Subsidy Impact on Sustainability of SHGs: An Empirical Analysis of Micro Lending through SGSY Scheme

Abstract

In sustaining rural livelihood, sustainability of credit provisioning operation is highly essential. It assumes more significance in the case of developing nations with low per capita income and high level of poverty. It is also important to note that in many of the developing nations the financial viability of rural lending institutions is not satisfactory. Studies of Hoff and Stiglitz, 1990, Adams and Pischke, 1992, Agarwala et al., 1997, and ADB 2000; have repeatedly cited this problem. Most importantly all of them put a question mark on the functioning of government run institutions and programmes. Most of the programmes were unsustainable because they were expensive, collected too little revenue, depended too heavily on outside funding, and often suffered serious default problems. Even worse, a substantial portion of the subsidies was captured by people who were not poor and who could have obtained loans in the commercial market (Adams and Pischke, 1992). The Indian experience also reveals that the addition of new institutional mechanism to address the issue of rural finance has not helped in improving the situation and in fact created new problems (Agarwala et al., 1997). The provision of subsidy as the patronage from the state is found in most of the rural lending institutions and many of the poverty alleviation and employment generation programmes launched by the Government of India. By merging the unsuccessful subsidy based Integrated Rural Development Programme (IRDP) and many others, another programme namely; Swarnajayanti Gram Swarozgar Yojana (SGSY) scheme was launched in 1999 to promote the economic well being of poor people by providing micro credit through the self-help groups (SHGs). The impact of this scheme, which carries a subsidy portion in its total loan component, on the sustainability of SHGs is yet to be analysed prominently in research studies.