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The challenges of micro-finance in the north-east

By Anjali Deshpande


The model adopted in India for disbursing micro-credit to the lower income groups through Self Help Groups (SHGs) will have to be suitably modified if the eight states of the north-east are to be included in financial services, says a recent study

A study carried out by the Indian Institute of Bank Management (IIBM), Guwahati, Assam, and commissioned by Sa-Dhan, shows that the SHG movement has not caught on in some north-eastern states for reasons that are peculiar to the region.

An association of Community Development Financial Institutions, Sa-Dhan was founded in 1999 and represents the emerging and rapidly growing sector of micro-finance in the country. At present, Sa-Dhan has a collective outstanding loan of Rs 1500 crore to seven million poor in the country. It is seriously concerned about the laggard growth of the SHG movement in the eight states of the north-east and hopes to lobby for policy changes to address the specific needs of each of these states.

The Government of India has set up a special zone for the north-eastern region (NER). The NER comprises Arunachal Pradesh, Assam, Nagaland, Manipur, Meghalaya, Mizoram, Tripura and Sikkim. Each of these eight states differs widely in terms of political and socio-economic environment. Almost 98% of the land area in the NER runs along international borders with Bhutan, Bangladesh Myanmar and China.

Almost 70 % of the region is hilly. Population, except in the valleys and in Assam, is sparsely distributed. The entire region has roughly a population of 3.88 crore, of which 3 crore is concentrated in Assam. The rail network is poor and also concentrated in Assam. Compared to the national average of 73 km of road per 100 square km, the average road length in the region is low, at 53 km, with Arunachal Pradesh having the least length of roads - 12.20 km per 100 sq km. Access to markets in the rest of India is difficult thanks to the poor infrastructure.

Agriculture remains the mainstay of the economy of the region engaging almost 75 % of the workforce. Most other economic activity is small scale and heavily dependent on traditional skills of weaving and handicrafts.

"The North East region remains a classic case of financial exclusion," says Dr Abhijit Sharma, assistant professor at the IIBM and the coordinator of the study conducted for Sa-Dhan.

Other indicators also reflect the poor state of the economy in the region. The average per capita income at the price level of 2001-02 stands at Rs 12,918 which compares poorly with the national average of Rs 17,977. Similarly, the credit per capita in some districts of the NER is as low as Rs 200 whereas the national average stands at Rs 12,500.

As Dr Sharma points out, some indicators are even moving in the wrong direction. Banks, for instance, are withdrawing from maintaining small accounts with less than Rs 25,000 deposits. In view of declining 'profitability', banks are adopting the strategy of concentrating on a few, 'safe' customers, says Dr Sharma.

The conditions in the region are actually appropriate to the growth of micro-finance. According to a 1998-99 Assam government survey - The District Potential Survey for Rural Non Farm Sector - micro-enterprises contribute over Rs 30 billion to the GDP every year. Most of these tiny enterprises are serviced by the informal financial market. In fact the informal financial market in the north-eastern region is widespread and diversely organised reflecting the creativity of local communities to meet their specific needs. They raise funds for economic activities as well as to cover exigencies in times of distress and need. There are many informal arrangements such as neighbourhood or family groups extending credit to cover business and personal needs. Many function as social insurance groups, many act like banks.

So, why has the micro-finance movement failed to cash in on this? The main reason, it appears from the study, is that the micro-finance movement relies mainly on Self Help Groups (SHGs) linked to banks. Banks are thinly spread in the region and are to be found mainly in urban clusters in the valleys. Banks are not only few, they are understaffed. Most banks have two or three employees and they are not equipped to handle many SHGs that could be spread over several kilometres. The cost of promoting SHGs in the virtually roadless hill regions is prohibitive, as Dr Sharma points out.

The study 'Expanding Outreach to Underserved Regions: Kickstarting Micro Finance in the North East Region' points out that many diverse traditional systems and even geographical conditions of the region make it almost impossible to transplant the model of SHGs adopted elsewhere in India into this region. The micro-finance movement started late in the region and is confounded by many regional complexities that must be understood, appreciated and incorporated into policy if the plans to make affordable loans to low income groups in the region are to bear any fruit. The state of the SHG movement varies from state to state, and within states from one district to another. The SHG movement is yet to take off in any major way in Arunachal Pradesh. In Manipur, too, it is not significant despite, or perhaps because, many traditional systems of organising savings and lending still hold sway.

The study outlines some of the traditional systems of savings and lending prevalent in the states in the region.

For instance, Manipur has a wide network of marups started by the Metei community. Marup, literally meaning 'friendship', is a small group of friends and family who collect money from the group and either lends it on interest, or buy in bulk gadgets and materials required for any enterprise and distribute them to members of the group. The members then pay back the credit amount in instalments. By definition, therefore, marups are formed of people belonging to the same or similar income group and profession.

It is so popular that almost 90 % of the population of Manipur is involved in marups. There are small marups of only five members and there are moderately large groups of fifty members too. Since these operate mainly on trust, they are not very large. The contribution of members to marups and the interest rates charged also reflect the wide range of needs and the members' capacity to save and repay. Contributions range from Rs 10 to Rs 30,000 a month and the interest rates charged vary from 5-20 % annually. In Manipur, such traditional systems still hold sway.

In Arunachal, the lack of a banking network and the thin spread of population make the SHG model irrelevant. As the study notes, the few SHGs that exist are located in or around the capital, Itanagar, and the SHG model may not work here at all. 'We need to look at alternatives for this state, particularly low cost traditional institutions which utilise social capital and need not expand and scale up to be sustainable,' says the study.

Forming SHGs to fit the prescription of India's apex development bank, NABARD (National Bank for Agricultural and Rural Development) is an uphill task and may involve heavy operational costs that will render them unviable.

For instance, according to NABARD, any SHG must have at least 20 members, which seems difficult to manage in the remoter and difficult to access areas of the region where it may be tough to find more than five people to join an SHG.

Suitable modifications have sometimes led to dramatic changes. In Mizoram, the number of SHGs linked to banks was just 28 in March 2005. By March 2006 their number had jumped to 974, which means 946 new SHGs had opened accounts with banks. This dramatic turnaround was due to the local chief of NABARD who, taking into account the problems of the region, changed the focus of SHGs. In SHGs, the emphasis is on savings and credit is given later, after the banks have made their own assessment of risks involved. In Mizoram, the NABARD chief made it possible for SHGs to open accounts only when assured of a loan. That encouraged the formation of SHGs and their linkages with banks.

Meghalaya has been the most proactive in the formation of SHGs, notes the study. This was also the first state in which banks directly started SHGs. The state has 4,800 SHGs linked to banks. This has been possible because of the dedicated efforts of the state government that not only allocated resources for development, but also set up a department on SHGs headed by a committed bureaucrat.

What is required is a multi-pronged strategy to overcome the many challenges the region poses. Banks, policymakers and NGOs - the major actors in the field of micro-finance - must come together to think through suitable modifications in policy. Banks may have to change their system of assessing risks. There is need for capacity building and expansion of infrastructure. In some cases, the SHG model may have to be replaced by other models. The Sa-Dhan survey has taken the first step towards understanding the many complexities of the region and the organisation is now gearing up for follow-up action on many fronts including lobbying for policy changes.

(Anjali Deshpande is a freelance journalist and an activist with interest in many issues especially those concerned with women, dalits and environment)

InfoChange News & Features, April 2008