Opinion
Let’s not conflate microfinance with self-help-group financing
Summary
- Recognizing the difference between the two will allow clarity in the official approach taken to both
The microfinance industry has witnessed moves by the Reserve Bank of India (RBI) to revise the regulatory framework (March 2022) for it and also caution it against an exclusive focus on business growth (November 2022). What remains in question, though, is whether RBI’s revised regulatory framework addresses the moral charge it seeks to impose on the industry. Thus, it wasn’t surprising for us to see the CEO of Sa-Dhan write an op-ed in April 2023 that spoke of some hurdles faced by microfinance institutions (MFI) in their search for growth. There appears to be a divergence in the way RBI and Sa-Dhan view MFI growth. While RBI sees the prioritization of growth as misaligned with the promise of microfinance—which ought to act as an economic development aid, help eliminate poverty and empower women—Sa-Dhan sees such expansion as an essential condition for those very aims to be realized.
This divergence is clear once we note that RBI is cautioning against a kind of growth that would pile on even more debt on the already-indebted, whereas Sa-Dhan is calling for greater geographical expansion and taking formal credit to places where it’s yet to create an impact. But the clarity emerging here is logical rather than substantive. For, it begs the question—can the form that MFIs have grown to assume thus far, and are likely to reproduce in new geographical areas, be considered an unmitigated blessing? If the answer is no, then we are back to the moral charge and scepticism about growth.
A possible way forward is to start with a critical distinction between self-help groups (SHGs) and MFIs. It is worthwhile to mention that neither RBI nor Sa-Dhan see any qualitative difference between the two institutions. Thus, an RBI deputy governor’s November 2022 speech subsumes SHG loans under the category of microfinance, while Sa-Dhan sees SHGs’ widespread geographical presence as a spatial model for MFIs to emulate. Yet, there is a very important difference between the two institutions. One begins with a moral commitment and overlays it with an economic calculation. The other begins with an economic calculation and overlays it with a moral commitment. This difference makes for different ‘cultures’ and operating dynamics.
At the core of the SHG model is a group of poor rural women (a mahila mandal) committed to helping each other. The pooling of tiny savings is one mode through which such help is rendered. Thus, it is no mean feat that the cumulative deposits as of March 2022 for all 11.9 million SHGs in India stood at ₹472.4 billion. But the moral commitment to help one another remains the primary purpose and is most likely the reason that the state has stepped forward to support the economic activities of SHGs with a variety of structured resources such as village level organizations, cluster level federations, state-level rural livelihoods missions and the National Rural Livelihoods Mission.
The economic calculation of a joint liability loan, with bank funds brought into the picture, came only later (in 1993, two decades after the first SHGs were formed), and was loaded on top of the social idea of mutual aid that was already the driving force. And, therefore, here too, a state subsidy becomes possible by enabling a low interest rate of about 12% per annum. Through all of these developments, the small groups of roughly 10 women each have remained the local and principal institution at the heart of this enormous system.
In contrast, MFIs originate joint liability groups (JLGs) in the service of an economic calculation, which is the business of lending. It should not be a surprise that a calculus of profit (which involves growth, scale and efficiency) has led the organic development of this institutional form. Over time, MFIs have built sophisticated technology systems and invested in offices, staff, process standardization, marketing and fund-raising. The JLGs have come to comprise poor women who are otherwise strangers. Furthermore, group meetings are losing relevance, since digital disbursement of loans has enabled repayment through debit mandates. Operational, compliance, management and fund-raising costs—60% of which are funded through commercial bank debt now—make it infeasible for MFIs to viably do business at interest rates less than 22% per annum, which is almost twice as expensive as for SHG members. Finally, group savings are barred for MFIs. The state does not offer direct support either.
The social origins of SHGs provide for their women members a working model of distributed and contextually-aware decision-making as well as empowerment. The business origins of JLGs are, however, unable to engender the same quality of trust, capacity or personal development. We are all for the growth of MFIs in the service of new-to-credit customers, but only if critical differences between SHGs and JLGs are recognized. We believe that clarity on how the two differ will allow for a rethink of the MFI growth model as well as of the appropriate forms of regulatory and state support that may be offered to spur the sector’s growth.
These are the authors’ personal views.
