SECTOR PERSPECTIVE - MICRO FINANCE IN TAMILNADU

DEFINING MICRO FINANCE

Microfinance offers poor people access to basic financial services such as loans, savings, money
transfer services and micro insurance.. Micro finance institutions, in turn gets defined hence as “an
organization that provides financial services to the poor” (see .micro finance gateway website,
http://www.microfinancegateway.org).

HISTORYOF MICRO FINANCE IN TAMILNADU – Before 1980

The existence of traditional institutions of micro finance like chit funds, and community based
informal credit groups (usually mercantile communities in market towns), seems to have existed
for centuries. This is evidenced by references in traditional Tamil literature. The existence of the
private middleman cum trader cum moneylender, who profiteered from agriculture produce
intermediation is also well documented, in traditional Tamil history and literature.

The origin of “institutional attempts” to make micro finance more equitable, seems to date to the
beginning of the 20th Century. The Vaidyanathan committee draft report (2004) traces the origin of
the agriculture credit cooperatives, to officials of the colonial government. They perceived the
Indian farmers’ dependence on usurious moneylenders to be a major cause of their indebtedness
and poverty. The report states that the passage of the Cooperative Credit Societies Act in 1904,
and the enactment of a more comprehensive Cooperative Societies Act in 1912, to be the
beginning of a government policy of active encouragement and promotion of cooperatives.
Further, it traces the wide acceptance gained in policy circles, to the adoption of “cooperation” as a
provincial government subject in 1919. The report infers the persistence of government interest in
cooperatives - in the appointment of three different Committees to review cooperative growth and
functioning. These were .- the Frederic Nicholson committee, followed by the Edward Law
Committee on Cooperative Legislation, and a decade later, the Maclagan Committee (1915). The
Maclagan committee advocated “there should be one cooperative for every village and every
village should be covered by a cooperative”. The report also mentions Royal Commission on
Agriculture in India, (1928) which suggested, that “the cooperative movement should continue to
focus on expanding rural credit and that the State should patronise cooperatives and protect the
sector” Apparently it was this Royal Commission that made the famous observations “if
cooperation fails, there will fail the best hope of rural India”.

The civil society leadership of the then Madras Presidency, with probably some informal support
from the presidency Government officials, , appeared to have been enthusiastically followed these
committee recommendations on cooperative finance. The Madras Presidency enacted, the first
ever cooperative legislation, (probably in Asia) in 1904 – the Cooperative Societies Act. Thus the
first ever urban consumer cooperative, The Triplicane Urban Cooperative Society came into
existence in 1904. Probably the first ever formal cooperative bank in Asia, was the Salem District
Urban Bank, registered on January 6th 2004. This bank, had as its initial focus, to help the poor
by promoting savings. It later expanded to take up other “community development initiatives” – like
an anti liquor campaign, treatment for leprosy patients by a qualified medical doctor, a “kiddies
bank” targeting savings among children in the age group ten to eighteen. It introduced a “local
currency note”, a one rupee note, for poor people, which later became to be accepted as local
currency in the region. It started a “Khadi Hundi” , under the patronage of Mahatma Gandhi, to
enable poor women who earned an income by spinning khadi yarn, to deposit their “yarn bundles”
as savings. Apparently because of its growing involvement in the freedom movement, the British
Government apparently shut down some of the developmental schemes?

Post, independence, in 1947, India started using the Government sponsored five year plan, as the
mechanism for targeted economic growth. The second five year plan (156 to 61), explicitly
recognized village cooperatives as the delivery mechanism to channelise developmental
resources. A massive program to form primary agricultural credit cooperatives, were started, and

Note on sector perspective on Micro finance in Tamilnadu, prepared for the workshop on Microfinance for community development 1
th st
in the Nilgiris, from 19 to 21 of Oct., 2009, at Ooty. Note prepared by S.Ananthanarayana Sharma, Centre for Action Research
and Training, Madurai
by 1968, around 90% of Indian villages had been covered by the Primary Agricultural Cooperative
Societies (PACS). A three tier structure, with village cooperatives federating to a district
cooperative, and district cooperatives federating to a state cooperative was prescribed and
implemented with Government funds and subsidies. Also a separate credit cooperative structure
was created for long term loans, (land development banks) and for urban areas (urban cooperative
banks).

Tamilnadu also followed the same institutional structure, which still continues to exist. The
Tamilnadu cooperative department statistics on the cooperative movement, gives the following
structure and numbers,

(A) Short Term Credit Structure

Tamil Nadu State Apex Cooperative Bank at State level with 45 branches, 23 District Central
Cooperative Banks at the district level with 717 branches and 4474 Primary Agricultural
Cooperative Banks at the grass root level.

B) Long Term Credit Structure

Long Term Cooperative Credit Structure consists of Apex Bank viz., Tamil Nadu Cooperative State
Agriculture and Rural Development Bank, Chennai and 180 Primary Cooperative Agriculture and
Rural Development Banks at taluk/block levels

(C) Urban Cooperative Banks (UCB)

120 Urban Cooperative Banks are functioning in the State, provide banking and credit facilities to
urban and semi urban population.

Inspite of this extensive outreach, various credit surveys, such as those brought out by the
Reserve Bank of India (RBI) , pointed out to the dominance of the informal money lender,
especially in the rural sector, and with the urban poor.

This led to the changes in micro finance in the 1980s, across India.

HISTORYOF MICRO FINANCE IN TAMILNADU – 1980 to 2000

The sixth five year plan (1980 to 84), explicitly recognized a direct targeted approach to contain
poverty. The Integrated Rural Development Program (IRDP), initiated as a pilot by the Janata
party government in Rajastan, was formally scaled up and replicated across the country. District
Rural Development Agencies (DRDAs) were set up, to be the main channel for all Government
sponsored rural poverty programs. The nationalized scheduled commercial banks, which had been
forced to go on an rural expansion of branches, were direct to partially loan some funds to each of
the “Below the Poverty Line” (BPL) family identified for economic assistance by the DRDA, with
another part coming from the Central Government funds.

This targeted approach, which continued for another twenty years, however did not do much to the
problems of micro finance for the poor. Government subsidies and bank loans (which were never
meant to be repaid), were quickly consumed, and the poor households were soon back to the
mercy of the private moneylender. (as per data presented by many studies by economists and
sociologists, including the planning commissions).

New thinking started on other creative ways to solve the problem of micro finance. The Grameen
Bank, started by a Bangaldeshi economist, Mr. Mohammed Yunus in 1976, formally initiated a
sustained a model which promised financial sustainability, while lending to the poor. Mrs. Ela Bhat,
replicated this concept of lending to the poor, through a specialized MFI, through her NGO SEWA,
targeting women labourers and textile workers in Ahmedabad, Gujarat, around 1980.
Note on sector perspective on Micro finance in Tamilnadu, prepared for the workshop on Microfinance for community development 2
th st
in the Nilgiris, from 19 to 21 of Oct., 2009, at Ooty. Note prepared by S.Ananthanarayana Sharma, Centre for Action Research
and Training, Madurai
These successes led the Sarvodayan movement in Tamilnadu, under the leadership of the
Bhoodan activist, Jaganatthanji to experiment with a concept borrowed from psychiatric therapy, a
professionally operated support group, in a village. Renamed Mahilir Manrams and Grama
Sabhas, these village groups encouraged savings and thrift within a small peer group – supported
by an external staff operating as a community accountant. The Association of Sarva Seva Farms
(Assefa) projects in Natham and Kariapatti block, in the mid 1980s, could be stated to be first
place where this experiment was tried.

The National Bank of Agriculture and Rural Development (NABARD) was interested in
experimenting with linking village credit groups with the rural branches of the formal banking
system – which had spread across the country.. Assefa’s Sarvodaya ideology of “Village self
reliance and Grama Swaraj”, did not allow village capital to be shifted out. Hence linkaging with
the mainstream banks, was not accepted. NABARD worked with MYRADA, an NGO initially set
up for rehabilitation of Tibetan refugees in Mysore. For this experiment, an action research project
was started in 1987, in Dharmapuri district of Tamilnadu. The village credit groups, consisting of
women were called “Credit Management Groups”. . The success of this project, measured in
parameters such as savings, and repayment of loans, led NABARD to scale up the action
research project. These credit management groups were renamed Self Help Groups (SHGs). The
formal SHG – Bank Linkage action research program started in 1992. 30 NGOs across the
subcontinent were enlisted as partners, which involved a three way relationship between the
village women Self Help Groups, as the users, the bank branches as providers of credit and the
NGOs as community organizers.

By 1995, the Reserve Bank of India, was convinced about this program to issue a special set of
guidelines to banks to enable SHGs to open bank accounts, based on a simple “inter se”
agreement. This was coupled with a commitment by NABARD to provide refinance and
promotional support to banks for the SHG - Bank Linkage Programme. Between 1992 and 1999,
around 32,995 groups had been credit linked. Much of this was spatially in the South Indian states
of Tamilnadu, Andhra Pradesh and Karnataka.

Assefa, with then newly formed Tamilnadu Women Development Corporation, started its own
expansion program, with the funds from the International Fund for Agricultural Development
(IFAD). Thousands of women savings and credit groups, called Mahilir manrams were organized
in some select districts, across the state under this program. The bank accounts of the Indian
Bank were used for depositing and withdrawing savings.

In a move initiated from Washington, home to the World Bank, the micro credit summit campaign
was initiated in 1997, to bring together microcredit practitioners, advocates, educational
institutions, donor agencies, international financial institutions, non-governmental organizations
and others involved with microcredit. The campaign aimed to promote best practices in the field,
to stimulate the interchanging of knowledge, and to work towards reaching common goals. The
first Microcredit Summit, held February 2-4, 1997, gathered more than 2,900 people from 137
countries in Washington, DC. They launched a nine-year campaign to reach 100 million of the
world’s poorest families, especially the women of those families, with credit for self-employment
and other financial and business services by the year 2005. That goal was reached in 2006, with
the NABARD SHG Bank linkage program credited with one third of the achievement.

Post 2000 – Upscaling of micro finance

The formation of the SHG federation, as a sort of a “wholesaler” of micro credit products, to
affiliating SHGs, was initiated by some Andhra Pradesh and Tamilnadu based NGOs. This could
be stated to , mark the next phase of micro finance in Tamilnadu. By 1999, the Madurai based
DHAN Foundation, , which had split from the parent PRADHAN, (one of the original partners of
NABARD SHG Bank linkage program) announced an ambitious program to cover some one
million women, through around fifty thousand SHGs, federated in around two hundred federations,

Note on sector perspective on Micro finance in Tamilnadu, prepared for the workshop on Microfinance for community development 3
th st
in the Nilgiris, from 19 to 21 of Oct., 2009, at Ooty. Note prepared by S.Ananthanarayana Sharma, Centre for Action Research
and Training, Madurai
in ten years. .In Andhra Pradesh, APMAS was set up as a resource centre with the explicit goal of
strengthening SHG Federations.

The SHG Bank linkage program, sometimes neatly dovetailed into the SHG federations. The
federations, became the “bulk or wholesale borrowers”, with the SHGs the retailing agents, to the
women members,

The Union Finance Ministry budget of 1999, was a significant recognition of SHGs and micro
credit/micro finance as a policy level tool for micro finance, by the Central Government. ,. Large
funds were allocated to NABARD for the goal of expanding the SHG Bank linkage program. Later
Central Government budgets, started setting expectations in terms of number of groups to be
covered. The combination of liberal refinance to commercial banks, from NABARD, resulting in
ample supply of credit, with the creation of demand mechanism, in the form of SHGs and their
federations, resulted in a of the SHG bank linkage program. The following table, sourced from the
Rangarajan Financial inclusion report, (2008) gives the numbers.

Year No. of SHGs financed Cumulative no. of SHGs

during the year financed (in 100,000)
2001-02 198000. 461000
2002-03 256000 717000
2003-04 362000 1079000
2004-05 539000 1618000
2005-06 620000 2238000
2006-07 687000 2925000

The share of the South Indian States in the SHG Bank linkage program, which was 71% in 2001,
had come down to 44% by 2007. However, individual banks and their branches, started finding it
profitable to work with the SHG Bank linkage program, with their own funds, instead of using
NABARD refinance – in Tamilnadu and perhaps in Karnataka and Andhra Pradesh. It would be
perhaps not wrong to concur, that the Southern states still have a disproportionate share of the
SHG Bank linkage program, if non NABARD funds are also taken into account. A minimum of
around US $ 1 billion could be estimated as the outstanding portfolio, with the figures reported to
NABARD alone.

The Tamilnadu Government sponsored Mahilir Thitam of the Tamil Nadu Women Development
Corporation, continued to provide support to NGOs to organize SHGs and link them with banks.
The 2009 policy note of the Tamilnadu department of rural development, provides the following
numbers in terms of achievement in terms of outreach by the Mahilir Thitam

No. of SHGs - 3,91,311

No. of Group Members -6293,000
No. of Rural Groups - 272,092
No. of Members in Rural SHGs 4414,895
No. of Urban Groups 119,219
No. of Members in Urban SHGs 1878,106
Total Savings Rs.2167 crores or Rs.21 billion, or US$ 450 million
No. of Groups Credit Linked 3,60,160
Total Credit Rs.5338 crores, or Rs.53 billion or US $ one billion

Around six hundred odd NGOs had been involved with the community mobilization efforts.

A more corporate variant of the SHG federation, appears to have been evolved in the erstwhile
Sarvodayan NGO, Assefa. The Mahilir Manrams/ SHGs which were earlier linked to a people
owned Non Banking Financial Company, the Sarva Jana Grama Kosh. These SHGs have now
been federated into Mutual Benefit Trusts – which in turn has invested in a non banking financial
company, Sarvodaya Nano Finance. SNF in turn appears to be controlled in terms of governance,
Note on sector perspective on Micro finance in Tamilnadu, prepared for the workshop on Microfinance for community development 4
th st
in the Nilgiris, from 19 to 21 of Oct., 2009, at Ooty. Note prepared by S.Ananthanarayana Sharma, Centre for Action Research
and Training, Madurai
by a private capital market entity, Basix, which sources funds from the international capital
markets. The governance structure however appears to be controlled by professional managers,
who represent the banks and investors in the MFI. This entity appears to be working with 171,000
members in around 10,000 SHGs as of 2008. It reported a micro credit portfolio of around 88 crore
rupees, (around US$ twenty million or Rs.880 million )

The Grameen Joint Liability Group model (usually consisting of five members, who stand mutual
guarantee for micro credit) also started making inroads in micro finance in India. This appeared to
be catlysed by the funding of Grameen Foundation - a global not for profit organization, based in
Washington, with the aim to replicate the Grameen Bank microfinance model around the world
through a global network of partner microfinance institutions. .Grameen Foundation began
supporting the growth of microfinance in India in 2000. Andhra based micro finance market leaders
like SKS and SHARE were the big success stories. Grameen Foundation also collaborated with
the ICICI Bank sponsored Institute of Financial Management and Research, Chennai, and Citibank
to set up Grameen Capital India. A noticeable feature of these loans was the transformation of the
previously voluntary agency NGOs to pure micro finance providers, structured as corporate
entitites, under the Non Banking Financial Company (NBFC) Act. Other large borrowers include
Grameen Koota, Sonata, Cashpor, and ESAP Grameen Foundation claimed to have covered
around one million clients in 2007, in India alone..The Grameen model can be stated to have been
the high profile player, directly working with global “venture capitalists” to bring in international
capital to the micro finance markets.

In Tamilnadu, the Trichy based ASA trust, is an example of the Grameen model at work.. ASA is
reported to have grown from serving 551 clients in 1994 to serving 233,652 clients as of
December 2007. Since its inception, ASA has disbursed more than $21 million in loans, and its
business plan is to reach out to approximately 400,000 clients, with a loan portfolio of $52 million
by March 2010.

Future directions for micro finance in Tamilnadu? -

Tamilnadu it appears has been in the forefront of micro finance. It would be safe to predict that it
would continue to influence and be influenced in turn by global micro finance trends.

The targets and goal statements of some of the major players, would perhaps have a bearing on
the business plans of the various micro finance players in Tamil nadu. It would be perhaps useful
to list the existing players in micro finance, who could shape the direction . These would include –

On the demand side,

• Stand alone individual micro finance clients,

• Grameen Joint Liability Groups, usually controlled by Grameen Foundation funded
corporate entities
• SHGs, and SHG Federations, with their NGOs providing community organization services,
• NGOS transformed to Section 25 and NBFC formats.

On the supply side ,

• Public sector and private sector Commercial banks and their branches,
• Large International Government sponsored funders like IFAD, World Bank, ADB, etc,
• Central Government funders like NABARD, and Rural development schemes that give
revolving funds
• A host of private players, in the corporate format, raising funds from the international
capital market, to invest in micro finance.

Note on sector perspective on Micro finance in Tamilnadu, prepared for the workshop on Microfinance for community development 5
th st
in the Nilgiris, from 19 to 21 of Oct., 2009, at Ooty. Note prepared by S.Ananthanarayana Sharma, Centre for Action Research
and Training, Madurai
The cooperative credit movement in Tamilnadu, appears to have slowly moved into the space of
providing access to a bank account, and subsidized credit with Government funds to SHGs and
their federations?

The micro credit summit, which has given a lot of publicity to Tamilnadu’s achievements, has
targeted new goals for micro finance. At the Halifax micro credit summit in November 2006, the
Campaign was re-launched to 2015 with two new goals:

MICRO CREDIT SUMMIT GOALS FOR 2015

1.Working to ensure that 175 million of the world's poorest families, especially the women of those
families, are receiving credit for self-employment and other financial and business services by the
end of 2015.

2.Working to ensure that 100 million families rise above the US$1 a day threshold adjusted for
purchasing power parity (PPP), between 1990 and 2015.

NABARD

NABARD, which seems to be working within such global mandates, seems to have set as its
goal, the coverage of all the 50 million poor households in India through SHGs. For this it is
planning a doubling in the number of SHGs It appears it efforts would be mostly concentrated, in
the presently under served regions of the country, north and north east.. NABARD’s emphasis in
Tamilnadu would probably shift to action research around new models, around livelihood
financing, to ensure the achievement of the second goal of a minimum wage of PPP based US 1
$ a day. (around fifty rupees a day)

CORPORATE MICRO FINANCE

It appears that the corporate sector working directly with the international capital markets, are
moving into the NBFC format, with the JLG model of lending. Large Andhra Pradesh based MFIs
in this model, like SKS have started expanding into Tamilnadu – and perhaps the future would
see more of such MFIs operating in the Tamilnadu micro finance market?

MAHILIR THITAM AND NGOS

The NGOs working with Mahilir Thitam SHGs and their federations appear to face an existential
dilemma ? The demand for their services as pure community organization providers seems to no
longer exist – and donor funds which support such initiatives are shifting to the micro finance
underserviced regions of the North and North east India. This makes it imperative for these NGOs
transform into corporate entities. If they wish to keep their community orientation intact, an option
of a hybrid cooperative form, say SHG MBT Federations investing in Section 25 or NBFCs, would
be needed. The other option would appear for them to quit the micro finance sector altogether,
and specialize as purely social work and community organizations?

CONCLUSION

The unorganized private sector money lenders, who have proliferated since the liberalization of the
Indian economy, in small towns and villages, would probably find their market shares cut down, as
well as their presently usurious interest rates reduced.. From the perspective of the usually poor
woman borrower, the expansion and deepening of the formal sector in the micro finance market, is
something that would be welcomed in Tamilnadu?

Note on sector perspective on Micro finance in Tamilnadu, prepared for the workshop on Microfinance for community development 6
th st
in the Nilgiris, from 19 to 21 of Oct., 2009, at Ooty. Note prepared by S.Ananthanarayana Sharma, Centre for Action Research
and Training, Madurai
Exhibit one – NABARD Study on impact of SHG

NABARD, in association with GTZ, conducted a study, in 2005, on the comparative performance of
SHG – Bank Linkage Programme vis-à-vis other priority sector credit. The findings are based on the
data received from 27 commercial banks, 192 RRBs and 114 cooperative banks participating in the
programme. One of the important observations of the study was that 1.44 million SHGs had loans
outstanding of Rs. 4,200 crore with the banking system. 2.63 million SHGs had saving accounts
with the banks and the savings outstanding was Rs. 2,391 crore.

Positive Features of the SHG - Bank Linkage Programme

The financial inclusion attained through SHGs is sustainable and scalable on account of its various
positive features. The programme confronts many challenges and for further scaling up, these
challenges need to be addressed.

Financial Inclusion of Poor Women

The Committee noted that more than 90% of the members of SHGs are women and most of them
are poor and assetless. The SHG movement has been instrumental in mainstreaming women by-
passed by the banking system.

Loan Repayments
7.09 One of the distinctive features of the SHG - Bank Linkage Programme has been very high on-
time recovery. As on June 2005, the on-time recovery under SHG - Bank Linkage Programme was
90% in commercial banks, 87% in RRBs and 86% in cooperative banks.

Programme Impact
.
The main findings reveal that the programme has :
• Reduced the incidence of poverty through increase in income, and also enabled
the poor to build assets and thereby reduce their vulnerability.
• Enabled households that have access to it to spend more on education than nonclient
households. Families participating in the programme have reported better
school attendance and lower drop out rates.
• Empowered women by enhancing their contribution to household income,
increasing the value of their assets and generally by giving them better control
over decisions that affect their lives.
• Reduced child mortality, improved maternal health and the ability of the poor to
combat disease through better nutrition, housing and health - especially among
women and children.
• Contributed to a reduced dependency on informal money lenders and other noninstitutional
sources.
• Facilitated significant research into the provision of financial services for the
poor and helped in building “capacity” at the SHG level.
• Finally, it has offered space for different stakeholders to innovate, learn and
replicate. As a result, some NGOs have added micro-insurance products to their
portfolios, a couple of SHG federations have experimented with undertaking
livelihood activities and grain banks have been successfully built into the SHG
model in the Eastern Region. SHGs in some areas have employed local
accountants for keeping their books, and IT applications are now being explored
by almost all for better management information sytems (MIS), accounting and
internal controls.

Note on sector perspective on Micro finance in Tamilnadu, prepared for the workshop on Microfinance for community development 7
th st
in the Nilgiris, from 19 to 21 of Oct., 2009, at Ooty. Note prepared by S.Ananthanarayana Sharma, Centre for Action Research
and Training, Madurai
References –

i) Rangarajan Committee report on Financial Inclusion, 2008

ii) Vaidyanathan committee draft report, 2004 (Task Force on Revival of Cooperative
Credit Institutions)
iii) Tamilnadu state Government statistics from the Department of Rural Development, and
Department of Cooperation.(2009)
iv) Sarvodaya Nano Finance Limited annual report, 2008
v) Second five year plan, Planning Commission, 1956 New Delhi
vi) Sixth five year plan. Planning Commission, 1981
vii) Policy note for the year 2008-09, Cooperative Department, Government of Tamilnadu
viii) All India Rural Credit Surveys of Reserve Bank of India
ix) Evaluation study of integrated rural development programme (irdp), by Planning
Commission (peo study no. 134), 1984
x) Second Concurrent Evaluation Survey on IRDP , Department of Agriculture,
Government of India, 1987.
xi) NABARD Annual reports
xii) Grameen Foundation Annual Report, 2007 - 2008.
xiii) DHAN Foundation, Annual reports
xiv) RBI guidelines and circulars on micro credit and micro finance
xv) State of the Microcredit summit campaign report, 2006.

Note on sector perspective on Micro finance in Tamilnadu, prepared for the workshop on Microfinance for community development 8
th st
in the Nilgiris, from 19 to 21 of Oct., 2009, at Ooty. Note prepared by S.Ananthanarayana Sharma, Centre for Action Research
and Training, Madurai