Why Credit Coops Outdo Banks In Alleviating Financial Distress Of Informal Workers

Photo Credit: Devika Oberai

New Delhi: Inclusive financial networks such as credit cooperatives are more effective than traditional financial institutions in relieving the financial distress of women whose lives and livelihoods are hit by catastrophic events such as the COVID-19 pandemic, shows a yet-to-be-published survey by SEWA Bharat, a federation of women-led bodies that provide economic and social support to women in the informal sector

Here are some anecdotes from SEWA’s research in eastern Bihar’s Munger district that illustrate this finding: Gangadevi, 35, an agricultural worker, and her family of four were hit by the pandemic in ways that she cannot even fully describe but she managed to avoid a crushing loan. Lailadevi, 42, is engaged in animal husbandry and manages to save Rs 125 a month and it is these small savings that saved her from getting entangled in a debt spiral over the last two years. Both these instances were reported in the summer of 2021.

The pandemic led to all-round job loss and ensuing financial distress, especially among the poor. However, those who were affiliated to credit cooperatives supported by SEWA had an easier time accessing money to buy food, run households and pay rents, the study found.

In May-June 2021, SEWA Bharat conducted relief efforts, primarily the distribution of ration kits, in five states including Delhi, Bihar, and Uttarakhand. To understand the impact of the crisis on the lives of women, the organisation also conducted a survey featuring 319 women working in the informal economy across these three states. 

About 50% of respondents described themselves as homemakers. Others were occupied in different trades including agricultural, home-based work and domestic work. Upto 80% of them were SEWA members. Some of the questions featured in the survey were: How prepared were they to deal with the pandemic? What was the kind of stress they were facing? What kind of support from civil society and the government could help them to tide over these anxieties? 

A significant finding of the survey was that many women reported that their affiliation with SEWA’s credit cooperatives helped them access loans and credit opportunities that other, more formal final institutions do not offer them. Mostly women rely on moneylenders known to the community and they charge exorbitant interest that sends debtors into a debt trap and impoverishes them. Banks too, require multiple documents for identity verification that many migrants may not have access to, creating barriers to loans, credit, pension and insurance facilities. One of the reasons for this is the lack of institutional recognition for informal workers and thus, the lack of policies and programs that protect their interest.

54% remained confident

Financial inclusion facilitates the process of acquiring credit insurance, pension, loan and other such financial services in an affordable and accessible manner. Having access to inclusive networks seemed to have accelerated resilience building in women and decreased overall stress. 

Contrary to other findings, we observed that 54% of women demonstrated confidence in their ability to face potential challenges; and 45% were optimistic that the outcomes of their efforts would be favorable. The everyday challenges include poor working conditions, low wages, unpaid care work and so on. These were compounded during the pandemic when workers had to decide between returning to their workspace and moving on to other livelihoods. The survey thus indicated that access to financial inclusion systems built a community that moderated the women’s stress response and their experience of uncertainty during the pandemic.

Only 6% of women surveyed reported taking loans from moneylenders. The majority thus avoided burdensome coping strategies that accumulate hard-to-repay debts. Leeladevi from Indore in Madhya Pradesh and many others like her reported that their affiliation to the cooperatives benefited them the most in accessing finance and loans to run their households, pay rent and buy food.

Many women also switched to other sources of livelihood when disaster struck. Those who could not access their place of work or those who lost their employment, could invest in asset-building to run a business, we found. 

For instance, women took to mask making for Ruaab, a SEWA social enterprise. Women were also able to buy sewing machines and start tailoring businesses to support their families. Women in low-income communities with affordable and accessible financial services could thus strengthen their ability to mitigate and recover from crisis.

Trouble with traditional financial institutions

Women, in both formal and informal sectors, fare worse than men due to entrenched gender roles. This predisposes them to greater poverty, especially during crises such as COVID-19. The loss of employment and acceptance of low paid or underpaid jobs due was an everyday reality for many women during the pandemic. 

In crises, banks and private money lenders are largely ineffective in addressing women’s financial concerns because they choose to focus mostly on those working in formal sectors and are considered safe borrowers due to their steady and relatively higher incomes. They tend to deny loans and credit services to informal workers assuming that their current lack of capital indicates their inability to repay their loan.

Moneylenders continue to remain popular sources of loans and credit despite their usurious rates because they offer instant money, require no paperwork and background checks. But then they trap borrowers in debt cycles that are almost impossible to shed, as we said earlier. The forceful acquisition of collateral is also not uncommon. 

Banks also require detailed documentation for verification and background checks when they extend loans, and these papers are not easily accessible to informal sector workers due to the nature of their work. Moreover, workers are also unaware and unfamiliar with the detailed procedures relating to when, where and how to access financial services.

Bank saathi, from the grassroots

Traditionally, financial institutions are led by individuals in positions of power who may come from diverse backgrounds but lack the lived reality of the women in informal economy. But credit cooperatives such as those affiliated to SEWA are built on the model of financial inclusivity, entailing grassroots leadership which ensures an in-depth awareness of the lived experiences of the people who need to access finance. This means that cooperative policies are in accordance with the needs and demands of the community. 

The SEWA model involves a “Bank saathi”, a woman from the community who provides doorstep banking services. She is there at the point of mobilisation and is responsible for collecting savings every month and verifing an individual’s loan repayment potential. This literally translates to last-mile financial services coming to an informal worker instead of her scrambling to reach them. Saathis also conduct training sessions where women are encouraged to open savings accounts. The training sessions also include basic financial and digital literacy modules.  

Since saathis know the women in their localities closely, they make for better verifiers than banks and other financial institutions that rely on paperwork to do this task. Bank saathis thus become a known and reliable point of contact between a member and the cooperative while the modern banking system lacks this close touch. 

Also the longer term objective of SEWA cooperatives is to empower women to make their own financial decisions instead of being just short-term providers of funds. The services, products, and mechanisms are thus designed according to women’s needs – starting a business, educating children, repairing a house, expanding business, repaying old debts and being ready for sickness, calamities, and old age.

Alleviating stress

Informal employment creates precarious conditions, social, economical and mental due to the absence of state regulation and recognition. This precarity worsened during the COVID-19 pandemic and the mental health of workers became a cause of concern in both formal and formal sectors worldwide. 

Stress response, or strain, has been defined by Lazarus and colleagues (1984) as a psychological condition where the demands of the external environment cannot be met by the resources available to an individual. The pandemic created multiple such situations due to uncertainty about employment and finances and uncertainty about returning to the accustomed ways of life. Women workers were stressed by depletion of resources and these were exacerbated throughout the course of the pandemic. 

The inability to access finance and credit was seen as one of the most pertinent problems informal women workers faced. Thus, credit cooperatives that make financial services like loans, insurance, credit, etc. affordable, accessible and available to the last mile of the society can moderate stress among informal workers during such crises. Even in the absence of such a large-scale crisis, financial inclusion can be one of the pathways to strengthen resilience.

Policy lessons

  • Finance plays a role in community building and access to finance is linked to empowerment. This empowerment can be used by women to nurture the communities around them. They can access loans that help them and their families during economic crises to support their interests; paying children’s tuition fees for instance. 
  • Women can also start businesses that employ more people locally, from the grassroots communities thus promoting self reliance. Access to finance becomes most beneficial for women entrepreneurs, who operate in local markets, i.e. procure raw materials, as well as her employees from the grassroots, thus strengthening the local economy. 
  • Verification and vetting process adopted by these institutions is reductive and limited at best. It is important to acknowledge that the multiplicity of identities that inform modern banking practices – salary slips, identification cards and residential proofs – are documents that migrant workers struggle to access. Making verification processes more responsive to the needs of marginalized communities can be a step forward.
  • Civil society organisations must attempt to increase financial and digital literacy training to help individuals understand modern financial institutions and add to their understanding of savings. Training can also be the way to create awareness around more accessible and realistic alternatives to the modern banking systems. 
  • An attempt must also be made to bring last-mile financial services to those who need it. Between uncertain wage, working hours and uncertain social or legislative protection, informal workers cannot be expected to keep up with the demands that mainstream financial institutions represent. As an alternative, having access points in between banks and informal workers can make finance and credit opportunities more approachable. 

Devika Oberai is a psychology graduate and is currently working at SEWA Bharat as a Researcher, where her psycho-social research interests can intersect. She is interested in dissecting the role social institutions play in determining people's physiological and mental health.

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