Microfinance in India: Socially Disadvantaged Groups, Organization and Collective Action

Abstract

The microfinance sector in India has emerged as the largest in the world, and Self-Help Groups (SHGs) formed by the government or NGOs are the dominant form. SHGs covered about 97 million households by March 2010. They enable the poor to build the capacity to save, so members can pool their resources, create a group fund and give out small loans to one another. Once SHGs develop into creditworthy institutions, they open savings accounts in commercial banks and can apply for bank loans. Although SHGs provide financial services to a substantial number of Indian households, studies about their attrition rates, functioning and possible roles within villages are limited. To obtain this information, I took part in a survey of 1,679 SHGs, consisting of women only, with a total of 26,971 members in selected regions of rural Northern India. In the first chapter, which is co-written with Jean-Marie Baland and Rohini Somanathan, I provide an empirical analysis of the performance of SHGs. We examine whether traditionally disadvantaged villagers, such as members of lower castes or landless farmers, are less likely to have access to groups and to bank loans. We find evidence of the attrition process being selective against lower castes: they have a lower probability of becoming a permanent member of a group. The net effects in terms of their expected access to a bank loan remain however relatively limited. By contrast, even though landless farmers are more likely to fail or leave the groups, they tend to benefit disproportionately. In expected terms, they receive more than two times the amounts of bank loans given to farmers owning more than one acre. Overall, the program therefore has positive and important distributional implications. Strict records of all saving and lending in SHGs is important, both to avoid conflicts and to obtain access to bank loans. Accounting is done either internally by a group member or externally by another villager. In the second chapter, I study the differences between groups with internal accountants and groups with external accountants. Economic theory suggests that repeated interaction between individuals can help to build social capital. However, in the context of these SHGs, the presence of an, often male, external accountant might hamper this process. I find that repeated interaction is more likely to create non-financial benefits in the form of mutual assistance and collective action when there is no external involvement. However, these benefits come at a cost, as SHGs with internal accountants distribute financial benefits more unequally and the accountants themselves receive larger shares than the other members of the groups. I provide evidence that the larger shares cannot be explained as a compensation for better financial performance, but that some form of elite capture occurs. Although this implies that an internal accountant is more expensive than an external accountant, there is no evidence that groups with an internal accountant are less stable. Members are not more likely to leave groups, possibly because the loss in financial benefits is outweighed by the gain in non-financial benefits. During my field work, I realized that women who are SHG members gain higher social status in the village. To better understand their role, I did a follow-up study in the autumn of 2010 which I use in the third chapter of my thesis. Together with Paolo Casini, I study the impact of collective actions undertaken by SHGs on the public good provision of the elected local authorities. We provide a simple model that suggests two hypotheses that we are able to test and confirm in our empirical study. The first hypothesis states that local authorities provide a larger variety of public goods when SHGs undertake collective actions, compared to a situation with exclusive provision by the local authority. The second hypothesis states that local authorities begin or increase the provision of public goods preferred by SHGs and that these might include goods that exert a negative externality on other villagers. We provide evidence of an important non-financial benefit of microfinance: it provides a platform that allows socially disadvantaged women to meet regularly and discuss problems. When they undertake collective actions to solve those problems, these are recognized by the local authorities: problems that are closer to the needs of women seem to find their way into the political agenda.

Date of Award	18 Nov 2011
Original language	English
Awarding Institution	University of Namur
Supervisor	Jean-Marie BALAND (Supervisor), Jean-Philippe PLATTEAU (Supervisor), William PARIENTE (Jury), Eliana LA FERRARA (Jury) & Rohini Somanathan (Jury)