It is the humblest section of society that keeps India rolling, defying Malthus at every step. From the sharecroppers who manage to survive farming 1 acre of land, to the women selling vegetables at roadside markets, all have shown the resolve and resourcefulness necessary to survive in an unforgiving world. Yet despite their toil they remain impoversihed as they are not able to profit from their effort. Well meaning policy makers seek to rectify the situation by seeking to spur industrial job growth. However, without the skills to contribute to that exercise, the rural poor rarely benefit from such schemes.

Instead, small organizations, working with ground realities, have seized on microcredit as the answer to chrnoic poverty. By their creative and sensible lending practices, these organizations have given us much to cheer. In December 1998, I had the opportunity to visit one such group, Activists for Social Alternatives (ASA), an Indian non-profit microcredit institution following the Grameen Bank (GB) methodology. While there are other approaches to microcredit lending, the techniques pioneered at Grammen Bank are the most widely reproduced; ASA's operations are typical of microcredit groups in Asia.

Picture: A meeting of SHARE, a Grameen Bank-style microcredit organization in Andhra Pradesh.

The ASA, originally a traditional "integrated rural development" organization, realized that their beneficiaries were in need of credit and savings facilities. They were operating in the Tiruchi district of Tamil Nadu, the southern most state of India. Large farms owned by zamindars (local patricians) and cultivated by extremely poor, seasonally unemployed, low caste laborers characterize Tiruchi, a largely agricultural region. It is these landless, poor, and illiterate laborers to whom ASA caters. Its target group of borrowers would readily be denied loans from a conventional bank.

Like other GB replications, ASA lends exclusively to women. The Grameen Bank of Bangladesh found that lending to women improved their social standing within patriarchal societies and improved conditions for their children. Men were found to be poor credit risks and spent most of their increased income on themselves rather than their families. In the GB method, collateral/assets are substituted with a system of peer pressure and close monitoring to ensure proper repayment. Loans are disbursed to individual members of a five woman group. The entire group is held responsible for the repayment of a loan made to an individual. Loan repayments are made weekly at "center" meetings where four to five loan groups meet to deposit savings, and request new loans.

I attended one such center meeting and was able to get an inside view of the GB model at the village level. The women gathered at 7:00 a.m. in a clearing at the center of the village ready with their bank record books. An ASA field banker arrived by bicycle and called the center to order. While staff qualifications vary across GB replications, ASA staffers tend to be high school educated women who hail from the same marginalized communities as the borrowers. They are required to have a basic proficiency in accounting, in-depth knowledge of local conditions, and an ability to deal effectively with the daily crises of people living at the subsistent level. At the start of an ASA meeting, the women collect and tally their individual savings. The remainder of the meeting is reserved for the collection of loan payments and the approval of new loans.

An interest rate of 25 % (on the remaining balance) is charged on all loans. While this may seem high, it is necessitated by the high rate of interest on loan capital and the costs associated with the delivery of many small loans. The borrowers find the interest rate to be acceptable as the returns on their enterprises are high. ASA loan products are designed to assist in income generation activities. Consumption oriented loans for the purchase/improvement of homes are reserved for bank members who have successfully repaid enterprise related loans. Loans are available in 4 progressive "cycles" ($50, $100, $200, and $375) and must be repaid within one year. First time borrowers are offered $50 loans, which they must repay successfully before advancing to the next loan cycle.

The most common complaint I heard was from long time borrowers with growing businesses who had the capacity to absorb more than $375. ASA wishes to meet their needs, but is short on loan capital and opts to offer loans to more first time borrowers. In addition to these loans, there are products designed to meet the seasonal credit requirements of sharecroppers. These loans, typically used for the purchase of seed or fertilizer, require the borrower to repay interest on the loan on a weekly basis with the balance due at the end of a four month term. Decision making in the GB model is decentralized. The five woman peer groups are held mutually accountable for the loan repayment of an individual memberõs loan, and are motivated to only forward loan proposals they believe to be viable. After the group approves a loan proposal, the field banker reviews it at the center meeting where it is generally accepted barring bad credit.

ASA, like other GB replications, makes a point of not getting involved in the borrowerõs business decisions. The logic behind this is that the women understand their local economy and available resources the best. Borrowers tend to gravitate on their own toward activities with well known returns on investment. 35 % of ASA loans are used towards the purchase of livestock, primarily dairy cows and goats. Other loans go towards farm supplies, farmland, roadside shops, raw materials for finished goods, and items like sewing machines.

Following the GB methodology, ASA has managed to grow, lending to over 5,000 women and achieving a 97 % repayment rate (much better than conventional banks lending to the middle class in India). It is close to achieving self-sufficiency with interest covering operating costs. Aside from the financial performance of ASA and the improved economic condition of its borrowers, I was impressed to see how empowered the borrowers had become. The children of these women were now able to attend school rather than work. The women and their husbands were organizing as a group to take unscrupulous landlords to court. Thirty-five borrowers have been elected to the panchayats (village assemblies), a remarkable feat for low caste women in India.

Several Indian GB replications have joined forces to form a group called INDNET. INDNET seeks to provide a support network for microcredit institutions seeking to implement the GB model. It provides technical assistance for its members and serves as a source of best practices. Its members include ASA, SHARE in Andhra Pradesh, Cashpor-India in Uttar Pradesh, SKS in Andhra, and BSS in Karnataka. All of these organizations seek to grow into financially viable institutions that serve the poorest of the poor . Once they reach that level of maturity, their potential outreach will only be limited by their operational capabilities. India Development Service (IDS), a Chicago based NGO recognized the potential of Grameen style microcredit and is supplying several INDNET members with low interest loans and grants. A member of the Microcredit Summit council of "Advocates in Industrialized Countries", IDS seeks to involve the expatriate Indian community in the advancement of Indian microcredit institutions.

IDS member Bala Krishnamurthy left a career in finance and consulting to assist in the Grameen Bank replication effort in India. An IIT alumnus and University of Chicago MBA, he saw that his private sector skills could be put to good use working to provide microcredit services for the poor. He is currently serving as a finance & MIS advisor to Cashpor-India's GB replication in the state of Uttar Pradesh. He finds that he needs to call upon his private sector experience as "Microfinance, though serving a specialized market sector and serving a social need, is not to me unusually different from any professionally run commercial venture. It needs good understanding of market conditions and needs, good organizational skills and controls, understanding of the bottom line in terms of cost structures and profit drivers, and good computerized MIS systems to record and analyze the huge volume of transactions. Associated with all of this is of course the need to be extremely sensitive to the needs of the clientele, who have had absolutely no access to financial services other than those at an incredibly exploitative level."

Bala is particularly impressed by the impact of microcredit on borrowers: "The positive side to all of this is seeing the impact on people [poor women and their families] who over a few cycles of loan taking, begin to improve their asset base and demonstrate a tremendous confidence in their ability to manage their economic affairs, and of course the spillover effects of this in other areas of empowerment." Perhaps that is the best thing to be said about microcredit organizations like ASA, that they are actually achieving the objectives they set themselves.

Kumar Thangamuthu
July 1999

Kumar Thangamuthu, a member of the India Development Service (IDS) works for a leading technology company in the United States, and is currently pursuing his MBA degree at the University of Chicago. Feel free to respond to this article; you can write Kumar directly using the email link above. Also, be sure to check out the other part of this issue's twin artilces on microcredit, where Kumar presents the rationale for microcredit, as well as its growing popularity.

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