Access to credit has been an inherent problem in rural and urban areas. Poor households require micro-credit for every household need including consumption, investment and emergency situations. Microfinance has emerged as a solution to mitigate the constraints faced by credit institutions in making credit available, as it has expanded its coverage to the poorest and the most vulnerable segments of population.
The International Labour Organization (ILO) has long worked on issues of the labour market and on how to combat forced labour. In this context, ILO commissioned a study to understand the effectiveness of microfinance in alleviating vulnerability to debt bondage. The study was carried out by Centre for Decentralization and Development (CDD) and Institute for Social and Economic Change, Bangalore in collaboration with Poverty Learning Foundation (PLF). PLF was instrumental in conducting the field work and in preparing the report. The study garnered comprehensive primary and secondary data and used qualitative and quantitative tools to analyse the data. It examined the following aspects:
- To what extent did the Micro-Finance Programmes (MFPs) cover the poorest households under microfinance groups, and what were the factors that influenced the same?
- What was the impact of MFPs on the vulnerability to debt bondage of member households?
- What factors determined the vulnerability of households to debt bondage? What are the best practices that will enable MFPs in reaching the most vulnerable households and in reducing their vulnerability to debt bondage?
The study was conducted in four districts of combined Andhra Pradesh, namely Ranga Reddy, Medak, Nalgonda and Guntur, with the support of four NGOs Ankuram Sangamum Porum, Swayam Krishi Sangham, Homo Sapiens and ASSIST, who extensively use microfinance as a tool for rural empowerment. The districts were also selected with the objective of understanding and assessing the different microfinance models and their impact on vulnerability to debt bondage. A Vulnerability to Debt Bondage Index was developed to analyse the data. Cobweb diagrams were used to assess the group-level impact of MFPs on the reduction of vulnerability to debt bondage.
The study revealed three major findings:
- A well-designed microfinance programme did not ensure coverage of all poor households under the micro-finance groups due to various constraints.
- Though four organizations were providing different credit facilities, it was found that they were able to meet only 50 percent of the credit needs. Further, over half the members were still forced to approach informal sources of credit despite the provision of Income-Generating Activities (IGAs). Thereby proving the hypothesis that microfinance does not meet all kinds of credit needs of rural households.
- The vulnerability to debt bondage of member households is less when compared to that of non-member households. Apart from membership, factors such as land-holding, occupational diversification and poverty status of the households play an important role in determining their vulnerability to debt bondage.
Based on the key findings of the study, the following policy recommendations were made to make microfinance programmes more effective in reaching out to the poor and reducing the vulnerability to debt bondage.
In order to improve the coverage of MFPs amongst the poor and the very poor, certain best practices in field placement need to be followed:
- It is essential to select field staff from the local community to mobilize the community to join microfinance groups.
- It is necessary to ensure efficient management of records or book-keeping to keep track of the savings and to analyse the performance of microfinance groups.
- It is important to form exclusive groups comprising the vulnerable households in order to cover the poorest households in the village.
It was observed that the annual savings of the households did not play a major role in influencing the role of microfinance as an option of debt. Further, there has to be some arrangement in place for collecting the voluntary savings of members rather than relying on informal sources for future financing.
Sustainable IGAs need to be promoted by facilitating organizations and they need to provide affordable credit services for the same. Providing asset insurance to the members will also help them increase the capital base of IGA of members. The members should be given autonomy to decide how to spend their credit borrowings.
The MFPs should be combined with social security products such as health insurance, old age pensions, and accident insurance as the current design of MFPs are unable to cater to emergency needs.
In order to ensure that there is no capture of microfinance groups by leaders from privileged backgrounds, there is a need for an internal policy within the groups for leadership rotation to help the members of the group gain exposure.