The history of cooperative societies in India dates back to the early part of the twentieth century. It grew over time and prompted intermittent legislative and executive intervention. Agricultural credit was provided through Land Mortgage Banks, which grew in number and soon organized into Cooperative Land Mortgage Banks. While LMBs were constituted and functioned under the cooperative societies Acts of respective states, their structures varied. Some states preferred a federal structure, some a unitary structure and a few blended federal and unitary features. This highly uneven development of LMBs was highlighted by the All India Rural Credit Survey Committee (AIRCSC) in 1954.¹ The Committee noted their uneven growth, and the resulting difficulty in accessing resources. It also felt that even as the LMB evolved mechanisms for funding subsistence needs of the agricultural producer, the structure should devise alternative mechanisms for meeting other social and lifecycle credit needs. The focus of lending had to be on increasing production. Towards this end, the Committee suggested that a new institution should be constituted to focus on long-term lending in the agriculture sector. This recommendation led to the establishment of the Agricultural Refinance Corporation in 1963, enabling the rapid expansion of the LT structure, and the change from being land ‘mortgage’ banks to land ‘development’ banks (LDBs).

Between 1956 and 1970, the number of central LDBs increased from nine to 19, their membership increased from a mere 10,000 to about 10 lakh and the loans outstanding went up from Rs 13 crore to Rs 507 crore. Over the same period, the number of primary LDBs (PLDBs) grew from 304 to 809, their membership increased from about three lakh to nearly 20 lakh and outstanding loans went up from Rs 10 crore to Rs 367 crore. While the loan business of LDBs increased, the overdues in the structure also increased manifold. Reviews by the Madhav Das Committee and the R.K.Hazari Committee (1975) led to the renaming of the LDBs to Agircultural and Rural Development Banks (ARDBs). ARDBs were to function as state-based refinance agents to credit cooperatives. In the R.K.Hazari Committee Report the changing realities of agriculture and need for investment credit in agriculture were noted.
In 1981, the Committee to Review Arrangements for Institutional Credit for Agriculture and Rural Development (CRAFICARD) recommended the establishment of a National Bank for Agriculture and Rural Development. The NABARD was consequently set up in July 1982, to integrate the functions of the ARDC and other key institutions in the field of agricultural and rural finance.

Microfinance ‘sector’ so far

Microfinance clients are typically self-employed, micro entrepreneurs. In rural areas, they are usually small farmers and people who are engaged in small income-generating activities such as food processing and petty trade. In urban areas, clients of microfinance may be shopkeepers, service providers, artisans, street vendors.
A Self-Help Group (SHG) is a small voluntary association of poor people of comparable socio-economic background. It promotes small savings among its members. The savings are kept with a bank. This common fund is in the name of the SHG. Usually, the number of members in one SHG does not exceed twenty and are usually very poor people who are not creditworthy enough to access credit from formal credit institutions. SHGs can open a Savings Bank account with the nearest Commercial or Regional Rural Bank or a Cooperative Bank. This is essential to keep the thrift and other monies of the SHG safely and also to improve the transparency levels of SHG's transactions. Opening of an SB account, in fact, is the beginning of relationship between the bank and the SHG. The Reserve Bank of India has issued instructions to all banks permitting them to open SB accounts in the name of registered or unregistered SHGs.

Roles of NABARD and RBI

The National Bank of Agriculture and Rural Development was created as a Development Bank with a mandate to support through promotion of credit, activities in the fields of agriculture, small-scale industries, cottage and village industries, handicrafts and other rural crafts.² Its various functions include not only the extension of credit, but also the evaluation, monitoring, inspection of client banks, implementation of programmes of the Government of India in agriculture and rural development, and assisting the RBI in its activities in these fields.

NABARD's credit functions cover planning, dispensation and monitoring of credit. It frames policies and guidelines, providing credit facilities, preparation of credit plans annually for districts for identification of credit potential, and monitors the flow of credit at the ground level. The NABARD is the apex refinance institution, in the rural and agricultural credit sector, offering various types of refinance facilities³ , to commercial banks, SCARDBs, SCBs PACs, RRBs, NGOs, partnership concerns, companies, state-owned corporations or cooperative societies as immediate beneficiaries.

The following are the criteria on which NABARD evaluates applications for refinance:

1. Technical feasibility of the project and adequate response from prospective beneficiaries
2. Financial viability and adequate incremental income to ultimate borrower to repay the loan within a reasonable period
3. Organisational capability to ensure close supervision

The assistance is meant to reach the individuals, who are members of the primary credit institutions. The refinance is usually 50% to 95% of the project cost. The balance is met by the banks and the concerned state governments or the Government of India in the case of SCARDBs. With a view to ensure credit flow to certain thrust areas, the quantum of refinance is enhanced to 100% as in the case of special category beneficiaries like SC/ST members and self help groups.

A pilot project for linking Self-Help Groups (SHGs) with banks was launched by NABARD in 1991-92 with a view to facilitating smoother and more meaningful banking with the poor. RBI had then advised commercial banks to actively participate in this linkage programme. The scheme has since been extended to RRBs and co-operative banks. The number of SHGs linked to banks aggregated 4,61,478 as on March 31, 2002. An estimated 7.87 million very poor families were brought within the fold of formal banking services as on March 31, 2002. More than 90 per cent of the groups linked with banks are exclusive women groups. Cumulative disbursement of bank loans to these SHGs stood at Rs. 1026.34 crores as on March 31, 2002 with an average loan of Rs. 22,240=00 per SHG and Rs. 1,316.00 per family.

As regards model-wise linkage, while Model I, viz. directly to SHGs without intervention/facilitation of any NGO now accounts for 16%, Model II, viz. directly to SHGs with facilitation by NGOs and other formal agencies amounts to 75% and Model III, viz. through NGO as facilitator and financing agency represents 09% of the total linkage. While 488 districts in all the states/UTs have been covered under this programme, 444 banks including 44 commercial banks (including 17 in the private sector), 191 RRBs and 209 co-operative banks along with 2,155 NGOs are now associated with the SHG-bank linkage programme.

Government of India, vide their notification dated August 29, 2000 have included ‘Micro Credit/Rural Credit’ in the list of permitted non-banking financial company (NBFC) activities for being considered for Foreign Direct Investment (FDI)/Overseas Corporate Bodies (OCB)/Non-Resident Indians (NRI) investment to encourage foreign participation in micro credit projects.

In a Master Circular (RPCD. No. Plan. BC.24/04.09.22/ 2005-06), dated 30 July, 2005, to banks on lending policy to Self-Help Groups, and enhancing the outreach of micro-credit, the Governor of RBI advised:

i. Banks should provide adequate incentives to their branches in financing the Self Help Groups (SHGs) and establish linkages with them, making the procedures absolutely simple and easy while providing for total flexibility in such procedures to suit local conditions.
ii. The group dynamics of working of the SHGs may be left to themselves and need neither be regulated nor formal structures imposed or insisted upon.
iii. The approach to micro-financing of SHGs should be totally hassle-free and may include consumption expenditures.

The Vaidyanathan Committee (2004)⁴ has asserted the need for State Governments to abide by RBI mandates/directions on regulation of cooperatives, while pointing out that the over-intereference from State Governments has impeded the growth and maturity of cooperative credit organisations. The regulatory and legal reforms it suggested were within the realm of already existing State Cooperative laws. It recommended that cooperative banks (SCBs, PACs, etc.) be brought under further supervision of NABARD, and suggested greater monitoring and intervention from RBI.