Agricultural Credit and Micro Finance
BASIX
in India
Equity for Equity
Presentation to Graduate Students
of
Cornell University
By
Vijay Mahajan
Founder and Chairman, BASIX
At Hyderabad
January 2011
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BASIX
Equity for Equity
Agricultural Credit in India
• India has over 116 million operational holdings
• Over 80% are small and marginal farmers (less
than 2 and 1 hectares, respectively)
• A large proportion of farmers engage in rainfed
agriculture, so are not input intensive.
• Since agriculture is seasonal, most farmers
engage in non-farm activity and migration
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BASIX
Equity for Equity
Agricultural Credit in India
• India has a long history of state intervention in
agricultural credit.
• It first began with the British colonial rulers
responding to the Maratha peasant rebellion in
1860s in the wake of drought and famine.
• Government started giving cash loans from the
land revenue to peasants in drought years.
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BASIX
Equity for Equity
Agricultural Credit in India
• Some enlightened colonial administrators who knew of
the German cooperative movement decided to promote
agricultural credit cooperatives.
• The first Cooperative Act in India dates from 1904!
Thrived in some states initially.
• Government started giving loans and later even equity
support to these cooperatives.
• This evntually led to bureaucratisation and politicisation
and lack of member control.
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BASIX
Equity for Equity
Agricultural Credit in India
• Post Independence, Government made food selfsufficiency a national goal and reviewed agri credit
arrangements through the All India Rural Credit
Enquiry (Gorawara) Committee.
• They found that less than 7% of rural credit was
coming from formal sources and rest was from
moneylenders, landlords and traders, etc.
• This led to Government asking SBI to open 400 district
branches and doing some agri credit.
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BASIX
Equity for Equity
Agricultural Credit in India
• After the onset of the Green Revolution, the need for
agri credit shot up.
• Government responded by nationalising major banks in
1969 and asking them to open large number of rural
branches and giving more agri credit.
• In 1976, Govt established a new chain of Regional
Rural Banks – and a large number of branches.
• Directed credit, (18% of total bank advances) was made
a policy. Despite this, only 27% of farmers got formal
credit in 2004-05
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BASIX
Equity for Equity
Agricultural Credit in India
• In 1982 Government set up the National Bank for
Agriculture and Rural Development (NABARD)
as an apex re-financing institution to augment the
agri lending resources of commercial banks,
Regional Rural Banks and cooperative banks.
• Despite all these steps, only 27% of farmers got
formal credit in 2004-05, as NSS 59th Round.
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BASIX
Equity for Equity
Agricultural Credit in India
• In 2004, the GoI decided to double agricultural
credit in three years.
• Commercial banks were given high targets and
RRBs were revived through consolidation.
• Cooperative credit system was given a US$ 4
billion revival package.
• All this did double the credit, but not the farmers’
outputs or incomes. Result – massive farm loan
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waiver in 2008 – USD 15 billion.
BASIX
Equity for Equity
The abiding challenge in providing
financial services to the poor
Low access,
High sustainability
Privately owned banks
High access,
High sustainability
New gen banks –
hopefully!
State owned banks
Low access,
Low sustainability
NGOs
High access,
Low sustainability
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BASIX
Equity for Equity
Part II
Micro-credit
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What is Micro-finance?
BASIX
Equity for Equity
• Sustainable provision of
–
–
–
–
credit,
savings,
insurance, and
other financial services (e.g. remittances,
pensions)
• with a focus on poor households, who find
it difficult to access banks/ financial
institutions.
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Vicious Cycle of Low
Income
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Equity for Equity
Low
Investment
Inadequate
capital for
further
investment
Inadequate
income to meet
consumption
needs
Inadequate
Savings
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Breaking the Cycle of Low Income
BASIX
Equity for Equity
Capital
on credit to
increase
investment
Lower to
Higher
investment
Capital for
investment after
servicing the
loan
Repayment
of principal
and interest
Adequate
income to meet
consumption
needs
Formation
of savings
into capital
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Why do banks fail to lend to the
BASIX
poor? (Even in the US!)
Equity for Equity
• Banks do asset based lending
– Poor people have no or low asset base
• Banks do project based lending
– Poor people do not have a project.
– Multiple activities, none of them individually bankable.
• Banks need documents and titles
– the poor don’t have these often
• High transaction cost and high perceived risk
– Cost of underwriting and monitoring high
– The poor are seen to suffer from household level risks as
well as seen risky as a class, due to political patronage
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BASIX
New Paradigm of Lending
Equity for Equity
•
•
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Prof Mohammad Yunus of Grameen Bank,
Bangladesh, has shown that the poor are bankable if,
Banking is made easy
Transaction cost is reduced
Physical collateral is substituted with social
Person is financed, not a project
Peers are involved in underwriting
Borrower repays small sum, frequently
Support services are provided with credit
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Variable Elements of Design
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Equity for Equity
• Who Borrows
• How funds reach
• Security of Loan
• Repayment Schedule
•
•
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•
•
•
•
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•
Individual
Group
Direct
Through Intermediary
Collateral
Peer Group
Collateral substitute
Bullet
Regular, Periodic
Cash-flow based
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BASIX
Different Lending Models
Equity for Equity
• Grameen Methodology
• Joint Liability Groups (JLGs)
• Self Help Groups (SHGs)/Federations
• On-lending through Intermediaries
• Direct Loans
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BASIX
Grameen Methodology
Equity for Equity
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Homogeneous affinity group of five
Eight groups form a Center
Center meets every week
Regular savings by all members
Loan proposals approved at Center meeting
Loan disbursed directly to individuals
All loans repaid in 50 installments
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BASIX
Equity for Equity
Joint Liability Groups
(JLGs)
• Five individual borrowers mutually
guarantee loans
• Loans given to individual borrowers
• Cash security is collected as a proportion of
loan
• Group meeting only when needed
• More suitable for men, farmers
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BASIX
Equity for Equity
Self Help Groups (SHGs)/
Federations
• Homogenous affinity group of 15-20 women who
live in the same neighbourhood
• Regular meetings – weekly/fortnightly/monthly
• Regular savings - Rs 10 to 50 per meeting
• Group selects their leaders
• Lending started with internal pool of funds
• Lending decisions are of the group
• Later, SHG accesses funds from bank/MFIs
• Groups federate at Cluster/ Block level
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Different lending methods are suitable for
different market segments
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Market Segment
Methods
Growth Enterprises/
Commercial Farmers
Direct Loans
Micro-Enterprises/
Small Farmers
Marginal
Producers
Joint Liability
Groups
Self-Help/Grameen
Groups
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BASIX
Equity for Equity
Credit is important but Savings is a
fundamental financial service
• Savings is setting aside a small sum of money away
from the regular cash flow and accumulating it to a
usefully large sum.
• If the ‘large sum’ is needed and received before the
small sums of money have been set aside, it is called
a loan
• If the large sum is received after small sums of
money have been set aside, then it is called a term
deposit
• If a large sum is to paid out upon happening of an
adverse event to a few of all those who have paid a
small sum, it is called insurance
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BASIX
Equity for Equity
Because of vulnerability to risk
insurance is also important for the poor
• The poor face all kinds of risks to their lives
and livelihoods.
• The death of a bread-winner can devastate a
family. So life insurance is useful.
• Death of livestock can halve the income of a
poor household. So livestock insurance.
• Crop failure can be cushioned by insurance.
• Yet, few insurance companies offer services
to the poor. In India, life coverage is < 6% 23
BASIX
Equity for Equity
Credit is a necessary but not sufficient
condition for promoting the
livelihoods of the poor
• Just (“minimalist”) credit works where the economy is
dynamic or with the enterprising poor, not with the
poorest nor in depressed areas
• So we need to provide livelihood support through
agricultural/business development services such as
– training,
– technology,
– market linkages
• For more on this see BASIX Livelihood Triad Strategy
at www.basixindia.com
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BASIX Achievements: As on Dec 31, 2008
BASIX • 15 states, 60 districts,16,000 villages/towns, 3500 staff
Equity for Equity
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Disbursed USD 400 million since mid-1996
On-time repayment rate 99%, outstanding USD 100m
Micro-credit 600,000+ borrowers, growing @ 75% pa
Life, health, crop, livestock and micro-assets insurance to
1.2 million customers
Agricultural, livestock and non-farm business development
services to 200,000 customers.
Institutional development to 150 community based MFIs,
development agencies - 4.5 million customers
Impact direct: livelihoods enhanced 1.5 million
Impact indirect: microfinance sector reaches 50 million
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Founder and CEO: Mr Vijay Mahajan, 54
vijaymahajan@basixindia.com
BASIX
Equity for Equity
• Graduate of IIT Delhi, 1975, IIM Ahmedabad,
1981, Woodrow Wilson School Mid Career Fellow,
Princeton University, 1989
• Founded PRADAN an NGO in 1983 working in
rural livelihoods, and worked in it till 1991.
• Advisor to Govt of India and State Govts and to
World Bank’s Consultative Group to Assist the
Poor
• Ashoka Global Fellow 2008; Schwab Foundation World Economic Forum, Davos, one of the 100
Outstanding Social Entrepreneurs of the World,
2003
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