Research studies conducted by NABARD during the early eighties showed that despite having an extremely wide network of rural bank branches which implemented specific poverty alleviation programmes that sought creation of self-employment opportunities through bank credit for almost two decades, a very large number of the poorest of the poor continued to remain outside the fold of the formal banking system. These studies gave signals that the existing banking policies, systems and procedures, and deposit and loan products were perhaps not most suited to meet the immediate needs of the very poor. What they really needed was a better access to these services and products, rather than cheap subsidised credit.

• The priority of the rural poor was for consumption credit, savings, production credit and insurance, in that order.

• Consumption needs included credit for short periods for emergent needs.

• The dividing line between consumption credit and production credit for the poor was gossamery. Consumption requirements were met by the informal sources at exploitative interest rates, as the poor borrowers were unable to offer to the banks any security for the small consumption loans.

• Main constraint faced by banks in extending credit in small doses to poor borrowers was the high transaction cost in financing large numbers in small quantities.

• The same constraint applied to provision of other financial services like small savings, where very small savers scattered in the rural areas were to be harnessed.

Against this background, a need was felt for alternative policies, systems and procedures, savings and loan products, other complementary services, and new delivery mechanisms, which would fulfill the requirements of the poorest, especially of the women members of such households. The emphasis therefore was on improving the access of the poor to microFinance (mF) rather than just micro-credit. As a village based network of bank branches already existed, it focused not on creating alternate organisations, but on finding ways and means to improve the access of the poor to existing banking network. The rural and semi-urban banking network in India includes about 33,000 branches of scheduled commercial banks, 14,500 branches of Regional Rural Banks and 92,000 Primary Agricultural Cooperative Societies. Many research studies, done in-house as well as sponsored to professional institutions, and some action research projects funded out of the Research and Development Fund of NABARD, led it to develop the Self Help Group [SHG] - Bank linkage model as the core strategy that could be used by the banking system in India for increasing their outreach to the poorest of the poor who were hitherto getting by-passed by them. The strategy involved forming small, cohesive and participative groups of the poor, encouraging them to pool their thrift regularly and using the pooled thrift to make small interest bearing loans to members, and in the process learning the nuances of financial discipline. Subsequently, bank credit also becomes available to the Group, to augment its resources for lending to its members. It needs to be emphasised that NABARD sees the promotion and bank linking of SHGs not as a credit programme but as part of an overall arrangement for providing financial services to the poor in a sustainable manner and also an empowerment process for the members of these SHGs. NABARD, however, also took a conscious decision to experiment with other successful strategies such as replicating Grameen.

Starting with a NABARD led limited scale Pilot Project (with the support of the Central Bank of the country, i.e., Reserve Bank of India) in 1992 that aimed at promoting and financing 500 SHGs across the entire country, the SHG- bank linkage strategy has come a long way. The strategy includes financing of SHGs promoted by external facilitators like NGOs and government agencies, as also promotion of SHGs by banks themselves and financing SHGs indirectly where NGOs and similar organisations act as financial intermediaries as well.

Research Studies and Action research projects by NABARD resulted in evolution of the 'Self Help Groups (SHGs)- bank linkage model' as an appropriate mechanism. Other delivery modes include replication of Grameen, networking of NGOs, federations of SHGs, cooperatives, etc.

Against the back cloth of different structures, diverse legal framework and varied approaches, the need for a national policy framework arose.

A High level Task Force on microFinance was constituted under the Chairmanship of Mr. Y. C. Nanda, Managing Director, NABARD. MicroFinance was defined by the Task Force as "provision of thrift, credit and other financial services and products of very small amounts to the poor in rural, semi-urban or urban areas for enabling them to raise their income levels and improve living standards".

The poor

• Perceived thrift as their strength as also as the bonding factor among themselves

• Realised that timely and adequate credit was preferable and productive than subsidies and doles.

• They needed hassle-free delivery mechanisms.

• Acted as catalysts of change

• Combined social and economic agenda with synergistic effect

• Recognised sustainability as the core factor in development.

Banking system

• Accepted SHG-bank linkage as a cost effective means of reaching the poor

• Accepted peer pressure as collateral substitute for excellent recovery of loans

Government

• Formulated supportive policy framework

• Encouraged routing of social programmes through SHGs

Reserve Bank of India

• RBI policy inputs on micro Finance led to increased involvement of banks.

• Liberalised interest rates and deregulated interest rate structure for micro credit, leading to flexibility in lending rates.

NABARD

• Provided inputs in capacity building for banks and partner agencies

• Promoted the idea of organising thrift and credit groups among the NGOs as an add-on activity and encouraged linking them with banks.

• Provided loanable funds to banks and financial support to eligible mFIs, to ease the fund flow position to the sector.

Empowerment of rural poor by improving their access to the formal credit system through various mF innovations in a cost effective and sustainable manner.

To extend financial services to one third of India's unreached and underserved rural poor numbering nearly 100 million through one million SHGs with focus on women during a ten year period through various microFinance interventions

• Forming and nurturing small, homogeneous and participatory self help groups (SHGs) of the poor has today emerged as a potent tool for human development. This process enables the poor, especially the women from the poor households, to collectively identify and analyse the problems they face in the perspective of their social and economic environment. It helps them to pool their meagre resources, human and financial, and prioritise their use for solving their own problems.

• The emphasis on regular thrift collection and its use to solve immediate problems of consumption and production not only helps to meet their most urgent needs, but trains them to handle larger financial resources more skillfully, prudently and with a more lasting impact.

• The SHGs have also become a forum for many social sector interventions.

The availability of bank loan to the group helps fulfill their needs further. SHG-Bank Linkage Programme has proved to be the major supplementary credit delivery system with wide acceptance by banks, NGOs and various government departments.

• NABARD has intensified its efforts in identifying potential districts in the Southern Region and for enlarging its partner spread.

• The coverage of districts/ partners in Western and Northern Regions are being widened.

• Priority has been assigned to awareness- building and for identification of NGOs and other partners in Eastern and North Eastern Regions.

• Sensitisation of senior executives of commercial banks and Chairmen of RRBs have been taken up by NABARD.

• Under the direct training programme for staff of banks/ NGOs, over 25,000 field level functionaries have already been trained by NABARD.

• NABARD provides training inputs on SHG financing to training establishments of participating banks, to help them to internalise the training requirements at their level.

• NABARD gives technical support to banks to evolve suitable intermediate structures like Farmers' Clubs (Vikas Volunteer Vahini Programme of the National Bank) to increase the outreach of their branches in promotion and linking SHGs

• NABARD supports and helps banking institutions (especially RRBs) to take on the role of Self Help Promoting Institutions (SHPIs )

• Necessary assistance is provided to the governments by NABARD for dovetailing mF practices with the poverty alleviation programmes

• NABARD also encourages the association of Panchayati Raj Institutions ( PRIs ) in adopting group processes for maximisation of empowerment.

• Several steps have been taken by NABARD for capacity building of NGOs which partner in promotion and nurturing of SHGs. The emphasis is on involving a large number of NGOs. Special focus is on those NGOs participating in watershed development, health, literacy and women development, to encourage them to take up promotion, nurturing and linkage of SHGs as an 'add-on' activity.

• NABARD has a scheme of part-financing the cost of promotion of groups by NGOs.

• The NGOs and other local bodies at village, block and district levels in the North Eastern States are encouraged to take up alternative micro-credit delivery mechanisms through direct funding.

• Formation and operation of SHG Federations is supported and encouraged by NABARD. Similarly, networking of NGOs is also encouraged.

The recommendations of the Task Force on microFinance are being followed up and implemented, to spawn a supportive and conducive policy mechanism for sustained growth of mF initiatives in India. These steps include facilitating emergence of standards for Micro Finance in India, Supporting graduation of Micro Finance - NGOs to pure Micro Finance Institutions, etc..

NABARD coordinates the mF activities in India at international/ national/state/district levels. These include organising international/national Workshops, Seminars, etc for experience sharing, Organising National and State level Meets of Bankers and NGOs, etc..

• Block/district/state level review meetings are organised and/or organised by NABARD. The relative documentation and data base is also carried out by NABARD. In addition, periodical Monitoring studies are conducted through NABARD/Bank Officers.

• Internal Impact Studies and are conducted by NABARD periodically

[Source: NABARD Website]