Social Finance in India

Bhārat was selected as the second principal short name for the Republic of India in its Constitution, adopted in 1950. In the opening article of India’s Constitution is written: ‘India, that is Bharat, shall be a Union of States’. Two names: one, India, associated with the foreigners whose rule was coming to an end; the other, Bharat (Sanskrit bhārata, also bhāratavarṣa), perceived as native because it was found in ancient Sanskrit literature. Bhārata is said to be situated between the sea in the south and the ‘Abode of snow’ (himālaya) in the north. Bhārata is also characterized as the ‘land of works’ (karmabhūmi), for example in the Viṣṇupurāna.

(i) Is microfinance an essential catalyst for social finance?

Social finance encompasses a wide range of interconnected socio-economic activities with significant social sustainability impact. Microfinance plays a crucial role in catalyzing social finance, providing financial services to economically marginalized individuals who may not have access to traditional banking systems.

Microfinance aims to bring essential financial provisions to the poorest segments of society, offering credit, savings, and other vital services to millions of people who are often excluded from the formal banking sector due to their lack of collateral or unstable income sources.

Historically, banks have operated as trust machines, offering security and credit based on tangible forms of collateral. However, this approach has left many disadvantaged individuals without access to essential financial resources. In low-income countries like Bharat (India), only a small percentage of the population has been able to borrow from formal institutions, leaving many without viable options for accessing credit.

Microfinance emerged as an innovative solution for addressing the needs of those traditionally deemed "unbankable" by conventional banking standards. It recognizes the underutilized skills and potential within impoverished communities and seeks to provide inclusive financial services tailored specifically for them.

The challenges faced by these marginalized populations include unsteady employment, unverifiable credit history, and unstable livelihoods - factors that make it difficult for traditional bankers to assess their ability to repay loans. As a result, these individuals are often caught in a cycle of limited economic growth due to restricted access to credit opportunities.

By expanding access to social finance through microfinance initiatives, we can empower underserved communities with more choices and opportunities for sustainable growth while mitigating risks associated with traditional lending practices.

Despite these efforts towards greater inclusivity in financial services provision, there remains a pervasive perception that banks exclude the poor from accessing credit opportunities. This historical trend underscores the urgent need for continued innovation and reform within the financial sector in order to address systemic barriers preventing equitable access to essential resources.

(ii) How did microfinance originate?

Throughout history, microfinancing has played a significant role in providing financial opportunities to underserved communities. The concept of microfinance dates back to the 1700s in Europe and has since evolved into a global movement aimed at empowering individuals with limited access to traditional banking services.

In Europe, formal credit and saving institutions such as People’s Banks, Credit Unions, and Savings and Credit Cooperatives began emerging in the 1800s. Similarly, outside of Europe, organizations like the Indonesian People's Credit Banks (BPR) were making strides in providing financial support to local communities.

Notably, from the 1970s onwards, programs in various countries including Bangladesh, Brazil, and India started extending loans to organized groups of impoverished women. These initiatives focused on fostering income-generating activities among women living below the poverty line.

Accion International stands out as an organization dedicated to building sustainable microfinance institutions by offering training and investment opportunities. Their approach combines capital investment with managerial expertise akin to a venture capital firm.

The Grameen Bank's pioneering work in Bangladesh is also noteworthy for its group lending model that enables rural populations to access credit without requiring collateral. This innovative approach has empowered millions of beneficiaries across villages in Bangladesh.

Furthermore, non-profit organizations like Kiva have leveraged crowdfunding to connect lenders with individuals seeking loans. This collaborative model has facilitated substantial funding for borrowers while maintaining an impressive repayment rate.

Overall, microfinance institutions have emerged as powerful agents of social change by promoting economic development within marginalized communities worldwide. Despite challenges associated with lending to low-income individuals through traditional banks, these initiatives continue striving towards greater financial inclusion for all members of society.

(iii) Social Finance in Bharat

NABARD has implemented the concept of social finance in Bharat and introduced microfinance in rural communities.

The National Bank for Agriculture and Rural Development (NABARD) is a key development bank and a public financial institution. It plays a vital role in promoting agricultural development and reducing poverty in rural areas of Bharat. NABARD was established by the Government of India through special legislation in 1982.

Under NABARD's framework, there is a connection between Self-help groups (SHGs), non-governmental organizations (NGOs), and the bank. SHGs are formed and supported by NGOs, and after reaching a certain level of maturity with their internal thrift and credit operations, they become eligible to seek credit from the bank. The involvement of the concerned NGO continues before and after the SHG-Bank linkage. This program, which has been operational since 1992, has reached approximately 142 million households and 11.9 million SHGs by 2022.

Microfinance encompasses financial services such as savings accounts, insurance funds, and credit provided to poor individuals to help them improve their income levels.

While microfinance is often associated with small amounts of credit, it actually includes various other financial services, such as savings accounts and insurance. As we delve into case studies later on, you will discover that social finance extends beyond just microfinance.

In terms of microcredits:

Loans are typically provided without collateral
Loans target individuals living below the poverty line
Members of SHGs benefit from microfinance
The maximum loan size under microfinance is generally around 25,000 INR or less (300 EUR or less)
Terms offered to impoverished individuals are determined by NGOs or social organizations within governmental regulations

Beyond its textbook representation, the impact of the microfinance sector extends to broader social development consequences.

Social Finance carries an inherent social aspect; pioneers in this field have recognized that micro-finance activities have far-reaching implications beyond just providing credit.

Today, news about microfinance often involves aspects like insurance coverage as well as skill development initiatives linked to employment opportunities. Financial services offered through stakeholders involved in microfinance are frequently tied to government welfare programs.

CRISIL released "India's 25 Leading MFIs" report on India’s Microfinance Sector back in 2014, offering an extensive overview of different institutions operating within this sector. CRISIL Inclusix index followed suit later on - serving as a measure of India’s financial inclusion progress while presenting growth trends along with district-wise data.
According to CRISIL's December 2021 report, NBFCs operating within the post-pandemic recovery period are expected to grow significantly.
Loan officers across Bharat establish emotional connections with borrowers prior to loans maturing; observing details about their personal lives & families while demonstrating affectionate community engagement strategies based on cultural & societal ties.
Many banks, including ICICI Bank, now offer loans tailored explicitly for self-help groups aiming at livelihood opportunities & overall growth prospects.
Microfinancing finds applications across diverse sectors ranging from self-help groups & agriculture businesses all the way up to cooperative units involving artisans like weavers alongside makers producing handicrafts, among others.
MFI’s reach spans training initiatives coupled with livelihood generation/protection efforts, preventive health care measures, and sanitation education awareness campaigns.
Political interference combined with religious values integrated into various socio-economic entities play pivotal roles within the economy’s expansive realm encompassing the Social Finance sector

(iv) What are Self-Help Groups (SHGs)?

Over the past two decades, there have been increasing reports of systemic corruption in a country abundant with natural resources, implicating influential political and business figures. These scandals serve as clear evidence that certain individuals within the human species have prioritized self-gratification over fundamental human values when dealing with their environment and fellow beings.

As the old saying goes - ‘God helps those who help themselves’. This philosophy underpins the concept of self-help groups (SHGs), where individuals from similar income categories voluntarily come together to deposit money into a group-held account. This collective effort allows them to request loans during times of need, fostering mutual support and financial independence.

Typically comprising five to twenty members, SHGs operate on principles of voluntary cooperation and use their pooled savings to provide credit for each other. This approach not only aids the most economically disadvantaged but also facilitates training opportunities for its members, reflecting prudent human behaviour aimed at achieving common objectives. Additionally, SHGs seek external sources of funding to further their initiatives.

Initially emerging in an unstructured manner, SHGs gained traction as a social phenomenon within the realm of social finance. Non-governmental organizations (NGOs) played a pivotal role in facilitating the establishment and ongoing operations of SHGs. Furthermore, these groups can receive promotion and financial backing from banks, NGOs, and microfinance institutions while establishing their own operational guidelines.

In India's economic landscape, women constitute a significant portion of SHG membership. The majority of business correspondents involved in the SHG bank linkage program—originally modelled by NABARD—are women who actively contribute as social advocates.

Federated SHGs, or Self-Help Groups, operate as a network of networks. This model involves significant scaling up of members and operations. According to the textbook definition, it comprises a three-tier structure:

The basic unit is the SHG itself.
The middle tier consists of clusters.
At the topmost level, there is an apex body representing the entire network of SHGs within a region or across specific social contours such as gender.

The apex body, typically comprising 10-15 members, serves as the link between the SHGs and supporting NGOs. By bringing together multiple self-help groups, federations aim to overcome individual limitations in obtaining finance and conducting operations.

At the cluster level, two representatives from each SHG form a representative body to decentralize processes and functions from the apex body. Through this decentralized approach, federated SHGs can increase capital flow to their members while optimizing capital utilization within their collective entity consisting of several SHGs.

(v) Models for microfinance

In reality, microfinance models are interconnected in various ways. Many established microfinance institutions operate with multiple models to achieve their overall goals. The use of different models is aimed at enhancing the outreach and impact of MFIs, emphasizing the sheer size and sustainable strength of Microfinance.

Globally, MFIs have demonstrated better delinquency rates compared to other credit service segments, leading to a belief that individuals, especially women from impoverished backgrounds, exhibit higher loan repayment capabilities. However, there's concern about whether some borrowers may be shifting their financial burden to unregulated moneylenders at significantly higher interest rates.

Different MFI products are organized under distinct models such as the Grameen Bank model which originated from Bangladesh. This model involves small voluntary groups providing guarantees for securing credit from traditional banking systems. Initially focused on women beneficiaries in rural areas, it has highlighted gender disparities and social values within these communities.

While data suggests that women may exhibit superior financial management skills compared to men in rural households, transgender individuals continue to face exclusion from microfinance services due to societal stigmatization and lack of gender-neutral financial solutions.

Despite these challenges, small groups utilize micro-loans for self-employment opportunities and agricultural purposes. The Grameen Bank model operates through weekly credit cycles facilitated by group members with peer pressure mechanisms ensuring consistent repayments.

However, this model relies heavily on external funding and faces issues related to irregular earnings impacting repayment schedules. Additionally, high operational costs contribute to relatively high-interest rates despite efforts towards universal credit inclusion for the poor.

Furthermore, non-banking financial companies rely on private equity and institutional lenders for social finance initiatives but still struggle with addressing the needs of the poorest populations effectively.

The Indian Postal Service has emerged as a potential solution by transforming into assisted banking services through its extensive network across rural India. Postmen now serve as business correspondents offering doorstep banking services while also facilitating federal and state scheme benefits for underbanked beneficiaries.

Overall it's evident that MFIs prioritize social impact over purely financial services but face significant challenges within a complex global economic system.