An Invisible Revolution in Rural India

Wall Street Journal published my article on the Self-Help Groups

An Invisible Revolution in Rural India
THE WALL STREET JOURNAL, JANUARY 4, 2010
By Madhukar Shukla

Mahua Devi is a petite woman in her early twenties. She cycles through 10 to 12 villages of the Koraput district in Orissa [one of India’s most backward states] everyday.

"I help these women keep their accounts," she tells me as we walk towards a group sitting in the shade under a tree

When she says "these women" she is referring to one of India’s millions of self-help groups, or SHGs. Each group has 15 to 20 women who pool their tiny savings of only 5 rupees to 10 rupees at a time. They use the money to give loans to members for income-generating investments like chickens, seeds or goats. The interest on the loans then adds to their savings pool.

Driving from the nearest city to the village, I don’t see any bank branches. Even if there is a branch, it’s unlikely it would be equipped to open even simple savings accounts for these women, given their meager savings, lack of assets and inability to read or write. For most of the village women the SHG is the only bank they have ever had.

Ms. Devi keeps the accounts for 20 groups, for which she gets a commission of 2% of the value of all the transactions. "On average, I earn about 5,000 rupees per month," she tells me.

That, I quickly calculate, works out to 250,000 rupees in cash transactions per month - an amazing economic engine, silently working in one of India’s poorest regions.

Self help groups are a transformational phenomenon which has swept the Indian countryside over the last decade and a half. The groups are India’s own social innovation. In a country where almost two-thirds of the population have no access to formal financial services, SHGs are a unique route to financial inclusion, increasing incomes and helping build productive assets among the poor.

Though similar groups were promoted by many non-government organizations in the 1980s the turning point of the SHG movement was a pilot project by the National Bank for Agricultural and Rural Development (NABARD) in the early 1990s.

Despite India’s network of around 30,000 bank branches in rural areas, a majority of the poor still remained outside the fold of the formal banking system. NABARD studies showed this was because existing bank policies, systems and products were not aligned to meet the financial needs and constraints of the poor. What the poor can earn and save varies widely each day. Meanwhile their tiny savings – as little as 50 rupees per month - make providing banking services to them too expensive for banks.

To bridge this gap, NABARD and a group of NGOs started a pilot project o 500 groups of women to be used a vehicle for financial intermediation through its SHG-Bank Linkage Program. Typically, these were informal groups of up to 20 women, who would meet regularly and pool their savings.

After saving for six months and proving the group had developed the required fiscal discipline through consistent savings, on-time loan payments and maintaining records the group becomes eligible to be "linked" to the local bank branch. The innovation here was that the group, rather than the individuals in it, could open an account with the bank and use that account to save and take loans.

The pilot was a remarkable success and within a year more than half of the first groups had become eligible for the bank-linkage. Even more impressive was the fact that 90% of the loan payments were on time and there were no defaults. The success of this pilot project sparked the SHG movement which has been an unparalleled, albeit under-reported, revolution in financial inclusion.

The number of bank-linked SHGs crossed 10,000 in five years. By 2004, there were more than one million groups with their own bank accounts. By the year ended this March, the number of groups had grown to about 4.7 million, touching 59 million rural families through their members. Meanwhile, the average loan size per group has increased from 1,137 rupees in 1992 to 74,000 rupees this year. That shows the women’s rising capacity to manage, utilize and pay back loans.

So is everything fine with the SHG movement? Not entirely.

According to one 2006 study (EDA Rural Systems and Andhra Pradesh Mahila Abhivruddhi Society’s "Self Help Groups in India: A Study of the Light and Shades") the groups still suffer from many inadequacies. For instance, the study found that a large proportion of SHG members remained poor even after being in the groups for seven years. Another report (Access Development Services’ "Microfinance in India: The State of the Sector Report 2009") underlined the popularity of SHGs has so far been a regional phenomenon tilted towards the southern and eastern states of India.

In spite of such inadequacies, however, self help groups have emerged as a critical vehicle for creating social equity and empowerment.

I once sat with women from three SHGs in the community hall of Madanpur in Haryana. The women had assembled for a workshop on "legal literacy" organized by a Delhi NGO. There was jubilation in the air and the village women were talking animatedly.

"We got the license of the local liquor shop stopped yesterday," one of the members told me with glee. "It was a drain on us because the men-folk would squander away their earnings, spoil their health, and often physically abuse us. This time we protested and kept the liquor license from being renewed."

The self help groups have gone beyond financial inclusion and become a platform to provide a voice to a marginalized section of society. Some SHGs have become forums for women to discuss everything from health and sanitation to legal rights and human trafficking. They are also being used to promote education and skill building. The groups are so respected now that they have been called upon to implement government and donor-driven programs such as the mid-day meal program for school children and HIV/AIDS awareness campaigns.

Between 2006 and 2008, more than 600,000 new self help groups were linked to banks. Assuming an average group size of around 13 or 14 members, that means more than 400 women are joining a SHG every hour!

Now if that’s not a revolution, then what is?

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—Madhukar Shukla is a professor of organizational behavior and strategic management at the XLRI School of Business & Human Resources in Jamshedpur.