Microfinance and the Cooperatives: Can the Poor Gain from Their Coming Together? H.S. Shylendra

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1 Microfinance and the Cooperatives: Can the Poor Gain from Their Coming Together? (Draft for discussion only) H.S. Shylendra Institute of Rural Management Anand (IRMA) Paper presented at the Third National Seminar On Microfinance: Issues and Challenges Organized by Centre for Microfinance Research Bankers Institute of Rural Development (BIRD) Lucknow On 2 nd and 3 rd December 2011 At Bankers Institute of Rural Development (BIRD) Sector H, L.D.A. Colony Kanpur Road, Lucknow 1

2 Microfinance and the Cooperatives: Can the Poor Gain from Their Coming Together? Introduction H.S. Shylendra 1 Institute of Rural Management Anand (IRMA) Formal co-operatives for meeting the credit needs of the rural households including the poor are now is existence for more than a century in India. The worsening debt conditions of the farmers had forced the colonial rulers to explore creation of the credit cooperatives through enactment of a legislation in While these cooperatives have traversed a long distance since then, but their goal of reaching the poor has remained largely elusive till now. The challenge of meeting the credit needs of the poor and other weaker sections by the cooperatives has been a major debating issue since their emergence. Linking cooperatives with the phenomenon of microfinance is the latest among a series of policy measures taken in making co-operatives pro-poor and equitable in their working. The rapid growth of microfinance, notwithstanding the several controversies, has evoked responses from varied quarters to tap its potential for overcoming the challenges involved in reaching out to the poor. Just as women empowerment groups have evinced interest in adopting the group based microfinance for espousing their cause, a section of the cooperative advocates have argued for internalizing microfinance methods by cooperatives to become more inclusive. Given the limited success achieved in the past in reforming the cooperatives for poor, a lot of hopes have been raised over the linkage being promoted between the cooperatives and the microfinance. On the eve of the United Nation s International Day of Cooperatives on July , the UN Secretary-General observed (The Cooperator 2005):. both cooperatives and microfinance, when used and managed appropriately, can help give those most in need the power to improve their lives. Cooperatives have a long history of providing financial services to poor and low-income people. Cooperative banks and credit unions were initially established to reduce poverty and high indebtedness among small-scale farmers and craftsmen in urban and rural areas. Cooperatives continue to serve this mission today- often by providing affordable and equitable access to microfinance services. It would be worthwhile examining this issue of linkage in a greater detail as the problem of indebtedness with its attendant implications for inclusion and poverty alleviation continues to be a major challenge (GOI 2007). The present paper makes an attempt to identify and discuss relevant issues and emerging experiences and outcomes of adoption of microfinance by credit cooperatives in India. Before we elaborate on the structure of the paper, it would be useful to explicate by way of clarification on the meaning of the terms microfinance, cooperatives and the poor used here. Microfinance, we mean here essentially the system and practice of providing financial services to 1 I am thankful to Dr Gyanendra Mani of CFMR, BIRD for the invitation, and his comments on the preliminary draft. The references in the paper are incomplete and to be finalised. Usual disclaimers apply. 2

3 poor / women through the use of group and other such innovative methods by formal agencies. Microfinance in this sense is identified with various group based savings and credit programmes as evolved prominently since 1970s in countries like Bangladesh, and replicated subsequently elsewhere including India. In the India context, microfinance has emerged broadly in two forms or models viz., the Self help Group (SHG)-Bank Linkage programme (SBLP) promoted by National Bank for Agriculture and Rural Development (NABARD) since 1992, and the Nongovernment organisations (NGO)/Microfinance Institutions (MFI)model. Under SBLP, the formal financial institutions including cooperatives provide savings and credit services to the poor through informal groups linked to them. In the later model, NGOs and other forms of MFIs provide these services directly to the poor mobilized through informal groups. In a way, it is the NGOs which pioneered and scaled-up the group method of lending to the poor. Cooperatives, we mean primarily here the credit cooperatives established under the conventional cooperative legislations passed initially by the British government in 1904/12 and repealed by various provincial acts after independence. Broadly such cooperatives fall under two structures the three-tier short term credit structure and the single/two-tier long term structure. The co-operative also include those established under new parallel liberal acts enacted by some of the states since 1990s. Our focus here will be largely on the credit cooperatives established under the conventional acts, though the role of new generation cooperatives is not fully ignored. Between the two models of microfinance, again though the primary focus is on capturing the experience of cooperatives under SBLP model, the role of NGO/MFI model is explored to the extent relevant in understanding linkage under discussion. Poor we mean here the socially and economically backward and disadvantaged groups. Economically, these groups may include the landless labourers, tenants, share croppers, small and marginal farmers, artisans and other petty producers. Socially such groups may include households from scheduled castes, scheduled tribes, most backward castes and minorities. There may be lot of overlaps between these social and economic groups. In terms of gender, the focus is on women from these groups given their social and economic disadvantages. The basic and common characteristic of these groups is that they may lack clear rights to land and assets, may be remote in their location, and socially discriminated. All these poses difficulty for them in obtaining credit and other services from formal institutions like cooperatives. Their social position also may come in the way of their participation in the affairs of the cooperatives leading to discrimination. The microfinance movement has mainly targeted such category of households in its coverage. 1. Cooperatives and the Poor Even before we look at the role of cooperatives in experimenting with new microfinance methods, let us look at some of past arguments and experiences relating to the cooperatives in reaching out to the poor. Both in theory and practice, there have been divergent views about the role of cooperatives in serving the poor. In a socialist system cooperatives are perceived as instruments which can help in the transformation of the society into a socialistic form ending inequality and exploitation (Khostov 1975). Cooperatives because of their emphasis on abolition of private property and group approach to enterprise are considered compatible with the socialistic goal. In a capitalist system, the role of cooperatives is more instrumental in serving 3

4 primarily the interest of the diverse members- poor or well-off, to help realize their economic objectives related to production or consumption. The cooperatives may also play a balancing role by trying to correct the excesses of private enterprises. In a mixed economy, cooperatives are visualized to help serve the welfarist objectives of the state in terms of poverty alleviation and empowerment of the poor (Parthasarthy 1991). Thus, in socialist and mixed economies the cooperatives are seen as agencies for attaining larger goals of development with a focus on poor and vulnerable groups. Given such a context, there are arguments especially in the mixed economies like ours that cooperatives must have a clear focus on the poor as they are a welfarist organization. Some even hold the view that it is not possible to conceive of cooperatives which are not drawn from the poor (Parthasarthy 1975), and if needed cooperatives having sole focus on poor may be created. Given the expectation that cooperatives have to proactively reach out to the poor, there are skeptics who argue that cooperatives may not be able to do justice to the cause due to certain fundamental dilemmas they face (Lele 1981). These dilemmas pertain to addressing the tradeoff involved between the goals of growth and equity and decentralization and equity. While the former dilemma largely relates to the constraint of attaining efficiency in serving the poor whose needs are small and pose challenge in achieving cost-effective delivery of services. The later dilemma emerges in the context of the elite capture of the cooperatives bypassing the poor in taking any advantage of the benefits. Given the strong nature of these dilemmas and in the absence of necessary pre-requisites to overcome them, conventional cooperatives may fail to deliver for the poor. Under such circumstances, even if cooperatives have to be promoted it would be better if these cooperatives either have a strong paternalistic approach or be small and simple in their form and size to bring in cohesiveness. However, such skeptical views are countered by others who argue that cooperatives may still succeed and reach out to the poor if they get the support and guidance of progressive leadership in the context of overriding private interests. Cooperatives hence may need a renewed attention to play the poverty alleviation role (Hulme and Montgomery 1995). Similarly, others have argued for a strong role for cooperatives in poverty reduction and social empowerment provided these cooperatives adopt lesson emerging from the past failures and try to be more homogenous and participatory in their working (Agarwal 2010). Thus, there is a renewed argument for promoting cooperatives to address challenges of poverty and inequality and that cooperatives learn from the experiences gained over a century of their existence. Hence, cooperatives continue to get the support from varied quarters for their revival given their relevance. There are efforts to rejuvenate cooperatives in India and elsewhere. The rejuvenation measures, among others, include creation of a more liberal legal frameworks so as to enable cooperatives to assume new forms and capabilities, recapitalization of weak ones, encouraging diversification by cooperatives, professionalization, and adoption of new technology and other innovations to give the needed edge to be more efficient. The 11 th five year plan has identified revitalization of cooperatives and adoption of group approach as a vehicle for fostering agriculture development involving small and marginal farmers and other vulnerable groups. Credit Cooperatives and the Poor: Credit cooperatives were the earliest of the formal cooperatives established in India by the colonial rulers. These cooperatives were modelled on the German Raiffeisen system to help farmers free themselves from the clutches of 4

5 moneylenders. The primary objective of the act passed in 1904 was `encouragement of individual thrift and mutual cooperation among the members, with a view to the utilization of their combined credit, by the aid of intimate knowledge of one another s needs and capacities and of the pressure of the local public opinion (Ibbetson 1975: 103). These primary cooperatives in rural areas were essentially meant for small men and were expected to work based on the bonds of these people adhering to the principle of unlimited liability, mutual confidence and mutual cooperation. Personal rather than material or tangible security was supposed to be the basis of lending (ibid). Subsequent to enactment of the Cooperative Societies Act in 1904, the credit cooperatives grew fairly rapidly. The Britishers took proactive steps to spread the cooperatives in different parts of the country. However, despite the rapid growth of the cooperatives their progress in terms of coverage of poor was found to be unsatisfactory. An assessment of the working cooperatives in the Madras Presidency concluded that the cooperatives suffered due to excessive control and elite influence resulting in large scale exclusion of the poor (Robert Jr. 1983). Even the principle of unlimited liability could not come to the rescue of the cooperatives as it proved to be elusory in addressing cooperative insolvency. The bias of cooperatives against poor thus has been a challenge since their inception. This situation did not change even after independence. Cooperatives despite being the sole agencies were found to be both inadequate and ineffective in addressing the problem indebtedness of rural households in general and the poor in particular. The report of the All-India Rural Credit Survey Committee (RBI 1954) brought out explicitly the failure of cooperatives in catering to the needs of the small farmers (as hardly 1.9% of small cultivators has been covered by the cooperatives) and the inequality in the distribution of institutional credit. The major conclusions of the Committee are worth quoting here: Perhaps the most startling revelation of the Survey has been the utter insignificance of the volume of the credit supplied to the cultivator by the Co-operative movement Co-operative agricultural credit is in quantitative terms little more than three per cent of the borrowings of the cultivator what reaches the medium and small cultivator from the co-operative institutions is a mere fraction of the little that co-operatives provide.. The development of co-operative credit movement in India has been inadequate in three respects. There are large parts of the country which it has not hitherto covered. there are large parts of agricultural population which still remain outside its membership, and even if attention is confined to those who are members of co-operative credit societies, the large bulk of their credit requirements is met from sources other than co-operatives. The Committee argued that there is no real alternative to some form of cooperative association at the all important rural base of agricultural credit even at levels higher than the base, there is eventually no alternative more suitable than a co-operative form of credit organization. 2 The Committee came out with the famous conclusion `Cooperation has failed, but cooperation must succeed. The Committee identified security based lending as against personal credit based on character and repaying capacity as the primary reason for the bias of the cooperatives against poor. The Committee while in general suggested an integrated scheme for strengthening cooperatives with active state support, specifically it argued for shift in the emphasis of lending from land to productive capacity and effective supervision. The Committee also highlighted the 2 as quoted in RBI (1985) 5

6 relevance of the formation of group or association of borrowers based on joint responsibility for the benefit of both borrowers and the lender. Many subsequent assessments brought out the continued failure of cooperatives to overcome their bias against the poor. The All-India Rural Credit Review Committee (AIRCRC) (1969) concluded that small farmers continue to be handicapped with cooperatives due to exclusion from membership, insistence on land security and restriction on loan size to tenants, which can aggravate the situation of inequality especially in the context of new agricultural technology. The National Commission on Agriculture (NCA) in one of its interim reports (GOI 1971) argued that formal agencies like cooperative and commercial banks lacked a clear understanding in dealing with the poor. It even said, Although the cooperatives were till recently the only source of institutional credit that could and should have helped people in the agriculture sector to reach the stage of a viable production, a large number of small and marginal farmers and agricultural labourers have had no chance even to enter them. In a way, so far, the cooperative system has not succeeded in securing the needs of the small and marginal farmers not to speak of the agricultural labourers to any significant extent. (Ibid p.16) Thus the various official assessments were almost unanimous about the failure of cooperatives in working with the poor. The findings of the official agencies were collaborated by many independent studies (Kumar 2007). These studies observed that cooperatives- both in short-term and long term structure, have neither been able to reduce the dependence on informal sources nor able to adequately cover the landless and other weaker sections. Land based credit policy, focus on agriculture and production loans, control by elite and other vested interests not keen to bring in poor are identified by these authors as the reasons as to why the co-operatives have not been able to reach out to the poor. As a result of this glaring evidence of the continued domination of cooperatives by the rich and better-off, there were calls to reforms the cooperatives in favour of the poor. While some argued for creation of separate structure of cooperative institutions for the poor, others suggested measures like credit rationing by the existing cooperatives in favour of the small borrowers. Recommendation for creation of Farmers Service Societies (FSS) with a focus on small farmers by NCA, Small Farmers Development Agency (SFDA) by AIRCRC, and Large Sized Adivasi Multipurpose Cooperative Societies (LAMPS) with a exclusive focus on tribals by the Bawa Committee were some of the pro-poor institutional arrangements suggested to reform the cooperatives. However, viability considerations came in the way of creation of such exclusive institutions for small farmers and poor. Based on the recommendations of the AIRCRC the government created SFDA and MFAL as developmental agencies which would identify viable small and marginal farmers and agricultural labourers and help channelise flow of credit from cooperatives and other formal agencies for pursuing productivity enhancing schemes. In order to ration credit in favour of the poor, RBI fixed a share of 40 per cent of the funds of cooperatives to be devoted to small farmers. Refinance to cooperatives was made conditional upon meeting the target fixed for the small farmers (RBI 1975) The state governments also came with many incentive based measures to encourage cooperatives to become more inclusive in their working. Universal membership drive was launched by many state governments which provided subsidy or concession loan to enable poor to subscribe to the share capital of the cooperatives. Contributions were made to bad debt 6

7 reserves to encourage cooperatives to take risk in lending proactively to the poor. Reservations were made for weaker sections to be on the governing committee of cooperatives to reduce elite control of cooperatives as well as help poor participate in the management of cooperatives. An attempt was made even to amalgamate primary credit cooperatives to make them become viable. However, many of these measures did not result in any significant change in the working of cooperatives towards of poor as corroborated by many assessments. An RBI Committee which assessed the working of credit cooperatives in Maharashtra argued that despite earmarking of funds for weaker sections, there was inadequate and poor efforts by the cooperatives in enlarging the coverage of weaker sections. Bose (1980) in his assessment of cooperatives in West Bengal argued that despite several efforts to bring in weaker sections, a very large section remained outside the purview of cooperatives. Neither the quota of funds nor the universal membership have yielded positive results. Bose attributed this to reasons like control of cooperatives by landed peasantry, poor management and corruption, strong resistance of elite against inclusion of poor and weak implementation by government of these measures. Bose even argued that poor themselves neither have the keenness to join the cooperatives nor have the faith in cooperatives. About SFDA and MFAL, the studies revealed that these agencies could not make much of a difference in reorienting cooperatives. These agencies not only had a limited coverage but also focused on farmers who were more productive and better-off and ignored the weaker sections who had been neglected by the cooperatives. Thus, the attempts to reform the cooperatives in favour of the poor did not yield the desired results. But the effort of the State to make formal agencies including cooperatives respond to the needs of the poor continued. Two or three initiatives worth mentioning here are the creation of Regional Rural Banks (RRBs) and launch of the Integrated Rural Development Programme (IRDP). Given the continued failure of the institutional agencies like cooperatives and commercial banks, the Government of India decided to create RRBs in 1975 as a via media between the local cooperatives and the professionally managed commercial banks. RRBs were created as a small man s bank to exclusively cater to the needs of the weaker sections. There was large scale expansion of RRBs in the country during 1980s reaching out to many remote rural areas. IRDP as a credit based poverty alleviation programme targeting the poor was launched in 1977 and covered nearly 54 million poor till The focus of IRDP was helping the identified poor by the state agencies to get access to easy and collateral free credit from the formal agencies at reasonable terms for variety of income generating activities. Cooperatives were also roped in the implementation of IRDP giving them an opportunity to overcome their past failure in reaching out to the poor. While creation of RRBs to an extent eased the pressure on cooperatives but as such did not make any dent on the nature of working of cooperatives. RRBs themselves also suffered in their attempt to serve the weaker sections exclusive. Neither their policies nor their methods were innovative enough to deepen the access of the poor (Shylendra 1996). About the impact of IRDP on the cooperatives in changing their orientation towards the poor, studies revealed several constraints faced by the cooperatives in this regard. Cooperatives despite having a much wider network had only a limited share in the coverage of IRDP households. Cooperatives had managed to cover only about 17 percent of the vast number of poor households 7

8 brought under IRDP by (Ahmed 1996). Moreover, cooperatives did not tune their practices to accommodate these newly inducted poor. Complicated loan procedures, share capital requirements increasing the burden on poor, and unfamiliarity of cooperatives with non-farm sector lending resulted in poor response of cooperatives to serve the developmental credit needs of the poor. Apart from these peculiarities of cooperatives in dealing with the IRDP households, IRDP failed in general to become a programme which can ensure sustained access to institutional credit for the poor. In a way IRDP was one of the last programmes with welfarist approach to reform the formal agencies including cooperatives. With the changed policy environment, the nature of policy initiatives meant for reforming cooperatives also underwent changes. These newer policies were more liberal and based on market principles. Two major strategies that could be identified are the encouragement given to cooperatives to become more business-oriented through professionalisation and diversification, and the promotion of microfinance among cooperatives. The financial liberalization launched since early 1990s eventually was extended to include cooperatives also. The financial institutions including cooperatives are expected to follow prudential business practices aided by conducive regulatory framework and liberalized interest rates. Through more market friendly and competitive practices, cooperatives are expected to revive themselves as well as work towards deepening the outreach of poor. This is based on the neo-classical theoretical argument of reducing control over functioning of financial institutions and allowing them work based on response of market forces. The thrust is on financial prudence and viability to survive and scale up. Adoption of business development plans and diversification are some of the specific initiatives under the new approach to revive cooperatives especially for the poor. The second important initiative is the promotion of microfinance among formal agencies including cooperatives. Microfinance being innovative in its methods to include poor and an apparently a viable proposition is considered to be a best bet in terms of really making cooperatives to reach out to the poor. In the next section we highlight along with the rationale and experience of adoption of microfinance by cooperatives in India. 2. Co-operatives and Microfinance Microfinance in the way defined earlier is the more recent of the various efforts made to reform the cooperatives. The linkage visualized and being attempted between the cooperatives and microfinance in fact has twin goals unlike other measures attempted in the past. While the primary goal is to make the cooperatives more inclusive, the secondary goal is to improve the economic and business prospects of the cooperatives in their revival attempt. The linkage is being even referred to as a `win-win proposition for cooperatives and poor. How is the linkage expected to work both for the cooperatives and the poor simultaneously? Microfinance uses unconventional methods to mobilize poor and provide access to them to credit, savings and insurance. The group method adopted by microfinance has been found helpful to overcome the basic problem of collateral faced by the formal agencies and poor. Through principles of mutual cooperation, joint liability and peer monitoring coupled with their 8

9 informal nature, small size and homogeneity of membership groups provide access to credit services to the poor in the absence of a physical collateral. Microfinance interventions all over have used group method to provide access to poor in a relatively successful manner. The same principles of groups help ensure better recovery, reduce risk and cost of intermediation for the lenders. The conventional cooperatives as evolved in India during 20 th century resorted to land based lending as they could not break the collateral barrier. The linkage through informal groups is expected to help the cooperatives to reach out to the poor by overcoming the fundamental problem of collateral. Hence cooperatives like NGOs and other MFIs can include poor in their working. Essentially, it is the institutional economics logic where in through adaptive behaviour and newer forms of institutions the problems of market failures are overcome (Shylendra et all 2009). As microfinance in a sense is a proven method, it is hoped that cooperatives can finally succeed in the effort they have been making since their emergence to reach out to the poor. The other advantage is the business prospects involved in promoting microfinance. Microfinance methods have the potential to help cooperatives scale-up their coverage of poor relatively easily bringing good dividends in terms of increased lending and assured recovery. Microfinance groups can also bring savings to cooperatives as savings are an essential component of microfinance methods. Moreover, microfinance interventions have the relative freedom to charge viable interest rates on lending reducing the element of cross subsidization for the poor. Thus, the linkage is argued to be both a social and bankable proposition for any formal agency. This is the essential rationale advocated by NABARD in its promotion of SBLP with the formal financial institutions including the cooperatives. As highlighted earlier, in the Indian context microfinance has emerged under two broad models- SBLP and NGO/MFI models. The issue of linkage of cooperatives with microfinance is relevant in both the context. While in the case of SBLP the linkage is seen between SHGs and the conventional cooperatives, in the NGO/MFI model it is seen in working of cooperatives including the newer types established under the self-reliant cooperative legislations as MFIs. While apparently the linkage between the cooperatives and microfinance is a promising proposition but there are several challenges and contradictions for a successful outcome. Though microfinance methods have certain strengths, they go with several limitations both at the conceptual and operational level. It is argued that microfinance is more a neo-liberal phenomenon and may not be suited for welfarist goals of inclusion, poverty alleviation and empowerment. Being neo-liberal as such it may bring several pitfalls in the efforts to achieve the above goals. There are several studies which have now captured in this regard the limitation of microfinance from diverse experiences. Though the advocates of cooperatives have claimed that cooperatives/ credit unions have been the original microfinancial institutions and harbingers of microfinance, even then the cooperatives cannot escape from the major constraints and limitations faced by the newer methods of microfinance including as a neo-liberal phenomenon. At the same time, given that cooperatives have a potential to bring balance in addressing various developmental contradictions, they may in fact be able to alleviate the negative consequences of microfinance for their members. 9

10 Let us briefly look at some of the challenges of microfinance methods for the conventional cooperatives like primary agricultural credit societies (PACS) in India. Microfinance groups like the SHGs need considerable resources for their emergence and sustenance. In the absence such social intermediation process, group may not emerge uniformly both in quality and quantity. The large variations one can see in the spread of SHGs across India is attributable to variations in the availability of agencies necessary to promote SHGs. Social intermediation is essential as groups have to be promoted in such a way as to internalize some of the essential principles of informal mutual cooperation, peer monitoring and joint liability. Formal institutions like cooperatives may not be able to promote such groups on a large scale unless supported by suitable and competent agencies. In principle, this should not have been a difficult proposition for cooperatives, as the cooperatives promoted in India are supposed to have been modeled on Raiffeisen system having many of the essential principles required for SHGs including the unlimited liability concept. However, the cooperatives which really emerged during British period are of the modified type violating many of the principles Raiffeisen system. In the post-independence period, the cooperatives further deviated from the original Raiffeissen conception including the principle of unlimited liability. Though in principle SHGs are compatible with the original conception of credit cooperatives, in reality there is a mismatch. Therefore, both in the formation SHGs and in their working cooperatives may face many contradictions posing difficulties for their actual integration in a meaningful way. Like for example, while a formal cooperative works on the basis of limited liability, an SHG is supposed to adopt the principle of unlimited liability. Similarly, a cooperative is a member-owned organization with ability of democratic governance and accountability. But an SHG is a informal body whose members may not be able to exercise the same rights as that of a original member unless provide for legally. Besides, cooperatives are no longer the sole agencies in the field of rural credit in the country. The field is dominated by commercial banks and regional rural banks which have many other strengths than cooperatives. Cooperatives which have lost their pre-eminent position now have to compete with other formal agencies which are also keen to scale up their microfinance interventions given the perceived benefits. Cooperatives may have to show or provide added benefits to the microfinance groups capitalizing on their original strengths of local feel and democratic governance. The experiment of linking microfinance with the formal agencies is nearly two decades old in the India context. What has emerged out of the experience and how far cooperatives have succeeded in this almost last ditch effort to deliver on the equity is the moot question. This is what is examined in the next two sections before arriving at some possible inferences and conclusions. 3. Cooperatives and Microfinance: A Review of Empirical Literature This section makes an attempt to capture through a review available literature the experience of the cooperatives in adopting the microfinance methods and the major outcomes observed thereof. The review covers here both the conventional cooperatives as well as those based on thrift and self-reliant approach. 10

11 Several studies have tried to look at the overall performance of cooperatives under SBLP and the some of the constraints faced by them. Sundar and Asokan (2004) in their study on the performance of cooperatives in financing SHGs found that there are wide variations in the performance of cooperatives under SBLP. The southern states have covered bulk of the SHGs both in terms of number and disbursement, though certain states in other regions have shown relatively better performance. Given the potential of SHGs, the authors argued that cooperative banks and their officials have to take proactive steps in identifying and linking SHGs. Sen (2006) assessing the governance of cooperatives as microfinance institutions argued that cooperatives have generally played a significant role in providing financial services to the poor. The cooperative however have lagged behind commercial banks under SBLP. The author found that the poor performance as such is not due to the weakness of organizational network as cooperatives have a good rural network. The author identified inadequacies in financial and governance areas as the major causes of the poor performance. The author suggested that for cooperative to succeed as microfinancial institutions they should strengthen their governance through professional management, higher transparency, and autonomy. Pramod (2006) in his assessment of SBLP experience argued that while cooperatives may be encouraged to participate in SBLP, however the financial and human resource strengths of the cooperative need to be carefully assessed. Any blanket expansion of SBLP by cooperatives may not be desirable. Prasad (2006) exploring the changes required for internalization of microfinance by cooperatives argued that there is a need for awareness creation among cooperatives. The SHGs need to be given a separate entity status by cooperative through amendment to the extent of cooperative laws. The bye-laws of cooperatively have to be amended to clearly specify the status, rights and responsibilities of SHGs. Tripathy (2008) in his analysis of microfinance by cooperatives argued that the SBLP model reached the cooperative very late resulting in its slow progress. The model got boost only after the recommendation by a Taskforce in 1999 and with state governments amending their cooperative acts to include SHGs. SHGs are compatible with cooperatives and have also got business potential. As the model has shown positive outcomes, the author argued for cooperatives to aggressively pursue the linkage. In a prominent all-india level assessment based on empirical data from DCCBs, Harper, Berkhof and Ramakrishna (2005) have tried to look at the role of SBLP in reforming the cooperatives. The authors argued that as SBLP holds certain pros and cons for both the SHGs and the cooperatives and it has to be approached cautiously by both the parties. The authors found that the SBLP as such reached the cooperatives late as compared to other financial institutions. There were wide variations observed in the spread of SBLP across different states even among cooperatives. A few states like West Bengal had done exceedingly well in the linkage due to the political support given to the cooperatives. The training and exposure of the top management also had played a role in the initiatives taken by the cooperatives. The study did not find any correlation between the strength of a DCCB and the extent of SHG linkage. However, successful DCCBs under SBLP have tried to link more and more SHGs directly with PACS. The choice of the SHPIs/SHGs, extent of decentralization adopted by the DCCBs, type of services and membership offered to SHGs were some of the factors found influencing the direct linkage of SHGs with PACS. NGOs were found to be the prominent SHPIs in the linkage of SHGs with cooperatives themselves playing a limited role with a few exceptions. All the state 11

12 governments have put in place the needed legal framework to enable the linkage of SHGs. An overwhelming proportion of cooperatives had offered only a nominal membership to the SHGs. Overall, inadequate appreciation of the market potential of SHGs was found to be the key factor in the low level of linkage by cooperatives under SBLP. In terms of services, the cooperatives had largely offered term loan facilities to the SHGs and as such had not placed any restriction on the use of savings by SHGs. However, the authors found the savings with cooperatives as a risky proposition for SHGs. Given the very low share of SHG business in the total portfolio, the impact of SBLP on the profitability of cooperatives was found to be small and unclear. At the same time, SHGs had brought good deposits to PACS in few cases. The loan recovery of SHGs was also found to be good. The study argued for a key supportive role by NABARD to help both the cooperatives and the SHGs to gain from the linkage, and for giving choice to SHGs to decide whether DCCB or PACS should be their bank. The macro level studies thus indicate the cooperatives at large have not been able to fully tap the potential of SBLP for reviving their business position. The general skewed spread of SBLP has also affected the linkage by cooperatives. The late reach of SBLP to cooperatives coupled with lack of legal clarity on the position of SHGs, and poor governance and business abilities of cooperatives have come in the way of widespread adoption of SBLP by cooperatives. The linkage model with the cooperatives varies across DCCBs, with many of the DCCBs on their own directly dealing with SHGs for savings and credit leaving only an indirect/limited role for PACS. Again in terms of membership, most cooperatives have offered only a nominal membership to SHGs reducing the members of SHGs to a position of only a nominal stakeholders. Moreover, despite SHGs showing promising performance in terms of savings and repayment, the overall business position of cooperatives remains unaffected. There are several case studies on DCCBs trying capture their specific experience. The pioneering effort of the Bidar DCCB has been assessed by quite a few studies. Sibal and Dave (2003) in their study had observed that the linkage has brought new vigor to PACS in Bidar. The savings of SHGs accounted for 38 percent of the loan outstanding of the PACS. The SHG linkage was found to be viable both for the bank and for the PACS. The PACS as a result have become active as well profitable. Kulkarni (2003) found that PACS in Bidar have been able to assimilate SHGs very well in their functioning. There was high level of awareness among the staff about the SBLP. The study also observed that PACS under SBLP besides acting as SHPIs have become very active in their day to day working. Interestingly, the cooperatives also perceived SHGs as vehicles of social development. The rapid expansion of SHGs and coverage of poor was attributable to motivation received from NGOs, training, and leadership commitments of the DCCB. Mohanty (2008) based on his case study of the Bidar DCCB argued that cooperatives can effectively include the poor in their working through SBLP. The DCCB along with PACS had credit linked nearly 78 per cent of the SHGs formed in the district. The linkage has been attempted both with the branches of DCCB and with the village level PACS. The DCCB had adopted a multiple models of SHG promotion with about 40 per cent of SHGs being promoted directly by DCCB/PACS themselves. The DCCB also had taken the help of NGOs and 12

13 government department for this purpose. The active participation of DCCB has been facilitated by the leadership which evinced keen interest in SBLP and internalized in its day to day working. The internalization of SBLP was enabled through collaboration with NGOs, creation of a separate micro-credit cell and appointment of staff for implementation of the programme. The DCCB s initiatives were also facilitated by the state government s legal amendment enabling SHGs to be linked to the formal cooperatives as nominal members and the financial support provided by NABARD for promotional activities. The study found that there was an active involvement of PACS which besides acting as SHPIs monitored locally the working of the SHGs. The SHGs have brought significant level of savings to the PACS with 90 per cent of total the savings of PACS being accounted by the savings of SHGs. However for lending PACS has merely acted as agents of the DCCB by getting a commission for lending and recovering on behalf of DCCB. The author concluded that the Bidar model has shown a potential for strengthening the PACS especially when the implementation of SBLP is eventually handed over to PACS as envisaged by DCCB. A few studies have also tried to look at the experience of other DCCBs and PACS. Puyalvannan (2003) in his study of SBLP of cooperative banks in Pudukottai and Trichy districts of Tamil Nadu observed that primary cooperatives in these two districts have been able to link significant proportion of SHGs formed in the district. The cooperative banks have taken the help of NGOs and women development corporation in the formation of SHGs. However, the provision of services to the SHGs by the cooperatives have suffered due to lengthy linkage process adopted by the cooperatives. While the SHGs are linked to primary cooperatives, the loans are sanctioned by the DCCB causing undue delay. The author argued for streamlining of the linkage process by the cooperatives through higher commitment and less bureaucratic loan process. Sundhararaman and Malaikolunthu (2004) in their study on the working of SHGs of DCCB in Tiruchirapalli district observed that the DCCB s involvement is facilitated by the creation of a separate women development cell which has responsibility for mobilizing women and arranging training for SHG formation. The DCCB has even formed SHGs under SGSY. The DCCB has been able to issue large number of loans to SHGs with highly encouraging recovery performance. Santhanam (2008) in his study of the working of Chandrapur DCCB in Maharashtra observed that DCCB has succeed in forming and providing linkage to a large number of SHGs mainly due to its proactive collaboration with the government agencies. The DCCB in collaboration with department of Women and Child Development took the help of widely spread Anganwadi Workers (AWWs) in forming SHGs. The DCCB involving PACS also carried out a campaign to form SHGs proactively. Over 12,200 SHGs could be formed by the DCCB of which about 60 per cent were formal by the AWWS. The study concluded that through convergence of efforts SBLP could be initiated by DCCB. However, certain concerns have been raised by the study with regard the quality aspects SHGs given the constraints faced by AWWs in terms of their incentives and accountability. Mishra (2008) in her study of the experience of PACS in West Bengal with special reference to Purulia district observed that SBLP is a potential mechanism for cooperatives to expand their outreach and business. The model has worked relatively successful in West Bengal especially in creating linkage for remotely located SHGs in a convenient and a cost effective way. However, the author found several limitations coming in the way of effective 13

14 linkage. There is lack of clarity on the ownership issue given the nature of membership of SHGs, PACS are also found to be suffering due to poor regulation and management resulting in liquidity crunch in meeting the needs of SHGs. Overall, the integration was found to be weak between SHGs and PACS. Another assessment of SHGs linked to cooperatives in West Bengal (BS 2010) observed that SHGs in West Bengal are being encouraged to keep their savings as term deposits leading to increase in small savings with PACS. The cooperatives do not permit SHGs to withdraw and recycle their savings. The case studies of DCCBs bring out several interesting issues in terms of both the strengths and weaknesses of SHG linkage by cooperatives. Many of these cooperatives have been able to link fairly a large number of SHGs through their proactive efforts. Besides acting on their own as SHPIs, they have taken help from NGOs and government agencies for large scale SHG linkage. Every effort has been made for internization of microfinance concept through training of leaders and staff in collaboration with NGOs, and creation of separate cells for promoting and implementing SBLP. At least in their area of working these cooperatives have been able to widen the coverage of poor even in remote villages through the SHG linkage. In terms of providing savings and credit facilities, the cooperatives have largely followed the norm adopted in general under SBLP. The linkage wherever has reached certain threshold level has proved to be viable for the cooperatives. Moreover, the inclusion of SHGs has made PACS become more active in their working. Several weaknesses have been identified by these case studies. The PACS are largely playing agency role with DCCBs having a major control over the programme especially in terms of lending activities. Bureaucratic delays and liquidity constraints also have come in the way of smooth delivery of loan services to SHGs. Given the extensive coverage of SHGs achieved, the quality of SHGs also has been an issue in these cases. Moreover, with assignment of nominal membership, the issue of ownership to SHG members has not been adequately addressed by the cooperatives. The role of conventional co-operatives apart, there are few studies which have tried to look at the experience of other type of cooperatives like thrift societies, urban cooperative banks (UCBs) and the newly created self reliant cooperatives. These cooperatives have also tried to reach out to the poor using microfinance methods in their own way outside the SBLP. Even before the group concept had emerged some of the urban cooperatives had made their own attempt to provide access to the urban poor. The Sewa Bank (Sri Mahila 1981) in Ahmedabad had tried to reach out to the poor through field staff who would identify the needy and mobilize them for purpose of savings and credit purpose. The members were encouraged to save and the bank would provide loan for economic purposes. Similar type of approach was observed by Harper (1998) in his case study of an urban cooperative bank in Orissa. The Sewa Bank had subsequently adopted SHG model to reach out to the poor in rural areas with the help of the Sewa NGO (Shylendra 2003). The SHGs dealt with the bank for savings and credit purpose through their federations formed at district level. The formation of SHGs had helped SEWA bank to extend its reach outreach in rural areas and in turn help the poor to access services from a cooperative bank. Anandgopal and Selvaraju (2010) in their study of the micro-credit 14

15 operations of urban cooperative banks in the Coimbatore district of Tamil Nadu observed that the UCBs have tried to reach out to the poor directly without any groups. The UCBs provided small loans based on personal security. However, the members found the loan to be highly inadequate and microcredit formed only a very small (0.17 per cent) of the total lending by these banks. The authors advocated adoption of SHGs by UCBs for expansion of the microcredit programme. Formation of thrift cooperatives was another major approach adopted in helping the poor meet their savings and credit needs. Thrift based cooperatives have been formed both under the conventional and the new self-reliant cooperative legislations. These cooperative have tried use both group and other methods to reach out to the poor. Dwarki, Narayanasamy and Ramesh (1996) in their assessment about the possibility of creating self-help credit cooperatives, argued that the conventional cooperatives have failed in reaching the poor. There is no alternative but to use SHGs for this cause. SHG cooperatives or federations can be formed for the purpose of large coverage of poor. Krishnamurthy (1996) in study on the working of a thrift and credit cooperative (TCS) in Adilabad district of Andhra Pradesh found that the cooperative has largely covered low income group people. The TCS had adopted group mechanism for enrolment of members. While the savings were made individually, loans were sanctioned through group consent. Loans were lent in 1:3 ratio of savings. The groups were supposed to help in loan recovery through joint responsibility. The TCS was able to achieve good loan recovery. The author attributed the emergence of TCSs due to the failure of cooperatives. However, the progress of TCS has been slow despite a new liberal legislation due to negative attitude of the cooperative department towards such cooperatives. Elsewhere, Hulme and Montgomery (1995) in their assessment of the working of thrift and credit societies (TCS) in Sri Lanka had found that the cooperatives promoted by the Sanasa movement to be more inclusive as poorer people were either able to join the existing cooperatives or could established new ones. The inclusion of the poor has been facilitated by the progressive approach of the Sanasa movement. The TCS being democratic were not captured by the local elites. The local and as well as national level leadership had played a positive role in the observed outcomes leading to the conclusion that self-interest behaviour need not be an axiomatic pattern. The authors argued that using market mechanism over state patronage may help cooperatives to remain aloof from elite capture. Assessing their own experience in promoting thrift cooperatives in Andhra Pradesh (AP), the Cooperative Development Foundation (CDF 1999, 2000) concluded that women have a different needs and hence need their own cooperatives. The women cooperative formed by CDF include members from various sections without any focus on any particular targeting group. The thrust of these cooperatives was on making the entire local economy vibrant for poverty alleviation. These cooperatives are federated at local level and relied largely on local savings for their working. The loans were lent to various purposes without any tangible collateral based on the savings held by the individual members. Further, the assessment concluded that these cooperatives were able to emerge as viable and autonomous member-based organizations aided by the new liberal law enacted for such cooperatives in the state. Sahu and Das (2007) have tried to examine the experience of the new self-reliant cooperatives in promoting microfinance in Orissa. The study observed that the mutually aided cooperatives have been trying to mediate their functioning through the mechanism of SHGs despite having 15