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A miracle or a mirage? A study to evaluate the impacts of microfinance

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A miracle or a mirage? A study to evaluate the impacts of microfinance

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A MIRACLE OR A MIRAGE?
A STUDY TO EVALUATE THE IMPACTS OF
MICROFINANCE

by

Pushpinder Singh Puniha

A Dissertation Presented to the
FACULTY OF THE USC PRICE SCHOOL OF PUBLIC POLICY
UNIVERSITY OF SOUTHERN CALIFORNIA
In Partial Fulfilment of the
Requirements for the Degree
DOCTOR OF PHILOSOPHY
(POLICY, PLANNING, AND, DEVELOPMENT)

August 2015

Copyright 2015 Pushpinder Singh Puniha
ii

Acknowledgements
PhD is a long journey and you often lean on the strong shoulders of others to
complete it. I have done so, may be more frequently than my fellow travellers on this
exciting but arduous path. I was inspired to apply for the program by Prof. Gerald
Caiden. I found a ‘Guru’ in him; a motivational teacher and a hard task master.
Along the way, I met Prof. Peter Robertson, who navigated me to explore the
intellectual roots of several interesting ideas in public management. Trained in Neo-
classical tradition of economics in India, I had a different feel for public policy and
management until I was introduced by Peter to richness and depth of this subject. Prof.
Pierrette Hondagneu-Sotelo equipped me with the tools to explore any social issue. Her
curiosity to examine interesting social problems is infectious and I caught that infection
early in my interactions with her.
My wife, Harinder has been my loving companion, fierce critic, and pillar of
strength in this endeavour. She is intuitive and spontaneous. She gave me energy and
verve and I was revived as and when my spirits were down. My sons Uday and Abhay
bore pangs of transition from New Delhi to Los Angles with fortitude and equanimity
that belied their teenage years. They made hard adjustments and hid their angst and
anxieties of assimilating in the schools and cultural milieu of Los Angles, mostly behind
a smile, and sometimes with a stoic and brave silence. I am thankful to Uday and Abhay
for bearing this for me.
iii

My father, late Dr. Sukhdev Singh, had embarked upon a much more difficult
journey from India in 1964 to complete his PhD in plant genetics from LSU. He did it all
alone as he could not afford to bring his family along with him to the United States. That
degree changed the trajectory of his professional career in India and it made my life so
much more comfortable. My mother, Nirmal Kaur, lives with me in India and she has
maternal pride in my attempt to emulate my father.
Lastly, I thank the faculty and staff of USC Sol Price School of Public Policy. I
was warmly embraced and never made to feel foreign, when I came to USC in 2006 as a
mid-career professional to pursue a graduate degree in public policy. I have often
wondered what bug got into me to become a student all over again, after I had been a
civil servant in India for more than 20 years. I may never know that but I do believe that
warmth and honesty of purpose of everyone around me at USC nurtured that bug.
Pushpinder S Puniha
Chandigarh, India.
June 15, 2015.

iv

Table of Content
Acknowledgements ii
List of Tables v
List of Figures vi
Abbreviations vii
Abstract viii
Chapter One: Introduction to Microfinance 1
Various Discourses of Microfinance 3
Microfinance and Shifting Definitions of Poverty 8
Varied Hues of Microfinance Impact Evaluations 21
Chapter Two: Issue Framing of Microfinance as a Miracle 27
Affinity Groups to SHGs in India 37
Why Study Microfinance in an Indian Context 51
Chapter Three: Research Methodology 70
Mixed Method Research 71
Units of Analysis: SBLP and SHG 75
Data Sets of Research 78
Chapter Four: Research Findings 82
Mimetic Isomorphism and the SBLP 84
SHG as an Action Situation of IAD Framework 95
Conclusion 121
Bibliography 132

v

List of Tables

Table 1: Stages of development of a typical SHG 39
in India
Table 2: A comparison of SBLP with a typical 40
Grameen Bank model
Table 3: Growth of SHG bank linkage program 45
Table 4: Percentage of population below poverty 54
line across states of India
Table 5: Poverty percentages in India across 55
social groups
Table 6: Sources of credit in rural India 60
Table 7: Financial inclusion indicators across 65
countries in 2011
Table 8: Access to bank accounts across 66
occupation groups
Table 9: Sources of loans across income 67
groups
Table 10: Interest rates on loans across 68
income groups
Table 11: Multi-faceted activities of SHGs 105
of Kudumbashree, Kerala, India
Table 12: Services offered by SHGs in 905
four villages in Kerala and
West Bengal
Table 13: Loan purposes of SHGs in four 107
villages of Kerala and West
Bengal
Table 14: Comparative social statistics of 112
Indian States
Table 15: Comparative indicators of female 113
status across Indian State
vi

List of Figures
Figure 1: Structure of IKP, Andhra Pradesh, India 42
Figure 2: Self-help group bank linkage program 50
Figure 3: The structure of an action situation in a 102
IAD framework
Figure 4: Participatory planning and poverty programs 117
in Kudumbashree, Kerala
Figure 5: Organizational structure of Kudumbashree 119
in Alleppey, Kerala

vii

List of Abbreviations

ADS Area Development Society, Kudumbashree
APRACA Asia-Pacific Rural and Agricultural Credit Association
CBO Community Based Organization
CDS Community Development Society, Kudumbashree
IAD Institutional Analysis and Development Framework
IKP Indra Kranthi Patham
ILO International Labor Organization
LGB Local Self Government Bodies
MFI Microfinance Institute
NABARD National Bank for Agricultural and Rural Development
NGO Non-government Organization
NHG Neighborhood Group, Kudumbashree
RBI Reserve Bank of India
SBLP Self-help Group Bank Linkage Program
SEWA Self Employed Women’s Association
UNDP United Nation Development Program

viii

Abstract
My research uses institutional theory to examine how financial services are
delivered to the poor in microfinance. The structure and growth of a large microfinance
program in India is analysed to delineate its promise and problems. Data from public
agencies and NGOs is used to institutionally identify savings led self-help groups and
their linkage with state supported banks as a functional organizational field. Both
quantitative and qualitative data is utilized to argue that resource dependence of the
program on state agencies has caused structural homogenization of the field. The formal
rules, procedures, and precedents have come to dominate this field. The needs as well as
values of the poor have been pushed into background. Efficient provision of financial
services to the poor is unlikely from a mimetic and isomorphic growth of the
microfinance program.
A mutual group is a core feature of microfinance. The interviews and surveys of
Kerala Development Society of Kudumbashree microfinance program form basis of my
postulate that a self- help group and its role in a particular locale can be conceptualized as
an action situation of the Institutional Analysis and Development framework. The
template of Institutional Analysis and Development framework is used to analyse
complexity of trust and reciprocity among members of the group that varies with maturity
of the group, rules in play and blue prints of various jurisdictions that govern actions of
the group, and embedding of the group in local government structure in Kerala. My case
study shows that Kudumbashree has produced better outcomes because microfinance was
accompanied by administrative, financial, and democratic decentralization in Kerala.
ix

Similar results from microfinance are not likely in other locations in India that have a
different institutional and local governance structure.

1

Chapter One: Introduction to Microfinance
Microfinance needs little introduction. From a small social experiment initiated by
Muhammad Yunus in 1970s at Jobra, Bangladesh, it has grown into a global movement.
Microfinance’s core principals are simple and yet radical. Microfinance suggests the poor
are credit worthy. They act responsibly in repayment of their loans, although they have not
assigned any collateral security for the loan and they have typically not signed any legally
enforceable document to obtain the loan. The poor have potential to become self-sustaining
entrepreneurs. Also, the poverty trap can be broken by access to affordable credit in small
amounts at reasonable rates of interests. Microfinance has captured popular imagination,
too. Micro-financers believe that they directly touch the poor and their small contributions
in form of loans and other financial services make a difference in lives of the poor.
Arguably, microfinance extends a hand to lift the industrious poor into self-supporting
merchants or producers. The holding of hands empowers the poor and it boosts their self-
esteem.
Yunus initially gave small personal loans to impoverished soap makers and basket
weavers. He was surprised by positive impacts of the loans as well as consistency in
repayments. “It is vital that this point be understood loudly and clearly: that for lack of
U.S. $27, 42 persons were spending their lives engulfed within a vicious cycle of poverty”
(Yunus 1998, 51). Subsequently, Yunus started Grameen Bank to grant group loans to
self-employed poor women. Now, the bank has 2567 branches and it serves 81386 villages.
More than 96 percent of its 8.37 million members are women. The bank has disbursed
4,549,270 micro enterprise loans of U.S. $ 1987.9 million and achieved a loan recovery

2

rate of more than 96 percent (Grameen Bank 2013). It is estimated that microcredit has
reached a pool of 195 million persons across different nations and most of them had no
access to formal credit before (Reed 2013).
The apparent success of microfinance and the Grameen experiment won early
approval of the United Nations as well as the Noble Prize Committee. The year 2005 was
declared ‘Microcredit Year’ by the United Nations. Yunus and the Grameen Bank were
awarded the Noble Peace Prize in the year 2006. The Nobel Prize was given for their efforts
to create economic and social development from below. The citation of the Nobel Peace
Prize Committee commended several innovative and novel features of microfinance.
Firstly, microfinance has opened a way to give loans to the poor without financial security.
It was considered an impossible idea before Yunus and Grameen Bank showed how it
could be done. Secondly, Yunus and Grameen bank have demonstrated that poor are
capable of diligent work for self-emancipation. “Every single individual on earth has both
the potential and the right to live a decent life. Across cultures and civilizations, Yunus and
Grameen Bank have shown that even the poorest of the poor can work to bring about their
own development. Micro-credit has proved to be an important liberating force in societies
where women in particular have to struggle against repressive social and economic
conditions. Economic growth and political democracy cannot achieve their full potential
unless the female half of humanity participates on an equal footing with the male” (Nobel
Peace Prize Committee 2006). Lastly, the Committee also added a caveat to the role of
microfinance. It applauded Yunus’s vision to eliminate poverty in the world. At the same

3

time, the Committee noted that microcredit alone could not be expected to achieve this
goal, even though it may play a major part in fight against poverty.

Various Discourses of Microfinance
The poor have always saved and borrowed. This apparent paradox has been
observed across time and societies. For instance, the poor in rural Nigeria borrow and save
frequently among family members, friends, and neighbors. A typical poor household in
rural Nigeria is a borrower and lender 2.5 times (Udry 1994). Informal and mutual clubs
that rotate savings and credit have been found in most developing societies. Fritz Bouman
(1995) has noticed participation rates in rotating savings and credit associations ranging
from 50 percent to 95 percent among poor in Nigeria, Kenya, and Ivory Coast. Collins et
al. (2009) narrate a similar experience from a slum in Vijayawada, India. “Seema
negotiated a loan of $20 from a moneylender, at 15 percent a month, just after leaving a
meeting of her local savings cooperative where she had $55 in a liquid savings account”
(Collins et al 2009, 110). The poor also tap into some form of informal institutional
mechanisms to transfer small amounts of money. The hundi system in South and East Asia
has been well documented. It offered informal but enfo rceable agreements that allowed
moneys to be transferred quickly and cheaply and without strict documentation or security
(Suleri and Savage 2006).
The financial services network of the poor was flexible and it created workable
instalment plans. The loans could be paid off in small bits or large chunks (Rutherford
2000). The easy availability of informal credit in small denominations to the poor has been

4

often highlighted in India. The moneylenders’ contracts are highly flexible and the terms
of agreement could be changed in duration of loan, if the circumstances of the borrower
demand postponement of repayment within a reasonable time spam. Abhijeet Banerjee and
Esther Duflo (2011) found that in various slums of Hyderabad, India more than fifty
percent families remained loyal clients of the local moneylender, who charged much higher
interest compared to cheaper alternate forms of credit available to them. The data suggests
that flexibility of the moneylender’s contract is a more attractive option for them. Collins
et al. (2009) gave an example of Mohammed Laiq, who borrowed from a moneylender US
$ 32 with an arrangement to repay the sum through 50 daily instalments of 75 cents each.
He failed to meet this commitment. He repaid the loan in ‘batches of days’ and returned
$4-$6 at a time with long gaps in between. The moneylender accepted the loan repayments
and treated the gaps as normal incidence in his business (Collins et al 2009, 141). If flexible
financial access was available to the poor then what is new in microfinance?
Microfinance is arguably different from traditional financial services available to
the poor. Microfinance provides a transparent access to finance that is predictable in
availability and non-exploitative in nature (Roodman 2012). It is not limited in availability
because it is sourced from formal institutions that have a much larger pool of funds as
compared to informal financial networks of the poor. The predictability of financial
services breaks a perceived poverty trap caused by lack of access to loans at reasonable
rate of interest. The poor could not avail formal loans because they lacked a collateral
security. They could not accumulate assets to be used as collateral because they had no
credit to acquire any assets. Microfinance attempts to break this vicious circle by replacing

5

social network with physical collateral. Microfinance could break the information gaps
about the good borrower by insisting that new borrowers have social ties to the existing
clients. Mohammad Yunus believes that more among poor are ‘working poor’ rather than
helpless destitute. “All human beings are born entrepreneurs. Some get a chance to unleash
that capacity. Some never got the chance” (Yunus 2008, 2). Microfinance also asserts that
provision of predictable and reasonably priced credit bridges most of the market failures
facing the poor. Credit somehow helps the poor to overcome other handicaps like poor
health, low education, and lack of access to reliable public infrastructure. The markets are
presumed to be open and the micro-entrepreneurs are not barred from entry in the market
because of smallness of their operations. The supporters of microfinance believe that
availability of low cost and reliable credit has a causative and an ameliorative impact on
the poor.
Initially, microfinance institutions had similar features in their loan products. The
Grameen Bank provided loans to self-selected joint liability groups. Each member of the
joint liability group, who was typically a women received a loan that was secured by social
ties within the group and loan was a shared responsibility of the group. The entire group
suffered severe socio-economic consequences as and when any one group member
defaulted. The theory shows that consolidation of borrowers into groups that are
concentrated geographically and follow similar activities can save processing, screening,
and loan collection costs for the lenders (Hulme and Mosley 1996). Joint liability of the
group filters selection of group members and reduces the risk of adverse selection
(Armendariz and Gollier 2000; Van Tassel 1999). Self-selection of the group members taps

6

local networks of information that are otherwise not available to lenders. The theory also
demonstrates that peer monitoring and social sanctions within a joint liability group reduce
risk of moral hazard (Stiglitz 1990; Ghatak and Guinnane 1999). The joint liability group
could improve efficiency by lowering audit costs. In small micro-loans high cost of
external audit viz-à-viz size of the loan could be a strong barrier. The joint liability groups
do not need external audit. Instead close social ties, threat of strong social sanctions in case
of a loan default, small size of groups, and long lasting relationship among members as
also with lenders help to enforce in-time repayment of the group loans (Khandker 1995;
2005).
The joint liability group model may seem attractive but the emerging evidence has
cast doubt on its importance in microfinance paradigm. In an experimental study in
Philippines, Dean Karlan and Jonathan Zinman (2009) found no impact on timely
repayment or persistent default, when joint liability was randomly removed from the loan
groups. Banerjee et al. (2013) also observed that impact of joint liability on repayment
behaviour of the slum dwellers in Hyderabad remains open to question. The data in that
study neither supports nor condemns role of joint liability in performance of the
microfinance schemes.
Secondly, typical microfinance loans were of short duration of less than a year and
loans carried a nominal interest that could be as high as 40 percent. The interest rates for
the microfinance clients were high, even when micro-loans were sourced from state funded
institutions. Pallavi Chavan and R. Ramkumar (2005) trace the credit cycle of micro-loans
in India, where National Bank for Agriculturist and Rural Development refinances micro-

7

loans of commercial banks at concessional rates. NABARD provides refinance to
commercial banks at 7.5 per cent per annum, banks on-lend to self-help groups at 12-24
per cent, after training and capacity building of group members through NGOs and the
groups lend to individual members at 24 to 36 per cent per annum. Typically, loan
repayments started a week or two after disbursal of loan and loan was repaid in small
instalments that were collected in every weekly meeting. The joint liability has been
subsequently dropped by most of the institutions although structured repayment schedules
that break repayments into weekly, fortnightly, or monthly instalments and a reliance on
community networks through repayments at public group meetings are largely retained
(Armendariz and Morduch 2010).
Overtime microfinance has expanded to include a variety of financial products and
services. Savings and insurance are more or less an integral part of newer microfinance
programs and schemes. The ‘Grameen Bank II’ now includes individual liability loans and
the clients are encouraged to insure life and to open pension accounts. The previous strict
loan cycle has been made more flexible and the clients are permitted additional lines of
credit within a loan cycle, if they are faced with peculiar and emergent situations that drain
their liquidity. The flexibility varies according to credit history of the client. Similarly,
Self-Employed Women’s Association Bank, India now caters to all potential financial
needs of the women members. Every member is strongly encouraged to invest in health
insurance and pension schemes and a constant support is provided to ensure a default free
recovery of loan and interest. Raghuram Rajan (2013, 6) asserts that to become attractive,
microfinance products ought to address major financial needs of the poor: “Financial

8

inclusion does not just mean credit for productive purposes, it means credit for healthcare
emergencies or to pay lumpy school or college fees. It means a safe means of remunerated
savings, and an easy way to make payments and remittances. It means insurance and
pensions. It means financial literacy and consumer protection.” The current focus is on
financial services for the poor that are vulnerability reducing instruments. An access to safe
and remunerative methods of saving, remittances, insurance and pensions are considered
as important as provision for credit.
The social experiment of microfinance preceded the theoretical developments to
support its foundations but theory has helped to establish the microfinance paradigm. The
way in which microfinance has reconstructed and simplified the poverty riddle would
showcase microfinance’s popularity as a poverty alleviation tool.

Microfinance and Shifting Definitions of Poverty
Poverty is an acute form of human deprivation. Poverty is more than a lack of basic
necessities of material well-being. Poverty is also the denial of opportunities to lead a life
that meets the minimum standards of human dignity and tolerance. The life in poverty is
“shortened, made hard, painful or hazardous, deprived of understanding and
communication, and robbed of dignity, confidence, and self-respect” (Anand and Sen 1997,
3). European Union defined poor to be those persons, families, or groups whose material,
cultural, and social resources are so limited as to exclude them from the minimum
acceptable way of life in their country (European Commission 2010). This definition
followed Peter Townsend (1979), who argued that poverty was a multidimensional

9

construct and it manifested as an exclusion from participation in the normal aspects of
social life. Poverty was not only a failure to meet the minimum standards of nutrition or
subsistence but it was also a ‘relative deprivation’ to keep up with standards of the society.
Adam Smith had also focused on the shame and social exclusion associated with poverty.
For Smith, being poor was to be ‘ashamed to appear in public’ (Smith 1776/2012, 161).
He termed the necessities of life to be commodities which are indispensably necessary for
support of life as well as whatever customs of the community render ‘indecent for the
creditable people to be without’. He noted that custom has rendered leather shoes a
necessity of life in England and poorest person of either sex would be ashamed to appear
in public without them.
Poverty is a multi-dimensional social phenomenon in the academic literature. Yet
poverty is commonly defined and measured as insufficient income relative to some socially
acceptable minimal level. Currently, an individual income of less than two dollars per day
has been the most popular benchmark to define the poor. Income has been a convenient
and a more readily available proxy for the living standard of an individual or a family.
Income criterion is also easy to communicate and understand and it has been very effective
in raising public concern against poverty. Notwithstanding the popularity, income is an
inadequate indicator of the multiple dimensions of human well-being. For Amartya Sen
(1992, 109) poverty is the “failure of basic capabilities to reach certain minimally
acceptable levels”. Nourishment, clothing, shelter, avoidance of preventable morbidity,
and participation in the community are some of the dimensions of well-being highlighted
in the capabilities approach to poverty.

10

As the brief discussion above suggests, poverty has a rich and varied vocabulary.
Is poverty only about low income? Is lack of access to social services a measure of poverty?
Is denial of participation in the community a good indicator of poverty? Poverty has been
used to mean one or all of these at different times and places. Low income or consumption,
social exclusion, lack of capability and functioning, vulnerability, un-sustainability of
livelihood, and lack of basic needs have been various components of the understanding
about poverty. A brief historical review of the major poverty conceptualizations would
highlight these elements. Despite the differences in detail and features, the review would
show an underlying thematic unity in the definitions and measurements of poverty.
Benjamin Seebohm Rowntree was a pioneer of the income measurement of
poverty. Rowntree derived a socially acceptable amount of money needed to “obtain the
minimum necessities for the maintenance of merely physical efficiency” for the city of
York, England at the beginning of the twentieth century (Rowntree 1910, 86). He estimated
that a family of six needed 15shillings to buy food per week. To this amount, he added the
likely expenditure on shelter, clothing, fuel, and sundries. This gave him a poverty line
income of 26 shillings for a family of six per week and a poverty ratio of about 10 percent
in the city of York. Conceptually, the same approach has been the foundation of country
specific poverty lines used to define and measure poverty at different times. For instance,
in the United States poor families are those with a threshold income that is about 30 percent
of the median family income (Blank 2008). This minimum threshold income is called the
poverty line and those earning below this line are counted as the poor. In some developing
countries the poverty line is based on a minimum nutrition requirement. In India poverty

11

line is the income required to buy 2100 calories of food per person per day in urban areas
and 2400 calories of food in the rural areas (Planning Commission 2009b).
The income approach to poverty has ignored the role of the assets in the lives of the
poor. The assets are included only to the extent that their usage and application is reflected
in the income. The personal and intellectual endowments are resources that could be used
to satisfy everyday needs or to meet an emergency. Not only the current well-being but
also the future life chances of the individuals depend on their material and personal assets:
more so in a globalized market economy, where asset ownership is a precondition to
participate in the market exchanges (Williamson 2003; Bhagwati 2007; Prahalad 2008).
Income measurement of poverty also does not distinguish between structural or chronic
poverty and ‘churning,’ or transitory poverty. In the first category are those poor who are
trapped in poverty for long whereas the churning pools of the poor are those who keep
floating in and out of poverty as they face shocks such as ill-health or job loss. The two
groups are distinct and require different interventions and policies to fight poverty
(Ravallion 2001; Carter and Barrett 2006). The lack of databases of assets across
individuals often leads to their omission in the empirical studies. The failure to develop
sufficient analytical tools to include assets in the poverty analysis is another reason for
downplaying the role of assets in the poverty measurements.
In 1970s definition of poverty had become broader to include a set of basic needs.
The basic needs approach “shifts attention away from the goal of output maximization to
poverty minimization (Hicks 1979, 985). The public provision of the basic needs of the
poor in areas of education, health, and housing till the time they could afford these services

12

was a distinctive feature of this approach (International Labor Organization 1977; Streeten
1979). The basic needs comprise of both material and non-material needs and it includes,
among other things, satisfying employment, self-reliance, political freedom, cultural
identity and a sense of purpose in life and work. The basic needs approach made the
integrated rural development the primary tool of poverty alleviation.
In the 1980s isolation and powerlessness of the poor came to be highlighted.
Chambers (1983) pointed out many biases that impeded outsiders’ contact with rural poor
in general and with those in deepest throes of poverty, in particular. “Visibility and
specialization combine to show simple surface symptoms rather than deeper combinations
of causes. The poor are little seen, and even less is the nature of their poverty understood”
(Chambers 1983, 27). This research has focused on vulnerability of the poor to frequent
external shocks. The vulnerability is expressed in the poor as defenselessness, which means
a lack of resources to cope with external shocks without a lasting and damaging loss. This
approach led to a greater role for participation of the poor in definition and measurement
of poverty. The sustainable livelihoods became the new focus of poverty alleviation
schemes. The knowledge and information about the poor in remote and rural areas was
conditioned by the roads and vehicular access. The isolated areas of poverty, such as the
Tribal districts in Central India or the lower Ukambani in Kenya, were rarely visited or
researched. The wealthier families used their power and status to corner the roadside
houses (Moore 1981). The poor resided in dirtier and difficult to reach inner core of the
villages that was often ignored by the researchers as well as the government officials. Also,
project bias exists whereby research and funds got concentrated in already well-endowed

13

areas and segments of the community. There was also a seasonality bias too; officials and
data collectors visited the poor during the normal dry season while the real problems of
hunger and extreme deprivation manifested during the droughts and floods that frequently
shocked the poor. No families in the studied communities in Gujarat, India were below the
poverty line in a normal year, but the drought periods pushed almost sixty nine percent of
the households below this line (Moench and Dixit 2004).
The focus shifted to the capabilities as the definition of poverty in 1990s. Amartya
Sen (1983; 1992) argued that income was only a means to put in operation the ‘capabilities’
of the individuals that permitted their ‘functioning’ in the society. A minimally acceptable
level of certain basic capabilities could provide a comprehensive and a more objective
measurement of poverty. Also, the cost of conversion of capabilities into income varied
greatly between individuals and societies; both personal and social circumstances came
into play in this conversion. Inspired by the capabilities approach, the United Nations
Development Program came up with new ideas on development and poverty; development
as “the denial of opportunities and choices…to lead a long, healthy, creative life and to
enjoy a decent standard of living, freedom, dignity, self- esteem, and the respect of others”
and poverty as the “Human Poverty Index derived from three deprivations of longevity,
literacy, and living standards (UNDP 1994, 12). Longevity is the percentage of population
that dies before the age of forty, literacy is the proportion of adults with rudimentary
reading and writing skills and living standards is a weighted average of percentage mal-
nutritional children under the age of five plus the percentage of population with access to
safe drinking water and health services.

14

A related issue is how to collect the data on poverty. The household surveys are the
conventional method of collection of data on poverty. Typically these surveys are
conducted by public agencies like census bureau or statistical departments. In contrast
participatory poverty assessments are more open ended, interactive, and qualitative
methods of measuring poverty. The people define what constitutes poverty in the
participatory assessments (Salmen 1987). The ‘stages of progress’ method is a recent
example of the participatory poverty assessments (Krishna 2010). This method uses group
interviews to analyze community understandings of poverty and what factors lead an
individual or family into and out of poverty.
Has the research on poverty moved far beyond Rowntree? The answer is mixed.
The popular estimates of poverty are still income based and poverty lines are still calculated
as Rowntree had suggested. A good amount of guesswork goes into deciding the poverty
lines. In Angus Deaton’s words “poverty lines are as much political as scientific
constructs” (Deaton 2004, 6). The progress has been in refinement of the conceptions of
human well-being, capabilities, and relative deprivation. The challenge has been to develop
indicators of the expanded definition of poverty and collection of data of these indicators
across sufficiently large populations. Despite these limitations the newer definitions have
driven the poverty alleviation strategy beyond the growth in per capita income to include,
among other things, public services to improve health and education of the poor, social
safety nets, employment guarantees, and the access to credit. A brief discussion of other
seminal ideas of poverty alleviation would also bring out the newer dimensions of the
microfinance approach.

15

If poverty was the lack of income than growth of per capita income would be the
best remedy for it. In the 1960s poverty had become a subset of the macro-economic
growth issues. The empirical underpinnings of this postulate were provided by pioneering
study of the national incomes by Simon Kuznets (1955). Kuznets hypothesized an inverse
‘U’ relationship between economic growth and income inequalities. Initially, as the
population migrated from low productivity subsistence agricultural activities to high value
added industrial production in inequalities of income sharpened. Subsequently, as more
and more people were absorbed in the industrial activities in the urban areas the per capita
productivity improved in agriculture too. This would eventually lead to a more equitable
distribution of incomes and reduction in poverty. The empirical findings of Kuznets were
supported by theoretical inputs from Ragnar Nurkse (1953) and Arthur Lewis (1954; 1955),
who saw economic development as a process of big capital investments that narrowed the
‘dualism’ between the agricultural-industrial and informal-formal sectors of the economy.
The conception of poverty and possible solutions for it changed in l970s. Based on
more than two hundred and fifty field studies, the World Bank found that "more than a
decade of rapid growth in underdeveloped countries has been of little or no benefit to
perhaps a third of their population" ( Chenery et al 1974, xiii). The new 'growth with
redistribution" discourse made three important contributions to the economics of poverty.
First was that equity and growth were not necessarily incompatible. The conventional
wisdom that asked for a choice between them was misleading as was the dictum that rapid
growth would lead to reduction and eventual elimination of poverty through 'trickle down'
of the benefits to the poor. Second was that poverty had more to do with capital and

16

personal resource endowments than the inequalities of income. Poverty reduction required
strategies to redistribute assets, particularly land as well as preferential investment in
human capital (health and education especially) of the poor. Third, to reach the 'target
groups' of poor it was necessary to know who they were and to understand their linkages
with others. In absence of knowledge of linkages strategies aimed at particular regions or
sectors of the economy may not benefit the poor although poor may be concentrated
therein.
The 'growth with redistribution' approach led to public policies that directly
confront poverty. The public interventions included social safety nets for the poor,
protection of labor rights and compensation, subsidized public services for the poor, land
reforms, and promotion of wage employment in public works and in small businesses
(Birdsall and de la Torre 2001). Food for Work Program whereby unemployed poor in rural
India were given food grains to work on public infrastructure such as roads and irrigation
channels and the Minimum Employment Guarantee Scheme that provided assured wage
employment of hundred days in a year to those below the poverty line in India in 1980s
and 1990s are illustrative of the programs that directly attacked the poverty problem
(Planning Commission 2009b).
In the 1990s role of the market came to occupy the center stage. The open and free
international trade and investments, privatization of public enterprises, market competition,
deregulation of business and industry came to dominate the public space under the
‘Washington Consensus’ (Williamson 2003). Jagdish Bhagwati (2007) has eloquently
defended these policies. For Bhagwati free market exchanges and globalization had a

17

benevolent effect on the poor. The allocation of goods and services by the bureaucracy
was more skewed in favor of the well-connected and well-endowed as compared to a
market system. The market based policies had a mixed impact on the poverty. Most income
poverty estimates showed a decline in poverty rates from the1980s; more than 400 million
people crossed the threshold of $1 threshold during this period (Banerjee et al 2006). On
the other hand, a larger proportion of benefits of economic growth went to the better off
segments of the population. The share in income of the bottom twenty percent of the
population fell from nearly three and a half percent to approximately two percent
(Milanović 2005 ). The debate on efficacy of the market to impact poverty gave rise to
poverty policies that suggested a greater role for the civil society in poverty reduction
initiatives and called for protection of property rights of the poor as well as provision of
cheaper public services to the poor (World Bank 2004). Microfinance came into
prominence in the backdrop of the policy debates that desired retention of market based
approaches of poverty alleviation and yet demanded a greater flow or resources and
benefits to the poor.
An ultimate solution to poverty has been a Holy Grail among social scientists.
Poverty has been a subject of intense scholarly engagement at least since Adam Smith’s
inquiry into reasons for wealth or poverty of nations in 1776 (Banerjee et al 2006). The
role of market forces and the direct state interventions to reduce poverty has been hotly
debated and contested. Microfinance brings back the primacy of the market into poverty
alleviation policy (Ramachandran and Swaminathan 2005). Microfinance has adopted the
individual rationality assumption of the neo-classical economics. Microfinance has

18

presumed that the poor have sufficient agency to respond to the financial incentives. The
structural, institutional, and social stratification factors that were so important in some
other policies to alleviate poverty have been relegated to the background. For the micro-
financers the societal factors either did not create obstacles for independent rational action
of the poor or the small loans created social forces strong enough to overcome these
barriers.
Another related issue in the microfinance paradigm concerns the peculiar nature of
the property rights of the poor. To become entrepreneurs poor would need not only an
access to the market but clearly defined and enforceable property rights as well as a fair
dispute resolution apparatus. They might not possess these rights. Hernando De Soto
(2000) traced the problem of poverty in the developing countries to their failure to integrate
the assets, particularly land owned by the poor into the legal and market system. The poor
might possess the land but they do not own it legally. They could neither monetize the land
nor productively use it because of the lack of legal titles. Partha Chaterjee (2004)
highlighted the ‘extra-legal’ status of the poor squatters of Calcutta, India, who have
illegally lived on the government land with tacit approval of the municipal authorities for
decades. Large proportions of the poor have faced similar legality issues. The governance
principles of microfinance, based on property rights and market exchanges, might not be
applicable to the extra-legal poor, who at best own assets that can neither be monetize nor
can be put to productive use.
The access to credit and the process of starting an informal business might not be
as seamless as presumed in the microfinance paradigm. The power inequality between the

19

poor creditor and the loan giving banker or even between the poor creditor and the non-
profit mediator’s agent may be exploited for corruption, rent seeking and other favors
(Kalpana 2008). She found corruption and favor seeking to be a common practice in the
process of granting loans to the poor in her research of microfinance programs located in
South India. The corruption and favor seeking could derail microfinance programs in two
ways. First the real cost of credit would go up proportionately. Second the time and money
needed to pay bribes might deter the poor from seeking credit even though they could put
it to productive use. The barriers to entry into market may require scale of operations that
micro-entrepreneurs cannot reach. Even if these enterprises survive on the subsidized credit
for some time, their small scale and rudimentary technology would limit them to the fringes
of the informal sector (Bateman 2010). The micro-enterprises would end up perpetuating
the roadside shacks in underdeveloped countries and these shacks could neither uplift their
owners out of poverty nor could they be the vehicles of economic development.
The high transaction cost of small loans and decentralized financial services implies
that poor would invariably face high cost of finance. The data from different locales in the
world suggests that a rate of interest of more than 30 percent per annum is a norm in the
microfinance schemes. Would the poor have investment opportunities that could service
high cost credit? A related issue is whether micro-loans are used for business investment
or not. The evidence on these issues is mixed, at best.
Suresh de Mel (2008) found a real return on capital of 55 percent to 65 percent per
annum in micro-financed small enterprises of Sri Lanka. Other empirical studies also show
opportunities for the poor that may give returns that are higher than the cost of servicing

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expensive micro loans. The marginal returns on capital in the informal economy could be
as high as 100 percent in the developing countries (Karlan et al 2014). Esther Duflo et al.
(2008) estimated that small Kenyan farmers could earn a return of more than 69 percent
annually on marginal increase in fertilizer usage. The land was so starved of nutrients that
any marginal increase in fertilizer application could significantly push up per unit yield of
crops. A monthly return on capital of 5.5 percent in microfinance supported small
enterprises that were run by women in rural Kenya was also observed in a field study
(Dupas and Roinson 2010). In Pakistan, it is estimated that microenterprises on an average
earned return on capital and assets that lay between the ranges of 29 percent to 133 percent
(Shirazi 2013).
However, Jonathan Morduch (2013) has found that micro loans are used both for
consumption and for business investment and the split between the two categories is even.
Evidence from other studies also shows that all segments of society show large time
inconsistent preferences among consumption, savings, and investments. For instance, 90
percent of holders of expensive credit card debt simultaneously hold liquid assets, which
could be easily liquidated to pay of expensive credit card debt (Gross and Souleles (2002).
Collins et al. (2009) have observed many poorer individuals, who take expensive loans
even though they hold liquid savings. The apparent ‘irrational choice’ is explained by one
of the participants in the study as, “Because at this interest rate I know I’ll pay back the
loan money very quickly. If I withdrew my savings it would take me a long time to rebuild
the balance” (Collins et al. 2009, 111). It is more than likely that micro loan would be used
to smoothen consumption rather than in asset accumulation or business investment. The

21

primary use of microloan seems to be to reduce cyclical peaks and troughs of income and
consumption of the poor as well as to reduce adverse impact of health emergencies or other
life risks (Ledgerwood 2013).

Varied Hues of Microfinance Impact Evaluations
The experimentation in microfinance schemes is paralleled by another discourse
that traces varied judgement on impacts of microfinance. The initial euphoria was full of
exuberance and high achievements, whereas current assessment seems to reflect growing
disappointment and disillusionment with microfinance. Yunus often claimed that 5 percent
of the Grameen borrowers get out of poverty every year. Microcredit Summit Campaign
asserts that microfinance is a proven and cost effective tool to help poor lift themselves out
of poverty and improve the lives of their families. Shahidur Khandker (1995; 2005) cites
empirical evidence from Bangladesh to claim that microfinance not only gives a lift to the
extremely poor but it is also reduces their consumption volatility that may save them from
hunger and disease. Khandker examined two of Bangladesh’s leading microfinance
institutions namely, BRAC and the Grameen Bank. His research assesses long term poverty
impact of microfinance and he claims to answer crucial policy question whether accrued
benefits at the borrower level are due to sustained income impact or simple income
redistribution. His study found that moderate poverty declined by 18.2 percent in villages
that were treated with microfinance as against 12.6 percent in villages, where microfinance
was not operational. Further, poverty indices showed decline in poverty of more than 20
percent for the participants, who consistently availed of financial services of the

22

microfinance institutions from 1991-92 and 1998-99. Based on his data, Khandker
concluded that microfinance accounted for one third to one fifth of overall reduction of
poverty in Bangladesh.
On the other hand, some recent studies suggest a very modest or negligible positive
impact of microfinance. From an impact study in Manila, Philippines Dean Karlan and
Jonathan Zinman (2009, 3) conclude, “We find no evidence of improvements in measures
of subjective well-being; if anything, the results points to a small overall decrease”. Other
studies that used randomly controlled trials at different locations to evaluate impacts of
microfinance have found little to no evidence of any sustained increase in income or
consumption among those who availed of micro loans in comparison to the control group
(Augsburg et al 2012; Angelucci et al. 2013). Similarly, after surveying the recent impact
evaluation studies, Odell (2010) finds no clear effects of microfinance on the poverty ratios
in the population. Duvendack et al (2011), while re-examining the data used in a highly
positive evaluation by USAID of the microfinance program of Self Employed Women’s
Association (SEWA) in Gujarat, India, found that careful use of the data did not support
many of the claims of success. “Not only do these data and methods not provide support
for the idea that microfinance is highly beneficial to the poor, rather than, perhaps
benefitting a slightly better off group, but it leaves open whether microfinance is of any
real benefit at all, since much of the apparent difference between microfinance participants
and controls is likely due to differences in their characteristics rather than the intervention
per se” (Duvendack 2011, 44).

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Other recent evidence on positive impacts of microfinance on the borrowers is also
much more nuanced and qualified. Crepon et al. (2011) and Banerjee et al. (2013) find
some positive impact on well-being of the poor but it is limited to small sub groups of their
samples. Microfinance seems to have helped agricultural households only (Crepon et al
2011). The small positive impacts were limited to already profit making micro-enterprises
and impacts were significant only in those enterprises, which were in the highest bracket
of profit earnings (Banerjee et al 2013).
Milton Bateman and Ha-Joon Chang (2012, 13) go beyond the more common
critiques of microfinance and assert that “microfinance actually constitutes a powerful
institutional and political barrier to sustainable economic and social development, and so
also to poverty reduction.” They argue that the microfinance model ignores crucial role of
scale economics and thereby denies the importance of large investments for development.
Microfinance also ignores the ‘fallacy of composition’ and adds to the saturation of local
economies by microenterprises all trying to do the same or similar activities. Partly as a
result of this, it helps to de-industrialise and infantilise the local economy. Microfinance
fails to connect with the rest of the enterprise sector and so does not allow for synergies to
develop in productive activities, without which innovation and productivity improvements
do not occur. It is also argued that benevolent paternalism lay behind an excessive focus
on the potential of microfinance. Microfinance gives undue preference to an ideology of
equality of opportunity over economic justice (Copestake 2013). A narrow definition of
microfinance also risks contributing to the neglect of a wider development finance agenda

24

that includes improving financial allocations to the collective services needed by poor
people such as physical infrastructure, security, health and education services.
Aneel Karnani (2009) also finds the hoopla over microfinance to be over-pitched
and over-hyped. He cites evidence from China, Vietnam, and South Korea to show that
stable jobs, and not informal businesses, are necessary to reduce poverty. For Karnani, the
answer to poverty lies in the development of large and labor-intensive industries. Bateman
(2010) draws on his two decades of field experience in Bosnia to raise doubts on the
efficacy of microfinance to decrease poverty. In his judgement, microfinance draws
resources away from the small and medium enterprises. By providing wage employment,
the small and medium enterprises could have been better instruments of reducing poverty.
Lamia Karim (2011) has noted that microfinance and affiliated NGOs have become
a shadow state in Bangladesh. The microfinance NGOs have successfully commandeered
traditional power basis of the local community. In her field study, she notes that
microfinance NGOs constantly retell borrowers that loan repayments have to be made even
in case of death in the family and loan repayment have a priority over rituals of burial. She
cites instances where the collection agent have taken away cooking pots and utensils, which
is often used symbol of shaming strategies used by the NGOs to focus on the ‘beggar’
status of a loan defaulter.
The practices highlighted in Bangladesh are prevalent in other locations also. Large
scale violence against microfinance institutions took place in Krishna District of Andhra
Pradesh, India in 2006. Prabhu Ghate (2008) notes that explosive growth of microfinance
operations in this area was partly caused by repeat micro-loans to same clients from

25

different microfinance institutions. The cross borrowings to repay old debts had pushed
number of microfinance clients in a debt spiral. The violence against the microfinance
institutions was caused by strict and often barbaric debt recovery methods, which led to
allegations that as many as 200 borrowers had ended their lives (Reddy and Galab 2006).
This cycle was again repeated in 2010, when number of suicides were reported in Andhra
Pradesh, India on account of indebtedness pressure on poor farmers. In face of growing
public and media criticism Vikram Akula, the then Chairman of SKS Micro-finance, a for
profit institution of microfinance was forced to acknowledge that some of suicide cases
reported in the print media were related to borrowers of SKS Micro-finance (Mader 2013).
This led to imposition of a harsh regulatory law by the state government of Andhra Pradesh,
India, which necessitated registration of microfinance institutions with the district
governments in which they were to operate. The microfinance institutions of Andhra
Pradesh were also required to seek permission of government officials before sanctioning
new loans. This adversely affected the spread of microfinance in India and caused a
political uproar for more stringent regulation of microfinance institutions.
A more middle of the road impact assessment suggests that microfinance may not
pull the poor out of poverty but it makes marginal improvements in their everyday life
(Cowen and Boudreaux 2008). After examining microfinance programs across three
continents, they conclude that microfinance does not work miracles that the popular press
attributes to it but they argue that microfinance need not be magical to do a great deal of
good. Microfinance makes lives of the poor more bearable and easier to manage. Its
benefits are very real: “If a poor family is able to keep a child in school, send someone to

26

a clinic, or build up more secure savings, its well-being improves, if only marginally”
(Cowen and Boudreaux 2008, 32). Paromita Sanyal (2009) cites evidence to support that
microfinance positively impacts collective social behaviour of the women: one third of the
fifty nine microfinance groups studied by her undertook various collective actions. Sanyal
argues that microfinance groups facilitate collective empowerment of women by
promoting their social capital and normative influence.
Abhijit Banerjee and Esther Duflo (2011) questioned Padmaja Reddy, CEO of one
of the largest MFIs in India on her expectations of potential benefits of microfinance. The
likely impact on the poor is modest in estimation of Padmaja Reddy. Microfinance gives
the poor a hope and a vision to plan their future in a manner they never did before. They
borrow with a strict commitment to repay and that puts them on a trajectory of hard work
and savings. By purchasing a sewing machine or a television, the poor have a mapping of
future that is based on hope for improvement and not a life of drift and misery. In their
evaluation of slum dwellers of Hyderabad, who had access to microfinance for eighteen
months, Banerjee et al. (2013) found that microfinance was working for the poor but not
to a degree, scale, or in a manner that was propagated in the popular press. Those who had
access to microfinance were more likely to have purchased durable goods like bicycles or
televisions and they had started spending less on wasteful items but microfinance was not
leading to any transformation in life of the poor. There was no measureable evidence of
empowerment of the women. The expenditure on education or health also had not increased
perceptibly.

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Chapter Two: Issue Framing of Microfinance as a Miracle
A survey of the recent scholarly literature questions various claims of the micro-
financers. It suggests that the ‘win-win’ appeal of microfinance that it reduces poverty and
yields profits to the lenders may not be well substantiated. The data to validate the positive
claims of micro-financers is hard to come by and whatever has been collected does not
seem to prove the claims. The anecdotal data often cited to show positive impacts of
microfinance suffers from the problem of ‘endogeneity’ (Alexander-Tedeschi and Karlan
2010). The microfinance clients self-select themselves. It is more than likely that smarter
and less risky poor are preferred in the group selection. Also, the nonprofit organizations
or the public development agencies favor individuals and locations that show more
potential for success and growth. This implies that the clients of microfinance are on a
different life trajectory than the non-clients even prior to their introduction to microfinance.
The biased selection of recipients of microfinance invalidates conclusions based on
anecdotes that show immediate and positive gains from microfinance. The sample review
of impact evaluations of microfinance in different locales and settings in Chapter One show
large variance. The data of outcomes is scarce and it is often vitiated by selection bias and
endogeneity. The review also shows that definition of measurement indices is a problem.
Microfinance clients are very likely to enjoy initial advantages over non-
participants. Their profile of income, wealth, education, and health as well as
entrepreneurial abilities is usually much higher than non-participants. The tight schedule
of loan repayments that typically start within few days or weeks after disbursal of loan
require that household borrowing funds have sources of income other than the project

28

where they are investing the borrowed funds (Jain and Mansuri 2003). Another field study
also found that future microfinance clients enjoyed more income and wealth than their
neighbors, who chose not to participate in microfinance programs (Coleman 2002). More
than half of non-participants in a microfinance program in Bangladesh reported that they
opted out of microfinance because they perceived that they would not generate adequate
profits to repay the loans (Hashemi 2001). The self-selection bias whereby more motivated,
able, and endowed joined microfinance program would lead to over estimation of positive
impacts of the program. In an experimental study it may be possible to control visible and
observable characteristics of income, wealth, or age for purpose of making comparison,
but intangible qualities like entrepreneurial ability or strong motivation to improve family
well-being is extremely hard to capture and control. After accounting for self-selection and
locational bias, the positive impact of an otherwise successful microfinance program in
north-east Thailand was found to be insignificant (Coleman 2002).
Another critical aspect is reach of microfinance. It is often argued that
microfinance does not reach the poor and the poorest are consciously and deliberately
excluded from microfinance programs (Scully 2004; Simanowitz 2003). The exclusion of
the poorest is caused by number of factors. The extreme poor often opt out of microfinance
program because they lack confidence, skills, or literacy to engage with organizers of
microfinance program. They also very frequently consider the loans with tight and
frequent repayments to be too risky. Their uneven and irregular income streams in past do
not inspire confidence in them to venture into loans that require fixed weekly or fortnightly
repayment. Their life experiences make them highly risk averse to borrow for investments

29

that may yield incomes in near future. An additional factor is perception of the core poor
by other members of the group. The other group members have information of credit risk
default of the extreme poor. The group members would like to select others, who are better
off or at minimum as well off as they themselves are (Hulme and Mosley 1996). The
organizers of the microfinance programs may also prefer to deal with poor, who are
perceived to be less risky and less likely to default in comparison to the extreme poor.
The program design of microfinance has often militated against reaching the real
poor. The funding organization of microfinance programs often require the grant
applications to mention how the microfinance program is to be sustained. They desire that
financial consultants and evaluators ought to be hired to show self-sufficiency of the
program. As a consequence, funds available in microfinance programs frequently do not
reach the poor. “My guess is that between 10% and 25% of the funds actually reach the
very poor” (Yunus 1999, 109).
The self-sustenance focus deprives microfinance programs from concentrating on
the very poor. Yunus drew attention to this lacunae in design of newer microfinance
programs as far back as 1999. He noted that “most consultants have little orientation for
targeting the very poor despite the rhetorical commitment given by CGAP-members to do
so…Since 40% of multi-lateral and 45% of bilateral agencies do not currently believe that
poverty targeting is important in the context of support to MCPs, and even those agencies
that do believe it is important often give it lower priority than others (presumably more
important) issues, consultants rarely push the issue. Worst of all, sometimes consultants
try to convince donors to avoid or de-emphasize the poverty issue, since poverty-focused

30

MCPs often appear to be the most different from traditional financial institutions (i.e. the
most in need of being “set straight”) when compared to MCPs not focusing on poverty.
Too often they succeed in their arguments, or at least weaken the poverty targeting focus
of a project to make it meaningless in practice” (Yunus 1999, 111).
A related concern has been diversion of microfinance funding to those NGOs that
are operationally self-sufficient and have a track record and history. The traditional local
NGOs that have been engaged at community level to provide variety of services to the very
poor are increasingly starved of funds that are earmarked for microfinance programs. “A
process of differentiation is setting in whereby the future lies with the professionally
managed, exclusively microfinance NGO, with funding for other NGOs becoming
increasingly difficult. This process would particularly affect local NGOs or community-
based organizations that are arguably best placed to work with the poor. Towards this end,
the development of indicators towards microfinance capacity assessment and “credit
ratings” to screen NGOs for this propose can only be seen as a disabling device leaving out
in the cold many NGOs working with the very poor” (Tankha 1999, 74).
Also, microfinance itself is not a static or a fixed concept. It started as a credit
intervention. Over time, savings and insurance have become more prominent components
of microfinance. Micro-entrepreneurs of Jobra, Bangladesh, who were soap makers and
basket weavers, were the original template of microfinance clients. Microfinance was
supposed to break the vicious circle of poverty by provision of credit to micro-
entrepreneurs, who were starved of funds and could not expand or scale up their
enterprises. Now, microfinance is seen as vulnerability reducing and consumption

31

smoothening tool for the poor in general. The newer discourse of microfinance is far more
modest and limited. It is about making life of the poor more bearable and to give hope to
the poor of better possibilities in life. Micro-financers no longer boast that they could
eliminate poverty in few decades but they claim that microfinance is an effective and
needed social intervention and it has potential to improve quality of daily life of the poor (
Collins et al. 2009; Banerjee and Duflo 2013).
The above discussion suggests that miracle of microfinance seems to be more
imagined than real. Most positive impact evaluations are either anecdotal or could be
explained by factors other than microfinance. Very few studies have been able to isolate
impacts that could be exclusively attributable to microfinance and outcomes in these
studies are either neutral or mildly positive only. The magic bullet social intervention of
early twenty first century may have earned accolades too prematurely.

Issue Framing of Microfinance as a Miracle
A look at another miracle intervention of recent past may provide a useful guide to
explore future of microfinance. The discovery of Penicillin and the development of
antibiotics are “probably the most successful form of chemotherapy in the history of
medicine” (Aminov 2010, 1). In popular perception, the magic cure of antimicrobials
happened with Alexander Fleming’s discovery of Penicillin in 1928. This is partially true
only and it omits to mention a long history of human endeavour to fight infectious deceases.
For instance, Paul Ehrlich had postulated that it may be possible to synthesize chemical
compounds that act exclusively on the parasite harboured within the organism more than

32

twenty years before Penicillin was discovered. An antimicrobial drug named Salvarsan was
developed to treat venereal infectious diseases by 1915 and it was the most prescribed drug
to treat syphilis, till it was replaced by Penicillin in 1940s (Mahoney et al 1943).
Also, discovery of Penicillin did not lead to its ready acceptance or use. Rustam
Aminov (2010) has traced evidence to show that Alexander Fleming tried hard to interest
chemists to resolve issues of purification and stability of substances that constitute
Penicillin for more than a decade. He failed in his endeavours and he had abandoned the
idea of Penicillin by 1935. It was in 1944 that commercial production of Penicillin could
start, after Howard Florey and Ernst Chain could purify and stabilize sufficient quantum of
penicillin for clinical trial. The protocols to synthesize Salvarsan and Penicillin led the way
to development of number of classes of antibiotics in 1950s and 1970s. After 1970s the
discovery of new classes of antimicrobials has dried up, although combination and
modification of the existing salts of antibiotics have helped in meeting the challenge of
drug resistant bacteria (Chopra et al 2002). Many pathogenic bacteria have developed
resistance to antibiotics overtime. The bacteria could overcome Penicillin and other
antibiotics through enzymatic degradation. Antibiotics identify and bind critical ribosome
of bacterial pathogens, which prevent production of proteins. The pathogens perish because
they are deprived of essential proteins. Ada Yonath (2005) has noted that similarity of
human and pathogen ribosome make identification and binding of correct ribosome of the
pathogens is a tricky exercise. Also, overtime pathogens can modify the anchors that
antibiotics are to bind. For her, evolution of pathogens in this manner is probably the most
fundamental problem facing medicine today.

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The scientific endeavour to beat bacteria pathogens through Penicillin and other
antimicrobials has important lessons about other miracle interventions. The miracle is a
product of long struggle of research and development (Field et al 2014). It does not happen
suddenly or spontaneously. Neither are magic bullet interventions, maybe in field of
medicine or economics, result of one insightful experimentation. Good outcomes are
achieved in a dynamic process that requires constant innovation in face of newly emerging
challenges. Also, the miracle cure happens when the magic bullet is consistently applied
to the target and in the right dosage. Alexander Fleming had warned of the dangers of the
applying Penicillin in small and wrong dosage. He decried self-medication of the drug
because in too small doses Penicillin is likely to fail in clearing infection and yet it may
educate the microbes to resist Penicillin (Fleming 1945).
The problem framing of microfinance in the context of antibiotic experience raises
very interesting issues. The current disillusionment with microfinance may hide critical
lessons that are capable of revealing elements of microfinance programs that need to be
redesigned, modified, and amended to better serve the poor. How to identify factors and
issues in microfinance programs that require refinement? This is a critical policy question.
John Dewey (1938) has observed that social science ought to be guided by problems of life
and practice and the problems of social inquiry must grow out of actual social needs,
tensions, and troubles. “Any problem of scientific inquiry that does not grow out of actual
(or “practical”) social conditions is factitious; it is arbitrarily set by inquirer instead of
being objectively produced and controlled” (Dewey 1938, 499).

34

The purpose of an inquiry is situated in an environment that can be improved. An
inquiry is demanded by a social condition that is incomplete or problematic and some
action by citizens can improve the situation that exists today. The ultimate objective of
inquiry is not to change the belief of the inquirer or those who would be impacted by the
inquiry. The goal has to be resolution of problematic situation. For Dewey (1938) values
are constructs that are time and location specific to solve practical problems. A value that
was evolved and constructed to address a problem may become out of date and it may
outlive its usefulness. An inquiry may distil the values that have become a hindrance and
an obstacle in capacity of those who may otherwise adequately deal with their current
worries and problems.
Also, any meaningful inquiry has to discover why projects work rather than whether
they work (Deaton 2010). How poor in low-income countries escape from poverty may not
be empirically evaluable from any study of actual projects or programs, howsoever
rigorous it might be. “Finding out about how people in low-income countries can and do
escape from poverty is unlikely to come from the empirical evaluation of actual projects or
programs, whether through randomized trials or econometric methods that are designed to
extract defensible causal inferences, unless such analysis tries to discover why projects
work rather than whether they work – however important the later might be for purpose of
auditing” (Deaton 2010, 3). The study of the poor draws upon all branches of economics.
The purpose of inquiry here is not only to build mechanisms and predictions but it is an
accumulation of useful knowledge and understanding.

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Joel Mokyr (2009) has explored industrial revolution in Britain as an outstanding
example of economic development. The learning of new production processes was mainly
through trial and error although very often artisans or craftsmen, who experimented in
factories and industrial sheds, shared their experiences with leading scientists through local
societies that harnessed useful knowledge to apply it for benefit of mankind. The progress
was uneven. New processes could be easily adapted in chemical or mechanical fields
because of lack of heterogeneity. The same practice could be applied universally. At the
same time progress was slow in agriculture, where soils and other farm conditions varied
and the differences or heterogeneity was large. The scientific or theoretical understanding
ultimately defeats heterogeneity of experiences but such precise knowledge often lay many
decades in future. Perhaps microfinance is yet in a trial and error stage and research ought
to concentrate on refining and calibrating practices of more successful programs in the
historic tradition of applying useful knowledge for benefit of the poor.
The crucial search is to delineate mechanisms behind positive development
outcomes. Fixed prescriptions of ‘knowing that’ soon give way to ‘knowing how’ because
any implementation is an evolutionary process (Pressman and Wildavsky 1979).
Implementation and evaluation of a microfinance schemes look at the same issue from two
different angles. Implementation is the experience that is subsequently questioned and
interrogated by the evaluation. In a slightly different context Eugene Bardach (2004) also
drew attention to this issue. He noted the need to understand how actors in a policy situation
adapt and customize programs to suit their context and environment. He lamented that

36

conceptual framework to understand such adaptations and improvisations are hard to come
by.
I have examined SHGs and their linkages with banks by drawing sustenance from
academic literature that emphasizes empirical inquiry into questions posed by socio-
economic milieu. In my research, I analyse how SBLP delivers financial services to the
poor? Why have all states in India adopted self-help group bank linkage scheme to
implement microfinance programs? What underlying values are driving the growth of
SBLP program across India? These are significant policy questions as the state is
supporting SBLP by providing concessionary finance to banks to implement the SBLP.
Both RBI and NABARD have very consciously and deliberately brought changes in
statutory law to make financing of SHGs a part of mainstream lending by the banks.
Two related issues explored in this study pertain to Kudumbashree program of
microfinance in Kerala. This program has been praised in official evaluations of the
microfinance schemes and number of other states in India propose to implement similar
programs in their areas (Ramesh 2007). Why Kudumbashree produces outcomes that are
apparently better than other state supported microfinance schemes in India? Kerala is a
state that is high on social indicators of well-being but its economic growth has been
disappointing in recent years. The credit for high social indicators goes to decentralization
of finances and administration in Kerala. How has decentralization played out in spread of
microfinance in Kerala? This is another issue that is investigated in this study.

37

Affinity Groups to SHGs in India
Are SHGs unique to India or similar financial groups operate in other countries too?
How SHGs were initially formed and why were the groups linked to banks for safe keeping
of thrift and to obtain credit? An exploration of these issues would provide clues to
understand processes and structure of activities within SHGs and their interactions with
formal financial institutions.
Rotating savings and credit associations permeate rural and urban landscapes of
most of the developing countries (Bouman 1995). The ‘chit funds’ or ‘committees’ are two
common and ubiquitous rotating savings and credit associations in rural India (Bouman
1989; Harper 1998). Overtime, the credit associations typically evolve in to instruments of
mutual savings accumulation too. The Tontine in Cameron and Senegal, Susu in Ghana,
and Bishi in India represent hybrid associations that serve as savings and social security
mutual clubs. Mutual aid emerged as an element of financial intermediation in rotating
credit associations as their members’ experienced economic growth (Bouman 1989).
“Case studies of financial self-help groups in Cameroon, Senegal, Nigeria and Gambia,
illustrate that the influence and the achievements of these African-styled associations go
far beyond the frontiers of the financial landscape into other fields, such as social security
and insurance, physical and institutional infrastructure, recreation, community
development, health, and education” (Bouman 1995, 382).
SHGs in India can be seen as a contextual expression of mutuality of the rotating
savings and credit associations. SHGs consist of ten to twenty women of homogenous
background, who are motivated to come together through a non-governmental organization

38

or a state supported agency to address their common problems. The group members are
encouraged to save regularly and pooled thrift is used to give small interest bearing loans
to members of the group. The group activities are centred on financial discipline and the
group members learn to prioritize needs, set mutually acceptable terms and conditions of
savings and loans, and maintain accounts. SHG handles financial resources that are much
more than individual capacity of the members. The group processes make members aware
that resources are limited and have a cost. The banks are encouraged to give loans to SHGs
in multiples of accumulated savings of the group, after the SHG has handled savings and
loans for more than six months. The bank loans are given to SHGs without any collateral
and at market rate of interest. The group decides terms and conditions of disbursal of bank
loans among members without any interference or appraisal by the bank. The accumulative
savings of the group are part of aggregate loans given to the members and each member
knows that her savings are at stake, if she defaults in repayment of loan. SHGs of India
also provide financial help in time of need as well as a social security net for the members
(Ghate 2008; Kroop and Suran 2002; Tankha 2012).

39

Table 1: Stages of development of a typical SHG in India

SHGs of India and their linkages with banks are very different from joint liability
group of the Grameen Bank of Bangladesh. SHG starts with pooling of savings of the
members. SBLP of microfinance is not a credit driven program and it aims to provide a
package of financial services to the poor. First linkage with the bank occurs when SHG
opens a savings bank account with the branch. The group handles mutually saved and
loaned resources for a minimum period of six months, usually a year or more, before it
approaches a bank with a credit proposal.

Phase 1:
Savings
 Group chooses an amount to be saved
by all members in every meeting
 Group opens a savings account at a
nearby bank
Phase 2:
Inter-lending
 Savings continue and book keeping
begins
 Group lends savings to members and
decides amounts and interest rates
Phase 3:
Bank Linkage
 Savings and lending continue within
group
 Group approaches bank for credit, up
to four times the amount saved
Phase 4:
Sustainability
 Group manages savings, lending, bank
credit, and book-keeping without
subsidy
 Group aids members to participate in
mainstream socio-economic activity

40

Table 2: A comparison of SBLP with a typical Grameen Bank model
SBLP Grameen Bank Model
1. Loan is given by a commercial
bank
2. Group members keep records and
undertake bank transactions
3. Loans are granted to SHGs, which
on lend to members
4. Smaller loans, lower interest rates
5. Savings for 6 to 12 months are
needed to become eligible for
borrowing
6. State subsidies are given to SHGs
by way of grants equivalent to a part of
the loan
7. Broader social agenda; skills
training and savings program
1. Lender is the MFI
2. Record keeping and bank
transactions are done by MFI
3. Loans are given to members
individually; originally on a joint
liability basis and without a joint
liability of group under Grameen II
4. Larger loans, higher interest rates
5. Loans are given without any prior
savings period. No savings collected
by MFIs due to regulatory reasons
6. There is no subsidy element in
operations of MFIs
7. Uniformity of service, professional
recordkeeping practices
Source: Adapted from M. Harper M. 2002. “Self-Help Groups and Grameen Bank Groups:
What are the Differences?”
The SHGs are also motivated to form formal organizations at a village or a
municipal ward level. A typical SHGs federation is a registered society, a mutual benefit
trust, or a mutually aided cooperative society. Also, federated SHGs are embedded within
local governance system; a Gram Sabha or a Village Panchayat in rural area and a
Municipal Council or a Municipal Corporation in urban area.

41

This design and structure of microfinance is found across India. The hub of
microfinance movement in Sothern Indian states of Andhra Pradesh, Tamil Nadu, and
Kerala has a large concentration of SHGs and their federations. For instance, IKP of
Andhra Pradesh is an SHG based microfinance program of poverty alleviation that was
launched by the state government in the year 2000. The program now supports more than
998,000 SHGs that are spread over all 22 districts of Andhra Pradesh (Tankha 2012; World
Bank 2012). SHGs are initially federated at the village level and upper structure of the
program is closely aligned with higher institutions of local governance in Andhra Pradesh.
Diagrammatically, embedding of the program in local governance structure is depicted as
follows:

42

Figure 1: Structure of IKP, Andhra Pradesh, India

Source: Adapted from World Bank. 2012. Andhra Pradesh Rural Poverty Reduction
Project. Washington DC: World Bank.
Similar design and nesting of SHGs in local governance institutions is also apparent
in Kerala, India. SHG based microfinance programme called Kudumbashree in Kerala has
a three tier structure. The neighborhood groups consisting of 20 to 40 women members
22 ZillaSamakhya;
aligned with local
district administration
1099 Mandal
Samakyas; Structure
parallels sub-district
local governance
38,375 Village
Organizations
Coterminous with
Gram Panchayats
998,000 SHGs with 11.1
million members; 90%
coverage of poor
households all over the
state
 Quality control of Mandal Samakhyas
 Insurance and social safety nets
 Providing jobs to youth
 Convergence with government departments of state
 Quality control of Village Organizations
 Management of Community Investment Fund
 Auditing SHGs and Village Organizations
 Handling social issues
 Quality control of SHGs
 On-lending Community Investment Fund to SHGs
 Collective procurement
 Handling health and social issues
 Savings
 Internal lending
 Accessing credit from banks

43

selected from poor families meet every week in the house of a group member. The group
meetings are often attended by government officials, who explain welfare schemes of the
state to Kudumbashree members (Kurian and John 2014). All members bring their thrift
that is collected and recycled for internal lending in weekly meetings. Each neighborhood
group of Kudumbashree selects five volunteers to look after different functional
responsibilities.
The second tier is the area development society, which is formed by federating 10
to 15 neighborhood groups. The area development society has representatives from each
neighborhood group. The area development society has a patron, who represents that area
in the Village Panchayat. In urban areas the Municipal Councillor acts as chairperson of
the area development society. The highest stratum of Kudumbashree is the community
development society, which is a federation of number of area development societies. The
president of the Village Panchayat or the Municipal Chairperson in urban area acts as
patron of community development society. The design and embedding of Kudumbashree
program in local governance structure facilitates alignment of priorities of the poor within
policy framework of the local self-governance institutions (John 2009; Oommen 2008).
The nesting of SHGs in hierarchy of local governments has been a deliberate and
conscious choice. Some concerns were expressed at sustainability of SHGs. Several
essential services needed by SHGs were subsidized by government agencies or the NGOs
promoting the SHGs. Linkages with local government institutions of federation of SHGs
would facilitate provision of these services in a sustained manner and with funds, which
are available with long term certainty (Nair 2005). “The project consciously shifted

44

emphasis towards institution building of federations of SHGs, at Village, Mandal and
District level. These institutional platforms enabled specialization for higher order services
that required convergence with public, private and financial sectors. For example Mandal
Samakhyas managed BMCUs, and the Village Organizations managed Milk Collection
Centres at the village level. Similarly, micro insurance initiatives are managed by Zilla
Samakhya at the district level. This shift also meant emphasis on consolidation of
institutional development efforts and putting in place supplementary institutional and
technological support systems during additional finance phase to achieve higher
development impacts” (World Bank 2012).
The relationship between SHGs and Panchayats has been emphasized in official
policy of the government in India. Jairam Ramesh, the then federal rural development
minister observed that the central government has made panchayats the pivot around which
the implementation of the National Rural Employment Guarantee Act, Bharat Nirman and
the Backward Regions Grant Fund revolves. These programs are conceived as partnerships
between SHGs and existing local self-governance institutions. “Devolution of finances in
many instances is to elected Zilla Parishads and Gram Panchayats. There is really no
conflict between the two. SHG institutions can and must play a supporting role in social
mobilisation and in social audit” (Ramesh 2007, 3623).
The SBLP started as an experimental program in 1992. Only 255 SHGs were linked
to the banks by 1993 under this program. Initial positive reports led to implementation of
SBLP throughout India from 1998. The growth in formation of SHGs and their linkage
with banks for savings and loans has been rapid and robust. 4,451,434 SHGs had been

45

linked with banks and SHGs had outstanding bank credit of 205.8 billion Indian rupees by
2013 (NABARD 2014).
Table 3: Growth of SHG bank linkage program
Year No. of SHGs with
outstanding b ank loans
Loans disbursed to SHGs during the year
(billion Indian rupees)
1996 4,757 -
1999 32,995 .57
2002 4,61,478 5.45
2005 1,618,456 29.94
2008 3,625,941 88.49
2011 4,786,763 145.48
2013 4,451,434

205.85
Source: T. Nair and A. Tankha. 2014. “Microfinance India: State of Sector Report 2013,”
New Delhi: Sage India. NABARD. 2014. Annual Report. Mumbai, India: NABARD
Why different states in India have adopted SHG based microfinance programs?
Why the Grameen Bank model of microfinance was not replicated in India? Why these
programs have been nested in existing local governance structures in rural and urban India?
What factors have contributed to growth and sustainability of SBLP? These issues are
critical to understand growth of SHGs and the SBLP in India.
The SHGs in the present form have roots in credit management groups created by
an NGO named Myrada in 1980s (Tankha 2012).A brief look at how the affinity based
SHGs of Myrada emerged sheds light on critical characteristics of the SHGs in India.
Myrada had established number of co-operative societies in Karnataka, which had more

46

than hundred members each. A large number of co-operative societies started to break in
early 1980s. The members of the co-operative societies complained against poor
leadership and opaque management of the societies. The members were willing to repay
their loans to the NGO but they were unwilling to repay it to co-operative societies that
had been captured by one or two dominant families of the area. The NGO did not accept
the repayment offer but suggested an alternate. The loans could be repaid to the small
groups that had been formed in resentment to domination of the co-operative societies by
one or two individuals. This was accepted by the group members and the loans were repaid
to whichever group the members had chosen to join. This led to formation of first set of
‘self-help affinity groups’. Myrada called it affinity groups on the basis of a strong feeling
of affection and shared life experiences, which brought the members of each group together
and helped to bind it.
Aloysius Fernandez (2006) believes that the group affinity was based on
relationships of trust. The relationship was non-exploitative because it was based on certain
homogeneity among the members, which in turn led to voluntarism and willingness to
support one another in need. A common livelihood base or common origin also helped in
formation and durability of the small groups. The gender bonding was also a crucial
component and only five percent of the groups had both gender members. A similar activity
undertaken by each member like basket weaving was also one of the foundations of affinity
group and caste also had a role in formation of the affinity group.
The groups are motivated by hope of material gain as well as social benefits. For
women, social needs seem to have a priority because groups based on common affiliation

47

and compatibility meet a traditional need of women in rural India. In villages women met
frequently to share concerns and express togetherness at water points like village well or
pond. They had no other public space to meet like village square or the village shop, which
have been exclusive domains of the village men. With increased water supply through
pipes, the water spots of the villages have started to disappear. The opportunity provided
by a common meeting ground of SHG is welcome as it fulfils a vacuum created by forces
of economic development. The compulsory weekly meeting of the SHGs, the attempt to
manage affairs of the group by consensus, decisions on issues of import through debate
and discussion, and imposition of social sanctions for dysfunctional actions are behavioural
norms that are appreciated and readily accepted by the women members of the SHGs. At
the same time these are indicators of well managed and smooth functioning groups.
Initially, the groups focused on management of savings and credit. When Myrada
entered into a contract with the NABARD in 1986-1987 to promote these groups in a pilot
project, the name of the affinity groups was changed to SHGs. Overtime, the SHG has
come to mean a group of ten to twenty persons, predominantly women, from a homogenous
class, who come together for addressing their common problems. They are encouraged to
make small interest bearing loans to their members. In process of pooling savings and
giving mutual loans, they imbibe the essentials of financial intermediation, prioritization
of needs, setting terms and conditions, and accounts keeping. This gradually builds
financial discipline in all of them. They also learn to handle resources of a size that is much
beyond their individual capacities. The SHG members begin to appreciate that resources
are limited and have a cost. Once the groups show this mature financial behaviour, banks

48

are encouraged to make loans to the SHG in certain multiples of the accumulated savings
of the SHG. The bank loans are given without any collateral and at market interest rates.
Banks find it easier to lend money to the groups as the members have developed a credit
history. The groups continue to decide the terms of loans to their own members. Since the
groups’ own accumulated savings are part of the aggregate loans made by the group to its
members, peer pressure ensures timely repayment and it replaces financial collateral for
the banks loans. Apart from financial help in the time of need, the group also provides
social security to its members (Kropp and Suran 2002; NABARD 2006).
The next issue is the linkage of the SHGs with the banks in India. What were the
factors that prompted this program? Number of studies and surveys including the All India
Debt and Investment Survey of 1981 of the Government of India had shown large scale
financial exclusion of the rural poor. More than 38 percent of outstanding debt of the rural
households was financed by money lenders and other informal financial actors. NABARD
was formed in 1983 as the apex rural bank with a mandate to develop a sustainable credit
delivery system for the poor in rural India and to improve credit recoveries from programs
that targeted bank advances to the agricultural and the rural sector.
Drawing on field experiments conducted by Asia Pacific Rural and Agricultural
Credit Association and International Labor Organization, NABARD decided to engage
NGOs to bridge the gap between the formal banking structure and the rural poor. These
NGOs already had a presence and an identity in rural India through their role in community
mobilization and training and the NGOs were well-placed to lead a community-based
banking initiative. NABARD designed training programs for low-income women to save

49

and manage loans to build their capacity to access bank funds and to eventually manage
their own loans and savings without any NGO assistance (Reserve Bank of India 2013).
The self-help groups and their linkage to banks were subsequently replicated throughout
the country.
The network of actors and the activity flow in SBLP microfinance programs can be
summarized in the following diagram:

50

Figure 2: Self-help group bank linkage program

NGOs or Public Agencies
Provide Training and
Incentives to Form Mutual
Groups
Financially Excluded
Poor in Rural India

SHGs
Mutual Savings and
Loans Among Members
of SHGs
NGOs and Public
Agencies Assist in
the Linkage
SHGs Linked to a
Bank to Get Loans
Banks Refinanced by
NABARD for Loans to
SHGs

NABARD’s Mandate to
Alleviate Rural Poverty
Federation of SHGs
and/other Linkage with
Local Self Government
Through NGOs or
Government Mediation

51

Why Study Microfinance in an Indian Context?
Microfinance is closely associated with Muhammad Yunus and Bangladesh. The
social experiment of microfinance did not originate in India. Yet, India is at core of any
debate on microfinance. Why is it so? First, India is home to the largest pool of poor in the
world. Microfinance and its performance in India is closely observed and analysed as it is
the largest laboratory to test efficacy of newest tool of poverty alleviation. The World Bank
estimates that at the beginning of 2012 a little more than 23.6 percent of Indians lived on
less than US $ 1.25 a day. In numbers, 291.8 million Indians out of a total population of
1236.7 million were extremely poor in 2012 and were classified in the pool of most
vulnerable population of the world (World Bank 2014). The aggregate figures hide a much
starker and grimmer reality across social groups and geographical area as would become
evident in discussion below.
India has an official poverty line. The official poverty estimates in India are based
on periodic consumer expenditure surveys done by National Sample Survey Organization.
The surveys count number of people living in household with monthly per capita total
expenditure below a specified threshold. The initial poverty line was anchored to per capita
calorie consumption norms of 2400 and 2100 for rural and urban areas respectively (Deaton
2004). The poverty line was food calories based because major expenditure of the poor
went to meet their food requirements; more than 80 percent of expenditure was on food in
most of the studies. In 2005, an expert group under Suresh Tendulkar was constituted by
the Government of India to recommend changes in methodology to compute poverty
estimates. The Tendulkar Committee noted that official poverty line estimates suffered

52

from some deficiencies. The poverty line calculations had assumed that health and
education services for everyone would be provided by the state. It was no longer a valid
assumption and private expenditure on these services had risen sharply for all income
groups “It may be noted that while the new poverty lines have been arrived at after
assessing the adequacy of private household expenditure on education and health, the
earlier calorie-anchored poverty line did not explicitly account for these. The proposed
poverty lines are in that sense broader in scope” (Planning Commission 2009b, 2).
The original poverty line was based on consumption pattern and basket of good
services consumed in 1973-74. The goods and services available to the poor have changed
over time and their consumption patterns include newer goods and services that fall within
limitations imposed by their meagre incomes. Also, the initial poverty line was tied to
consumer price index for agricultural workers and this index consistently underestimated
increase in prices of goods and services. Overtime, the poverty line had not sufficiently
moved upwards to account for inflation rate that the poor suffered. After taking into
account changes recommended by the Tendulkar Committee, the poverty line was revised
upwards to Rs. 32 and Rs. 26 per person per day in urban and rural India in 2011. The
conversion rate of Indian currency was approximately 53 Indian rupees to a US dollar in
2011 and the official poverty line translate to a daily per capita expenditure of 50 to 60 US
cents.
The distribution of poor, who are below this poverty line in different geographical
jurisdictions, is tabulated below. A large pool of poor in India inhabits semi-arid tracts in
interior of India, which are dependent on rain-fed agriculture. The social barriers across

53

castes and land holding patterns in these areas have excluded a large proportion of
population from owning any economic asset. This deprives significant segments of
population from effective participation in economic activity. More than 53 percent of
population in Bihar, which is one of the largest and most populated states of India, lived
below the poverty line in 2009-10. In comparison, Punjab and Kerala had 15 percent and
12 percent of the population below the poverty line respectively. The unevenness of
poverty across states and concentration of poor in particular areas is evident from the
official statistics on poverty.

54

Table 4: Percentage of population below poverty line across states of India
State 1993-1994 2004-2005 2009-2010
Uttar Pradesh 48.4 41.0 39.9
Maharashtra 48.4 38.9 24.8
Bihar 60.6 54.6 53.6
Andhra Pradesh 44.7 30.0 21.3
West Bengal 39.8 34.9 27.1
Tamil Nadu 44.8 30.7 17.4
Madhya Pradesh 44.4 49.3 37.3
Rajasthan 38.2 34.5 24.8
Gujarat 38.2 32.5 23.2
Karnataka 50.1 33.9 23.8
Orissa 59.4 57.5 37.3
Kerala 31.4 19.8 12.0
Assam 52.2 35.0 38.5
Jharkhand 61.1 47.2 39.3
Haryana 35.8 24.2 19.9
Punjab 22.2 21.0 15.8
Chhattisgarh 51.1 51.0 50.3
Total 45.5 37.9 29.9
Source: Adapted from A. Panagariya and M. Mukim. 2014. A Comprehensive Analysis
of Poverty in India. Asian Development Review. 31:1-52.

A poverty percentage across social groups showcases another dimension of poverty
in India. The castes and tribes that were economically poorest and were subjected to
discrimination and deprivation had been identified in a government schedule. The target
groups of schedule castes and schedule tribes were identified for affirmative action and

55

reservation benefits. Despite specific policies to improve their living standards and
programs to bring them into mainstream of socio-economic life, they have continued to
suffered varying degrees of economic and social exclusion (Dreze and Sen 2002; Kijima
2006). The poverty ratios among social groups of schedule castes and schedule tribes are
more than 15 to 20 percentage points higher than the other groups.

Table 5: Poverty percentages in India across social groups
Social Group 1993-1994 2004-2005 2009-10
Scheduled Tribes 63.5 62.4 45.6
Scheduled Castes 60.2 51.0 40.6
All Social Groups 45.5 37.9 29.9
Source: Adapted from A. Panagariya and M. Mukim. 2014. A Comprehensive Analysis
of Poverty in India. Asian Development Review. 31:1-52.

India has achieved accelerated rate of economic growth since 1991. The Gross
National Income has risen at a rate nearly 6 percent per annum in this period. The rate of
economic growth has been substantially higher than the neighboring countries but
improvement in key social indicators has lacked behind. The United Nations Development
Program had developed a Multi-Dimensional Poverty Index that compares quality of life
across different countries and provides a more neutral estimate of poverty across countries.
It is estimated that nearly 54 percent of Indian population lived in households that were
multi dimensionally poor in 2005-06 (UNDP 2011). The economic growth of recent
decades in India has not translated into better living conditions for the poor, especially for

56

women. The poor suffer disproportionately from inadequate social services such as schools
and hospitals as well as paucity of physical services like clean drinking water, reliable
power, cheap transportation and public provision of sanitation because they cannot afford
alternate private services, which are far more expensive. India earmarks only 1.2 percent
of gross domestic product for public health and the annual expenditure on per capita on
health services is a lowly $39; China spent $203 and Brazil $483 per capita on public health
in 2010. Sanitation facilities in rural areas in India were worse than all the Sub-Saharan
countries taken together (Dreze and Sen 2013).
Secondly, the focus of microfinance has shifted from credit to savings and from
poverty reduction to improving quality of life of the poor (Banerjee et al 2013; Collins et
al 2009). The microfinance in India particularly, SHGs and SBLP are savings driven
programs of microfinance. SHGs and SBLP represent newer forms of microfinance that
are initiated and sustained by savings of the members. The credit linkage comes much later.
It took an intellectual battle to overcome an intuitive but a misguided view that poor cannot
save (Morduch 2011). Credit is also more attractive for financial institutions, which see a
business opportunity in investing in undercapitalized markets. These investments are likely
to earn higher returns of income. It is also far more difficult to establish mutual savings
institutions among the poor. In microcredit the lender bears risk of default but in a savings
led program the client or customer also suffers when a default occurs as her own savings
are at peril. “If a lender fails, the damage is primarily to the lender, not the customers.
Savings accounts, on the other hand, have to be safe and are expected to pay interest. If a
savings bank fails, the damage is primarily to its clients. For formal deposit taking

57

institutions to work in poor communities, you need regulation (to protect savers), business
models (so that the banks cover costs by reinvesting deposits), and technology (to slash the
costs of delivery to the poor). Each piece poses its own technical challenge” (Morduch
2011).
Thirdly, SHGs have risen partly in response to failure of cooperative credit societies
in India. These societies were supported by state and often guided by NGOs. A brief look
at history of cooperative societies in India as well as reasons for state focus on cooperatives
for credit delivery and financial inclusion would show that SHGs and their linkage with
banks are likely to remain a substantial part of financial architecture in India. Current
research suggests that modern cooperatives existed in ancient India. Patrick Olivelle (2013)
has shown that Kautilya’s Arthshastra, a Sanskrit text identified with Maurayan Empire of
ancient India prescribed that guilds of workmen performing cooperative work ought to
divide their earnings either equally or as agreed upon among themselves. However,
modern cooperative credit movement in colonial and post-colonial India has been a state
initiative. The colonial literature often commented on plight of poor marginal farmers;
‘Indian peasant is born in debt, lives in debt and dies in debt’ (Darling 1925). Cooperative
societies and banks were floated in rural India to encourage financial inclusion of the poor
and to save the poor from usurious rates of interests of the moneylenders. The cooperative
societies were inspired by success of similar institutions in Germany and Britain. The
Cooperative Credit Societies Act, 1904 gave an impetus to the movement. A Committee
on Cooperation in India was appointed in 1915 to review the performance of societies and
to suggest measures to strengthen the committees. The committee observed with approval

58

the close connection between the state and the cooperative societies. There was a run on
joint stock banks in India in 1913-14 and large deposits were shifted to the cooperative
credit societies. The committee noted that transfer of deposits was motivated more by close
connection of the government with cooperative movement and less by local character and
publicity of the cooperative societies. In its report, the Committee suggested that there
should be one cooperative for every village. It recommended a microcredit dispensation
based on principals of mutuality and cooperation. The Committee observed “that an
isolated and powerless individual can, by association with others and by moral
development and mutual support obtain in his own degree the material advantages
available to wealthy or powerful persons, and thereby develop himself to the fullest extent
of his natural abilities. By the union of forces material advancement is secured, and by
united action self- reliance is fostered, and it is from the interaction of these influences that
it is hoped to attain the effective realisation of the higher and more prosperous standard of
life which has been characterised as better business, better farming and better living” (RBI
1999, 1)
The Royal Commission on Agriculture, India (1927) noted that cooperation is the
best hope of rural India. The Reserve Bank India Act, 1934 specifically provided for
refinancing of cooperative credit. The intent might have been purposive and strong but
progress was neither smooth nor spectacular. By 1945, it was seen that cooperatives were
facing problems of frozen assets because loans were not repaid in time. The provision of
credit through cooperatives and commercial banks were to the extent of about 4 percent of
the total outstanding debt as at end-June 1951. The All India Rural Credit Survey of 1954

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highlighted need for institutional credit to rural sector through formal channel of
cooperatives and commercial banks. The survey report also stated that Cooperation has
failed, but Cooperation must succeed and it recommended for credit delivery through
cooperative channels (Pradhan 2013).
The RBIs first decennial report found that 92.8 percent of rural households relied
on informal financial sector. The moneylenders dominated the rural finance and credit and
as group they fulfilled around 70 percent of rural credit demand in 1950s. The studies of
that time suggested that any realistic system of rural credit should seek to incorporate
moneylenders rather than compete with them or wishfully expect to eliminate
moneylenders altogether (RBI, 1954).

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Table 6: Sources of credit in rural India
(Percent)
1951 1961 1971 1981 1991 2002
Institutional Agencies 7.2 14.8 29.2 61.2 64.0 57.1
Government 3.3 5.3 6.7 4.0 5.7 2.3
Co-op. Society/bank 3.1 9.1 20.1 28.6 18.6 27.3
Commercial bank incl. RRBs 0.8 0.4 2.2 28.0 29.0 24.5
Insurance -- -- 0.1 0.3 0.5 0.3
Provident Fund -- -- 0.1 0.3 0.9 0.3
Others institutional agencies -- -- -- -- 9.3 2.4
Non-Institutional Agencies 92.8 85.2 70.8 38.8 36.0 42.9
Landlord 1.5 0.9 8.6 4.0 4.0 1.0
Agricultural Moneylender 24.9 45.9 23.1 8.6 6.3 10.0
Professional Moneylender 44.8 14.9 13.8 8.3 9.4 19.6
Traders and Commission Agents 5.5 7.7 8.7 3.4 7.1 2.6
Relatives and Friends 14.2 6.8 13.8 9.0 6.7 7.1
Others 1.9 8.9 2.8 4.9 2.5 2.6
Total 100 100 100 100 100 100
Note: -- denotes not available.
Source: All India Rural Credit Survey (1954); All India Debt and Investment Survey, Various Issues.

After independence, India adopted planned development with the state playing a
major role in the economy. A consensus across political spectrum on paramount role of
state in economy had emerged in pre-independent India. The National Committee of the
Indian National Congress appointed in 1938 and chaired by the first Prime Minister of
India, Jawahar Lal Nehru as well as the ‘Bombay Plan’ of group of progressive citizens of
Bombay had advocated centralized planning with major investments to be undertaken by

61

the state (Thakurdas 1945). The nascent labor organizations in the country produced a
People’s Plan, which also supported a planned development of the economy with state
controlling the core sectors of production and distribution (Banerjee et al 1944).
A discordant note was struck by followers of Mahatma Gandhi. Their conception
was an India composed of largely self-sufficient villages. The industrial enterprise was to
be a predominantly village based and labor intensive cottage and handicraft units, which
could sustain large populations within villages itself. The large urban industrial units were
to be run in trust by entrepreneurs, who would hold capital as trustees of their community
and not as private individuals (Agarwal 1944). The village and cooperative activities were
central to Gandhi’s vision of future of India. Gandhi perhaps articulated this conception
most clearly in a piece published in journal, Harijan in 1942. “My idea of village Swaraj
is that it is a complete republic, independent of its neighbors for its own vital wants and yet
interdependent for many others in which dependence is necessary....As far as possible
every activity will be conducted on the co-operative basis….The government of the village
will be conducted by a panchayat of five persons annually elected by adult villagers, male
and female, possessing minimum prescribed qualifications” (Gandhi 1979, 308-09).
The role of state to control ‘commanding heights of the economy’ and
mainstreaming of excluded poor through rapid economic growth were core principles of
planning in post independent India. The Mahalanobis model of growth guided the planning
process in India from 1950s to the early 1990s. The Mahalanobis model conceived
economic growth to be dependent on rate of investment as well as distribution of that
investment. The model postulated that a higher proportion of investment in metal

62

producing and machine building sectors would lead to a higher rate of economic growth.
The model recognized three constraints in accelerating economic growth. The first was
savings that could be turned into investment. The second was foreign exchange to procure
equipment and knowledge from abroad to convert money investment into commodity
production. The third, and a transient constraint, was the likely mismatch in initial stages
of growth between production and requirement of consumer goods. The shortage in
consumer goods was assumed to be taken care by the cottage industries and the handicraft
sector. “The basic strategy of planning in India should be, on the one hand, to increase
investments in the heavy industries and also expenditure on services to increase the
purchasing power and create fresh demand; and, on the other hand, to increase the supply
of consumer goods by increasing investment and production as much as possible in the
small and household industries to meet the new demand” (Mahalanobis 1955, 15-16). The
strategy of inclusion of the poor in economic activity was summed up in 1962 by the
Perspective Planning Division of the Planning Commission as, “It is difficult to say a prior
what degree of inequality is necessary for growth; but a comparison of the distribution of
incomes in different countries is suggestive. It shows that in countries with different levels
of development and varying socio-political environment, the distribution of incomes
follows a remarkably similar pattern, especially in respect of the proportion of incomes
earned by the lowest three of four deciles of the population. If this hypothesis is sustained,
the income of the poorest segments as a result of spontaneous economic development may
be expected to increase in more or less the same proportion as the total income in any

63

country. The attainment of a specific level of minimum income within a given period
becomes purely a function of the rate of development”.
Mahatma Gandhi’s conception of ‘Self Sustained Village Republics’ may not have
become the focus of planning in independent India but it ensured that planned growth
strategies have been designed to cast a wider net over excluded regions and social groups.
As a consequence, inclusive growth has remained a consistent, though not a dominant
discourse in development strategy of India. Also, inclusiveness became a desired political
objective even though it was not an over reaching goal of the planning models followed in
India (Raj 1973). In an ‘intermediate regime’ inclusiveness retained its persuasiveness
within an ultimate goal of faster economic growth.
The inclusiveness of the poor was to be achieved through cooperative movement.
Jawaharlal Nehru, the guiding force behind the Indian state till 1962 often commented on
the plight of the poor. “I listened to their innumerable tales of sorrow, their crushing and
ever-growing burden of rent, illegal extraction, ejectments from land and mud hut,
beatings; surrounded on all sides by vultures who preyed on them – zamindar’s agents,
moneylenders, police; toiling all day to find that what they produced was not theirs and
their reward was kicks and curses and a hungry stomach” (Nehru 1980, 52).
Nehru’s prescription to ameliorate the poor was through rapid economic growth as
well as to engage the poor in communal and cooperative movements, which could take
advantage of traditions of peaceful co-existence in villages. “The village, which used to be
an organic and vital unit, became progressively a derelict area, just a collection of mud huts
and odd individual. But still the village holds together by some invisible link, and old

64

memories revive. It should be easily possible to take advantage of these age long traditions
and to build up communal and cooperative concerns in the land and in the small industry
(Nehru 1946, 534)”.
The centralized planning promoted cooperatives to provide credit needs of the
farmers. The state also setup special purpose government sponsored institutions such as
Regional Rural Banks, which were required to service financial needs of the poor,
particularly those who lived below a state mandated poverty line. After nationalization of
the major commercial banks in 1969, broad targets were mandated to channel credit to
sectors of the economy and categories of persons, who were excluded from access to
institutional finance. The result of all the efforts has been mixed and the data presents a
grim picture.
It is estimated that in 2013 only 36 percent residents had a bank account. In urban
India the proportion is 45 percent and in rural India only 32 percent of target population
has a bank account (RBI 2014). The World Bank has reported that only 7.7 percent of
population of age 15+ in India had taken a loan from a financial institution in the past year
and only 11.6 percent of this target population had a saving with a financial institution in
the past year (World Bank 2011).

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Table 7: Financial inclusion indicators across countries in 2011
(Proportion of Population of Age 15+)
Indicator Name
United
States
United
Kingdom
Germany
Russian
Federation
Brazil China India
CREDIT:
Loan from a financial institution
in the past year
20.1 11.8 12.5 7.7 6.3 7.3 7.7
Loan in the past year 44.6 28.8 25.3 31.9 23.8 29.4 30.6
PAYMENTS:
Checks used to make payments 65.5 50.1 7.2 5.2 6.7 1.8 6.7
Electronic payments used to
make payments
64.3 65.3 64.2 7.7 16.6 6.9 2.0
SAVINGS:
Saved at a financial institution in
the past year
50.4 43.8 55.9 10.9 10.3 32.1 11.6
Saved any money in the past year 66.8 56.7 67.3 22.7 21.1 38.4 22.4

Source: Adapted from Global Financial Inclusion Database 2011. Washington D.C.:
World Bank.
The aggregates figures hide a very sharp divide across states and regions and the
access of poor to financial services is exceptionally meagre. Only 14 percent of agricultural
wage labor, who earn an average annual income of approximately U.S. $ 355, operate a bank
account. In contrast, 95 percent of businessmen earning an average annual income of
approximately U.S. $ 8000 hold a bank account. The proportion of bank account holders
across occupation groups earning low annual income is less than 50 percent in all categories.
For instance, 45 percent self-employed workers, who earn less than U.S. $ 1000 per annum

66

have bank accounts and this proportion rises to 86 percent for salaried government workers
who earn approximately U.S. $ 2300 per annum.
Table 8: Access to bank accounts across occupation groups
Occupation Average Annual Income in US$
[Conversion rate 60 Indian Rupees =
1 U.S. Dollar]
Percentage holding Bank
Account
Agricultural wage labor 354.91 14
Wage Labor – non-agriculture 527.93 25
Own account worker 551.66 25
Street vendor 621.66 39
Other self-employed workers 994.78 45
Self-employed in primary production 1001.3 49
Part time earner 1075.11 50
Shopkeeper 1667.4 67
Private salaried workers 1761.16 68
Government salaried workers 2333.35 86
Self-employed professionals 5325.91 90
Businessmen 7983.08 95
Source: Adapted from Government of India. 2009. A Hundred Small Steps. New Delhi:
Planning Commission of India.
The data also showed that in 2007 only 34.3 percent of lowest income quartile had
savings and only 17.7 percent of this sub-group had a bank account. 29.8 percent of lowest
income quartile had availed of loans but only one in ten of these loans were from a bank.
Close to 40 percent of the loans by the lowest income quartile were sourced from relative
and friends and 39.8 percent of the loans came from moneylenders. In the highest income
quartile more than 45 percent of the loans were sourced from banks and this proportion was

67

lower than 10 percent for persons in the lowest income quartile. The All India Credit and
Investment Survey, 2013 estimates that for class of agricultural households that owned less
than 0.01 hectares of land, less than 15 percent of the loans came from institutional sources.
The proportion of institutional finance for agricultural households that possessed more than
10 hectares of land was as high as 79 percent (RBI 2014).
Table 9: Sources of loans across income group

Loan Sources
Source of loans across income group (In percentage)

Lowest income
quartile
Second income
quartile
Third income
quartile
Highest income
quartile
Relatives/friends 39.2 34.4 33.2 32.0
Moneylenders 39.8 33.2 25.8 14.8
Banks 9.6 20.7 33.3 45.8
Self-help groups 9.7 8.4 3.3 3.4
Cooperative societies 5.4 4.9 6.5 7.4
Chit funds/NBFC 1.6 1.9 1.5 1.2
Microfinance
Institutions
1.1 1.4 1.2 0.9
Others 1.0 0.9 0.8 1.4
Source: Adapted from Government of India. 2009. A Hundred Small Steps. New Delhi:
Planning Commission of India.

The cost of loans also varies dramatically across income groups. It is estimated that
48.4 percent of lowest income quartile loans paid an interest rate of more than 36 percent
per annum. In sharp distinction 40 percent of the loans of the highest income quartile are
financed at less than 12 percent per annum.

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Table 10: Interest rates on loans across income groups

Income quartile
Percentage of persons in income quartile paying interest
at the rate:
Less than
or equal to
12% p.a.
Between
12% to 24%
p.a.
Between
24% to 36%
p.a.
More
than 36%
p.a.
Lowest income quartile 16.0 16.9 18.7 48.4
Second income quartile 22.8 18.8 18.7 39.7
Third income quartile 29.1 26.1 18.7 26.2
Highest income quartile 40.4 24.5 11.7 23.4
Total 22.6 19.4 17.7 40.4
Source: Adapted from Government of India. 2009. A Hundred Small Steps. New Delhi:
Planning Commission of India.

The key indicators of All India Debt and Investment Survey of 2013 show a further
deterioration in access of the poor to institutional finance. Side by side, the share of debt
from moneylenders has risen sharply. For rural households, the share of debt from formal
sector fell from 64 percent in 1992 to 56 percent in 2013. The most significant trend was
withdrawal of commercial banks from lending to small and marginal farmers. The share of
debt from commercial banks of the cultivator households declines from 35.2 percent to
30.7 percent from 1992 to 2013. For all rural households, the share of debt outstanding
from moneylenders rose from 17.5 percent in 1992 to 33 percent in 2013 (RBI 2014).
The poor at the bottom of the pyramid also represent an invisible opportunity for
expansion of markets for the large commercial businesses. Extension of credit to the poor
so they may purchase durable or consumable goods produced by commercial enterprises

69

has a long history. “Consider how I.M. Singer & Company, founded in 1851, provided
credit as a way for millions of women to purchase sewing machines. Very few of those
women could have afforded the steep $100 price tag, but most could afford a payment of
$5 per month” (Prahalad and Hart 2002). The informal economy accounts for 40 to 60
percent of all economic activity in developing countries. The commercial enterprises need
to create buying power and shape aspirations of the poor so they may upgrade their
consumption from low quality products of informal sector to better quality goods from
large business enterprises. The current strategy to provide credit to the poor is based on
market forces and competition in India. “The financial sector does not ignore the poor
because of biases, but because the transaction costs in serving them are high. Initiatives
that reduce these costs will allow service providers to begin thinking of financial services
for the poor as a business opportunity and not as an act of charity” (Planning Commission
2009a, 79). Microfinance fits in with this strategy and it is an institutional reality of Indian
financial structure now and for the future too.

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Chapter Three: Research Methodology
My research questions are rooted in a real world problem. I examine SHGs and
their linkages with banks under a large microfinance program in India through the lens of
institutional theory. SBLP links the poor with formal financial institutions initially
through savings. It is an attempt to meet both savings and credit needs of the poor. I
explore how SBLP works and how this program has been designed and structured to
serve the poor. SBLP has seen a rapid growth in the last two decades. From a small
experiment in late 1980s, when a few hundred SHGs were linked with the banks, it is
now a large institutional reality of India with more than four million SHGs of the poor
availing credit from formal financial institutions. My research questions are guided by
John Dewey’s (1938) concern for focusing inquiry to current social situations that could
be improved.
In the recent past, microfinance was considered a magic bullet social intervention
that could transform lives of the poor. The power of finance, and in particular credit, was
supposed to break shackles of poverty traps that confront the poor. Microfinance
presumed that poor had sufficient entrepreneurial skills to put additional money made
available through microfinance to productive use. They could easily become micro-
entrepreneurs and earn returns on their investments that were not merely sufficient to
repay their loans but were large enough to significantly improve their income streams.
Yunus and Grameen Bank demonstrated how financial inclusion could be achieved by
convincing formal financial institutions that social collateral of joint liability groups of
the poor was a sufficient security to safeguard their loans. The subsequent narrative has

71

not been that rosy. The supposed benefits to the poor have not been significant and
microfinance is now seen as more of a vulnerability reducing instrument rather than a
transformative social intervention (Banerjee and Duflo 2013; Crepon et al 2011). As a
corollary, focus has shifted to fine tune and recalibrate design and structure of
microfinance programs so better outcomes for the poor may be achieved. My research
objectives are similar. I open the black box of SBLP by the tools provided by institutional
theory to understand how SBLP has overcome problems that beset microfinance
programs to grow rapidly as well as to appreciate its strengths and weaknesses in a
particular setting.

Mixed Method Research
I argue that mixed method research is best suited for my research questions. My
inquiry is a blend of both real world problem solving as well as conceptual clarification.
Neither numbers nor narratives, in exclusion of each other, may explain all facets of
SHGs and SBLP that I explore. Mixed method research is rooted in a pragmatic world
view. It is more of a problem centric approach. Mixed method world view is pluralistic: it
is neither exclusively reductionist and deterministic nor purely meaning and
understanding based. It is qualitative to the extent that it focuses on the participant
meanings. At the same time it also incorporates quantitative elements of empirical
observation and measurement. It is guided by theoretical perspectives but it is more
grounded in the problem orientation (Creswell 2009).

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Mixed method research acknowledges that all methods have inherent biases and
weaknesses. The usage of both quantitative and qualitative data increases the likelihood
that aggregative data would be more meaningful and richer and would be more useful in
answering the research questions. Both sets of data require interpretation and the
understanding emerging from data is likely to be more expressive and telling, if both
qualitative and quantitative interpretations support each other. In my study, I have used
qualitative data of APMAS (2OO6) collected through interviews with group members of
the SHGs that showed how same set of members of the SHG dealt with defaulting
members differently at two points of time. In the initial phase of the group formation, the
defaulting member was dropped from the group, although she faced extreme hardship
that was in knowledge of the other members of the group. The members were far more
tolerant of default, after the group had built solidarity and identity over a period of time.
A much more serious breach in repayment of loan was condoned by the group and the
defaulting member continued to be part of the SHG. I have triangulated this information
with quantitative data collected through a survey of SHG members, which detailed
reasons for drop outs from the SHGs. This data showed that a much smaller percentage of
members were expelled from the groups on account of breach of group discipline and
default in loan repayment. A much larger proportion of members quit the SHGs on their
own or on mutual agreement with other members of the group. Another quantitative data
set showed multi-faceted activities of the group as it matures. The common activities of
the members go far beyond pooling of thrift and sharing of bank loans, after the group
has been sustained for a significant length of time. The three sets of data, one qualitative

73

and two quantitative, were used to postulate that SHGs have varying levels of
transactional and relational trust and reciprocity and that degree of trust or its foundation
is not static but it is dynamic and oscillating. The triangulated data was linked with IAD
framework that focuses on trust and reciprocity within action arenas to suggest that SHG
may be fruitfully framed as an action situation.
Similarly, I have used both quantitative and qualitative information to examine
causation of mimetic pressures on SBLP. The quantitative data showed that state and line
departments have become major actors in formation of the SHGs in recent years.
Initially, SHG formation was primarily entrusted to NGOs and the NGOs were provided
funds by apex financial institutions to train bank officials as well as to build capacity of
members of the SHGs. In subsequent period, the task of SHG formation was more or less
exclusively taken over by the line departments and the state supported banks (Puhazhendi
2013). The increased pressure for compliance with desired structure of SBLP is
supported by qualitative data available through mandatory circulars and guidelines issued
by RBI and NABARD to the banks. A close reading of these instructions reveal that
Banks were directed to treat SHG funding as mainstream activity and a certain proportion
of concessional refinance to priority sector was specially earmarked for SHG advances.
These instructions of RBI and NABARD have force of pecuniary penalty behind them.
Any deviation may cause serious financial loss to the banks. Also, senior officials of RBI
NABARD often sit on selection and promotion committees of senior executives of the
state owned banks. As an example, the managing director of the State Bank of India is
selected by a committee that is mandated to include Governor of RBI. A combined

74

reading of both quantitative and qualitative data showed that formation of SHGs and their
linkage with banks may not be a ‘people’s movement’ based on values of efficiency or
competition, as it is often portrayed, but its design and structure is more likely to be a
result of mimetic isomorphic pressures that goad organizations to imitate design and
structure of existing organizations in that field to increase their own chances of survival
and success.
In my study, research questions and institutional theory are closely interwoven
and engaged. I have attempted to operationalize two well received and often researched
theoretical perspectives; on structure of an organizational field (DiMaggio and Powell
1983) and on a collective action problem within a group based on relational and
transactional trust and reciprocity that is located within a particular environment and
context ( Ostrom 2011). The research results have been generated through an iterative
process, where data continuously informs and fine tune the inquiry within the framework
of received institutional theoretical perspectives. An iterative approach has flexibility. As
new information and data is collected and examined, it allows change that meets needs of
research design, data requirement, and analysis methods (Yin 2009). Also, loops of
iterative cycles may begin small but repeated triangulation through information and data
permits a movement in to larger cycles of understanding and conceptualization. An
illustration from neighborhood groups of Kudumbashree would show how it has worked
in my research. The data on evaluation and formation of neighbor groups had repeated
reference to local governance structures in Kerala. The flow of funds from these
institutions to Kudumbashree and the nesting of neighborhood groups in wards of

75

Panchayat was highlighted as a distinctive feature of the program (John 2009; Kurian and
John 2014). I examined data and information of other state aided programs of
microfinance. Their nomenclature and points of emphasis were different. Each program
was perhaps more keen to highlight uniqueness of their experimentation as well as
innovative features of the program. However, a closer examination showed that SHG
formation followed a similar path and the groups were linked to banks and local
government institutions for funds, support, and viability.

Units of Analysis: SBLP and SHG
The iterative process also helped me to divide my research in two units of
analysis. SBLP is constituted in two distinct steps. First, group of poor women are
encouraged and motivated to form mutual groups that pool savings and prioritize respect
needs of the members. The group members are trained in processes of record keeping and
their capacity is built over time to deal with resources that none of them has ever handled
individually. After the members show trust in each other and carry out their roles within
rules and discipline of the group for a fixed time, usually six months to a year, the group
is linked to a financial institution to avail loans. The linkage to a financial institution is a
clear second step in the SBLP programs. The SHGs might be ubiquitous in India now but
it is the SBLP that forms an organizational field. Consequently, my first unit of analysis
is the organizational field of SHGs spread all over India and their linkages with the
banks.

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An organizational field is a legitimate unit of analysis and it draws attention to
totality of all relevant actors. “By organizational field, we mean those organizations that,
in the aggregate, constitute a recognized area of institutional life: key suppliers, resource
and product consumers, regulatory agencies, and other organizations the produce similar
services or products” (DiMaggio and Powell 1983, 148). An organization field is not
simply an aggregative construct. For actors in the field, it is a meaningful construct with
boundaries defined by perception of the actors. The definition of boundaries of an
organizational field is a difficult and complex problem. The conception of an
organizational field in this form, where relevance of relationships perceived by the actors
as well as relationships in a dynamic structuration are boundary defining agents give rise
to this vexed issue. How to operationalize the concept of organization field has engaged
number of researchers. In most cases, attempts have been made to somehow find
boundary defining agents that are clear to the actors as well as to the researchers without
doing any major violence to totality of relevant players in that field. One such conception
is to identify field as a center of dialogue and debate around a common thematic interest.
Here organizational field is a set of organizations that often have different objectives and
purposes. However, these organizations participate in a debate surrounding a specific
issue. All of them a have a deep and abiding interest in reproduction of institutional
practices or arrangements related to matter being discussed and debated (Hoffman 2001).
In another attempt, the concept of organizational field has been refined to mean a
functionally specific arena to meet challenges of demarcation of boundaries of the field
(Scott and Meyer 1991; Scott 2004). Here organizational field is a collection of similar

77

and different but interdependent organizations that operate in a functionally specific
arena. The boundaries of organizational fields are institutionally defined on the basis of
sources of funding or regulatory bodies. This conception of organizational field does not
represent totality of all relevant actors yet it maintains coherence with conceptual logic of
DiMaggio and Powell (1983). I have used definition of an organization field based on
functionality test in my research. I argue that the network of SHGs linked to the banks in
SBLP programs of microfinance satisfy all tests of a functional organizational field and it
is a well-defined and meaningful construct that is recognizable by the actors as well as
observers from outside.
SHG is my second unit of analysis. The boundaries and actors of SHGs are well
defined and these are easy to recognize and define. Group has always been central to any
debate on microfinance. The innovation of the Grameen Bank that attracted maximum
attention was formation and dynamics of joint liability group of the poor women. The
field data continues to support centrality of the group in microfinance programs.
Individual poor are hard to reach by formal financial institutions and they in turn find
financial institutions and their procedures too expensive and cumbersome to maintain a
lasting relationship. Varied forms of mutual groups of poor women, may be a joint
liability group of Grameen Bank, Bangladesh or an affinity group of Myrada, India, have
in their garb potential answers to many problems of providing formal financial services to
the poor (Ghatak 2013). SHG is among newer forms of microfinance groups that focus
on savings and provision of a package of financial services to the poor. My research

78

focuses on SHG as it remains core issue of microfinance today and it is likely to be
attention of research agenda in future too.

Data Sets of Research
I have used published data of RBI and NABARD in my research. Both
institutions publish monthly, quarterly, and annual reports on various financial indicators
of Indian economy. Another source of primary data is the Planning Commission of the
government of India. It conducts number of independent research studies on issues of
economic and social relevance and it also provides background data for number of
committees and commissions established by the Indian Parliament.
My research is also based on three detailed field studies of the SHGs and the
SBLP. The first study was conducted by the Andhra Pradesh Mahila Abhivrudi Society,
Hyderabad in collaboration with EDA Rural System, Gurgaon. This field study covered
214 SHGs in 108 villages of 9 districts located across 4 states of Andhra Pradesh,
Karnataka, Orissa, and Rajasthan. The selection of districts was purposive to represent
different agro-climatic and socio-economic regions. The SHGs were randomly sampled
within a criteria that all SHGs must be rural, constituted exclusively by women, and had a
savings account with banks for more than four years. At district and block levels, data
was collected from NABARD officers, bank managers, government agencies. The data
sets were primarily quantitative and a few personal interviews were conducted to
understand data collection methods of different agencies and the meaning of data. At

79

village level, both quantitative and qualitative data was collected through inspection of
records as well as interviews with NGO field staff, SHG leaders, and members in a
group. Interviews were also conducted with non-members drawn from the poorest part of
the village and village leaders to understand their perception of the SHGs and their
operations. “We were interested in the 'stories', whether 'light' or 'dark' and had detailed
discussions on some of these to develop into case studies. SHG members who had been
elected to the Gram Panchayat were interviewed separately” (APMAS 2006, 14). Focus
group discussions and review of records were carried out in each of the 214 sample
SHGs. Individual interviews were also conducted with 150 key informants like Panchayat
members, village secretary, school teacher, political party workers, husbands of SHG
members, and SHG federation leaders.
For my study of Kudumbashree microfinance program, I have used two data sets
of Kerala Development Society, Delhi. In their study to evaluate impacts of
Kudumbashree in 2009, Kerala Development Society collected primary data from all 14
districts of Kerala at all three structural levels of Kudumbashree namely neighborhood,
area, and community. In a purposive sampling, 66 Community Development Societies
were surveyed. A random sample of 3500 members of the neighborhood groups were
administered structured questionnaire that collected both quantitative and qualitative
information. 700 officials at different levels of local government were also surveyed to
collect information on the relationship between Kudumbashree and the various branches
of the local government. “The first questionnaire was divided into 8 sections with 95
questions. This was meant for eliciting information about the activities and impact of

80

NHGs. NHG is first tier of the KDMS (Kudumbashree) and its members are the
immediate beneficiaries of the programmes. The second questionnaire with 11 sections
and 44 questions was prepared for collecting information from functionaries and
members of ADS (Area Development Society of Kudumbashree) and CDS (Community
Development Society of Kudumbashree) and also from elected representatives and
officials of local government institutions” (John 2009, 10).
Side by side, qualitative data was also collected through observation and casual
interaction with respondents. A conscious effort was made to triangulate the quantitative
data collected through questionnaires with more intensive and non-structured interaction
with members of the NHGs and other participants in the program. “Focus group and
individual discussions were held beyond these two questionnaires. The researchers also
prepared case notes on the basis of their findings relevant to issues and objectives of the
research. Successful cases of selected KDMS (Kudumbashree) members, ventures and a
panchayat were also documented” (John 2009, 10).
In 2014, Kerala Development Society conducted an empirical study to clarify
methodological issues in data collection of SHGs (Kurian and John 2014). All SHGs in
two villages of Kerala were identified by using snowballing sampling technique. The data
collection by using leader of an SHG as a snowballing agent helped in locating all SHGs
and their members in the two villages. A census of all SHGs and their members was
conducted and all possible sources of data such as members of the SHGs, their leaders,
elected Panchayat officials as well as bank staff and officials of line departments of state
that interact with members of the SHGs were identified. Both structured questionnaires

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and semi-structured interviews were administered to all participants to build a data base
of all activities undertaken by the members of the SHGs in the two villages. The
quantitative and the qualitative information collected from the two villages of Kerala in
this study provide a dense description of repeated and myriad ties among members of the
SHGs and of the SHGs with local self-government agencies.

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Chapter Four: Research Findings
SHGs and their linkages with banks have undergone scholarly scrutiny (APMAS
2006; Fernandez 2006; Harper 2002; Lejano and Shankar 2013; Nair 2005; Seibel 2006;
Tankha 2012). The review of literature shows that SHGs in present form have roots in
credit management groups created by an NGO named Myrada in 1980s. As discussed
before, one discourse looks at SHGs as a popular response to capture and dominance of
credit societies by few influential and powerful individuals or families (Fernandez 2006).
The popular discontent was channelized into formation of affinity groups by
experimentation of local NGOs that were financed and supported by apex financial
institutions of the country. It suited NABARD and state owned banks to build an
institutional structure that could help them in meeting stiff mandated targets to grant
loans and advances to poorer and vulnerable segments of the society. The mandated
institutional lending to priority sector was considered a major policy initiative of financial
inclusion and of reducing dependence of the poor on high cost credit from money lenders
and other informal sources. SHGs would soon become a big and critical component of
priority sector lending by the banks, which was focus of all policy forums at that time
(Planning Commission 2009a; Harper 2002).
For Paul Lejano and Savita Shankar (2013), the SBLP model is an example of
bricolage. A bricolage uses fragments of pre-existing institutional principles in a novel
assembly to form new institutions. The participants along with policy actors combine
elements, routines, and designs at hand in newer ways of mixing and matching of elements
(Douglas 1986; Weick 1988). SBLP brought together different institutions, each able to

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provide only one part of solution of the problem. The state supported banks in India had
rural branches but they could not be accessed by low income groups. Small loans could be
serviced by state owned banks at prohibitively high transaction costs. The bank rules
required presence of customers in their branches at specific hours of the day, which the
poor could not manage. The NGOs were active in rural areas in community mobilization
and training and were well placed to participate in a local community based banking
initiative.
SBLP pieced together existing institutions to fit needs of the poor as well as
providers of credit and financial services to the poor. SBLP “used the existing
infrastructure of state-owned financial institutions to deliver financial services to the poor
by using NGOs as boundary agents. Earlier, even though the state-run financial institutions
had been specifically mandated to serve low-income groups, it was found that in practice
they were not doing so. To address this issue, a model was evolved that would enable these
institutions to better reach out to the poor. This is a macro-level type of bricolage, as two
distinct programs were combined and allowed to co-exist as local actors saw fit”(Lejano
and Shankar 2013, 91).
The active process of bricolage also happened at the household level. The SHG
members fitted multiple sources of loan into household budget contrary to program practice
of SBLP. The SHG members often indulged in double talk. They agreed to terms and
conditions of SBLP objectives and processes, while they employed convenient local
strategies to take advantage of concessional loans from wherever they could. The women
members of SHGs reshuffled their daily routines and schedule to attend many meetings

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that were mandated by different programs offering loans. In SHG based microfinance
programs “the household is an important site for bricolage” (Lejano and Shankar 2013,
99).
My research focuses another lens at the same data. I examine SBLP at two distinct
units of analysis. My first unit of analysis is the organizational field of SHGs spread all
over India and their linkages with the banks.

Mimetic Isomorphism and the SBLP
Institutional theory argues that institutions are socially constructed templates for
action. Institutions evolve and are maintained through continuous interactions among
actors, who assign meanings to their actions. The patterned actions and relations slowly
acquire a moral and an ontological status and they shape future negotiations and
interactions among actors. “No social process can be understood save as it is located in the
behavior of individuals and especially in their perception of themselves and each other.
The problem is to link the larger view to the more limited one, to see how institutional
change is produced by, and in turn shapes, the interaction of individuals in day-to-day
situations” (Selznick 1957, 4).
The scholarly interest in institutions reflects a degree of unease with predominance
of self-interest guided value of efficiency as the driving force behind decision making. It
also shows disenchantment with explanations of variations in formal structures of
organizations based on rational adaptations to technical and environmental conditions. It

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is not so much the technical demand of production that causes complexity in organizations.
The wider myths in institutional environments probably play a greater role in structure of
organizations as well as in decupling actual practices within the organizations from official
blue print or espoused policies (Meyer and Rowan 1977).
Institutions play a dual role in social action. They arise from and yet they constrain
social action. The stability and integration is created by social entanglements and
commitments. “Institutionalization constrains conduct in two main ways: by bringing it
within a normative order, and by making it hostage to its own history” (Selznick 1992,
232). The capacity of institutions to constrain and to cause compliance has been recognized
and emphasized for some time now (Zucker 1987; Scott and Meyer 1994). In this tradition,
institutionalization is not caused by diffusion but is an organizational level force that leads
to diffusion. The institutional processes through demands of centralized authorities or
regulatory agencies play a greater role than well-established beliefs, practices, and norms.
The environment ‘interpenetrates the organization’ and it has direct bearing on conformity
(Meyer and Rowan 1977; Sutton et al. 1994).
The idea that institutional pressures lead organizations to adopt same organizational
form is fairly well established and it is often reiterated. It is well recognized that the
institutional context provides “templates for organizing” (DiMaggio and Powell 1991).The
values of legitimacy and a strong motivation to improve their chances of survival goad
organizations to adopt mimetic practices. “Organizations tend to model themselves after
similar organizations in their field that they perceive to be more legitimate or successful.
The ubiquity of certain kinds of structural arrangements can more likely be credited to the

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universality of mimetic processes then to any concrete evidence that the adopted models
enhance efficiency”(DiMaggio and Powell 1991, 70).
Some field level predictors that encourage mimetic behaviour have also been
identified (DiMaggio and Powell 1983). Two postulates are particularly relevant to SHGs
and their linkages with banks in India. The first hypothesis predicts that where an
organizational field is dependent upon single or similar sources of support for vital
resources, then the level of isomorphism is likely to be greater. A related hypothesis is that
greater the extent to which an organizational field transacts with agencies of the state, then
greater is the extent of isomorphism in the field as a whole. The combination of the two
hypotheses suggest that rule-boundedness and formal rationality of government actors as
well as a greater role of institutional rules in state agencies would lead to greater
isomorphism.
The two hypotheses have been articulated in very clear terms. The first hypothesis
postulates that “the greater the extent to which an organizational field is dependent upon a
single (or several similar) sources of support for vital resources, the higher the level of
isomorphism” (DiMaggio and Powell 1983, 155). The resource suppliers put the
organizations under similar pressures and that is a causative factor for homogenization.
The causation may run through mandates or it may be more subtle. The grant criteria may
demand particular evaluative norms that show sustainability of the organization that
receives funds. The evaluation through designated experts may demand a particular
structure of the organization. The success of one kind of structured organizations to receive

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funds from a source may encourage new entrants into the organizational field to mimic the
existing firms.
The second hypothesis states that “greater the extent to which the organizations in
a field transact with agencies of the state, the greater the extent of isomorphism in the field
as a whole” (DiMaggio and Powell 1983, 155). The causative mechanism here is stronger
than the previous hypothesis. The state private sector interaction is thickly governed by
rules, instructions, and precedents. The pressure on state agencies to remain within their
rules, and in ambiguous fact situations to be bound by precedence and history, leaves little
room for values and myths. The rules of formal rationality prevail in these situations.
The data on SBLP strongly supports mimetic isomorphism. SBLP has been a state
aided microfinance program from the beginning. Myrada was given a grant by state owned
NABARD to begin experimentation of linking SHGs with banks. The capacity building
and training expenses of SHG members were financed by NABARD. Subsequently, task
of formation of new SHGs has been increasingly undertaken by government agencies and
state owned banks.
NABARD’s internal studies in 1980s had shown that most immediate and
important banking needs of the poor in order of their priority were as follows:
i. Safe keeping of their occasional small saving and thrift.
ii. Availability of consumption loans to meet emergent needs.
iii. Free and transparent access to financial services including
loans for micro- enterprises.

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These studies showed that process and procedures of rural banks were unduly
complicated and costly. The banks solely emphasized production loans and ignored
preference patterns of the poor, who wanted borrowings to tide over emergency situations
like ill health or a social obligation like death or birth ceremonies. The poor were able to
save, but they had no opportunity of safe keeping of their savings. The transaction costs of
small loans were prohibitive and financial products offered by banks were unsuitable for
the poor. NABARD’s conclusion was that programs for the poor have to be savings-led
and not credit-driven and that the poor must have a voice in design of products and process
associated with access to savings and loans (NABARD 2002).
The international organizations and agencies supported NABARD in linking SHGs
with banks. The World Development Report noted that “informal financial institutions
have proved able to serve the household, agricultural, and microenterprise sectors on a
sustained basis. Measures that link informal institutions to the formal financial system will
improve that service and ensure a competitive environment” (World Bank 1989, iv).The
policy dialogues at the umbrella organization for cooperation in agricultural credit among
nations of Asia and Pacific region, APRACA in early 1980s had observed that traditional
banking was ignoring creative human potential of the poor in Asia. The quality and
endurance of informal financial self-help groups in number of participating countries was
noted with approval in these deliberations. These groups provided cost effective and
valuable services to the rural poor by mobilizing their savings as well as creating a credit
portfolio with their members. In India, a task force was setup in 1987 by government of
India in collaboration with APRACA and NABARD to identify the existence of SHGs,

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undertake a sample survey of SHGs, and to draw plan of action to channelize flow of
savings and credits between rural poor and banks through SHGs. The task force team found
that “self-help groups, were largely (but not invariably) homogeneous in terms of caste and
activity, built a common fund from very small regular savings and interest income, and lent
to their members for periods of 1-3 months at an interest rate of 2-3% per month. Recovery
of these loans was excellent, and an impact, however small, was felt, reaching from
emergency assistance to release from bonded labor” (Seibel 2006, 56).
Empirically, it was found that access of SHGs to formal credit institutions was
minimal. The low resource base of SHGs to provide credit to members of the group limited
effectiveness of SHGs. NABARD’s internal research team posed a question as to ‘what
types of pilot or action-research projects need to be developed for evolving appropriate
linkage models?’ It suggested an answer too. A similar project of linking SHGs with banks
had been started in Indonesia in 1988 and NABARD proposed a modified version of the
Indonesian experiment. NABARD’s proposed strategy had three components. It suggested
that the linkage in India ought to use existing infrastructure of banks and non-government
organizations. Also, the first component of linkage should be savings and not credit. The
finance for loans to SHGs should come from commercial, rural, cooperative banks to scale
up the resource base of such linkage.
Hans Seibel (2002) has summarized objectives of the SHGs and their linkages with
the banks as follows:

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i. to evolve supplementary credit strategies for meeting the
credit needs of the poor by combining the flexibility, sensitivity and
responsiveness of the informal credit system with the strength of technical
and administrative capabilities and financial resource of the formal credit
institutions.
ii. to build mutual trust and confidence between the bankers
and the rural poor.
iii. to encourage banking activity, both on the thrift as well as
credit sides, in a segment of the population that the formal financial
institutions usually find difficult to cover.
The objectives show that financial institutions and the government of India were on
a look out for an organizational structure that could bridge the gap between formal financial
institutions and the poor. They considered SBLP to be an appropriate response to meet this
challenge.
How deep has been NABARD’s commitment to development and promotion of
SBLP? NABARD has confidently asserted that the program was conceived and nurtured
by it. NABARD was encouraged by other agencies and international organizations along
the way but NABARD’s own initiative to meet its mandated goals has been the prime
driver. Y.C. Nanda, the then Chairman of NABARD articulated it clearly and boldly in
2002. “NABARD developed the Self Help Group (SHG) bank linkage approach as the core
strategy that could be used to by the banking system in India for increasing their outreach
to the poor. The strategy involved forming SHGs of the poor, encouraging them to pool

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their thrift regularly and using the pooled thrift to make small interest bearing loans to the
members, and in process learning nuances of financial discipline. Bank credit to such SHGs
followed” (NABARD 2002, vii).
The form and objectives of SBLP could be easily woven into mission of NABARD.
The goal of NABARD has been to take formal financial institutions to rural areas in India
and to provide increased access to cheaper and assured credit to the rural poor. In a ten year
evaluation of the SBLP in 2002, NABARD looked back at what it had achieved through
SBLP and it laid out future of the program (NABARD 2002). “The corporate mission for
microfinance set by NABARD envisages reaching banking services to one third of the very
poor of the country, i.e. a population of about 100 million rural poor through one million
SHGs by the year 2007-08. The banking system has already reached microfinance services
to 40 million poor through SHGs, reinforcing this commitment, NABARD and its partners
are all set to traverse the path beyond the mid-mark” (NABARD 2002, viii).
A series of circulars issued by RBI and NABARD to public sector commercial
banks and rural banks show how SHGs and their linkages with formal financial institutions
was made a mainstream banking activity in India. The circulars issued by RBI and
NABARD are mandatory instructions for the formal financial institutions. RBI and
NABARD have a supervisory and regulatory authority over the banks and they are the apex
refinance institutions in India. Any guidance note from RBI and NABARD has a
compulsory mandate behind it and all formal financial institutions are expected to be fully
compliant. Any deviations have pecuniary penalties and it leads to administrative
consequences for the public sector bank officials, who are promoted by selection

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committees that include representatives from the RBI and the NABARD. As an illustration
RBI Circular dated 2nd April 1996 and Circulars dated 1st October 1996 and 7th October
1996 from NABARD to commercial banks, regional rural banks, and cooperatives required
these institutions to treat SHG lending as normal mainstream lending activity of banks.
SHG financing would be priority sector lending and it would be refinanced at concessional
rates by apex financial institutions of the country. There would be a separate segment for
SHG financing under priority sector. Also, SHGs could open savings bank accounts with
financial institutions even though the SHGs may not avail any loans. The defaults by a few
members of SHGs or their family members ought not to be a deciding factor in financing
SHGs and loans to the SHG would continue till SHG per se commits a default in
repayment. Another NABARD Circular of 21st February 1997 decried banks insistence on
keeping group savings of SHGs in savings bank accounts or in fixed deposits with their
branches as collateral for providing loans to SHGs. The banks were asked to take a
pragmatic view in the matter and the banks were advised against depriving SHGs from use
of their own thrift.
RBI issued a Master Circular on SBLP to all commercial banks in India in July,
2013. The circular mandated banks to provide adequate incentives to their branches to
finance SHGs and to encourage bank branches to establish linkages with SHGs. The
procedures of loans to SHGs were to be as simple as possible and bank branches were to
be given complete flexibility to suit local condition of the SHGs. RBI also advised banks
to meet entire credit requirement of SHG members. The banks were reminded to fulfil
promise made by central government in paragraph 93 of the Union Budget for the year

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2008-09, which stated that “Banks will be encouraged to embrace the concept of Total
Financial Inclusion. Government will request all scheduled commercial banks to follow
the example set by some public sector banks and meet the entire credit requirements of
SHG members, namely, (a) income generation activities, (b) social needs like housing,
education, marriage, etc. and (c) debt swapping” (RBI, 2013, 4).
The line departments of the state government use public funds to form and sustain
the SHGs and their linkages with banks. The annual budgetary allocation to the state
departments provides funds for this purpose. For instance, Kerala has a scheme of
providing matching state grants to the neighborhood groups (Kurian and John 2014). The
grant depends on amount of thrift mobilized by the neighborhood group and loan availed
by the group from the bank. The eligible neighborhood groups could avail a grant of 5,000
Indian rupees. Under this scheme of encouraging SHGs to maintain their linkages with
banks to scale their operations, 64,806 neighborhood groups were granted matching grants
of more than 236 million Indian rupees (Kurian and John 2014).
Initially task of forming SHGs was performed by NGOs. The members of SHGs
were familiar with local NGOs and their representatives in the villages. The NGOs had
been active in providing various social services for the poor. Slowly this task was taken
over by public agencies. “There is another dimension of what is happening in the SHG
movement that is worth recalling here. Six years back, almost two-thirds of the SHGs were
those promoted by NGOs. Today, a little over half of the SHGs are promoted by
government (which means mostly state governments), less than a third by the NGOs and
the balance by banks” (Ramesh 2007, 3621). This ratio has changed more dramatically in

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recent years. The data suggests that more than 80 percent of newly formed SHGs that were
linked to banks under SBLP have been created with active participation by line departments
of the state governments and public sector banks (Puhazhendi 2013). The new SHGs under
the Kudumbashree, Kerala are exclusively formed by the state agencies (Kurian and John
2014). The virtual take over take-over of the SHG formation and training of members by
the state agencies and financial institutions has obvious consequences for structure of the
SBLP.
The SHGs may have started as an institution of the poor with its own values,
functions, and mission but SBLP has often reduced them to become final link in credit
delivery chain of the line departments of the government and the banks (Fernandez 2006).
At a conceptual level, increased dependence of SBLP on line departments of the state and
public sector banks make it a good illustration of formal rationality prevailing over
substantive rationality. For Max Weber (1921/1968), economic action is substantively
rational to the extent it is rooted in value postulates or clusters of values that are preferred
by the actors. The choice of means to end is not banal but it is infused with values. In
contrast, formal rationality is calculation of means to ends based on universally applied
rules, regulations, and laws (Kalberg 1980). In formal rationality rules and regulations
imprinted in institutionalized procedures and precedents guide actions and not any human
value. The choice of means to ends is determined exclusively by the larger structures of
bureaucracies and their rules and laws. The rules and regulations of formally rational
institutions often lead to decisions that disregard the needs and values of actors. Weber saw
bureaucracies becoming ubiquitous because of their advantages over other mechanisms in

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discovering and implementing optimum means to ends. He was simultaneously aware of
the irrationalities of formally rational systems. Bureaucracies often become inefficient as
the regulations that are used to make them rational degenerate into set routines and red
tape.

SHG as an Action Situation of IAD Framework
My second unit of analysis is the SHG. The boundaries and actors of SHGs are well
defined and these are easy to recognize and define. Microfinance has been closely
associated with groups and their role in replacing financial collateral security to obtain
loans. The Grameen Bank provided loans to self-selected joint liability groups. Each
member of the joint liability group, who was typically a woman, received a loan that was
secured by social ties with the group and shared responsibility of the group. The entire
group suffered severe socio-economic consequences as and when any one group member
defaulted. For the economists, consolidation of borrowers into groups that are concentrated
geographically and follow similar activities can save processing, screening, and loan
collection costs for the lenders (Hulme and Mosley 1996). Joint liability of the group filters
selection of group members and reduces the risk of adverse selection (Armendariz and
Gollier 2000; Van Tassel 1999). Self-selection of the group members taps local networks
of information that are otherwise not available to lenders. The economic theory also
demonstrates that peer monitoring and social sanctions within a joint liability group reduce
risk of moral hazard (Stiglitz 1990; Ghatak and Guinnane 1999). The joint liability group

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could improve efficiency by lowering audit costs. In small micro-loans high cost of
external audit vis-à-vis size of the loan could be a strong barrier. The joint liability groups
do not need external audit. Instead close social ties, threat of strong social sanctions in case
of a loan default, small size of groups, and long lasting relationship among members as
also with lenders help to enforce in-time repayment of the group loans (Khandker 1995).
The joint liability group model may seem attractive but emerging evidence has cast
some doubt on its role in microfinance paradigm. In an experimental study in Philippines,
Dean Karlan and Jonathan Zinman (2009) found no impact on timely repayment or
persistent default, when joint liability was randomly removed from the loan groups.
Banerjee et al. (2013) also observed that impact of joint liability in group on repayment
behaviour of the slum dwellers in Hyderabad remains open to question. The data in that
study neither supports nor condemns role of joint liability in performance of the
microfinance schemes.
Why has group remained at the heart of microfinance programs, if it has little or no
impact on default rates of loan repayments or the timely repayments of loans? Is group
essential to reach the poor in microfinance schemes? The field data supports centrality of
the group in microfinance programs. Individual poor are hard to reach by formal financial
institutions and they in turn find financial institutions and their procedures too expensive
and cumbersome to maintain a lasting relationship. “There is little documented experience
till date where marginalised individuals have successfully accessed a facility which enabled
them to repeatedly borrow and repay from mainline financial institutions” (Fernandez
2006).Under Grameen II, joint liability of group may no longer be enforced, yet its design

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leans on solidarity groups; small informal groups of self- selected members coming from
the same background and trusting each other (Ghatak 2013).Thus, issue framing of
microfinance groups and the processes therein remain an important issue in microfinance.
I propose that IAD framework can be fruitfully used to unravel puzzle of SHGs
growth and sustainability. A brief sketch of core ideas and components of IAD would
facilitate my argumentation. The intellectual roots of IAD framework can be traced to
Alexis Tocqueville. Tocqueville was surprised by the ‘general equality of condition among
the people’ in the United States (Tocqueville 1954/1835). He also wondered why
democracy flourished in the United States, while monarchy persisted in a number of
European countries. His tentative answers were rooted in geographical isolation of the
United States that made it less vulnerable to complex European power relations. More
importantly, he drew attention to ‘habits of hearts and minds’ of citizens of the United
States that were mirrored in the institutions like churches, juries, and townships. These
institutions were built on principles of association and an informed respect for views of the
majority. “In no country in the world has the principle of association been more
successfully used or applied to a greater multitude of objects than in America….In America
the citizens who form the minority associate in order, first, to show their numerical strength
and so to diminish the moral power of the majority; and, secondly, to stimulate competition
and thus to discover those arguments that are most fitted to act upon the majority; for they
always entertain hopes of drawing over the majority to their own side, and then controlling
the supreme power in its name” (Tocqueville 1954 (1835), 256). The majority was never
static because the minority was always striving to accommodate in it views and opinions

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of more citizens so that it could attain the requisite numbers to become a majority. This
happened within the four walls of constitutional means and in a spirit of accommodation.
The peaceful existence of associated citizens was guarded by a constitution that was built
on checks and balances of authority and power. The pursuit of self-interest may have been
the driving force but the citizens were also motivated by fair play and associational
objectives. The ‘principle of self-interest rightly understood’ that was highlighted by
Tocqueville does not call for great acts of self-sacrifice, but it disciplined citizens of the
United States in habits of regularity, temperance, moderation, and self-command.
Similar strands of human social behaviour and social outcomes have been examined
in IAD framework. For instance, Elinor Ostrom's (1990) work on the commons showed
that self-governance is a viable alternate that communities have often evolved to avoid over
exploitation of common pool resources. The theoretical assumptions of individual
rationality command that each individual is likely to over use the common good and that
may eventually lead to a Hobbesian calamity of conflict and clashes. Ostrom (1990)
established both empirically and theoretically that self-governance in the commons is a
reality and it is possible to design human endeavours by ‘reason and choice’, howsoever
bounded and limited that rationality and decision might be.
The IAD is also grounded in the theory of rational choice, which assumes bounded
rationality and opportunism of individuals. Here the rationality is not absolute and perfect
and the self- interest of individuals is not limitless and exclusionary. In contrast to the
classical economic theory, the IAD recognizes values of reciprocity and fairness in humans
as one of the core principles governing their socio-economic relations and associations.

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Thomas Hobbes (1994/ 1668) had postulated that to avoid and curb self-interest motivated
conflict and clash communities evolve an authority external to themselves that imposes
and enforces rules and commands. Fear is the basis of ‘sovereignty by institutions’ of
Hobbes that is reached when citizens mutually covenant to obey a common authority. The
social covenant has two elements; renunciation or transfer of rights by the individuals and
authorization of a sovereign power external to individuals themselves (Lloyd and Sreedhar
2014). In contradistinction, the IAD views humans as fallible and imbibing beings, who
are broadly rational. They attempt to do the best they can in given situations by developing
heuristics, norms, and rules and they trust others within the community to follow the
mutually crafted rules and commands. In the IAD framework citizens “seek to improve
values of importance to them (including what happens to other individuals who are of
concern to them); select actions within interdependent situations in which what they do is
affected by their expectations of what others will do; use information about the situations
and about the characteristic of others to make decisions; and they try to do as well as they
can given the constraints they face” (Ostrom and Walker 2003, 39-40).
The IAD also focuses on language as an important component of associations
because language is the instrument that humans use to communicate, reason, and to
commit. The IAD subscribes to consistent and replicable experimental findings that face
to face communication increases levels of cooperation. Based on an experiment that
allowed communication among participants after ten rounds of a game, Ostrom et al (1994)
found cooperation rate of 73 percent among the participants after they communicated with

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each other. It compared very favourably with average rate of cooperation of 21 percent in
rounds that preceded communication among the participants.
The IAD is also closely associated with ‘polycentricity’. Polycentric connotes
many centres of decision making that are formally independent of each other. Whether they
function independently, or instead constitute an interdependent system of relations, is an
empirical question. Often they take each other into account in competitive relationships,
enter into contractual and cooperative undertakings or take recourse to central mechanisms
to resolve conflicts. If that be so, then they constitute a system (Ostrom, Tiebout, and
Warren 1961). The IAD lay emphasis on the ability of many independent units that are
multi-level, multi-purpose, and operating in different sectors to mutually adjust their
relationships with one another within a general system of rules. In a slightly different
context, Lindblom (1965) calls it decision making through mutual adjustment, which for
Lindblom is the core of democratic intelligence.
The IAD looks at a world that is more complex and layered than dichotomous
reality of ‘the market’ or ‘the state’. The critical issue is whether complex human
motivations and existence of multiple centres of power and decision making produce chaos
and confusion or does this complex reality still constitutes a system that is comprehensible
and consistent. The IAD demonstrates that it is possible to take into account all complexity
and yet derive rational choices and design of rules and authority that is both coherent and
productive. It does not rule out the possibility of destructive and perverse outcomes, but it
posits that often humans do create diverse community arrangements that are complex and
yet productive and innovative (North 1991). The IAD examines system of governance with

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overlapping jurisdictions and centres of power and it strive to show how citizens,
authorities, and jurisdictions operate within a system of rules and action arenas to act for
public purposes (McGinnis 2011).
In IAD framework, "duplication of functions” and "overlapping of jurisdictions" is
a positive development that calls on different municipalities to work out their own
problems (McGinnis 1999). In doing so, rules and action situations are created through
competition and complementarities among the different municipalities as well as co-
production among producers and consumers of public goods that result in efficient
outcomes. The efficiency and equity also have a contextual and a situational definition in
the IAD, unlike the Pareto Optimal efficiency of classical economics. The lack of Pareto
Optimality may not be a disadvantage; Amartya Sen (1970) has pointed out that a society
with Pareto Optimality can still be perfectly disgusting to live for the citizens.
I argue that SHG can be conceptualised as an action situation within a collective
action problem. IAD has been used as a method to examine collective action problems in
a number of contexts. In IAD, the collective ideation problem is to find and agree on
common definitions, knowledge, and understanding of a situation. If members of any group
agree on major features of a situation and how they might deal with each other as well as
the situation, then it may be easier to achieve goal that benefits the whole group. An action
situation is the arena in IAD, where choices are exercised. Individuals participate in action
situations as themselves or as agents of organizations. In action situations, they observe
information, weigh pros and cons of any action to make a particular choice, engage in
patterns of interactions, and achieve outcomes for themselves and the group.

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Figure 3: The structure of an action situation in IAD framework
External Variables

Source: Adapted from Ostrom, E. 2011. “Background on the Institutional Analysis and
Development Framework,” Policy Studies Journal, 39, 1, 7-27.
My initial argument is that complexity of the basis of trust and reciprocity among
members of SHGs can be well captured in an action situation of the IAD framework. Trust
and reciprocity in SHGs bridge risk and uncertainty of contribution to be expected from
others. The members know that their contribution in shared thrift is safer based on their
experience of patterns of interactions with other group members. Their risk in contribution
to the pooled thrift can be reasonably estimated within a certain range. After several years
of togetherness, group members of SHGs know each other and their respective situations.
Boundary
Rules
INFORMATION
about
CONTROL over

Linked to
POTENTIAL
OUTCOMES
NET COSTS AND BENEFITS assigned to
Actors
Assigned to
POSITIONS
Assigned to
Actions
Position
Rules
Choice
Rules
Information
Rules
Aggregation
Rules
Payoff
Rules

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When vulnerability, such as loss of main bread earner, loss of a child, or serious illness,
causes a member to fall behind on repayments, the group usually adjust and try to assist
her. The members may reschedule the loan, make repayments on her behalf, or are willing
to wait until she can begin to make her repayments again.
Trust and reciprocity in SHGs is both relational and transactional. The method of
formation and subsequent linking of mature SHGs with banks as well as internal processes
of SHGs make it clear that both foundations of trust and reciprocity work simultaneously.
The SHGs are formed by members, who have lived in close proximity to each other; they
have homogeneity of backgrounds and occupations; they either belong to same caste or
similar castes that occupy a particulars stratum in social hierarchy; they have affinity of
togetherness and shared experiences in local community. The attributes of the members are
foundations of a strong relational trust and reciprocity among them. The members pool
their thrift and give loans to members of the group for a specified period before they
become eligible for lending from the banks. The funds availed from banks are also rotated
by the members among themselves based on a consensus on rates of interest and
prioritization of needs of the members. SBLP introduces elements of transactional trust and
reciprocity among the members.
Further, degree of trust and reciprocity either relational or transactional keeps
changing and oscillating. It is not a static but a dynamic process, wherein one prevails over
the other and dominance of one value over the other possibly depends on length of
existence of SHG as well as maturity of SHG. In an illustrative case, SHG members
supported poorest member of the group, who was in great financial difficulty and could not

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repay her loan, when her husband died in an accident. Her SHG decided to support her on
grounds of group identity and solidarity. The same SHG had dropped from membership a
widow in earlier period, who could not keep with periodic savings deposits. At that time,
this SHG was still in formative stage and transactional trust had not taken deep roots
(APMAS 2006, 117-118).
An examination of dropouts from SHGs would also suggest critical role of trust and
reciprocity in SHGS, which are core and differentiating values focussed in IAD. Nearly
65 percent of dropouts from SHGs are on account of members’ own decisions or on basis
of mutual agreement between dropping out member and the group. The expulsion of
members from the group on account of irregular attendance at group meetings, missed
savings deposits, or loan repayment default is comparatively much lower at nearly 35
percent (APMAS 2006).
A typical SHG is arena for number of common activities of the members. The
relational ties among the members are multi-faceted and thick. To conceptualize SHGs as
purely thrift and credit institutions is not supported by data. The multiplicity of common
activities and thick and dense ties among the members are factors that are often
underplayed in various models on microfinance groups. IAD has the tools to analyze action
situations, where multiple internal and external factors play a role in determining how
actors develop rules in place that are different from organizational templates.

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Table 11: Multi-faceted activities of SHGs of Kudumbashree, Kerala, India
(Figures in Percentage)
Thrift and
Credit
Micro-
Enterprises
Agricultural
Activities
Animal Husbandry, Bee
Keeping, Poultry
Welfare
Activities

99 48.5 24 22 26
Source: State Planning Board. 2012. Evaluation Study on Kudumbashree.
Thiruvananthapuram, Kerala.

Table 12: Services offered by SHGs in four villages in Kerala and West Bengal
(Figures in Percentage)
Services Offered Bermajoor II Mohanpur Parathodu Vazhappally
Savings 65 70 85 90
Credit 63 69 90 93
Capacity Building 75 80 85 91
Loans through
Linkages with Banks
80 90 82 94
Social/Welfare
Activities
25 30 55 60
Livelihood Activities 78 75 76 80
Source: N. Kurian and J. John 2014. “Development of an Appropriate Methodology
Framework for Creating a Database for Self Help Groups,” KDS Working Paper, Series 1-
14, New Delhi: Kerala Development Society.
SHGs are given freedom to allocate loans among the members and the rate of
interest on pooled thrift and loans to the members. The intra-group appraisal and
prioritization of loans among members are decided by consensus. The group members
themselves are responsible to verify antecedents of other members as well as needs of the

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members before sanction of loan. The end use of loans sanctioned by SHG to its members
is an exclusively monitored by the group. The financial institution or the bank cannot guide
or direct the group on utilization of pooled or borrowed funds. This freedom has helped in
evolving rules in play that are in consonance with preferences and desires expressed by
members in interactions at SHG meetings. The varied utilization of group funds to
predominately meet immediate needs or consumption requirements implies that loans are
given on trust and with knowledge that sanctioned loan is not increasing productive
capacity of the member or income earning capability of the member.

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Table 13: Loan purposes of SHGs in four villages of Kerala and West Bengal
(Figures in Percentage)
Purpose Bermajoor
II
Mohanpur Parathodu Vazhappally
Day today Expenditure 12 14.29 12.14 17
Children’s Education 5 6.12 5.21 9.0
Medical Expenses/Health
Care
4 2.04 7.50 8.99
Children’s Marriage 13 17 12.50 7.83
Housing 28 28 31 20.14
Income Generating
Activities
9.5 6.5 5 7.5
Redemption of Loan 2.5 3.5 5.79 6.09
Festivities 1 0.5 0.5 0.6
Purchase of Household
Items
24.6 21.5 20.12 22.23
Others 0.4 0.55 0.24 0.62
Total 100 100 100 100
Source: N. Kurian and J. John J.2014. “Development of an Appropriate Methodology
Framework for Creating a Database for Self Help Groups,” KDS Working Paper, Series
1-14, New Delhi: Kerala Development Society.

I examine neighborhood groups of Kudumbashree, Kerala through lens of IAD to
suggest a framework to examine cohesion and tensions within SHGs. IAD can be used at
different levels of specificity. Three levels are suggested by Elinor Ostrom (2011);
framework, theory, and model with level of specificity increasing from framework to
theory and then to model. My examination of NHGs of Kudumbashree falls in the category

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of framework. “The development and use of framework are the most general forms of
theoretical analysis. Frameworks identify the elements and general relationships among
these elements that one needs to consider for institutional analysis and they organize
diagnostic and prescriptive inquiry” (Ostrom 2011, 8).
Kudumbashree is a community based self-help initiative of poor women in Kerala
that has local government institutions as active partners in the program. It is a self-
governing network that is supported and aided by state resources and funds. At the outset,
the IAD framework would demand a close examination of socio-economic context of
Kerala, where the NHGs bank linkage program was implemented through Kudumbashree.
The neighborhood groups of Kudumbashree would require operational rules that are
specific to institutional and physical environments. Any failure to account for both informal
and formal characteristics of the environment in honing operational rules may result in
conflict and friction. As a corollary, the norms and rules that govern group lending
programs would be highly dependent on the social and economic attributes of the
community as well as the locale in which the community is situated.
Kerala has achieved high social development indices and it has active public actions
in a low economic development setting. This has been frequently highlighted, both in
academy and popular press (Sen 1999; Heller 2001). The vigorous social mobilization,
energetic capacity building initiatives, and vibrancy of civic society has made Kerala a
unique and an interesting model of socio-economic development that is worth replicating
in other states in India (Dreze and Sen 1996; Tornquist 2000).

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Kerala stands in contrast to governance in other states of India, where civil society
or the local institutions have very limited powers and play. Historically, citizens have little
voice in shaping local development in India and limitations of local governments have been
often highlighted in literature (Chaudhuri 2006). He points out that, before the 73
rd
and
74
th
constitutional amendments in 1993, local governments enjoyed hardly any authority,
very few resources and a limited accountability to the citizens. Ayesha Jalal (1995) has
termed the Indian state to be ‘democratic authoritarian’. Her assessment is based on
functioning of local governments, which acted as implementing agencies for line
departmental schemes that were approved without local participation or answerability.
Partha Chatterjee (2004) finds local governance in India to be less of politics and more of
administrative policy, which is to be implemented by bureaucrats or experts and not by
locally elected representatives. Also, since most of the marginalized and poor occupy
physical and political space that is neither legal nor sanctified by the state, they are not
recognized as virtuous citizens. Chatterjee observes that majority of Indians “are not proper
members of civil society and are not regarded as such by the institutions of the state”
(Chatterjee 2001, 8).
The two enactments in 1994, the Kerala Panchayat Raj Act and the Kerala
Municipality Act, were major legislative steps of fiscal and administrative decentralization
in Kerala. Overtime Kerala became most fiscally decentralized state in India (Heller 2001).
The Acts gave authority and responsibility of poverty alleviation to the local self-
government institutions. The People’s Campaign for Decentralized Planning was launched
in Kerala in 1996 with twin objectives. It was aimed to create local self-governments with

110

new resources and authority and at the same time it desired to use planning as an instrument
of political mobilization (O’Donnell 1993; Isaac and Franke 2002).
The campaign had a four stage nested structure. The campaign has been
described by Heller et al. (2007) as follows:
i. Each village Panchayat was divided into 10 to 12 wards. An
open forum, Gram Sabha was held in each ward and residents identified
development issues and priorities in these meetings. The Gram Sabhas were
open meetings presided by local elected officials and facilitated by
Resource Persons. The Gram Sabha proceedings were recorded and on the
basis of deliberations a list of ‘felt needs’ was prepared.
ii. Seminars among selected Gram Sabha members, local
political leaders, key local officials of the area, and local experts were held
to develop comprehensive development plans for the Panchayats.
iii. The development seminars also selected Task Forces to
convert broad solutions of the seminars into an integrated Panchayat plan.
The constitution of Task Forces was representative and it was constituted
by select members of Gram Sabha, members of the Panchayat Samithi and
the concerned local officials.
iv. The budget for the plan includes grant-in-aid from the state
government, a share of federally aided project funds, and local resource
mobilization through taxes. Crucially, the local governments in Kerala were

111

given discretionary budgetary authority over 35 to 40 percent of
development expenditure of the state.
The campaign was implemented through active participation of civil society
organizations such as Kerala Sastra Sahitya Parishad. More than one hundred thousand
persons were trained as Resource Persons through a massive mobilization plan (Heller
(2001). The campaign produced ‘People’s Plans’, based on the idea of democratic
decentralization, and the plans have been closely examined in their content and
representative character. For most, it is a move from ‘constitution of public spheres to the
institutionalization of participatory publics’ (Heller et al. 2007), while for others, the plans
were an exercise in controlled decentralization that merely served to maintain the
hegemony of the state and party-led politics (Menon and Nigam 2007). However, it can
be safely argued that both legislative changes and popular participation to operationalize
the intent of legislations has resulted in the transfer of powers, functions, and human
resources to the local institutions. Also, 35 to 40 percent of the state development budget
has been placed at the disposal of local self-governing institutions (Isaac 2001). The
campaign has created new structures of participation in neighborhood and local
governance. The local governments in Kerala have functions and resources that were
outside their domain and purview in the recent past. “In sum, new loci of governance and
new spaces of citizenship now mark Kerala’s political and development landscape”.
(Heller et al. 2007, 643). The current aggregative data of social indices and indicators of
female status across Indian States suggest that Kerala has succeeded in areas of socio-
economic development, where many other Indian states have faced serious difficulties.

112

Table 14: Comparative social statistics of Indian States

Name of the State

Sex ratio,
2011 (females
per 1,000
males All ages

Female life
expectancy
at birth,
2006-10
(years)
Infant
mortality
rate, 2011
(per 1,000
live births
Maternal
mortality ratio,
2007-09 (per
100,000 live
births
Female labor
force
participation rate,
age 15-59 years,
2009-10 (%)
Percentage of
women among
organized sector
employees,
2009
Andhra Pradesh 992 68.2 43 134 48.9 21.8
Assam 954 63.2 55 390 21.1 33.3
Bihar 916 66.2 44 261 9.0 5.2
Chhattisgarh 991 n/a 48 n/a 45.4 13.9
Gujarat 918 69.0 41 148 35.3 14.7
Haryana 877 69.5 44 153 28.9 17.1
Himachal Pradesh 974 72.4 38 n/a 58.3 15.6
Jammu & Kashmir 883 71.1 41 n/a 31.1 10.7
Jharkhand 947 n/a 39 n/a 21.1 7.5
Karnataka 968 69.7 35 178 40.2 32.7
Kerala 1,084 76.9 12 81 33.6 40.1
Madhya Pradesh 930 63.8 59 269 35.2 13.8
Maharashtra 925 71.9 25 104 38.6 16.8
'North-East' 961 n/a 30 n/a 35.8 25.2
Odisha 978 63.9 57 258 27.2 15.3
Punjab 893 71.6 30 172 28.6 21.3
Rajasthan 926 68.3 52 318 36.4 17.4
Tamil Nadu 995 70.9 22 97 42.3 33.7
Uttar Pradesh 908 63.7 57 359 18.2 11.6
Uttarakhand 963 n/a 36 n/a 43.7 14.3
West Bengal 947 71.0 32 145 20.5 12.5
India 940 67.7 44 212 30.7 19.9
Source: Census of India, 2011; National Sample Survey of India, 2005 and 2011; Dreze
and Sen 2013.

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Table 15: Comparative indicators of female status across Indian States

Name of the State Female Literacy
rate, age 7 years and
above, 2011(%)
Proportion (%) of female
children aged 6-14 years who
are currently in school, 2005-06
Proportion (%) of never-
enrolled female children in
the 6-14 age group, 2004-05
Andhra Pradesh 59.7 78.1 6
Assam 67.3 83.6 12
Bihar 53.3 56.2 31
Chhattisgarh 60.6 77.6 10
Gujarat 70.7 78.5 8
Haryana 66.8 81.2 9
Himachal Pradesh 76.6 95.2 2
Jammu & Kashmir 58.0 85.7 7
Jharkhand 56.2 66.1 22
Karnataka 68.1 82.0 7
Kerala 92.0 97.7 2
Madhya Pradesh 60.0 76.9 15
Maharashtra 75.5 85.5 5
'North-East' 76.4 80.1 4
Odisha 64.4 74.7 8
Punjab 71.3 84.7 5
Rajasthan 52.7 65.9 23
Tamil Nadu 73.9 92.7 2
Uttar Pradesh 59.3 73.8 13
Uttarakhand 70.7 88.1 6
West Bengal 71.2 80.1 10
India 65.5 76.4 12
Source: Census of India, 2011; National Sample Survey of India, 2005 and 2011; Dreze
and Sen 2013.

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Another area of focus for IAD framework would be the relationship and interaction of
Kudumbashree programs with existing structures of local governance in Kerala. The two are
closely associated. Launched in 1998, Kudumbashree has evolved a nine point poverty index
to identify poor. The poverty identifiers are,
1. No Land /Less than 5 cents of Land
2. No house/Dilapidated House
3. No Sanitary Latrine
4. No access to safe drinking water within 150 meters
5. Women headed household/ Presence of a widow/ divorcee / abandoned lady / unwed
mother
6. No regularly employed person in the family
7. Socially Disadvantaged Groups
8. Presence of Mentally or physically challenged person / Chronically ill member in the
family
9. Families without color TV

Any family that satisfied four of the nine indices was identified as risky. The poor
women of risky families form a three - tier community based organization in Kudumbashree.
At the bottom is NHGs comprising of 20-40 women members selected from poor families.
Area Development Society is formed at the level of ward of local government by federating
8 to 10 NHGs. The Community Development Society is formed at the village Panchayat level
or at the municipality (town) or corporation (city) and it is a federation of ADSs. CDS, the

115

highest tier, is the federation of all the ADSs in the respective Panchayat (rural) or
municipality (town) or corporation (city). The program works in close association with both
the urban and rural local governments through a network of Community Based Organizations.
The NHGs are mandated to meet on a weekly basis in the houses of members. The
weekly meeting is hosted by one of the members of the group and cannot be held at any other
place. In the meeting, various problems faced by the group members are discussed along with
suggestions for improving the situation. Micro plans are also prepared after taking stock of
the situation. Often, government officials are invited to the meeting to explain government
programs that are operating in the area. Thrift of the members is collected for recycling as
loans. Five volunteers are selected from NHGs for undertaking various functional activities.

1. Community Health Volunteer looks after various health- related aspects of the
group members including children, women and the aged. The volunteer also
interacts with Health and Social Welfare Department of the state to leverage any
service or funds for NHG.
2. Income Generation Activities Volunteer collects, consolidates, and maintains
books of accounts and registers. She also looks after thrift mobilization and she is
mandated to be trained in NABARD approved program to increase her capacity and
capability.
3. Infrastructure Volunteer liaisons with the local bodies and acts as a catalyst for
local development.

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4. Secretary of the NHG records the proceedings of the meeting and is responsible
for team building.
5. President chairs the mandatory weekly meetings and imparts necessary
leadership and guidelines to the group members.

ADS coordinates and monitors the operations of NHGs in the respective wards of local
government. It evaluates the thrift and credit operations of each NHG and provides guidance. It
identifies individual and group ventures that can be set up by NHGs and it provides training.
ADS also facilitate banking linkages after grading strength of each NHG. In some instances, the
certificate of ADS is required to avail loan facility. For example, ADS examines all applications
of loan of NHGs under the housing scheme. ADS consolidates micro plan at ward level by
incorporating the project ideas of each NHG. ADS is responsible for formation of clubs for
children and teenagers of the members. The executive committee of ADS meets every month to
evaluate the activities and integrate the records of members, activities and accounts of all the
NHGs in the respective ward, and submit the documents related to finance and administration to
CDS.
CDS monitors the thrift and credit activities of NHGs at Panchayat or municipal level.
The executive meeting of CDS evaluates and appraises activities undertaken in Kudumbashree
programs. CDS also identifies uncultivated land and facilitates the lease farming among NHGs.
It ensures the annual audit of all the NHGs and ADSs. CDS identifies entrepreneurs for starting
micro enterprises and assists in developing their project ideas.

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Figure 4: Participatory planning and poverty programs in Kudumbashree, Kerala

Source: J. John. 2009. “A Study on Kudumbashree Project,” New Delhi: Planning
Commission of India.

The integration with local government takes place all levels of Kudumbashree structure.
A ward level monitoring and advisory committee is formed to integrate the activities of the ADS
with the local self-governments. Also, resource persons selected from that area are nominated to
the general body of ADS. Selected resource persons and officers of the local self-government,
who are participants in poverty alleviation and women empowerment programs, are nominated
to the general body of the CDS. The Project Officer of poverty alleviation program is member
secretary of governing body of the CDS. The monitoring and advisory committee of CDS has
Municipal Chairperson or President of the Panchayat as its head and Municipal or Panchayat
Secretary as the convener of this committee.

NHG: NHG members with NHGC
prepare micro-plans
ADS: All micro-plans from NHGs
consolidated as mini-plans
CDS: Mini-plans consolidated as
action plan
LGB: Action plan forms
the antipoverty sub-plan

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Various field studies show that an enabling environment of situating Kudumbashree
structures within, and not in conflict and contradiction to existing local self- governments, as
well as concurrent devolution of finances to the local self-government institutions was critical in
sustaining and scaling up Kudumbashree. As an instance, close affiliation of the CDS structures
with local government helped in the financial sustainability; funds under women’s component
plan of local government could be converged as earmarked assistance to NHGs of the
Kudumbashree program (Pillai and Alkire 2007). Kudumbashree is a part of the participatory
planning process as well as a link between poor and local government institutions for delivery of
state funded welfare programs. As NHGs and ADSs have gained strength and sustainability,
Kudumbashree’s role to convergence activities of several departments at the local level has
increased. Fragmented approach of line departments and agencies of various state and local
government institutions has been a serious hindrance in local governance in India. In contrast,
“that over 170 Neighborhood groups per Panchayat are alive and are active is a great institutional
reality in Kerala’s contemporary development process” (Oommen, 2008, 7).
The organizational structure of Kudumbashree and its close consonance with the local
self-government institutions is represented in the diagram below

119

Figure 5: Organizational Structure of Kudumbashree in Alleppey, Kerala

Neighborhood level
350 NHGs

Ward level
24 ADS

Town level

Source: Adapted from V. Pillai and S. Alkire. 2007. “Measuring Individual Agency
or Empowerment, A Study in Kerala,” Centre for Development Studies:
Thiruvananthapuram, Kerala, India.
The data sets of the two evaluations of implementation of structures and programs of
Kudumbashree by the Planning Commission of India in 2009 and by the Planning Board,
Kerala in 2012 respectively provide tentative answers to why Kudumbashree is a robust and
expanding program in Kerala. The evaluations show that Kudumbashree has succeeded in
creating a strong network of NHGs across all wards of the state. The NHGs have also been
20-45 poor families
NHG
NHG committee of
5 elected members
Ward level advisory
committee presided
over by municipal
ward counsellors
CDS advisory committee
presided over by
municipal commissioner
Supporting organizations
such as NABARD
Donors such as UNICEF
ADS general body
Elected ADS
governing body
CDS general body
Elected CDS
governing body
Local Government,
District
Administration

120

fairly successfully federated at Panchayat or Municipality levels. The presence and
participation of the poor women in Gram Sabhas has increased on account of SHGs
constituted under Kudumbashree program. Kudumbashree has provided a platform and space,
where poor women in groups could interact with local governments. The interface became
particularly meaningful because local governments were given substantial funds and
resources under anti-poverty and women component plan schemes in Kerala (John 2009;
Kurian and John 2014; Pillai and Akire 2007).
Behind the attainments of Kudumbashree program in Kerala lay a linkage between
implementation and evaluation as well as structures of the NHGs and the local self-
government that is alive and reciprocal (John 2009; Oommen 2008). Kudumbashree has
succeeded in creation of action arenas, where groups of poor in their roles as members of
the NHGs and the Gram Sabhas interact within norms and rules that have sanction of
different jurisdictions of the Village Panchayat in rural areas or Municipal Council in urban
areas as well as the CDSs of Kudumbashree.

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Conclusion
It has been argued that SBLP has not delivered on its promise. The resource
dependence of the program on the state has caused a formally rational and homogeneous
structuring of the program. The underlying force of the program is not competition or
meeting needs of the poor but to satisfy rules and regulations of the state funding agencies.
The SHGs that were initially conceived as a mutually cooperative and affinity based
association of self-selecting poor women have lost their vitality and energy. The SHGs are
no longer nurtured by NGOs in their infancy and their new promoters are line departments
of the state and the state supported banks. The departments and the banks have stiff and
fixed targets of forming new SHGs and they have little stake in increasing capacity of the
members of the SHGs. Newly formed SHGs are no longer an arena of dynamic associations
among the poor, who shared trust and reciprocity based on similar life experiences. It is
more a last delivery point of many state funded or subsidized services.
My research raises questions on the state policy in India to grant concessionary
credit running into billions of rupees to a microfinance program that is isomorphic and
mimetic in design and structure. It has limited impact on the poor because it is goaded by
legitimization and sustenance needs of the microfinance institutions. The program has been
conceived and sustained by NABARD and RBI and it is more in tune with formal rules,
procedures and mandates of the apex financial institutions of the country.
The pressures to conform to a particular design and structure for microfinance have
been noticed before too. For instance, Yunus notes that “most programs are heavily

122

dependent on donor country consultants and contractors. Most often, the consultants hired
are the wrong kind. Since they are likely to have a conventional banking background, they
must get busy setting MCPs (Microfinance Programs) ‘straight so that they become
‘proper’ financial institutions (i.e. like the ones that consultants are familiar with). On the
whole they are reluctant to believe that this is a distinct field that has its own work style
and logic. Even if a consultant is open minded, it takes an MCP staff (who earns a fraction
of consultant’s wages) to educate the consultant. Even after consultant is educated, their
report is likely to be shaped by consulting firm colleagues and donor agency officials, who
do not understand microfinance” (Yunus 1999, 111).
My research findings also fit into imagery of microfinance that has shifted from a
miracle in the recent past to a mirage now. A mirage is an image of something that is visible
far away but does not really exist. Historically, mirage is understood as a naturally
occurring optical phenomenon that creates an illusion of water by refraction of light
through a non-uniform medium. The water does not exist but it always seems within reach
and it entices travellers to continue their journey in search of water. Is microfinance a
mirage that is tempting the poor and the experts alike? Is it is only a chimera of an
instrument of poverty alleviation? Social sciences have often encountered mirages in their
quest for answers to difficult puzzles. A good current illustration of chasing a mirage in
psychology is that of social priming. A parallel with quest of social priming could provide
a useful reference to sum up the findings of this study on microfinance.
Perceptual priming has been studied for a long time. A number of experiments have
shown that measurable behavioural effects can be observed in individuals, who have

123

incidental or minimal exposure to some words, pictures, or other stimuli. The perceptual
priming has robust theoretical foundations. The prime creates a bias in interpreting of
ambiguous information. It is a short term rational adaptation, wherein the prime raises
threshold levels of detector units that are associated with target items (Pashler et al 2012).
The arguments have been extended under social priming. The prime not only
impacts perception but it arguably has strong bearing on behaviour. The behaviour may be
influenced without knowledge or consciousness of the individual through activation of
stereotypes, traits, or goals. “Priming” refers to the passive, subtle, and unobtrusive
activation of relevant mental representations by external, environmental stimuli, such that
people are not and do not become aware of the influence exerted by those stimuli. In
harmony with the situationist tradition, this tradition, this priming research has shown that
the mere, passive perception of environmental events directly triggers higher mental
processes in the absence of any involvement by conscious, intentional processes” (Bargh
and Huang 2009, 128).
The proponents of social priming make bold assertions of impacting aggregate
social behaviour. The social priming holds that behaviour can be primed by motives that
are triggered unconsciously. The exposure to a stereotype in one context causes behaviour
that is consistent with stereotypical traits in a later and subsequent context “The same
priming techniques that have been shown in prior research to influence impression
formation produce similar effects when the dependent measure is switched to social
behaviour” (Bargh et al 1996, 239).

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It has been claimed that people walk more slowly, if they are primed with old age
related words. The authors of this experiment “suggest that exposing individuals to a series
of words linked to a particular stereotype influences behaviour coconsciously. How the
activated stereotype influences behaviour depends on the content of the activated
stereotype itself, not the stimulus words actually presented. Because there were no
allusions to time or speed in the stimulus materials, the results of the study suggest that the
elderly priming stimuli activated the elderly stereotype in memory, and participants
subsequently acted in ways consistent with that activated stereotype” (Bargh et al 1996,
237).
The social priming suggests that it is possible to change choice or style of social
action through priming. That is how social priming came to be called goal priming in
popular perception and it spawned millions of dollars of spending by organizations to prime
people either to become more sympathetic to organizational goals or to increase their effort
and output unconsciously for benefit of the organization. Harold Pashler et al (2012) have
discussed number of claims made by supporters of social priming. These include that
candidates score higher on general knowledge questions, after they had been asked to think
and imagine the attributes of a professor in comparison to a situation, where they were
made to think about soccer hooligans; potential donators and volunteers reduce their
contributions and donations, after they are exposed to money related words prior to
volunteering or making a donation; a visual exposure to national flag of USA make
participants in an experiment more favourable to political conservatism even after eight
months of such visual experience.

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The field of social priming has come under serious cloud recently. The criticism
has been sharp and pointed both in academy and in popular press (Shanks et al 2013).
Daniel Kahneman’s (2012) open email to students of social priming warned of a train
wreck looming. He observed that field faces a prospect of a prolonged eclipse because of
failure of subsequent experiments to replicate salient results of social priming. “Positive
results in psychology can behave like rumours: easy to release but hard to dispel. They
dominate most journals, which strive to present new, exciting research. Meanwhile,
attempts to replicate those studies, especially when the findings are negative, go
unpublished, languishing in personal file drawers or circulating in conversations around
the water cooler”(Yong 2012, 298-99). The positive feel and euphoria on social priming
continued from mid 1990s till voices of dissent became louder and they found some
resonance in academy after 2010 or so.
Subsequent experimentation has shown that the unconscious impact of priming
stereotypes and trades has been overplayed. The automatic behavioural priming may seem
well established in the social cognition literature but its proponents seem to have
overlooked its limitations. It is not yet an established phenomenon but it may be an
interesting area of further exploration and research (Pashler et al 2012). In another study,
nine experiments were conducted to replicate a well-advertised result of social priming,
where individual accuracy to answer general knowledge questions could be positively
influenced by activation of thinking about attributes of a professor (Shanks et al 2013).
None of the experiments could obtain the desired effect. “The current results are also
consistent with the view that conscious thoughts are by far the primary driver of behaviour

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and that unconscious influences – any exist at all – have limited and narrow effects”
(Shanks et al 2013, 9).
Issue framing of microfinance in terms of social priming showcases core areas of
weaknesses and strengths of microfinance programs. That availability of cheap, assured,
and transparent financial services is a serious constraint in lives of the poor is well
recognized. Their savings are small and sporadic and they do not have safe instruments to
accumulate their thrift. They cannot access credit because they do not have assets that can
serve as a collateral security for loan. At the same time, lack of credit at reasonable rates
hinders them from creating assets. This produces a vicious circle of poverty that is difficult
for the poor to break. Two arguments can be initiated at this stage. Is credit the most
important and critical limitation that traps the poor? If so, is microfinance a good
instrument to address this problem? Somewhat like social primers, the proponents of
microfinance closed this argument too prematurely. They chose to ignore the caveat so
insightfully made in the Nobel Peace Prize citation of 2006. The Nobel Peace Prize
Committee of 2006 had commended Muhammad Yunus for his zeal to end poverty in the
world but it had warned that poverty cannot be ended soon and nor it can be exclusively
tackled by microcredit. The supporters of microfinance also pushed in the background a
long history of human endeavour to ameliorate conditions of the poor.
Poverty has remained a core agenda of development literature from the time of
Adam Smith and the search for appropriate tools to fight poverty has occupied social
scientists for a long time. A brief history of poverty and engagement of social scientists to
conceptualize it and to devise better methods to tackle it at different times in Chapter One

127

of this study demonstrates that microfinance is currently one of the more acceptable policy
options to tackle this problem. It is more readily accepted because its popular narrative is
attractive and it appeals to moral sentiment of donors and philanthropists. It is a feel good
instrument for the better off segments of the population, who believe that their small
contributions towards the poor matter to them. Microfinance also agrees more readily with
a market economy than a more rigorous redistribution of assets and incomes suggested by
the alternate policy options.
The leap of faith of micro-financers that microfinance is the core instrument to rid
the world of poverty is not supported by evidence. Its transformative powers on lives of
poor is based on anecdotal data that is not as sharply positive in the aggregate. On the other
hand, limited impacts of microfinance on poverty indices cloud attainments of
microfinance in providing institutional credit to the poor on such a large scale and to
achieve more than ninety percent repayment rate from very vulnerable segment of
population. A good illustration of this is provided by Abhijeet Banerjee and Esther Duflo
(2011). Their field study in the slums of Hyderabad showed that although microfinance did
not radically transform the lives of the poor but it had worked. The microfinance clients
were more likely to have started a business and had a higher percentage of purchase of
consumer durable like bicycle or refrigerator. Their quality of life had improved although
they remained poor. As economists, they were fairly pleased with the results. However,
their results were not appreciated by some of those who ran microfinance organizations.
For instance, Brigit Helms, CEO of Unitus responded in writing that such studies gave
inaccurate impression that poor do not benefit from increased access to financial services.

128

She quoted a case of a young widow from India, who was able to increase her business
income from selling plastic bangles by more than 50 percent, after she took a micro loan
to start tailoring business on the side. “Kanti was able to take control of her household
finances and send her kids to school for the first time. The positive impact of microfinance
program has had on her family is undeniable” (Helms 2010).
To rephrase John Dewey (1938), the purpose of any inquiry is to improve a
problematic situation and not to change values of the inquirer and the actors. My endeavour
has been to apply an alternate theoretical lens to the data sets that have been examined by
other researchers previously and to cull out salient features of SHGs and SBLP that may
require modification or recalibration to better serve the poor. The data highlighted in my
research shows that virtual takeover of the SBLP as well as formation of new SHGs by the
line departments of the state and the state owned banks have led to dominance of formal
rational values of rules and precedents in their operations.
The data sets examined in this study also demonstrate that an SHG can be fruitfully
conceptualized as an action situation of IAD framework. The relationships of trust and
reciprocity within the group members are based both on relational and transactional
interactions. The foundations of trust and reciprocity in groups are not static and are
constantly changing as the group matures and interactions among members are repeated
and sustained overtime. The initial formation of the group is based on affinity and shared
experiences. A common caste or a similar occupational background add more relational
glue to the group. As the group interactions are repeated in weekly meetings and shared

129

thrift and loans become common resource that is divided among members through
consensus on priority of respective needs of the members, transactional relations among
members come in to greater play. A close examination of both quantitative and qualitative
data on dropouts from the SHGs further supports this conceptualization. Counter
intuitively, the data shows that many more members drop out of groups voluntarily or
through mutual agreements and expulsion of members on account of default of loan
repayment is relatively rare. Typically, interactions among group members are multi-
faceted and spread over number of activities. I have argued that changing foundations and
nature of trust and reciprocity in SHG interactions can be richly articulated in IAD
framework. The argumentation only suggests a framework of analysis that is useful for
prescriptive and initial inquiry into any social problem (Ostrom 2011). A much more
detailed research would be needed to build models that would test various levels of trust
and reciprocity as an SHG matures and its impact on outcome of group activities.
Kudumbashree, Kerala is a good illustration to operationalize SHG’s conception as
an action situation of IAD framework. I have used case study of Kudumbashree, Kerala to
lay out interplay of SHG as an action situation in a local context that is characterised by
high social indicators in a poor economic settings as well as high degrees of administrative
and fiscal decentralization. The case study shows that poor play their roles as members of
SHGs and local government institutions without much conflict as the SHGs are deliberately
nested in the local governance structures. The SHGs are able to bridge the problems of
varied jurisdictions that have control over them by developing rules in play that are in close
conformity with multi-jurisdictional blue prints. The office bearers of local self-

130

government institutions are given a bridge role that facilitates conflict resolution and it
permits flow of funds from cash rich local governance structures to SHGs and institutions
related to it.
The Kudumbashree microfinance program shows that context and institutional
landscape surrounding the SHG play an important role in operation of the SHG. The SHG
needs support of funding and capacity building agents that are located both within and
outside the immediate network of the SHG. The small and micro plans of the SHGs require
to be owned and supported by local self-government organizations as well as area and
community level federated structure of Kudumbashree. The mutual support and synergy of
the Kudumbashree with local self- government is a major reason for sustenance of this
program.
The nesting of SHGs in local government institutions raises many more interesting
questions that require further exploration and research. For instance, the degree of coupling
between the two structures is a crucial variable. Too tight a coupling may lead to long term
conflict. In field studies instances have been highlighted, where women members of SHGs
are seen as potential political rivals by the leaders of the elected bodies of local government
(Kurian 2009; Sanyal 2009). Such threats have serious consequences for smooth operations
of SHGs and flow of funds to SHGs from local self-government institutions. Also,
empirical relationship between embedded structures and firms performance was found to
be non-linear in a related, though in a different context (Uzzi 1997). In the embedded
relations a fine grained information transfer takes place among actors, who know each
other and trust each other in their joint problem solving. This gives flexibility and a reach

131

to resources that are otherwise not available to a firm. “This component of the exchange
relationship is important because it enriches the firm’s opportunities, access to resources,
and flexibility in ways that are difficult to emulate using arm’s length ties” (1997, 45). This
relationship is positive only to a point and beyond that embeddedness has more costs than
benefits. This raises important questions of degree of nesting of SHGs in the local
government structures. The nesting may have worked for SHGs of Kudumbashree yet but
more intensive research is needed to determine optimal degree of networking between
SHGs and local self-government institutions.

132

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Abstract (if available)

Abstract My research uses institutional theory to examine how financial services are delivered to the poor in microfinance. The structure and growth of a large microfinance program in India is analysed to delineate its promise and problems. Data from public agencies and NGOs is used to institutionally identify savings led self-help groups and their linkage with state supported banks as a functional organizational field. Both quantitative and qualitative data is utilized to argue that resource dependence of the program on state agencies has caused structural homogenization of the field. The formal rules, procedures, and precedents have come to dominate this field. The needs as well as values of the poor have been pushed into background. Efficient provision of financial services to the poor is unlikely from a mimetic and isomorphic growth of the microfinance program. ❧ A mutual group is a core feature of microfinance. The interviews and surveys of Kerala Development Society of Kudumbashree microfinance program form basis of my postulate that a self- help group and its role in a particular locale can be conceptualized as an action situation of the Institutional Analysis and Development framework. The template of Institutional Analysis and Development framework is used to analyse complexity of trust and reciprocity among members of the group that varies with maturity of the group, rules in play and blue prints of various jurisdictions that govern actions of the group, and embedding of the group in local government structure in Kerala. My case study shows that Kudumbashree has produced better outcomes because microfinance was accompanied by administrative, financial, and democratic decentralization in Kerala. Similar results from microfinance are not likely in other locations in India that have a different institutional and local governance structure.

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Creator Puniha, Pushpinder Singh (author)

Core Title A miracle or a mirage? A study to evaluate the impacts of microfinance

School School of Policy, Planning and Development

Degree Doctor of Philosophy

Degree Program Policy, Planning, and Development

Publication Date 07/30/2015

Defense Date 06/22/2015

Publisher University of Southern California (original), University of Southern California. Libraries (digital)

Tag microfinance,OAI-PMH Harvest

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Language English

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Advisor Caiden, Gerald (committee chair), Hondagneu-Sotelo, Pierrette (committee member), Robertson, Peter John (committee member)

Creator Email pspuniha@gmail.com,puniha@usc.edu

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