1. Conditions in Which Microfinance has Emerged in Certain Regions and Consequent Policy Implications M.S.Sriram Radha Kumar Indian Institute of Management Ahmedabad

2. Background India has two strands of MF: The mutuals – including SHGs, co-ops, thrift and credit groups The providers – where the institution is externally owned and managed, but focus on low income clients. For the purpose of this presentation we focus only on SHGs.

3. What are mutuals? The mutuals have 10 to 20 members. All mutuals meet regularly – weekly fortnightly or monthly. The mutuals start with savings. Some pay interest, some dividends & some accumulate group funds. The mutuals borrow from banks after a few cycles of group fund rotation. The banks lend a multiple of the group fund. In areas of multiple SHGs, they may form federations. These deal with the bank on behalf of mutuals. Mutuals are more liberal than the “providers” in terms of discipline. Repayment terms are more friendly.

4. Assumptions to be tested There are certain conditions under which mutuals may work. The “promoters” would go to areas having low economic growth Areas that have good connectivity are likely to have better access to formal finance, therefore alternative finance will emerge in other areas. To be cost effective, microfinance would work in areas having relatively dense populations Microfinance would emerge where formal finance has failed

5. Data Data were examined from two regions: South: Karnataka, Kerala, Tamilnadu and Andhra Pradesh West: Gujarat, Maharashtra and Rajasthan North and North-East were not considered because of difficulty in comparison

6. Growth Growth in Net State Domestic Product (per cent) State 1961-62 to 1970-71 1971-72 to 1980-81 1981-82 to 1990-91 1991-92 to 2000-01 Andhra Pradesh3.113.466.585.52 Karnataka4.363.385.097.51 Kerala42.33.345.74 Tamil Nadu2.592.15.716.25 Gujarat4.834.315.996.34 Maharashtra2.954.516.125.74 Rajasthan Rajasthan5.784.14.354.47 Source: Bureau of Applied Economics and Statistics, Government of India

7. Connectivity State Road Length (Kms)Connectivity May 2001 Per 100 Sq Km. Area PerLakh Popln No. of Ha bitations No of Conn ected Habit ations Percent A.Pradesh65.2239675056068189.90% Karnataka79.2294.4566824516779.70% Kerala381.7462.110820692864.00% Tamil Nadu117.7249.3779237241192.90% Gujarat47.6195.3231041973485.40% Maharashtra124.1422.3404123824594.60% Rajasthan41.2266.3378891590342.00% Source: www.indiastat.com

8. Population Density and Incidence of Poverty State Population density (per sq km - 2001) Rural Poverty Ratio (1999-2000) Andhra Pradesh27511.05 Karnataka27517.38 Kerala8199.38 Tamil Nadu47820.55 Gujarat25813.17 Maharashtra31423.72 Rajasthan16513.74 Source: Population Density from www.indiastat.com Poverty Ratio from Planning Commission, Government of India

9. Formal Sector outlets: Number No of Households to be serviced per outlet State Bank BranchesPACSs PNACSs * Formal SectorSHGs AP347430903374110152 Karnataka191513322452595167 Kerala182326184926882339 Tamil Nadu275922944734991132 Gujarat24848671363436619 Maharashtra3294542547252569 Rajasthan268214759792867561

10. Formal Sector outlets: Amounts outstanding (Rs) State Amount outstanding per Household Bank BranchesPACSsPNACSs * Formal SourcesSHGs AP116739213265419411 Karnataka1856373413186908115 Kerala2614146487231798568 Tamil Nadu151458486197981245 Gujarat11774314462595214 Maharashtra1030535846951108238 Rajasthan902140014231633

11. CD Ratios Year20002004 State Rural branches Semi Urban branches Rural branches Semi Urban branches A Pradesh7652.284.354.7 Karnataka6955.174.661.7 Kerala54.734.358.137.8 Tamilnadu61.951.361.655.2 Gujarat43.831.43226.3 Maharashtra58.443.376.543.6 Rajasthan45.732.954.639.8 Source: Banking Statistics of RBI.

12. Post Offices (for savings, the figure is small) State Population in Villages No of Post Offices Poplation serv ed by a PO Andhra Pradesh55.22148573717 Karnataka34.8185694062 Kerala23.6041955626 Tamil Nadu34.87102053417 Gujarat31.9882343884 Maharashtra55.73112704945 Rajasthan43.2796484485 Source: www.indiastat.com

13. Summary State Growth of Net GDP Conne c tivity Inciden ce of poverty Populatn Density No of Formal Sector outlets Amt O/s per HH Post Offices A Pradesh √√ Karnataka √ Kerala √√ √ Tamil Nadu √√√ Gujarat √ Maharashtra √ √ Rajasthan√√ √√

14. Interpretation Macro data does not indicate that there is causality between some indicators and growth of SHGs Microfinance is too small in terms of amounts for such relationships to emerge Anecdotal evidence suggest a policy push might help

15. Parentage? State % of SHGs formed & financed by banks % SHGs formed by SHPIs Financed by banks % SHGs financed by banks through NGOs Andhra Pradesh1%98%1% Karnataka33%38%29% Kerala15%26%59% Tamil Nadu7%81%12% Gujarat7%90%2.50% Maharashtra51%49%0% Rajasthan40%60%0% Source: Micro Credit Innovation Department, NABARD

16. Policy Initiatives Anecdotal evidence suggests that the push by state (AP) helps not only in SHG movement growing, but with that environment, other models also growing If the banks focus on the model, they could do wonders (Karnataka) The power of reach is tremendous (one SHG per 50 HHs in AP) The potential that can be unleashed is significant The reach has to be leveraged to provide greater variety and quantum of financial services

17. Thankyou www.iimahd.ernet.in/~mssriram mssriram@iimahd.ernet.in 079-26324855