Creative Credits for the Poor: India’s Microfinance Movement

In the year, 1997 at a small urban slum in the Guntur District of Andhra Pradesh in India, a likely encounter led to an unlikely idea. The encounter was between Ms. Padmaja Reddy, an NGO (Non-Governmental Organization) employee and a rag picker, who had discussions about the poor availability of cash with the latter, and the idea that struck during the course of this meeting was the provision of small credits to the poor slum dwellers, which could bring about a sustainable change in their toilsome labyrinth of livelihood. Ms. Reddy, under the banner of the then little known NGO called SPANDANA, began mobilizing donations from her friends and associates, which could be used as a source to extend loans to the financially deprived populations of the urban slums in the district. Ten years later, SPANDANA grew into a specialized microfinance company offering a wide range of innovative financial products to approximately 800,000 people belonging to the poor urban and rural regions of the state, in collaboration with Rashtriya Mahila Kosh (RMK), which is a governmental agency, the ICICI bank, the internationally affiliated microfinance institution, namely, the Friends of Women’s World Banking (FWWB India) and many other organizations.

India, as of now, stands as one of the biggest microfinance markets in the world. Only a few decades ago, it was a testing ground for several asymmetric anti-poverty models. The first efforts to improve poor people’s access to formal financial systems began with the nationalization of banks that took place in the late 1960s. There was subsequent opening up of bank branches in rural areas across the country, where the underprivileged could gather resources for uplifting their livelihoods. Another attempt to increase credit availability to the poor was made in the year, 1978 under the Integrated Rural Development Program, but it turned out to be a major failure because of its high bureaucratic transaction costs, poor coordination and low recovery. However, it was finally the liberalization of the 1990s that conclusively instituted the microfinance movement, bringing in range of actors such as the NGOs, the government and the private sector. Substantial ground work had to be undertaken by the NGO, which later played the pivotal role in coordinating governmental mechanism, advocating favorable policy environment and attracting private agencies for long-term collaborations in rendering effective, innovative and customized financial services to those living below the poverty line. Many microfinance institutions like SEWA (though it started off earlier), SHARE, BASIX and, of course, SPANDANA emerged in the country as exemplary models serving to alleviate poverty.

Earlier, the micro-lending processes had limited products offered to a certain category of people from the poorest regions. Loans were confined to financing agriculture-related livelihood activities only and mostly, men were at the forefront applying and getting credit from the institutions – perhaps, these could be the major reasons for the un-sustainability and poor loan recovery of earlier programs, operated mostly through governmental agencies and which led to wider social disparity. However, the new microfinance movement was characterized by the hallmarks of equitable development. It started catering to the needs of women more, but also men included, and loans were granted, not just for agriculture, but also for off-farm micro-enterprises such as dairy, livestock, poultry, plantation, pickle-making, carpet-weaving and other informal occupations.