The credit thrift and other financial services are provided to rural masses in general and to the poor in particular through the rural financial markets comprising an unorganised markets consisting of commission agents, money-lenders, landlords, relations, friends and organised markets consisting of pyramid type cooperative credit institutions - primary cooperative credit societies at the village level and intermediaries like district central cooperative banks at district level, primary land development banks at block or district level and state cooperative banks and central land development banks at apex level, scheduled commercial banks at village, semi-urban. urban and metropolitan levels, and RRBs at village and block levels.

There are also urban cooperative banks at the urban level. The organised rural financial markets are linked with NABARD/RBI atthe national level. There is overlapping, duplication and dichotomy of functions within organised markets. The poor, however, heavily depend on unorganised markets of credit like traders, landlords, money lenders, relations and friends etc.

The informal credit has a number of plus points such as prompt supply of credit, no formalities, no security or collaterals with excellent recovery results. The dark side of the informal markets is limited credit supply and exorbitant interest rates. The formal markets provide credit at comparatively cheaper rate of interest but with lot of hassles such as time consuming and cumbersome loaning procedures, unrealistic lending policy leading to lot of paper work, inadequate and untimely finance, higher transaction costs both for borrowers' and lenders' along with poor recovery result.

The inability of the formal financial markets in maximising the outreach can be gauged from the fact that cultivators possessing asset less than Rs 5,000, still borrow 62 per cent of theirtotal debt from informal markets [All India Debt and Investment Survey, 1991]. Apparently, this is mainly because of higher transaction costs involved in covering the large number of small sized loans on the one hand and inability of the hard core poor to offer suitable/acceptable security or collaterals.

The poor recovery rates of formal rural financial markets has further aggravated the situation by impinging their already fragile viability. In order to enlarge the flow of credit to the hard core poor, NABARD launched a scheme of organising them in self-help groups (SHGs) and linking the SHGs with banks, in 1992. The scheme is broadly on the pattern devised by Bangladesh Grameen Bank. Under the scheme, poor, preferably the women are organised in SHGs and banks financing these SHGs for on lending to poor are eligible for concessional refinance from NABARD.

There are three distinct models to route the credit to the micro enterprises. While under the first model, banks lend directly to the SHGs for lendingto micro entrepreneurs under the second model, banks provide loans to NGOs for on lending to SHGs and ultimately to micro entrepreneurs. Under the third model banks extend credit to SHGs with NGO as facilitator.

As at the end of March 1999, there were about 33,000 SHGs with 5.6 lakh micro enterprises having loan outstanding of Rs 57 crore with average outstanding per SHG and per family at Rs 17297and Rs 1019 respectively.The number of banks and NGOs involved were 202 and 550 respectively. The average members per SHG worked out to 19. The share of the micro credit to total priority sector credit constituted hardly 0.1 per cent. Obviously, SHG movement is yet to gain significant momentum. Furthermore, SHG culture is not completely free from applicative hazards like first, the premise of the SHG scheme is singularly based on peer pressure. The peer pressure can work in all the cases for some time.

It can work in some cases for all he times but it cannot work in all the cases for all the times. Somewhere, oneday peer pressure may fall apart and contagion may spread far and wide with loans turning sour at an alarming speed. The point in cite is in regard to cooperative credit movement in India which failed in spite of sound principles of self help and mutual benefit.

Similarly, the excellent collection rate of Bangladesh Grameen Bank was attributed to the regularity of weekly meetings and efforts of the bank staff rather than to peer pressure [Susan Johnson and Ben Raigaly, 1997].

Second, the weakest link in the SHGs scheme is facilitator, who is generally on the roll of NGOs or SHGs, responsible for collection of thrift and disbursement of loans and book keeping etc at the SHG level. The facilitator travels to and from branches and villages with heavy amounts in public transport or on bicycle. The safety and integrity of facilitator is not above the board in the absence of proper control mechanism.

Third, keeping in view the theme that availability of the credit is more important than cost of credit, theSHGs have been given full freedom in regard to rate of interest. This policy is appropriate in higher inflationary period. Now that inflationary pressure is at a low ebb and real rate of interest higher than real growth of the micro sector, this would make micro activities a non-viable proposition ultimately leading to higher default rates.

Fourth, the NGOs associated with financing of micro enterprises as facilitator are now graduating to take up financing activities of their own by resorting to deposit mobilisation. Allowing them to function as bank without proper control system in place would jeopardise the credibility of the banking system in general and the interest of depositors in particular.

Fifth, most of these NGOs are thriving on foreign aids and now evincing interest in external commercial borrowings for on lending to micro enterprises. The external borrowings for on lending to micro enterprises is fraught with danger particulars when proper rating and control mechanism is not inplace.

Sixth, the success of the SHG scheme is highly person specific, such as success of the Sewa Cooperative Bank, depends on Ela Bhatt and that of Oriental Bank Grameen Project [OBGP] on Tomar and Hooda. Any change in placement of these key persons may dampen the chances of success of these projects. The successful replication of SHG model, therefore, depend, among other things, on institutional and social setting. Even in congenial institutional and social settings instead of unbridled expansion slow and steady approach should be followed.

The Swarnjayanti Gram Swarozgar Yojana [SGSY] launched from April 1, 1999 envisaged upliftment of 30 per cent of below poverty line [BPL] families in the next five years. It has laid down special role for SHGs and NGOs as a conduit for financing micro activities at concessional rate of interest and capital subsidy. The SHGs outside the fold of SGSY or any other subsidised credit programmes may find going ahead tougher and tougher as they have to compete with thosedoling out subsidies. Besides, SGSY will take its own time to settle down and to proceed further. Till that time 70 per cent of the remaining micro-enterprises could not and should not wait.

Moreover, a vast country of sub-continent size like India should not get stuck with a single model. Keeping in view diverse social settings, our approach should be flexible enough to design and adopt multi-models to maximise outreach in a quickest possible time span. The sponsoring bank should provide loans to credit facilitator at prime lending rate for lending to micro enterprises with a spread not exceeding 6 per cent. However, entire credit risk of lending to micro enterprises will rest with the credit facilitator. So utmost care should be taken while selecting the credit facilitator ensuring certain eligibility conditions.

This model would have all the advantages of formal and informal rural financial markets without any weaknesses thereof. It goes without saying that system will integrate unorganised ruralfinancial markets with organised financial market and will pave the way for effective transmission mechanism of monetary policy to the areas which have remained uncharted for all along. The scheme is not new in Indian context as it is a restructured version of "Multani Hundi". A scheme broadly based on similar pattern is already in vogue in Sri Lanka.

The author is an economist with a banking organisation