Loans were given for enterprises which had no demand. There were no backward or forward linkages, no training or technical assistances provided. After having spent Rs. 20,000 crores for about 20 years, what it led to was an inadvertent creation of 45 million official defaulters. There was no recourse except to waive those loans. This led to the famous Devi Lal Loan Waiver of 1989, which was formally known as the Agricultural and Rural Debt Release Scheme of 1989. Under this scheme all loans by commercial banks below 10,000 rupees were written off and the cycle was supposed to start again.

The Era of Prudential Banking
In July 1991, India had to ship out 21 tonnes of gold out of the country to pay SBI’s foreign debts. Rigorous reforms were introduced soon after. The banking sector turned from social banking to prudential banking. Between 1992 to roughly 2003, banking statistics reveal that the total bank lending to the poor went down. In terms of percentages of total outstanding, which was as high as 19 per cent in 1993, it came down to about 5 per cent by 2003. In terms of number of loan accounts, it came down from about 56 million to about 38 million. By any yardstick, the banking sector started reforming but basically turned its back against the poor. But the need for credit did not vanish. And that’s how the so-called micro finance was born.
The need for micro finance was abiding and the interventions in response to that largely came from non market actors. The primary non market actor was the State. But by the late 1980s, civil society institutions and the Grameen Bankof Bangladesh had taken off.

Several NGOs started ooking for alternatives to the ldefunct, corrupt, IRDP type of loans and also wanted to break away from recalcitrant bankers.

Coming Together Finally- Self Help Groups
While banks like the ICICI and the IDBI gave loans to retail out, and though the SBI headquarters too was supportive, as one went down the chain it became difficult. That is why the concept of voluntary organisations becoming an alternative retail channel came into being.
The first formal loan came in 1986 from the National Bank for Agriculture and Rural Development (NABARD) to MYRADA, a voluntary organization in Karnataka. MYRADA helped form a large number of Self Help Groups (SHG) and started giving loans to them. Typically groups of about 20 women who lived within the same neighbourhood and came together voluntarily, were brought together by a voluntary or a government agency. Initially they start by meeting regularly and saving money on a monthly or fortnightly basis. The amount could be as low as Rs.10 a month or as high as Rs.100 per month. Generally the average is about Rs.30 monthly. The money is pooled and kept in a box or post office. Eventually, as the kitty grows they start giving small loans, between Rs. 200 – 300, out of that sum. More important is to build that experience of lending to each other. This involves appraisals, credit worthiness, and building trust. The process continues for a year and a record is maintained, which is very important. Then usually a microfinance institution or a bank gives them maybe twice or thrice more than their common pool.