to state that norms should be relaxed in the case of
urgent credit needs.
" All the members who had not borrowed so far also fulfilled the nonn and hence, there ""' a
difference between those members who fulfilled the attendance nonn and this table.
136
The same emerges from Table 6.13, which provides the distribution of members
by compliance of savings to credit norm and their responses on those not
complying with the norm.
Table 6.13: of Respondents by Reasons for Obtaining Loans and
TheIr PossIble ReactIOns to Those Who Do Not Fulfil Saving Linked to Credit
Norms
Compliance with the norms
Reaction towards loan applications from non
complvine members
Will not It is Will Total
reject if alright if reject Number
the loan is there is (%) (%)
urgently prompt
needed repayment
(%) (%)
N Complied with the norm 45.2 27.4 27.4 84(100)
H Borrowed before becoming a 100 - - I (100)
G defaulter
Loan was sanctioned as it was 83.3 16.7
- 6 (100)
an urgent need
No other borrower at that time
-
100 - 2 (100)
So far not borrowed, but
-
66.7 333 3 (100)
fulfilled the norm
Total 45.8 29.2 25.0 96 (100)
s Complied with the norm 38.7 25.3 36.0 75 (100)
H Loan was sanctioned as it was 58.8 29.4 11.8
17 (100)
G an urgent need
No other borrower there at that 25 75
- 4 (100)
time
Total 41.7 28.2 30.2 96 (100)
Note: FIgures In the parentheses IndIcate percentages
Table 6.14 on the distribution of members by compliance of repayment norms
and their reaction towards the members not fulfilling the norm shows that the
pattern was distinctly different. The proportion of norm-complying members
stating that they would reject the proposals from non-complying members was
very high in the case of repayment as compared to attendance and savings norms.
This shows that the members were alert in so far as free-riding in the groups was
concerned, and that they would reduce the chances of selecting bad borrowers.
The strict enforcement of the repayment norm was due to the fear among
members that if a loan was beyond member's ability to make repayment, this
might lead to her indebtedness and thereby the failure of the group.
137
Another prominent response was that so long as a member did not take two loans
from the same source, there was no problem. This implies that members made a
clear distinction between loans from internal and external sources. This further
implies that if the member had taken a loan from external fund and this was not
sufficient to start income generating activity, member could be given a loan
from group savings fund.
Table 6.14: Distribution of Respondents by Reasons for Obtaining Loans and Their
Pbl R Th Wh D N F lfil R N
OSS1 e eaclJons to ose 0 0 ot u 1 epayment
orm
Compliance to the
Reaction towards loan applications from non complying
nonn
members
Will not It is This is not a major Will Total
reject if alright if issue, if one loan is not reject
the loan there is
sufficient enough to (%J (%)
is prompt satisfy their demand.
urgently repayme If they borrow 2 from
needed nt (%)
4.
the same category ,
(%)
then problem arises
(%)
N Complied with the 22.5 11.3 -
66.2 71
H norm
( 1(0)
G Obtained external 22,2 33.5 13.5 44.4 13
and internal loans ( 1(0)
at a time
Loan - 66.7 - 33.3 9 (100)
sanctioned as the
need was urgent
So far not - 66.7
-
33.3 3 ( 100)
borrowed, but
fulfilled the norm
Total 18.8 13.5 13.5 54.2 96
( 100)
S Complied with the 9.4 3.1 - 87.5 64
H norm
( 1(0)
G Obtained external
- - 100 - 18
and internal loans
( 1(0)
at a time
Loan
W(J\ 57.1 28.6 14.3 14
sanctioned as the
( 100)
need was u!ent
Total 14.6 6.3 20.8 58.3 96
( 100)
. t'I' d' Th', can be either internal or external.
4(, Same l'alegory represent .... source () t.:n Ing. L
Thus, a large proportion of the members (especially among NHGs) complied
with the norm. The member responses on what would be their reaction if a
member did not comply with the norm shows that a large proportion of the
members would not reject the loan disbursal to non-complying members in the
case of first two nonns. In the case of repayment, the members preferred to be
stricter to reduce the emergence of free riders. These responses were shaped by
their past experiences from the group and the future benefits, which they were
likely to receive from the group. Thus, the benefits, which the members were
gomg to receive from repeated interactions, appeared to be the basis of these
responses. This formed the basis of Game theory. In the case of attendance norm
and saving to loan ratio nonn, a large proportion of the norm complying members
would not prefer rejecting the loans to non-complying members because these
members might have urgent needs or it was alright if the group had trust on the
member.
The ahove shows that the memhers were trying to help their partners at present,
even if this meant that they were violating the norms. This was based on the
expectation that their co-p,lrtners might cooperate with them in case they helped
them at the time of their urgency. Thus, this was the case where there was
reciprocity. which prevented the members from strictly enforcing the attendance
norm. The reciprocity was more explicit among members belonging to
homogeneous groupS-l7 Perhaps this was the reason why a large proportion of the
norm complying NHG members did not state that they would reject the disbursal
of loans to non-complying members. Even though the mechanism of meeting was
prevalent among the micro-finance group members, they did not strictly enforce
the norm. Moreover, the preferences of the members indicate that a large
proportion of the members would not even find any problem in sanctioning loans
to those who did not comply with the norm.
The reciprocity was quite observable even among norm-complying members.
These norm complying members needed other members' support while getting
J7 arc more among NIIG!'o as comparL'u 10 SHGs.
139
their loans sanctioned. They presumed that if they did not support others, they
might not get support at the time of their need. Thus, it was an issue of
reciprocity where members had some kind of adjustment that 'if you help me
now, I will help you in return later or I will help you now on the condition that
you will help me at a later stage'.
However, in the case of repayment norm, a large proportion of the members
preferred rejecting the issue of loans to non-complying members. Such responses
from the members indicated that they tried to avoid the emergence of free riders
with respect to this norm. If the members were liberal in sanctioning loans
without complying with the norm, then the members would have borrowed more
and it would have resulted in the failure of the entire group. Repayment norm
insisted repayment of their earlier loans to become eligible to obtain further loans
from the group. If the members were not strictly enforcing this norm, then all of
them would have preferred to borrow frequently from the group. If a member
npected th;Jt the benefits. which he W;JS going to get from the group in future,
were less. it W;JS quite likely that he might free ride and others too would prefer to
do that and hence. it would have lead to the failure of the group. Therefore,
repayment norm was the one in which the members were bound by the previous
loans ;Jnd it inSisted that the members should repay their earlier loans to become
eligible for funher loans. In the case of norms relating to attendance and saving to
loan ratio, there were no such strict and direct monetary bindings related to the
past. This could be the reason why the members were very strict in avoiding the
emergence of free riders with respect to repayment norm.
As per the repayment norm, the disbursal of second loan to those not repaying the
tiN loan was denied. In this regard, Morduch (1999b) states that if the members
felt that they were not gOiOg to receive funher benefits from the programme or if
the further chances of gettiOg benefits were less, they might try to maximise their
benefits from the group by borrowing more loans at a time, without making any
repayment. Moreover, if alternative credit sources were available for a person.
she might free ride by borrowing from the group at a time without any
140
repayment. Such behaviour on the part of a member might adversely affect the
further functioning of the group, as other members in the group would be liable to
makc repayments for the defaulting members. This indicates that members
strictly enforced repayment norm to prevent the occurrences of such free riders.
The qualitative evidence further corroborates this. According to some members,
no one should be issued two loans from the same category at a time, either
internal or external. More groups were tying to enforce this principle in the case
of external loans as against internal loans. This was because external loans were
binding to the external credit sources and therefore, prompt repayment was
necessary. A non-rcpayment of external loan might adversely affect the chances
of obtaining loans by other members of the group in future. Some members were
of the opinion that there existed a limit on common group fund of savings
contributed by the members from where the loans were sanctioned. Therefore,
such a limit restricted frequent issue of loans to a single member.
6.6. Summary
In the present study, all the sample members except three NHG members
received loans from the programme. It is observed that SHG members received
larger number and amount of loans as compared to NHG members. The groups
generally followed four types of mechanisms for the selection of borrowers.
These are participation of members in the group meetings, issue of loans as a
proportion of savings. new loans are issued only after the repayment of the earlier
loans and completion of minimal duration of membership. A majority of both
NHG and SHG members followed these norms. NHG members were observed to
be more in fulfilment of these norms. The financial backwardness of the NHG
members was one of the reasons behind this.
As a majority of the members stated that they joined the programme mainly to
get financial benefit from the programme, the amounts of loans received by the
members have been subjected to our analysis. It has been found that the variables
relating to group size, external debt, type of programme, years of stay in the
141
programme, fulfilment of nonns relating to saving to loan and repayment, caste
and group discussion explained the amount of loans received by the members.
Though variables of fulfilment of nonns and group discussions were significant,
they could not explain the expected relationship. We examined the perception of
the members regarding the selection procedure followed in the group. It indicates
that the variables relating to the type of the programme, group size, mechanisms
of participation in meetings, monthly savings, group discussion, education and
experience of the members explained the perception of the members regarding
the selection procedure.
We, further, examined the respcnses of the members to those who did not follow
the norms. Both the SHG and NHG members stated that they would relax the
fulfilment of norms while issuing loans to others. NHG members were found to
be more in relaxing the norms. The study brought out that there existed a
reciprocal adjustment with regard to the relaxation of nonns. It was mainly
because of the homogeneity of the members. In the foHowing chapter, we
discuss. how do the members utilise the loans borrowed from the programme.
t42
CHAPTER 7
MONITORING THE UTILISA nON OF LOANS
7.1. Introduction
How do micro-finance groups monitor that the loan amounts are used for need-
based and productive activities? How do they ensure that prospective borrowers
have required skills, access to raw materials and adequate marketing facilities to
sell the final products? Moral hazard, so common in the rural credit markets,
arises when lenders do not monitor the utilisation of loans. Members of micro-
finance groups, it is expected, are better placed when it comes to monitoring the
actions of their pcers. The principle of joint-liability compels the micro-finance
group members to monitor the utilisation of loan amount because non-repaymcnt
on account of moral hazard tendencies will lead to a situation where the members
have to bear the losses on account of non-repayment. The peer monitoring in a
group is like a public good or an investment made in the group (Devereux and
Fishe 1993). This investment increases the likelihood that group members repay
their loans. There is, however, a problem. Since monitoring is a collective good,
there are chances that the members may undersupply this good. In order to avoid
the emergence of such non-cooperative behaviour, members need to he provided
with mechanisms and incentives (positive and negative) to monitor the actions of
their peers (Olson 1965; Stiglitz 1990).
The sample micro-finance groups incorporated certain mechanisms and provided
incentives to monitor the actions of borrowers. This chapter aims to examine the
impact of these mechanisms and incentives on monitoring of borrowers with the
help of data collected from sample groups and individual borrowers.
7.2. Monitoring Status in the Sample Groups
What are the different monitoring mechanisms and incentives prevalent in the
sample micro-finance groups to encourage the promotion of those activities.
which reduce the likelihood of default? We analyse this question in this section
143
by first providing information on mechanisms and incentives prevalent in the
sample groups and then discussing the status of monitoring.
7.2.1. Types of Monitoring
According to representatives of the sample groups, four monitoring mechanisms
were incorporated. These relate to the purpose of utilisation of the loan,
providing skills for undertaking IGA, ensuring the availability of raw materials
and marketing facilities. The extent to which these were actually followed in the
groups varied (Table 7.1). The purpose of utilisation was monitored, to a large
extent, by about 28 per cent of the groups. The proportion of groups stating that
they monitored the other aspects to a large extent declined, as we moved from the
provision of skills to ensuring marketing facility. This suggests that monitoring
was limited to loan utilisation wherein groups sought to ensure that loan amounts
were not diverted to risky activities. The other point that emerged was that a
larger proportion of SHGs was involved in monitoring, and this could be
attributed to longer duration of these groups and hetter presence of literate
members.
T fM Tahle 7.1: Distribution of Group., by 0 omtonng
TypesoC Responses of the NHG SHG Total
monitoring

Purpo,e of To a large extent 4 (25.0) 5 (31.3) 9 (281)
utilisation of the
10 (62.5) II (68.8) 21 (65.6)
loan
Not at all 2(12.5) - 2 (63)
The skills to To a large extent 3(18.8) 4 (25.0) 7 (219)
undertake economic Part lilll Y 4 (25.5) 6 (37.5) 10(313)
activity
Not at all 9 (563) 6 (37.5) 15 (46.9)
The avai lability of To a extent I (62) - I (3.1)
raw materials Partially 7 (43.8) 3(18.8) 10(31J)
Not at all 8 (50.0) 13(81.2) 21 (656)
The availability of To a large extent I (6.2) -
1(3.1)
marketing facilities Partially 5 (31J) 2 (12.5) 7 (21.9)
Not at all 10(62.5) 14 (87.5) 24 (75.0)
Total
16 (1000) 16 (100.0) 32 ( 100.0)
Note: Figures In the parenthe'es are percentages
The sample groups not only ensured that loan applicants required skills but also
made efforts to obtain the same from promoting agencies through training
144
programmes. Promoting agencies conducted training programmes to enable the
micro-finance group members to undertake viable and feasible IGAs. In general,
group leaders or those who were relatively free at home, participated in these
programmes. However, it was expected that a trained member from the group
should transfer the skills to the other members, if they showed interest in
acquiring the skill. Table 7.2 reveals that over 80 per cent of the SHGs received
some or the other training, while the corresponding proportion was about 54 per
cent in the case of NHGs. Most of the sample groups obtained skills in the
manufacturing of soap, umbrella and candle, food processing and cultivation.
Table 7.2: Distribution of Micro-Finance Groups by Training Programmes
Received
Type of training NHG(%) SHG (%) Total (%)
(n=16) (n=16) (n-32)
Soap making 25.0 37.5 31.3
Candle making 12.5 0.0 6.3
Food processing 0.0 12.5 6.3
Umbrella making 6.3 12.5 9.3
Agriculture related 6.3 12.5 9.3
Footwear making 6.3 0.0 3.1
Cow rearing 0.0 6.3 3.1
No training provided 43.6 18.7 31.3
Total 100.0 100.0 100.0
7.2.2. Incentives for Monitoring
Three types of incentives were stated to be prevalent in the sample groups. Of
them, two were positive incentives, while one was negative incentive. The first
positive incentive was related to sharing of profits. If members' monitoring of
the loan utilisation lead to good repayment and profits within the group, each
member could "hare the profits. The second positive incentive was that good
repayment enabled group members to have regular access to credit. The negative
incentive was the Iiahility to make repayments in case of default by other
members. The response" of sample members on the extent to which these
incentives were followed have been presented in Table 7.3. It can be seen from
Table 7.3 that a larger proportion of sample members stated that the positive
incentive of ensuring loans to other members and the negative incentive of
145
liability to repay in cases of default were present. either to a large extent or
partially. in the groups. The proportion of members stating that the positive
Inc'enlive of sharing profits \\as present was comparatively less. Another finding
was that a relatiwly larger proportion of SHG members stated that the incentives
were present in their groups.
T ;}hle 7.3: Responses of Members ('7<-) on the Extent to Which Monitoring
Inc t P h G en I yes were resent III t C
roups
IncentiHs of
Members of Total (n=192)
for members on the
NHG SHG
monitoring extent to which
(n=96) (n=96)
incentins were
Dresent
Sharing the To a large extent 1-'(135) 30(31.3) 43 (22.4)
profits from Partially 41 (417)
3809.6) 79 (41. 1 )
the group
Nol at all 42 (43.1\) 28(29.2) 70 (36.5)
Liaoility to To a large extent 36 (37.5) 46 (479) 82 (42.7)
repay III Partiallv 27 WI.l) 30 (3 13) 57 (29.7)
of default
NOI al all 33(34.4) 20 (2(UI) 53 (27.6)
Ensuring that To a large extent 38 (39.6) 46 (47.9) 1\4 (43.8)
others Partially 33 (34.4) 30 (JU) 63 (32.8)
receive loans
Not al all 25 (26.0) 20(208) 45(234)
Note: FIgures In the parentheses are percentages
7.2.3. Group Met'ting.'i. Discus..'iion and Monitoring
'.loral ha7ard is (lost:rved to Oe a sainu, proolcm In the credit market. as
horrowers direct the funds for those projects which have high risks. An important
contrihullng fach)r for moral hazard prohlem is the information a'ymmetry
between lenders and oorrowers. Micro-finance group meetings provide a
mechanism \\ hcrl'1Il such mformation problem can nc sOI1ed out by having a
di'-Cussion on each horrower, ,haring the informaliol) PI) the loan utilisation and
monitoring tht: aclHHlS of the borrower. For nlonitoring to he effective, there must
be meetings and dl'lu .. ,i(ln, among member, rciating tll monitoring. We,
therefore. a .. ked the re'p(llldents about the frequency of participation in group
rcl'lting to monitoring. The responses. which have heen presented in
Tahle 7.4. show that ahout 44 per cent of the NII(, members and 48 per cent of
the SHG members stalt:d that they regularly participated in group meetings
relating 10 monitoring. Ah(lut 2X per lTnt (If thL' NIIG memhers and <Jbout 45 per
1-16
cent of the SHG members stated that they occasionally participated in the group
meetings. Thus, a larger proportion of SHG members participated either
regularly or occasionally in the group meetings. The proportion of
stating that they rarely participated in group meetings was relatively high among
NHGs. This could be attributed to the larger presence of tribal members who
were illiterate and often did not have prior experience of partiCIpation in such
meetings. Another reason is that since the NHGs depended on external
volunteers for the conduct of meetings, they did not often hold regular meetings.
This implies that groups, even if they were homogeneous, did not succeed in
collective action if a majority of them were illiterate. This would. in tum, call for
capacity building efforts.
Table 7.4: Distribution of Members (%) by their Responses on the Frequency of Their
Participation in the Group Discussion Relating to Monitoring and the Reasons for Such
R esponse
Participat-
Distribution of members (%) by
ion in Does not Not in Often Speaks Everyb- She had
group
know good accepts only ody been the
discussion
how to terms the when speaks in group
particip- with decisions need the represe-
ate others of others arises forum ntath'e
actively
since it is
her own
NHG
Rare 23 (82.1) 5 (17.9) -
-
Occasional -
- 12(46.2) 14 (53.8) -
-
Regular
- -
-
- 27 (64.3) 15 (35.7)
Total 23 (24.0) 5 (5.2) 12(12.5) 14 (146) 27 (28.1) 15(15.6)
SHG
Rare 5(71.4) 2 (28.6) - -
-
Occasional
- 20 (48.8) 23 (55.4) - -
Regular -
31 (64.6) 15 (313)
Total 5 (5.2) 2 (2.1) 20 (20.8) 23 (24.0) 31(32.3) 15 (156)
In
Total
28
(100.0)
26
( 100.0)
42
( 100.0)
96
( 100.0)
7
( 100.0)
43
( 100.0)
48
( 1000)
96
( 100.0)
What factors influence the members to participate regularly or occasionally or
rarely in the group discussions? Two factors were stated to have contributed for
regular participation. First response was that since the group had their own entity
everyone participated. Second response was that since some members had
gained experience of participation as group representatives, they regularly
participated. The reasons for occasional participation were again two-fold.
Some members stated that they spoke in the group meetings only when there was
a need. The other response was that some members did not often participate
because they accepted the decisions arrived at by the others.
The reasons for rare participation were more serious. The important reasons why
members rarely par1icipated in the group discussions relating to monitoring were
lack of capacity and poor governance. Of the members who stated that they
rarely participated in the group meetings, a majority noted that they did not know
how to participate. Another reason cited was that a few members did not get
along with the other members. This came in the way of effective participation.
Since the proportion of members stating that they rarely participated was high
among NHGs. this needed to be addressed as a part of capacity building
measures.
How effective was the monitoring among sample groups? As can be deduced
from the foregoing discussion. the monitoring of the loans was stated to be
effective or extremely effective by 69 per cent of SHG members as compared to
about 57 per cent of NHG members.
Table 7.5: Status of Monitonng In t e ample h S I G roups
Status of monitoring Proportion of members from
NHGs SHGs
Ineffecti ve 42.7 31.2
Effective 35.4 38.6
Extremely effective 21.9 30.2
Total 100.0 100.0
The foregoing discussion suggests that both the types of groups incorporated
mechanisms for the monitoring of loans. However. the extent to which these
148
were followed varied. Similarly, there was also difference between NHGs and
SHGs in so far as the group discussions relating to monitoring. In sum, while a
larger proportion of the SHG members noted that the monitoring was effective in
their groups, over 43 per cent of the NHG members stated that monitoring was
ineffective in their groups. What implications did these differences have on
outcomes? In the ensuing sections, we have made an attempt to examine the
outcomes in terms of the proportion of members undertaking IGAs, success of
these activities and factors influencing the monitoring function within the groups.
7.3. Monitoring the Loan Utilisation
Rural poor obtain credit to meet the needs relating to consumption and income
generation. At times, it is maintained that credit for productive activity leads to
the creation of asset base. improvement in the ability of the members to generate
income to repay loans and economic empowerment. The groups, however, have
dilemma in this regard. Since undertaking of new or non-traditional IGAs
involves risks. the memhers should be encouraged to undertake those activities in
which they have some experience. or those activities, which do not pose serious
problems to the memhers in acquiring the required expertise. Yet another
argument is that the consumption credit needs are as important as those relating
to income generation. and hence, no distinction should be made in so far as the
provision of credit is concerned. It has been found that in the absence of reliable
social security provision by the government, the rural poor often face crises
relating to health emergencies, etc. (Rajasekhar 2002; Rajasekhar et al 2005).
These ,lUdies suggest that there should be adequate provision for consumption
credit or the micro-finance groups should be linked to social security schemes of
the government or the private sector.
It is in this context that monitoring the purpose of loan utilisation becomes
important. We have seen in Table 7.1 that over 90 per cent of the sample micro-
finance groups stated that they monitored the loan utilisation. It should be,
however, noted that there was no restriction on the part of groups to utilise the
credit for a particular purpose - be it for consumption or production. Even in the
149
case of those sample groups, which had accessed credit from external agencies
such as NGOs, banks and gram panchayaths, it was leamt that, there was no
insistence on using the loan for a particular type of activity. All that external
agencies did was to undertake regular visits to groups to review the repayment
progress rather than to monitor the purpose of utilisation. Such a freedom in the
utilisation of loans either for consumption or production lead to a situation where
members were not under pressure to write different purpose in the loan
application though the purpose for which they needed credit was actually
different. This, in a way, prevented the emergence of moral hazard tendencies
within the groups.
If this was the case. the following question arises. What did the groups mean
when they stated that they monitored the loan utilisation? The groups merely
ensured that used the loan amount for the purposes for which it was
taken, and that there was repayment.
7.3.1. Purpose-wise Distribution of Credit Provided by the Sample Groups
The micro-finance groups in India enable the members to obtain credit for
consumption in the initial stages (say, first six months to one year). The logic
behind is as follows. First, the members, most of whom being poor, may
have pressing consumption credit needs, and until the time that these have been
met, they cannot focus on income generation activities. Second, the revolving
credit fund at the disposal of groups may be small in the initial stages and this
would not allow the groups to provide credit for income generation. In general,
only when the groups mature, members inculcate the habit of borrowing and
repayment, and groups gain access to credit from external sources such as bank,
do members gain access to production credit (Rajasekhar 2004). Since the
sample SHGs) existed for over two years, we anticipated that
they would have proVided larger share of credit for income generation. In the
ensuing paragraphs, an attempt was made to analyse the purpose-wise
distribution of credit.
150
Following Rutherford (200 I ), one can categorise the credit needs into three broad
types - life cycle, emergency and investment. Life cycle needs include
marriages. education. etc., while emergencies relate to health, death, etc. In
addition to these, we have identified one more need relating to repayment of past
debts. Purpose-wise distribution of credit has been provided in Table 7.6.
T bl 76 a e : Purpose-wise Distribution of the Loan Amount
Purpose NHG
SHG
Amount Average Propo- Amount Aver- Propo-
( R ~ . ) of loan rtion (Rs.) of age rtion
loans amount of the loans loan of the
(Rs.) loan amou- loan
nt
( Rs.)
Agriculture and 90.600 UI4.3 16.3 66,700 2,223.3 5.7
allied activities
Manufacturing and 32.000 3.555.5 5.8 12,300 3.075.0 1.1
business
Life cycle needs 1.45,200 2.420.0 26.2 2,63,750 2,747.4 22.3
Emergency needs 30,750 1.088.7 5.6 85,950 2,046.4 7.3
Repa) ment of past 1.90,350 2.046.8 35.2 7.06,752 3,397.8 59.9
debts
Other needs 60,250 1.396.3 10.9 43,400 1,570.4 3.7
Total 5,53.650 2.171.2 100.0 11.78.852 2,903.6 100.0
The sample NHGs had disbursed Rs. 5.54 lakhs since inception, while SHGs had
disbursed as much as Rs. 11.79 lakhs. Since SHGs existed for relatively longer
period, the volume of credit disbursed was understandahly high. However,
higher average amount in the case of SHGs suggests that these groups were, in
general. providing larger amounts of credit.
About one-third of the total credit was provided by SHGs and NHGs for needs
relating to life cycle (marriages, education and house construction) and
emergencies (health). This can be interpreted as follows. The micro-finance
groups consisted of the poor. who had diverse needs relating to life cycle and
emergencies. [n the wntext of agrarian crisis in the district and falling wage and
farm incomes, the credit needs towards life cycle and emergencies might have
been all the more important. [f they did not have access to micro-finance groups,
they had to depend on some outside agencies for meeting these needs, and this
1St
Following Rutherford (200 I ), one can categorise the credit needs into three broad
types - life cyeIe, emergency and investment. Life cycle needs include
marriages, education, etc" while emergencies relate to health, death, etc. In
addition to these, we have identified one more need relating to repayment of past
debts. Purpose-wise distribution of credit has been provided in Table 7.6.
Table 7.6: Purpose-wise Distribution of the Loan Amount
Purpose NHG
SHG
Amount Average Propo- Amount Aver- Pmpo-
of loan rtion (Rs.) of age rtion
loans amount of the loans loan of the
(Rs.) loan amou- loan
nt

Agnculture and 90,600 4,314.3 16.3 66,700 2,223.3 5.7
allied activities
Manufacturing and 32,000 3,555.5 5.8 12.300 3,075.0 1.1
business
Life c\clc needs 1,45,200 2,420.0 26.2 2,63,750 2,747.4 22.3
Emergencv needs 750 1,088.7 5.6 85,950 2,046.4 7.3
Repayment of pa\t 1,90,350 2,046.8 35.2 7,06,752 3,397.8 59.9
debts
Other needs 60,250 1.396.3 10.9 43,400 1,570.4 3.7
Total 5,53,650 100.0 I 1,78,852 2,903.6 100.0
The sample NHGs had disbursed Rs. 5.54 lakhs since inception, while SHGs had
disbursed as much as Rs. 11.79 lakhs. Since SHGs existed for relatively longer
period, the volume of rredit disbursed was understandahly high. However,
higher average amount in the case of SHGs suggests that these groups were, in
general, providing larger amounts of credit.
About one-third of the total credit was provided by SHGs and NHGs for needs
reIating to life cycle (marriages, education and house construction) and
emergencies (health). This can he interpreted as follows. The micro-finance
groups consisted of the poor, who had diverse needs relating to life cycle and
emergencies. In the contex t of agrarian crisis in the district and falling wage and
farm incomes, the credit needs towards life cycle and emergencies might have
been all the more important. If they did not have access to micro-finance groups,
they had to depend on some outside agencies for meeting these needs, and this
151
might have, in tum, led to borrowing at higher rates of interest, growing debt
burden and considerable leakage of incomes. Considering these, the opportunity
provided by the groups to meet the credit needs relating to life cycle and
emergency should be appreciated.
Significantly, nearly 60 per cent of the total credit disbursed by the SHGs and
over 35 per cent of the credit provided by the NHGs was used for the repayment
of old debts. The major components under the category of repayment of old
debts were the following; 1) Getting back pledged assets; 2) Renewal of gold
loans and micro-finance loans; 3) Repaying the loans obtained to repay
SHGINHG loans. If the members borrowed from the sample micro-finance
groups to get back the pledged assets, this would be beneficial to the members, as
their asset base would not get eroded. This would also help reduce the debt
burden. Viewed from this angle, the loans provided by micro-finance groups to
get back the pledged assets could be considered as positive. But, the members
often borrowed either to renew gold loans or to repay the amounts borrowed to
repay the group loans. This could be considered as negative because members
adopted the strategy of utilising different sources of credit to service the existing
debts. Borrowing from micro-finance groups to renew the existing loans or repay
the loans taken to repay previous micro-finance loans had become a growing
trend largely due to the agrarian crisis in the district. This has been further
discussed in the chapter on repayment.
Income generation loans include those taken for agriculture and allied activities
of livestock rearing, and small manufacturing and business (candle making, soap
making, electrical shop and petty business). Since income-generating activities
provide constant supply of income to the members and improve their capacity to
repay the loans, one would expect micro-finance groups to focus on lending for
productive activities. But, Table 7.6 reveals that, only 22.1 per cent of the total
credit provided by the NHGs and as low as 6.8 per cent of the credit provided by
the SHGs had gone for income-generating activities.
152
Table 7.7 provides data on broad distribution of members by those who
undertook income generation and those who did not undertake the activities-l8
About 67 per cent of the NHG members and 70.8 per cent of SHG members were
not involved in any IGA; the proportion of members not involved in any IGA
was higher in the case of tribal members.
Table 7.7: Distribution of Members by Income Generation Activities Undertaken
'th L R . d f h G
WI oan eceive rom t e roups
Activities
NHG
SHG
Non Tribal Total Non Tribal Total
tribal (n=48) (n=96) tribal (n=18) (n=96)
(n=48) (n-78)
Not undertaken 62.5 70.8 66.7 65.4 94.4 70.8
Agriculture 4.2
-
2.1 6.4
- 5.2
Business 2.1 - 1.0 1.3 -
1.0
Livestock rearing 29.2 16.7 22.9 26.9 5.6 22.9
Manufacturing 2.1 12.5 7.3
- - -
Total 100.0 100.0 100.0 100.0 100.0 100.0
Among those undertaking lGAs, a majority was involved in livestock rearing.
This comprised of rearing of milch animals and goats; the former, requiring
larger investment. was mostly undertaken with the help of the bank loans, while
the latter was undertaken with the help of revolving fund from the gram
panchayath. The activity of manufacturing of soap and candle was confined only
to the NHG members. It should be also noted that a large proportion of the
activities undertaken by the members were those in which the members were
already involved. As in the case of Beegamjan (Box 7.1), 47 per cent of the
NHG and 43 per cent of the SHG members stated that they had continued the
activity, which they had been doing for a long time.
'" It should be remembered thaI there were some SHG members who had initiated the activity and
had leflthe same due 10 the problems of marketing.
153
Box 7.1: Preference for the Traditional Income Generation Activities
Beegamjan, a member of SHG from Noolpuzha panchayath, has been rearing
milch animals and selling milk for a long time. In 2002, she received a SGSY
loan of Rs. 20,000. She utilised the loan amount for expanding the dairying
activity. She bought two additional cows with the loan amount and started to
sell milk to the cooperative society. Her past familiarity enabled her to succeed
in this activity, which contributed a major share to the household income.
The reasons for a low proportion of credit for income generation are not far to
seek. The existing literature has come up with the following factors. A study by
Floro and Dymski (2000) shows that credit for income generation made
households financially fragile and women became more vulnerable. This was
especially the case when women depended on external sources for making
repayment of the loan once their activity eroded. Many times pressure to repay
forced the women to depend on outside support and this lead to indebtedness
(Chavan and Ramakumar 2002). The social and economic constraints also
disabled the poor women to undertake income generation activities (Rajasekhar
2002 and 2004). Faced with similar problems, the sample micro-finance groups
might have taken the decision not to allow the members to undertake risky
activities.
7.3.2. What Factors Influenced Undertaking ofIGAs by the Members?
Notwithstanding the general expectation that micro-finance programmes should
disburse a larger proportion of loan amount to IGAs as these activities enable
members to generate income and repay the loans, a majority of the sample
members have not undertaken IGAs. Why is that a large proportion of members
have not undertaken IGAs'? An attempt is made in this section to analyse the
factors that influence the members to undertake IGAs with the help of a
regressIOn
outcomes,
model. Since the dependent variable is a dummy with two possible
we have estimated a logit model. We have broadly classified the
major factors into three heads, namely, member, household and group
characteristics. The expected relationship of these variables with dependent
variables along with average and standard deviation has been provided in Table
7.8.
154
Table 7.8: Description of the Variables and Their Expected S' lGA U d k b
h M b
. Ign on s n erta en y
teem ers
Dependent variable: I
if the member had undertaken lGA
0- if the member had not undertaken IGA
Variables Description
Expect- Pro port- Standa-
ed sign ion! rd
average deviati-
on
G roup characteristics
GRPSIZE Number of members in a group -
16.31 3.26
SHGNHG Programme to which the member
+
50 0.50
belongs. Dummy= I, if the member is
SHG member;
0, otherwise or NHG
50
CASTE Social categories such as caste, tribe
+
65.62 0.48
etc. Dummy= I, if the member is a non
tribe;
0, otherwise 3438
PCI Per capita income of the household (Rs)
+
6,384.47 5,919.52
EDUCN Education of the member in terms of the
+
6.83 4.05
number of years of schooling
TOTLNA Total loan received (Rs.) by the member
+
11,111.9 ]3,529.4
MT since inception 2 4
TNGPRG Dummy=), if the member has
+
23.28 0.42
M participated in the training programme;
0, otherwise
76.72
Group size is expected to have a negative relationship with IGAs undertaken by
the members, This is under the assumption that the members belonging to groups
having larger number of members have a lower capacity to enforce collective
monitoring on the utilisation of the loan, On the other hand, free riding would be
more in large groups while sharing the responsibility of monitoring. Therefore, a
negative relationship for group size with IGAs is expected. The variable
SHGNHG is expected to have positive relationship as SHG members, with
considerable experience in micro-finance, are more likely to undertake IGAs.
They have also received larger loan amounts, which may provide more
opportunities for productive investment.
Among the household characteristics, caste and per capita income are expected to
have positive relationship with the dependent variable. The variable Caste is
155
measured as a dummy. The expectation IS that as compared to non-tribal
members. tribal members are less likely to undertake IGAs. This is under the
assumption that tribal members have greater credit needs for consumption as
compared to non-tribal members. Members belonging to households having
higher per capita income are expected to be in a better position to make
investment on IGAs. Moreover. members belonging to households having higher
per capita income are in a better position to direct funds from their own income if
the loan amount is not sufficient enough to meet their investment.
The variables on education. total loan amount and participation in the training
programme are expected to have positive relationship with the dependent
variable. Educated members. with more awareness of the investment
opportunities. are likely to undertake IGAs. Higher loan amount facilitates
members to invest for productive purposes. Participation in the training
programmes enables the members to undertake IGAs that are less risky and more
remunerative in character.
The regrc"IOn results have been presented in Table 7.9. Chi-square value
indicates that the logit model was highly significant at one per cent to explain the
IGAs undertaken by the members. Four variables were significant at one per cent
level. The variables of per capita income of the household. total loan amount
received by the members. participation in the training programme and type of the
programme were significant at one per cent. But. the variable on the type of the
programme received a sign against our expectation.
G
49
Surprisingly. the results indicate that a fewer SHG members undertook I As .
The field data show that some of the SHG members undertook the activities in
the past and closed them down due to problems of marketing, stiff competition
from established products. problems of small scale of operations, etc. Thus.
though SHG members had better experience as micro-finance group members
and received training. they could not undertake IGAs or sustain them due to due
"J Our analy,i,,, haseu on the IGAs unucrtukcn by the members at the time "fthe stuuy.
156
to problems of marketing. The examples of such cases have been given in Boxes
7.2 and 7.3.
Table 7 9' Determinants of IGAs Undert k b h M b ..
a en ,y t e
em ers
Variables Coefficients
T value Marginal effect
CONSTANT 1.913583***
-1.66 -
GRPSIZE
-0.0081 -0.12 -0.00163
SHGNHG -1.381* -2.86 0.2732*
CASTE 0.0738 0.16 0.0147
PC! 0.000099* 2.82 0.000019*
EDUCN 0.02143 0.43 0.004
TOTLNAMT 0.000056* 3.44 0.0000112*
TNGPRGM 1.4654* 3.51 0.32706*
Pseudo R2 0.1975
Lo)! likelihood function -94.781361
Chi square 46.66
De)!rees of freedom 7
Significance level (0.0000)
No. of observation, 189
* Significance at I prr cent level; *** slgmficance at 10 per cent level
Box 7.2: Difficulties of Sustaininl!, Group Enterprise
Pw,hpa. a SHe; member from Noolpuzha Panehayath, shared hcr difficulties in
operating her slllall enterprise. Four members from her group started a small
food-processing unit by mobilising Rs. 5,000 of loan from the revolving fund.
They had the intention of selling their products to the nearby houses and in the
established market. But. later, they realised that marketing was a mammoth
problem hefon: them. It was difficult for them to compete with the products in
the established market. Moreover, the selling of products to the neighbouring
families w a ~ even more difficult, as some of their neighbouring SHGs too had
engaged in the production of similar products. Later, they decided that the
products should he ,old among the members in the group. However, the market
was limited. ri nally, they were forced to close the enterprise.
Even though the promoting agencies provided training, there was inadequate
support from their part to scll the products manufactured by them. This, in turn,
limited the scope of the market. This adversely affected their scale of operation.
Therefore, the ,mall scale of operations of the activities undertaken by the micro-
finance groups did not enable them to exploit the benefits of scale economies.
157
Constant fluctuations in the prices of raw materials, especially in the case of
coconut oil for soap making, brought the production to a standstill in the case of
group enterprises of some SHGs. Another factor, which limited the marketability
of the product, was the lack of interest on the part of the local people to purchase
the products, which were manufactured at the local level. Besides this, similar
products manufactured by neighbouring groups limited the scope of operation.
Box 7.3: Marketing Problems
Celine, Jyothi NHG group member of Sulthan Bathery, stated about her struggle
to continue her small enterprise, a candle making unit, in the context of stiff
competition from the market. It was her individual enterprise and she obtained a
loan amount of Rs. 5.000 from the group fund. She could mobilise the remaining
Rs. from moneylenders. She thought that it would enable her to contribute
some money to the family her husband's job was not permanent in nature. She
was operating this in her home. Her family members helped her in procuring raw
materials. producing candles and marketing. According to her, wax, the most
important raw material for candles, was very expensive. As the product was
manufactured at the local level, she had not received any licence from the
government and therefore, she faced problems while marketing her products in
established shops. Then she started selling her products to the neighbouring
households. hut there was a limit to such a market. Moreover, there was
reluctance on the pan of the customers to purchase her product, as it was not a
branded one.
7.4. Did the Sample Groups Monitor IGAs?
The foregoing discussion suggests that a majority of the members did not
undertake IGAs, and this was largely due to smaller loan amounts and lack of
training. Consequently, those with higher income undertook IGAs. Did the
groups monitor a few IGAs that were undertaken by members in ensuring that
loan amounts were adequate to start the economic activities? If loan amounts
were inadequate, how did members meet the deficit'l Did the groups ensure that
the economic activities undertaken had access to the required raw materials and
marketing facilities? Did the groups ensure that the IGAs undertaken by the
memhers were remunerative? This section seeks to provide answers to these

158
Were loan amounts adequate?
Tahle 7.10 shows that in the case of more than 60 per cent of the IGAs
undertaken by the members, group fund
50
contributed less than 75 per cent of the
total investment. In other words, there existed a deficiency in the loan to meet the
required investment costs in the Case of significant proportion of the IGAs. In the
case of husiness, where the members needed to make a higher investment, the
contrihution of the group fund was less than 75 per cent. This was the case with
agricultural activities undertaken by the NHG members. On the other hand,
manufacturing activity undertaken by the NHG members indicates that a larger
proportion of the was realised from the programme. It was because of the
presence of six NHG memhers who had undertaken soap making where the
in\estment cost was less. Moreover, these members met this cost completely
from the revolving fund of the panchayath. The percentage of loan amount to
total investment varied on the basis of size of the investment required for the
activity. The loan from SHGfNHG formed a smaller proportion if the required
size of inve,tmcnt for an activity was large and vice versa.
Table 7 10' Conlnbutlon of SHGfNHG Loan to Total Investment
Proportion of the SHGINHG loan to the total
Activity investment
Up to 25-50% 50-75% 75-100% Total
25%
NHG
Agriculture I (50.0)
- I (50.0) - 2(100.0)
Business I
- - -
I (100.0)
(100.0)
Livestock 2 (9. I ) 5 (22.7) 9 (40.9) 6 (27.3) 22 (100.0)
ManufacturinR - 1(14.3) 6 (85.7) 7 (100.0)
Total 4 ( 125) 5(15.6) II (34.4) 12(37.5) 32 (100.0)
SHG
A..riculture
- - I (20.0) 4 (80.0) 5 (100.0)
Business - - I (100.0) - I (100.0)
Livestock
I (4.6) 6 (27.3) 8 (36.4) 7 (31.8) 22 (100.0)
Total
I (3.6) 6(21.4) 10 (35.7) II (39.3) 28 (100.0)
Note: Figures 111 the parentheses are percentages
'" Group fund includes hOlh inlernal and eXlernal loans from Ihe programme such as loans from
hanks and NGOs and revolving fund of Ihe panchayalh.
159
Generally, loans were disbursed based on the financial capacity of the groups,
rather than looking into the requirements of IGAs. Loans issued from the groups
followed particular pattern of increasing at certain constant rates. Loan issued
from the sample groups varied from Rs.500 in the initial stages to Rs. 20,000 in
the case of groups with seven years of experience. Groups did not always
completely meet financial requirements of the members for IGAs. Often, they
provided whatever was possible for the groups. Therefore, one could suggest that
the groups did not bother whether the loan amounts met the total costs of
investment. Moreover, in all the cases, which we discussed, the groups had not
enquired how and from where the members mobilised the deficit amount and the
financial costs for acquiring the same.
How was the deficit lIIet?
A majority of the members depended on external sources for meeting the
deficiency in loan amount from SHGINHGs. This dependency had future
implications as the amount borrowed from outside agencies imposes certain
liabilities onto the members. Four major ways in which the deficit was met were
borrowing from moneylenders, financial assistance from friends or relatives, sale
of assets and own saving. Generall y, the rates of interest charged by the
moneylenders ranged between 60 and 120, which were significantly higher than
the rate charged by micro-finance groups. Often, friends and relatives did not
charge any interest rate, as there existed reciprocal relationships between them.
But, if the friends or relatives borrowed from SHGINHG to give money to their
co-members, the rates of interest were the same as those prevalent in groups.
Own savings represent the past savings, either in terms of money or in terms of
sale of assets such as crops, fattened livestock, etc. The fourth source, sale of
assets, indicates the amount mobilised from the sale of fixed assets such as
agricultural land and gold ornaments. In the case of agricultural land, there
existed opportunity cost for these members, as they had forgone their income
from the agricultural land to meet the investment gap.
160
Table 7.11 shows that more than 60 per cent of the NHG and 40 per cent of the
SHG members who had undertaken agriculture depended on own savings to meet
the deficiency in investment. Generally, these members belonged to the
landowning class with previous savings. Those who had undertaken business sold
their assets such as land and gold ornament to meet the deficiency in the
investment costs. Livestock rearing was the activity where the members had
relied on all the four sources. It is significant to note that these members often
sold their existing livestock to purchase new ones. In addition to this, NHG
members relied on relatives and friends, whereas SHG members relied more on
own savings. Manufacturing was one activity where the members had 100 per
cent reliance on moneylenders. This was the case with the member who
undertook candle making and the rate of interest was as high as 100 per cent per
annum.
Table 7.11: Amount of Loan Mobilised from Sources Other Than Groups for
Investment
Economic Mon- Relativ- Own Sale of Total amount
activities eyes/ saving assets from external
lende- friends (%) (%) sources (Rs)
rs (%)
(%)
NHG
A...&riculture
-
37.7 62.7 - 5,300 (100.0)
Business - 28.8 8.8 62.5 80,000 (100.0)
Livestock rearing 8.9 45.9 18.9 26.3 37,488 (100.0)
Manufacturing 100.0
- -
- 2,156 (100.0)
SHG
ANiculture
-
58.3 41.7 -
4,075 (100.0)
Business -
- 51.4 48.6 3,085 (100.0)
Li vestock rearing 7.7 17.9 40.6 33.8 88,506 (100.0)
Table 7.12 indicates that as compared to non-tribal members, tribal members had
depended significantly on moneylenders. It imposed higher liability on the tribal
members, as the interest rates charged by the moneylenders were quite high.
They were unahle to raise funds from own savings and assets, as they were daily
wage earners not pussessing any savings other than those held in SHGINHGs.
Moreover, their friends and relatives belonged to a community with lower
161
economic conditions. Among the non tribal NHG members, own savings and sale
of assets constituted important sources. In the case of SHG members undertaking
lGAs, own savings accounted for about 44 per cent of the deficiency in the
investment cost, whereas it was about 22 per cent in the case of NHG members.
Table 7.12: Social Category-wise Distribution (%) of Amount of Loan Mobilised
from Sources Other than NHG/SHG
Sources other NHG
SHG
than Non Tribal Total Non Tribal Total
SHGINHG tribal (n=14) (n=32) tribal (n=l) (n=28)
(n=18) (n-27)
Moneylenders 13.3 92.9 27.2 - 100.0 3.6
Relatives 25.3 7.1 28.1 26.1 - 24.2
Own saving 30.9 - 22.5 45.7
-
43.5
Sale of assets 30.5
-
22.2 28.2 - 28.7
Total 100.0 100.0 100.0 100.0 100.0 100.0
The dependency on external sources for undertaking lGAs implies that the
monitoring in the groups was not good in ensuring that the members mobilised
the funds from the micro-finance groups for investment. Moreover, outside
borrowings had three future implications on the members. First, interest rates
charged by the moneylenders were higher than rates charged by micro-finance
groups and hence. borrowings from moneylenders indicate higher liability for the
members. Second, sale of assets especially in the case of agricultural land had
opportunity cosh. Third, investments were made on IGAs that made future flow
of income uncertain. and often, risky.
Were the IGAs relllllllerutive?
The monitoring has to be examined in terms of the income generated from the
activity. As the members who borrowed from outside sources had incurred costs,
which were higher than the borrowings from micro-finance groups, it is
important to examine whether lGAs were profitable. Moreover, as a majority of
the members belonged to the poorer sections, it is significant to examine whether
the benefits from lGAs were sufficiently higher to cover the costs of investment.
t62
The relative importance of the IGAs undertaken by the members can be
examined from the contribution of the activity to the total income of the
household. It is difficult to find out the exact contribution of the IGA undertaken
with the SHGINHG loan to the totaJ income of the household as members
,
depended on sources other than SHGINHGs. However, it has certain significance,
as SHGINHG loan constituted a major stimulant for the members to undertake
the acti vity.
In order to examine the contribution of the IGA to the total household income,
information pertaining to the annual income of the household and the income
generated from the activity was gathered. A higher contribution of the IGA to the
total income of the household indicates that the activity undertaken by the
member was a major contributing factor to the household income.
Table 7. I J shows that the [GAs, which incurred losses, constituted around 7 per
cent. A large proportion of activities undertaken by the NHG and SHG members
contributed up to 25 per cent of the household income. This constituted about 44
per cent of the NHG and 61 per cent of the SHG members. Thus, in a majority of
the cases, IGAs contributed only a small portion to the income of the households.
About 15 per cent of the IGA, undertaken by NHG members and 25 per cent by
the SHG m e m b e r ~ had contributed more than 50 per cent to the household
income as a larger number of SHG members had received skill based training.
Livestock rearing was the only IGA, which contributed more than 75 per cent to
the household income. It was because of the prior experience and sufficient
marketing opportunities that it contributed higher income to the household.
163
Table 7 13' Contribution of the IGA ('Jl) t th A II 0 a e
nnua ncome of the Hou,ehold
IGA
Percentage contribution
Total
undertaken Loss
Upto 25-50%
50-75% Above
25%
75%
NHG
Agriculture
-
2 (100.0)
- - 2 (1000)
-
Livestock I (4.3) 7 (30.4) II (47.8) 2 (87) 2 (8 7) 23 (100.0)
rearing
Business - - - I (100.0)
- I (lOOm
Manufacturi I 5 (83.3) - -
-
6 (100.0)
ng (16.7)
Total 2 (6.3) 14 (43.8) II (34.4) 3 (9.4) 2 (63) 32 (100.0)
SHG
Agriculture - 4 (100.0 - - -
4 (1000)
Livestock 2 (8.7) 13 (56.5) I (4.3) 4 (17.4) 3 (13.1) 23 (100.0)
rearing
Business
- - I (100.0) -
-
1 (100.0)
Total
2(7.1) 17 (60.7) 2(7.1) 4 (14.3) 3 (10.7) 28 (100.0)
Note. Figures m the parentheses are percentages
The IGAs undertaken by the members contributed only a small proportion to the
total household income. This could be due to the following. First, income from
other sources to the household might be higher in comparison with income from
IGAs. Second, activities might not be remunerative enough. The groups had not
monitored the availability of raw materials and marketing opportunities, which
might have resulted in the poor generation of income. Moreover, the groups had
not discussed about the relative benefits and costs of undertaking activities either
with the micro-finance loans or with the loan borrowed from outside sources.
The monitoring had not worked effectively in enabling IGAs to contribute
significantly to household income. It is, therefore, pertinent to examine how did
the memhers perceive about their monittlring of loans in the groups. The
following section discusses the monitoring in the groups and factors determining
members' hehaviour in so far as monitoring is concerned.
7.S. Collective Action in Monitoring the Utilisation of Loans
Table 7.5 shows that the monitoring of the loans was stated to be effective or
extremely effective by 69 per cent of SHG members as compared to about 57 per
cent of NHG members. Let us now examine the reasons for these perceptions.
There were 21 NHG and 29 SHG members who perceived that they were very
1M
effective while monitoring other members in their group. A majority of these
members stated that they wanted to ensure good repayment. Of 41 NHG and 30
SHG members who perceived that they were not effective in monitoring. about
46 per cent stated that they did not want to hurt the feelings of other members. As
in the case of selection of borrowers, here too we could notice a reciprocal
relationship existing among members and it was more among those who were
financially weak. There were about 37 SHG and 34 NHG members who
expressed that their monitoring was efficient and a majority of them explained
that they monitored for the better functioning of the group. This would have
positive future implications on the group while enforcing repayment.
165
Table 7.14: Distribution of the Members b
y Their Perceptions on Monitoring
Characteristic and the Reasons B h" d Th .
e In
at
Monit
Reasons behind characteristic
Does not
For the
Group
No strict
To make
charac want to

Total (%)
ally mem-
it
teristic hurt function-
listens bers
ion is available
anybody
ing of
to are not
required to others
by asking
the others coope-
, since (%)
in the group (%)
rative
everybo-
group, (%)
(%)
dy
since they
repays
are
prompt-
financially
Iy (%)
weak (%)
NHG
Ineffici 19(46.3) -
22 - -
- 41 (100.0)
ent (S3.7)
Efficie 3 (8.R)
17 (SO.O) 2 (S.9) - 2 (5.9) 10(29.4) 34 (100.0)
nt
Extrem
-
13 (619)
- - - 8 (38.1) 21 (100.0)
ely
efficien
t
Total
22 (229)
30 nU) 24 -
2 (21) 18 (18.7) 96 (100.0)
(2SO)
SHG
Ineffici 14 (467) -
10 6 - - 30 (100.0)
ent
(333) (20.0)
Efficie I 14 (37.8) 4
- 9 (24.3) 9 (24.3) 37 (100.0)
nt ( 108)
Extrem
- 22 (75.9) -
- 3(10.3) 4 (13.8) 29 (100.0)
ely
efficien
t
Total IS(IS6) 36 (37.S) 14 6 (6.3) 12(12.5) 13(13.5) 96 (100.0)
( 146)
-"
Note: hgure, In the parenthe,es are percentages
What factors would influence a member to perceive that their monitoring was
effective or no!") A logit model was estimated for this purpose. In this model, the
dependent variahle was a dummy variable with ineffective monitoring as zero
and the responses on effective and very effective monitoring were combined and
we had assigned the value of one to such responses. The independent variables
included member and household characteristics, group characteristics,
mechanisms and incentives for monitoring. The relationship between monitoring
the uti Iisation of the loan and each of these variables, their description, the
expected signs, mean and standard deviation have been presented in Table 7.15.
t66
Among the group characteristics, type of the programme and homogeneity of the
group were expected to have positive relationships with effective monitoring. As
SHG members were better experienced and more educated, they were more likely
to state that they were effective in monitoring. Members belonging to
homogeneous groups are expected to perceive that the monitoring is effective in
their groups. On the other hand, group size was expected to have a negative
relationship with effectiveness of monitoring as the number of members In a
group increases, it was difficult to enforce monitoring.
The mechanism of number of meetings attended by the members was expected to
have a positive relationship with the dependent variable as the participation in
group meetings and discussions provided a forum for the members to monitor
other members in the group. The incentives of monitoring such as obtaining
profit from the group, liability in case of default of other members and provision
of loan to other member, were expected to motivate the members positively to
participate in the monitoring.
The households with higher per capita income were expected to be active In
monitoring as such households were major contributors to the group by way of
savings. As the years of experience of the members in the group increased, the
members were likely to be more aware of the advantages of monitoring, and
hence. effectively participate in monitoring. The literate members were expected
to be more aware of advantages of monitoring. Hence. we expected a positive
relationship between education and effective monitoring.
Ib7
Table 7.15: Description of the Variable and the Expected Signs for Monitoring
Characteristics
Dependent variable: 1- if a member is highly efficient in monitoring
0= if the member is less efficient in monitorin
Variab- Description
Expect- Proport- Standa-
les
ed sign ion! rd
average deviati-
on
GRPSIZ Number of members in a group
- 16.31 3.25
E
SHGNH Programme to which the member belongs.
+
50 0.50
G Dummy=l. if the member IS a SHG
member;
O. otherwise or NHG member
50
HMTC Dummy= I, if the group is homogeneous
+
56.25 0.50
ASTE in terms of social category, such as caste.
tribe;
O. otherwise 43.75
Mechanisms
MTNG The proportion of the group meetings
+
79.77 13.26
ATND attended by the member in the last year in
a group
Incentives
PROFIT Dummy= I, if the members consider profit
+
64.02 0.48
from the group as an incentive to monitor;
0, otherwise
35.98
LIABT Dummy=l. if the members consider
+
72.49 0.45
Y liability to repay in case of default by
another member from the group as an
incentive to monitor;
O. otherwise
27.51
LNOTH Dummy=l. if the members consider +
76.71 0.42
ER
provision of loans to other members from
the group as an incentive to monitor;
O. otherwise
23.28
PCI
Per capita income of the household (Rs.) +
6.384.47 5.876.11
EDUCN
Education of the member. Dummy-I. if +
82.29 0.37
the member is literate;
O. otherwise
17.71
EXPYR Years of membership since joining the +
2.84 1.61
S
programme
168
Table 7 16' Determinant f M' Ch so omtonng
aracteristics
Variables
Coefficients
T value
Marginal effect
CONSTANT
19.91191
-4.99**
-
GRPSIZE 0.1097842
0.89 0.02520
SHGNHG 0.1318069
0.19 0.03024
HMTCASTE
1.730988
2.45* 0.3885878*
MTGATEND 0.1313549
4.93* 0.0301544*
PRFT 1.308862
1.89*** 0.3042879**
LIBTY 2.210701
2.50* 0.5017093*
LNOTHER 4.203948
3.5* 0.7610783*
PCI 0.0000502 1.04 0.0000115
EDllCN 1.241836 1.62 0.2989***
EXPYRS 0.0789454
0.36 0.018123
Pseudo R ,quare 0.6526
level (0.0000)
Log likelihood function -43.94466
Chi square 165.10
Degrees of freedom 10
No. of ob,erYations 192
. - . -
* SIgnIficance at I % level; ** SIgnIficance at 5% level; *** SIgnIficance at 10%
levd
The results of the regres,ion have been presented in Tahle 7.16. The chi-square
value indicates that the model was significant at one per cent level. Six variables
were signi ficant including the coefficient. The variables of homogeneity of the
group in ternh of caste, meetings attended by the members, the liability to make
repayment in case of default and the provision of loan to others were significant
at one per cent level. The variable of profit from the group was significant at 10
per cent.
All the variahle .. received signs according to our expectation, except group size,
which was, however, not statistically significant. The reason for this might be the
following. As explained in the last chapter, some of the larger groups became
smaller in due course of time due to internal contlicts. These conflicts continued
to plague such groups although they are smaller in size. It is, therefore, possible
that smaller groups may not he successful in collective action under certain
circumstances. It can he, thus, suggested that while examining the size of the
1f>9
group, it was necessary to analyse the factors which contributed to the groups to
become smaller in due course of time.
We can conclude that both positive and negative incentives of monitoring and the
mechanisms of participation in the meetings had contributed positively towards
effective monitoring in the group. However, it should be noted that we could not
look into the four types of monitoring such as monitoring the purpose of
utilisation of the loan. monitoring the skills for undertaking the activity,
monitoring the availability of raw materials and marketing facilities, as they were
not applicable to all the groups. The model indicates that the perception of the
members regarding the effectiveness of monitoring depended on the incentives,
mechani.,ms. group homogeneity and education of the members.
7.6. Summary
r-.licro-finance groups employed various mechanisms and incentives to monitor
the actions of the borrowers. Monitoring was aimed at the timely repayment of
the loans by the members so that micro-finance institution would function
effectively.
In the sample groups. members had complete freedom of utilisation of the loan
borrowed. Three types of monitoring among the groups, such as ensuring skills
for undertaking the activity. availability of raw materials and marketing
opportunities that a majority of the members. were not present in several groups.
However. more than 90 per cent of the groups had monitored the purpose of
utilisation of the loan. The incentives of monitoring relating to sharing profits
from the group, liability to repay in case of default and ensuring that others
receive loans were significantly high among the members.
Both the NHG and SHG members utilised a large proportion of the loan for
consumption purposes. Only about 30 per cent of the members had undertaken
IGAs. There was a tendency among the members to undertake risk aversive
traditional occupations such as agriculture and livestock rearing. Compared to
170
non-tribal members, tribal members were less likely to undertake IGAs. The
regression results showed that variables relating to participation in the training
programme. amount of loan received from the programme, per capita income of
the household and the type of the programme were the major detenninants of
whether a member would undertake income generating activity or not.
Monitoring had not worked effectively in the case of the selected groups. The
groups had not monitored whether the members had sufficient funds for
undertaking the activity. Generally, the groups provided loans based on their
financial capacity and had neglected the aspect how the members managed to
meet the deficit. The sample members had borrowed from different informal
agencies such as moneylenders. The costs of such borrowing were higher than
that of micro-finance loans. The dependency was seen more among tribal
members as compared to non-tribal members. The groups had also not monitored
whether the members had adequate marketing facilities. The absence of
monitoring on the'e various factors brought down the contribution of the IGAs to
the total income of the homehold.
As the monitoring had not worked at the group level, the perceptions of the
members regarding monitoring were captured. Based on the pefCI:ptions, we
classified the members into two broad groups of those effective in monitoring
and tho,e who were not. The logit regression estimate indicated that the
i n c e n t i v e ~ of mOllitoring. meetings attended by the members, homogeneity of the
group and education played significant role in whether a member was effective in
monitoring or not.
Since a majority of the members had not undertaken IGAs, it is pertinent to
examine the following issues. What were the repayment rates? If they were high,
how did the members manage to repay when a majority did not undertake
economic activities? The next chapler, therefore, examines the isslie of
repayment.
171
CHAPTER 8
ENFORCING REPA YMENT OF LOANS
8.1. Introduction
Repayment of loans is the final process involved in the completion of a credit
transaction. It is normally expected that members make repayment from the
IGAs. However, a large proportion of sample members had not undertaken IGAs.
Therefore, it becomes important to examine the processes by which members
make repayment, and also the processes by which the groups enforce repayment.
As per the principle of joint liability, the responsibility of enforcing repayment
falls on all the members. An individual member, however, will have a dilemma.
If she participates in forcing a defaulting member to repay, the entire group
benefits; but, she may become unpopular with the defaulter. In order to stimulate
the collective action among the members, groups incorporate both positive and
negative repayment incentives. Therefore, groups try to ensure that correct
incentives and mechanisms are incorporated.
Generally, the selected groups followed two types of repayment mechanisms.
These were repayment of the loans in various instalments and repayment within
the stipulated duration. It was expected that these mechanisms not only reduced
the burden of the members but also ensured loans to others in the group. Gelling
higher amounts of loans in future could be considered as a positive incentive,
whereas fear of social sanction could be considered as a negative incentive. The
present chapter discusses these mechanisms and incentives in some detail and
attempts to answer the following questions.
What were the mechanisms incorporated by the micro-finance groups to ensure
timely repayment of the loans? Did the members follow the mechanisms? Were
there differences in the repayment mechanisms with respect to loans from
different sources? What were the different repayment incentives followed and
practised across the micro-finance groups? What was the repayment pattern of
172
the members? How did members make repayments, if a majority of the members
had not undertaken IGAs or if the IGAs were not very remunerative?
8.2. Mechanisms of Repayment
Mechanisms of repayment are intended to facilitate timely repayment of the
loans. Generally, micro-finance groups followed two mechanisms to ensure
timely repayment of the loans. Firstly, repayment should be completed within the
duration stipulated by the group at the time of disbursal of loan. Secondly,
repayments of the amount to be made in various monthly instalments.
As micro-finance groups go through different stages of formation with varying
loan amounts, the duration of repayment varies. Generally, the sample groups in
the initial stages lent for short duration, as the fund at the disposal of the group
was relatively small. Secondly, as the amount of loan tended to be small, short
duration of repayments was given importance. This not only enabled faster
circulation of money but also provided an opportunity for the other members to
get loans from the group. In other words, larger amounts of loan required a long
duration to repay. Generally, the duration of repayment varied from one group to
another and also from one category of loans to another. The repayment duration
varied across the type of (internal and external) loans
s1
. As the external loans
were relatively larger in size, members needed longer duration to repay.
Another mechanism for ensuring repayment was to make repayment of the loans
in various small instalments. This provision reduced the financial burden of lump
sum payment at the time of maturity. This mechanism also ensured that others
could borrow money from the common pool as the repayments to the group were
continuous.
It is significant to note the differences between internal and external loans as far
as the repayment pattern was concerned. As there was a strong enforcement from
" Internal loans arc those OOITowcd from the common pool of the group whereas external loans
are those OOITowcd from external sources like hanks, NGOs, and revolving funds of the
Panchayath.
the external lending sources, members made timely repayment of external loans
as compared to internal loans. Moreover, the members were fully aware that
further loans from the external sources would be possible only when they make
prompt repayment.
External loans had wider implications as far as the mechanisms of repayments
were concerned. Compared to internal loans, external loans were bigger in size
and hence, they had a longer duration. Therefore, non-repayment of external
loans would adversely affect the borrowing capacity of the groups at a later stage.
However, duration was not stipulated in the case of panchayath revolving fund as
this was to be rcturned only when a group breaks. Such a provision was made 10
prevent the breaking of the groups.
It is significant to note that the repayment duration varied across different
categories of loans and across groups. A classification of the mechanism of
duration of repayment across various types of loans has been given in Table 8.1.
Table 8.1: Distribution of Groups by Duration of Repayment
Duration of G roUJ!. loan (%) Bank loan (%) NGO loan (%)
repayment
(n-16) (n-16) (n=16) (n=16) (n=16) (n=16)
So far not issued
- -
62.5 56.3 100.0 68.8
2.5 months - 6.3
-
- -
3 months 12.5 - - - -
5 months 12.5 6.3 - - - 6.3
6 months 62.5 37.5 12.5 - -
8 months 6.3 - - -
10 months 12.5 43.8 6.3 18.8 - -
12 months
- - -
12.5 -
-
20 months - 18.8 6.3
24 months
- 12.5 - 18.8
Total 100.0 100.0 100.0 100.0 100.0 100.0
Internal group loans had a shorter duration of rcpayment as these were smaller in
size. The average duration of repayment for majority of the group loans was six
months. Generally, banks stipulated the members to make repayments within 12
to 24 months, as the amount lent by them was larger in size. However, with the
174
purpose of getting immediate loans from the external sources in future, some
groups collectively decided smaller repayment duration. Let us examine whether
in actual practice the duration of repayment varied with the loan amount received
by the members (Table 8.2)
Table 8.2: Distribution of the Loan Amount (Rs.) Borrowed by the Members by
theu Average Duration of Repayment and their Proportion
Amount of loan (Rs)
A verage duration Proportion of the total
for repayment loan disbursed in the
(months) group
Up to Rs. 500
4.1 14.6
Rs 500-Rs 1,000
4.5 21.3
Rs I.OOO-Rs 3,000
5.3 35.7
Rs 3,000-Rs 10,000 6.8 26.7
Above Rs 10,000 9.6 1.8
Total 6.1 100.0
Larger amounts of loans had a longer duration of repayment as compared to
smaller amounts. Therefore, the quantum of loan was a major factor, which
determined the duration of repayment. Size of the loans had certain implications.
Generall y, smaller loans were utilised by the members for consumption purposes.
On the other hand, larger loans had impact on the income of the members as
these could he utilised for productive purposes. As about 72 per cent of the
members received loans below Rs. 3,000 to make investment on IGAs, it would
be interesting to examine the repayment pattern of the members.
A repayment before the stipulated duration was desirable, from the perspective of
the group, as an earlier repayment provided considerable amount of loanable
funds with the group for further lending. Members considered that early
repayment from their part would enable them to access further loans in the future.
Thus, the positive incentive of getting higher loans in future motivated them to
make an earlier payment.
The instalment-wise repayment pattern among the micro-finance members has
been analysed in terms of the last loan borrowed from the group. This has been
done on the assumption that their present repayment behaviour reflected the
175
repayment behaviour in the past also. Moreover, the instalment pattern of
repayment was the major contributing factor towards the repayment within the
stipulated duration. With this purpose, the members were asked whether they
were able to comply with repayment of monthly instalments. The responses have
been presented in Table 8.3.
Table 8.3: Distribution of Members by Their Fulfilment of the Instalment
R P f epayment altern or the Last Loan
Fulfilment of the NHG (n=93) SHG (n=96) Total (n=189)
instalment ('!o) (%) (%)
repayment pattern
No 78.5 60.4 69.3
Yes 21.5 39.6 30.7
Total 100.0 100.0 100.0
Ewn though the members were required to make repayments on instalment basis,
only 30 per cent of the members had followed the instalment repayment pattern.
SHG member, were slightly better in following the instalment repayment pattern
as compared to those from NHGs.
As only one thml of the memhers followed monthly instalment of repayment, it is
important to examine whether this had implications on repayment within the
,upulated duration. Therefore an analysis was made to examine whether the
members repaid loans on time. This was examined in terms of delinquency of the
members in ca,e of hoth the external and internal loans. A member was said to be
delinquent. if ,he had failed to repay the loan, within the stipulated duration. But,
this did not necessarily mean that she was a defaulter. The term default in
repayment indicates that the member had failed to repay the amount borrowed.
The delinquent member could still repay the due amount at a later time and avoid
the hranding of a defaulter.
'>mce the repayment duration varied from one category of loan to another across
the groups. we examined the delinquency based on the stipulated duration
prevalent in each group for both the external and internal loans.
t76
Table 8 ~ . Distribution of Me b b h' .
m ers
ly t elr Delinquency of the Loans Taken
Delinquency
NHG(%)
SHG (%)
Total (%j
(n-93)
(n 96)
(n 189)
Delinquencv in both
2.1 2.1
Delinquency 10 internal when
49.5
29.2 39.2
there is no ex ternal loan
Delinquency 10 external when -
2.1 l.l
both are received
Delinquency 10 internal when
7.5 11.5 9.5
both are received
Delinquency in at least one loan
57.0 44.8 50.8
No delinquency in internal when 32.3 37.5 34.9
there is no external Il)an
No delinquency in both
10.8 17.7 14.3
No delinquency at all 43.0 55.2 49.2
Total 100.0 100.0 100.0
For the total sample. almost 50 per cent of the members were not delinquent at all
in the ca!>e of any loan received from the micro-finance groups. This proportion
was considerably higher in the case of SHGs. These members had either received
hoth internal and external loans or anyone of them. Delinquent members
constituted 50.8 per cent. NHG members were more delinquent in making
repayment as compared to SHG members. This could be attributed to the
financial inahility of the NHG members. Another finding is that the delinquency
was less in the case of external loans as compared to internal ones. This indicates
that the members considered delay in external loans have significant impact on
their further chances of getting loans. Moreover, the monitoring on the part of the
external agencies was also present.
8.3. Delay in Repayment
We have d i ~ c l l s s c d that micro-finance members followed two types of
mechanisms to ensllre repayment of the loans or to avoid the emergence of
default in repayment. It is relevant to note that in the selected sample groups,
there were no defaults In repayment or in other words all the members had repaid
their loans. Some of them had repaid their loans fully and others were in the
process of making repayment. Thus, even without following the instalment wise
177
repayment and repayment within the stipulated duration, the sample members had
repaid the loans.
Since there was no default in repayment, one can argue that the sample groups
were successful in achieving the objective of 100 per cent repayment of the loans.
However, a timely rcpayment of the loans would have been more preferable, as
such a practice could have brought down the burden of the members as well as
made the loan available to other members. Since the delay in repayment of the
loans had resulted in some welfare loss, we have discussed this further.
Delay was measured in terms of the average number of days. Let us examine
whether there was any relation between number of loans received by the
members and the average number of days of delay (Table 8.5). The average
number of days of delay was calculated by dividing the total number of days of
delay in repayment by the number of loans received by a member.
Table 8.5: Distribution of Members by Number of Loans Received and Average
N b fD fDI R urn er 0 ays 0 e a In epayment
Number of loans
Members (% ) by average number of Total (%)
dl!Ys of delay
No delay 175 days Above 75
days
NHG 1-4 loans 35 (74.5) 10 (43.5) 18(78.3) 63 (67.7)
5-8 loans 1") (15.5)
13 (56.5) 5(21.7) 30 (32.3)
Total 47 (100.0) 23 (100.0) 23 (100.0) 93 (100.0)
SHG 1-4 loans 42 (73.7) 14 (30.4) 2 (50.0) 58 (60.4)
5-8 loans 11(19.3) 24 (52.2) 2 (50.0) 37 (38.5)
Above 8 loans 4 (70) 8(17.4)
-
12(12.5)
Total 57 (100.0) 46 (100.0) 4 (100.0) 96(100.0)
Note: Figures In the parentheses Indicate percentages
It is pertinent to note that as the number of loans increased, the members with
delay in repayment decreased. Thus, the members who received larger number of
loans were the ones who made timely repayment or they were the ones without
any delay. Timely repayment could he one of the reasons why they received
larger number of loans. When the average days of delay increased to 75, the
delayed memhers were observed to he more among those who received 5 to 8
178
number of loans. This was because more the frequency of loans, higher would be
the amount. A higher amount imposes an increased liability on members to make
repayment and resulted in delay. But, when the days of delay increased more than
75 days, the delay is observed more among I to 4 or lower number of loans. The
delay in repayment could be one of the reasons why they received lower number
of loans.
Therefore, one could say that an inverted 'U' shaped relationship existed between
the number of loans received and days of delay. As the number of loans was less,
the delay would be less, indicating the fact that at lower repayment
would be prompt. When the number of loans was more, the delay would be less,
implying that it was because of their promptness in repayment that the members
received higher number of loans. Those who received medium number of loans
were the ones who delayed more. Delay in repayment would be one of the
reasons. which prevented them to receive higher number of loans from the
groups.
Let us examine whether there are significant differences between NHG and SHG
members in terms of the average days of delay in their repayment.
Table R.t>: Results of the Difference of Means Test Between NHGs and SHGs for
Average Number of Days 0
fD I . R
e ay In epayment
Types A verage no. of days of delay in repayment
Mean Mean difference
NHG 61.825
( 137.045) 46.443
SHG 15.383
(23.760)
- ..
Note: The figures m the parentheSIS mdlcate standard deViatIOn
*lndicates significance at 1 per cent level
T value
3.203*
Table 8.6 indicates that there was a significant difference between NHG and SHG
members in terms of their average days of delay in repayment. The SHG
members were hetter in making an early repayment as compared to NHG
Inillal afe lower In amounts.
179
members. This supported the earlier finding that NHG memb
ers were more prone
to become delinquent. This might be explained in terms of economic
backwardness of NHG members. Moreover, most of the NHGs were relatively
new and not yet stabilised well. The standard deviation indicates that there was a
higher variation in the delay among the NHG members as compared to SHG
members.
8.4. Factors Influencing the Delay in Repayment of Loans
As there was significant difference between SHGs and NHGs in terms of number
of days of delay, there is need to examine the factors influencing the delay in
repayment. These factors can broadly be classified into group characteristics,
mechanisms, incentives, member and household characteristics. We have already
discussed the mechanisms of repayment. The expected relationships of each of
these variables have been presented in Table 8.7.
It was expected that group characteristic, i.e. homogeneity of the group, was
likely to reduce the delay in repayment. This was because collective action would
be more in homogeneous groups. Group size is expected to have positive
relationship with delay in repayment, as the size of the group increases, more
would be chances of the internal problems. Compared to NHGs, SHGs were
expected to have a higher delay in repayment. This was because, SHGs were
more experienced and hence, issued higher amount of loans to the members. The
mechanism of duration of repayment was expected to have negative relationship
with the delay. This was because, higher duration provided more time with the
members for repayment.
Both the positive and negative incentives were expected to reduce the delay in
repayment. Member education reduced the delay, as educated members were
more aware of the need for making timely repayment. IGAs undertaken by
members were expected to reduce the delay in repayment, as IGAs improved the
economic condition of the memhers, enabling them to make repayment. The
same logic was attrihuted to another household characteristic, namely, the income
IXO
of the household, which was expected to have a negative relationship with the
delay in repayment. Higher the number of loans received by the members, lower
would be the delay in making repayment. The monitoring on the part of the
memhers would bring down delay in repayment. Debt of the members in sources
other than SHG was expected to have a positive relationship with the delay,
implying that those households with debt contracted from sources other than
SHGfNHG would most likely to delay their payments. The results of the
regression have been given in Table 8.8.
I K 1
Table 8.7: Descriptive Statistics with Respect to Avemgc Number of Days or 1Jel'I\ '"
R cpaymcnt
Dependent variable: a\crage numt'<:r of days of delaved repayment
Variabl
Variable description
....
Expecte Proporti Standard
es
d sign
onl de\'iation
Average
SHGNH Type of the programme. Dummy= I. If
+ 50.00 0.50
G it IS non-government
supponed
programme;
0, otherwise
50.00
HMTC Homogeneity of the group in terms of -
56.25 0.49
ASTE social category such as caste/tnt'<:.
Dummy= I. if the member helongs to a
homogeneous group;
0, otherwise
43.75
GRPSIZ Number of members in a group from
+
16.31 3.26
E where the member comes from
Mechanisms
DURNR The stipulated months for repayment of - 6.81 2.26
PT the loan
Incentives
SOPRE Dummy=l. if the member consider - 94.71 0.22
social pressure from the group as an
incentive to make repayments;
0, otherwise 5.29
FURLO Dummy= I, if the member consider to
- 93.65 0.22
N get funher loans from the group as an
incentive to make repayments;
0, otherwise
6.35
EDUCN
Dummy= I, if the member is literate;
- 82.29
0.37
0, otherwise
17.71
IGA Dummy= I, if the member had
- 3175
OAt>
undertaken IGA;
O. otherwise
68.25
MNTC
Dummy= I. if the member monitors his
-
62.96 OA8
HAR
fellow participants;
0, otherwise
37.04
NOLOA Number of loans received by the
- 3.59 253
NS member
Household characteristk
LNTOT
Log of income of the household
- 26,719.4 0.66
INC
0
LNDEB Log of debt from sources other than +
15,7206 3.73
T SHG
4
Table 8 8' Dete .. nrunan S 0
fA
verage Number of Days of Delay in Repayment
Variables
Coefficient T values
CONSTANT
497.1887*
5.136
SHGNHG
2.752
-0.276
HMTCASTE
2.514
0.322
GRPSIZE
2.680***
1.838
DURNRPT
-3.266** -2.342
SOPRE
-198.717* -2.496
FURLON
-147.331** -2.254
EDUCN -36.827*** -l.862
IGA 5.356 0.407
MNTCHAR -4.814 -0.572
NOLOANS -2.399 -1.305
LNTOTINC -12.963** -2.345
LNDEBT 2.399 1.231
F statistic 23.217
Significance lcvel 0.0000
R square 0.615
Adjusted R square 0.587
*Slgmficant at I per cent, **slgmficant at 5 per cent, ***slgmficant at 10 per
cent
F statistic indicates that the model representing the relationship between the
independent variables and the average number of days of delayed repayment was
significant at one per cent level. R square value indicates that about 61 per cent of
the variations in the days of delay in repayment was explained by the independent
variables. Seven variables were significant including the constant. The variables
of education of the member, total income of the household, group size, duration
of repayment, incentives such as social sanction and getting further loans wcre
significant. The variables, which were statistically significant, had received signs
as per our expectation.
Among the member and household characteristics, education and total income
were significant. Education indicates that compared to literate members, illiterate
members had an average delay of repayment of one month and six days. Thus,
literacy had an impact on the timely repayment of the loans by the members. As
the income of the household increased, the members were less likely to delay or
higher income households were more prompt in repaying the loan amounts. It
indicates that the higher income households could make repayments from their
own income. Among the group variables, group size was significant which
indicated that more the number of members in a group, more the delay. In other
words, the members coming from smaller groups repay loans on time. As some
of the smaller groups had members with higher delay in repayment left the
programme, the members belonged to small sized groups were likely to repay
timely. This was an indication of the working of collective enforcement of
repayment among small groups. The variable representing the duration of
repayment indicated that higher the stipulated months of repayment, the less
would be the delay. Incentives playa significant role in enforcing the timely
repayment of the loans. Both positive and negative incentives motivated the
members to make an early repayment.
It is significant to note that the variables representing IGA undertaken by the
members, type of the programme and homogeneity of the groups received a sign
against our expectation, though these variables were not significant to explain the
relationship. Generally, [GAs required certain minimum duration to generate
income for making repayments and hence, those who had undertaken the activity
had a longer delay. This signifies the necessity of giving additional time for those
who had undertaken [GAs to make repayments. SHG members were less likely to
delay in repayments as compared to NHG members. This could be supported
from the variable relating to income. As most of the NHG members had come
from economically backward circumstances, their ability to make repayment
would be less. Moreover, SHG members were more experienced and this would
have provided stability to these groups. It is significant to note that the members
belonging to homogeneous groups were more likely to delay. Members belonging
to homogeneous groups were mostly tribals and hence, their capacity to make
repayments within the time would be less.
IR4
8.5. Incentives for Repayment of the Loans
We have seen in the above regression model that incentives (both positive and
negative) had played a significant role in reducing the delay in repayment. While
positive incenti ves promoted cooperation among the members, negative
incentives prevented occurrenCes of non-cooperation. Social pressure of singling
out a member or the fear of social isolation from the group was considered as a
negative incentive. It should be noted that the members found it difficult to break
the rule and live in a community where all the members were familiar to each
other. Therefore, the fear of social pressure worked effectively for the members.
More than 90 per cent of the NHG and SHG members stated that both these
incentives motivated the members to make repayment of the loans (Table 8.7).
8.6. Repayment Behaviour of the Members
We have already discussed that there were no defaulting members in the group.
But, there were some members who repaid loans only after the completion of the
date of maturity. It is significant to examine how the members characterised their
repayment behaviour. Generally, the behaviour of the members was guided by
their fulfilment of the mechanisms of instalment pattern and duration of
repayment. The members stated their repayment behaviour in the group and the
reasons for that.
Table 8.9: Distribution of Members by Their Statements on Repaymcnt
Behaviour
Rt1>ayment behaviour NHG SHG
Unsatisfactory 22 (23.7) 15 (15.6)
Satisfactory 48 (51.6) 33 (34.4)
Extremely satisfactory 23 (24.7) 48 (50.0)
Total 93 (100.0) 96 (100.0)
Note: Figures m the parentheses mdlcate percentages
Table 8.9 "hows that members with 'unsatisfactory' responses were more among
NHGs as compared to SHGs. It was because of the timely repayment of the SHG
members that a majority of them stated that they were extremely satisfied about
their repayment. At this point, reasons behind these repayment characteristics
might bc examined (Table 8.10).
185
Table 8 10' Distribution of th R
S db h
e
easons
tate
oy t e Members for Repayment
Reasons behind
NHG
SHG
To reduce burden
52 (55.9)
34 (35.4)
To get further loans
39 (41.9)
63 (65.6)
To make available to others
2 (2.2)
3 (3.0)
Total
93 (100.0)
96 (100.0)
Note. Figures In the parentheses mdlcate percentages
Among the NHG members, reduction of financial burden constituted a major
reason for making repayment. Hence, we can say that the NHG members were
giving importance to the future liability. On the other hand, more than 50 per cent
of the SHG members stated that getting further loans from the programme was
the force behind them to make repayment. These responses show that various
mechanisms inherent in the micro-finance groups were functioning effectively to
ensure timely repayment. As the members themselves had stakes in repayment
for ensuring their own future benefits, they made sure that there was timely
repayment.
Wherever income generated from the activity undertaken with the SHG loans
were not remunerative enough to repay the loans, members borrowed from
different sources. Thus, while making repayment, micro-finance members relied
on various agencies. Some of them relied on their own income, whereas others
harrowed from different sources.
Table 8.11: Distrihution of Members
y lelf
b Tl . S
ource-wlse R epaymen t
Sources of repayment Nature of the group (%) Total (%)
NHG (n=93) SHG (n=96) (n=189)
Self 17.2 11.5 14.3
Self and others 14.0 20.8 17.5
Others 45.2 64.6 55.0
In the of 23.7 3.1 13.2
Total 100.0 100.0 100.0
Dependence on external sources at the time of the repayment shows that there
was a dependency on outside sources, even after participating in the programme.
As low as 14 per cent of the members repaid loans either from IGA or from their
own daily wages without depending anyone else. 'Self and Other sources'
denotes the fact that the members repaid the loan with the assistance of others
lR6
within the households. More than 50 per cent of the members depended
completely on others at the time of repayment and this dependency was more
among SHG members. The 'Other" category indicates that the members
completely depended others including both from within and outside the
household for repaying their loan amount. In the case of dependence on 'others'
within the household. members relied on male relatives within the household. On
the other hand. 'others' outside the household implied dependence on SHGINHG
loans. dependence on co-partners and reliance on gold loan and informal agencies
such as moneylenders. However, the dependence on moneylenders for making
repayment of micro-finance loan was less than 3 per cent. The dependence on
others outside the household was observed to be more as compared to reliance
within the household.
This is an extremely important finding with respect to this study as it examines a
wider question of the 'impact' of such a programme. Micro-finance has been
conceived as an Institutional set up. which would help the members to initiate
IGAs and make repayments from them. But. the data shows a significant
proportion of the members was not able to repay the loan amount by themselves.
This further indicates two possibilities. One represents the cases where IGAs
were not taken up. Second represents the cases where IGAS were ineffective in
generating enough income to repay the loan amount. Both of these possibilities
point at the serious ,hllrtcomings of the programme.
8.7. How Do :\Jembers Repay the Loans, When a Majority of Them Had Not
llndertaken IGAs?
At this juncture. two interrelated findings need further examination. First, the
dependency on others for repayment of loans. and second, the issue of a large
proportion of members not undertaking IGAs (see Chapter 7). The above section
clearly indicated that a substantial number of members were depending on others
for repayment and almost 70 per cent of the members had not taken up IGAs. At
the same time. the repayment was prompt, though there were frequent delays.
This situation prompts us to enquire into an extremely important question about
the means of repayment. How do members make repayment even without
1 ~ 7
undertaking IGAs? Does a repayment of lOOper cent indicate that the
programme was financially viable and sustainable?
The usage pattern of the loan by the members was examined in terms of the last
loan received by them. For this purpose, we included only those members who
had received more than one loan
s3
from the group in the ensuing analysis. Table
8.12 gives an idea about the time gap between the issue of last loan and
repayment of the previous loan. The difference between the repayment of the
previous loan and the issue of another loan was analysed over a period of 15
days. It gave an idea of how many members had borrowed the loan within a short
duration of 2 weeks immediately after repayment of the previous loan. Immediate
borrowing after the repayment of the loan shows that the members were in
financial emergency. The information on the purpose of borrowing mentioned by
them has also been given.
" h h b'rs who borrowed more (han once, were examined, since some of (hem
U,e of la,( loan y I e mem c " . r I . Second borrowing had been laken inlo
had horrowed from Ihc SHG 10 repay theIr ear ler Dans. ._
(
I
. wh ,th"r (he memoers borrowed the second loan for repaymg thc hrs( loan.
3((:OU n () sec c ....
188
Table 8.12: Distribution of Members by the Number of Days Taken Between
Issue of Last Loan and Repayment of Pre' . Lo. .
Utilisation VIOUS an Aero)'s Purposes of
Natu- Purpose of loans
Difference between the dav (If issue of the
re of
loan and day of repayment of the previous
the
loan (no. of da,rs)
group
Within 15
More than 15 I Total (%)
days (%)
days (%) I
NHG Income
generating
I (2.8)
1(7.1) 2 (4.0)
activity
Agriculture and animal
6 ( 16.7)
2 (14.3) X (16.0)
husbandry
Consumption
10 (27.8) 3 (21.4) 13 (26.0)
Education/medical
2 (5.5)
4 (28.6) () (12.0)
House construction 2 (5.5) 2 (14.3) 4 (80)
Old debt repayment 15 (41.7) 2(14.3) 17 (340)
Total 36 (72.0) 14 (2R.O) 50 (100)
SHG Income generating I (2.3) - I (1.7)
activity
Agriculture and animal 8(18.2) I (6.3) 9 ( 150)
husbandry
Consumption 5 (11.4) 4 (25.0) 9 (15.0)
EducatiOn/medical 3 (6.8) I (6.3) 4 (6.7)
House construction 5(11.4) 2(12.5) 7 ( I 1.7)
Old debt repayment 22 (50.0) 8 (50.0) 30 (500)
Total
44 (73.3) 16 (26.7)
60 ( 1(0)
Note. Figures m the parentheses mdlcate percentages
It can be seen from Table 8.12 that at least I \0 members (50 NHG and 60 SHG
members) had received loans more than once from the group. It shows th;Jt more
than 70 per cent of the SHG and NHG members had borrowed within a short
duration of 15 days of their repayment. This indicates heavy dependence of the
members on the programme. Of these members. almost 42 per cent NHG and 50
per cent SHG members revealed that the purpose of borrowing was to repay their
old debt. So. it became clear that a majority of them might have used the new
loan amount to repay their earlier debt incurred from SHGINHG. This
assumption along with the data which shows the consumption nature of the loan.
without having undertaken any IGAs indicate a disturbing trend of continuous
cycle of borrowing and repayment from the programme. In other words, it
indicates that the money from SHGfNHG was used mainly for the consumption
purposes and new loans were taken in order to repay the old debt. This situation
resulted in heavy dependence on micro-finance programmes for meeting the daily
exigencies and SHGINHG function as a lending agency rather than an institution,
which would ensure a sustainable economic livelihood. This became morc
pertinent in the light that SHGINHG were widely seen as a more easy source of
credit compared to formal and informal banking system in an crisis ridden
agranan economy.
Box 8.1: Adjustments' at the Time of Repayment
Geetha is a 40-year-old SHG member from Sulthan Bathery. She stated that
initially, she was scared to borrow from the SHG. She thought it would lead to
financial burden, in case of default. She borrowed Rs. 500 from the SHG for the
first time and as she was thir!king about the way in which this money was to be
repaid. she could not get sleep on that night. But, now, after seven years of
experience in the SHG she had learnt how to manage the debt. Last time, she
borrowed Rs.20,OOO. Even though it was not used for IGAs, she had not felt any
difficulty in making timely repayment. She was confident that in case she was not
able to mobilise the amount for repayment, she could borrow either from the SHG
or from her co-partners. Such things she had done in the case of her carlier
borrowings. Sometimes. she borrowed from her neighbours to repay the loan
amount. According III her, all the members in her group, including her. did the
same kind of 'adju<,lment" at the time of repayment.
A question needs to be asked at this point. Whether the dependency of the
members increa,cd llf decreased or remained stable over a period of their
borrowings. This can be explained with the help of duration between repayment
of the first loan and their borrowings and duration between last borrowings and
previous repayments This has been presented in the Table 8.13.
190
Table 8.13: Distribution of Members by Their TI'me G B h I f
. . ap etween t e ssue 0
Lpoans and Repayment of PrevIOus Loans over a Period of Membership in the
ro"ramme
'F-
Natu Duration
Duration between the last loan received and previous
re of between first
repayment (davs)
the repayment
30
3190 91180 Above Total
group and next loan
180
(days)
NHG 30 19(82.6) 2 (8.7) - 2 (8.7) 23 (46.0)
31-90 10(83.3) 1 (8.3) 1 (8.3) - 12 (24.0)
91-180
6 (75.0) 1 (12.5) 1 (12.5) - 8 (16.0)
Above 180 6 (85.7)
- I (14.3) 7 (14.0)
Total 41 (82.0) 4 (8.0) 2 (4.0) 3 (6.0) 50 (100.0)
SHG 30 26 (89.7) 2 \6.9) 1 (3.4)
- 29 (48.3)
3\-90 8 (6\.5) 4 (30.8) 1 (7.7) 13 (21.7)
91-180 6 (66.7) 1(11.1) 1(11.1) I (ILl) 9 (15.0)
Above 180 7 (77.8) - I (ll.l) I (11.1) 9 (15.0)
Total 47 (78.3) 7 (1\.7) 4 (6.7) 2 (2.3) 60 (100.0)
Note. Flgurcs In thc parenthcses indIcate percentages
T ~ b l e 8.13 hrings out the dependency on micro-finance programme at the time of
repayment hy the members over a period of their stay in the programme. The
figures given in rows indicate the distribution of members with number of days
taken between repayment of the first loan and the issue of the second loan. The
column figures bring out the distribution of members with number of days taken
between the issue of the last loan and repayment of the previous loan.
About 46 per cent of the NHG members and 48.3 per cent of the SHG members
had borrowed within a period of 30 days after the repayment of the first loan.
However, the proportion had increased to 82 per cent for NHG and 78.3 pcr cent
for SHG memhers for the last loan. In other words, the proportion of members
with a shorter duration of 30 days between repaymcnt of previous loans and issue
of the last loan increased over a period of their horrowing from the programme.
In short, the study indicates that the dependency of on micro-finance group loan
had increased over a period of time for large number of members. This finding
strengthens the earlier argument that members developed a heavy dependency on
SHGfNHG immediately after thcir repayment.
191
Now, it is significant to examine the reasons behind this repayment pattern of the
members. We have stated that all groups except 12.5 per cent were homogeneous
in terms of socio-economic standards. As there was homogeneity among a
majority of the members, the effectiveness of the principles of joint liability
would be more. The fear of social sanction or the social penalty of not repaying
the loan would force the members to make repayment. However, in the absence
of IGAs. the members were forced to borrow from the micro-finance programme
to repay their earlier loans and this led to a perennial indebtedness.
Now a question arises. Why did the members continue to be in the programme
and borrow from groups to make repayment of loans from sources other than
micro-finance groups') A majority of the members belonged to BPL category and
they did not have any alternative sources of credit. Moreover, the continuous
benefits. which the members receive from the government programme, forced
them to remain in the programme. Besides, repayment of previous loans enabled
them to receive higher loans in further borrowings and in tum, it acted as an
Incentive for them to repay back the loans.
8.8. Summary
Micro-finance group was conceived a, a viahlc institution for meeting the credit
needs of memocrs working on the principle of joint liability. This chapter
examined the actu<ll dfectiveness of this joint liability with respect to the pattern
of repayment. In IllllTo-finance programmes. repayment was regulated through
the mechanism of Instalment repayment within a given timeframe. The study
shows that the memhers more or less abide by the regulation of repayment
duration. Though many of them delayed the instalment, none of them became
defaulters. This shows the effectiveness of the social sanction and realisation of
the member_ that repayment of their loan was extremely important for them to
avail loans In the future. While comparing the SHGs with the NHGs. it was found
that the incidents of delay was seen more among the NHG members owing to a
number of reasons including the general economic backwardness and instability
due to lower experience. Among the variables. which entered into the regression
192
of delay in repayment, education, income, duration of repayment and incentives
had contributed negatively towards delay, whereas group size had a positive
impact on delay.
Another important area of analysis of this chapter pertains to the issues of sources
and means of repayment. The data show that a majority of the members depended
on outside help for repayment. This along with the data discussed in the seventh
chapter on the lack of IGAs among the members raise some important questions
about the economic sustainability of the programme.
Further analysis on the renewal of loans after the last repayment shows that a
majority of the members borrowed money immediately after completing the
repayment of the old debt. This indicates that there is a dependency on
SHGINHG for repayment. The repayment pattern of the members brings out that
this dependency on the programme increased over a period of time.
All these analyses show that members fulfilled the technical requirement to
improve the success of the programme i.e., the repayment, though there was a
significant amount of delay in repayment. But, the study poses serious question
on the economic sustain ability of the programme as it is evident that a majority of
the members used SHG/NHG loans to repay their old debts. Hence, it leads to the
conclusion that SHGINHG functioned as an alternative source of credit compared
to the fomlal and informal lending sources. This finding raises an issue on the
success of the programme because this will not result in the creation of a
sustainable economic institution for the rural poor but a cycle of dependence over
this institution for their survival requirements. This will also not result in poverty
reduction among members.
1'l3
9.1. Introduction
CHAPTER 9
SUMMARY AND CONCLUSIONS
Micro-finance groups emerged not only to address the imperfection in the rural
credit markets but also the concerns relating to poverty alleviation and women
empowerment. In these groups, the transaction costs arising out of three main
problems (namely, selection, monitoring and repayment) of the credit market can
be reduced through familiarity of the members, small size of the groups and
repeated interactions. Since these are small groups and members of such groups
belong to similar socia-economic background, they can undertake collective
action in the selection of o r r o w e r ~ , monitor the utilisation of the loan and ensure
timely repayment of loans. The outcome of such collective action is expected to
be reduced transaction costs and from which both lenders and borrowers benefit.
The lenders are able to shift a part of the hurden associated with borrower
selection, loan administration and repayment enforcement onto the borrowers.
Similarly, borrowers will be able to save transaction costs by not having to
undergo the cumbersome procedure of filling out lengthy applications, and
undergoing project and collateral appraisal (Bhatt and Tang 1998). Under micro-
finance groups, large number of poor people without adequate individual physical
collateral can access credit based on the social collateral. The peer pressure is the
main force behind continued existence of the group. The joint liability provides
incentives to (and/or compels) the group members to undertake those actions.
which reduce uncertainty in the credit market (Ghatak and Guinnane 1999; Bhatt
and Tang 1998; Morduch 1999b). Thus, collective action within the group is the
key aspect of micro-finance groups. The reliability and the sustainability of
micro-finance institutions, however, depend on how well they can enforce the
contracts among the members. Micro-finance groups arrive at certain rules and
regulations to ensure that the mechanisms concerning contractual relations are in
operation. Similarly, the members are provided with adequate incentives to
promote co-operation or to avoid the emergence of non-eo-operative outcome.
Institutional mechanisms and incentives involved in the selection of borrowers
,
monitoring the utilisation of the loans and ensuring repayment of the loans are,
thus, important in micro-finance programmes. The incentives and mechanisms
for the selection of borrowers aim to rectify the problems of adverse selection,
whereas, monitoring of the utilisation of loans looks into moral hazard problems
and enforcing repayment tries to avoid the chances of free rider problems.
Therefore, positive and negative incentives (Lin and Nugent 1995) need to be
provided. The chance of getting a next and bigger loan can be considered as a
positive incentive whereas punishment in case of default can be considered as a
negative incentive to reduce free rider problems. Since the members dynamically
interJct at different points of time, incentives are to be directed to the members to
avoid chances of free riding. The mechanisms like compulsory weekly savings
contributions, repayment of loan in various instalments etc., are built into the
system to ensure collective responsibility among the members and ensure timely
repayment of the loan (Patten et aI2001).
It i ~ in this context that this study has been undertaken to examine the incentives
for and processes of collective action in different types micro-finance groups, the
impact of mechanisms and incentives in undertaking collective action and the
pattern of selection, monitoring and repayment. Such a study will be of some help
for the policy makers in the context of considerable growth and spread of micro-
finance groups in India in the last one-and-half decades.
Ohjectives
I) Understand the existence and the nature of collective action among micro-
finance group members; . .
2) examine the mechanisms and incentives incorporated for collective actIOn
monitoring the utilisation of the loans and enforCIng repayment; .and, .
3) analyse the impact of mechanisms and inc.entives for collective actIOn
among micro-finance group members w ~ l l e selectIng the borrowers,
monitoring the utilisation of loan and enforCIng repayment.
195
Hypotheses
I) Appropriate mechanisms and incentives are not incorporated in micro-finance
groups for collective action in the selection of borrowers. monitoring and
enforcing repayment of loans;
2) groups do not select creditworthy borrowers, monitor the
utilisatIon of the loan and enforce loan repayment; and,
3) There are no differences between government and NGO initiated micro-finance
group members in terms of their socio-economic profile and their performance in
terms of selectIOn, monitoring and repayment.
9.2. Methodology of the Study
Wayanad, one of the backward districts of Kerala, was selected for the study as it
had high presence of government and NGO initiated micro-finance groups. This
district also had the highest proportion of households covered under micro-
finance programme.
From this district, two panchayaths - Sulthan Bathery and Noolpuzha - were
randomly selected from Sulthan Bathery block, where the incidence of micro-
finance groups was high. Equal number of groups was selected from these
panchayaths based on the assumption that there was no difference between
government and NGO initiated groups in so far as the perfonnance was
concerned. Accordingly, 8 NHGs (government initiated) and 8 SHGs (NGO
initiated) were selected from each of these panchayaths and a total of 32 micro-
finance groups were selected randomly. From each of these groups, 6 members
were randomly selected. The total number of sample member households
selected for the study was 192. A structured questionnaire was used for collecting
information from the sample member households. The information collected
included socio-economic details of members, profile of members, access to loans,
utilisation and repayment of loans, the presence and compliance of the rules
relating to mechanisms and incentives in the selection, monitoring and repayment
of loans. Another questionnaire was used to collect data on the micro-finance
operations at the group level. Checklists were prepared to gather information
about the groups from bank officials, NGO and government personnel.
ltJ6
9.3. The Context
Among various states in India, Kerala is widely recognised as a state in which
micro-finance programmes have been successfully implemented. Micro-finance
in Kerala was introduced at a time when there was an active debate on the
sustainability of Kerala model of development. The introduction of micro-finance
coincided with the democratic decentralisation campaign initiated in Kerala
during I 990s, following the 73'd Constitutional Amendment. It was pointed out
that Kerala economy could be recovered from stagnation in the productive sectors
mainly through the mobilisation of funds from voluntary services, beneficiary
contributions in development projects, small savings through SHGs of women
and loans from financial institutions (Mohanakumar 2002; Tharakan and Rawal
200 1; Isaac el.al 200 I). Thus, the proponents of decentralisation expressed their
hope in the local elected bodies. Micro-finance programmes were introduced
mainly through these local bodies.
Kerala is one of the firsts states in India, which adopted micro-finance
programmes as a part of the state's reforms on decentralisation. In 1999, the
Government of Kerala implemented the state poverty eradication mission (also
called KI/dlllllhllshree) and introduced micro-finance groups called NHGs all over
the state through local elected bodies. This study has examined the functioning of
micro-finance groups initiated by the government and NGOs in Kerala
specifically looking into the institutional aspects.
It is essential to keep the agrarian economy of Wayanad district in our mind in so
far as attempt to examine the micro-finance programmes. Most of the people of
this district .Ire small and marginal farmers engaged in the production of cash
crops for the international market. But, the fall in the prices of these products
such as coffee. pepper. etc . since 2000 adversely affected the agrarian economy
of the district. The studies (Mohanakumar and Sharma 2006; Sainath 2005) show
that the financial condition of a large section of the people also has rapidly
deteriorated. Many of these people, who borrowed from the formal and informal
financial sources for agriculture and other purposes, found it difficult to repay
197
their loans. The agriculture of this district has reached a point of crisis and this is
retlected in the high number of farmers' suicides reported from Wayanad district
in the recent years (Krishnaprasad 2004; Mohanakumar and Sharma 2006).
Another important feature of this district is the high population of tribals. They
are the original inhabitants of this district and are socially and economically
backward as most of them are landless labourers.
Social service organisations of the church administration in the district have been
initiating development activities since 1960s. A few of these organisations have
started micro-finance programmes as well. However, the Kudumbashree
programme received wider popularity as the government channelled most of the
development assistance to the poor through NHGs. For those poor who were
interested in obtaining government assistance, membership in NHGs became a
prere4uisitc Thi .. intluenced the members of NGO initiated SHGs to register
their groups as NH(;s.
Though both the N IlGs and SHGs were initiated by two different institutions, the
internal llpera! ions relating to savings and credit were almost the same. Only
women were the member, of these groups. The average period of stay for SHG
members was 3.4 years. whereas it was 2.3 for NHGs. Thus, SHG members had
relatively longer years of experience in micro-finance groups. Most of the
members knew each uther even before joining the programme, and this might
have contributed positively towards the collective action within the groups. From
7R per cent of the groups, one ur the other member left largely due to the inability
to make regular saving contributions and migration. This indicates that the
poorest household .. were finding it difficult to stay in the groups.
The size and homogeneity varied across the groups. The average size of SHGs
. q
wa.. 16 members, whereas it was 17 for NHGs. As far as homogeneity was
concerned, M7.) per cent of the groups were homogeneous. The NHGs were
" A group i, ,aid III he homogeneous, if more than 50 per cent of the members in a group
hclongcd to particular ca,te.
198
more homogeneous, as most of the members in these groups were tribals.
Households living below the poverty line constituted a majority of members in
both types of groups; but, the proportion was high in NHGs. In terms of level of
education and annual income, NHG members were backward as compared to
those in SHGs.
The groups encouraged members to attend weekly meetings and contribute
savings regul;.trly. Though a majority of the members regularly attended the
meetings, the attendance was less among tribal members. The tribal members
contributed l()wer savings amounts as most of them were poor. A majority of
both the NHG and SHCi members made regular saving contributions and this was
more among SHG members where almost 90 per cent saved regularly. The
financial benefit of getting loans from the group was the major reason for
contributing savings to the groups. A majority of the members depended on
husbands for making saving contributions. The dependence on male relatives was
less among NHG members, as a majority of them were working as daily wage
labourers with a better possibility of having their own income.
9.4. Findings of the Study
It is often noteo Ihal Ihe three problems of rural credit markets, namely, selection,
monitoring ano repayment, can be solved in micro-finance groups, as the problem
of asymmctric information is dealt through collective action. For this, groups
must incorporalL: in,litutional mechanisms and incentives. Let us now examine
the study finoings relating to the extent to which these were present in the groups,
and whether they helped in solving the problems of selection, monitoring and
repayment.
9.4.1. Selection of Rorrowers
In the absence of information on borrowers, adverse selection is the common
problem in rural credit markets. We have, therefore, examined different aspects
relating to selection of borrowers in micro-finance groups formed both by the
government amI NGOs.
199
The sample micro-finance groups introduced four types of norms to ensure
proper selection of borrowers. As per these norms, a member will be issued a
loan only when (a) she completes certain duration in the group, (b) fulfils
attendance requirement, (c) has savings in certain proportion of loan amount
requested, and (d) has repaid her previous loans. Though a majority of NHG and
SHG members had followed the first three norms, the proportion of members
following repayment norm was about 70 per cent. The exact norm followed
differed across thc groups; but, within a group a norm was uniformly applied to
all the members.
All the members except three from NHGs had received at least one loan. Though
close to 80 per cent of the members from both the types of groups received I to 5
loans. about 28 per cent of the SHG members received more than 5 loans. In
terms of the cumulative loan amount received, 60.4 and 25.0 per cents of SHG
and NHG members. respectively, received loans above Rs. 7,500.
What factors intluenced the loan amounts received by the members? A regression
analysis with total amount of loan as dependent variable was undertaken to
address thi, question. The results show that those members who were non-tribal
and had longer duration of stay in the group received larger loan amounts. The
SHG memhers received relatively larger loan amounts as they were in micro-
finance for a longer period of time. An interesting finding was the positive
association hetween the size of borrowing from sources other than micro-finance
groups and loan amount. In other words, those members who were borrowing
heavily from informal agencies were the ones receiving larger loan amounts. This
implies that members often borrowed to repay the loans contracted from other
agencies including infurmal ones. Surprisingly, there was no association between
the loan amount. and mechanisms and incentives incorporated for good selection.
In other words. the members who did not follow the institutional rules were the
ones who received larger loan amounts.
200
Loan amount is, perhaps, not an appropriate variable to examine the impact of
mechanisms and incentives on selection. We, therefore, asked the sample micro-
finance group members on their views on the selection procedure. The responses
were three-fold; very good, good and not good. An overwhelming majority of the
members termed the selection procedure to be either 'very good' or just 'good'.
In order to arrive at two variables amenable for estimating a logit model, the
responses of 'not good' and 'good' were combined into one category, whereas
the 'very good' responses as one category. This enabled us to have a
dichotomous variable on the perception of the members. The dependent variable
was the perception of the members on selection procedure. The members
belonging to SHGs, large groups, attending meetings regularly and participating
in group discussions relating to selection are likely to term the selection
procedure to be very good. However, there was no association between
incentives and the member perceptions on type of selection procedure adopted in
the groups.
Why i/lcmtivl'.\ fiJI' the selection of borrowers did /lot work?
The above a n a l y ~ i s makes it necessary to closely examine two issues; How did
the ,ample members obtain loans even though they did not follow the norms?
What would be their reaction to those members who did not comply with the
norms and yet asked for loans? Though responses to the second question would
be hypothetical. they have been analysed because they would have been shaped
by their previous experience in the group.
The results show that despite the fact that some of the members did not comply
with the norms, they obtained loans because of the following reasons. First, these
members had urgent credit needs. Second, since the groups simultaneously
disbursed both internal and external loans, the norm relating to repayment could
not be strictly enforced. Third, non-conduct of regular meetings was the reason
for not fulfilling the attendance norm by a few members. Fourth, since there was
no other horrower and the group wanted to disburse loans in any case, a few of
the memhers obtained loans though they did not comply with savings norm.
20)
What was the reaction of members to those who did not comply with the norms"
The responses show the following. First, the proportion of member'. ,tating thaI
they would reject the issue to loans to non-complying members w a ~ high (well
over 50 per cent) in the case of repayment norm. This was because the repayment
norm insisted that if a particular member was not making timely repayments.
others were liable to make repayment. Second. among the members who stated
that they would reject the disbursal of loans to non-complying members, SHG
members constituted a relatively larger proportion in the case of all the three
norms. Third, in the case of the norms relating to attendance and savings-Iinked-
to-credit, the dominant responses were that these could be relaxed If the credit
need was urgent or if the group was confident of repayment.
Although the proportion of norm-complying members was high, the proportion of
those stating they would reject the proposals from those not complying the norm
was less. This difference could be attributed to considerations among members
that urgent needs should be met regardless of whether members complying with
norms or not. This can be explained in terms of humanitarian considerations that
members had on the others in the group. The humanitarian considerations arose
largely due to the agrarian crisis in the district, widespread distress faced by
people and dire need for credit.
This also led to reciprocal relationship. The tendency of the members to relax the
selection norms indicates that there existed mutual understanding among the
members to help each other even though some borrowers had not fulfilled the
norms. In other words, there existed some leniency at the time of disbursal of
loans. Thus, there was reciprocal understanding and relaxation of the rules
against the formal stipulations to benefit each other.
The net result of the above tendencies was that certain institutional rules had been
gradually weakened. This can be found out from the following. First, the
members who had not complied with the norms were likely to state that the
nonns should be relaxed in cases of urgent credit needs and if group had trust.
Second, a higher proportion of those complying with the norms was likely to
state that proposals from those not complying with the nonns should be rejected.
Third, the proportion of norm-complying members stating that they would reject
the proposals from non-complying members was very high in the case of
repayment as compared to attendance and savings norms. This shows that the
members were alert in so far as free-riding in the groups was concerned, and that
they would reduce the chances of selecting bad borrowers. The strict enforcement
of the repayment nonn was due to the fear among members that if a loan was
beyond member's ability to make repayment, this might lead to her indebtedness
and thereby the failure of the group.
Thus, in groups with familiar members having diverse types of credit needs in the
wake of agrarian crisis, strict enforcement of the group nonns was found to be
difficult while selecting the borrowers. Hence, relaxation to the compliance of
nonns (except, to significant extent, in the case of repayment) was given to the
members based on humanitarian considerations and expectations of future co-
operation from their peers. This suggests that certain institutional rules would not
work in the communities where people are known to each other and share their
problems and in the context of widespread problem such as agrarian crisis.
9.4.2. Monitoring the Utilisation of Loans
Moral hazard problem in the credit markets arises when borrowers undertake
those actions that may adversely affect the chances of repayment. The micro-
finance groups undertake monitoring to ensurc that borrowers utilise the credit
producti vely for the stated purposes and help them in succeeding in economic
activity (undertaken with the loan from micro-finance group) so that repayment is
prompt and timely.
Types of and for monitorillg
The groups incorporated four types of monitoring mechanisms. They are
monitoring of purpose of loan utilisation, skills, availability of raw materials and
marketing opportunities. The evidence shows that monitoring was limited to loan
203
utilisation wherein groups sought to ensure that loan amounts were not diverted.
The sample groups did not, however, strictly enforce the monitoring mechanism
to ensure that the loans were utilised for economically productive purposes. In
other words, the members enjoyed considerable freedom with respect to the
utilisation of the loans.
Three types of incentives were prevalent in the sample groups. Of them, two were
positive incentives, while one was negative incentive. The positive incentives
were sharing of profits and regular access to credit. The negative incentive was
the liability to make repayments in case of default by other members. A larger
proportion of sample members stated that the positive incentive of ensuring loans
to other members and the negative incentive of liability to repay in cases of
default were present, either to a large extent or partially, in the groups.
For monitoring to be effective, there must be meetings and discussions among
members relating to monitoring. The data on frequency of participation in the
group discussions relating to monitoring show that a larger proportion of SHG
members participated either regularly or occasionally. The proportion of
members stating that they rarely participated in the group meetings was relatively
high among NHGs. The important reasons why members rarely participated in
the group discussions relating to monitoring were lack of capacity and poor
governance.
Purpose-wise distribution of micro-credit
The loans disbursed by NHGs and SHGs were used predominantly for
consumption and repayment of old debts. As much as 59.9 per cent of the total
loan amount disbursed by SHGs and over 35 per cent of that distributed by NHGs
were utilised to repay the past debts. About one-third of the total credit was used
for various types of consumption, and this can be understood in the context of
lack of reliable and sufficient social security from the government. Of the total
loan amount disbursed by NHGs since inception, only 22 per cent was utilised for
income generation. The proportion was much less in the case of SHGs at 6.8 per
204
cent. This can be attributed to the agrarian crisis in the district. The socio-
economic profile of the study area portrays that as this district had been going
through an agrarian crisis, the members had borrowed from various financial
sources mainly to meet the consumption requirements such as repayment of
earlier loans, conduct of marriages and medical treatment (Mohanakumar and
Sharma 2006). Under such situations, we can argue that it is quite natural for the
micro-finance groups to meet the immediate credit demands of the members.
Otherwise, the members would have to depend on sources other than micro-
finance at higher costs to meet their consumption requirements. Secondly, in the
absence of support towards skill acquisition and marketing, members were
unwilling to take up income generating activities. Third, the past experience was
not encouraging. The members, who started economic activities such as soap
making. food processing etc., were forced to close down the enterprise because of
the stiff competition from the established products in the market and fluctuations
in the prices of raw materials. The members also did not receive any support from
either micro-finance groups or promoting agencies towards marketing.
About 67 per cent of the NHG members and 70.8 per cent of the SHG members
were not inmlved in any IGA; the proportion of members not involved in any
IGA was higher in the case of tribal members. The income generation activities
that had been taken up by members were mostly related to livestock rearing and
agriculture. This implies that the members were reluctant to undertake risky
income generating activities probably due to agrarian crisis in the district. What
factors inpul'll('e the members whether to undertake IGAs or Ilot? The results of
logit regression show that the variables of provision of training, income of the
household and loan amount positively influenced the members in undertaking
IGAs.
Did the Xmups monitor the IGAs undertakell by the members?
In the case of as many as 90 per cent of the members undertaking IGAs, the loan
amount was less than the investment on the activity. In the case of 60 per cent of
the members. the loan amount constituted less than 75 per cent of the total
lOS
investment. The deficit was met either through borrowing or sale of assets. A
larger proportion of tribals depended on moneylenders to meet the deficit. This
had the following negative implications. First, the costs of borrowing were
higher than that in the case of micro-finance loans. This resulted in considerable
leakage of income from the activity. Second, the income generated from the
activity constituted a small portion of the total income of the household. The
above implies that the groups did not monitor the actions of the borrowers and
this had resulted in certain practices (such as borrowing from moneylenders)
leading to poor incomes. This brings us to another important issue of what
factors influence the success of groups in monitoring.
HoI\' did rhe KrouP memhers characterise their monitoring behaviour?
The monitoring of the loans was stated to be effective or extremely effective by
69 per cent of SHG members as compared to about 57 per cent of NHG
members. What factors would influence a member to perceive that their
monitoring was effective? A logit model was estimated for this purpose. In this
model, the dependent variable was a dummy with ineffective monitoring as zero
and effective/ very effective monitoring as one. The independent variables
included member and household characteristics, group characteristics,
mechanisms and incentives for monitoring. The results show that homogeneity,
mechanisms (attendance in meetings) and incentives for monitoring would
positively influence the members to perceive that the monitoring in their groups
was effective.
9.4.3. Repayment of Loans
Repayment is the final stage in a credit transaction. The micro-finance groups
incorporated certain mechanisms and incentives to motivate the members to
repay on time. The dynamic incentive of disbursal of second and higher amount
of loan if the previous was repaid was incorporated in the sample groups. The
social pressure also existed in the sample groups. The groups adopted two types
of mechanisms, namely, repayment in monthly instalments and repayment within
the stipulated duration. However, 70 per cent of the members did not follow the
206
instalment pattern of repayment and about 50 per ce t did h .
n e aye t elr repayment.
At the same time, no member defaulted in repayment In th d ..
. 0 er wor s, a maJonty
of the members repaid the loan amounts in one go el'th th d f .
. er on e ate 0 matunty
or at a later stage.
What factors influenced the delayed repayment?
The regression results with number of days of delay as dependant variable show
that the delay was less in the case of higher income households and literate
members. More importantly, both mechanisms and incentives significantly
influenced the members to repay on time. It was found that longer the duration
lesser would pe the delay. This suggests that the micro-finance programmes
should arrive at realistic repayment schedules. The incentives also influenced the
members to repay on time. If micro-finance groups introduced the incentive that
every repayment would lead to next and bigger loan, the delay tended to be less.
Similarly. in the case of those groups, where social pressure was intense, the
delay tended to pe lower.
HOI>" did the mellihers make repaymelll?
How could all the members repay their loans when the district was going through
agrarian crisis and a majority of the members did not undertake IGAs? This
que,tion can PC answered as follows. First, repayment was not with income
generated Py the member or from the IGA. Secondly, the borrowing either from
the micro-finance group or elsewhere constituted a significant source of
repayment. The results of the study show that members borrowed from the group
soon after the repayment either to repay moneylenders from whom they had
initially borrowed. This shows that the purpose of micro-finance programme was
defeated. The members, instead of obtaining cumulative benefits through
borrowing from the groups, had been only circulating money obtained through
borrowing from informal agencies to micro-linance groups and vice versa. Such
a practice, no doubt was due to agrarian crisis, would not lead to sustained
poverty alleviation among the members.
207
9.5. Conclusions
Group s i ~ 1 '
Theories on collective action note that the groups function effectively when they
are small in size (Olson 1965). Stiglitz (1990) has stated that the members in a
group would take up the responsibility to monitor only if the number of members
involved in a group was small. The chances of free riding would be less or the
incentives to act collectively would be more in a group where the number of
members is less.
In the prest'nt ,tudy we have taken group size as a variable influencing the
selection. monitoring and repayment. It has been observed that the members
belonging tll 'lIIalkr sized groups received lower amounts of loans. Moreover,
the member, helonging to small sized groups did not express a better opinion
about the selection procedure followed in the group. Similarly, the monitoring
was less effective in small sized groups. This indicates that the outcomes with
respect to selection and monitoring had not produced the expected results with
respect to the group size. On the other hand, the members belonging to small
sized groups were hetter in enforcing repayment. In the study area, we have
examined that members belonging to some of the smaller groups stating that they
became smaller in due course of time due to conflicts within the groups. Thus.
small group, need not necessarily be democratic and inclusive especially when
they were large to hegin with and become small due to internal conflicts.
HOmO!;1'I1eitr of the gmu{JJ
Another important variable discussed by collective action theorists as having a
hearing on collective outcome is homogeneity of the groups. The members
helonging to hOl1logeneous socio-economic conditions provide familiarity to one
another and contnhute towards social networking and produce positive impact on
collective outcome
Instead of re,ulting in better outcomes III terms of selection, monitoring and
repayment. homogeneous groups III our study area resulted in a mutual
208
adjustment with regard to the relaxation of selectl'on 't' d
. , mom onng an repayment
mechanisms. Members were finding it difficult to close their eyes to the plight of
their neighbours and it was for this reason that the members became lenient when
it came to enforcement group mechanisms.
One of the reasons behind poor perfonnance of homogeneous groups in our study
area may be because of high presence of tribal members. Perhaps because of the
financial backwardness and lack of awareness. the groups in which tribal
members were the maj0rity experienced poor outcomes with respect to selection,
monitoring and enfnrcement. The study. therefore. suggests that homogeneity of
the groups need not always c()ntnhute positively towards collective action.
Afechlllli.mLI <111" /IICl'llIil"',1
The study has rewaled that in a community where the members had close face-
to-face interactil)n, \llth each other. it wa, difficult to enforce norms and
regulations. This was the reasnn behind strong reciprocal adjustment among
members with regard to ,ei<:ction. monitoring and repayment. Moreover. the
"bsence of an alternatl\e credit source fix a majority of the members forced the
members to relax thc norms, Therefore. in the comext of homogeneity of the
group' and absence of altern"t i \e credit sources. it was difficult for the members
to strictly enforce group mechan"llls. The study has revealed that both the
positive and negati\'e incentivc, had worked effectively towards collective action
in so far as 1Il0nltOrtn!! and rep,,),mcnt are concerned,
To conclude. the micro finance groups have incorporated certain mechanisms
and mcenllvc, to cncourage and/or force the members to participate in collective
auion relating 10 ,election. monitoring and repayment of loans, The members in
these group'. howe vcr. cxercised their own judgement on which of these were to
he complied wilh on genuine credit needs of memher households facing
hanbhip\ due to agrarian crisis and their own capacity. The institutional
rule, relalm/( 10 and incentives led to desired impact only in the case
of monilOring and repaymcnt of loans, But. the outcome of the collective action
209
did not always result in the cumulative benefits to member households. Thus,
although collective action existed in the groups, the nature was such that it did
not result in su\taint'd poverty alleviation. This was largely due to the agrarian
crisis in the district. which adversely affected not only the employment and
incomes of households depending directly and indirectly on agriculture but also
investment and marketing opportunities in the areas. This was also an important
reason why there was not much of difference between government and NGO
initiated groups in the outcomes of collective action, though the latter were
formed earlier than the fonner ones. Institutional mechanisms and incentives are
thus important in facilitating collective action. But, whether the members comply
with these mechanisms and incentives in such a manner that they result in
beneficial outcomes is context specific.
210
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220
ANNEX No.1
MICRO-FINANCE AND COLLECTIVE ACTION: A STUDY OF SHGs IN
KERALA
GROUP SCHEDULE SL. NOI

L IDENTIFICATION
a) Name of the Grama Panchayath:
b) Ward number:
I
Name nf the sa"'l'le SHGI NHG:
2
When was the group started (mention the month and
year)"
3
What factnes have made you to join as an SHG?

If the group is an SHG. does this group have
re(lislralinn in NHG?
5
If yes. since when
6
\\'hat are the reasons for registration in
NHG'
7 Q
h be h' f h
ues IOns---'pcr ammg () L C Illeln
rs lip 0 t c_ group
No. of members
No. of mcmhcrs
Reasons behind
No of new
Reasons behind
at the time of
left the
their
members joi ned joining this
f()rmation
rn )gr31lllllc

the programme
programme
( I )
(2)
(3)
(4) (5)
II SELECTION OF BORROWERS ..
X
Have you receiseo guidelines from the promoting
agcm:ic,'\ for group 'll'ti\ilies? Mention
\I How often docs the group meet" I. Weekly
2. Fortnightly
3. Monthly
4. Any other. specify
10 What IS the total number of meetings held during the
last one year (December 2()02 to November 2003)"
I I Where dOloU normally conouctJ!.fOUj'. meeti'!lCs"
12 Generally. how long docs it take for each meeti'!lC')
13 Do you have any meetings other than the regular SHG I. Yes
2. No
14 Jf ye"i, menlion those meetings'!
15 H()w do y()U select
16 What is the .saving amount contrihuted by each I. Rs. .per week
221
",,'mocr to the group'?
2. Rs ... per fortnight
3. Rs ... per month
17
Is the saving amount same for all the memhers')
4,
Rs ... any other
I. Yes
2. No
18 Gi,e reasons for the above response.
19. Menuon the group requirement for obtaining loans
SI. Cntena Requirement
No
I Allemlance
2 Sa\ Ing loan ratio
3 Repayment of earlier loans
-t Duration of memocrship
5 Trust in ones ahility to repay
(, An) other ,specify)
20 (Juestions 10 loans borrowed from different sources
Loan Frequency Year Memhers
Amount
t I) (2) (3) befitted
(Rs)
(-t)
(5)
I SHG group Illan
2 Grantl rc\oh iog fund
3
Illan
-t
Any llther through SHG
( S p"co f y)
21. Prl)\' e
etal '" on the savings, ere
It an rc
ayment 0 l e sanw e
or t east 3 years
Year
Sa,ing (Rs)
Loan (Rs)
Repayment (Rs)
Overdue (Rs)
r I )
(2)
(1) (4 )
(5 )
oJ dl
f h
I SHG f h I
2001
2002
2003
Total (since
inception)
22
Have y()U given loan to all the group memhers')
I. Yes
2. No
23
If no, state the reason.
222
2-l
Docs the group make any difference between loans for
I. Yes
consumption purposl'S and productive purposes while
2. No
lending?
25
Give reasons for the above response.
26
Whal is thl' I..'urrcnt interest raLe per annum for loans?
27 Is il thl' ....dllll' fllT .111 th\. ... members?
I. Yes
2. No
2K Give reasons.
29
If you have receIVed revolving fund from the
panchayath. how did you receive it"' Or mention the
conditions that fJcilitatcd you to avail the same.
:10
If you have received loans from NGO, mention the
(ondititllh Ihat facilitated you 10 access that.
31
If the gH'UP Ita.' recel'l,d Inan from hanb, how did you
approach the hank"
III. QUEST\( lNS PERTAINING TO MONITORING
Questions rclaling 10 the participation of group members in training programmesl
dasscs
pro)!rammc Awan.:ncss classes
Mentum the Numher of Agency Mention the Number of Agency
pH)!;ramIllC mcmhcr.;; provided programme members provided
participated participated
II Docs this group monitor utilisation of I. Yes
loan and generation of income?
2. No
l4 If yC!\. what a'pt.'ch arc mnnitoH:u','
Response code
I. To a large t:xlt,:ll(
2. Partially
.\. Not at all
-l. Do not know
5. No response
I. Loan utilisation for the purpose
mentioned in the application
2. Ensuring that .skills arc obtained
oy borrowers
22:1
3.
Ensuring
that raw
materials are
available
4.
Marketing of the produce
5 .
Any other, specify
.15
Is there any monitoring hy promoting
I. Yes

2 . No
.\6
If yes. specify"
.17
Who panocip,nes in the group
moniloring','

E'plain the nWl'hanism, uscd in the
(group Iraining
progranllllt.' ........ lc).
IV Ql'ESTIONS PERTAINING TO REPA YMENT
W
What are Ihc procedures adopted in thc
1. Repayment schedule
follOWing'
,
Repayment amount
.1. Repayment period
40. (JUt"lIon, pcnaooong to t h k C wor 1nJ! 0 f repa vrnent mec h amsms In a group.
Inl:L'nli\c,
Docs your If ycs, how il If no. why the grDUp does nol have
group havc" works'! these')
I. Yes
2. No
Denial of funlter loans 10
dcfauhinJZ members
Imposition of lines
Succe"ful repayment of
(otber) members
Deharring defauhing
members from the -.irou!>
Social pressure
Any other
41 How often the above are applil'd" I. Rarely
2. Occasionally
3,
U (ilve the reasons for ahuvc rCSp(Hl"'C,
224
!'IIO, 2
Details relating to thl' wlllpo,ition of thl' SIH; and .,a\ inJ,!.\ ;11111 lTl'dit adhities of individual members
Group sl. no ----]
! SI. I Sail)( the ITlCmb<r
I .\K< I
Cil.\I' Lt"rlof I Land o ... nfll! of 1.0Mn lI.te or Pu"""e or Amount \\'hen 10Hn V.le of Amount Halance
I :.. I I AIon& willi the pooiliOlll eduClllion by the loa ... ca1eaory borrowing loon of loan was to be: actual repald so lif any In
! o. I
heidi
I
hou. .. hold oblalned lin R.I repaid repayment rar lin Rs,) R>.)
I lin
I I I
-
225
ANNEX NO.3
MICRO-FINANCE AND COLLECTIVE ACTION: A STUDY OF SHGs IN
KERALA
SI.
No.
( I I
LIDENTIFlCATION
I. Name of the respondent
HOUSEHOLD SCHEDULE SLNO.LI ___ --'
GROUPSLNO I
L--_-.J
a) Name of grama panchayath (GP):
b) Ward in which the member belongs:
c) Poverty status of the household:
d) No. of meetings attended by the respondent In
2003:
Demographic composition of ihe Household (HH) (Circle the serial no. of the
d tI d h hi)
en an mem cr In t c sampl e group :
Relationship with
Sex Age
Level of education Occupation
ht'ad of the household
12)
1:1 )
(4)
(S)
Primary (6) Secondary
(7)
II UESTIONS PERTAINING TO SELECTION OF BORROWERS Q ..
:I Please ment"," the name of the sample SHG in
"h,ch you arc a memhcr
In addition to the sample SHG. did you have any I. Yes
mClI1hcrship In SHGs/ NHGs. PRIs. church 2. No
... :ialions. tratic unions and initialed
organizalions ':>ut:h as prayer groups etc., in the
la\t five
5 h If yes. please provide t c 101 OWIIlJ.!
d '1 ct.':u S
SI Name of the organiJution
Reasons for participation and/or discontinuation
No
(3)
II ) i2I
In which year did you join the sample SHG?
226
7 What factors have influcnced you to join SHG?
X Wcrc you familiar with the members before 1. Yes
joining the group" 2. No
9 If yes, desrrihe the lype of relationship and the
aClivities that hroughl members together"
10
Did you hold any position of responsibility In f-_-:-_-o?-P."o"'si"ti"o"n'----___ +_-"P-=e:.:n.:.' o",d"--'(L:Cy,ea",r'-')_-j
the group in the last three years" I. President
2. Vice president
J. Treasurer
4. Secreta!y_
5. Others (specify)
11 How do you "haractcrizc your attendance In 1. Rarely
mcetings 2. Occasional
3. Regular
12 Give reasons for the ahove response
I,) From where do you make savings 10 the sample
SHG'
14 Hnw do you charal"tcrise your "';Jvings?
15 Give reasnns for the above response.
16 Have you received loan from the sample SHG"
17 If no. why didn't you receive loan from the
gn)up'!
1 R
I f you havc harrowed from the group, mention
the formalitlcs that you have followed wh!le
applym!! for the loan
1. Rarely
2. Occasional
J. ReGular
I. Yes
2. No
227
19. Loans availed from different Sources through SHG in the last One year
Sources
Amount
Amount
Rale of
No. of days

UlilisLltion aHem
rt"4ue\lnt
sanclinne
mleresl
belween
incurred in
Heahh & Repayme IGAs Others
d
application
obtaining lhe
edllcalitlO
nt of uld
(II
and sanction
loan
(7)
deb' (8) ,9) ( 10)
(5)
(6)
C)
(4)
,.1)
SHG
group
loan
Granll
RC'\ol\'ing
fund
Bank loan
(direct
linb,,)
Any other
thwugh
SHG
(speL'ih)
20
Do lind any difference in the response of SHG
I. Yes
mcmhcrs "hen you ask for consumption loan and
2. No
protlu<'\I\'C Illan in terms of
al Amount
hi Numher of instalments
cI Interest ratc'!
21 If \ es. l"r1am the TCSpOn!\c",)
Criteria follolJ.'l'd in the selection of horrowers
Q II t h
O\C "'"
h o recen'C dl uan f h rom 1 c sample group (b d ase on t
h . I
Clf asl oan
Critena Mentinn the Did you fulflll If no. how did you get What will be your response if your
grnup the required 10iln fwm Ihe gwup? fellow ponicipants do not fulllil the
rl'4 Uirl'ITlCOI condition'? rC4uiremenl?
I) Ye,
2) No
III ( 2)
1.11 (4) (5 )
Attendan(c
Saving to loan
ratio
Repayment of
earlier
Duration 01
membersh'n
Trust in one...,
ability to repay
Any other
(specify)
Note: Please remember to (heck these qalements w,th the help of dala at the group level.
L-.
How do you sec Ihe selc(tion pnKedure in the
group?
I. Not good
2. Good
_1-____________________________________ __ ______________________
228
24
Give reasons for the above
response in terms of
mechanisms and incentives
25
Dit! you horrow from sources other thiJn
SHG in
I. Yes
the last year
2. No
26 If
r yes. answer the following Questions
Sources
Amount
Amount
Interest
Collatera
No. of Jays Other Purpos
requested
sanctioned
rate
I
hctween ('x pense
(I)
(2) I)
(4)
<Jpplication and s
Formal
(5) sCloctino (6) (7)
(specify)
Informal
(specify)
II. QUESTIONS PERTAINING TO MONITORING OF THE ACTIVITIES FOR WHICH LOANS ARE
GIVEN
27 Have you participated In any of (he
awareness I. Yes
classes organised tl'the promotino aoency"
2. No
28
Have you participated in any training programmes')
I. Yes
2. No
29
How do you characterize yourself in participation
I. Rarely
of the sample group discussions?
2. Occasional
3. Reoular
30 Give reasons for the above response (such as
dominance in the decision-making. not taking
members' views into serious consideration).
..
31. Questrons pertarntng to the economIC actrvrtles undertaken with the SHG loan by the
respondent
e
(8)
Specify the economic activity Specify the economic activity that State the reasons for adopting this
that you were undertaking you have undertaken after joining the activity')
before joining the group') (I) group with the SHG loan" (2) (3)
32 Was the training programme helpful for you to 1. Yes
undertake the economic activity? 2. No
33 Where do you undertake the economic activity"
34 How do you undertake the economic aeti vity') 1. Individually
2. Collectively (if so, mention the no.)
35 Give reasons fOT the above response
16 T ota amoun spen on th ClIvlty ea
Expenditure (Rs)
2001 2002 2003 Total
I. Total expenditure on the estahlishment, if
purchased
2. Cost of raw materials, mention
'--
229
3. Cost of marketing
4. Any other
Total amount spent on the activity
37. MentIOn the amount of money from dIfferent sources and rate of mterest. whIch you have
. de d k' receive or un erta
109 the activity
Sources
Year in which borrowed
Amount (Rs)
Rate of interest
(1)
(2)
(3) (4)
I SHG internal loan
2 GrantIRevolving fund
3 Bank loan
4 Any other (specify)
,8 If the amount in (,6) was more tha th (17) h
th bT d') - n e
-
ow was e amount rno I IZC
Source
Year in which borrowed
Amount mobilized (Rs) Interest rate. if
(I)
(2)
(3) any
(4)
Moneylenders
Rc1ativcslFriends
Own savings
Anv other (specify)
Total
39. If the amount in (36) was less than (37). how was lhe remaining amount utilized?
Purpose of utilization Amount utilized (Rs) Why was it utililed')
( I ) (2)
(.' )
Crop production
Purchase of milch animals
Repayment of old loan
Social functions
Consumption
Any other (specify)
Total
40 Where do you sell your product from the
actIvity undertaken"
41 What is the nature of the marke!"' I. Seasonal
2. Permanent
42 Who mainly undertakes the marketing of the
product')
4,
Mention the income from the economIc 2001 2002 2003 Total
activity undertaken with the SHG loan
44 Was the income more than what you I. Yes
expected?
2. No
45 If yes. what factors contributed to more I. Good previous experience in the activity
income'?
2. Village conditions are favourable (explain)
3. Household conditions are favourable (explain)
4. Interest is less
5. I have reinvested a part of the income on the
activity
6. Training helped me
L-
230
7_
Any other I'pecify)
-+0 If no, what faclors
conlri hUled
10
Ie"
I.
Lack of pre\ ious t'\pcrrt"n(.'t'
income'!
2_
Village arc not ourahh: h:\pl:lIn)
3_
Household art' IHlt LJ\llUlahk
( explain)
4_
Interest rate is too high
5_
1 could nOi reinvest Into the acti\lly Inplain)
6_
Training did not help
7_
Failure oflhe activily (explain)
x_
Any olher (specify)
47 Did you reinvest on the aClivity?
I. Yes
2_
ND
48 If yes, give details
Particulars first Second Th"d year
year year
On whal
Amount (Rs)
invcsled
49 I I' no, what are the reasons')
50 Who supervises whether you have_ invesled
the amount on the activity and gelling good
income'!
51 How do you find the supervision?
52
Do you monitor the activities of your fellow L Yes
partIcipants')
2_ ND
53
If yes, how do you characlerise yourself as a
I _inefficient
supervisor of your fellow participants"
2 efficient
3 extremely efficient
54 Give rcasons for the ahove response
55 Menlion Ihe incentives hehind monitoring
(ode-
your group memhers?
L To a large

2_
Partially
3_
NOI at all

Do not knov.
). No
I. Regular
contrihution 10 Ihe
group fund
2. Profils from Ihe group
Liahility on a particular pCfS"n
for default of any olher memher
-+.
Provision of loans 10 olher
memhcr
5. Any olher (specify)
231
IV QUESTIONS PERTAINING TO REPAYMENT OF LOANS
56
How do you characterise your repayment
I. Unsatisfactory
behaviour"'
2. Satisfactory
57 Give reasons for the above response
3. Extremely satisfactory
58. Gtve folloWIng detaIls on loan repayment In the last year
Sources of Amount
Amount yet to Ti me taken for Reasons hehind Sources of
loan repaid (Rs) be repaid (Rs) repayment repayment repayment
( I ) (2) (3) (4) (6)
(5 )
SHG group
loan
Grant!
Revolving
fund
Bank loan
Any other
loan through
SHG
(specifv)
Others
59. IncentIves behInd repayment of loans from the sample SHG
If youlyour fellow participant havelhas borrowed from the sample group answer to the following
table
Does Did they I f yes, state the If it didn't work in Did they If no,
your influence impact your case. stale the work in the state the
group you in Response code reason case of reason
have repaying I. To a large
other
I. Yes the loan extent
members
2. No I. Yes 2. Panially
I. Yes
2. No 3. Not at all
2. No
4. Do not know
5. No response
(1)
(2) (3) (4)
(6)
(,S)
(7)
Denial of further
loans to defaulting
memhers
Imposition of fines
Successful
repayment of (other)
members
Deharring defaulting
members from the
group
Social pressure
Any other
00
Has any mem!>er from your group had faced
1. Yes
If yes. how
a)
Denial of further loans
2. No
many of
b) Imposition of lines
them
e)
Debarring from the group
experienced
232
a)
h)
c)
V HOUSEHOLD INFORMATION
,
61
Typ<' of house owned
1. Pueea
2. Semi puce a
3. Kutcha
4. Do not own hose
-. ssct ownership of the household
I) Yes
Radio
Present value (Rs.)
Year of acquisition
TV
SCOl)tl'r
W,II
lr\)n ht)\
"\11\ l'
ACrlCultural implements
.... m "thcr (sDeCifv)
bJ Details of income January 20m to Dcccmhcr 2003.
SI Source
Particulars Gross annual
No.
Income
(Approximate)
I Land Extent (iflllcres) Croos
Irril!aled land
Dry land
Total land
:2 Livesloc'k No, til 'e.\rvck No. of {ifres .. mles etc
Cows
Buffaloes
Goat! sheen
Poultry
Others (spedfy)
-'.
Wa!!e income No. of persons No. of dan! wage per
lilli'
.t Pelly busincs" tradelscrvice T\f'e -;;j bllsiness Furl/m'er per day
5. Other (specifv)
Total
233
ANNEXNO.4
MICRO-FINANCE AND COLLECTIVE ACTION A STUDY OF SHGs IN
KERALA
I.
7
CHECKLIST FOR BANK MANAGERS SLNO. D
a) Name of the bank branch:
b) Address
Name of the respondent
Ho" long hase you been in this branch?
Has this oanl oran,h r"" IJed linaneial "S\iSlance to SHGs under the linkage programme?
Y l'S (lr No.
\\'hat fUJi.kllnt ... arc folh l\h'J \\ hlle group for providing financial assistance?
Parlh.-ul;lr ...
As on SgJtcmber 2003
No "f \fj(;s linked
Amount "I loan (Rs)
Amount repatd IRs. )
Percent"fe of repayment
Rate of lnlerc:sl
8. What arc thl" "];'I"r differences hctwccn Kudl1loashrcc groups and NGO groups in tefms of the
rollowing'
Seleclion 01 norrllwcr ... (IlK'\.:hanisms. incenlives):
Par1i":lpallon ot lin: poore ... "
234
ANNEX NO.5
AND COLLECTIVE ACTION: A STUDY OF SHGs IN
KERALA
I. Name of the respondent
CHECKLIST FOR NGO/GO STAFF SL.NOD
a) Name of the organisation:
2. POsition held
3. Year in which you joined this organisation
4. No. of SHGs supervised by you
5. Melltion the important activities performed by your organisation for the promotion ofSHGs?
6. Ha, c you received any training in rdation to this work'! Mention
7. How do you form a group') Describe the guidelines adopted by you while forming a group
8. What types of problems are faced hy the SHG in the initial stage?
9. What is your opinioll about the participation of the poorest of the poor in the sample SHG?
Dcscnht'
10. Mcnt" III lhe mechamsms followed by your group memhers in lhe selection of borrowers
II Explain in de(,"llhe procedures followed by you while helping the groups in obtaining loans
12. Do you organise meetings wilh olher organizations to obtain benefits for SHG members? If
yes. menlion lhe lype of organisation. meetings, member participation. advantages of this etc.
13. Describe the major instances where you have helped in resolving conflicts within the sample
SHfi
236
14. Explain in detail how monitoring is performed? Mention frequency of interactions with the
group rnemhers
15. Whal are Ihe major economic aClivilies performed by your group members?
16. Mcmi(ln Ihe mechanisms followed by your SHGs to ensure timely repayment?
17. What are members' reactions to Kudumbashrec intervention?
18. Do Ihe members of the sample SHG participate in grama sabha meetings?
1'1. Ho" much IS Ihe remuneralion from NGO/GO for your work')
20. Whal are Ihe rcasons for laking up Ihis joh?
21 To whorn arc you responsible? Describe
22 Docs Ihe sample group have Ihe capacity to maintain accounts without any external

23. Whal w!>uld you like 10 suggest for funher improvement of the SHGs?
237
creditworthiness of the borrowers and provide an incentive to make timely
repayments (Bhatt 1988; Vogel 1984; Bouman 1984; Hulme and Mosley 1996).
The periodic savings contributed by the members act as checks and balances
(Morduch 1999a, 1999b; Hulme and Mosley 1996). Morduch (1999b) notes that
the following are the advantages in the contribution of savings: Firstly, savings
can provide a relatively inexpensive source of capital for re-Iending. Secondly,
savings programme creates a natural client pool. Thirdly, building up savings
may offer important advantages to low income households directly. Households
can build up assets to use as collateral, they can build up a reserve to reduce
consumption volatility over time, and they may be able to self finance
investments rather than always turning to creditors.
Under group lending, the principle of joint liability ensures completion of the
credit transaction. Joint liability principle asserts that all the members in a group
are equally responsible to timely repayment. The principle of joint liability
among the members in a group provides incentives to (and/or compel) its
members to undertake those actions, which reduce uncertainty in the credit
market (Bhatt and Tang 1998; Morduch 1999b). This collective responsibility
among the members in a group is the key aspect of micro-finance groups
whereby the transaction costs relating to the enforcement of the contract can be
brought down. Such lower costs increase the volume of transactions in the credit
market and in the process, lead to an improved access to credit for large number
of members.
It i, observed that in remote communities where the poorest are less mobile and
do not have alternative sources of credit, the micro-finance programmes work
effectively (Sharma and Zeller 1998; Morduch 1999b). Additional non-financial
services offered by the group such as training programmes, provision of inputs
for project initiation and marketing facilities, etc., have positive impact on the
performance of the group in terms of repayment (Mosly and Dhal 1985; Godquin
2(04). These together with dynamic incentives such as second and higher amount
of loan will be provided only after the repayments of the first loan have improved
24
required to monitor and incur the ill-will that would result from reporting
offenders who had misused the funds lent to them. Moreover, the cost to each
member as a result of a default by one member might be sufficiently small that
incentives to monitor were minimal in large groups. In short, as the size of the
group increased, the time spent for monitoring also increased. Even though the
costs of supervision increased for larger groups, the costs of mobilising resources
could be brought down for larger groups (Poteete and Ostrom 2004). Ghatak and
Guinnane (1999) have brought out that smaller groups could effectively cope up
with free rider and mass co-ordination problems.
Homogeneity of the members involved in a cooperative effort was another most
important precondition often discussed and debated by the scholars. It is argued
that the socio-economic homogeneity of the members could ensure collective
action (Lin and Nugent 1995), as members with similar socio-economic
characteristics had advantages while interacting repeatedly into the future and
attaining a co-operative solution. There were strong incentives for groups with
similar risk characteristics to form. It was quite natural for those members with
high risks to free ride and they would like to join groups with those having lower
risk of default. Homogeneous groups emerged as those with lower default risk
recognised their mutual interest in grouping together and the process would
continue until the individuals with the highest risk were forced to group together
(Stiglitz 1990).
Social norms, rules and conventions present in the society can influence the co-
operative behaviour (Putnam 1993: 167). Historical experiences and traditional
mores help the people to shape their preferences and degree of trust in their
mutual relationship (Baland and Platteau 1996). A study on the Malawian group
credit has brought out that the pre-existing groups had a significant impact on
collective outcomes, as it was easy for them to join the groups (Schaefer-Kehnert
1(83). Moreover, groups formed without any external influences would sustain
for long, as they were formed voluntarily and from the felt needs of the people.
28

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A STUDY OF SELF-HELP GROUPS IN KERALA

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