Agricultural Credit and Micro Finance in India

1. Agricultural Credit and Micro Finance in India Presentation to Graduate Students of Cornell University By Vijay Mahajan Founder and Chairman, BASIX At Hyderabad January 2011

2. Agricultural Credit in India • India has over 116 million operational holdings • Over 80% are small and marginal farmers (less than 2 and 1 hectares, respectively) • A large proportion of farmers engage in rainfed agriculture, so are not input intensive. • Since agriculture is seasonal, most farmers engage in non-farm activity and migration

3. Agricultural Credit in India • India has a long history of state intervention in agricultural credit. • It first began with the British colonial rulers responding to the Maratha peasant rebellion in 1860s in the wake of drought and famine. • Government started giving cash loans from the land revenue to peasants in drought years.

4. Agricultural Credit in India • Some enlightened colonial administrators who knew of the German cooperative movement decided to promote agricultural credit cooperatives. • The first Cooperative Act in India dates from 1904! Thrived in some states initially. • Government started giving loans and later even equity support to these cooperatives. • This evntually led to bureaucratisation and politicisation and lack of member control.

5. Agricultural Credit in India • Post Independence, Government made food self-sufficiency a national goal and reviewed agri credit arrangements through the All India Rural Credit Enquiry (Gorawara) Committee. • They found that less than 7% of rural credit was coming from formal sources and rest was from moneylenders, landlords and traders, etc. • This led to Government asking SBI to open 400 district branches and doing some agri credit.

6. Agricultural Credit in India • After the onset of the Green Revolution, the need for agri credit shot up. • Government responded by nationalising major banks in 1969 and asking them to open large number of rural branches and giving more agri credit. • In 1976, Govt established a new chain of Regional Rural Banks – and a large number of branches. • Directed credit, (18% of total bank advances) was made a policy. Despite this, only 27% of farmers got formal credit in 2004-05

7. Agricultural Credit in India • In 1982 Government set up the National Bank for Agriculture and Rural Development (NABARD) as an apex re-financing institution to augment the agri lending resources of commercial banks, Regional Rural Banks and cooperative banks. • Despite all these steps, only 27% of farmers got formal credit in 2004-05, as NSS 59th Round.

8. Agricultural Credit in India • In 2004, the GoI decided to double agricultural credit in three years. • Commercial banks were given high targets and RRBs were revived through consolidation. • Cooperative credit system was given a US$ 4 billion revival package. • All this did double the credit, but not the farmers’ outputs or incomes. Result – massive farm loan waiver in 2008 – USD 15 billion.

9. The abiding challenge in providing financial services to the poor

10. Part II Micro-credit

11. What is Micro-finance? • Sustainable provision of • credit, • savings, • insurance, and • other financial services (e.g. remittances, pensions) • with a focus on poor households, who find it difficult to access banks/ financial institutions.

12. Vicious Cycle of Low Income

13. Breaking the Cycle of Low Income

14. Why do banks fail to lend to the poor? (Even in the US!) • Banks do asset based lending • Poor people have no or low asset base • Banks do project based lending • Poor people do not have a project. • Multiple activities, none of them individually bankable. • Banks need documents and titles • the poor don’t have these often • High transaction cost and high perceived risk • Cost of underwriting and monitoring high • The poor are seen to suffer from household level risks as well as seen risky as a class, due to political patronage

15. New Paradigm of Lending Prof Mohammad Yunus of Grameen Bank, Bangladesh, has shown that the poor are bankable if, • Banking is made easy • Transaction cost is reduced • Physical collateral is substituted with social • Person is financed, not a project • Peers are involved in underwriting • Borrower repays small sum, frequently • Support services are provided with credit

16. Who Borrows How funds reach Security of Loan Repayment Schedule Individual Group Direct Through Intermediary Collateral Peer Group Collateral substitute Bullet Regular, Periodic Cash-flow based Variable Elements of Design

17. Different Lending Models • Grameen Methodology • Joint Liability Groups (JLGs) • Self Help Groups (SHGs)/Federations • On-lending through Intermediaries • Direct Loans

18. Grameen Methodology • Homogeneous affinity group of five • Eight groups form a Center • Center meets every week • Regular savings by all members • Loan proposals approved at Center meeting • Loan disbursed directly to individuals • All loans repaid in 50 installments

19. Joint Liability Groups (JLGs) • Five individual borrowers mutually guarantee loans • Loans given to individual borrowers • Cash security is collected as a proportion of loan • Group meeting only when needed • More suitable for men, farmers

20. Self Help Groups (SHGs)/ Federations • Homogenous affinity group of 15-20 women who live in the same neighbourhood • Regular meetings – weekly/fortnightly/monthly • Regular savings - Rs 10 to 50 per meeting • Group selects their leaders • Lending started with internal pool of funds • Lending decisions are of the group • Later, SHG accesses funds from bank/MFIs • Groups federate at Cluster/ Block level

21. Different lending methods are suitable for different market segments Market Segment Methods Growth Enterprises/ Direct Loans Commercial Farmers Micro-Enterprises/ Joint Liability Small Farmers Groups Marginal Self-Help/Grameen Producers Groups

22. Credit is important but Savings is a fundamental financial service • Savings is setting aside a small sum of money away from the regular cash flow and accumulating it to a usefully large sum. • If the ‘large sum’ is needed and received before the small sums of money have been set aside, it is called a loan • If the large sum is received after small sums of money have been set aside, then it is called a term deposit • If a large sum is to paid out upon happening of an adverse event to a few of all those who have paid a small sum, it is called insurance

23. Because of vulnerability to risk insurance is also important for the poor • The poor face all kinds of risks to their lives and livelihoods. • The death of a bread-winner can devastate a family. So life insurance is useful. • Death of livestock can halve the income of a poor household. So livestock insurance. • Crop failure can be cushioned by insurance. • Yet, few insurance companies offer services to the poor. In India, life coverage is < 6%

24. Credit is a necessary but not sufficient condition for promoting the livelihoods of the poor • Just (“minimalist”) credit works where the economy is dynamic or with the enterprising poor, not with the poorest nor in depressed areas • So we need to provide livelihood support through agricultural/business development services such as • training, • technology, • market linkages • For more on this see BASIX Livelihood Triad Strategy at www.basixindia.com

25. BASIX Achievements: As on Dec 31, 2008 • 15 states, 60 districts,16,000 villages/towns, 3500 staff • Disbursed USD 400 million since mid-1996 • On-time repayment rate 99%, outstanding USD 100m • Micro-credit 600,000+ borrowers, growing @ 75% pa • Life, health, crop, livestock and micro-assets insurance to 1.2 million customers • Agricultural, livestock and non-farm business development services to 200,000 customers. • Institutional development to 150 community based MFIs, development agencies - 4.5 million customers • Impact direct: livelihoods enhanced 1.5 million • Impact indirect: microfinance sector reaches 50 million

26. Founder and CEO: Mr Vijay Mahajan, 54vijaymahajan@basixindia.com • Graduate of IIT Delhi, 1975, IIM Ahmedabad, 1981, Woodrow Wilson School Mid Career Fellow, Princeton University, 1989 • Founded PRADAN an NGO in 1983 working in rural livelihoods, and worked in it till 1991. • Advisor to Govt of India and State Govts and to World Bank’s Consultative Group to Assist the Poor • Ashoka Global Fellow 2008; Schwab Foundation -World Economic Forum, Davos, one of the 100 Outstanding Social Entrepreneurs of the World, 2003