Microfinance in India

Microfinance in India Microfinance in India Edited by K.G. Karmakar Copyright © K.G. Karmakar, 2008 All rights re...

Author: K. G. Karmakar

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Microfinance in India


Edited by

K.G. Karmakar

Copyright © K.G. Karmakar, 2008 All rights reserved. No part of this book may be reproduced or utilized in any form or by any means, electronic or mechanical, including photocopying, recording or by any information storage or retrieval system, without permission in writing from the publisher. First published in 2008 by SAGE Publications India Pvt Ltd B1/ I-1, Mohan Cooperative Industrial Area, Mathura Road, New Delhi 110 044, India www.sagepub.in SAGE Publications Inc 2455 Teller Road Thousand Oaks, California 91320, USA SAGE Publications Ltd 1 Oliver’s Yard, 55 City Road London EC1Y 1SP, United Kingdom SAGE Publications Asia-Pacific Pte Ltd 33 Pekin Street #02-01 Far East Square, Singapore 048763 Published by Vivek Mehra for SAGE Publications India Pvt Ltd, typeset in 10/12pt Times Roman by Excellent Laser Typesetters, Delhi and printed at Chaman Enterprises, New Delhi. Library of Congress Cataloging-in-Publication Data Microfinance in India/edited by K.G. Karmakar. p. cm. Includes bibliographical references and index. 1. Microfinance—India. 2. Rural development—India. 1952– HG178.33.I4M533 ISBN:

332—dc22

978-0-7619-3626-8 (HB)

I. Karmakar, K.G.,

2008

2007051845

978-81-7829-790-3 (India-HB)

The SAGE Team: Sugata Ghosh, Maneet Singh and Mathew P.J. Jacket Design by YaWeDo International

Dedicated to The Rural Women of India who have empowered themselves through the Self-Help Group Movement. Recall the face of the poorest and the weakest man, whom you may have seen and ask yourself, if the step you contemplate is going to be of any use to him. In other words, will it lead to self-reliance for the hungry and spiritually starving millions? Then you will find your doubts and yourself melting away. —Mahatma Gandhi If a free society cannot help the many who are poor, it cannot save the few who are rich. —J.F. Kennedy

Contents

List of Abbreviations Foreword

11 15

PART I Microfinance: An Overview 1.

A Financial System for India’s Poor Priya Basu

19

2.

Microfinance Revisited K.G. Karmakar

33

PART II Microfinance Institutions (MFIs) 3.

MFIs in India: An Overview K. Muralidhara Rao

57

4.

Regulatory Framework for MFIs Krishan Jindal

67

5.

Promoting Linkages between Banks and MFIs P. Satish

79

6.

Sustainability of MFIs Vijay Mahajan

95

PART III SHG-Bank Linkage Programme 7.

SHG-Bank Linkage Programme: Progress and Prospects Sukhbir Singh

113

8


08. SHGs and Savings Mobilization H.R. Dave

125

09. Livelihood Promotion among SHGs Pradeep Kashyap

135

10. Emerging SHG Federations and Challenges C.S. Reddy

143

11. Sustainability of SHGs N. Srinivasan

176

12. Impact of SGSY on SHG: Bank Linkages Thanksy Francis Thekkekara

188

PART IV Successful MFI Models 13. Why Sanghamitra is Different? Aloysius P. Fernandez 14. Beyond Microcredit: Building Nested Institutions of Savings and Credit Groups in India—The Kalanjiam Experience K. Narender

219

242

15. Banking with Poor Self-employed Women Jayshree Vyas

262

16. Good Practices in SHG Book-keeping: Three Case Studies Jan Meissner, Ramakrishna and Marie Luise Haberberger

274

17. Attaining Outreach and Viability: Case Study of Bandhan A.K. Parhi

324

PART V Successful Bank Models 18. Pandyan Grama Bank SHG Linkage Model S. Manickam

333

19. Prathama Bank: Farmers’ Club Model L.R. Ramachandran

343

Contents

9

20. Bidar DCCB-PACS Model B.B. Mohanty

358

21. Chandrapur DCCB-Anganwadi Model: A Case Study S. Santhanam

386

PART VI Innovations for Growth 22. Role of Technology as a Growth Catalyst in the Microfinance Sector Niket Kamdar and Puneet Gupta 23. Leveraging Mutual Guarantees for Gaining Financial Access: Joint Liability Groups as Collateral Substitutes B.S. Suran

397

409

24. The ‘Credit Plus’ Approach for Tribal Development K.G. Karmakar and N.P. Mohapatra

425

25. Innovations in Credit Delivery Systems K.G. Karmakar and N.P. Mohapatra

448

About the Editor and Contributors Index

470 479

List of Abbreviations

ACSTI AD AIDIS APMACS Act APMAS ASA ASP ASSEFA BAAC BASIX BC BIRD BISWA BOA BPL BRAC BS C&AG CAMEL CAPART CARE CASHE CBO CCD CDR

Agricultural Cooperative Staff Training Institute Authorized Dealer All India Debt and Investment Survey Andhra Pradesh Mutually Aided Cooperative Societies Act Andhra Pradesh Mahila Abhivruddhi Society Association for Social Advancement Ankuram Sangamam Porutm, Andhra Pradesh Association for Sarva Seva Farms Bank for Agriculture and Agricultural Cooperatives Bharatiya Samruddhi Investment and Consulting Services Banking Correspondent Bankers’ Institute for Rural Development Bharat Integrated Social Welfare Association Books of Accounts Below Poverty Line Bangladesh Rural Advancement Committee Balance Sheet Comptroller and Auditor General Capital Adequacy, Assets Quality, Management, Earnings and Liquidity Management Council for Advancement of Peoples’ Action and Rural Technology Cooperative for American Relief Everywhere Credit and Savings for Household Enterprise Community Based Organization Covenant Centre for Development Credit Deposit Ratio

12


CDFI CEAD CEFI CM CMS COVA CRISIL CRR DCB DCCB DDM DFID DHAN DOS DPIP DRDA DWCRA ECB FARR FC FI FWWB GA GIRAFE

GOI GRADES

GRAM GTZ ICDS IFAD IPCARDB IRDP IRMA

Community Development Financial Institution Centre for Education and Agriculture Development, NGO, AP Community Enterprise Forum International Computer Munshi Computer Munshi System Confederation of Voluntary Association Credit Rating Information Services of India Ltd. Cash Reserve Ratio District Cooperative Bank District Central Cooperative Bank District Development Manager Department for International Development (UK) Development of Humane Action Disk Operating System District Poverty Initiatives Project District Rural Development Authority Development of Women and Children in Rural Areas External Commercial Borrowings Friends Association for Rural Reconstruction Farmers’ Club Financial Institution Friends of Women’s World Banking Group Accountant Governance and Decision Making Process, Information and Management Tools, Risk Analysis and Control, Assets Including Loan Portfolio, Funding (equity and liabilities), Efficiency and Profitability Government of India Governance and Strategy, Resources, Asset Quality, Design of Systems and Implementation, Efficiency and Profitability and Services to SHGs Gramaabhudaya Mandali Deutsche Gesellschaft f ü r Technische Zusammenarbeit (GTZ) GmbH Integrated Child Development Services International Fund for Agricultural Development Irinjalakuda Primary Credit Agriculture and Rural Development Bank Integrated Rural Development Programme Institute of Rural Management, Anand

List of Abbreviations

IRV JLGs KCBP KVIC KYC LAB LFI LIC LMS LRTS M-CRIL MAPP MART MAVIM MCID MFDEF MFDF MIS MRCP MYRADA NABARD NBFC NBSC NCAER NDDP NEED NGO NID NPA PACS PANI PCARDB PLR PRA PRADAN PRI RBI RDD REDP

Individual Rural Volunteer Joint Liability Groups Kalanjiam Community Banking Programme Khadi and Village Industries Corporation Know Your Customer Local Area Bank Local Financial Institution Life Insurance Corporation of India Liquidity Management Support Local Resources and Traditional Skills Microcredit Ratings International Limited Massive Agriculture Production Programme Market and Research Team Mahila Arthik Vikas Mahamandal Microcredit Innovation Department, NABARD Microfinance Development and Equity Fund Microfinance Development Fund Management Information System Maharashtra Rural Credit Project Mysore Resettlement and Development Agency National Bank for Agriculture and Rural Development Non-Banking Financial Companies National Bank Staff College National Council of Applied Economic Research Net District Domestic Product Network of Entrepreneurship and Economic Development Non-Government Organization National Institute of Design Non-Performing Assets Primary Agricultural Cooperative Societies People’s Action for National Integration Primary Credit Agriculture and Rural Development Bank Prime Lending Rate Participatory Rapid Appraisal Professional Assistance for Development Action Panchayati Raj Institutions Reserve Bank of India Rural Development Department Rural Entrepreneurship Development Programme

13

14


RFAS RMK RMTS RRB RSVY RUDSETI SAG SAHARDA SBI SCARDB SEEP SERP SEWA SFMC SGRY SGSY SHARSETI SHG-BLP SHPI SIDBI SITRA SLR SME SRO STD TAHDCO TMSSS TNCWDC TNWDC TRYSEM TSS UNDP UNIDO UPLDC VMSSS VVV WWF ZP

Rural Financial Access Survey Rashtriya Mahila Kosh Regular Meeting Transaction Statement Regional Rural Bank Rashtriya Sam Vikas Yojana Rural Development and Self Employment Training Institute Self Help Affinity Group Sahakara Rural Development Academy State Bank of India State Credit Agriculture and Rural Development Bank Small Enterprise Education and Promotion Society for Elimination of Rural Poverty Self Employed Women’s Association SIDBI Foundation for Micro Credit Swarnajayanti Gram Rozgar Yojana Swarnajayanti Grameen Swarozgar Yojana Shakara Rural Development and Self Employment Training Institute Self Help Group Bank Linkage Programme Self Help Promoting Institution Small Industries Development Bank of India Supply of Improved Toolkits to Rural Artisans Statutory Liquidity Ratio Small and Medium Enterprises Self Regulatory Organization Subscriber Trunk Dialling Tamil Nadu Adi Dravidar Housing and Development Corporation Tuticorin Multipurpose Social Service Society Tamil Nadu Child and Women Development Corporation Tamil Nadu Women’s Development Corporation Training of Rural Youth for Self Employment Tirunelveli Social Service Society United Nations Development Programme United Nations Industries Development Organization Uttar Pradesh Land Development Corporation Vallitoor Multipurpose Social Service Society Vikas Volunteer Vahini Working Women’s Forum Zilla Panchayat

Foreword

I

am glad to be invited to write a foreword to this collection of essays on microfinance being published by NABARD. Having formulated the five principles of ‘Development through Credit’, in the 1980s, I have been working with interest on NABARD’s initiatives since 1992 for the uplift of the poor through microfinance and their further economic development. It has been a long journey for NABARD on the microfinance route and an exciting one with surprising twists and turns and there is yet no sign of the main goals to be reached. By the time some of the goals are reached, the main goals themselves get shifted upwards. Many believe that microfinance is at best a minor tool in poverty eradication, and as such is incapable of creating fundamental changes and that the delivery mechanism through SHGs, cannot be scaled up sufficiently to make a real dent on poverty. Microfinance operates on an incremental approach and cannot be expected to generate instant results. Several cycles of lending in SHGs may result in reversing the conditions of abject poverty and ensure that besides meeting the consumption needs of the family, the production/ investment credit are also met eventually. In other words, the SHG members are developed into microentrepreneurs. This process is necessarily long and takes time. For any financial institution to succeed, strong governance norms, the rule of law, negligible corruption levels and perseverance are essential. These attributes are equally necessary for microfinance institutions or SHG federations. Besides, the quality of service and the ability to anticipate problems in SHGs before they occur, are added requirements. However, best practices can always be highlighted so as to infuse reforms in the concerned institutions. We must always remember that the poor do strive hard to break out of the shackles of poverty and meet their economic needs. While doing so, they also contribute their mite to national

16


wealth creation. Microfinance enables the poor people to scale up their operations, in an affordable manner. Microfinance is not charity. The poor cannot be left to the tender mercies of those who look down upon microfinance as ‘discretionary’ funding and the members of SHGs as ‘beneficiaries’. Truly, they are all partners in a common endeavour. Microfinance in the form of bank SHG linkage model has been able to inspire hope in the lives of thousands of rural people, women in particular, and also enable them to contribute to their families’ well-being, through their savings and enterprise. For banks, it is a business opportunity and for bank officials, it is an opportunity to extend their rural clientele without much risk, as the recovery levels exceed 95 per cent. The SHG members of today could turn out to be clients for several financial products over the years! For the NGOs/NABARD officials, policies have to be developed to harness market forces and yet help the poor to survive and advance. The UNO celebrated 2005 as the year of Microcredit and our endeavour has been to celebrate the achievements of the millions of poor women who have formed SHGs and empowered themselves in the process and also to present the endless array of innovations evolved by the Indian microcredit delivery system. It has been an exciting challenge and my fervent hope and belief is that as long as the rural people keep on innovating and evolving, the assault on poverty will continue and be won eventually. We take pride in the largest microfinance programme in the World and cherish all the contributions made by thousands of truly brilliant SHG innovators. They are indeed our real heroes and heroines. We hope that these carefully selected papers are able to convey the scope of the timely and path-breaking innovations in microfinance practices and can be emulated by our brothers and sisters, everywhere. I am doubly pleased to learn that the royalty proceeds of this book will be donated to the Prime Minister’s Relief Fund by the publishers, in order to help poor people in distress. M. Ramakrishnayya Founder Chairman, NABARD Hyderabad

Part I

MICROFINANCE An Overview

1 A Financial System for India’s Poor PRIYA BASU*

The strategies that were designed to increase access to finance for the poor have not delivered their intended outcomes. It is not just policies, but institutions and markets that need to be transformed so as to improve the efficiency of the formal rural finance sector.

INTRODUCTION

A

growing body of research from around the world shows that well developed and inclusive financial systems are associated with faster growth and better income distribution.1 Finance helps the poor catch up with the rest of the economy as it grows. Finance also helps extend the range of individuals, households and firms that can get a foothold in the modern economy, and it reduces damaging concentrations of economic power. By and large, thanks to microfinance, there is now a growing appreciation of the ‘empowerment’ dimension of finance, of the extent to which it can give ordinary people and the poor access to opportunity and the ability to escape ossified social structures. It is perhaps symbolic of * Email: [email protected] 1 See, for example, Beck, Demirguc-Kunt and Levine (2004); Honohan (2004). Furthermore, financial sector development has been shown to relax the constraints on small firms the most. See, for example, Beck, Demirguc-Kunt and Maksimovic (2005); Beck, Demirguc-Kunt, Laeven and Levine (2005). The conceptual links between finance and poverty reduction are presented persuasively by Rajan and Zingales (2003).

20

Priya Basu

this evolutionary thinking that ‘building inclusive financial systems that work for the poor’ has become the mantra of the United Nations International Year of Microcredit 2005. In India, since the early national plans, successive governments have emphasized the role of finance in promoting equitable growth.2 With the overwhelming majority of India’s poor living in rural areas, policies aimed at financial inclusion have understandably had a rural focus.3 The objectives of broad-based financial development that would allow financial institutions to mobilize savings from throughout the economy and allocate them to agriculture and small industry, particularly in the countryside, motivated the establishment of a vast network of rural cooperative banks in the 1950s. Other institutions were built at the national, state, district and village levels to intermediate savings and credit for investment. But big corporations, with majority ownership in many of the commercial banks, cornered much of the bank credit. There were also many bank failures in the early 1960s, affecting the flow of credit to agriculture and small industry. As the desired policy objectives were not being met, a drive to nationalize commercial banks was launched by Indira Gandhi in 1969. Nationalization had four goals: to prevent a few corporations from controlling all the banks; to mobilize the savings of the public (including from remote areas); to limit the concentration of wealth and economic power by using resources mobilized by banks to achieve egalitarian growth; and to pay more attention to priority sectors (agriculture and small industry). Between 1969 and 1980, thousands of new bank branches were established across rural India. Throughout this period, the strategy for banking was shaped by the goal of ‘serving better the needs of the development of the economy in conformity with the national policy and objectives’.4 Social benefit rather than profitability was the overriding objective and the two were not seen as naturally compatible. The strategy during the 1970s and 1980s gave the lead role to the nationalized commercial banks, which were charged with loosening the grip of traditional informal sector moneylenders through the use of targeted, low-priced loans. 2 The focus on poverty and finance was articulated most famously in the Report on the All-India Rural Credit Survey of 1951–52. Reserve Bank of India, 1954. For a good summary of the evolution of India’s banking policies, see Mohan and Prasad (2005). 3 Even today, poverty is concentrated in rural areas. Of the estimated 260 million Indians (or 26 per cent of the population) who live in poverty, some 193 million (or 74 per cent) live in rural areas. Another 180 million rural people are ‘near poor’. A majority of these households are marginal or small farmers, and the poorest households are landless. 4 Reserve Bank of India (1983).

A Financial System for India’s Poor

21

Credit planning, involving quantitative credit targets and subsidized credit, became the order of the day. Mandatory requirements were placed on banks to direct large proportions of their credit to priority sectors, including agriculture, small-scale industries and other sectors, identified as critical for bringing about economic and social change in rural areas. A ‘service area approach’ was adopted to focus banks on their clients. Under this approach, rural branches were given a service area of 15–20 villages in which to operate, and other banks were allowed to set up a branch in that area only after obtaining a ‘no objection’ certificate. Severe constraints were placed on the operational and financial autonomy of banks. The 1990s saw increased competition and liberalization in the Indian financial sector, but some of the key features of rural credit planning have persisted, and perhaps even more importantly, mindsets have not changed as much as one would have expected. Over the past decade, interest rates have been largely deregulated, although lending rates on small loans (under Rs 2,00,000) are ‘capped’ at the prime lending rate (PLR), which banks are free to set; also, there is a ‘floor’ on short-term deposit rates. Priority sector credit requirements have been eased, but remain high at 40 per cent. Debt or interest waiver schemes are used frequently. Competition in the banking sector has increased, but the public sector banks (including the nationalized banks, the State Bank of India and Regional Rural Banks) continue to dominate the banking system, accounting for 73 per cent of commercial banking assets and 52.4 per cent of the assets of all financial institutions in the system. Competition is particularly weak in rural areas, although the recent decision to dispense with some of the restrictive provisions of the service area approach may help stimulate the entry of new branches in rural areas. Underpinning this stance on banking—which has come to be known as ‘social banking’—is a belief that small borrowers are not really ‘bankable’, that banks will serve the rural poor and small-scale industry only if they are mandated by policy to do so, and that competition has to be restricted to ensure that banks do serve such clients. This has formed the basis for maintaining a government-dominated banking system. Suggestions of bank privatization are branded as being ‘anti-poor’ and shot down on the grounds that it is only by keeping the majority of banking assets in the government’s control that finance can be made available to the poor. This chapter seeks to assess whether, and to what extent, the social banking stance of successive post-independence governments in India has improved access to finance for the poor. It presents some

22

Priya Basu

evidence on the level of inclusiveness of Indian banking, using measures of access to finance. It traces some positive developments over time, but highlights the current inadequacies in access to finance for India’s rural population, and particularly the poor. It also examines why results have not lived upto expectations, and tries to explain what lies behind this divergence between strategy and outcomes. In conclusion, it provides some suggestions on how to build a more inclusive financial system. TABLE 1.1 Share of Rural Household Debt by Source of Credit, All India, 1951–91 (Percentage) Year

1951 1961 1971 1981 1991

Institutional Banks

Cooperatives

1.1 0.3 2.4 28.6 29.0

4.6 10.4 20.1 28.6 18.6

Non-Institutional

GovernTotal ment Institutions 3.1 6.6 6.7 0.4 5.7

8.8 17.3 29.2 61.2 53.3

Relatives/ MoneyFriends lenders 14.4 5.8 13.8 9.0 6.7

68.6 60.9 36.9 16.9 15.7

Others* 8.2 16.0 20.1 12.9 24.3

Source: All India Rural Credit Survey and All India Debt and Investment Survey (AIDIS). Note: *‘Others’ include non-institutional sources other than friends and relatives and moneylenders, e.g., traders, agriculturist moneylender, landlord, etc.

HOW INCLUSIVE IS INDIAN BANKING TODAY? Over the years, Indian banking has certainly become more inclusive. But the majority of the rural population still does not appear to have access to finance from a formal source, and the poor face particularly severe problems in getting finance. Data from the All India Debt and Investment Surveys indicate that the share of commercial banks and cooperative banks in rural household debt increased from just 10.7 per cent in 1961 to 22.5 per cent in 1971 and then rose sharply to 57.2 per cent in 1981. In the decade that followed, the share of banks remained more or less stable, while that of cooperatives declined slightly. The share of moneylenders declined over the decades. Since 1991, no official survey of rural access to finance has been conducted. However, a recent survey by the World Bank and the National Council of Applied Economic Research (NCAER)—the Rural Finance Access Survey (RFAS) 2003—allows for some analysis of trends


23

between 1991 and 2003.5 Relative to the findings of the AIDIS 1991, the incidence of indebtedness (i.e., proportion of households with debt outstanding to a formal finance institution) had further increased by 2003, indicating greater access and the ability to borrow.6 Under the assumption that households ‘prefer’ formal borrowing and were earlier rationed due to inadequate supply of such debt, the increase in formal indebtedness could be viewed as an improvement (Table 1.2). TABLE 1.2 Summary Comparison of AIDIS 1991 and RFAS 2003

Percentage of households indebted AIDIS-1991 RFAS-2003 Average debt per household AIDIS-1991 RFAS-2003

All India Formal

UP Formal

AP Formal

15.6

12.5 19.4

16.5 24.0

1221.0

1521.0 6376.0

1691.6 4313.0

Sources: RBI; National Sample Survey Organization (NSSO) Report No. 420; RFAS 2003.

Notwithstanding the progress made over the decades, the majority of the rural population still does not appear to have access to finance from a formal source. According to the RFAS 2003, some 59 per cent of rural households do not have a deposit account and 79 per cent of rural households have no access to credit from a formal source. The problem of access is even more severe for poorer households in rural areas. Indeed, bank branches in rural areas appear to serve primarily the needs of richer borrowers: some 66 per cent of large farmers have a deposit account; 44 per cent have access to credit. Meanwhile, 70 per cent of marginal farmers do not have a bank account and 87 per cent have no access to credit from a formal source. Another segment that faces serious problems in accessing formal finance is the commercial household (i.e., microenterprise) segment (Figure 1.1). Amongst formal institutions, commercial banks are by far the most dominant source of formal finance for rural households. They account 5 RFAS 2003 covers 6,000 rural households in two Indian states—Andhra Pradesh (AP) and Uttar Pradesh (UP). See World Bank (2004); Basu and Srivastava (2005). 6 Higher incidence of debt can be interpreted in different ways; it could signify greater access and ability to borrow but it could also denote greater distress leading to higher demand for debt.

24

Priya Basu FIGURE 1.1 Access to Finance—RFAS 2003 (Percentage)

100.0 80.0

87.0 70.4

83.2 70.5

69.2 58.0

55.6

60.0

44.7

58.8 39.1

34.0

40.0

70.9

20.0

No credit account

Total

Others

Commercial

Large

Small

Marginal

0.0

No savings account

Source: RFAS 2003. Note: Marginal farming households = landholding 4 acres; Commercial households = with or w/o land but with income from nonfarm sources exceeding half of total household income; Others = mixed households with land and non-farm commercial incomes but the latter being less than half of their total household income.

for 51 per cent of household deposit, and are also the most important source of credit for those rural households who have access to the formal sector. Regional Rural Banks (RRBs) account for 34 per cent of household deposits and 31 per cent of credit. Other formal sources, such as cooperatives and post office branches, appear to play a modest role in providing savings and credit services to rural households. For the minority with no access to finance from a formal source, transaction costs are high. The RFAS 2003 indicates that all types of formal institutions demand bribes before approving loans. On average, some 27 per cent (and 48 per cent in UP) of sample households who borrowed from a RRB, a little under 27 per cent of households who borrowed from a commercial bank, and 10 per cent of households who borrowed from a credit cooperative, had to pay a bribe to get a loan. The bribe amounts are hefty, ranging from 10 per cent of the loan amount (in the case of banks) to 20 per cent (in the case of cooperatives). Procedures for opening an account or seeking a loan are cumbersome and costly, with high rejection rates. It takes, on average, 33 weeks for a loan to be approved by a commercial bank. Longer processing times for loans, together with bribes, have resulted in high effective costs for small borrowers (Table 1.3).


25

TABLE 1.3 Aspects of Formal Borrowing and its Costs Bank Interest rate (median) per cent p.a. Loan amount received as per cent of amount applied Percentage households reporting bribes Bribe as per cent of amount approved Time taken to process a loan application (weeks)

RRB Cooperatives Schemes Others

12.5

11.0

11.0

14.0

14.0

91.8 26.8 10.1

88.2 27.0 18.2

83.5 9.7 19.9

86.6 27.3 42.3

93.9 23.2 8.3

33.0

28.5

24.0

89.0

14.3

Source: RFAS 2003.

Another problem is that banks demand collateral, which the poor lack. Indeed, the majority of loans extended by commercial banks, RRBs and cooperatives are collateralized, with 89 per cent of households who borrowed from RRBs, and 87 per cent of households who borrowed from commercial banks, reporting that they had to provide collateral (RFAS 2003). Land remains by far the most predominant form of collateral. But this collateral is seldom executed, so it is just another cost, with little benefit in practice. Poor access to finance has led to a heavy reliance by rural household on informal finance, from moneylenders, friends and relatives, etc. Around 44 per cent of the households surveyed by RFAS 2003 report having borrowed informally at least once in the preceding 12 months; the interest charged on informal loans average 48 per cent per annum. Not surprisingly, informal borrowing is very important for the poorest (marginal and commercial categories), who are the most deprived of formal finance, though it is important for virtually all household categories (Table 1.4). TABLE 1.4 Incidence and Size of Informal Borrowing by Household Category (Per cent of Households unless otherwise stated) Bank Borrowed in past 12 months Loans currently outstanding Average debt/borrower (Rs) Average debt/household (Rs)

RRB Cooperatives Schemes Others

48.24 39.84 44.58 34.79 9,152 12,523 4,332 4,834

35.90 31.45 18,572 6,373

39.07 36.13 13,075 5,007

42.82 39.90 17,885 7,495

Total 44.06 40.07 11,136 4,790

Source: RFAS 2003.

DIVERGENCE BETWEEN STRATEGY AND OUTCOMES Clearly, the strategy and policies of successive governments over the past four decades or so, designed to achieve pro-poor financial sector

26

Priya Basu

development, have not quite delivered in terms of improving access to finance for most rural households, particularly the poor and other small borrowers. By keeping rural banking in public hands, and restricting competition through the ‘service area approach’, newer and more innovative entrants have been largely kept out of rural lending. Meanwhile, the government-dominated rural banks have not met with much success. In large part, this is because they have operated in a framework of distorted incentives that have led to deep inefficiencies. Indeed, many rural banks, particularly RRBs and rural cooperative banks, are in such a weak financial position, owing to decades of political interference, poor governance and bad management in the face of distorted incentives, that they are no longer in a position to perform their task of financial intermediation (Figure 1.2). These problems are exacerbated by problems of risk averseness and conservatism. The inability of small borrowers to provide collateral, coupled with their irregular/volatile income streams and expenditure patterns, in the face of insufficient credit information, drives up the default risk. Transaction costs of dealing with the poor also tend to be high because of small loan sizes, the high frequency of transaction, large geographical spread, heterogeneity of borrowers and widespread illiteracy. Returns on such lending can be high, as demonstrated by the experience of banks that have an appetite for risk and innovation, and also by the experience of microfinance. But risk-taking and innovation are qualities that do not automatically spring to mind when one thinks of India’s public sector bankers. FIGURE 1.2 Status of Rural Banking in India

80 58.9

60

48.9 32

40 20

63

14

21

0 Percentage that are unprofitable RRBs

Percentage that are undercapitalised

DCCBs

StCBs

Source: RBI and NABARD. Note: RRBs (196) DCCBs (367) StCBs (29). Figures in brackets represent total numbers of rural banks.


27

At the same time, other special policies to support rural lending through the formal sector, for example, through priority sector credit targets, do not appear to have done much to help the poor access finance. Year after year, banks report having fulfilled the priority sector lending targets. But it seems they are able to get round the target by subscribing to other eligible instruments, for example, by investing in bonds issued by apex banks such as the National Bank for Agriculture and Rural Development (NABARD) and the Small Industries Development Bank of India (SIDBI), instead of direct lending (this is expected to change, in light of the recent policy that makes investments in bonds issued by certain institutions ineligible for classification under priority sector lending).7 Even when banks do lend directly to priority sectors—for example, to agriculture— the benefits tend to be captured by the larger and more prosperous farmers, while marginal and small farmers remain largely excluded and have to rely on moneylenders. It is also worth mentioning that, in the name of priority sector lending, banks have made loans that represent bad credit decisions; at the end of March 2004, almost 10 per cent of the total priority sector advances of public sector banks were reported as non-performing, as against 6.8 per cent of their non-priority sector advances reported as non-performing. Priority sector non-performing assets (NPAs) accounted for 47.5 per cent of the total NPAs of the public sector banks. Provisioning for these NPAs has eroded the capital base of banks, reducing the space for new lending. Policies on interest rates for small loans also do not appear to have provided the poor with better access to finance and may, in fact, have reduced the attractiveness of lending to smaller clients, with the unintended consequence of ‘credit rationing’. With lending rates on small loans ‘capped’ at PLR, and banks’ borrowing costs kept high by ‘floors’ on short-term deposit rate, banks are faced with an ‘implicit tax’: losses in the income of rural banks from lower lending rates are estimated at US$ 550 million to US$ 1.1 billion; this implies that the net profit of the banking sector is 30 per cent lower than what it could have been.8 An outcome of these realities has been a dilution of the credit-creating role of banks. Distorted risk and return signals have led banks to adopt asset allocation strategies that favour investment in government 7 In order to encourage direct lending to priority sectors, investments made by banks on or after 1 April 2005 in special bonds issued by certain institutions have been made ineligible for classification under priority sector lending. 8 See Basu and Srivastava (2005a).

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Priya Basu

securities over credit, and deny access to poor, rural clients and other small borrowers.9 Investments in government securities and other approved securities amounted to 41 per cent of net demand and time liabilities at end-March 2004, well in excess of the required statutory liquidity ratio of 25 per cent. Meanwhile, credit represented just 44 per cent of bank assets and 55 per cent of their deposits, ratio that are substantially lower than in most OECD countries. However, the recent increase in interest rates has reduced banks’ appetite for government securities, and the revaluation of existing securities in their portfolios is putting pressure on profitability. It remains to be seen whether, and to what extent, these pressures will force banks to start looking for new and profitable lending avenues that could benefit clients at the bottom of the pyramid, and how much freedom banks will have to pursue such strategies, in the face of high fiscal deficits that will have to be financed from somewhere. Meanwhile, to compensate for the relative lack of success with which formal banks have been able to serve the poor, new microfinance approaches are being developed. Some of these, such as the linkage between self help groups (SHGs) and banks championed by NABARD, have received strong support from government. Others have been led by the private sector. But outreach has been modest so far: latest estimates suggest that SHG-bank linkage reaches about six million women through credit services, and specialized microfinance institutions provide credit to another one to two million clients. Thus, Indian microfinance directly reaches about eight million customers through credit services in a country where 260 million people live below the poverty line. Microfinance can be scaled up, and it deserves whatever support it needs from government. However, microfinance is no substitute for an efficient formal financial sector and, in the longer run, microfinance clients would, in any case, need to graduate to banks and other formal financial institutions where they could access standard ‘individual’ loans of slightly larger sizes.10 9 Indian bank managers found that they could make large profits from the trading of government securities in an environment of declining interest rates (and bankers in India did not appear to have a full appreciation of the interest rate risk involved in such investment allocation decisions, viewing government securities as risk-free assets). Income on sale of investments thus rose steadily in the late 1990s up until 2003, accounting for around 33 per cent of operating profits in FY 2002–03. Simultaneously, the share in total income of interest income on advances fell to levels below 40 per cent. For a detailed analysis of these issues, see Basu (2005). 10 This case is made persuasively by Murdoch and Rutherford (2003). See also Basu and Srivastava (2005); Basu and Srivastava (2005a).


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TOWARDS A MORE INCLUSIVE FINANCIAL SYSTEM: THE AGENDA AHEAD If India is serious about building a more inclusive financial system that works for the poor, it must re-think its rural finance strategy. Policies, institutions and markets will need to be transformed with an eye on improving the efficiency of the formal rural finance sector. In the short-term, much can be achieved by introducing more appropriate products and services, simplifying procedures and re-thinking staffing policies. Introducing flexible products: The rural poor have irregular/volatile income streams and expenditure needs, and therefore, prefer to borrow frequently, and repay in small instalments. An immediate challenge for banks and other formal financial institutions is to introduce products and services that are better tailored to the needs of the poor. Here, there are lessons to be learnt from microfinance. For instance, a critical breakthrough for the Grameen Bank in Bangladesh was to create a loan product that allowed borrowers to repay in small, weekly instalments. This suited poor households well, since they could repay out of the regular bits of income coming in daily or near-daily. Need for composite financial services: While small rural borrowers seek savings and lending services, they also seek insurance (life, health, crop insurance, etc.); bank branches in rural areas would do well to explore opportunities to offer composite financial services, as they have begun to do in urban areas, and as some microfinanciers have begun to offer in rural and urban areas. Simplification of procedures to open a bank account, access credit, etc., could also go a long way in encouraging the poor to bank with the formal sector, by reducing clients’ transaction costs. The Kisan Credit Card experiment is a move in the right direction, but it needs to be scaled up and accompanied by procedural simplifications. Technology can also play an important role in simplifying procedures and reducing transactions costs for banks and their clients, alike. Better staffing policies and doorstep banking: Public sector banks currently do not have the flexibility to recruit staff locally, but staffing policies could be revisited. Branch managers recruited from local areas

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are much more likely to understand their clients’ needs and deal with them sympathetically than managers who are parachuted from the metros. Doorstep banking would help improve recovery. It is costly, but the gains from better recovery and cost savings from hiring local staff in rural branches could well outweigh the higher transaction costs of doorstep banking. It is worth noting in this context that the high recovery rates of microfinance are associated with staffing policies that allow recruiting staff from the local area who understand clients’ needs, and a focus on doorstep banking.

IMPROVING

THE

INCENTIVE REGIME,

AND

PROMOTING COMPETITION

Over the longer-term, building a more inclusive banking system will require more fundamental changes to improve the incentive regime, promote competition and enhance the efficiency of rural financial institutions and markets. Making ‘priority sector’ lending obligations tradable: Government should also consider revisiting its policy on priority sector lending requirements imposed on banks. One option, that would allow the most competitive lender to emerge in rural areas and minimize distortions, is for government to make the priority lending obligation ‘tradable’. The most competitive lender would then be paid by the less well-placed banks to effectively take on their priority lending requirements for a price. Creating such a market for priority lending requirements would benefit both banks and the rural poor, who would be able to access finance from the most efficient and competitive institution. Interest rates: One obvious area could be for government to revisit its policy of setting interest rate ‘caps’ on rural lending rates and ‘floors’ on the deposit rates. As noted above, caps and floors have the opposite effect of what is intended—poor borrowers are cut off from access and end up paying higher interest rates to informal lenders. Meanwhile, banks face an implicit tax (cost) that is not insignificant. Entry of new private banks in rural finance: The entry of private banks could have a good demonstration effect for other rural banks on how to reduce transaction costs and make rural banking profitable. Some private banks, such as ICICI Bank, have shown a growing interest in entering rural finance—and have introduced innovative approaches and financial products designed to reach the rural poor. The government needs to do what it takes to create an environment that would make it possible and


31

profitable for interested private banks to enter the rural financial market. In this context, the recent decision to dispense with some of the restrictive provisions of the service area approach is a welcome move. But much more needs to be done to increase competition in rural banking. For one thing, interest rates would need to be fully liberalized (see above) so that lending to small, rural clients can become a more profitable business for banks. Branch licensing policies and procedures also need to be revisited (private banks may be interested in buying up the branch networks of the government-owned rural banks). Better regulation and supervision would pave the way for the restructuring of rural banks: Weaknesses in regulatory standards, poor enforcement and regulatory forbearance, have contributed to the deep financial distress that characterizes many RRBs and cooperatives, and have undermined market discipline. Prudential regulation standards (related to capital adequacy, asset classification, income recognition and provisioning) for RRBs and rural cooperative banks urgently need to be upgraded to match up to the standards for commercial banks, and supervisory enforcement needs to be tightened. This would help wean out the good banks from the bad ones. At the same time, a more effective prompt corrective framework for dealing with troubled banks needs to be put in place. Dealing with inefficient RRBs and rural cooperative banks: Sooner or later, India’s policy-makers will have to face up to the serious problems that continue to plague many banks operating in rural areas. Over the years, various task forces and committees have highlighted what needs to be done to deal with the weaker commercial banks, RRBs and rural cooperative banks. This may involve tough measures, perhaps requiring government to let go of its control over rural banking, making way for new entrants. Inevitably, there will be many who will oppose such change—albeit for different reasons. But those who oppose change on the grounds that it will generate anti-poor outcomes need only look at the large number of the rural poor in India today who are denied access to finance by a system that is largely controlled by government. Beyond these measures, government can also play an active role in other areas to facilitate increased efficiency of rural finance markets: Better laws and regulations governing financial transactions, a judiciary that can enforce contracts, the demarcation of property and improvements in land titling, better credit information, and an enhanced regulatory, supervisory and legal framework to support the development of price

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insurance products, price derivatives instruments and commodities futures markets can go a long way in helping India’s rural poor access finance on better terms. The measures discussed above constitute a formidable reform agenda. Many of the changes required in rural finance, as in other sectors, challenge the interests of privileged groups, and some could involve painful adjustments. But there is something far more significant at stake. To postpone action is to deny the poor the right to obtain the financial resources that they need to catch up with the rest of economy as it grows.

ACKNOWLEDGEMENT The article ‘A Financial System for India’s Poor’ by Priya Basu was first published under the ‘HT Parekh Finance Forum’ section of the Economic and Political Weekly dated 10 September 2005, Volume 40, Number 37.

REFERENCES Basu, Priya (ed.). 2005. India’s Financial Sector: Recent Reforms, Future Challenges. New Delhi: Macmillan and Washington, D.C.: World Bank. Basu, Priya and Srivastava. 2005. ‘Exploring Possibilities: Microfinance and Rural Credit Access for the Poor in India’, Economic and Political Weekly, 40(17): 1747–56. —————. 2005a. ‘Improving Access to Finance for India’s Rural Poor’, in Basu, Priya (2005), op. cit. Beck, Thorsten, Asly Demirguc-Kunt and Ross Levine. 2004. ‘Finance, Inequality and Poverty: Cross-Country Evidence’, Working Paper. Washington, D.C.: World Bank. Beck, Thorsten, Asly Demirguc-Kunt, Lue Laeven and Ross Levine. 2005. ‘Finance, Firm Size, and Growth’, mimeo. Washington, D.C.: World Bank. Beck, Thorsten, Asly Demirguc-Kunt and Vojislav Maksimovic. 2005. ‘Financial and Legal Constraints to Firm Growth: Does Firm Size Matter?’, Journal of Finance, 60(1): 137–77. Honohan, Patrick. 2004. ‘Financial Sector Policy and the Poor: Selected Issues and Evidence’, Working Paper No. 43. Washington, D.C.: World Bank. Mohan, Rakesh and A. Prasad. 2005. ‘India’s Experience with Financial Sector Development’, in Basu, Priya (2005), op. cit. Murdoch, Jonathan and Stuart Rutherford. 2003. ‘Microfinance: Analytical Issues in India’, Background Paper. Washington, D.C.: World Bank. Rajan, Raghuram and Luigi Zingales. 2003. Saving Capitalism from the Capitalists. New York: Crown Business. Reserve Bank of India. 1954. ‘Report on the All India Rural Credit Survey of 1951–52’. Mumbai: RBI. —————. 1983. ‘The Reserve Bank of India: Functions and Working’. Mumbai: RBI. —————. 2004. ‘Report on Trend Progress of Banking in India’. Mumbai: RBI. —————. 2005. ‘Reserve Bank of India Annual Report 2004–05’. Mumbai: RBI. World Bank. 2004. ‘India: Scaling Up Access to Finance for India’s Rural Poor’, Report No. 30740-IN. Washington, D.C.: World Bank.

2 Microfinance Revisited K.G. KARMAKAR

RURAL CREDIT TODAY

T

he dynamics of the rural economy have resulted in rapid sectoral changes of far-reaching magnitude. The services sector has been growing at a very fast rate and the rural marketing emphasis of MNCs and Indian companies is now paying off. Cable TV and transport operators, hotels, public call booths are all growing in rural areas. The rural-urban divide is slowly crumbling due to the reach of television and increasing mobility of labour, capital, products and also credit for the rural and urban sectors. Commercialization of agriculture with increasing emphasis on cash crops has given way to a new breed of moneylenders in the rural economy. The traders and commission agents are now the major moneylenders in the rural economy with seeds, fertilizer and pesticides being supplied by traders on credit or on deferred payment basis. Commission agents advance money towards purchase of output from farmers and include elements of forward trading. These credit arrangements are all on voluntary basis as the formal banking system does not readily finance these types of transactions. There is also a proliferation of non-banking finance companies providing loan services in rural areas and they are better described as ‘blade’ companies by the rural people. Another need of the rural people is for consumption credit for meeting urgent religious, social, educational and medical needs and again banks do not normally give loans for such purposes. There appears to be a mismatch between the services provided by the formal rural finance sector and the loan

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requirements of the rural people and hence the need for parallel credit systems which are better able to meet the genuine credit needs of rural people. A World Bank Study (1995) reveals that 67 per cent of the credit needs of poor people in India are for consumption and of the consumption credit required, 75 per cent was for short periods for emergencies such as illness and household expenses during the lean monsoon seasons. It was estimated that 75 per cent of production credit (comprising 33 per cent of total credit) was met by banks while 100 per cent of consumption credit requirements were met by informal sources at interest rates ranging from 30 per cent to 90 per cent per annum. As no collateral is offered, banks could not sanction consumption loans as per current norms. However, for Kisan Credit Card holders, consumption credit also has been permitted by the RBI. Indian agriculture has seen a marked shift away from cereal production. Sectors like poultry and fish culture are growing at faster rates. Product diversification is increasing. With increasing commercialization of agriculture, tenancy terms between the owner and sharecropper are also changing in favour of the sharecropper. But working capital requirements of sharecroppers are not met by the banks as tenancy agreements are rarely registered due to Tenancy Act problems. Multiple occupations are being resorted to by the rural people to enhance incomes, creating hurdles in credit monitoring by banks. Rural prosperity is very uneven due to the level of commercialization and diversification while in tribal areas, the rural economy is largely non-monetized. Flexible terms and procedures for credit need to be evolved by banks. Also, due to underemployment and seasonality of incomes, agricultural labourers and fishermen who do not own land may need more consumption credit but there are few institutional arrangements available to meet these needs. Another phenomenon is that the formal banking system is transferring funds from rural areas to urban areas, as is evident from the low credit-deposit ratios. There is a need for formal or informal credit markets which will retail rural money for developing rural areas. The All-India Credit Survey Report in 1951–52 advocated the policy of extending formal credit through institutions while viewing local, traditional and informal agencies as usurious. In 1952–87, despite a multiagency approach, the formal credit institutions have been unable to cover large sections of the rural poor despite massive expansion of the banking network. Efforts were concentrated on developing and strengthening cooperative credit structures. Re-finance was also provided as also financial contributions to cooperative institutions by the Reserve Bank of India

Microfinance Revisited

35

(RBI). The State Bank of India (SBI) Act was passed in 1955 for the purpose of extending banking facilities on a large scale, more particularly in rural and semi-urban areas and SBI was an important agency for extending rural credit to supplement that given by cooperative institutions. In 1969 and again in 1980, 14 and six major commercial banks respectively were nationalized with the objective of ‘controlling the commanding heights of the economy’. The nationalized banks also became important instruments for advancement of rural banking in addition to cooperatives and SBI. Another step to supplement the efforts of cooperatives and commercial banks was the establishment of 196 RRBs since 1975 in various states with equity participation by central/state governments and commercial banks. To further supplement the institutional mechanism, 10 Local Area Banks were licensed since 1996–97. There are over 1,05,735 cooperative societies, 12,590 branches of 365 DCCBs, 11,825 rural and 2,153 semi-urban branches, 445 branches in urban/metropolitan areas of 196 RRBs (pre-merger), 20,253 and 12,522 rural and semi-urban branches of 99 commercial banks. Besides there are 31 SCBs with 885 branches and 20 SCARDBs and 768 PCARDBs with 863 and 1,008 branches respectively. Thus, there are about 1,50,000 retail rural credit outlets for a rural population of 680 million people giving a population per credit outlet ratio of 4,155. There is now a reasonably extensive formal banking institution network capable of meeting the financial needs of the entire rural population. But over 45 per cent of the members of Primary Agricultural Cooperative Societies (PACS) are not borrowing members and over 65 per cent of the 1,01,245 PACS are dormant or in poor financial health due to insufficient recycling of funds and other weaknesses. It is a matter of record that failures of the rural credit delivery system have been sought to be addressed by creating yet another set of institutions rather than trying to identify the problems and setting them right. With the financial sector reforms (post-1991) and introduction of prudential norms, commercial banks are concentrating more on urban areas and profitability while RRBs are concentrating more on the investment route to profitability. All banks are conscious of the need to restrict NPAs but in view of the GOI directive for doubling of agricultural credit by March 2007, all banks were trying their best to meet targets. However, there is a need to strengthen cooperative banks which are meeting rural credit requirements in the country besides redeploying funds in the rural areas, unlike commercial banks and RRBs. The Vaidyanathan Committee Report 2005 is a step in the right direction.

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As regards rural credit agencies, the cooperative banks and RRBs are weak due to under-capitalization and high level of NPAs. The cost of financial intermediation of rural financial institutions is high and the interest rates charged on loans by cooperative banks are also high. Also, institutional credit is being cornered by the better-off sections of the rural people and the poorer sections have little or no access to rural credit at regulated rates of interest. The relatively less endowed or backward regions also have less access to institutional credit. The non-availability of adequate amounts of credit in times of need, accompanied by cumbersome procedures and documentation, are a problem for bank customers, whether in rural or urban areas. The poverty-alleviation and governmentsponsored schemes in banks have problems in implementation, with more NPAs than for other schemes. Thus, the rural banking institutions are out of step with the changing rural credit requirements and are unable to come up with systems and credit/savings instruments as required by the rural clientele.

MICROCREDIT CONCEPTS Microfinance is defined as the provision of thrift, credit and other financial services such as money transfer and micro-insurance products for the poor, to enable them to raise their income levels and improve living standards. Is microfinance an input for microentrepreneurial activities or is it an industry worth promoting for rural business to flourish? It is being increasingly debated that the microenterprise development model is not relevant for manufacturing enterprises and growth as only 20 per cent of microbusiness startups go on to flourish. For poorer countries with a large proportion of the population below poverty levels, the emphasis should continue to be on microenterprise development—and whether microfinance as an industry flourishes or fails is of little relevance today. Possibly, with more education and better prosperity levels some years down the line, a debate may be held as regards their relative merits as economic growth models. Today, the need is to ensure the survival of poor people with little skills or education and without any safety net who are required to earn a livelihood even in resource-poor regions. Our goal is to ensure that the poor are enabled to meet their funds requirements in emergencies or set up microenterprises to earn their livelihoods. Microfinance refers to the entire range of financial services such as savings, money transfers, insurance, production and investment credit as also housing finance and includes the need for skill upgradation and


37

entrepreneurial development that would enable them to overcome poverty. Microfinance provides credit support in small doses along with training and other related services to people who are resource-poor but who are able to undertake economic activities. Microfinance rests on the following principles:

Self-employment/enterprise formation is a viable means for poverty alleviation. Lack of access to capital assets/credit is a constraint for existing and potential microenterprises. The poor are able to save despite their low-level and sporadic incomes.

Microfinance concepts have existed since 1904, when the Cooperative Societies Act was passed for ensuring production credit loans for farmers through primary credit societies. The formation of long-term cooperative credit institutions to meet investment needs of farmers started in 1928. The Syndicate Bank, started in 1921, concentrated on raising micro-deposits in the form of daily/weekly savings and also sanctioned micro-loans for its constituents. With the various priority sector targets under social banking in 1967 and after bank nationalization in 1969, microfinance concepts in banking institutions once again came to the fore. However, in the rural areas, the moneylenders and traders did extend loans at high rates of interest and even for consumption purposes. Under priority sector norms, microfinance was extended for investment credit purposes but included elements of production credit and even consumption credit! The Integrated Rural Development Programme and the revamped programme named as Swarnajayanti Grameen Swarozgar Yojana (SGSY), laid emphasis on investment credit needs only. But the subsidies and low interest rates ensured that the rural poor did not receive these loans which were instead cornered by the better-off sections of the rural people. Also, repayment rates were poor possibly due to ‘rent costs’ incurred by the borrowers and poor monitoring and follow-up by bankers. With the NABARD programme on self help groups (SHGs) in 1992, the emphasis shifted to loans without collateral, 100 per cent repayment norms and lending to groups of people who would also invest their savings and regulate their groups and group loans, thus reducing transaction costs for the borrowers and for the banks. Other innovative concepts were sanctioning of production-cum-consumption loans, unregulated interest rates, weekly/monthly savings and loan repayments.

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Thus, microfinance as a means of meeting the credit requirements of the rural people is not a new concept and was met both by formal/informal credit sources. As the SHG-bank credit linkage programme is now a decade old, it is high time the SHG movement was reviewed to analyze the lessons learnt. The journey from priority sector loans to IRDP loans to microcredit and now to microfinance, has been a long journey with many lessons learnt for banks. Today, the microfinance scenario needs to be reviewed for emerging trends, concerns and growth prospects. Since its humble start in the late 1980s, the SHG-bank linkage movement took off in 1992 and is today the largest in the world. Details are set out in Annexure I. As per current growth rates, by 31 March 2007, NABARD aims at linking 2.5 million SHGs involving 37.5 million poor households with the help of 5,000 NGOs and 1,000 microfinance institutions. It is interesting to note that as per government estimates, 25 per cent of the world’s 100 million poor are in India. There will be a tremendous demand for quality NGOs and microfinance institutions in India over the next few years.

MICROFINANCE IN RURAL AREAS There are three delivery mechanisms being tried out over the last 35 years for microfinance as under:

Priority sector/weaker sections/government schemes through the banks to individuals, groups of people and cooperatives as per RBI guidelines. Banks were to ensure 40 per cent of total credit for priority sectors with 18 per cent for agriculture. The priority sectors have been defined as: (a) (b) (c) (d) (e) (f) (g)

agriculture; small-scale industries; land and water transport; retail trade; small business; consumption credit for weaker sections; and housing for weaker sections.

Rs 106 billion has been disbursed as against Rs 105 billion budgeted by GOI including 25 per cent for loan subsidy and loan


39

administration costs under IRDP. These had capital subsidies but were poorly targeted and credit programmes were badly implemented resulting in wrong targeting with subsidies being cornered by undeserving people and very poor recoveries. Still, 5.38 crore families were assisted under this programme, making this the largest microfinance programme in the world as the borrowers were to be identified on the basis of income below Rs 11,000 per annum. From April 1999 onwards, the IRDP has been replaced by the Swarnajayanti Grameen Swarozgar Yojana, with back-end subsidy instead of front-end subsidy and using the SHGs. In fact the popularity of SHGs as a reliable credit delivery model with little wastage and diversion of funds, has ensured that for the weaker and neglected sectors of society, most credit programmes are delivered using SHGs. Various government departments have re-designed their credit programmes using the delivery mechanism of SHGs—and as an added precaution have provided subsidy as a back-ended component for various schemes. Today, most government departments use SHGs as essential components of various development schemes. The SHG-bank linkage programme being implemented by NABARD and SIDBI separately has banks utilizing SHGs for on-lending, with or without support from NGOs and other promotional institutions. This has been spectacularly successful, with 47 commercial banks having linked up 11,88,040 SHGs, 158 RRBs having linked up 7,40,024 SHGs and 340 cooperative banks having linked up 3,07,543 SHGs. As on 31 March 2006, a total of 22,38,565 SHGs have been linked to bank credit. Bulk loans from banks and specialized financial institutions to various financial intermediaries in the non-formal sector for onlending to SHGs or individuals, through financial intermediaries like RMK, SEWA, MYRADA, WWF, SHARE, etc.

Largely, due to various government programmes like IRDP, DWCRA, TRYSEM, now modelled as SGSY (in April 1999) and the SHG movement, the incidence of poverty in the country has been reduced with the number of families below the poverty level reducing from 56.4 per cent in 1973–74 to 37.3 per cent in 1993–94 and further to 26 per cent in 2003–04. However, in absolute numbers, about 26 crore people continue to lead an existence below poverty levels.

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The microfinance initiatives taken by the government/financial institutions/banks/NGOs, etc., since 1992, have provided the following important lessons:

The SHG model is a flexible one and variation of sizes and compositions are permitted as also charging flexible interest rates, purposes and repayment terms. This flexibility has enabled various types of SHGs to flourish which meet the varying requirements of their clientele. The poor are bankable, with transaction costs reduced for both borrowers and banks. This helps in meeting the microcredit needs of poor people, with greater efficiency. Over 90 per cent of the SHGs financed by banks have been set up by women who are not only saving for their families, but are being subtly empowered in the process. The savings aspect is emphasized and the infrequent and small savings of the members are allowed to accumulate and add to the group funds. Once the members are able to operate bank accounts responsibly, loan screening process time as also costs for the banks are reduced and some individual SHG members may graduate to lasting relationships as valued customers of banks on an individual basis. The poverty alleviation process is hastened as leakages are virtually nil. The members use their own funds judiciously and after estimating individual loan risks, price their loans accordingly. The loan recovery rate at 98 per cent when contrasted to loan recovery rates for various bank loans and other loans for government poverty alleviation programmes is excellent by any standards. The SHGs are sustainable even though the NGOs have to spend money, time and efforts in group formation. Intermediation costs are often not fully recovered.

The growth rate of the SHGs has been phenomenal, which shows that the rural people are keenly involved in their growth and are able to sharpen their microentrepreneurial skills with the help of their micro-savings and additional bank credit as needed. The SHG movement has thus come to stay and is especially needed for women’s empowerment.


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The basic services provided by the microfinance institutions and SHGs are: (i) savings (compulsory and optional); (ii) consumption credit, production credit, trade/services credit, housing loans and investment credit; and (iii) insurance or risk fund services. But there are a few issues emerging which need to be resolved by microfinance institutions.

MAJOR ISSUES IN MICROFINANCE Upscaling of the Programme: The SHG-bank linkage programme is facing problems of upscaling as there is lack of credible non-governmental organizations and other agencies/individuals who could do social intermediation, that is, formation and nurturing of SHGs. The absence of quality agencies/individuals for social intermediation is limiting the spread of the programme. Capacity-building: The capacity-building of various partners in the programme, namely, bank officials, NGO officials, animators, SHG group leaders and SHG members is a gigantic task. NABARD has been playing attention to the capacity-building of all the partners in the SHG-bank linkage programme. However, the enormity of the programme warrants other agencies which could also include donor agencies to collaborate in capacity-building of the partners in the programme. Sustainability of SHGs: The sustainability of SHGs depends to a great extent on the quality of SHGs. The quality of SHGs is dependent on the care and attention given by the Self Help Promoting Institution (SHPI) in the formation stage. It has been observed that there has been a tendency at the field level to hasten the process of formation of SHGs to achieve targets, which affects the sustainability of the SHGs in the long run. Graduation from Microfinance to Microenterprises: There are a vast number of SHGs which have come of age and are struggling to graduate from the stage of microfinance to the stage of microenterprises. Lack of adequate skills as also marketing linkages affect the graduation of SHGs to microenterprise stage. Not many NGOs/agencies are in a position to provide SHGs the requisite backward and forward linkages as also market survey reports. This affects setting up of microenterprises on a sustainable basis.

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Attitude of Partners: There have been a number of success stories where formal financial institutions have been able to form and link SHGs on a large scale. However, these efforts are isolated in nature. The SHG-bank linkage programme has still not been institutionalized as a corporate philosophy in most of the banks, especially the Commercial Banks and Regional Rural Banks. Bankers at the grassroots level still view this programme as a social/developmental programme and rarely treat SHGs as a business proposition. Impact of Government Programmes with Subsidy Component: Governmental programmes such as Swarnajayanti Grameen Swarozgar Yojana (SGSY), which adopted the group mode for delivering credit, are affecting the sustainability of SHG-bank linkage programme. SGSY has a subsidy component of Rs 15,000 and there have been reports that established SHGs have split or disintegrated as members have a tendency to join schemes where subsidy is available. Such schemes have a dampening effect on SHG-bank linkage programme. Issues facing the Microfinance Institutions: A number of Microfinance Institutions (MFIs) have come up in the country which are adopting SHG approach or Grameen model or a variant thereof, in order to enable poor people access to credit. However, the microfinance sector which is fast becoming an industry in the country, is also facing some issues which need resolution, such as:

Transparency: Whether microfinance is considered as a social enterprise to alleviate poverty or the future of retail banking, it is fair to say that proliferation of microfinance institutions is a positive trend keeping in view the vast unmet demand of credit by the rural poor. However, the MFIs need to enhance their credibility. Some of the steps could be: (a) having common performance indicators/parameters/rating norms/standards; (b) standards for assessment and risk evaluation of MFIs’ financial performance which could include disclosure guidelines for financial reporting. Rating of MFIs by rating agencies is now subsidized by NABARD; (c) issues relating to interest rate regulation will arise as the size of the institution grows and the need for a regulator will arise;


43

(d) regulations relating to capital adequacy, resources, liquidity and loan losses will also have to be considered, eventually; and (e) registration as a trust or society or corporation has to be considered.

Sustainability with Outreach: The cost of outreach to the poor is high and the MFIs have a major issue before them: how to be sustainable while serving the poor. They need to address the issues of minimizing costs for the poor by having operating efficiency, administrative effectiveness, maintaining portfolio quality, tracking future risks in portfolio, covering expenses and fixing appropriate interest rates. Self-regulation: The MFIs are handling savings of poor people. Savings being an inherent part of microfinance, MFIs need to operate in a self-regulatory framework which could include selfregulation to begin with. Besides, issues relating to regulation and supervision may have to be addressed later, depending upon credit volumes and risks involved.

SHG FEDERATIONS EXAMINED As per the World Bank model of microfinance heavily influenced by the Grameen Bank, federations of SHGs are needed as the World Bank model does not take into account the utility of existing banks/branches as has been done in India. Professor Malcolm Harper, an eminent scholar and microfinance practitioner, has voiced his concern on the relevance of adding a SHG federation as another layer in the microcredit delivery system. Does the new intermediary serve a purpose? Does it add value to the system? At what cost? Professor Harper has analyzed the operations of SHG federations which engage in financial intermediation and his observations are worth quoting below:

SHG federations were a necessary but temporary measure when very few bank branches were willing to deal with SHGs and it was necessary to mobilize more funds than those mustered by a single group. That is no longer necessary except for a small and rapidly decreasing number of locations. The initial savings deposit of an SHG, perhaps Rs 2,000, and the initial loan, of possibly Rs 8,000 –10,000, are reasonable first transaction amounts for a bank branch. After a year or so, SHG deposits of Rs 10,000 and SHG loans of Rs 50,000 are not

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uncommon. The SHG itself achieves the necessary bulking up function for the individual members. Being profitable accounts, there is no need for a federation to bulk them up further. India has the largest network of bank branches in the world and most villages are within easy distance of a branch. There is no need to have a federation in order to provide a more accessible place at which to make deposits or take loans. Some federations are themselves federating and aim to create new financial institutions. India already has commercial banks, regional rural banks, PACS and DCCB branches, some are not functioning properly, but the way to improve matters is to reform them, not to create yet another set of institutions. The existing financial institutions are not properly regulated or supervised and there are frequent failures and frauds. There is no way by which the authorities can take on yet another type of institution; SHG federations will need supervision but will not receive it. Loans and other profits of SHG membership already flow away from the poorest to the most powerful and least needy of the members, as happens in all institutions. This process of marginalization will also happen within federations, so that whole groups will be marginalized, not just individual members within groups. The process of promoting an SHG is not easy, but bankers and new SHG members themselves are increasingly taking over the task, thus reducing the need for dependence on NGOs and subsidy. Promoting a federation is much more difficult, and a federation requires much longer ‘hand-holding’. This may suit NGOs which need a reason to exist, but it perpetuates dependence on external assistance. A single SHG does not contain enough voters to be worth ‘hijacking’ by political interests, but a federation is a very attractive target. The day-to-day operations of a federation cost money. This may come in the form of contributions or interest spreads paid by member SHGs, or from individual members’ voluntary work. SHG members already complain, rightly, about the amount of time that their membership demands, and about the interest rates they have to pay. Federations will make these burdens worse. One of the most ‘empowering’ aspects of SHG membership is the way it allows members to pick and chose between financial


45

service providers. At last, banks, PACS and MFIs are having to compete for SHG members’ business. Federations can demand ‘loyalty’, which is essentially a loss of freedom. These statements are not applicable to SHG federations which neither take the savings of SHG members, nor lend to them but concentrate on other activities such as skills development, book-keeping of SHGs and adding value to individual SHG activities. As far as SHG-bank linkage programme in India is concerned, the need for SHG federations has emerged in areas where mature SHGs have graduated from microsavings to micro-deposits to microcredit to microenterprises over a span of years. The Kalanjiam model of Development of Humane Action (DHAN) Foundation is a fine example of such SHG federations providing value-added services and trading for SHG members to develop into microenterprises eventually.

WOMEN AND SHGs The first report (2004–05) of the Committee on Empowerment of Women on the functioning of SHGs highlights a number of weaknesses in both the programmes. For instance, the average loan size under the bank linkage scheme still remains extremely low at Rs 1,766 per family and Rs 28,559 per SHG. One of the constraints in providing hassle-free and adequate credit to SHGs is that banks do not follow consistent norms in grading SHGs while procedural requirements are cumbersome and vary to a large extent. Although NABARD has put up an ‘indicative model’ of grading norms for rating SHGs, these are purpose oriented rather than definitive. Although SHGs are increasingly becoming delivery channels for the distribution of a variety of products in rural areas, the lack of supply chain model for SHG products is hampering the development and sustainability of microenterprises. There is a need for more research on which segments of the population the SHGs are serving, the use to which credit is put, interest rate spreads, the class of assets created, who these assets are owned by, factors inhibiting or promoting their growth and so on. The delivery of development through SHGs needs emphasis rather than the need to distribute credit. It needs to be stressed that SHGs were never intended to empower rural women but yet they have emerged as a strong factor in empowerment of women! There seems to be a duality in approach towards microfinance in India. One model looks upon it as an enabling tool to escalate the rate of

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economic growth. Poverty is officially viewed from the income or consumption perspective, meaning thereby that insufficiency of income denies the poor fulfilment of their consumption needs. Focus on social and community development of the poor and marginalized section is conspicuous by its absence in this system. There is an accent instead on enterprise creation and growth. There is a demand for targets, numbers, larger volumes of credit thereby signifying growth and productive out puts. This is the quantitative school of thought. The other approach is concerned more with opportunities that the poor have access to and improve the quality of their lives. It puts human needs centrestage rather than structures such as markets or governments. The crucial role of opportunities is strongly influenced by social circumstances and public policy, especially those relating to education, health, nutrition, social equity, civil liberties, and other basic aspects of the quality of life. Lack of access to business opportunities makes deprivation intense and powerful. Vulnerability to external shocks reinforces the poor people’s sense of deprivation. Social intermediation facilitates creation of social capital, hastening access to social opportunities and coping with external shocks. This school of thought is overtly qualitative instead of quantitative.

SHGs: WHAT NEXT? In mature SHGs which have been in existence for over three years, there is a growing sense of boredom which is setting in, among even the most united of them. This is because the challenges have diminished. The pangs of hunger, of lack of education for children, repairs for homes, have all been attended to. What next, is the question being asked. The challenge lies in trying to ignite the spark once again in group-based microentrepreneurship model. There has been considerable evaluation of the impact of SHGs on rural poverty and the empowerment of women since SHGs were created in 1992. SHGs have provided members with ready access to credit where networks are strong and because they encourage women’s participation, have increased women’s bargaining power and status in the family. However, the promise of SHGs in terms of encouraging microenterprises and establishing building blocks for development and in raising economic levels in rural areas has yet to be borne out. The evolution of microcredit into microenterprise has not necessarily taken place for the average size of loans taken is still very small,


47

with initial cycles of credit used for personal consumption rather than for productive investment. Essential inputs and support services to undertake and sustain rural enterprises have not been effective. The number of SHGs has grown in a haphazard way and with an uneven geographic spread, promoted as they are by a variety of entities such as NGOs, government ministries, multilateral financial institutions, NABARD, etc., without any coordination. The induction of SHG networks into the formal banking system has also been slow in the central states while the nascent microfinance industry has not been helped in any measure by the lack of a formal regulatory framework. Also, microfinance institutions tend to proliferate in regions where the SHGs and banks are thriving and are not spreading in areas where the entire rural banking credit delivery system or SHGs have been ineffective in checking the spread of poverty. Be it a developmental fad promoted aggressively or an intervention mode necessitated by the conditions of material deprivation of millions of people in the not so developed part of the world, microfinance seems to have worked. It has worked in the sense of creating a euphoria that is unparalleled in the recent history of development practice. It has worked because right from international donors and national policymakers to regulators to bank supervisors, NGO practitioners and local bureaucrats, everyone is passionately pushing it as the answer to the worries of the masses at the bottom of the development pyramid. Even the most conservative development practitioners cannot but take note of the rapid pace of expansion in the outreach of microfinance institutions, mostly functioning outside the formal channels of credit delivery. By December 2005, about 90 million clients across the world were being serviced by approximately 3000 such institutions. India’s share in the global microcredit market in 2005 was 15 per cent of all clients and 20 per cent of the poorest clients, thanks to the SHG linkage programme of NABARD, India, thus, is the home of the largest microcredit/microfinance programmes in the world. The excitement about ignoring the conventional banking approach to rural lending and poverty alleviation needs to the tempered by a realistic assessment of the broad context of financial services provided in the country. It needs to be noted that the role and participation of the state and the formal system of credit delivery in the microfinance sector is more evident in India than elsewhere. Repayment of loans in cash necessarily requires that the loan has to be invested in some production activity so as to generate surplus for serving debt obligations. Using the loan to

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increase the sphere of non-commodity production will not enable the borrower to earn the necessary amounts for loan repayment. Production for the market which was formerly only produced for household consumption, means a change in economic practice. MFIs promote, through the mechanism of loans and their repayment, the widening of the sphere of commercial production. It promotes the spirit of reviewing production not as a necessarily satisfying activity in itself, though it might also satisfy one’s needs or preferences. From micro-deposits to micro-savings, to microcredit to microfinance and then on to microenterprise has been a long journey, with shifts in emphasis at various points where variations in the earlier model-designs, have emerged. With the amount of innovations being carried out, there is a major churning over of ideas, innovation, insights and design.

MICROENTERPRISES: THE WAY AHEAD The crucial importance of rural livelihoods cannot be overlooked in the context of poor households, especially in resource-poor regions or where the infrastructure is not very supportive. There is a need to appreciate that the livelihood strategies of the poor are invariably a mix of natural resource management and agricultural wage employment, with migration often an important livelihood strategy. Any improvement in the livelihoods of the poor is possible on a complex, slow and incremental strategy. The following opportunities may have to be explored to secure preferred livelihoods for the poor and the marginalized tribal people.

Supporting home-based livelihood initiatives like dairy, bidimaking, weaving, papad making, etc. Supporting gradual incremental approach to capital asset formation. Supporting joint forest regional groups of tribal people with clear focus on non-timber based forest produce-based livelihood objectives such as tussar silk rearing, brooms-making, sabai grass weaving, bamboo produce, sal leaf plates, etc. Supporting off-season livelihood opportunities, including wage employment for traditional farm labour. Supporting training/skills upgradation activities for production of goods/services. Supporting development of livestock wealth especially dairy activities for additional farm incomes.


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Organizing producer SHGs or wage labour for sericulture, floriculture, poultry, dairy, handlooms, handicrafts, etc. Supporting desilting of ponds/local water bodies for fisheries/ drinking water purposes. Supporting possibilities for value-addition and marketing of rural products by training/skills upgradation.

As most of the women SHGs prefer traditional livelihoods initially, it is necessary to integrate livelihood skills with market-related training and related but upgraded skills.

CONCERNS AND PROBLEMS Reports prove that the SHG organizations of the poor, especially among women, have a strong and positive correlationship with the current initiatives for strengthening decentralization. There has been renewed emphasis on installing decentralized pro-poor participatory planning and implementation processes being initiated at various levels. These participatory processes ought to include a focus on sustainable livelihood development. The process of decentralization should create an enabling environment necessary for communities and the poor within them to take initiatives to plan for their needs, raise resources including groups’ savings where necessary and implement programmes. This will need a role reversal for the existing PRIs. Participation may have to be redefined as that of the state’s and panchayat’s participation in community initiatives. Action plans need to form a part of the bottom-up planning process. Obviously, SHGs can thus become active participants in decentralized planning and can access opportunities available from government programmes like SGRY, SGSY, RSVY and NPFW. But there are several dangers lurking as the government believes in a target-oriented approach— and with subsidies, the danger of wastage of funds/subsidies does exist. SGSY subsidies are detrimental to the SHG movement as easy money can only damage the self help movement. The role of the state should be supportive and not unnecessarily restricted to providing funds. The non-southern states are late starters in microfinance compared to the SHG expansion in southern states like Andhra Pradesh, Tamil Nadu, Karnataka and Kerala. The MF sector is, however, growing rapidly since 2000 in many states. Though precise data is not available on growth, there is enough evidence collected during field surveys and from other

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secondary sources that by the end of the Tenth Five-Year Plan, the SHGs could cover almost 60 per cent of the poor households. MF is, therefore, poised to become a very strong collaborative poverty-alleviation strategy in many states. Several policy initiatives have contributed to its growth namely (1) SHG-bank linkage model; (2) policy initiatives of the RBI/ Central/State governments; and (3) NGO initiatives since 1995. Many pilot studies on MF reveal several positive features through empirical evidence such as (a) the marginalized sections of the rural community are very keen to be organized into SHGs irrespective of caste, religion or social class; (b) thrift and credit are the strong motivating factors to join the group; (c) the members have prudently used microcredit either for social or economic benefit; (d) saving has a value in itself to the poor and has helped them to access microcredit; (e) microcredit is usually short-term and unsecured; (f) because of the tiny volumes of microcredit, the increase in individual income is also small; (g) microcredit is generally used for traditional livelihood options available like agriculture, livestock, fishery, household industry and services which the local economy can absorb; and (h) the overall impact of microcredit on increasing confidence of the poor and empowering the women, is found to be positive. There are several areas of concern as under:

Most of the groups formed are neither natural nor voluntary but need-based and the social intermediation and facilitation processes which are prerequisites for empowerment are extremely weak; In most SHGs, there is a dominance of two or three members, others are passive. The structural imbalance has reduced access of the poorest to institutional credit; In spite of multiplicity of agencies and institutions, facilitation processes for SHGs are found to be weak; The links with PRIs are weak and generally absent as their roles are not found to be complementary. The basic amenities and services to which the poor are entitled are not within their reach nor are the development workers effective; Financial management and book-keeping practices of SHGs are totally inadequate and weak and the approach is minimalist; building up relevant skills is not being emphasized by the NGOs/ SHGs.


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Increasingly, government agencies are turning into SHG promoters and there is no uniformity of approach, resulting in needless confusion and wastage of funds. There is divergence in quality of best practices and there is no coherence as regards development objectives. SHGs are neither a panacea for all the ills of rural society nor are they a tool for poverty alleviation.

PERSPECTIVES From a relatively simple on-lending model, the microfinance model of SHG-bank linkage has grown into a very complex system since 1992– 93, when the first few SHGs,were linked to banks by NABARD. Has microfinance developed into a reliable tool for development of the poor? Or has it only emerged as one more experiment in poverty alleviation, to be discarded when the next fad comes along? Are SHGs becoming building blocks for participatory planning and development? Can SHG-based convergence of basic services be established for extended outreach to poor households? What about the SHGs being launched by myriad government departments? Are these really SHGs or are these a vehicle for enabling government departments to deliver needed goods and services? What are the limitations on SHGs imposed by resources, infrastructure, markets and technologies? What are the possibilities of enhancing the scope of livelihood options based on natural resources? What levels of social intermediation are necessary for the poor to access social and economic opportunities? Is the SHG structure sustainable at present levels of growth? Are changes necessary in the regulatory/supervisory mechanisms in the near future? What about the coordination mechanism at the ground level for convergence of SHG based programmes and services? What are the policy gaps and what steps are being initiated for an enabling policy environment? Will SHGs continue to be an ‘inclusion’ model and emerge into ‘microenterprises’ incubation model eventually? The crisis in Andhra Pradesh as regards usurious interest rates charged by microfinance institutions and indebtedness leading to suicides of SHG members has led to swift state government response and considerable tension. The problem of ‘self regulation’ and ‘regulatory mechanisms’ cannot be ignored any longer and legislation is now necessary. What is the level of regulation necessary that will not throttle the emerging microfinance market in its infancy? Another important area is the microinsurance needs of SHGs

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and individuals addressing life, health, assets, crops and accidents. Such add-on products will help the rural poor. These are all relevant questions. What is at stake is not the future of microfinance institutions. What is rather at stake is the availability of microcredit for the vast multitudes of poor people who have little or no access to institutional credit and who have often to depend on very costly informal credit sources. The SHG mechanism has enabled the marginalized poor to access credit and harness their entrepreneurial skills and seek a way out of the grinding cycle of poverty that crushes them. After SHGs, what next? Microenterprises? Only 20 per cent of SHG members, after meeting two or three cycles of consumption needs, manage to set up small production units, using skills and local resources. Another 65 per cent continue to invest in agriculture and allied activities like dairy, backyard poultry etc. while the remaining continue to meet consumption needs. How is the microentrepreneurship model for mature SHGs to be created? With the experience gained by SHG members in handling individual savings, group funds, dealing with bankers and bank officials, keeping track of loans, taking loaning decisions, the next logical step is to become a microentrepreneur. This entails delivery of training inputs for skills development, marketing skills and sales deliveries, packaging techniques and quality control for production schedules. A SHG member who masters these concepts and is able to deliver goods and services for which there is a ready market, blossoms into a full fledged microentrepreneur who can market wares with confidence. But the majority of SHG members may not be able to develop these skills or find time to develop into entrepreneurs on their own. What are these SHGs to do before inertia sets in and these SHGs collapse? What next? This is a very important question which begs an urgent answer. To expect SHGs which are over 10 years old to continue to maintain their cycles of micro-deposits or micro-savings, over and over again, with a few cycles of credit, is not being realistic. If SHGs breed individual microentrepreneurs, that could be a preferred option. However, group entrepreneurial activities can be set up by subgroups within the individual SHGs or different members of various SHGs can bond together in small production groups which have a separate identity. At present, the SHG programme does not envisage further training for some SHG members to emerge as full fledged microentreprenurs. Who is to provide further training? At what cost? Who is equipped to provide further training in marketing and production? In such intricate operations, the level of hand-holding needed is indeed high and the failure rate of microentrepreneurs is also


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expected to be high. Will NGOs take up this challenging task if at all they are equipped to do so? Probably only NGOs who have specialized in setting up rural entreprenurship development programmes which are highly flexible in nature could take up this challenge. However, the logical candidate is a federation of SHGs as has been done by DHAN Foundation or in the Andhra Pradesh Model. Bankers have to be trained to meet the needs of individual microentrepreneurs and the group entrepreneurs of SHGs, sponsored by the federation of SHGs. Appraisal machinery for sanction of micro-loans by rural bankers is also to be created without insistence on collateral or elaborate documentation. The real assault on rural poverty can be possible only when microfinance enables the emergence of a large number of microentrepreneurs in rural areas, who have graduated from various SHGs.

ANNEXURE I. Growth of SHGs in India (Rs crore) Sl No.

Year

1 2 3 4 5 6 7 8 9 10 11 12 13 14

1992–93 1993–94 1994–95 1995–96 1996–97 1997–98 1998–99 1999–2000 2000–01 2001–02 2002–03 2003–04 2004–05 2005–06

No. of SHGs 255 620 2,112 4,757 8,598 14,317 32,995 114,775 263,825 461,478 717,360 1,079,091 1,618,456 2,238,565

Bank Loan 0.29 0.65 2.44 6.06 11.84 23.76 57.07 192.87 480.87 1,026.3 2,048.68 3,904.2 6,898.46 11,397.55

NABARD Re-finance 0.27 0.40 2.30 5.66 10.65 21.38 52.06 150.13 250.62 796.47 1,418.80 2,124.20 3,092.01 4,156.56

Source: Various issues of ‘Progress of SHG-Bank Linkages in India’, NABARD, Mumbai.

II. SHG-bank Linkage Patterns (i)

MODEL-I : Bank as self-help promoting institute—20% SHGs, RRBs, Commercial Banks, DCCBs and PACS included. (ii) MODEL-II : Groups formed by NGOs and linked to banks—74% SHGs, includes State govts. in AP, Rajasthan, MP. (iii) MODEL-III : NGO forms SHGs and perform financial intermediation role as onlender to SHGs after sourcing loans from Banks.

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III. Financial Parameters of SHG Formation (cumulative position as on 31 March 2005) (Rs crore) Sl Type of No Banks

No. of SHGs Financed

% to Total

Bank Loans

1

11,88,040

53%

6,987.45

7,40,024 3,07,543

33% 14 %

3,322.15 1,079.78

22,38,565

100%

11,397.55

2 3

Commercial Banks RRBs Co-op. Banks Total

Refinance from NABARD

% to Total

61.3%

499.57

46.8%

29.2% 9.5%

390.02 178.13

36.5% 16.7%

% to Total

1,067.72

IV. Amount Spent by NABARD in SHG/MFI Formation (Training and Seminars etc.) Sl No

Year

1 2 3 4 5 6 7

1999–2000 2000–01 2001–02 2002–03 2003–04 2004–05 2005–06

No. of Training Programmes Conducted

Amount Rs

No. of Participants Trained

1,323 3,240 2,348 3,735 7,175 4,831 5,012

120.75 201.04 173.08 216.08 336.04 336.13 289.58

43,069 171,638 89,698 194,817 244,000 329,943 283,531

Part II

MICROFINANCE INSTITUTIONS (MFIS)

3 MFIs in India: An Overview K. MURALIDHARA RAO*

INTRODUCTION

M

icrofinance has emerged as an important sector in many countries for providing financial services such as savings, credit, insurance and remittance services to the poor. Microfinance has become a global phenomenon. Governments, central banks, donors, practitioners, and other development agencies promoting microfinance are increasingly involved in developing suitable policy initiatives for meeting local needs. In India, a range of institutions in the public sector as well as the private sector, offers microfinance services. These can be broadly categorized into two categories namely, formal institutions and semi-formal institutions. The former category comprises apex development financial institutions, commercial banks, regional rural banks, and cooperative banks that provide microfinance services in addition to their general banking activities and are referred to as microfinance service providers. On the other hand, semi-formal institutions that undertake microfinance services as their main activity are generally referred to as microfinance institutions (MFIs). While both private and public ownership are found in the case of formal financial institutions offering microfinance services, the MFIs are mainly in the private sector. * General Manager, National Bank for Agriculture and Rural Development (NABARD), Mumbai. The views expressed in the article are those of the author and not of the organization.

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MICROFINANCE SERVICE PROVIDERS Microfinance service providers include apex institutions like National Bank for Agriculture and Rural Development (NABARD), Small Industries Development Bank of India (SIDBI), and, Rashtriya Mahila Kosh (RMK). At the retail level, commercial banks, regional rural banks, and cooperative banks provide microfinance services. Today, there are about 60,000 retail credit outlets of the formal banking sector in the rural areas comprising 12,000 branches of district level cooperative banks, over 14,000 branches of the regional rural banks (RRBs) and over 30,000 rural and semi-urban branches of commercial banks besides over 90,000 cooperatives credit societies at the village level. On an average, there is at least one retail credit outlet for about 5,000 rural people. This physical reaching out to the far-flung areas of the country to provide savings, credit and other banking services to rural society in general, is an unparalleled achievement of the Indian banking system. However, discussions on microfinance through formal banking institutions are excluded and an attempt made to deal with various aspects relating to emergence of the private microfinance industry in the context of prevailing legal and regulatory environment for private sector rural and microfinance operators.

EMERGENCE OF PRIVATE MICROFINANCE INDUSTRY The microfinance initiative in the private sector can be traced to the initiative undertaken by Ela Bhatt for providing banking services to the poor women employed in the unorganized sector in Ahmedabad, Gujarat. Shri Mahila SEWA (Self Employed Women’s Association) Sahakari Bank was set up in 1974 by registering it as an urban cooperative bank. Since then, the bank has been providing banking services to poor self-employed women working as hawkers, vendors, domestic servants, and so on. In the midst of the apparent inadequacies of the formal financial system to cater to the financial needs of the rural poor, NABARD sponsored an action research project in 1987 through an NGO called MYRADA. For this purpose a grant of Rs 1 million was provided to MYRADA for an R&D programme related to credit groups. Encouraged by the results

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of field level experiments in group-based approach for lending to the poor, NABARD launched a pilot project in 1991–92 in partnership with non-governmental organizations (NGOs) for promoting and grooming self help groups (SHGs) of homogeneous members and keeping savings with existing banks and within the existing legal framework. Steady progress of the pilot project led to the mainstreaming of the SHG-bank linkage programme in 1996 as a normal banking activity of banks with widespread acceptance. The RBI set right the policy environment by allowing savings bank accounts of informal groups to be opened by the formal banking system. Launched at a time when regulated interest rates were in vogue, the banks were expected to lend to SHGs at prescribed rates, but the RBI advised the banks not to interfere with the management of affairs of SHGs, particularly the terms and conditions at which SHGs disbursed loans to their members. As at the end of March 2006, over 2.24 million SHGs comprising about 32.98 million rural poor, 90 per cent of them women, were accessing financial services in the form of savings and credit from 44,362 bank branches of the formal financial sector in different parts of the country. These 32.98 million rural poor have received loans aggregating Rs 113.98 billion, through SHGs. The uniqueness of microfinance through SHGs is that it is a partnershipbased approach and has encouraged NGOs to undertake not only social engineering but also financial intermediation, especially in areas where the banking network was inadequate. The rapid progress achieved in SHG formation, which has now turned into an empowerment movement for women across the country, laid the foundation for emergence of MFIs in India.

MFIs AND LEGAL FORMS With the current phase of expansion of the SHG-bank linkage programme and other microfinance initiatives in the country, the sector is now beginning to evolve. MFIs in India can be broadly sub-divided into four categories of organizational forms viz; NGO-MFIs, non-profit Section 25 NBFC-MFIs, cooperative MFIs, and for-profit NBFC-MFIs. While there is no published data on private MFIs operating in the country, the number of MFIs is estimated to be around 800. However, not more than 10 MFIs are reported to have an outreach of 100,000 microfinance clients. An overwhelming majority of MFIs are operating on a smaller scale with

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500 to 1,500 clients each. The geographical distribution is lopsided, with concentration in southern India where the rural branch network of banks is excellent. NGO-MFIs: There are a large number of NGOs that have undertaken the task of financial intermediation. A majority of these are registered as Trusts or Societies. Many NGOs have also helped SHGs to organize themselves into federations and these federations are registered as Trusts or Societies. Many of these federations perform non-financial and financial functions like social activities and capacity-building activities, facilitate training of SHGs, undertake internal audit and promote new groups. Some of these federations are engaged in financial intermediation. The NGOMFIs vary significantly in their size, philosophy and approach. Therefore these NGOs are structurally not the right type of institutions for undertaking financial intermediation activities, as the byelaws of these institutions restrict commercial operations. These organizations by their charter are non-profit organizations and as a result face several problems in borrowing funds from higher financial institutions. The NGO-MFIs, which are large in number, are still outside the purview of any financial regulation. These are the institutions for which policy and regulatory framework would need to be established. NGO-MFIs cannot accept public deposits although many do, from their ‘members’. This is an incorrect interpretation of ‘members’ as clients are not members in the sense of members of a cooperative. Non-Profit Section 25 NBFC-MFIs: Many NGOs feel that combining financial intermediation with their core competency of social intermediation is not the right path. They feel that a financial institution including a company set up for this purpose performs better banking functions. Further, if MFIs are to demonstrate that banking with the poor is indeed profitable and sustainable, they have to function as distinct institutions so that cross-subsidization can be avoided. On account of these factors, NGO-MFIs are of late setting up separate non-profit companies for their microfinance operations. The MFI is prohibited from paying any dividend to its members. In terms of Reserve Bank of India’s notification dated 13 January 2000, relevant provisions of RBI Act, 1934, as applicable to NBFCs, will not apply for NBFCs (1) licensed under Section 25 of Companies Act, 1956; (2) providing credit not exceeding Rs 50,000 for a business enterprise and Rs 1,25,000 for meeting the cost of a dwelling unit to any poor person; and (3) not accepting public deposits. However,

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if any such company wishes to accept public deposits, it will have to comply with the minimum capital norm of Rs 2 crore, and can accept only termdeposits after being rated by an accredited rating agency. In such an event, the difference between not-for-profit companies and for-profit companies is lost and is generally limited to whether profits are being shared by promoters or not. Cooperative MFIs: The cooperatives organized under State Cooperative Acts did not emerge as business enterprises owned, managed and controlled by the members for their own development as government owned shares in many of the cooperative societies. Several state governments therefore enacted the Mutually Aided Cooperative Societies (MACS) Act for enabling promotion of self-reliant and vibrant cooperative societies based on thrift and self help. MACS enjoy the advantages of operational freedom and virtually no interference from the government because of provisions in the Act that societies under the Act cannot accept share capital contributions or loans from the state government. Many of the SHG federations promoted by NGOs and development agencies of the state government, have been registered as MACS. Reserve Bank of India does not regulate MACS, even though they may be enabling financial services to its members. For-Profit MFIs: Non-Banking Financial Companies (NBFC) are companies registered under the Companies Act, 1956, and regulated by Reserve Bank of India. Earlier, RBI did not regulate NBFCs but in 1997 it was made obligatory for NBFCs to apply to RBI for a certificate of registration and NBFCs were required to have minimum net owned funds of Rs 2.5 million. RBI introduced a new regulatory framework for those NBFCs interested in accepting public deposits. All the NBFCs accepting public deposits are subjected to capital adequacy requirements and prudential norms. There are only a few MFIs in the country that are registered as NBFCs. Many MFIs view NBFCs as the preferred legal form and are aspiring to be NBFCs but they find it difficult to meet the requirements stipulated by RBI. The number of NBFCs having exclusive focus on MF activities, is negligible.

CAPITAL REQUIREMENTS NGO-MFIs, non-profit section 25 company MFIs, and cooperative MFIs are regulated by the specific Act under which they are registered and

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not by the Reserve Bank of India. These are therefore not subjected to minimum capital requirements or prudential norms. These MFIs desiring to become NBFCs, are required to have a minimum entry capital requirement of Rs 2 crore. As regards prudential norms, NBFCs are required to achieve capital adequacy of 12 per cent and maintain liquid assets of 15 per cent on public deposits.

FOREIGN INVESTMENT Foreign investment by way of equity is permitted in NBFC-MFIs subject to a minimum investment of US$ 500,000.

DEPOSIT MOBILIZATION NGO-MFIs and NBFC-MFIs are barred by the Reserve Bank of India from mobilizing any type of savings from the public. Mutual benefit MFIs can accept savings from their members. Only NBFC-MFIs rated by approved credit rating agencies are permitted to accept deposits. The maximum quantum of deposits that could be raised, is linked to their net owned funds position. However, it is learnt that regulated MFIs may be permitted to raise deposits upon accepting certain conditions laid down by the regulator.

BORROWINGS Initially, the bulk of funds required by MFIs for lending to their clients were met by apex institutions like National Bank for Agriculture and Rural Development, Small Industries Development Bank of India, and Rashtriya Mahila Kosh. In order to widen the range of lending institutions to MFIs, the Reserve Bank of India has roped in commercial banks and regional rural banks to extend credit facilities to MFIs since February 2000. Both public and private banks in the commercial sector have extended sizeable loans to MFIs at interest rates ranging from 8 to 11 per cent per annum. Banks have been given operational freedom to prescribe their own lending norms keeping in view the ground realities. The intention is to augment flow of microcredit through the conduit of MFIs. In regard to external commercial borrowings (ECB) by MFIs, not-forprofit MFIs were not permitted to raise ECBs. However, effective from

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25 April 2005, Reserve Bank of India has permitted NGOs from accessing ECB. Under the guidelines issued by the RBI, NGOs engaged in microfinance activities having satisfactory borrowing relationship of three years with a bank and ‘fit and proper’ board/management committee would be eligible to avail of ECBs. The designated Authorised Dealer (AD) must ensure that the ECB proceeds are utilized for lending to SHGs or for microcredit or for bonafide microfinance activity including capacitybuilding. ECB funds should be routed through normal banking channel. ECB from the following agencies is permitted from following internationally recognized sources i.e. (1) international banks; (2) multilateral financial institutions; and (3) export credit agencies. Furthermore, overseas organizations and individuals complying with Know Your Customer (KYC) guidelines and anti-money laundering safeguards can also lend ECBs. The maximum foreign currency borrowings for an MFI borrower are US$ 5 million in a financial year. The methodologies used by MFIs for lending are not uniform. The SHG model has been predominant but certain MFIs follow the Grameen model. The MFIs that follow individual lending model and a mixed model are very few in number.

INTEREST RATES Interest rates are deregulated not only for private MFIs but also for the formal banking sector. In the context of softening of interest rates in the formal banking sector, the comparatively higher interest rate (12 to 26 per cent per annum) charged by the MFIs has become a contentious issue. The high interest rate collected by MFIs from their poor clients is being perceived as exploitative. It is argued that raising interest rates too high could undermine the social and economic impact on poor clients. As most MFIs have lower business volumes, their transaction costs are far higher than those of formal banking channels. The high-cost structure of MFIs could affect their sustainability in the long run.

COLLATERAL REQUIREMENTS All legal forms of MFIs can waive physical collateral requirements from their clients. The credit policy guidelines of the RBI allow even banks to waive any type of collateral and margin requirement for loans up to Rs 50,000.

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REGULATION AND SUPERVISION India has a large number of MFIs varying significantly in size, outreach and credit delivery methodologies. Presently, there is no regulatory mechanism in place for MFIs except for institutions registered as NBFCs. As a result, MFIs are not required to follow standard rules and it has allowed many MFIs to be innovative in operation, particularly in designing new products and processes. But the flip side is that the management and governance of MFIs generally remains weak, as there is no compulsion to adopt industry’s best practices accepted systems, procedures and standards. Because the sector is largely unregulated, not much is known about its internal health. Various committees have examined the road map for regulation and supervision of MFIs, as under:

Task force (appointed by NABARD) Report on Regulatory and Supervision Framework for MFIs, 1999. Working group (constituted by Government of India) on legal framework and regulation of MFIs, 2002. Informal groups (appointed by RBI) on microfinance which studied issues relating to (a) structure and sustainability; (b) funding (c) regulations; and (d) capacity-building, 2003. Advisory Committee (appointed by RBI) on flow of credit to agriculture and related activities from the banking system, 2004.

The Advisory Committee (2004) observed that while a few of the MFIs have achieved significant scales of outreach, the MFI sector as a whole is still in an evolving phase as is reflected in wide debates ranging around (1) desirability of NGOs taking up financial intermediation; (2) unproven financial and organizational sustainability of the model; (3) high transaction costs leading to higher rates of interest being charged to poor clients; (4) absence of commonly agreed performance, accounting and governance standards; and (5) heavy expectation of low-cost funds, including equity and start-up costs. The development of a regulatory system for MFIs envisages three stages: stage one–making MFIs appreciate the need for certain common performance standards; stage two–making it mandatory for the MFIs to get registered with identified or designated institutions and stage three– encouraging the development of a network of MFIs which could function as quasi self regulatory organisations (SROs) at a later date or identifying a suitable organization to handle the regulatory arrangements. The

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committee recommended that while the MFIs may continue to work as wholesalers of microcredit by entering into tie-ups with banks and apex development institutions, more experimentation has to be done to satisfy doubts about the sustainability of the MFI model. Such experiments need to be encouraged in areas where banks are still not meeting adequate credit demand by the rural poor. In regard to offering thrift products, the committee felt that, while the NGO-MFIs can continue to extend microcredit services to their clients, they could play an important role in facilitating access of their clients to savings services from the regulated banks. As regards allowing NGOMFIs to access deposits from public/clients, the committee considers that in view of the need to protect the interests of depositors, they may not be permitted to accept public deposits unless they comply with the extant regulatory framework of the Reserve Bank of India. As no depositors’ interest is involved if they do not accept public deposits, a simpler regulatory regime could be considered. As regards the high interest rates being charged by MFIs, the committee felt that lenders to MFIs may ensure that these institutions adopt a ‘cost-plus-reasonable-margin’ approach in determining the rates of interest on loans to clients.

MFIS

AS

BANKING CORRESPONDENTS

An internal group to examine issues relating to rural credit and microfinance (Khan Committee) constituted by RBI in 2005 has recommended that properly identified ‘Business Correspondents’ under contractual arrangement may be allowed to function as ‘pass through’ agents. The MFIs as correspondents could provide value-added services such as (1) disbursal of small value credit; (2) recovery of principal/collection of interest; and (3) sale of microinsurance/mutual fund products/pension products. This recommendation, if implemented, would provide MFIs the potential to leverage both the existing network of bank branches on the one side and the plethora of informal and formal agencies engaged with the poor in particular and the rural sector in general to achieve the objectives of expanding the effective outreach of the formal financial system.

ESTABLISHING EQUITY FUND FOR MFIs The official policy is to promote MFIs so as to empower them to access commercial funds from banks for on-lending to the poor clients. For this

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purpose, the Union Government in February 2005 decided to redesignate the existing Microfinance Development Fund as Microfinance Development and Equity Fund. Further, the corpus was raised from Rs 1,000 million to Rs 2,000 million. The capital support by way of soft loan or equity is expected to provide leverage for MFIs to borrow commercial funds from banks. An Advisory Board to the Fund that has been constituted comprising representatives from Reserve Bank of India, NABARD, banks, and the MFI sector has addressed the need for a differential regulatory framework for MFIs and a regulatory Bill is expected to be put up for Parliamentary approval after wide consultations.

CONCLUSION Private MFIs in India, barring a few exceptions, are still fledgling efforts and are largely unregulated. Their outreach is uneven in terms of geographical spread. They serve microfinance clients with a variety of services, varying in quality and using different operational models. The regulatory framework may be considered only after the sustainability of the MFI model for the poor is clearly established. A developmental mode rather than a regulatory mode needs to be adopted for encouraging MFIs to innovate and evolve in areas where financial exclusion of the poor is widespread.

4 Regulatory Framework for MFIs K RISHAN J INDAL

P

rovision of credit to poor people has been one of the main concerns of policy planners in India since independence and cooperatives were the only formal financial institutions providing credit to the poor. To augment the credit flow to this sector, commercial banks were nationalized in phases beginning 1969. Since then, there has been massive expansion of commercial banks in terms of number of branches in the unbanked areas. As a fillip to the rural credit delivery mechanism, regional rural banks (RRBs) have been set up in India since 1975 as a unique institution, in the sense that these are meant to be local institutions, familiar with the local conditions and at the same time commercial in range of operations. Today India’s formal financial sector is vast and consists of commercial banks, RRBs and cooperative banks. As many as 32,885 rural and semi-urban branches of commercial banks, 14,303 branches of RRBs and nearly 92,000 rural outlets of cooperative banks are engaged in microfinance. The banking infrastructure has evolved over a period of time through various policy interventions. The main driving force behind these policy initiatives has been to create infrastructure to improve credit flow, particularly to the poorer sections of society. Despite this massive infrastructure of banks, as per All-India Debt and Investment Survey 1991–92, 36 per cent of rural indebted households are still dependent on the informal sector. The dependence on the informal sector was much higher in the case of lower asset group.

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SHG-BANK LINKAGE PROGRAMME Against the above backdrop, National Bank for Agriculture and Rural Development (NABARD) initiated a series of action research studies during the 1980s to assess as to why a majority of the poor were being bypassed by the formal banking system and whether the products and services offered by the banking system were appropriate to the requirements of the poor. These studies confirmed that a very large number of the poorest of the poor continued to remain outside the fold of the formal banking system. These studies also showed that the existing banking policies, systems and procedures, and deposit and loan products are not suited to meet the most immediate needs of the poor. The study findings from the demand perspective revealed that what the poor really needed was better access to these services and products, rather than cheap and subsidized credit. Thus began a search for alternative policies, systems and procedures, savings and loan products, other complementary services, and new delivery mechanisms, which would fulfill the requirements of the poorest, especially the women members of such households. The emphasis therefore was on improving access of the poor to microfinance rather than just microcredit. As a village-based network of bank branches already existed, the focus was not on creating alternate organizations, but on finding ways and means to improve the access of the poor to the existing banking network. This led to the emergence of the self help group (SHG)bank linkage model that could be used by the banking system for increasing their outreach to the poorest of the poor, hitherto being by-passed by them. The model envisages forming small, cohesive and participative groups of the poor, encouraging them to pool their savings regularly and using the pooled thrift for small interest-bearing loans to their members, and in the process learning the nuances of financial discipline. The SHG concept is unique because of several factors.

First, it is built around both formal and informal systems. Second, it seeks to promote both social capital and financial capital that are prerequisites for any meaningful development. Third, it allows for flexibility (in interest rates, repayment schedules, instalment size, etc.) around certain core principles. Fourth, it allows for interaction between professionalism of bankers and wisdom and local knowledge and experience of the group.

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It was in this scenario that the SHG-bank linkage programme was launched by NABARD as a pilot project in 1992. Encouraged by positive results, Reserve Bank of India advised banks in 1996 to mainstream it. The programme acquired national priority from 1999 onwards. With support from both the government of India and the Reserve Bank of India, NABARD successfully spearheaded the programme through partnership with various stakeholders in the formal and informal sector. As on March 2006, cumulatively, 2.24 million SHGs comprising 32.98 million rural poor families have been credit linked to banks and cumulative disbursement of credit was of the order of Rs 11,397.55 crore. As the SHG-bank linkage model makes use of the existing, prudentially regulated banking sector, it obviates all issues relating to regulatory mechanisms.

EMERGENCE OF MICROFINANCE INSTITUTIONS (MFIs) The mechanism of directing credit to the poor through sponsored programmes has suffered from poor recovery rates that had made an adverse impact on the recycling of credit. Also, there has been a mismatch between what the poor people needed, particularly in terms of products and product delivery mechanisms and what conventional financial institutions could offer. To fill the gap that has arisen due to this mismatch, Micro Finance Institutions (MFIs) have emerged. MFIs can be broadly defined as institutions other than banks that are engaged in provision of financial services to the poor. MFIs can be divided into three categories of organizational forms as under:

NOT-FOR-PROFIT MFIS

Societies registered under Societies Registration Act, 1860, or similar state Acts. Public Trusts registered under the Indian Trust Act, 1880, or any state enactment governing religious or charitable public trusts. Non-profit companies registered under Section 25 of the Companies Act, 1956, that are specifically exempted from registration with RBI.

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MUTUAL BENEFIT MFIS

State credit cooperatives. National credit cooperatives. Mutually Aided Cooperative Societies (MACS).

FOR PROFIT MFIS Non-Banking Financial Companies (NBFCs) registered under the Companies Act, 1956, and as defined in the Reserve Bank of India Act, 1934 whose principal business is the provision of microfinance. While there is no database in regard to the number of MFIs operating in the country, it is estimated (Advisory Committee, 2004) that their number could be around 800. On the basis of the data collected from 304 MFIs, the position of different categories of MFIs in terms of their number and credit flow achieved is presented in Table 4.1. It will be seen from Table 4.1 that MFIs are broadly divisible into two categories. One set comprises institutions registered under diverse legislative frameworks and not regulated by RBI. The share of these institutions in credit (40 per cent) relative to their numbers (98 per cent) is not significant at the disaggregated (MFI) level. On the other hand, as few as five MFIs for which data is available and which are registered as NBFCs and regulated by RBI, purvey 60 per cent of ground level credit provided by MFIs. An overwhelming majority of MFIs are, however, small in size and are from the NGO sector, with clients ranging anywhere from 500 to 1,000. The large MFIs are NBFC MFIs typically belonging to the ‘forprofit’ category. In short, India has a large number of MFIs with diverse legal forms, varying significantly in size, outreach and credit delivery methodologies. The microfinance sector in India is relatively young but growing fast. MFIs are slowly coming of age but still suffer from many limitations, as under:

MFIs, except the top 10, are very small in size and lack appropriate operating systems. Most of the MFIs are still to mature as financial institutions as significant improvements are required in their governance, internal control and MIS.

NBFCs

Particulars

No. of MFIs Percentage to total

Loan outstanding (Rs crore) Percent to total

No.

1

2

Source: Unpublished Data from NABARD, Mumbai.

398.3 60

5 2

Regulated by RBI

Sl

29.5 5

28 9

Trusts

152.4 23

167 54

Societies

20.8 3

96 32

Coops.

Not Regulated by RBI

TABLE 4.1 Category-wise break-up of MFIs

56.5 9

8 3

Sec 25 Cos.

657.5 100

304 100

Total

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A majority of these MFIs are subsidy dependent. Therefore, sustainability of microfinance operations, independent of subsidized funds, is critical for scaling up the provisioning of financial services to the poor. Most of the MFIs in India are NGO-based and are registered as societies or Trusts, which are not appropriate organizational forms to carry on microfinance operations on a commercial scale. As the transaction costs for handling small amounts is usually high, MFIs do tend to cover them by charging high interest rates. For the poor, the lending rate of interest may not be an immediate area of concern as long as they get hassle-free and timely access to credit. But cost of credit becomes an important issue when the credit needs of clients graduate to higher levels.

NEED FOR REGULATORY FRAMEWORK Need for regulatory framework for MFIs arises because of the following factors:

FOR NGO-MFIS

Most of the financial institutions irrespective of their mode of legislation, are required to report to a financial institution such as RBI, NABARD, SEBI or any other specific agency designated for the purpose. NGO-MFIs engaged in microfinance do not report to any such statutory body. Microfinance activities of NGOs are not explicitly stated in the preamble of their Acts as these organizations can undertake only activities relating to charitable purposes. NGO-MFIs are exempted from Income Tax because they undertake charitable activities. Many a time, tax authorities question the status of microfinance as a charitable activity. NGO-MFIs are considered as unincorporated bodies and such bodies as per the RBI Act are not allowed to mobilize deposits from the public. Still, many of these organizations accept deposits from their borrowers and there is a need to protect the interest of small savers. NGO-MFIs do not have real owners as the promoters usually do not have their own money at stake. Banks are therefore generally


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hesitant to extend loans to these organizations as they have to rely only on local goodwill as an indicator of loan repayment capacity.

FOR SECTION 25 COMPANIES

Section 25 companies are ‘not-for-profit’ institutions and it is not clear whether microfinance is an eligible activity to be undertaken by these MFIs. Section 25 companies are also not allowed to mobilize deposits, yet many of these organizations accept deposits from their members.

FOR NBFCS NBFCs are the only type of MFIs falling under the regulation of the Reserve Bank and are subject to prudential regulations. MFI practitioners have been demanding a more liberal framework for regulation, as discussed in the subsequent paragraphs, than existing today:

At present, the minimum capital requirement for NBFCs is stipulated at Rs 2 crore. Many of the NGOs who intend to transform themselves into NBFCs feel that this amount is too high. Moreover, NGOs are not allowed to invest capital in ‘for-profit’ institutions including NBFCs. As a result of this, NGOs find it difficult to graduate into NBFCs and as a result, only a few MFIs are registered as NBFCs. NBFCs engaged in microfinance activities are allowed to mobilize deposits by RBI only if they conform to prescribed criteria. First, deposit-taking by NBFCs is generally possible only three years after registration. Second, NBFCs must receive an investment grade rating from accredited rating agencies. Third, NBFCs are allowed to accept only time deposits for periods ranging from one to five years subject to an interest rate ceiling. Fourth, mobilization of deposits upto a certain limit is allowed only in the province of registration. These prescribed criteria are quite stringent. NBFCs find it difficult to conform to lay down criteria and therefore are not involved in mobilization of deposits. Government of India has allowed foreign equity investments in NBFCs subject to a ceiling of 51 per cent with a minimum amount of US$ 5,00,000.

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Broadly, the need for a regulatory framework arises due to two major factors. First, there is a huge unmet potential for savings from the poor and regulation could help MFIs in offering saving services to their clients. Second, most of the MFIs are dependent on donors for their resources and these resources are limited. A regulatory framework could facilitate better access to savings and commercial loans for MFIs, thereby upscaling their operations.

RECOMMENDATIONS OF VARIOUS COMMITTEES NABARD TASK FORCE, 1998 The need for an appropriate policy and regulatory framework for microfinance has been engaging the attention of policymakers for quite some time. In November 1998, a ‘High Power Task Force on supportive policy and regulatory framework for microfinance’ was set up by NABARD at the instance of Reserve Bank of India. Key stakeholders such as GOI, RBI, NABARD, banks and NGOs were represented on the Task Force. The objectives of the Task Force, inter alia, were to suggest a regulatory framework that created an enabling environment for MFIs to improve their operations. It recommended the regulation of MFIs whether deposit facilities were offered by them or not and the amount of savings mobilized could determine the extent of regulation. From a long term perspective, the Task Force favoured the setting up of a system of self regulatory organizations. As self regulatory mechanisms take time to evolve, as an intervening arrangement, a regulatory framework for MFIs was recommended with the following broad features:

FOR NGO-MFIS The Task Force proposed that the regulation and supervision of NGOMFIs could involve the following: (i) Registration of NGO-MFIs: The first step for regulation proposed is registration with a competent authority. This is considered necessary as NGOs engaged in microfinance activities are operating without any license from the financial authority. While registration under Societies Registration Act, Indian Trusts Act or


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any other Act provides legal status, this registration does not empower them to undertake microfinance services. (ii) Receipt of periodic information: NGO-MFIs to provide information to an authority designated for the purpose. (iii) Proposed regulation: The framework proposed for regulation of NGO-MFIs was as under: (a) MFIs purveying credit only: There need not be any regulation for the MFIs purveying credit only and not involved in mobilizing savings in any manner. Once the initial registration is done, the agencies may furnish only periodic statements providing details of their financial operations. (b) MFIs purveying credit and mobilizing savings from the clients and loanees: The Task Force was of the view that those NGO-MFIs mobilizing savings not exceeding Rs 2 lakh at any point of time might be excluded from the regulatory norms. They may, however, obtain registration and submit periodic information to the competent authority. (c) MFIs purveying credit and mobilizing savings from the clients/loanees (above cut-off limit): For those MFIs mobilizing savings above Rs 2 lakh and below Rs 25 lakh, the regulation may comprise a minimum reserve of 10 per cent of savings mobilized. In respect of MFIs having savings above Rs 25 lakh, reserve requirement may be 15 per cent of the savings plus these MFIs should be subjected to comply with prudential norms regarding income recognition, asset classification and provisioning. (iv) Supervision of MFIs: Task Force recommended that NGO-MFIs should also be subjected to supervision right from the beginning like any other agency in the financial sector. However, the norms and the parameters could not be as stringent as in the case of banks and financial institutions and a system of off-site supervision would be adequate for such institutions.

FOR NBFCS The Task Force observed that NBFCs engaged in microfinance are subjected to the same regulations as applicable to other NBFCs. It was proposed that the net owned funds requirement for NBFCs engaged in microfinance should be reduced to the level of Rs 25 lakh.

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INFORMAL GROUPS

BY

RBI

ON

MICROFINANCE

In October 2002, RBI constituted four informal groups for addressing various issues confronting microfinance including regulatory arrangements. Senior bankers, practitioners and other stakeholders were represented in these informal groups. One of the major recommendations of these groups was to create a separate category of non-deposit-taking NBFCs with a lower capital of Rs 25 lakh and to create a facilitative environment so that NGOs and federations of SHGs transform themselves into Section 25 companies or NBFCs or MACS. RBI is yet to take a view on the recommendations made by Task Force and Informal Group.

EXEMPTION FOR NON-DEPOSIT TAKING SECTION 25 COMPANIES As regards NBFCs, the RBI issued instructions in 2000 that NBFCs, registered under Section 25 of the Companies Act, 1956, those are engaged in microfinance and not accepting public deposits, would be exempted from the purview of Section 45 (1)(a) [registration and minimum net owned funds], 45 (1)(b) [maintenance of liquidity assets] and 45 (1)(c) [transfer of profits to Reserve Fund] of the RBI Act, 1934. These instructions essentially created a new legal form for providing microfinance services without having to comply with the strict regulatory requirements for NBFCs.

WAY FORWARD In pursuant to the Union Budget announcement in 2005, the Microfinance Development Fund (MFDF) was redesignated as the Microfinance Development and Equity Fund (MFDEF) and the corpus of the Fund has been raised from Rs 100 crore to Rs 200 crore. Equity support is being provided out of MFDEF to MFIs. This should help in facilitating access of commercial loans to the MFIs. The Advisory Board of MFDEF is also entrusted with the responsibility of suggesting a suitable regulatory framework for MFIs. The major challenge for evolving a regulatory framework is that the MFI sector is highly heterogeneous. It is divisible into two broad institutional categories, comprising institutions incorporated under diverse legislative framework and the other incorporated as NBFCs and registered with Reserve Bank of India.


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The former, though large in number, are not significant in terms of credit purveyed at the disaggregated level (MFI level). The latter, on the other hand, are few but have significant outreach and deal with substantial volumes of credit. In keeping with their heterogeneous character, MFIs reflect diversity of interest. The regulatory framework should be able to accommodate these different types of interests. Many of the MFIs are very small in size and operate over a small geographical area. Any structured legislative framework for such MFIs is likely to throttle their initiatives. The regulation of MFIs would undoubtedly help in expanding their outreach but keeping in view the diversity in the MFI sector, it would be appropriate to introduce a regulatory framework in a phased manner. For this, the broad strategy is proposed in the subsequent paragraphs:

A new NBFC category be created for provision of microcredit services which could be defined as a company which provides thrift, credit and other financial services in very small amounts in rural, semi-urban and urban areas for enabling them to raise income levels of the poor people besides raising the present standards of living. At present, the minimum capital requirement for NBFCs is stipulated at Rs 2 crore. A majority of MFIs experience difficulty in raising this level of capital and therefore the capital requirement for new types of NBFCs can be reduced to Rs 1 crore. With the reduction in capital requirement, the number of NBFCs involved in microfinance is likely to increase but the number would still remain within limits manageable by RBI. NBFCs involved in microfinance should be allowed to mobilize thrift deposits from its clients in a more liberal manner subject to appropriate safeguards such as imposition of appropriate levels of Statutory Liquidity Reserve and capital adequacy. With a view to spur growth and achieve better transparency, there is a need to set up a body that can maintain a database on MFIs, prescribe appropriate performance standards and create an enabling environment for the growth of MFIs. To begin with, NABARD, which has relevant experience in supervising rural financial institutions could be empowered to perform the following functions: (a) Set minimum performance standards for MFIs. (b) Maintain a sector-level database in the public domain on all microfinance service providers. (c) Facilitate the rating of MFIs for the purpose of linkages.

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(d) Support capacity building for microfinance service providers and ensure effective delivery. (e) Facilitate provisioning of appropriate capital resource support. (f) Engage in promoting sector related research.

This body should help particularly in building capacities of NGOMFIs for adopting better performance standards in governance, auditing and accounting so that the institutions can transform themselves to the regulated entities. As recommended by Khan Committee, MFIs should be allowed to function as correspondents to banks for providing microfinance services such as mobilization of savings, disbursal of small loans. This would facilitate banks to liberalize lending norms on the strengths of MFIs for expanding their outreach to the poor.

CONCLUSION The MFI sector in India is highly heterogeneous and only a few of the MFIs have significant outreach with substantial volumes of credit. These MFIs are already regulated as NBFCs but the remaining MFIs that constitute the bulk are generally very small in size and operate in a small geographical area. These MFIs require huge capacity-building efforts before they can be subjected to effective supervision and regulation. A move to regulate these MFIs presently is likely to curb their growth and throttle their slender development initiatives. The imperative need is thus more for a developmental framework rather than a regulatory framework.

REFERENCES GTZ. 2004. ‘Emerging Scenario for Microfinance Regulation in India: Some Observations from the Field’. Eschborn: GTZ. NABARD. 1999. ‘Task Force on Supportive Policy and Regulatory Framework for Micro Finance: Report’. Mumbai: NABARD. RBI. 2004. ‘Advisory Committee on Flow of Credit to Agriculture and Related Activities from the Banking System: Report’. Mumbai: RBI. Unpublished reports of NABARD, Mumbai. World Bank. 2004. ‘India Scaling up Access to Finance for India’s Rural Poor: Report’. New Delhi: World Bank.

5 Promoting Linkages between Banks and MFIs P. SATISH

THE PROGNOSIS

T

he statement of the Advisors Group to the UN International Year of Microcredit 2005 (United Nations, 2005) makes the following three significant points:

We welcome the increasing enthusiasm of many providers of microfinance, old and new, for delivering financial services to poor people on a commercially sustainable basis. Though many established microfinance institutions are rightly proud of their charitable roots, a growing number of them are willing to talk about possible partnerships with established commercial financial institutions, about scrutinising loan portfolios, retailing insurance policies underwritten by commercial insurers, and even of making profits and perhaps becoming listed companies. Some of the best institutions are now reducing their dependence on donor financing, exposing their operations to critical ratings agencies, and hunting out private capital. We also welcome the growing interest of commercial financial institutions in serving poor people, who until recently they often avoided as customers. Nevertheless, rhetoric is certainly running ahead of action. Although a growing number of institutions and governments talk

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about treating people who are poor as clients and not beneficiaries, they often continue to ghettoize microfinance within the philanthropic arms of their organizations, where resources and accountability are typically limited, or otherwise evaluate them in non-commercial ways. A culture change is still required in many of the established institutions that provide financial services to poor people. In particular, we recommend that providers of microfinance become more transparent, especially about their loan problems and about the degree to which they depend on subsidized capital, and we recommend that they subject their performance data and accounts to independent audit/inspection. We note with some concern the fact that much of the commercial capital available to microfinance providers is foreign, and therefore carries significant exchange-rate risk. This risk has been sufficiently large to bankrupt some microfinance providers in the past. We recommend that foreign suppliers of capital to microfinance institutions develop ways of providing such funding in local currency.

This triad bring us to the necessity of building up linkages between banks and MFIs. This necessity is also manifested in Indian microfinance, despite the fact that MFIs cater only to a small segment of the microfinance market in the country.

MICROFINANCE: THE BEGINNINGS IN INDIA Microfinancing by ‘non-formal’ financial organizations already had tentative beginnings by the time the National Bank for Agriculture and Rural Development (NABARD) initiated the pilot project for self help group (SHG)-bank linkage in 1992. Self Employed Women’s Association (SEWA) owned by women of petty trade groups was established on cooperative principles in 1974 in Gujarat. This earliest initiative in microfinance in India can be traced to the initiative undertaken for providing banking services to the poor women employed in the unorganized sector of Ahmedabad city in Gujarat. Shri Mahila SEWA Sahakari Bank was set up by registering it as an urban cooperative bank. Since then the bank has been providing banking services to the poor as self-employed working as hawkers, vendors and domestic servants. This MFI model has not been replicated elsewhere in the country, though the Working Women’s Forum

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81

(WWF) was promoting working women’s cooperative societies in Tamil Nadu since 1980. Shreyas in Kerala has been actively involved in microfinance operations since 1988 with the objectives of promoting people’s cooperatives, inculcating habits of thrift and self-managing a people’s bank (HDFC, 1997). The pilot project initiated by NABARD in 1992 for linking banks with SHGs evolved into a regular lending programme as an outcome of the recommendations of the RBI’s Working Group on NGOs and SHGs (RBI, 1996). The SHG-bank linkage programme has expanded at a fast pace in India to evolve into the largest microfinance programme in the world and it undoubtedly is the main microfinance programme in India.

MICROFINANCE OUTSIDE SHG-BANK LINKAGE However, there are also microfinance institutions (MFIs) operating in the country following a variety of saving and credit systems. While there is no published data on MFIs in India, their number is estimated to be around 800. But not more than 10 MFIs are reported to have an outreach of more than 1 lakh microfinance clients. An overwhelming majority of the MFIs are operating on a smaller scale with clients ranging from 100 to 1,500 per MFI. The geographical distribution of MFIs is lopsided, with concentration in south India. It is estimated that the share of MFIs in the total microfinance business in the country is about 8 per cent. The following paragraphs describe the various legal forms under which MFIs operate in India. NGO-MFIs: There are a large number of NGOs that have undertaken the task of financial intermediation. A majority of these NGOs are registered as a trust or a society. Many NGOs have also helped SHGs to organize themselves into federations and these federations are also registered as trusts or societies. Many of these federations perform non-financial functions like social and capacity-building activities, facilitate training of SHGs, undertake internal audit, promote new groups and some of these federations are engaged in financial intermediation, acting as apex level financial service providers. The NGO-MFIs vary significantly in their size, philosophy and approach. While these institutions are strong on social and community capacity-building, these are inexperienced as far as financial management issues are concerned. Therefore, these NGOs are structurally not the right type of institutions for undertaking financial intermediation activities, as the byelaws of these institutions are

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generally restrictive in allowing any commercial operations. These organizations, by their charter, are non-profit organizations and as a result, face several problems in borrowing funds from higher financial institutions. The NGO-MFIs, which are large in number, are still outside the purview of any financial regulation. Non-Profit Companies as MFIs: Many NGOs felt that combining financial intermediation with their core competency activity of social intermediation is not the right path. It was felt that a financial institution including a company set up for this purpose does better at banking functions. Further, MFIs need to demonstrate that banking with the poor is indeed profitable and sustainable; it has to function as a distinct institution so that cross subsidization can be avoided. On account of these factors, NGO-MFIs are of late setting up separate non-profit companies for their microfinance operations. The MFIs are prohibited from paying any dividend to its members. In terms of the Reserve Bank of India notification dated 13 January 2000, relevant provisions of RBI Act, 1934, as applicable to NBFCs will not apply for NBFCs (i) licensed under Section 25 of Companies Act, 1956; (ii) providing credit not exceeding Rs 50,000 (US$ 1,112) for a business enterprise and Rs 1,25,000 (US$ 2,778) for meeting the cost of dwelling units to any poor person; and (iii) not accepting public deposits. Mutual Benefit MFIs: The State Cooperative Acts did not provide for an enabling framework for emergence of business enterprises owned, managed and controlled by members for their own development. Several state governments therefore enacted the Mutually Aided Cooperative Societies (MACS) Act for enabling promotion of self-reliant and vibrant cooperative societies based on thrift and self help. MACS enjoy the advantages of operational freedom and virtually no interference from government because of the provision in the Act that societies under the Act cannot accept share capital or loan from the state government. Many of the SHG federations, promoted by NGOs and development agencies of the state government have been registered as MACS. Reserve Bank of India does not regulate MACS, even though they may be providing financial services to their members. For Profit MFIs: Non-banking financial companies (NBFCs) are companies registered under the Companies Act, 1956, and regulated by Reserve Bank of India. Earlier, RBI did not regulate NBFCs but in 1997


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it was made obligatory for NBFCs to apply to RBI for a certificate of registration and for this certificate, NBFCs were to have minimum net owned funds of Rs 25 lakh and this amount has been gradually increased. RBI introduced a new regulatory framework for those NBFCs that need to accept public deposits. All the NBFCs accepting public deposits are subjected to capital adequacy requirements and prudential norms. There are only a few MFIs in the country that are registered as NBFCs. Many MFIs view NBFCs as a more preferred legal form and are aspiring to be NBFCs but they find it very difficult to meet the requirements stipulated by RBI. The number of NBFCs having exclusive focus on microfinance is negligible.

ISSUES

IN

ACCESSING PUBLIC DEPOSITS

AND

REGULATION

The basic hindrance to the rapid growth of microfinance outside the linkage programmes relates to issues of accessing public deposits, regulation and supervision. The expectations are that the institutions that have emerged to provide microfinance services, MFIs, expand their outreach in provision of financial services to microenterprises and at the same time attain financial self sufficiency. Achieving financial self sufficiency implies recourse to public money, access to deposits as well as private investments. Deposits from the public are less volatile and more costeffective sources of funds than alternative sources such as refinance from the Central Bank and second-tier institutions or funds from donor agencies. A reliable funding source like savings can expand loaning operations and thereafter also benefit poor borrowers. Microfinance institutions expanding their activities to accept public deposits would imply that suitable regulatory and supervisory mechanisms by the central banks have been put in place in those countries. Institutions receiving public deposits need to be regulated and supervised by the central banks or superintendencies of financial entities as well as the existence of supportive legal framework. Absence of such enabling environment in many countries has stunted the growth of MFIs into fullfledged financial institutions. Over the last two decades, a small number of successful MFIs have built up sufficient financial strength and managerial capability to allow them to become commercial banks. While Grameen Bank in Bangladesh has a special regulation which authorizes its working, PRODEM in Bolivia and K-REP in Kenya had to necessarily transform themselves into full-fledged commercial banks to enable access public deposits. Later, Bolivia enacted a law for private financial

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funds which enabled MFIs to access public deposits (Navajas and Schreiner, 1998). But in vast parts of the developing world, governments and central banks have not shown much enthusiasm to enact a separate regulatory and supervisory framework on similar lines. The expansion of the operations of MFIs has taken place within legal and institutional environments that are not designed to support the expansion and sustainability of these institutions. As a result, MFIs operate in a situation where law and regulation is at best ambivalent. The increasing amount of savings mobilization by MFIs has to take place within a proper regulatory framework. In the absence of the same, the relative supervisory laxity gives scope for unscrupulous elements to enter the sector and exploit the hard-earned savings of the poor. If this happens, the entire microfinance movement could come under a cloud and the gains for the rural and urban poor in the last two decades in the form of accessible financial services would disappear (Satish, 2000). The Vyas Committee recommended that while the MFIs may continue to work as wholesalers of microcredit by entering into tie-ups with banks or apex development finance institutions, more experimentation has to be done before endorsing the MFI model. Such experimentation needs to be encouraged in areas where banks are yet to meet adequate credit demands of the poor, especially the rural poor. As regards offering thrift products, the Committee felt that, while the NGO-MFIs can continue to extend microcredit services to their clients, they could play an important role in facilitating access of their clients to savings services from the regulated banks (RBI, 2004). The debate therefore veers round to the matter of building up and promoting linkages between banks and MFIs.

GOVERNANCE

OR ITS

ABSENCE

As an appropriate regulatory and prudential framework which enables microfinance institutions to mobilize public savings is absent, except for those that are registered as NBFCs, MFIs are not required to follow standard rules and this has allowed many MFIs to innovate in their approaches, particularly in designing new products and processes. But the negative aspect is that the management and governance of MFIs remain weak, and there is no compulsion to adopt widely accepted systems, procedures and standards. It is a widely observed phenomenon that most MFIs are closely held institutions with their boards populated by family members, relatives and


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friends. Any attempts by either public authorities or by people in general to get information on their activities or details of their operations especially financial are stonewalled quite effectively. Many a time even requests for basic data or information by institutions like NABARD or DRDAs are met either with studied indifference or outright hostility. There have also been whispers about financial misdemeanours by some of the promoter-executives who have luxurious and jet-setting lifestyles. In a lighter vein, it is said that usually any two MFI promoter-executives meet at conferences only in Washington or Paris or Bangkok, never in the backwaters of the Indian sub-continent. This lack of governance has to be addressed by the MFI sector and transparent standards and procedures of functioning have to be set forth. One way of ensuring this would be through appropriate regulation and supervisory systems. As we have observed earlier there are considerable difficulties in setting up these systems, as the Indian financial sector has not yet reached a stage of acquiescence to such systems. One has therefore necessarily to search for alternatives that can ensure such regulation.

LINKAGE AS A SURROGATE FOR REGULATION Linkages with the formal sector, especially the banks and other financial institutions ensures third party surveillance on MFIs. Banks extending financial assistance to MFIs have to undertake a process of due diligence and also subject them to rating norms by reputed rating agencies. These processes ensure a thorough analysis of the systems and procedures, corporate governance norms, internal checks and controls. The financing bank should require MFIs to maintain standards of corporate governance including specific disclosure norms. The critical elements of the governance process include the setting and enforcing clear lines of responsibility and accountability throughout the organization and ensuring that board members are qualified for their positions, have a clear understanding of their role in corporate governance and are not subject to undue influence from management or outside concerns. The existence of appropriate oversight mechanisms by senior management has to be ensured. Corporate governance should be conducted in a transparent manner. Transparency can also reinforce sound corporate governance. For this, public disclosure is desirable in the areas of board structure (size, membership, qualifications and committees), senior management structure (responsibilities, reporting lines, qualifications and experience), basic organizational structure (line of business structure, legal entity

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structure), information about the incentive structure (remuneration policies, executive compensation, bonuses, stock options), and the nature and extent of transactions with affiliates and related parties (Thorat and Arunachalam, 2005). The financing bank should also establish standards for certain nonnegotiables in terms of minimum systems requirements such as MIS, risk management and internal controls, internal audits, portfolio management guidelines including asset classification and income recognition, accounting standards, capital adequacy and the like. Some of these would have to be verified through on-site supervision and special audits and could form part of a lender’s supervisory oversight. Conduct of regular portfolio audits on a required scale and with sufficient scope has to be ensured. With these aspects of lenders’ oversight, bank linkage acts as a surrogate for regulation.

FINANCIAL DEEPENING AND SMOOTHENING THROUGH LINKAGES The Task Force on Microfinance Regulation was of the view that supporting MFIs may be another cost effective way for the banking sector to deal with the poor. The loanable funds requirements with the MFIs may far outstrip the available resources in the sector and MFIs will also have to necessarily rely on the banking sector. The linkage of MFIs with the banking system will aim at using the intermediation of MFIs between banks and the rural poor for evolving an additional delivery mechanism for providing financial services by combining the service ethos, grassroots link and familiarity with rural milieu possessed by MFIs with the financial resources of the formal banking system, for creating future quality clientele for the banking system and for generating healthy competition among institutions in rural areas for promoting sustainability among them (NABARD, 1999). The linkage of MFIs and bank branches has many advantages for both. First, the recovery performance of the loans through MFIs has been found to be highly satisfactory at 90–100 per cent. Second, intermediation through MFIs significantly reduces the transaction costs of both the bank as well as the MFI, thereby ensuring reasonable margins in their operations. And third, bank branches have the opportunity of getting future quality clients, both for deposits and loans. MFIs resort to different mechanisms for providing their financial services to the poor, which include


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financing them directly or through SHGs, SHG federations or other types of groups like cooperatives. The security for the loans to be availed of by the MFIs from the banks is going to be a crucial issue in the MFI linkage programme. MFIs will generally be hard placed to offer both primary and collateral securities. Most of the MFIs may not be in a position to offer collateral due to restrictions in respect of donor-supported assets or absence of such assets. Due to innumerable small volume loans at the ground level, they may not be in a position to put in any primary security, except their book debts. The banks, therefore, have to consider other aspects of the quality and performance of the MFIs for the purpose of securing their loans. The past performance of MFIs in terms of outreach, savings mobilized, number of borrowers, their repayment performance, increase in the amount of outstanding over the years through increase in loans and the number of borrowers, that is, the quantifiable and verifiable indicators, show the strength of the MFIs. Banks can consider extending loans to MFIs as a proportion to the savings mobilized by them, the extent of loans gradually increasing over time with repayment performance, increase in outreach and viability of the operations of the MFI. Banks can also take assignment of all book debts of the MFIs and enter into an agreement that all loan outstandings against the branches are held in trust by the MFIs on behalf of the banks. With registration, fixation of performance standards, application of prudential accounting norms and development of proper selection criteria, the banks can take assignment of book debts as a major component of security and finance MFIs without traditional collaterals. On their part, the MFIs may, wherever possible, offer available collateral like existing premises or vehicles. The savings mobilized by them for clients and deposited with the bank could also be treated as collateral substitute. In the matter of financial deepening, the linkages serve three purposes. The first is the expansion of the portfolio. A second is the function of liquidity balancing. Bank borrowings increase the loan portfolio substantially, sometimes reaching up to six times the deposit portfolio of the MFI. Within the MFI sector there are differences in the usage of the bank linkages. The linkages to banks can basically be delineated into two streams. Under the intermediation model, an MFI borrows from banks and on-lends to clients (either groups or individuals). The incentives of MFI to maintain supervision levels and collections are high, as it bears 100 per cent credit risk. This could act as a dampener on the MFI’s efforts

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to rapidly expand its loan portfolio. The MFI may not be willing to take enough risks and may be too cautious. The other approach is the partnership model, which aims to separate the risk of the MFI from the risk inherent in the microfinance portfolio and provides a mechanism for banks to continuously incentivize partner MFIs. The loans are contracted directly between the bank and the underlying borrower, that is, it does not reflect on the balance sheet of the MFI. Contrary to the SHG model where there is no financial intermediation, the bank relies on the MFI’s field operations for loan repayment collection and monitoring, which should be done continuously in a professional manner. The loan amount is not dependent on savings, which are not compulsory. In this model, the MFI collects a service charge from the borrowers to cover transaction costs and margins. In order to preserve MFI incentives for portfolio quality, the structure requires the MFI to provide a first loss default guarantee which makes the provider of the guarantee liable to bear losses up to a certain specified limit, usually the first 10 per cent of loss on the portfolio. As MFIs may not be able to provide the risk capital implied in the guarantee, a solution is to provide an overdraft facility to the MFI which is equivalent to the amount which the MFI is liable to provide as the default guarantee and is drawn only in the event of default.

BANK PARTNERSHIP MODEL This model is an innovative way of financing a MFI. A bank is the lender and the MFI acts as an agent for handling items of work relating to credit monitoring, supervision and recovery. The MFI acts as an agent and takes care of all relationships with the client, from first contact to final repayment. The model has the potential to significantly increase the amount of funding that MFIs can leverage on a relatively small equity base. A subvariation of this model is where the MFI as an NBFC holds the individual loans on its books for a while before securitizing them and selling them to the bank. Such refinancing through securitization gives the MFI enlarged funding access. If the MFI fulfils the true ‘sale criteria’, the exposure of the bank is treated as due to the individual borrower and the prudential exposure norms do not then inhibit such funding of MFIs by commercial banks through the securitization structure. Some banks have proposals to finance a network of village internet kiosks in partnership with MFIs, who will act as loan service agents. MFIs are viewed as key partners in tapping the potential of the market, it


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aims to leverage. Their current infrastructure and relationships are leveraged towards delivering microfinance. Through a wholesale linkage model, the bank provides credit directly to the intermediary NGO or MFI for on-lending to the SHGs or to other forms so as to microfinance their clientele. There is a need for innovative structures that will enable the expansion of the microfinance market and overcome current constraints to scaling up. The new structures include buying out MFI loan portfolios, on-tap securitization (i.e., securitizing MFI loan portfolio receivables on an on-going basis) and the partnership model in which the MFIs act as loan service agents. Through these linkages, the MFIs access loan funds as well as mezzanine capital (i.e., investment with characteristics of debt and equity financing) from banks. The structures have been worked out with the following objectives:

Provide assured source of funding so that the expansion plans of the MFIs are not constrained by lack of resources. Separate the credit risk of the portfolio from the credit risk of the MFIs and hence seek to provide funding to the MFIs at lower costs. Leverage the inherent strengths of the MFI such as origination and collection capabilities. Provide collection incentives and review triggers related to portfolio performance.

BANKING CORRESPONDENTS The proposal of ‘banking correspondents’ could take this model a step further, extending it to savings. It would allow MFIs to collect savings deposits from the poor on behalf of the bank. It would use the ability of the MFI to get close to poor clients, while relying on the financial strength of the bank to safeguard deposits. RBI has worked out the modalities for the appointment of MFIs as banking correspondents.

SERVICE COMPANY MODEL The service company model developed by ACCION and used in some of the Latin American countries is interesting. The model may be workable for public sector banks and private banks with large branch networks. Under this model, the bank forms its own MFI, perhaps as an NBFC, then works hand in hand with the MFI to extend loans and other services. On paper, the model is similar to the partnership model: the MFI originates the loans

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and the bank books them. The model has two interesting operational features: (a) The MFI uses the branch network of the bank as its outlet to reach clients. This allows the client to be reached at lower cost than in the case of a standalone MFI. In case of banks with large branch networks, it also allows rapid scaling up. In the partnership model, MFIs may contract with many banks in an arms length relationship. In the service company model, the MFI works specifically for the bank and develops an intensive operational cooperation between them to their mutual advantage; and (b) The partnership model uses both the financial and infrastructure strength of the bank to operate at lower costs and generate faster growth. The Service Company model has the potential to take the burden of overseeing microfinance operations off the management of the bank and put it in the hands of MFI managers who are focussed on microfinance to introduce additional products, such as individual loans for SHG graduates, remittances and so on without disrupting bank operations and thereby provide a more advantageous structure for microfinance (Thorat, 2005).

MFI LINKAGE PROGRAMME

OF

SIDBI

The apex financial institution for promotion, financing and development of small-scale industries in India, SIDBI (Small Industries Development Bank of India) also has a programme of linkages with microfinance service providers. SIDBI started microcredit initiatives in 1994 as a development project, the objective being to encourage reaching out to the poor through informal sector institutions. Accordingly, support was extended to select well-managed NGOs for on-lending to the rural poor with emphasis on improving outreach to poor women for taking up income generation activities at the grassroots level. The SIDBI Foundation for Micro Credit (SFMC) came into operation in January 1999, incorporating lessons from the pilot phase with a mission ‘to create a national network of strong, viable and sustainable microfinance institutions (MFIs) from the informal and formal sectors to provide microfinance services to the poor, especially women’. SFMC offers customized need-based packages of loan, grant and equity to partner MFIs for meeting their on-lending requirements as also for institutional capacity-building to enable them to transform themselves into state-of the-art; financial institutions, besides facilitating the overall growth of the microfinance sector in India. These include efforts to develop a market of service providers, consultants, rating agencies, microfinance training institutions and mentors through a number of initiatives.


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Further innovation introduced by SFMC was to move away from security-based lending prevalent in the operations of SIDBI. The collateral requirement for availing loan assistance from SFMC is 10 per cent security deposit. More than acting as security for the loan, this initial deposit with interest accrued was envisaged to contribute to building up the equity base of the MFI in the long run. The other features of the on-lending loan product are as follows:

Credit for large and medium MFIs with fund requirement of Rs 10 lakh and above. Focus on building long-term partnership. Annual/need-based repeat loans. Flexible interest rate based on performance based score chart; on-lending rate to be market driven.

SFMC, while interacting with partner MFIs, observed that liquidity was a major concern of the middle level MFIs and a small working capital support goes a long way in better liquidity management, providing a way for faster growth. In view of the above, a short-term loan scheme christened liquidity management support (LMS) for the bigger clients has been launched. One of the encouraging recent developments in the Indian microfinance sector is that MFIs are now in the process of experimenting with appropriate organizational forms. As a prelude to this, and also to encourage MFIs to transform into a more formal organizational set-up, SFMC is providing equity support to partner MFIs. This is expected to enable the MFIs to consolidate and expand their operations and will eventually help them to leverage funds from other national and international financial institutions (SIDBI, 2005).

NABARD’s LINKAGES WITH MFIs NABARD’s linkage with MFIs is as old as its SHG-bank linkage programme. Many of the present-day mainline ‘big’ MFIs were able to find their feet and expand their operations on the strength of the initial seed money provided by NABARD. NABARD provides loan funds in the form of Revolving Fund Assistance (RFA) on selective basis to MFIs. This RFA has to be used for on-lending to groups or individuals and the amount has to be repaid along with service charges within 5–6 years. This assistance enables them to build a ‘credit history’, which would help them to access credit facilities through regular banking channels. It also

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enables MFIs to supplement their immediate lending needs. In addition, the institutions are also sanctioned, on a case-to-case basis, grant assistance for partly meeting the salary of field level staff, infrastructure development and operational deficits during the initial years. NABARD also provides technical support in form of capacitybuilding of staff of MFIs and also bankers in appraisal of MFIs for providing wholesale resource support. Bankers’ Institute of Rural Development (BIRD) conducts training programmes on ‘Appraisal of MFIs’. These training programmes are intended to equip the stakeholders to appreciate the nuances in financing MFIs and also enhance the flow of loanable funds from mainstream financial institutions like banks. Specially designed capacity-building programmes are also being organized for chief executives and other staff of MFIs in various areas of MFI operations and management. Recently NABARD had come out with a scheme that enables MFIs to get themselves rated so as to obtain bank finance. NABARD has tied up with a few reputed credit rating agencies like Credit Rating Information Services of India Limited (CRISIL), Microcredit Ratings International Limited (M-CRIL) and Cooperative for American Relief Everywhere (CARE) Ratings in India for this scheme. Eighty per cent of the professional fees (maximum Rs 80,000) of the credit rating agency for the grading exercise would be sponsored by NABARD under this scheme. The MFI grading is based on a thorough analysis of the microfinance programme and the grading report of the agency therefore carries weight with donors and lenders and can help MFIs access cost-effective funds in a timely manner. The report will not only be helpful in fund raising for MFIs but also in identifying the weaknesses that the MFI needs to address. The grading exercise would help bankers evaluate the functioning of MFIs and enable appropriate decisions to enhance credit flow to this important sector. The report from the rating which the bank would receive would include: MFI grading, rationale for the grading, summary of the performance across various parameters such as Management, Institutional Arrangement, Capital Adequacy and Asset Quality, Resources, Operational Effectiveness, Scalability and Sustainability along with a summary of key financial and operational indicators (NABARD, 2005). Since 2000, NABARD had opened a refinance window for banks for their credit to MFIs. All legal forms of MFIs are included in this refinance window for which NABARD extends 100 per cent refinance at an interest rate 3 per cent below the rate charged by the bank to the MFI. The norms which banks have been requested to follow in the selection of MFI for credit are those which ensure lenders’ oversight. In particular,


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banks have been requested to ensure that the MFI has a good track record and has been providing financial services to the poor with high repayment performance, proper system of maintaining accounts/records with regular audit, necessary financial management capacity for enlarged operations, adequate, trained and motivated field staff for close observance/ monitoring and having operations in rural areas. One can, therefore, discern that contrary to the perceived notion that its sole preoccupation is with the SHG-bank linkage programme, NABARD has pro-actively set up a variety of instrumentalities for encouraging partnerships between banks and MFIs.

CONCLUSION A significant feature of microfinance innovations in India is that though all variants of microfinance models and technologies are in existence, the most widespread with regard to depth and outreach are the linkage models. The basic feature here is that financial resources are being sourced from regular banking channels as well as members’ savings. NABARD’s SHG-bank linkage programme and other linkage programmes with MFIs have shown the path forward for accessing mainstream finance exclusively from the formal banking sector for microfinance. The analysis is clear that even for MFIs working outside the SHG-bank linkage programme, linkages with banks have manifold advantages. These linkages facilitate financial deepening and smoothening of microfinance services by accessing mainstream banking resources. Through due diligence norms exercised by banks, a surrogate regulation is ensured which takes care of governance issues. The linkages also enable the MFIs to overcome the problems related to regulation and supervision, accessing public deposits and reliance on donor and grant funding. Thus, it is imperative on the part of the government, the Reserve Bank and NABARD to encourage and promote strong and enduring linkages between banks and MFIs.

REFERENCES Housing Development Finance Corporation Ltd. 1997. Source Book on Reputed Indian Practices of Microfinance. Mumbai: HDFC. NABARD. 1999. ‘Task Force on Supportive Policy and Regulatory Framework for Microfinance’. Mumbai: NABARD. NABARD. 2005. Available online at www.nabard.org/roles/microfinance.

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Navajas, Sergio and Mark Schreiner. 1998. ‘Apex Organizations and the Growth of Microfinance in Bolivia’, Economics and Sociology Occasional Paper No. 2500, Rural Finance Program. Columbus, Ohio: The Ohio State University. Reserve Bank of India. 1996. ‘Linking of Self-Help Groups with Banks-Working Group on NGOs and SHGs-Recommendations—Follow up’. Mumbai: RBI. —————. August 2004. ‘Advisory Committee on Flow of Credit to Agriculture and Related Activities from the Banking System’, RBI Bulletin. Mumbai: RBI. —————. May 2005. ‘Annual Policy Statement for the Year 2005–06 by Dr Y. Venugopal Reddy, Governor, RBI Bulletin. Mumbai: RBI. Satish, P. March 2000. ‘Microfinance—Need for a New Regulatory Framework’, BIRD’s Eye View. pp. 25–29. SIDBI. 2005. Available online at www.sidbi.org/english/products/sfmc Thorat, Y.S.P. 2005. ‘Microfinance in India: Sectoral Issues and Challenges’, theme paper presented at ‘HighLevel Policy Conference on Microfinance in India’ organized by NABARD on 3–5 May 2005, New Delhi. Mumbai: NABARD. Thorat, Y.S.P. and Ramesh S. Arunachalam. 2005. ‘Regulation and Areas of Potential Market Failures in Microfinance’, paper presented at ‘HighLevel Policy Conference on Microfinance in India’, organized by NABARD on 3–5 May 2005, New Delhi: Mumbai: NABARD. United Nations. 2005. ‘Statement of the Advisors Group to the United Nations International Year of Microcredit’, United Nations Forum to Build Inclusive Financial Sectors. New York: UN Headquarters.

6 Sustainability of MFIs VIJAY MAHAJAN1

M

FIs are usually established to fulfil a mission—of reaching financial services to the poor who are otherwise not reached by commercial banks and insurance companies, with an eventual goal of promoting livelihoods of the poor and empowering them. Thus MFIs try to simultaneously achieve the twin goal of access (by the poor) and sustainability (of the MFI). This was illustrated in a 1996 paper as depicted in Figure 6.1. FIGURE 6.1 Twin Performance Measures: Access and Sustainability1 High Sustainability 2. Sustainable financial services with low access by target clients

Low Access 3. Highly subsidized financial services with low access by target clients

1. Sustainable financial services reach target clients 4. Highly subsidized financial services reach the target clients

High Access

Low Sustainability

1 See Vijay Mahajan and Bharti Gupta Ramola, ‘Financial Services for the Rural Poor and Women in India: Access and Sustainability’, Journal of International Development, Vol. 8, No. 2, 211–24 (1996).

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The history of microfinance in India, as elsewhere, has been an attempt to move to the virtuous quadrant 1, starting from the third and/ or the fourth quadrants. However, the destination has not always been reached. Due to the effect of policy initiatives since 1969, commercial banks in India, which were in quadrant 2 (low access, high sustainability), reached quadrant 4 (high access, low sustainability). This led to the reforms after 1993, focussing on financial sustainability, which had the effect of taking them back to quadrant 2. This was reflected in RBI data on small loans by banks, which shows the number of small loans steadily coming down since 1993. The policy corrective for this was greatly enhancing the banks’ exposure to the poor mainly through SHGbank linkage programme from 2000 onwards and since 2004 also enhancing direct loans to farmers. MFIs have a conceptual relevance because they have demonstrated that it is possible to reach quadrant 1 (high access, high sustainability). The top 10 MFIs in India by March 2006 reached over 2 million poor customers and have done so while making moderate amounts of profit, and MFIs were able to grow their operations to this stage without any subsidy. Thus, just as 10 years ago the banking system learnt from and built on the NGO-promoted self help group (SHG) model, it will do well to study the lessons from MFIs and see how it can sustainably extend financial services to the poor. Similar lessons are there for insurance companies. Figure 6.1 reflected the author’s thinking in 1996. Over the years, he added other dimensions to sustainability, beyond just financial. In a 1998 paper,2 the author had posited that the other dimensions include:

Sustainability of demand. Financial sustainability. Organizational sustainability. Sustainability of the mission of MFIs.

We will use the same framework and examine the issues of MFI sustainability along these dimensions during the 1996–2006 decade and make some informed guesses for the next decade. 2 Mahajan, Vijay. 1998. Issues in Sustainability of Microfinance Institutions—A Practitioner’s Viewpoint.

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SUSTAINABILITY OF DEMAND The first question here is: Is the demand for microcredit sustainable at a price remunerative to MFIs? Experience has shown that this translated into MFI interest rates from as high as 30–36 per cent per annum plus in the initial years to mainly in the range of 20–24 per cent per annum now. Can demand be sustained at these interest rates? Several informed persons—politicians, bureaucrats, bankers and intellectuals—find it hard to accept that the poor can pay interest rates in this range. Yet, there are many activities such as petty trading in which rates of return on capital in microenterprises run by the poor exceed 20 per cent plus per day, which is why they are able to pay wholesale traders an interest of as much as 10 per cent per day. The next range of activity is small livestock rearing, such as backyard poultry, goats and cattle, where again the rates of return in the range of 100 per cent per annum are not unusual. However, the rates of return start falling as the activity size goes up. The rates of return come down to 40–50 per cent per annum in crop production and animal husbandry. If a farmer makes investments in land development, irrigation and cattlesheds or a microentrepreneur invests in processing equipment, the rate of return comes down to 25–30 per cent. The returns generally seem to come down as capital invested goes up. The obvious question that arises is that if the rates of return are so high, why are the poor not able to come out of poverty. That has to do with the low absolute value of earnings in spite of high financial rates of return. None of the microentrepreneurs reported an annual income of more than Rs 40,000 and the average is below Rs 2000 per month. This is barely adequate to support a household. Thus the families continue to be poor even when they have an apparent high financial rate of return. As average loan size goes up, the MFI may be able to lower its price by reducing transaction costs as a percentage of loan size. This can be further reduced as the overall portfolio outstanding of the MFI goes up, as overheads can be distributed over a larger base. Thus it appears that if the natural course of economic pricing of microcredit is allowed to be followed then demand for loans from MFIs will be sustainable. There can be errors on both sides, with some incidents of ‘overcharging’ till competition sets in and other cases of ‘undercharging’ because subsidies in one form or the other were available to the MFI or due to popular pressures. But the long-run average route seems to be the matching of a declining

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rate of return in micro-economic activities as their size goes up, with the lowering of MFI interest rates as their volumes go up. From the above, we can see that the demand for microcredit cannot be sustained without greater economic improvement of poor households. In the absence of this, the poorer households will remain in a subsistence economy, with limited need for credit, except for consumption in the lean season and/or contingencies. For chronically income deficit households, this kind of credit can only lead to a debt trap. Thus efforts have to be made to improve their overall economic situation. Yet there is evidence that by itself, microcredit does not lead to sustained income enhancement. After five years of microcredit operations, BASIX carried out an impact assessment study in 2002 and found that while 52 per cent of its three time successful borrowers reported an increase in income, 25 per cent said there was no change and as many as 23 per cent reported a decline. When the reasons for this were studied, it was found that the poorer households suffered from severely unmanaged risks, and had low overall productivity in whatever activity they were engaged in—mainly subsistence farming and livestock rearing. If, after the risks and the low productivity, they had anything to sell, they faced adverse terms of trade in the marketplace. Based on this, BASIX devised a comprehensive strategy to offer, along with microcredit, a suite of insurance services and agricultural/business development services for productivity enhancement, risk mitigation (apart from insurance, such as vaccination of animals), local value addition and alternative market linkages. This often required bringing the customers together into informal groups or even formal cooperatives, and these entities then required capacity-building and institutional development support. This comprehensive strategy—offering livelihood financial services, agricultural/business development services and institutional development services all as a package—is known as the ‘Livelihood Triad’ and is extensively used by BASIX since 2003. Its results show that even in very low income areas such as Chhotanagpur in Jharkhand, Marathwada in Maharashtra and Telangana in Andhra Pradesh as average household income goes up, variance in income due to shocks comes down as poor households move from subsistence to surplus producers of at least one or two commodities. A vast majority of poor households do not have access to savings services.3 Due to overly conservative restrictions on deposit-taking by 3

World Bank, RFAS.


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the Reserve Bank of India, the unintended consequence has been financial exclusion of the majority of poor households. MFIs have been asking the RBI to examine innovative but prudent ways to extend savings services to poor, such as through the banking correspondent model. There was some progress towards this, particularly in the wake of the report of the Khan Committee.4 However, even in that report, there was a suggestion that the fees that can be charged by banking correspondents will be limited to a certain percentage of the transaction. If the fees are fixed at below economic levels, the banking correspondent model will fail to take off and the poor will be left with no provision of savings services, as is now the case. With the opening up of insurance to the private sector, the Insurance Regulatory and Development Authority (IRDA) imposed obligations on private companies that of all policies issued by them (by number) at least 5 per cent in the first year should be for weaker sections, with the number rising to 15 per cent in three years. This was done to ensure coverage of the rural and lower income market segment. In addition, to encourage insurance companies to cater to this market, the IRDA issued Microinsurance Guidelines,5 2005, which provide for simple products and use of distribution channels more likely to reach the rural poor, such as NGOs. However, under these guidelines, there is a cap of 20 per cent of the premium on the administrative charges on small policies. This would discourage MFIs from acting as distribution channels for microinsurance.

FINANCIAL SUSTAINABILITY In this section, we examine what can be done to achieve financial sustainability by MFIs as they have to cover their costs, which include the market rate of funds plus transaction costs plus bad debt risk. In addition, as a MFI becomes larger and becomes regulated, it has to maintain a minimum capital adequacy and yield a return on this capital so as to be able to attract additional capital. Table 6.1 shows the range of costs that MFIs incur at various stages of their growth.

4 5

Reserve Bank of India. IRDA Microinsurance Guidelines.

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Vijay Mahajan TABLE 6.1 Costs of MFIs at Various Stages

Component of Cost

Growing MFIs (between 10,000 to 100,000 customers with Rs 5 to Rs 50 crore outstanding)

Mature MFIs (above 100,000 customers with more than Rs 50 crore outstanding)

12–15% 16–20% 2–3%

10–12% 10–15% 1–2%

8–10% 7–9% 1–2%

Nil 30–38%

3–5% 24–34%

2–3% 18–24%

Nascent MFIs (below 10,000 customers with less than Rs 5 crore outstanding)

Cost of funds Operating costs Bad debt costs Profit to maintain capital adequacy Total

Source: Vijay Mahajan and Bharti Gupta Ramola, ‘Financial Services for the Rural Poor and Women in India: Access and Sustainability,’ Journal of International Development, Vol. 8, No. 2, 211–24 (1996). Note: The percentages are the proportion of the cost component on an annual basis to the annual average loans outstanding.

As can be seen, the total percentage necessary for sustainability comes down as the overall volume goes up. The key to MFI financial sustainability is controlling costs and bad debts, increasing volumes and spreading distribution costs by offering other financial services such as savings and insurance. Another key to financial sustainability is that the source of funds should largely be deposits rather than borrowings.

CONTROLLING COSTS The primary source of funds for an MFI initially is member savings, adequate in the initial year or so. But as the demand for credit from members takes off, institutional lenders become an important source. In the longer run, the equity base of the MFI has to be built up. MFIs are not allowed to mobilize deposits and have to rely on borrowings. One way of reducing average cost of funds is borrowing from lower cost sources. However, if these sources are themselves subsidized, as they often are, it does not lead to sustainability in the long term. In the case of MFIs, 60–70 per cent of the operating cost is largely staff cost, including salaries and travel expenses. Though MFI staff is modestly paid compared to banks, they are more numerous and more mobile because of the MFI model of doorstep delivery (at least at village or neighbourhood level) of financial services. Some of these costs can be reduced by introducing changes in the operating models and insisting that customers perform some of the functions. For example, Cashpor


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requires its customers (one representative per centre of 20–40 customers) to go to the nearby bank branch and deposit the repayment in the Cashpor account the day before the weekly centre meeting. This not only cuts out the need for the Cashpor staff to handle cash, but it also significantly reduces meeting time. Operating costs can also be reduced substantially and monitoring improved with the use of information technology. MFIs such as BASIX have invested heavily in computerization for reaching poor households at a lower transaction cost. Capturing transactions as those happen in the field, using hand-held devices and even mobile phones, has also been experimented successfully by BASIX. An even more radical solution would be to eliminate or minimize cash transactions by borrowers by offering them smart cards (with biometric identifiers to ensure security and stored value features to make them like e-wallets) and enabling transactions (in addition to those with the MFI) by having a network of point of sale (POS) devices at grocery stores, seed and fertilizer shops and so on. Swayam Krishi Sangam (SKS), the AP-based MFI, has been carrying out an experiment on this technology jointly with Visa International. The results are worth tracking and in case significant economies are effected by replacing cash with e-cash, then this could be the next breakthrough in reducing transaction costs. However, a substantial investment will have to be made in creating a ‘micropayments system’ and it will require a large volume of transactions to amortize the capital costs of this.

CONTROLLING BAD DEBT To reduce bad debt, it is important to establish screening mechanisms for acquiring relevant information about potential borrowers. In the initial round of lending, MFIs routinely use a lot of informal, peer information about potential borrowers, which is factored in while making the first loan decision. Subsequent loans are based on the borrower’s repayment history. It is also necessary to establish incentives for staff and borrowers that increase repayment. It is also important to use mechanisms that diminish possibilities of wilful default such as peer groups or Joint Liability Groups (JLGs) of 5–6 borrowers engaged in the same occupation (farmers, weavers, vendors) to mutually guarantee each other’s loans. One of the lessons of MFIs is that repayments are split into small and affordable but frequent instalments, and thus the skipping of an instalment is the first trigger for going after a potential default. Most MFIs take action after default of a single instalment and this keeps the defaults rates in check.

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Another way to reduce bad debt costs is by offering a suite of insurance to cover the various risks that borrowers face to their lives and livelihoods—such as death of the borrower or a family member, or of livestock, or crop failure. In such cases, insurance can be claimed and part of it can be used to repay the loan. However, it should be noted that this does increase the effective cost of the loan for the borrowers, since they have to pay insurance premium as well. Nevertheless, on balance, welldesigned microinsurance policies do help the borrowers and reduce the MFI’s bad debt costs. As customers borrow repeatedly and their loan size goes up, it is very important to track their repayment history instalment by instalment. This yields valuable information about credit risk for the group as a whole and for individual borrowers. Tracking and analysing these will require sophisticated MIS systems, which at the moment only relatively few MFIs have—such as the BASIX software FAMIS and DELPHIX and the SKS Portfolio Tracker. Eventually, this vast number of computerized credit histories could be used to build credit scoring models which could to a large extent automate loan decisions and thereby increase the number of customers serviced by MFI staff, thereby reducing operating costs. The careful tracking of bad debt has this secondary spinoff.

ORGANIZATIONAL SUSTAINABILITY OF MFIs In this section we look at organizational issues which impact the sustainability of MFIs. These include: who owns them, who governs them and who manages them.

OWNERSHIP

OF

MFIS

The pattern of ownership of MFIs and good governance are crucial to their sustainability. Ownership can be by charitable persons who do not personally benefit from the MFI in any way (like NGOs), of memberusers (as in cooperatives) or of investors (as in companies). Each ownership pattern has its problems and plus points. A vast majority of MFIs in India are non-profit MFIs, which are registered as Societies or Trusts under the Societies Registration Act, 1860, or a few under the Indian Trust Acts, 1882. These Acts provide relative ease of registration, have no minimum capital requirement, prescribe no capital adequacy nor any prudential norms. In January 2000, the RBI


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issued a circular exempting from registration as non-bank finance companies those not-for-profit entities which are incorporated under Section 25 of the Companies Act, 1956, and which undertake microcredit activity but do not take deposits. The RBI circular is silent about NGO-MFIs which are Societies or Trusts, except forbidding them from raising deposits. As a result, and partly encouraged by RMK, FWWB, SIDBI and even ICICI Bank through its partnership financing model, thousands of NGO-MFIs undertake microcredit activity. There are some well-run NGO-MFIs, but they are exceptions. Unfortunately, the general situation is that accountability is structurally limited in case of these legal forms as they are not designed for running financial entities and the RBI has not extended its regulatory framework to this type of entity. In case of mutual benefit MFIs (e.g., cooperatives and mutual benefit trusts), the assumption is that member control would ensure good governance. Cooperatives are more difficult to register in practice than Societies and Trusts, but are also subject to political interference through the Registrars (with the exception of nine states, starting with Andhra Pradesh, which adopted a progressive Act in 1995). Similar Acts have come up in Bihar, Jammu and Kashmir and Madhya Pradesh are on the anvil in Orissa and Tamil Nadu, as also at the Centre. If a cooperative grows, it may apply for a licence as an urban cooperative bank, which is then regulated by the RBI. Member control in a mutual benefit gets seriously limited as soon as the size and distance of an MFI grows beyond a few hundred members and a few villages. Differences in income, literacy and exposure levels can also lead to the problem of oligarchic control in mutual benefit MFIs. Once again, there are some very good examples of member-controlled MFIs such as the SEWA Bank, an urban cooperative bank in Ahmedabad, the Women’s Thrift Cooperatives (WTCs) established by Sahavikasa, the erstwhile Cooperative Development Foundation (CDF) in Andhra Pradesh. Another example is Sarvodaya Nano Finance Ltd, an NBFC co-promoted by ASSEFA and BASIX, which has over 2,50,000 women members organized into over 15,000 SHGs which are then federated into 90 different mutual benefit trusts (MBTs) at the block level. There are relatively few for-profit MFIs in India. They have to be registered as Non-Banking Financial Companies (NBFCs) with a minimum equity capital of Rs 2 crore, which is rather high. The first example of this was the BASIX-promoted Bhartiya Samruddhi Finance Ltd in 1996 which attracted reputed institutional investors in 2001—the IFC Washington, ShoreCap International, Hivos-Triodos Fund, Netherlands,

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ICICI Bank and HDFC. Since 2001, several NGO-MFIs have ‘transformed’ (i.e., moved their microcredit activity) into NBFCs including SHARE into Share Microfin Ltd and Asmitha Microfin Ltd, Spandana into Spandana Sphoorty Microfin Ltd, Swayam Krishi Sangha into SKS Microfin Ltd, Mahasemam Trust into SMILE Microfin Ltd. Several of these have seen investments from individual social investors such as Vinod Khosla, the reputed venture capitalist, who has invested in SKS and Cashpor. New equity funds have come up, including the SIDBI Foundation for Microcredit, the NABARD-run National Microfinance Equity and Development Fund, Bellwether, Oikocredit, Lok Capital, Unitus and the Michael and Susan Dell Foundation (MSDF). Others such as the Dutch FMO, GoodWell Fund and the Catalyst Fund and the US-based Omidyar Network, MicroVest are also looking at the Indian market without opening an office here. However, except for SIDBI which has invested in SKS and Bellwether, which has financed three new NBFC MFIs—Ujjivan, Aarohan and Sonata—the other funds had not made any equity investments till March 2006. However, as these and other equity investors become active, a new ownership configuration will emerge among MFIs with some if not all ownership vested with these funds and the funds in turn owned by development finance institutions and/or individual social investors. But even this could be a transitional state for 5–10 years till MFIs grow so large that they have to go to ‘real’ equity investors in the capital market. As an MFI grows and mainstreams its sources of funds, it has to become more aligned with regular market investors’ interests. What this may do to the sustainability of its mission is yet to be seen, as few MFIs have as yet raised equity from commercial investors or the stock market, not just in India but anywhere in the world. Some lessons can be drawn from the early cases of such transformation. The first and most wellknown case is that of the Bolivian NGO-MFI PRODEM spawning BancoSol as a regulated investor-owned bank. While BancoSol initially led to a significant expansion of the microfinance market in Bolivia, it later faced a dilemma between its founding mission and the need for returns to keep attracting investors and the need to adopt products and policies that keep regulators satisfied. Eventually, PRODEM has re-started its microfinance work while Bancosol also continues to serve the next rung of the market. Thus the dilemma remains—as MFIs become larger and have to attract capital from mainstream investors, just how focussed can they remain on the poor? The author’s own view is that there remains the


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permanent need for pushing the financial frontier and that is best done by MFIs which, though profitable, may not be at the upper end of the earnings level that mainstream investors seek. Thus the need for patient investors–foundations, development finance institutions and social investors—will remain forever. However, some of the poor market segments will become commercially viable due to the pioneering work of MFIs. At that stage MFIs will have a choice–either let this market be taken over by banks and insurance companies, while the MFI becomes the servicer/partner, or let this market be taken over this segment and begin/enhance work with newer segments which may still need MFIs. Another option is to go to scale pursuing the commercialized segment and use the profits and infrastructure thereof to finance the work with as yet unremunerative market segments.

GOVERNANCE

OF

MFIS

What type of governance is required to ensure organizational sustainability of an MFI managed by professionals? Good corporate governance is needed in all MFIs, whether non-profit, mutual benefit or for-profit. Governance structures emanate from the ownership pattern, though it is possible to have a looser or tighter governance within the same type of entity. In case of non-profit MFIs, the Boards generally comprise of persons invited to join by the founder. This is the only possibility in the early stages, when a socially motivated person is starting an NGO to do some good work. Later, if the work grows, there is a possibility to attract independent professionals and donor/funder nominees to the Board. In case of a non-profit, the users (borrowers) are not ‘members’ of the Society or the Trust and thus cannot be on the Board. Indeed, it would violate the tax-exempt status of these entities if the Board members were the beneficiaries. A governance structure comprising elected members/ shareholders is feasible in a cooperative or a mutual benefit company. However, mere adoption of these legal forms does not assure that the governance of an MFI would be with the user-members (borrowers). For the MFI to become truly member-managed, it takes a particularly enlightened leadership and years of investment in capacity-building of the members. For example, Ela Bhatt set up the SEWA Bank, which is an urban cooperative bank, but its Board is entirely comprised of poor women members/shareholders. The SEWA Bank is managed by a banking professional and her colleagues, with guidance from the Board.

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The author’s own experience in this regard has been through Sarvodaya Nano Finance Ltd, which was co-promoted by ASSEFA and BASIX, and whose share capital of Rs 12 crore (in 2006) was entirely owned by over 15,000 SHGs federated into 90 mutual benefit trusts comprising 200–300 SHGs each. It took five years of capacity-building to bring the elected women SHG leaders to a position where they can now govern and manage the mutual benefit trusts largely on their own. However, the governance and management of the federal entity, Sarvodaya Nano Finance Ltd, an NBFC, is still with professionals, with input by members into the Board. Another issue in governance is how to move from the entrepreneurial founders in the early years, to a governance structure comprising investor representatives and independent Board members overseeing the MFI being run by professional managers. Not doing this in a planned manner is the single most important threat to the sustainability of an MFI. The 10 largest MFIs are all in this situation and so far only BASIX has moved beyond its entrepreneurial founder, though only recently. However, one positive trend in almost all MFIs is that their Boards are beginning to go beyond the founding Boards and are being reconstituted with new members representing investors, lenders and independent professionals from the financial/development sector. Building a professional and involved Board is, however, only a first step for engaging the Boards in governance. It requires several other processes, including the founder-CEOs yielding space to the Board, investors and regulators requiring this and Board members developing the necessary interest and confidence to truly guide the CEO and the management team and keep them in check both on issues related to the mission and the financial performance. In extreme cases, where there are issues of integrity, breach of trust or lack of concern for the mission, the CEOs and/or the senior management team may have to be removed and a new team installed. Like in the corporate world, getting Board members who can play this role effectively is difficult.

HUMAN RESOURCES

IN

MFIS

Human resources are the key to the long-run sustainability of any organization as they are the ones who make a difference in the way MFIs operate and function. MFIs need, first and foremost, those who will establish them, that is, microfinance entrepreneurs. The concept of ‘mentoring’, which means an intense personalized input by a senior guide to foster the


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personal and professional growth of the microfinance entrepreneurs, can be used to increase the number of microfinance entrepreneurs. With several new start-up MFIs coming up, this process has become both necessary and possible. Investors should ensure that mentoring is done in a manner that the MFI CEO is able to balance the pro-poor mission and the financial performance. The microfinance incubator programme at the Indian Institute of Management, Bangalore is a good beginning towards this. Apart from founder-entrepreneurs, the organizational sustainability of an MFI depends crucially on its ability to attract, retain and effectively deploy human resources at all levels. There is a shortage of good quality staff at all levels, from village-level barefoot accountants to back office systems administrators. The more senior level staff usually have better opportunities in the mainstream. Sa-Dhan, the pre-eminent association of MFIs in India, offers the Microfinance Education Programme to senior MFI staff. The SEWA-FWWB-promoted Indian School of Microfinance for Women, the BASIX-promoted Indian School of Livelihood Promotion, EDA Rural Systems, MicroSave, APMAS, IRMA, IIMB, CFMR and BIRD also offer specialized programmes regularly. However, there is a severe shortage of trained human resources and it imposes the additional burden on MFIs of training freshers.

SUSTAINABILITY OF MISSION The sustainability of MFIs must be seen in the context of their mission— that of reaching microfinance services to the poor so as to enhance their livelihoods: employment and income. This requires the provision of a comprehensive range of services—savings, credit and insurance, coupled with livelihood promotion services. The term mission drift is used in microfinance literature to refer to the phenomenon that as MFIs grow and try to become like mainstream institutions, they lose their focus on serving poorer customers and move to serving the entrepreneurial poor or just those non-poor households which lack access to financial services. This is particularly true when the main offering of the MFI is microcredit, which is of limited use to the poorer households engaged in wage employment. In most cases, while recognizing that the narrow offering of microcredit is not doing much for the clients, MFIs have not been able or willing to offer savings, insurance, remittance and other financial services.

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Only when the scope of microfinance is increased to cover the combination of savings, credit and insurance services can an MFI make a sustainable contribution to poverty alleviation. This is a departure from the earlier thinking that only credit is what the poor need. It recognizes the livelihood patterns and constraints of the rural and urban poor. For example, a vast majority of the rural poor are landless and also usually do not have the skill set or the inclination to become self-employed. To such people, the most important financial service needed is savings (usually small and frequent deposits with doorstep collection) and later, credit, which is usually initially used for consumption needs. Only after a certain stage of income can credit be used for ‘productive’ purposes. In the meanwhile, poor households need insurance to reduce their vulnerability to a variety of adverse events which can make a big dent in the financial health of the household, wipe out savings and send them back to moneylenders. Another form of mission drift that occurs is due to the pursuit of high growth and/or profitability. In some cases, while the poor continue to be the target segment, the quest for growth leads the MFI to offer several loan products, in some cases simultaneously, which then can lead the borrower into a debt trap. This phenomenon has been seen in some cases in certain districts of Andhra Pradesh which already had a high density of SHG-bank linkage and which saw aggressive competition by and among two leading MFIs, Share and Spandana. This led to a severe backlash from the government of Andhra Pradesh and a setback to these MFIs. In other cases, the quest for profitability has led some MFIs to continue to charge interest rates which were necessary to break even when these MFIs were smaller but which later more than covered their costs and reasonable returns. Take, for example, Compartamos, the leading MFI from Mexico, which has reported a 50 per cent return on equity. In theory, other MFIs or other players will come and beat down the interest rates of Compartamos and its profitability, but this may take several years and till then this level of profitability becomes difficult to defend in this mission-driven sector, where the MFIs and their founders said they came to help the poor climb out of poverty. In Bangladesh, where there is no dearth of MFIs, Association for Social Advancement (ASA) has a return on assets of 14 per cent as against 1 per cent for the Grameen Bank. Yet ASA does not charge lower interest rates, and thus has not passed on the benefits of its apparent efficiency to its borrowers. We came into this sector because we wanted to help the poor to get access to financial services. Undoubtedly, we want to do this in a


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financially sustainable manner, so that we can reach a large number of those not yet reached. Yet, in the quest for being profitable, if we open ourselves to charges of profiteering, then the sector will lose its very basis of wider support from society and the quest for wider outreach will have a severe setback. Indeed, the need for the existence, or at least the reputation of the sector will be questioned widely, as happened in Andhra Pradesh in 2006.

Part III

SHG-BANK LINKAGE PROGRAMME

7 SHG-Bank Linkage Programme: Progress and Prospects SUKHBIR SINGH

T

oday India’s formal financial sector is vast and consists of commercial banks, regional rural banks and cooperative banks. As many as 32,885 rural and semi-urban branches of commercial banks, 14,303 branches of RRBs and nearly over a lakh of rural outlets of cooperative banks are engaged in providing formal credit in rural India including microfinance. Despite this massive infrastructure of banks, as per All-India Debt and Investment Survey 1991–92, 36 per cent of the rural indebted households are still dependent on the informal sector. The dependence on informal sector was much higher in the case of lower asset group.

STATUS OF MICROFINANCE IN INDIA Microfinance services in India are provided mainly by two different models viz. SHG-bank linkage model and MFI-bank model. The self help group (SHG)-bank linkage model has emerged as the more dominant model due to its adoption by state-owned formal financial institutions, namely, commercial, regional rural and cooperative banks. The MFI-bank model too is gaining importance due to the massive support it gets from banks, especially new generation banks in the private sector and foreign funding agencies.

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GENESIS OF SHG-BANK LINKAGE PROGRAMME A series of research studies conducted by NABARD during the early 1980s revealed that despite having a wide network of rural bank branches which implemented a variety of poverty alleviation programmes seeking creation of self-employment opportunities through bank credit for almost two decades, a very large number of the poorest of the poor continued to remain outside the fold of the formal banking system. These studies also showed that the existing banking policies, systems and procedures, and deposit and loan products were, perhaps, not suited to meet the most immediate needs of the poor. It also appeared that what the poor really needed was better access to these services and products, rather than cheap subsidized credit. Thus began a search for alternative policies, systems and procedures, savings and loan products, other complementary services and new delivery mechanisms which would fulfil the requirements of the poorest, especially the women members of such households. The emphasis therefore was on improving the access of the poor to microfinance rather than just microcredit. As a huge network of state-owned bank branches already existed, NABARD focussed not on creating alternative organizations, but on finding ways and means to improve the access of the poor to the existing banking network. Many research studies, done in-house as well as sponsored by professional institutions, and some action research projects funded out of the research and development fund of NABARD, led it to develop the SHG-bank linkage model as the core strategy that could be used by the banking system in India for increasing its outreach to the poorest of the poor, hitherto bypassed by them. The strategy involves forming small, cohesive and participative groups of the poor, encouraging them to pool their thrift regularly and using the pooled resources to make small interest-bearing loans to members, in the process learning the nuances of financial discipline. Bank credit then follows. It needs to be emphasized that NABARD views the promotion and bank linking of SHGs not merely as a credit programme but as part of an overall arrangement for providing financial services to the poor in a sustainable manner and also an empowerment process for the members of these SHGs. NABARD, however, also took a conscious decision to experiment with other successful strategies such as replicating the Grameen Bank (Bangladesh) model. Above all, the need for evolving suitable mechanisms for meeting the economic aspirations of the poor was considered necessary.

SHG-Bank Linkage Programme Credit from

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% Share

Landlords Agricultural Moneylenders Professional Moneylenders Relatives and Friends Others All Non-Institutional Agencies All Institutional Agencies All Agencies

4.0 7.0 10.5 5.5 9.0 36.0 64.0 100.0

It was in this scenario that the SHG-bank linkage programme was launched by NABARD in 1992, with the firm policy backup of the Reserve Bank of India.

EVOLUTION OF SHGs-BANK LINKAGE PROGRAMME The SHG-bank linkage programme is the flagship microfinance intervention mechanism of NABARD. The launching of its pilot phase in February 1992 could be considered as a landmark development in the annals of banking with the poor. The informal thrift and credit groups of the rural poor came to be recognized as bank clients under the pilot phase. The pilot phase was followed by setting up of a working group on NGOs and SHGs by the Reserve Bank of India in 1994, which came out with wide-ranging recommendations on internalization of the SHG concept as a potential intervention tool in the strategy of banking with the poor. The Reserve Bank of India accepted most of the major recommendations

What is a Self Help Group? A Self help group [SHG] is a small, economically homogeneous and affinity group of rural poor which comes together to:

Save small amounts regularly. Mutually agree to contribute to a common fund. Meet their emergency needs. Have collective decision making. Resolve conflicts through collective leadership and mutual discussion. Provide collateral free loans on terms decided by the group at market driven rates.

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and advised the banks to consider lending to the SHGs as part of their mainstream rural credit operations. An SHG is a small localized group of 10–20 persons from a homogeneous background. It is formed and groomed by an NGO or a bank branch or a government agency called a self help promoting institution (SHPI). The members of the group are encouraged to collect regular thrift on a weekly or fortnightly or monthly basis and use the pooled resources to give interest-bearing small loans to their members. The SHPI trains the members to maintain simple accounts of the collected thrift and loans given to members. The regular meetings also provide them a platform to discuss and resolve many social and common issues, thus strengthening their bonds. A savings bank account is opened with a bank branch and regular thrift collection and loaning to members, builds up financial discipline among the members and encourages the bank to provide larger loans to the group. In brief, an SHPI (generally a NGO and at times, a bank branch, or government agency) facilitates evolution of an informal group of the rural poor initially to encourage thrift, learn participative fund management, meet varied credit needs of the members in the beginning, learn to interact with a bank branch with a savings deposit account followed by borrowing of small loans from the bank and managing such credit. The partners in the process include an SHG, an SHPI and a bank branch. The conceptual thinking behind the SHG philosophy and the bank linkage may be summarized as under:

Self help supplemented with mutual help can be a powerful vehicle for the poor peoples’ efforts in achieving upward socioeconomic transition. Participative financial services’ management is more efficient and responsive. The poor can save and are bankable. The mismatch between the expectations of the poor and capabilities of the formal banking system needs to be minimized. The poor need not only credit support but also savings and other financial services. Small affinity groups of the poor, with initial outside support, can effectively manage and supervize microcredit among their members. Collective wisdom of the group and peer pressure are valuable collateral substitutes.

SHG-Bank Linkage Programme

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SHGs could be a pre-microenterprise formative stage for a majority of the rural poor. SHGs as clients facilitate wider outreach, lower transaction costs and much lower risk costs. Empowerment and confidence building of the poor, especially of poor women, is a major outcome.

NABARD’s INITIATIVES NABARD has been playing the role of propagator and facilitator by providing a conducive policy environment, training and capacitybuilding besides extending financial support for the healthy growth of the SHG-bank linkage programme in the country. Over the years, various promotional steps taken are enumerated as under:

Conceptualization and introduction of pilot programme in February 1992 for linking 500 SHGs with banks after consultations with Reserve Bank of India, banks and NGOs. Introduction of Bulk Lending Scheme in 1993 for encouraging the NGOs which were keen to try group lending approach and other financial services’ delivery innovations in the rural areas. Developing a conducive policy framework through provision of opening savings bank accounts in the names of SHGs (though they are informal groups), relaxation of collateral norms, simple documentation and delegation of all credit decisions and repayment terms to SHGs. Training and awareness building among the stakeholders. Provision of capacity-building support of NGOs/SHGs/banks. Mainstreaming the SHG-bank linkage programme as part of corporate planning and normal business activity of banks in 1996 and internalizing training, monitoring and review mechanism. Encouraging banks (RRBs and cooperative banks) for promotion of SHGs. Financial support to NGOs for promotion of SHGs. Encouraging rural individual volunteers in promotion and nurturing of SHGs.

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Close monitoring. Dissemination through seminars, workshops, occasional papers and print media. Constitution of a high powered task force to look into the aspects of policy and regulation of microfinance and suggest policy, legal, regulatory measures for smooth, unhindered growth of the microfinance sector. Setting up a Microfinance development fund in NABARD for meeting the promotional costs of upscaling the microfinance interventions. The fund has since been re-designated as microfinance development and equity fund (MFDEF). Initiating the credit rating of MFIs through accredited credit rating agencies in India by meeting 75 per cent of the cost of the rating as grant. This is done to enable the MFIs to approach banks for commercial borrowing and extending microcredit to the poor.

ACHIEVEMENTS Starting with the NABARD-led pilot project in 1992 that aimed at promoting and financing 500 SHGs across the country, the SHG-bank linkage strategy has come a long way. Nearly 2.24 million SHGs were provided bank credit of over Rs 11,397.55 crore by March 2006. Almost 90 per cent of groups are women groups. Over 44,362 bank branches of 47 commercial banks, 158 regional rural banks (RRBs) and 340 cooperatives were involved in financing these groups. TABLE 7.1 Highlights of SHG-bank Linkage Programme (as on March 2006) Cumulative no. of SHGs linked by March 2005 (provisional) % of women groups No. of families covered (million) No. of participating banks No. of NGOs participating Bank loan released (Rs in million) NABARD refinance released (Rs in million)

2,238,565 90 32.98 545 4,800 1,13,975.5 41,565.6

Repayments by members to SHGs have been exceedingly high and on time. Repayments have generally been above 95 per cent.


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TREND IN PROGRESS OF SHG-BANK LINKAGE A summary of progress under the SHG-bank linkage programme made between 1992–93 to 2004–05 is presented in Table 7.2. TABLE 7.2 Progress under SHG-bank Linkage in 1992–2005 Total SHGs Financed During the year Year

No.

1992–99 1999–2000 2000–01 2001–02 2002–03 2003–04 2004–05 2005–06

32,995 81,780 1,49,050 1,97,653 2,55,882 3,61,731 5,39,385 6,20,109

Cumulative

% Growth 148 82 33 29 41 49 15

Bank Loan (Rs in million) During the Year

Cumulative

Amount % Growth 32,995 1,14,775 2,63,825 4,61,478 7,17,360 10,79,091 16,18,476 22,38,565

570.7 1,359.1 2,878.9 5,454.7 10,224.0 18,555.0 29,942.5 44,990.8

138 112 89 87 81 61 50

570.7 1,929.8 4,808.7 10,263.4 20,487.0 39,042.1 68,984.6 1,13,975.5

GENDER COVERAGE Around 90 per cent of the SHGs linked were exclusive women SHGs. As on 31 March 2006, the SHG-bank linkage programme enabled over 32.98 million poor women in the country to negotiate access to savings and credit services at commercial terms and without subsidy.

WHAT MAKES THE SHG APPROACH SUCCEED? At group level:

Group formation and nurturing is the key to a successful SHG; Group composition gives thrust on affinity and homogeneity; Members learn to maintain financial discipline; Members own stake in the group is in the form of savings; Collective wisdom in credit decisions; The peer pressure enables the group to minimize the aggregate risks of failure; Savings and credit is a continuing process and not a one-time affair;

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Freedom of selecting the purpose for loans to members, with benefit of peer counselling.

At bank level:

Emphasis on grading of SHGs. (a) The group formation and nurturing process is intensive and not rushed through; (b) Banks grade the SHGs for credit support based on parameters of group dynamics, regularity in savings, internal lending and participation level; (c) NGOs grade the SHGs before recommending them for bank loan linkage; and (d) The weak SHGs have to wait and overcome weaknesses.

Cost effective, operationally simple and low risk strategy for expanding client base and business. Externalizing some of the credit functions to the SHG. Bank loans only after initial savings and internal lending has stabilized. Banking with disciplined clients and not beneficiaries. More than 95 per cent on-time repayment from the poor some of whom were possibly defaulters earlier.

At programme level:

The programme relies on complementarity of roles among partners. (a) NGOs promote SHGs for deepening the impact of their programmes and furthering their own social agenda. (b) Banks promote/finance them for expanding quality business coverage. (c) Governments promote them for meeting multiple developmental objectives. (d) Each stakeholder works for itself and for other stakeholders (The relationship among partners is not onesided).


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(e) Intensive training and awareness building efforts precede the group formation/linkage. (f) Facilitating/arranging training for all partners including SHGs.

Heavy investments by NABARD in formation, nurturing of SHGs, building capacities of NGOs, training of banks and other stakeholders as investment in human capital development. NABARD has since spent an amount of Rs 33.46 crore as on 31 March 2006 to this end.

ISSUES IN SHG-BANK LINKAGE PROGRAMME Regional Imbalances: Historically, there has been a concentration of SHGs in southern states. The share of cumulative SHGs linked in southern states has been at about 60 per cent of the total SHG-credit linkages in the country. To correct this anomaly, NABARD had taken up intensification of SHG-bank linkage programme in 13 identified priority states which account for 70 per cent of the rural poor population, namely, Uttar Pradesh, Orissa, West Bengal, Madhya Pradesh, Gujarat, Rajasthan, Chhattisgarh, Jharkhand, Bihar, Uttaranchal, Assam and Himachal Pradesh in the year 2004–05. Focussed attention was paid to these states so as to flood the market by promoting a large number of quality SHGs. During 2005–06 with concerted efforts and strategic moves, this trend has been reversed to a certain extent. Out of the total SHGs linked within the year, 56 per cent were in states other than southern states. Microenterprise Promotion among Members of Mature SHGs: Presently there are nearly 2.4 million SHGs credit-linked with banks. Out of this, there are over 4 lakh SHGs which are now over three years old. The core needs of savings and credit for consumption and production needs of these SHGs are being met by the banking system. These SHGs have not only availed loans but have also gone in for repeat loans. It is being emphasized that a member of the older SHGs whose basic financial needs have generally been met would now be in a position to take up microenterprises by taking up income generating activities. The task of finding viable microenterprises for millions of poor households in rural areas is stupendous. Though microenterprise is not a panacea for

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the complex problem of chronic unemployment and poverty, yet microenterprise promotion is a viable and effective strategy for achieving significant gains in incomes and assets of poor and marginalised people. But in the absence of any specific hand holding strategy to provide financial and non-financial services in an integrated manner, graduation of SHG members from microfinance to microenterprises has not been smooth due to several roadblocks. NABARD is therefore undertaking a pilot project in select districts, particularly for members of matured SHGs for promotion to the stage of microenterprise. Quality of SHGs: With fast all-round spread of the SHG-bank linkage programme having credit linkages with a huge number of SHGs, the quality of SHGs has come under stress and is reportedly getting impaired, in certain areas. This is reflected in poor maintenance of books and accounts at SHG level and diminishing skill sets on part of SHG members in managing their groups. Significant financial investment, capacity-building and technical support is required for meeting this challenge. NABARD has taken up various measures like barefoot accountant, computer ‘munshi’, smart card, IRV programmes to combat this challenge. The IRV scheme is taken up with a view to finding solutions for the NGO deficit areas where motivated and suitably oriented individuals can assume the NGO’s role as well as hand holding the SHGs. Impact of SGSY on SHG-bank linkage programme: There is no subsidy element in SHG-bank linkage programme, whereas the government is giving some amount of subsidy to the SHGs promoted under SGSY. From field-level feedback, it is found that many members of existing SHGs are inclined to join SGSY groups in view of the subsidies being offered and as a result quite a few quality SHGs do disintegrate. Various studies point out that the SGSY groups lack quality and the poor do not get long-term benefits under the programme. Provision of microinsurance to the SHG members: Presently there is a dearth of microinsurance products in the market, which can take care of the needs of the SHG members as they require composite insurance products which take care of their health, assets and life risk. Hence it is desirable to evolve suitable insurance products. However, a few insurance companies both in the public and private domain are involved in evolving suitable model insurance packages which can suit the needs of the poor as well as its financial viability and sustainability.


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It is widely recognized that the strategy for microfinance has been successful in providing much needed financial services to the poor on a sustainable basis. The access of financial services has enabled a large number of the poor through out the developing world to make significant progress in their own efforts to challenge poverty through the exercise of options. It is generally agreed that the impact of microfinance on poverty reduction has been significant. Versions vary depending upon the sample site and sample size. Some of the empirical findings are that microfinance has reduced the incidence of poverty through increase in income; building assets and thereby reducing vulnerability. The reports indicate that the households having access to microfinance spend more on education than non-client households. They send their children to school and there is reduction in the drop-out rate in the higher primary grades. The housing conditions generally improved from kuchha to pucca housing; the share of consumption loans declined from 50 per cent to 25 per cent; employment increased by 18 per cent. The involvement in the group significantly contributed in improving the self-confidence of the members. The feeling of self worth and communication with others improved after association with SHGs. The members were relatively more assertive in confronting social evils and problem situation. As a result there was a fall in the incidence of family violence. There have been considerable gains on the socio-economic front.

8 SHGs and Savings Mobilization H.R. DAVE

I

n the early 1980s, when the world was desperately searching for viable ways of poverty alleviation, the initial microfinance approaches offered a ray of hope. The rationale was that access to small loans would lead to creation of assets in the hands of the poor. These assets, howsoever small, would enable the poor to raise their income levels. As the pioneers went about trying different credit delivery models, it became increasingly clear that what the poor needed was a basket of financial services, rather than only credit. That is when the experts started talking about microfinance, rather than microcredit. Around that time, having brought private banking under social control, India was the pioneer in using the formal banking system for providing credit access to the poor, primarily through the largest ever subsidized credit-led poverty alleviation programme called the Integrated Rural Development Programme [IRDP]. A large number of activities were identified for which techno-financially appraised project profiles were prepared for financing by the banking system to the rural poor. The poor themselves were identified through well articulated (not necessarily well implemented) approaches and a list of Below Poverty Line (BPL) families was prepared. The identified nodal department of the government ‘sponsored’ their loan applications to the designated rural branches of banks. Banks extended subsidized credit to these borrowers. Subsidy was on two counts, capital and interest. By the late 1980s, a large number of

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poor families were covered under this unique state initiative for poverty alleviation. However, not everybody appeared to be impressed with the impact of the programme. More particularly, the ‘beneficiaries’ and the funding agencies. It was in the late eighties that the National Bank for Agriculture and Rural Development (NABARD) as the apex funding agency, alarmed at the poor impact of the programme, took the initiative of getting to the roots of this problem. A study team was constituted comprising economists, experienced bankers, academicians and social sector practitioners. The task was to go round the country and assess what was missing. The findings were startling and contrary to traditional wisdom. On the nature of credit needs, it appeared that the poor required hassle-free credit, small and frequent doses of credit, loans for emergency and consumption purposes. Importantly, they wanted a say in selection of economic activities to be undertaken by them. But this was not all. They spelt out the need for finding a place to keep safe their occasional surplus incomes and thrift—a traditional way of forced savings to meet needs on a rainy day. Surely, this was a much taller order than giving subsidized credit. Thus the search began for a suitable medium for delivery of financial services, development of financial products and practices which are capable of meeting the aspirations of poor clients. Other dimensions of sustainable delivery of financial products were the cost of delivery to the banking system and cost of access to clients. Both had to be kept at reasonable and affordable levels. It needs to be mentioned at this stage that given the large number of poor clients in the country, the designers were mandated to create a product and delivery system which had the potential of scaling up on a nationwide basis, thereby meaning a product for the masses and not for a select few. Then came in MYRADA for an action research project. NABARD initiated the action research carried out in partnership with MYRADA in Karnataka. MYRADA was already using group mechanisms for delivery of various services. The groups, then known as ‘savings and credit groups’, were later re-christened as self help groups (SHGs) during the pilot phase of the SHG-bank linkage programme launched in 1992. The rest is history in terms of outreach and being the largest microfinance programme in the world.

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THRIFT AS BASIS FOR PRODUCT DESIGN FOR MICROFINANCE PROGRAMME What makes the SHG-bank linkage programme design unique is its heavy emphasis and reliance on mobilization of savings. Members have to save a fixed amount regularly. From the demand side, the savings pooled give the group the required strength to leverage and negotiate higher resources from the banking system as loans. Initially, the banks were encouraged to extend loans to SHGs in the ratio of savings to credit starting from 1:1 to 1:4. This was primarily aimed at building confidence of the financing branches in dealing with SHGs. As the experience of the financing branch in dealing with SHGs grew, they gained higher levels of confidence and today one observes banks extending loans to older SHGs in much higher proportions. This is observed even in case of first loans to SHGs and in a large number of cases while extending repeat loans to SHGs financed earlier. The second reason for institutionalizing savings was the ability of the pooled savings to bind and unite the group members. The higher the volume of regular savings, the higher the need for members to work together. Savings give the required unifying motivation to the group members in working towards a common goal of accessing financial services. In fact, as NABARD sharpened its marketing strategies for nationwide implementation of the SHG-bank linkage programme, ability of savings (and credit) to give longevity to the groups was included as one of the USPs for winning more SHG promoters from among NGOs and government agencies. It needs to be remembered that the SHG-bank linkage programme was launched amidst an environment of doling out subsidized credit by the government-owned banking system. Cheap credit to the poor was recognized as ‘public good’ and ‘loan melas’ or credit camps for mass dispensation of loans were commonplace. The poor were compromised to the level of being ‘beneficiaries’ of government policies and not clients of the banking system. Waivers of outstanding loans (generally past dues) were being granted in the name of making the borrowers eligible for fresh finance. The new product for banking with the poor had to factor in the need for restoration of the dignity of the poor as clients of the banking system from a level of being beneficiaries. The emphasis on savings mobilization among the SHGs was also aimed at addressing this aspect. This was easier said than done. How does one convince the branch staff, witness to heavy defaults under the IRDP and periodic loan

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write-offs, that the poor are worthy of consideration as clients? It could possibly be done if the members saved their small surpluses and also used such pooled resources for giving small loans among themselves before approaching the banking system for funds. The design of the product was accordingly put in place. The branch officials found that not only were the groups saving regularly, they were also lending such resources for small, emergent needs and consumption purposes. They also observed that before approaching the bank for loans, even during the initial period of six months to one year of group stabilization, the members were repaying such loans on time. This aspect of fund management by the SHGs impressed sceptical branch officials and convince them to give funds to the groups. Simultaneously, as the SHG starts extending loans to the members through their own savings, and as these members start repaying their loans on time, the level of mutual confidence among the members also increases, providing justification for co-existence as SHGs. After all, it is said that the value of thrift and importance of safekeeping thrift is much higher than the deposits kept by the rich. On a higher level of rationalization, the country needed to overcome the ‘free or cheap loan’ mindset among the poor. The poor members of SHGs, while taking loaning decisions with their own savings, quickly realized that money has a cost and that all bank loans must be repaid. Silently, India was revolutionalising the way its poor citizens were looking at the issue of financial access. The product design with emphasis on savings and internal loaning ensured that the poor were graduating to disciplined client status before knocking on the doors of bank branches. They also negotiated bank loans on the basis of their new-found confidence. Small and regular savings as pre-conditions for members to join SHGs worked another miracle. It turned out to be a tool for member selection and limited it to the same low-level income groups. There was a criticism earlier about NABARD not defining the poor who were eligible to become members of the SHGs. Under the project design, there was no articulated definition of the poor who could become members of SHGs. Member selection was left to SHG-promoting agencies, generally NGOs and government developmental agencies. As the SHG-bank linkage programme graduated from the pilot stage to the mainstream programme of the banking system to reach out to the poor, it started attracting attention of international agencies and academicians. NABARD experienced increasing pressure to come out with a clear definition of the


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poor, maybe similar to the one adopted by the government for its poverty alleviation programmes. However, after a series of discussions and field studies, it decided not to spell out its definition of the poor. Apart from the fact that there were no capital or interest subsidies being extended to the SHGs which would not tempt the non-poor to join the SHGs, it was also reasoned that the small amounts of savings, which is supposed to be equal among all the members, would be one of the tools to make the process of participation in the SHGs less attractive for the non-poor. In a nutshell, bringing in the savings component into the SHG product design has enabled multifarious advantages right from minimizing adverse client selection to generating a force for unifying the group and enabling the poor to emerge as disciplined clients for the banking system. In the process, the dormant savings potential has been converted into a productive resource.

POLICY FRAMEWORK FOR SAVINGS MOBILIZATION BY SHGs All this would not have been possible without the policy support of the Reserve Bank of India [RBI], which, first allowed opening of savings deposit account of informal groups and then, based on the proven experience and recommendations of the Task Force on NGOs and SHGs constituted by it under the chairmanship of S.K. Kalia, Managing Director, NABARD, advised the banks to mainstream the SHG-bank linkage programme as normal banking activity. While the SHGs continued to enjoy the freedom of being an informal entity, they secured access to the banks for safe-keeping its resources in savings deposit accounts and leveraging loans.

MANAGEMENT OF SAVINGS IN SHGs The savings pattern of the SHGs varies widely ranging from weekly to monthly deposits. In terms of amount, generally it ranges from as low as Rs 10 a month to Rs 100 a month per member. The amount of savings and frequency of savings (which coincide with the frequency of meetings) are also influenced by the ideas shared by the promoters of SHGs, level of poverty prevailing among the members, nature of surplus

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resources being generated from the economic activities undertaken by members, etc. Generally, regularity of savings is witnessed among the good groups, with the exception of areas where lack of livelihood opportunities force the poor to migrate to other areas. Generally, such savings constitute contribution to the corpus and do not become eligible for payment of interest. However, using collective wisdom, the SHG may decide to share the surpluses generated over a period of time or even redeem surplus savings back to the members. In terms of its liquidity, such savings by members score low, while the members can expect better access to loans from the SHG. Proper book-keeping is the key to healthy growth of savings within SHGs. Realising the importance of this aspect, the following initiatives were taken by NABARD at different stages of the expansion of the linkage programme:

Inclusion of proper book-keeping norms as important parameters in the rating mechanism for SHGs. Focus on book-keeping in all the training interventions aimed at SHG promoters. Encouraging standardization of books among SHGs promoted by one promoter and facilitating exchange of best practices through workshops and seminars. Support for capacity-building of field staff of promoters and SHGs in maintenance of books and records. Provision for cost sharing for supply of books and registers to SHG promoters as part of various promotional assistance programmes.

Needless to say, proper book-keeping holds the key to continued existence of the SHGs, besides winning confidence of the financing bank branch. However, various field studies have revealed that this continues to be an area calling for significant strengthening by all SHG promoters. Some of the best practices in management of books of accounts relate to (i) intensive training of identified literate members or literate wards of the members who would volunteer to look after the work relating to book-keeping, either with payment of incentive or without; (ii) engaging literate animators trained by promoters for book-keeping on payment basis; (iii) providing book-keeping help by the federal structure of SHGs; and (iv) provision of printed books of accounts by SHG promoter which are supplied to SHGs on payment basis.


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Apart from proper maintenance of the books of the SHG, it is important that all the members are issued individual passbooks showing their balances in savings and loans. In addition, it is also considered important for all the members to have an overall view of the finances of the SHGs, such knowledge not being limited to a few office-bearers. Such transparency and awareness within the group is considered to be the hallmark of a good and empowered group.

POTENTIAL OF SHG MOVEMENT IN TAPPING UNTAPPED SAVINGS In the initial period of the SHG movement in India, banks used to look at the programme as a credit outreach programme. However, it has now been recognized that savings mobilized by the SHGs could form a sizeable proportion of loans extended to the SHGs. Assuming that one SHG with 15 members saving Rs 50 a month can mobilize Rs 750 every month, the annual savings mobilization within the system, wherein over 15 lakh groups have been credit linked, would be of the order of Rs 1,350 crore. Keeping in view the growth of the SHG movement in the country, it is estimated that over Rs 4,400 crore would have been saved by the poor and pooled into the system. A part of such savings translates into deposits of the banking system, falling under low cost deposit category. One needs to understand that the banking system could never have had access to such large resources from the poor clients without the SHG platform. To that extent this amounts to tapping the untapped savings potential. Assuming a credit to savings ratio of 1:2, this would translate into a loaning business of Rs 8,800 crore. The money multiplier effect of such loans would certainly be a significant factor for the rural economy, especially when it leads to ‘financial inclusion’ of the rural poor.

KEY ISSUES Some of the key issues being debated relating to the savings mobilization by SHGs are as under:

Safety of the savings mobilized. Payment of interest on the savings mobilized. Need for other savings products for the SHGs and members.

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SAFETY

OF

SAVINGS MOBILIZED

The savings mobilized by the SHGs from among the members is either lent among themselves or kept in the savings deposit account with the SHGs. Questions were raised about the safety of such savings in the hands of informal groups. However, the excellent track record of the SHG movement in terms of safety of the savings can be rationalized from two counts. First, the initial hand-holding provided by the SHG promoters in training the SHGs in management of their own resources minimizes the inherent risk during the formative stages of the group. Second, in the initial periods, the volume of the savings itself is so small making any fraudulent transactions not so attractive for the office-bearers of the group who anyway live in the same neighbourhood or community. Further, as the group stabilizes, peer pressure proves to be a real collateral substitute even for the larger loans availed by the group from the banks. Thus, as evident from vast experience by now, concerns about the safety of the thrift are not pronounced or not significant enough for any elaborate risk mitigation net to be theorized and practised.

PAYMENT

OF

INTEREST

ON

SAVINGS MOBILIZED

Another issue talked about is concerning non-payment of interest on the savings of individual members. True, this was not conceived either at the formative stages of the SHG movement or contemplated during the current expansion phase. The reason being, in the initial stage of a SHG, such savings form the core of the group resources, which are gradually put to productive use. The pooled amount remains small for at least a couple of years. Even when the groups charge 2 per cent monthly interest rate on loans extended out of the savings, the interest accrual is not significant in absolute terms. The members tend to prefer to accumulate such income of the group in order to be in a position to leverage higher volume of bank loan. However, over the years, the interest earned by the SHGs on increased volume of loans becomes significant. It is at this time that groups adopt different approaches and treatments to the income generated from the loaning operations. Some groups tend to continue to accumulate their resources while others prefer to share such income among the members as dividend, justifying the savings as equity. When the group resources including bank loans and own savings/surpluses reach


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a level where present credit needs of the members are satisfied, it starts to consider sharing of the surpluses. This reinforces the belief that the poor value safe-keeping of the savings as more important than the need for earning interest on such savings.

NEED

FOR

SAVINGS PRODUCTS

FOR

MEMBERS/SHGS

Having recognized that the poor can save and save cumulatively, the time has possibly come to offer diverse savings products to the SHGs and in turn to the members. At this stage, it would be worth sharing a fieldlevel interaction with an SHG in Warangal district of Andhra Pradesh during the course of the study conducted along with Professor H.D. Seibel. The group had put in eight years of successful existence and was a good customer of Kakathiya Grameena Bank, having accessed loans of over Rs 1 lakh. The group had a savings balance of Rs 55,000 with the bank branch and a loan portfolio outstanding of nearly Rs 75,000. To a question as to why such a large proportion of savings has been kept in the savings deposit account earning an interest of around 4 per cent per annum at the same time paying an interest of around 11 per cent per annum on the loans outstanding, the group observed, ‘What we have in our savings account is our money which we can access any time we need hasslefree loans and it is our buffer in case of failure of any member to repay the loans to the group’. This was an eye-opener and very convincing. But certainly the group would have liked to park some of its surplus into higher interest bearing instruments such as term deposits or even recurring deposits. It is in this background that more experimentation needs to be carried out by the banking system to evolve need-based savings products for SHGs of different maturities. Similar initiatives also need to be tried by the system for tapping the occasional surpluses of individual members. Such surpluses do arise with the members on account of sale of harvests or animals or extraordinary income. As of now, the SHG mechanism does not offer avenue to individual members to park such surpluses within the SHG and earn better returns. The question is whether the banking system and the promoting agencies would like to take this savings-led movement to the next logical stage of ‘second generation banking with the poor’.

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LOOKING AHEAD At this stage one is reminded of an observation made by J.S. Tomar, then general manager of Oriental Bank of Commerce at the national-level seminar organized in New Delhi on the occasion of completion of a decade of SHG-bank linkage programme. He attributed the graduation of the programme into a true microfinance movement to the fact that ‘NABARD walked shoulder-to-shoulder with the banking system in this difficult endeavour’. Having established banking relationship with over 2.25 crore poor families through over 15 lakh SHGs and having accorded the status of ‘most favoured customers’ (in the words of Mr Krishnan, then chief general manager of State Bank of India), is the banking system now ready to offer them better, flexible, high-yielding savings products? Already, initiatives in the microinsurance sector, which is also a part of the savings mechanism, are available in the market. But much more remains to be done on an evolutionary basis for emerging needs and priorities.

9 Livelihood Promotion among SHGs PRADEEP KASHYAP

B

y now, microfinance programmes across the country have shown convincingly that the poor are both prompt and reliable in repaying loans. Loans taken under these programmes have helped individual women members increase their incomes somewhat, but the microenterprises started by them are hardly ever sustainable in covering the running costs and generating a bit of surplus. More and more practitioners have realized that credit alone is not enough to tap the economic potential of the microenterprise sector. Access to markets, information on raw material and technology, skills upgradation, design inputs and a range of other business development services are equally significant in making microenterprises more profitable and sustainable. Our own decade-and-a-half experience of providing business development services to NGOs supporting income generation efforts of self help groups (SHGs) has shown that success rates in creating sustainable enterprises are low. This is because activities are selected primarily on the basis of the interest shown by the women without keeping market demand in mind. Inadequate identification of markets, diseconomies of scale of production, absence of simple business plans and marketing strategies and a general lack of a business approach among NGOs are further reasons that contribute to low sustainability. Most practitioners and bankers make the faulty assumption that all members of the group wish to be self-employed. The truth is that a

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majority of poor women, particularly the poorest (landless labourers) would opt for steady wage employment, if available. Success of microenterprise initiatives among SHGs should therefore be determined by sustainability and the incomes generated and not necessarily by the number of members who take loans for starting a microenterprise. There are several successful approaches which provide answers towards enterprise and livelihoods promotion among SHGs. Some of these approaches are described below.

APPROACHES TOWARDS LIVELIHOOD PROMOTION 3M APPROACH Market and Research Team (MART) at New Delhi has developed the 3M (microfinance, micromarkets, microplanning) model, which is a simple, scientific and practical approach for microenterprise promotion. A survey in the project area of local haats, village shops, traders and other marketing systems is conducted to understand the demand pattern. The supply possibilities are ascertained by surveying the availability of different raw materials, skills, and infrastructure and support services available in the villages. By analyzing the supply and demand in the area through a microplanning exercise, a scientific selection of activities is ensured. Simultaneously, entrepreneurs already pursuing these activities are interviewed at length to understand the problems they face and the solutions they have evolved. The data gathered through the surveys is analyzed for preparing business plans for cluster level activities and detailed and practical implementation strategy for microenterprise development. The approach is shown in Figure 9.1 pictorially. 3M is a generic and practical approach to microenterprise development. It is a self-sustaining model as it relies on local resources, existing skills and local markets without depending on any external agency for support. A user manual (available in English, Hindi, Oriya, Telugu, and Bengali) has been prepared which describes step by step how to conduct the survey and analyze data along with tips that make it easy for NGOs to undertake the exercise.

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FIGURE 9.1

Source: User Manual for 3M Micro Enterprise Model, an internal publication of MART, New Delhi.

MARKET ACCESS

THROUGH

RURAL HAATS

Periodic markets or haats form the major rural marketing system in India where farmers and artisans bring their products for sale and from where they buy items of daily use such as groceries, garments, vegetables, spices and much more. SHG members who start microenterprises face the challenge of accessing remote city markets. The haat is easily accessible as it is held in the vicinity and it offers a ready market to women entrepreneurs as the range, quality and price of products available at the haat is similar to what they produce. The haat offers the following advantages:

Easy access to markets. Ready cash, thus ensuring a smooth cash flow and production cycle. Low marketing overheads. High sales volume. Elimination of middlemen and hence better price realization. Better understanding of taste and choice of rural buyers.

There are 47,000 haats; average sale at a haat is over Rs 2 lakh; the number of stalls over 300; the number of visitors per haat averages 4,500.1 1

Reference-Traditional Haat and Melas in India, 1995 by Pradeep Kashyap.

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A study has found that haats are the economic-social-cultural nervecentres for villagers. However as these are unregulated markets, infrastructure is poor. There is an immediate need to provide platforms, sheds, toilets and bicycle stands to develop these markets. Similarly, with the growing population, there is scope to start 18,000 new haats to provide better market access to remote village locations. MART has created several new haats in Madhya Pradesh under District Poverty Initiatives Project (DPIP) supported by the World Bank and in Orissa under Western Orissa Rural Livelihoods Project (WORLP) supported by the UK’s Department for International Development (DFID) which has boosted local level entrepreneurship in the vicinity, with 50 per cent of the new entrepreneurs being women. Based on years of work with haats, a booklet2 that explains step by step how to upgrade existing haats and promote new haats has been prepared for mass dissemination.

PUBLIC-PRIVATE PARTNERSHIPS High levels of competency and professionalism are required to survive in the competitive market which SHGs, NGOs and government bodies generally lack. Corporates, on the other hand, are strong in marketing and have excellent distribution reach. A win-win partnership is possible where producer groups make products that are branded and marketed by companies. For example, ITC markets Mangaldeep, a premier brand of agarbattis that are supplied by several tiny units supported by Khadi and Village Industries Corporation (KVIC) and Sri Sri Ravi Shankar centre. Bata gets leather products manufactured in several small units located in Agra. The system is mutually advantageous. The small unit gets a secure market for its products without undertaking costly marketing efforts. It also gets access to improved technology and key managerial inputs. The large company benefits because it does not have to invest in production and this system also imparts greater flexibility to adjust to changing demand patterns. This public-private model needs to be pursued more actively. NABARD, CAPART and other developmental agencies should initiate dialogues through local chambers of commerce with corporates to make the latter see the benefits of such partnerships with SHGs and NGOs. 2

Handbook on Promoting Periodic Rural Markets (Haats) by MART.


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COLLECTIVE MARKE TING Production by individual women is so insignificant that they have no bargaining power in the market for obtaining raw materials at low rates or fetching better prices for finished products. Economies of scale can only be achieved by producing large volumes of the same product (as demonstrated by Lijjat or Amul) or a large population in a district engaging in the same activity to gain competitive advantage (for instance the brassware industry in Moradabad, pottery in Khurja or the fire cracker industry in Sivakasi). DRDAs/NGOs supporting SHGs should concentrate on a limited number of economic activities in each district. Collective marketing in agriculture and non-timber forest produce (NTFP) is a way to fetch better prices by taking goods to the terminal markets. Individually, women end up selling to the local intermediary at a low price. VELUGU project in Andhra Pradesh has organized SHGs and their federations into collective marketing of various agri-commodities resulting in significant improvement in the prices fetched. Tribals in some villages in WORLP project in Orissa were organized into collective marketing groups and they fetched 18 per cent higher price for NTFP by selling in the terminal market. The success of Amul and Lijjat (where production is done at individual level) can be attributed largely to collective marketing and a centralized quality system. This model, with adaptations to suit local conditions should be used by SHGs to move up the value chain. In the agricultural sector, collective marketing can start by taking up cleaning, sorting and grading and later some processing activity to get still higher prices for its members whereas in the non-farm sector, SHGs can source raw material collectively and market the finished product under a common umbrella brand.

BRAND BUILDING Branding is an effective means of popularizing a product and adding value. But owing to the cost factors involved, small producer groups can never hope to create strong brands because of which their products have limited market reach and fetch low prices. Promotional agencies and large NGOs such as Gurjari, SEWA, Dastkar, Shyam Ahuja and Fab India that have created strong umbrella brands have helped products made in remote villages expand their reach to city and export markets. These market support agencies also provide design,

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quality and marketing support in response to felt customer needs to ensure higher customer satisfaction and brand loyalty. Government promotional agencies such as KVIC, Bharat Leather Corporation and others need to hire the services of professional marketers to help them build strong brands so that these agencies can provide the muchneeded support to our village producers. NGOs too should consider branding as an integral part of their handholding support to SHGs so that as production grows, brand equity also becomes strong.

CLUSTER DEVELOPMENT APPROACH BY UNITED NATIONS INDUSTRIES DEVELOPMENT ORGANISATION (UNIDO) Isolated enterprises are unable to achieve economies of scale, lack negotiating power, find it difficult to specialize and have limited access to credit, strategic information, technology and markets. Small enterprises grow best in clusters. The co-existence of various complementary enterprises across the value chain of a sub-sector helps each to grow. Moradabad for brassware, Agra for shoes, Khurja for pottery and Coimbatore for knitwear are examples of successful clusters. In fact there are some 6,500 production clusters in India. The competitive or comparative advantage of each district or block should be mapped through a survey (using 3M or similar scientific approach) and a maximum of three or four major activities should be identified and supported in a focussed manner. This ensures that the producer SHGs can be supported for building up linkages with private business development service providers within the cluster itself for supply of raw materials, design and technology inputs and marketing. UNIDO has been supporting the cluster approach in India for over a decade and some of the benefits experienced by production units are enhanced turnover, new market linkages, quality upgradation, efficient sourcing, technical improvements and creation of better infrastructure. The cluster ensures economy of scale because of production at one location which otherwise is never possible with individual producers scattered over a large geographical area.

LESSONS LEARNT

The experience from application of 3M in various projects shows that systematic and integrated effort around a sub-sector provides better results. However the sub-sector selected should


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offer competitive advantages in terms of skill, resources, infrastructure and market. Movement from microfinance to microenterprises is more successful in projects where the facilitation team has adopted a ‘business’ and not a ‘welfare’ approach and has made the effort to understand the local economy pattern of the area. The poorest people are more comfortable with wage employment, so the poor need to be supported for microenterprise promotion because they have better exposure and risk-taking ability, and hence are more likely to succeed. Some of them may even generate much needed wage employment for the poorest. In our experience the impact is high when the enterprise promotion focusses on the semi- and pre-entrepreneurs among the SHGs (poor) and not the non-entrepreneurs (poorest). Group-based activities have inherent problems of lack of accountability and responsibility. However individual production and collective marketing is a good model (especially for agriproducts, NTFP, milk and other such commodities) as it overcomes the problems of group work and offers better price realization. Local haats add value to the enterprise promotion process. SHG members should be taken to haats to identify income-generating activities as also to understand market dynamics as an integrated part of their capacity-building effort. Private-public partnerships have worked well where it is a winwin model and both parties respect each other.

NEW INITIATIVES CAPACI TY-BUILDING To address the challenge of livelihoods and enterprise promotion among SHGs, capacity-building for opportunity sensing, sub-sectoral approach, value chain analysis, collective marketing, business and marketing plans preparation, cost-benefit analysis, convergence is necessary. There is a strong need to develop need-based modules to address the above issues along with right dissemination methods like posters and audio visual films. Apex institutions like NABARD with the support of state governments should promote capacity-building resource centres to meet the emerging challenges related to livelihood and enterprise promotion among SHGs.

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CLOSER LINK

WITH

CORPORATE SECTOR

As suggested earlier, there is a need to establish closer links with the corporate sector to tackle the issue of unemployment jointly.

CREATING BDS PROVIDERS

IN

PRIVATE DOMAIN

To create sustainable rural enterprises and livelihoods, a range of technical support services are necessary. Dastkar, SIPA, Sasha and others are providing much needed support to several producer groups. But there is an urgent need to promote many more one-stop private business development service providers. However as the ability of groups to pay for these services is extremely limited, NABARD and CAPART should provide startup grants to encourage young professionals from IRMA, National Institute of Design (NID) and other institutes to start their own market support agencies.

CONCLUSION Thus, it can be stated that unlike microfinance where the approaches are limited and have been more or less standardized by now, microenterprise and marketing require customized solutions. Far from following one universal principle, microenterprise approaches and strategies have to be tailored to suit the needs of each SHG/product/location. Success in the microfinance sector is a function of how well the group manages internal factors largely within its control, whereas success in the microenterprise sector depends almost entirely on how well the market and the competitive environment is managed, factors that are completely beyond the control of the entrepreneur. So the way to improve chances of success in the competitive and ruthless marketplace is to prepare the entrepreneur adequately through capacity-building and handholding support.

10 Emerging SHG Federations and Challenges C.S. REDDY

I

n India, the women Self Help Group (SHG) model is the home-grown model for poverty reduction and women empowerment with strong emphasis on savings and credit. The model emphasizes the ‘savings first’ approach. The success of the SHG movement in India was never a sudden surge in the microfinance sector, which dates back to the late 1970s and early 1980s. The non-governmental organizations (NGOs) were the pioneers of the SHG movement in India and started to work in the field as early as the 1970s. NGOs innovated on the process of SHG formation and the norms that they would evolve for themselves to become sustainable. Though the technology of SHG promotion is fully developed now, it took more than a decade for the systems and processes to be developed for upscaling. Though the self help movement began in the late 1970s and early 1980s, the movement gained widespread recognition over the past few years with south India leading the movement from the front. There are significant regional disparities in the growth of the SHG movement with limited progress in the north and the north-east. The evolution of the SHG movement could be divided into six major phases. NGOs promoting women SHGs on a small scale for their overall development could be considered as phase I of the self help movement. NABARD’s lead in partnering with NGOs, particularly MYRADA, to pilot the well-known SHG-bank linkage model could be termed as phase II. The third phase began with the state governments, particularly in the

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south, taking a proactive role in the promotion of SHGs in a big way by way of revolving loan funds and other support. SHG-bank linkage reaching the scale of more than a million bank-linked SHGs could be considered phase IV. Emergence of SHG federations to sustain the SHG movement and to provide value addition could be considered as phase V. Widespread recognition for SHGs and SHG federations to act as implementing agencies of various government schemes and also as agents for microinsurance could be considered as phase VI. While the SHG-bank linkage model has experienced exponential growth over the past decade, bank lending to SHG federations is currently being piloted. In the long term, the SHG federation-bank linkage, if done well, will prove to be sustainable as federations provide a basket of financial and livelihoods services to their member-SHGs and ultimately to rural women. Initially, they were supported by the NGOs but the popularity and the success of the endeavour led the government to take a big leap and institutionalize credit and financial support to be provided through SHGs. The SHG-bank linkage, thus, took birth and is the talk of the walk. The bank linkage programme allowed the rural poor, a group often ignored by the traditional banking sector, access to mainstream financing. Throughout the decade, 1.6 million SHGs (cumulative) linked to banks with Rs 6.8 billion worth of loans by March 2005. While the SHG-bank linkage achieved significant scale and has shown exponential growth, quantum of loan to SHGs is a significant issue if SHG members are to engage in meaningful livelihood activities. The tremendous success of the SHG movement relied, and continues to rely, heavily on promoting institutions to mobilize, train, and support groups. By the late 1990s, the state governments had become a key promoter of SHGs, especially in southern India. As groups strengthened and their number increased, there arose a need to bring together SHGs to deal with issues beyond the reach of these small groups. The networks of SHGs, referred to as federations, have come together in various forms. Their existence resolves issues faced by promoting institutions, such as sustainability of SHGs, providing economies of scale and lowering transaction costs. However, this creates a new set of challenges.

PILOTING OF SHG FEDERATIONS Networking of SHGs was inspired by the felt need of the SHGs that they are not able to deal with issues that are beyond their reach. SHGs having

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a membership of 10–20 women are too small and informal to deal with larger issues to realize the needs and aspirations of women members. Inter-group lending, ability to negotiate with higher level structures and to gain greater bargaining power were the reasons why informal SHG networking was initiated by NGOs. Though SHG networks start as informal bodies, they need to develop into formal, legal corporate bodies to better service member-SHGs. The unique feature of SHG federations is that the primaries, that is the SHGs, are not legal entities and do not have body corporate status. However, SHGs are allowed as per the RBI guidelines to engage in financial transactions with banks. SHG federations function as per the subsidiarity principle to undertake those roles that cannot be performed by member-SHGs. SHG federations have been promoted by the NGOs and the government from mid 1990s to address the issues of ensuring quality while up-scaling, ensure that costs of promotion are low, and create sustainable institutions to facilitate withdrawal of the promoting organization, from some of its functions and roles. PRADAN and MYRADA are the two NGOs, which also have pioneered the concept of SHG federations. MYRADA has promoted unregistered federations of 15–25 SHGs, which focus primarily on solidarity building, delinquency management and dealing with social issues. MYRADA also promoted community-managed resource centres (CMRCs) to offer services for the overall development of the SHG members. PRADAN in 1992 promoted the Sri Padmavathi Mahila Abhyudaya Sangham (SPMS) in Tirupathi. Dhan Foundation that was evolved from PRADAN has formed several SHG federations across south India. The SHG federations promoted by Dhan are nested institutions with SHGs at the village level, cluster of SHGs covering a few villages and federation (called Kalanjiam) at the apex level. These are registered under the Public Societies Act. CARE initiated its microfinance activity in the early 1990s in Chevella and nearby mandals of Rangareddy district of Andhra Pradesh, and has established a three-tier structure of SHG-cluster-federation. Based on its experiences, CARE is implementing CASHE project in three states— Andhra Pradesh, Orissa and West Bengal—working with more than 25 NGO partners promoting SHGs and SHG federations. The NGO partners of CASHE project promoted a large number of cluster and block level federations in those states. UNDP’s South Asia Poverty Alleviation Project started in 1994 in Andhra Pradesh and was implemented in 20 mandals spread across three districts. SHGs in each mandal are federated into a Mandal Samakhya

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(mandal-level federation) as a three-tier structure of SHG-village organization—Mandal Samakhya, and are registered under the APMACS Act. This model has been scaled up under the World Bank-funded Poverty Reduction Program in Andhra Pradesh covering all the rural areas in the state. A large number of NGOs promoted SHG federations as two-tier structure to facilitate sustainable institutions of the poor. While SHGs are informal, the federations often become formal institutions adopting appropriate legal forms. NGOs either directly access funds for on-lending to federations or facilitate SHG federations accessing bulk loans from a variety of financial institutions, including banks. In most of these cases, SHG federations perform both financial and non-financial functions. Some of the promoting organizations have ensured that SHG federations perform the functions of a financial institution, others have facilitating the federations taking a more holistic role including marketing activities.

DEFINING SHG FEDERATION The dictionary meaning of federation is ‘association of autonomous bodies uniting for a common perceived benefits’. A federation is an association of primary organizations. Primary organizations may federate to realize economies of scale or to gain strength as an interest group. A cluster-level federation is a network of several SHGs and a structure or body evolved by SHGs themselves consisting of representatives from all member-SHGs, with the motive of supporting member-SHGs to attain the goals of economic and social empowerment of women members and their capacity-building. In other words, it is another forum for SHGs to step up development of women members taking advantage of collective effort of member SHGs, enabling holistic and need-based economic and social development. An SHG federation is a democratic body formed with a certain number of SHGs functioning in a specific geographical area with the objective of uniting such SHGs for common cause and for achieving these causes which an individual SHG would not be able to do. In short, the SHG federation has to be necessarily of SHGs, by SHGs and for SHGs.

NEED FOR FEDERATION There are a variety of reasons for promoting federations of SHGs, some of which assist the promoter institutions and others which directly


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benefit members. The literature suggests that SHG federations have been promoted over the past 15 years in India. NGOs took the leadership role in promoting them on a pilot basis. Considerable donor funds were invested in evolving the SHG federation model by leading NGOs. The concept of federation emerged from the felt need of the SHGs that have been functioning well and were keen to come together for sharing and learning. The federation was to serve the purpose of undertaking those roles that cannot be performed well by individual SHGs on their own. Each promoter has different reason(s) for federating SHGs at different levels—it may be at village, cluster (group of villages), mandal1 (or subblock), block level, district and state level. The reasons are: Scaling up: The promoter’s experience with group formation and development grows and it seeks to scale up its level of activities. The promoters’ experience and proven credibility in the area allows group formation to occur at a much faster pace than before. As the number of groups grows with continuous addition of new groups, the promoter’s degree of involvement and even direct contact with the groups greatly diminishes. At this stage, the promoter begins to think of setting up an apex-level body (federation) that is able to take on many of the promoters’ tasks thus enabling it to leverage its limited resources in the most judicious manner possible. Withdrawal strategy: The promoting organization cannot continue working in the same area for an indefinite period of time. To provide sustainability to SHG activity initiated and developed by the promoter, it is necessary to build peoples’ institutions that can eventually and independently carry forward the social and economic empowerment agenda. Issue-based: In a few cases, groups may have come together informally either on a particular issue/crises or for exchanging information and experiences through joint meetings. In such cases the initiative for a collective organization comes from the SHGs themselves but the setting up of a formal structure is usually promoted and guided by the promoting agency. To take up community action programmes and mobilize and lead collective action on wider social issues like child labour, female infanticide, illicit liquor, representation of women in panchayats, and violence against women. 1 Sub-district geographical unit unique to Andhra Pradesh that is both a revenue and development planning unit, but smaller in size than a Block.

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Collective bargaining power: When dealing with local bodies and institutions, individual groups do not carry much weight, but as a collective representing a large number of people, they gain both visibility and impact. As a collective it is possible to establish linkages with banks and other financial institutions to access greater funds. Principal of subsidiary: The most compelling reason for federation formation is to overcome the constraints faced by individual SHGs by undertaking the tasks that they find difficult to do.

DISADVANTAGES OF PROMOTING SHG FEDERATIONS As has been explained before, there are several benefits in promoting SHG federations. However, there are several disadvantages or dangers if federations are promoted. The promoters must be fully aware of these and follow a process by which many of these could be mitigated. Federations were seen as an opportunity to ensure that the life of an SHG was not dependent on an external facilitator; that with its own support mechanism (through the federation), an SHG could function as its members wanted it to do. In spite of the above benefits, some of the SHG promoters and microfinance specialists question the need for SHG federations. The following are the limitations of SHG federations:

A majority of the well-functioning SHGs have bank linkage. SHG federation is not required to play the financial intermediary role as SHG-bank linkage is a sustainable relationship. India has the largest network of bank branches in the world, and most villages are within easy distance of a branch of some sort; there is no need to have a federation in order to provide a more accessible place at which to make deposits or take loans. Some federations are themselves federating and aim to create quite new financial institutions. India already has commercial banks, regional rural banks, Primary Agricultural Credit Societies (PACS) and District Central Cooperative Bank branches. Some are not functioning properly but the way to improve matters is to reform them, not to create yet another set of institutions. The existing financial institutions are not properly regulated or supervised and there are frequent failures and frauds. There is no


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way the authorities can take on yet another type of institution; SHG federations will need supervision but will not receive it. The better off among the poor may capture all the benefits of the SHG federation. The process of promoting an SHG is not easy but bankers and new SHG members themselves are increasingly taking over the task, thus reducing the need for dependence on NGOs and subsidy. Promoting a federation is much more difficult and a federation requires much longer handholding. A single SHG does not contain enough voters to be worth ‘hijacking’ by political interests but a federation is a very attractive target. The day-to-day operations of a federation cost money. This may come in the form of contributions or interest spreads paid by member SHGs or from individual members’ voluntary work. SHG members already complain, rightly, about the amount of time that their membership demands and about the interest rates they have to pay. Federations will make these burdens worse. One of the most ‘empowering’ aspects of SHG membership is the way it allows members to pick and choose between financial service providers. At last, banks, PACS and MFIs are obliged to compete for SHG members’ business. Federations can demand ‘loyalty’, which is essentially a loss of freedom.

OBJECTIVE(S) AND ACTIVITIES OF SHG FEDERATION Experiences and literature shows that federations are set up with one or more of the following objectives: To strengthen SHGs:

To strengthen (through training, information dissemination, onsite support, etc) the capacity of member-SHGs in one or more of a variety of fields (book-keeping, accounting, marketing, financial management, advocacy, bank linkage, accessing government schemes, to name some). To resolve any conflicts that may arise within member-SHGs. To assist in strengthening the performance of member-SHGs. To help in achieving sustainability of SHGs. To provide staff support to member-SHGs.

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To prepare and/or audit the accounts of member-SHGs. To review/regulate/supervise the functioning of member-SHGs.

To provide value-added services:

To provide credit, especially multiple credit lines. To provide savings facilities, especially voluntary savings. To undertake marketing of the produce of the SHG members. To provide life/loan insurance services.

For upscaling:

To promote new SHGs.

To facilitate linkages:

To get access to policymaking bodies through political empowerment and social mobility. To facilitate linkages between SHGs and banks/government agencies/local institutions. To have better access to development information and marketing linkages.

To facilitate women’s empowerment:

To create the political/social space that women need to live their lives as fully as they desire to. To be the window to the outside world, in replacement of the promoter organization. To undertake all that the external facilitator was undertaking, after its departure.

PROMOTION OF SHG FEDERATIONS Initial piloting of SHG federation promotion in the early 1990s evolved the institutional model and the step-by-step approach in promoting SHG federations. A large number of NGOs and externally funded projects of the government began SHG federation promotion in the late 1990s. Table 10.1 gives estimates of the number of SHG federations in those states that have been engaged in promoting SHG federations in a big way. SHG federation promotion is widespread across the country with a large number of these federations being small, consisting of less than 50 SHGs.

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Emerging SHG Federations and Challenges TABLE 10.1 Promoters of SHG Federations Sl No. State

Major Promoters

01 Andhra Pradesh

02 03 04 05 06 07 08

09 10

SERP (Govt.), UNDP, NGO partners of CASHE project of CARE India, ASP, GRAM, CEED, COVA, MYRADA, Dhan Foundation, YIP, Outreach etc. Tamil Nadu TNCDW (Govt.), PRADAN, Outreach, DHAN, MYRADA. Karnataka MYRADA, Outreach Maharashtra MAVIM, NGO network support by Chaitanya Kerala Kudumbasree (Govt.) Orissa Mission Shakti, BISWA, Swayam Sree, Gramodbhav, FARR West Bengal CARE, Rural Development Consortium Gujarat Gujarat Rajya Rachanatmak Karyakar Sangh Janani, International Centre for Entrepreneurship and Career Development Uttar Pradesh PANI, NEED Other federations under Swashakti and Swayamsidha projects (Govt.)

No. of SHG Federations

Total

29,265 14,104 220 120 15,153 5,429 300

63 92

1,826 66,572

Source: Study report ‘Status of SHG Federations in Andhra Pradesh’, published by APMAS, Hyderabad (2004). Notes: The number of SHG federations in a given state is a Best Guess only. Above information is collected through websites and telephones. In most Indian states, SHG federations are promoted by government through projects like Swashakti, Swayamsidha, etc. SERP ASP PRADAN DHAN COVA GRAM CEAD YIP TNCWDC PANI MAVIM TNCDW BISWA NEED FARR

Society for Elimination of Rural Poverty, Government of Andhra Pradesh Ankuram Sangamam Porutm—an NGO in Andhra Pradesh Professional Assistance for Development Action, an NGO working in several Indian states Development of Humane Action, an NGO working in south India Confederation of Voluntary Association Gramaabhudaya Mandali, an NGO in AP Centre for Education and Agriculture Development, an NGO in AP Young India Project, an NGO in Andhra Pradesh Tamil Nadu Child and Women Development Corporation People’s Action for National Integration Mahila Arthik Vikas Mahamandali, Maharashtra government Tamil Nadu Corporation for Development of Women, Tamil Nadu government Bharat Integrated Social Welfare Association Network of Entrepreneurship and Economic Development Friends Association for Rural Reconstruction

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Over the past few years, SHG federations have been incorporated in the initial design of many multilateral and bilateral funded projects. In fact, almost all the large-scale projects that have SHGs as part of the strategy for poverty reduction and women empowerment also have taken up the federation promotion. As a majority of these externally aided projects are implemented by the government, either through NGOs or directly, a target-oriented approach is followed in promoting SHG federations. In some cases, the federations are promoted even before the SHGs are promoted. IFAD-funded large-scale projects promoted SHG federations at the cluster level—Tamil Nadu Women Development Project, Maharashtra Rural Credit Programme implemented by MAVIM and Swashakti project implemented in Bihar, Gujarat, Haryana, Karnataka, Madhya Pradesh and Uttar Pradesh. IFAD-funded projects together have contributed to the introduction of the SHG federation concept in eight Indian states. At present there are a large number of projects funded by the World Bank and Government of India being implemented in several Indian states that promote SHG federations. DFID-funded projects have supported the SHG federation promotion in Andhra Pradesh, Orissa and West Bengal. A large number of international NGOs are funding local NGOs to promote SHG federations. On the whole, the SHG federation concept has been promoted in almost all parts of India including the north-east, though it is widely in practice in south India with more than 60,000 SHG federations functioning—a majority of them being at the village/cluster level. In Kerala the federations are promoted under the Kudumbashree programme covering more than 1,50,000 neighbourhood groups (NHGs). These SHGs are organized into more than 14,000 Area Development Societies (ADS) and 1,050 Community Development Societies (CDS). In Tamil Nadu, more than 12,000 SHG federations are functioning under the Tamil Nadu Corporation for Development of Women (TNCDW) and a large number of NGOs. In Karnataka there are a large number of federations promoted by NGOs-prominent among them being MYRADA (340 federations) and OUTREACH (120 federations). It is to be noted that MYRADA promotes federations for social intermediation and to promote Community Managed Resource Centres (CMRCs) to provide a variety of support services to the SHGs on a fee-for-service basis. In Andhra Pradesh there are more than 30,000 SHG federations promoted by Indira Kranthi Patham programme funded by World Bank and several NGOs. In the rest of the country, most federations are promoted by NGOs, with a limited number promoted under government-supported


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programmes. The Women and Child Development (WCD) Department of the Government of India promoting several cluster-level federations through its programmes called Swashakti and Swayamsidha. The DFID-funded Poorest Areas Civil Society which is being implemented in several northern states is in the process of promoting village/clusterlevel federations for social intermediation. The World Bank is funding several poverty reduction projects through the state governments. Many of these projects incorporate SHGs and SHG federations as the institutional mechanism for poverty reduction.

STATUS OF SHG FEDERATIONS BASED ON APMAS RATING FINDINGS APMAS emerged from the felt need to have a resource organization that provides high quality technical and managerial support for strengthening the SHG movement in India, more specifically in Andhra Pradesh. One of the mandates of APMAS is to establish standards for the SHG federations based on the practice. To enable the promoters of SHG federations to adopt the standards, APMAS provides capacity-building through a series of training of trainers programmes. To facilitate an independent third party assessment of the quality of the SHG federations, APMAS has established a strong professional team within the organization. The rating of SHG federations would aid the promoters to understand the performance of the federations. The rating could also facilitate financial flows to the federations from banks and other financial institutions. There are rating tools available for rating of credit unions and microfinance institutions like CAMEL, GIRAFE, PEARLS, MICROS in the microfinance sector. However, no attempt was made to develop a comprehensive rating tool for the SHG federations. With almost four years work of APMAS with various stakeholders like Government of Andhra Pradesh, NABARD, bankers and NGOs developed a quality assessment (QA) system for rating SHG federation, called GRADES, which is developed in collaboration with Micro-credit Ratings International Limited (M-CRIL), New Delhi. GRADES represent the key assessment areas of the Federation Assessment—Governance & Strategy, Resources, Asset Quality, Design of Systems & Implementation, Efficiency & Profitability, Services to SHGs in addition to the SHG performance. It has been revised every year and GRADES version 2.0 is being used currently.

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The GRADES tool has been successfully utilized for the assessment of the over 310 SMFIs to date. This service of Quality Assessment has been availed of by diverse clients ranging from organizations funded by World Bank—SERP, government agencies like DRDA, MAVIM, international organizations like CARE International, NOVIB, MFIs like FWWB, BASIX, banks like SIDBI (SFMC), commercial and rural banks, NGOs like ASP, YIP, GRAM and government projects like APRLP etc. The findings of the SHG federation rating done by APMAS are presented here to give an overview of the present status of SHG federations in India. While analyzing the data, only data of comparable SHG federations is taken. The purpose of presenting the findings of our ratings is to clearly bring out the key issues and challenges in promoting sustainable SHG federations. The analysis included 83 SHG federations rated by APMAS during 2003–05. The SHG federations’ overall performance is moderate when converted into a letter grade ‘B-’. Federations have performed reasonably well at resource, moderate in the areas viz., governance, design of system federations and its implementation, services to SHGs and overall SHG performance and poor in the areas of asset quality and efficiency and profitability. TABLE 10.2 Performance of SHG Federations Section

Performance

Governance Resource Asset Quality Design of Systems & implementation Efficiency & Profitability Service to SHGs SHG Performance

B– B+ C B– C+ B– B

Total

B–

Source: Study report ‘Status of SHG federations in Andhra Pradesh’, published by APMAS, Hyderabad (2004). Note: N = 83 federation (average).

GOVERNANCE Governance of a people’s organization is critical for the sustainability of the SHG federation. Board members (or Executive Committee) have limited understanding about the federation’s vision, objectives, functions, roles and responsibility. A majority of the SHG federations do not have a

Regularity of meetings (%) Attendance in board meeting % Attendance in general body meeting (%) Village coverage (%) Target beneficiaries coverage (%) Available funds per SHG (Rs)

Idle fund to total assets (%) Capital adequacy ratio (%)

External repayment rate (%) Internal repayment rate (%) Loan outstanding to SHGs (%) Portfolio at risk > 90 days (%) Portfolio at risk >180 days (%) Arrears rate > 90 days (%) SHGs per staff (No.)

Loan outstanding per staff (Rs)

Yield on portfolio (%)

01 02 03 04 05 06

07 08

09 10 11 12 13 14 15

16

17

Sl No. Indicator

13.0

4,96,552

90.0 65.8 55.5 23.7 17.4 6.8 75

17.4 42.8

94.8 74.7 41.4 85.3 80.4 9,776

Average*

>95.0 >90.0 >75.0 95.0 >90.0 At least Rs 10,000 100.0 >=100.0 >6.0 >12.0 >90.0

90 days—24% Portfolio at Risk > 180 days—17% Arrears Rate > 90 days—7% Providing of Loan Loss provision

Understanding of board on federations vision, objectives, functions, roles and responsibility Attendance of board members (75%) Compliance of legal obligations, except audit Review of MIS, action plan and operations by board

Areas to Improve

Regularity of meetings and attendance Regular upto date and accuracy of recording Quality of loans (PAR>90 days—33%) Enforcement of norms Velocity of internal lending (0.7 times) Idle funds (9%)

Dependence on promoters for services Strengthening of SHGs Grading and auditing of SHGs Training Problem solving

Staff productivity in terms of loan outstanding per staff (Rs 5 lakh) Full recovery of interest Operational cost—12.5 % Financial self sufficiency—73%

Internal controls Internal audit Default mechanism Cash controls Staff review

Areas to Improve

Source: Study report ‘Status of SHG federations in Andhra Pradesh’, published by APMAS, Hyderabad (2004).

SHG Performance Homogeneous and cohesive groups Regularity of savings (90%) External repayment rate (88%) Maintaining of all required books of accounts Financial transactions done during meetings Self-reliant (operational & financial) Participation in decisions and social activities

Services to SHGs Financial products—loans and savings Participation in Govt. welfare and development activities

Efficiency & Profitability Staff productivity in terms of SHGs per staff (75 SHGs) Operational self sufficiency—138%

Clear defined joining and loan sanctioning processes with adherence to same Availability of information

Strengths

(Table 10.4 contd)


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long-term strategy or business plan. Sources of income for the sustainability of the federation are not well developed by the Board. Concepts like service fee, membership fee and need-based savings products are not developed. Elections are held democratically, but not in accordance with the byelaws. All the Board members change at one time, instead of following the Rajya Sabha model of only one-third changing each time to ensure continuity for managing the federation. Often times, when all the Board members are new, they will not be able to perform the functions well. Also, the newly elected/selected Board members may not get the required training to perform their roles effectively. During the assessments that APMAS undertook, it was observed that some of the old Board members come in the way of the new Board members performing their role. The short tenure of leadership results in more direction by the promoters/staff. There is a marked absence of second line leadership at the federation level to take on leadership role when the first set of leaders step down. Majority of federations are not performing legal compliance except for external audit. The board meetings are regulars (95 per cent) with less attendance (75 per cent) and the decisions are taken in consultation with staff. However, the decision-making process is democratic and participatory. Board members are not reviewing previous decisions, progress, MIS and staff performance in their monthly meetings. The governance has high positive correlation of 0.8 with federation overall performance implying the direct impact of good quality Board on overall performance.

RESOURCE Almost all the SHG federations rated by APMAS have paid staff. In many cases, the federation staff is recruited, oriented and paid by the promoting organization. The staff recruited by the promoting organization is qualified, competent and have reasonably good field experience. Most federations are heavily dependent on the promoter for their resources. Many times, the federations receive grants, both as corpus and for meeting recurring expenses. It is observed that at the federation level the fund availability per SHGs is not sufficient to meet member-SHG demands. In some cases, the funds availability in the federation(s) is much lower in comparison to the funds in an SHG. In such cases the SHGs are not interested in being part of the federation. The federations have started internal mobilization of funds from SHGs in the form of savings. Very few federations have accessed external borrowing from financial

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institutions. Idle funds are high at federation level compared to what is expected as per good practice. This is a paradoxical situation as SHG members want larger loans, while there are idle funds both at SHG and SHG federation levels. Inadequate fund management capacity and not having the necessary systems result in high idle funds. Each SHG member would like to have a loan of Rs 10,000 to Rs 30,000. However, the funds of SHGs and the federation together are much lower than the requirement. The large gap between supply and demand clearly indicates limited fund flow from banks and other financial institutions to the SHGs and federations.

ASSET QUALITY The internal recovery rate in the federations averages 66 per cent (ranges from 20 per cent to 100 per cent). Where loan monitoring is good, recovery rate is generally above 85 per cent. The repayment of loans from individual members to SHGs, particularly loans from their own savings, is much lower. The low repayment rate is attributed by women mainly to severe drought conditions and poor loan tracking. It is a trend that repayment has been increasing along with the age of the federation. The portfolio at risk (PAR) at 90 days is 24 per cent and arrears rate at 90 days is 7 per cent. There is positive correlation between board quality and asset quality, that is, high quality of board results in better asset quality. Similarly the asset quality has positive correlation with a federation’s overall performance (correlation 0.7). The federations that have adequate capacity to manage their operations and have the appropriate systems and processes are able to ensure high asset quality.

DESIGN

OF

SYSTEMS

AND

IMPLEMENTATION

SHG federations engaged in financial intermediation must have the required book-keeping system and also the management information system for decision-making during the Board meetings. From the 83 SHG federations rated by APMAS, systems emerges as one of the important areas that requires considerable improvement for the SHG federations to survive and thrive. Required books of accounts are in place and are maintained reasonably well. However, regular and accurate maintenance of the books is a major issue needing improvement. A limited information is available at federation level. However, the data is not processed,


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consolidated, analyzed and reviewed. There is an absence of two-way information flow. Information flows from SHGClusterfederation but not vice versa. Some SHG members are not even aware of the importance and the objectives of establishing their own federation and its activities. The internal audit, staff review, and the default management mechanism are poor. In majority of the federations, up-to-date information about the status of member-SHGs and performance is not available. SHG federations are expected to lend to their member SHGs after carefully appraising the SHGs. Such a system is not followed in the federations.

EFFICIENCY

AND

PROFITABILITY

Staff efficiency in terms of managing of number of SHGs per staff is 75 and the amount of outstanding loan per staff is Rs 5 lakh. The average operating cost ratio is 12.5 per cent indicating that for every Rs 100 loan the operational costs are Rs 12.5, which is high for federations maintaining such small portfolios. The banks are yet to lend to SHG federations in a big way. Only in Andhra Pradesh, there is a systematic effort to facilitate SHG federation–bank linkage. As most SHG federations have limited funds for on-lending, the operating costs are much higher. The federations get funds from their promoters as a grant, seed capital or loan. The striking aspect of the federations’ average Operational Self Sufficiency (OSS) is 138 per cent and Financial Self Sufficiency (FSS) is 73 per cent. Most of the costs of the SHG federations are borne by the promoting institution. Those federations that have been there for more than five years are able to meet some of their costs while younger federations are dependent on grant funds. The federations which are only financial intermediatiaries have become operationally self-sufficient within four to five years, whereas the federations that have financial and social intermediation face problems in becoming financially self-sufficient even after five years. The profitability of the federations depend on the increase in the quantum of the portfolio and its quality. Higher funds being available at federation level for on-lending to SHGs with improved internal capacity and systems would result in federations achieving sustainability. There is high positive correlation between profitability and asset quality (correlation 0.7).

SERVICES

TO

SHGS

The services provided by the federations to the SHGs, could be classified into financial, non-financial and other services. The financial services

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being provided comprise of only loans and compulsory savings without any interest being paid. Very few federations are offering insurance services and even in those cases the response is not good. Non-financial services like bank linkage to member SHGs, training and grading the performance of SHGs are provided to some extent. The banks are directly linked to SHGs, the federation facilitates to the link. The federation staff monitors the SHGs in the federations’ operating area. The work burden on staff is high, for this reason the staff is not able to monitor each SHG closely. The SHG grading system exists but not implemented properly for all SHGs. The federations are participating in various welfare and developmental activities of the government actively.

SHG PERFORMANCE The regularity of the monthly meetings in the SHG is reasonably good with moderate attendance and has good savings collection at 90 per cent and it was observed that this was common across the structure. However, the recovery rate of the loans given to SHG members was lowest portfolio at risk at 90 days high (at 30 per cent). But the significant factor is that there is more than 90 per cent repayment rate of the loan amounts taken from banks and other financial institutions. Most SHGs have more than 10 per cent of idle funds (average is 9 per cent) as bank balance. SHGs have adequate books of accounts, but need to improve regular maintenance and accuracy. The systems and the communication flow is the lag which needs to be addressed. The financial transactions are done during meetings. Norms exist, but enforcement is poor. The social performance of the SHGs is not laudable as there are lacunae everywhere in the participation of the members in social activities; adult literacy has to be given importance. It was noticed that there was an inverse relationship between SHG age and SHG performance: younger SHGs seem to perform better compared to the older SHGs. In fact, many of the APMAS studies reveal that SHGs that have been around for more than 7–8 years have poor performance and some even disintegrate.

CHALLENGES The challenges that federations face arise even at inception. When is the right time to federate SHGs? Should federations be initiated by Promoting Organization or by the SHGs themselves? Should the federation be


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registered or unregistered: under what legal form should it be registered? Another common concern is: at what stage and in what manner can the Promoting Organization initiate the process of withdrawal from the federation? What training should be imparted to the federation for establishing its legitimacy and credibility? Finally, it is important to identify an appropriate role for Promoting Organizations developing a federation to ensure its sustainability.

INTERNAL GOVERNANCE Lack of clarity of vision: Most of the Board members of the federations and the office-bearers are not fully aware of the vision and objectives of federation, even though they exhibit good commitment and interest to build the institution. How to ensure that the vision of the federation is driven by its members? Limited Board quality and ownership feeling: Accountability and transparency in most of federations is low because of weaknesses in governance and ownership feeling. The federation board does not feel true ownership of the federation. Most of these federations have sociallymotivated members who tend to put a priority on the institution’s achievement of social objectives. The board of directors of most such institutions are often ineffective in overseeing the institutions; frequently they are chosen because they are vocal and active with inadequate understanding of the financial management aspects of microfinance. The staff of the promoters has limited capacity to build the capacity of the Boards. Poor understanding on technical aspects of finance by the board: The federation Board largely depends on the promoting agency for fund management. Besides, the operating systems, procedures and practices and the availability of support services to track financial performance are minimal. Even the promoting agencies (NGO or government) come from a social service background. Thus, most federations suffer from low levels of managerial and technical understanding of banking and finance leading to adoption of inappropriate accounting practices, insufficient information system, inadequate internal control, and ineffective risk management. Tenure and time spending of the board: Too short a tenure of the federation Board is a problem in many federations studied, where officebearers (or board members) change every year. Giving Board members

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(or at least the president) sufficient financial compensation to permit them to spend more time on federation-related duties would also improve the effectiveness of governance. Second line leadership: Development is not being given emphasis, particularly at the federation level, and promoters seem more comfortable to work through staff who are articulate and are more comfortable in ‘understanding’ issues. This hampers knowledge development of the Board members, and also leads to staff domination at a later stage. It has been noticed that the federation staff, while competent and efficient, see themselves as being accountable to the promoting organization, rather than to the Board. Well-developed plans are not in place to develop capacities to take on governance. Legal compliance: A majority of the SHG federations are not registered under an appropriate legal form. In those federations that are registered, the byelaws are not formulated by them. They tend to adopt the model byelaws available which may not reflect the work of the federation. The Board has limited understanding of the byelaws of their own organization. Many federations which are registered as cooperatives do not get their accounts audited and do not present their annual reports and accounts to their members. Some formats are prepared by the SHPI staff, or the federation staff, but very rarely are these presented to the general body of the primary. Submitting the reports to the appropriate legal authority is also an issue.

RESOURCE Quality and trained human resource: Most of the existing federations do not have skilled human resource for local level accounting. Dropout rates of trained staff is very high. Staff review: In most of the federations, staff is recruited, trained and paid by the promoting agency in the initial period. Later, the persons become employees of the federation. So the staff are more committed to the promoting institution rather than to the federation. At the same time Board members keep rotating every year; invariably the Board members depends on the staff. So the federation boards find it difficult to review the staff performance. Board members find it difficult to hold staff accountable.


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Fund availability to SHGs at federation: At present the federations do not have much funds available per SHG. The funds are not at all sufficient to meet the members’ needs. Few federations have borrowings from financial institutions (FIs). Preparation of plans: It is observed that at the federation level the fund availability per SHG is not sufficient to meet member demand due to lack of long-term and short-term plans.

ASSET QUALITY Portfolio quality: The major challenge in the federations is systems to ensure good portfolio quality. Lending methodology: As the federations start seeing themselves more as financial institutions, direct lending to members and bypassing the SHG becomes the norm. Lending through SHGs ensures that SHGs continue to be the building block of the federation, and not lose relevance. Across federations, it is noted that SHG members have simultaneously taken more than one loan, and many a time differentiation is made between loans from SHG funds and loans from federation/bank funds. SHG leaders use their influence either to take a larger chunk of the SHG loan portfolio or take a number of loans simultaneously.

DESIGN

OF

SYSTEMS

AND

IMPLEMENTATION

Two-way communication: Instead of the current bottom-ups only data transfer, would help if SHG members are made more aware about federation activities and functioning, and this would help facilitate emergence of second-line leadership. It is noted that many a time there is a data transfer between the SHG and the federation. However, this data is not shared in a format that would help the Board analyze the information and understand the performance of the member SHGs. Systems and operating processes: Good systems and sound processes are the backbone to an efficient and well-performing federation. It is one that requires immediate attention. Quality and regularity of book-keeping and MIS are the two major areas which need to be improved. Though the records maintained at the SHG level are adequate, accuracy and timeliness in recording information is low. With federations handling multiple

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activities and geared to play a major role in the social and economic empowerment of women, having strong systems would help in building institutions with long-term sustainability. SHGs being the building block of the structure, a simple and user-friendly MIS would help in the federations to understand the status of SHGs better and work towards strengthening the SHGs by providing appropriate capacity-building inputs and interventions. Monitoring: In most of the federations, monitoring of the financial performance of member-SHGs is mentioned, but the systems for monitoring these are not reported. Some of the federations associated with the partners of CARE, CDF, SIFFS, do appear to be receiving regular financial statements from member-organizations, and these are consolidated and possibly reviewed at the federation and even SHPI level. For a federation to analyze financial statements of members and to advise them on the basis of such analysis, the member units need first to prepare such data, and present it to the Board/general body for consideration. When such data is presented to the federation, it can be taken as authenticated data—data which those responsible cannot deny at a later stage.

EFFICIENCY

AND

PROFITABILITY

Sustainability: The challenge associated with sustainability, currently being faced by SHGs, is two-fold; it refers to both financial and operational sustainability. In this context, financial sustainability is whether the SHG federation is being held afloat using grant money or on its own accord. Institutional sustainability is defined as the ability of the overall organization to continue to exist as a social institution. As mentioned above, one of the rationales behind creating SHG federations is that they are more likely to become sustainable than individual SHGs. Although this might be the case, the current state of federations across the country demonstrates low financial sustainability. There is enough evidence to show the contribution of SHG federations for the sustainability of SHGs, the issue of SHG federation sustainability is by far the most significant challenge in the future.

SERVICES

TO

CONSTI TUENTS SHGS

Limited services and products: Federations have limited financial and non-financial products. Federations should offer different savings,


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loan and insurance products and non-financial products and support services aimed at strengthening the performance of its members on a fee-for-service basis in order to sustain the federation. SHG member awareness: At every level, the furtherance of the interests of the primary member is central to the setting up of a tier, and the vibrancy of its member-organizations is vital to its own vibrancy. However, the more tiers there are within the federation, the more removed the individual members become from the core decision-making process. Also, each tier would add to cost and so should not be added if it does not add value. Therefore, one major challenge associated with the creation of SHG federations is to retain member awareness even as the structure of the institution grows from individual SHGs to federations. This challenge is especially difficult when the federation is located in far-off villages not often visited by members. If two-way communication is not practiced in the federation and systems are lax, it can be extremely difficult for individual members to gain an understanding of the federation and its roles and responsibilities.

EXTERNAL Commercialization of federation: Most federations do not adopt a commercial approach in pricing their products and services or consider their operations to be commercial. The widespread perception among microfinance providers appears to be that social considerations should predominate and overshadow profit concerns, because their operations target poor households. As a result, the interest rates charged by many federations is insufficient to cover their operating costs. Their pricing policies do not aim to protect the erosion of capital from inflation. Similarly, the emphasis on operational efficiency is inadequate. Therefore, many federations require continued subsidies. Conceptualization of federation: The strategy and vision of the SHPI has an important role to play in the process of institutional growth towards self reliance. A large number of SHPIs are in the process of adopting SHG federation model without focussing on the generic nature of the issues and concerns related to the SHG federations. Due to lack of information of existing structures, role of the promoting organizations and the institutional need of federations to become viable, self-sufficient and community-based institutions are yet to succeed in proper conceptualization of the federation.

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Legal and regulatory framework: A secured transactions framework is of great importance in enabling federations to move toward commercialization by reducing their credit risks and costs of lending. In nine Indian states there is a favourable cooperative Act that gives full autonomy to members to establish their own byelaws and business rules. In those states, the SHG federations may adopt the cooperative legal form. In other states, federation registration may be preferably under the Societies Act. The Companies Act, the federal law governing corporate entities, has too many statutory requirements that make it difficult to incorporate SHG federations under it. No framework for self-regulation: Self-regulation is one alternative to government regulation that many promoters (or federation) practitioners are considering. To date, there is no specific and effective self-regulation to protect member funds. Target-oriented approach: Though the federation concept is fairly nascent, there are already a large number of federations in India. In most of the poverty reduction projects, SHG federations are being promoted. Building a sustainable federation through a participatory approach will be time-consuming and expensive. Building the institutions of the poor also requires specialized skills. However, most of the federation promoters are not able to follow the process and have the staff with necessary skills and the mindset. As a result, the federations are promoted in a target-oriented manner. Such an approach undermines the sustainability of the federation. Furthermore, the federations are promoted without strengthening member-SHGs. This results in weak federations. Capture by vested interests: SHGs of 10–20 women are too small and informal for vested interests to capture. However, SHG federations with membership ranging from 100 to 1,00,000 or even more would be attractive to vested interests. There is scope for the better off within the federation to use the organization to serve their own agenda and not work in the interest of the majority of members. Another possibility is the staff that works for the federations could manage these federations as its own organization. In theory it is an organization owned, managed and controlled by members. However, in practice it will be the chief executive of the federation who makes all the decisions and manages it as per her/his wishes. Another distinct possibility is the political capture. As these federations manage large volume of funds and become a significant player in the


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local economy, politicians will either try to have their own persons in leadership and management roles or would use the federation for political gains. Capacity of promotional agencies: Limited organizational capacity of promoter organizations is a major constraint in federating SHGs. Promotion of federations requires institution-building skills beyond what is needed for the promotion of SHGs. Although NGOs have been the primary agencies involved in promoting SHGs and SHG federations, there are very few NGOs that have the skills to promote federations. Of late, many government agencies have also become involved in forming SHGs and their federations though they lack the grassroots organizing skills needed for this. Some governments have sought to overcome this limitation by creating special agencies such as Society for Elimination of Rural Poverty (SERP). Cost of promotion: Promoting SHG federations is a costly activity for a promoting institution to undertake. The two types of costs involved in promoting federations are promotional costs and operational costs. While estimating the cost of group formation is difficult and depends on the quality and quantity of support provided, the Ministry of Rural Development has established a norm of Rs 10,000 per SHG. If there is an average of 250 SHGs in one federation, the cost is an astonishingly high Rs 2.5 million. In addition to the SHG promotion costs, there are considerable costs incurred on promoting federations. It may cost Rs 2–5 lakh to promote a smaller federation and Rs 10–25 lakh to promote a larger federation. Considering PIs estimate it takes anywhere from 5–10 years for a federation to become sustainable, promoting institutions must incur tremendous costs simply to promote one federation. The challenge of decentralization: The FWWB study on federations finds that to enable greater member participation most of the formal/ informal federations have three-tier structures, that is, the SHG, the cluster and the federation. As the federation grows in size and complexity, maintaining member participation becomes one of its biggest challenges. Appropriate training needs to be provided by the promoting institution to ensure that members remain the owners, users and managers of the federation and the federations power and resources do not get appropriated by a few. As and when the organization grows in size, there is a possibility of creation of vested interest and power base in one place. It should be ensured that accumulation of power at the top level of the federation does not happen.

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Institutional sustainability: While the management skills of federation members and leaders in changing environments was seen as important, their ability to contribute effectively was limited due to their low literacy levels and limited exposure to the formal sector and formal systems.

RECOMMENDATIONS FOR PRIMARY STAKEHOLDERS

While networking has distinct advantages, it also has several disadvantages. It is absolutely critical that these federations are built based on the felt need of the members through a processoriented approach. The promoters need to have long-term vision on developing sustainable institutions of the poor. It is essential for the SHG federation promoters to ensure that the staff has the required capacity and the appropriate mindset to build sustainable institutions for the poor. While an SHG is an informal group, an SHG federation needs to have body corporate status so it must register under an appropriate legal form. In those states that have a liberal cooperative act like the APMACS Act, the federations could register under that Act. Federations are registered under the various Acts but are not complying with legal obligations. The federations should work towards complying with all legal obligations and requirements in time. In particular, all federations, registered or unregistered, must ensure annual audit of their accounts by a qualified auditor, prepare their annual report and conduct annual general body meetings ensuring at least 50 per cent of their members’ participation. The AGM could be conducted as a business and social event to celebrate their success and to show their collective strength. Federation meetings are a platform to discuss and review the progress and performance of institutions. But most of the federations’ agenda is confined to financial transactions. The SHPI has to facilitate and ensure the meeting agenda covers the overall performance of federations. Specifically, SHG federations must routinely review the performance of member-organizations for initiating appropriate action as may be necessary. Most of the Board members of the federation and the office bearers are not aware of their roles and responsibilities but exhibit good commitment and interest in building their own institution.


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Awareness-building exercises should be done for members to create awareness about the institution, roles and responsibilities of the Board and functions to be carried out by the federation. Exposure visits to well-run federations would be an excellent way of learning. SHGs may federate at the apex level (more than two tiers) to form an independent but interdependent federation, to play the role of a catalyst to bring about social change, functions like an NGO/PIA (Project Implementing Agency) and focus on strengthening the primary federation and SHGs. This would help the social agenda not getting mixed with the financial activity, and thereby not get diluted. Such a federation would also help in creation of a pressure group of members to ensure proper functioning of the primary federations. This federation may not be a viable entity, and may depend on grant funds for its operations, while also raising resources on a fee-for-service basis from the primaries (i.e., primary federation and SHGs). The federation has only credit products with limited non-financial products. The federation needs to develop tailored products addressing members’ needs and offer support services aimed at strengthening the performance of its members on a fee-for-service basis in order to sustain the federation. With the liberalization of the insurance sector, the SHG federations have a unique opportunity to play the role of an agent in ensuring appropriate insurance services for their members. SHG federations could negotiate with micro-insurance service providers to ensure the best possible products. SHG federations have multiple objectives and perform multiple functions. While in the initial stages this may be appropriate, to ensure sustainability there may be a need to establish different institutions for different purposes. For example, to undertake marketing activities, an SHG federation could promote a commodity cooperative. Similarly, to pursue a social agenda, there may be a need for promoting a separate organization. The same women could be in different organizations with different objectives. The changing complexities of member management, human resource development, financial management have necessitated availability of professional assistance to SHG federations through adequately trained and professional paid staff on appropriate terms working under the general guidance of a democratically elected body. It is suggested that the promoters and SHG federations develop some of

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their women members to take on the role of federation staff in the long run. This would reduce costs and dependence on external staff. SHG federations could also access consultancy services of professionals in line with their needs of augmenting internal capacity. At present the federations have limited funds available per SHG to meet the members’ needs. The federation should develop linkage with banks and other Financial Institutions (FIs) to meet credit demand of the members, to have diversified sources of funds and enable SHGs in the federation to improve their operational and financial self sufficiency. For federations to attract mainstream funds, they must demonstrate excellence in governance, systems and sustainability. NABARD may formulate appropriate guidelines to facilitate SHG federation-bank linkage. Bankers will have to be trained on the concept of the federation and the process to be followed in appraising the SHG federations. Once the SHG federation is bank linked, the member SHGs will not be eligible for bank linkage as it may lead to duplication of effort, making monitoring difficult. To access commercial funds from banks and other financial institutions, SHG federations must get themselves rated by a credible rating agency. The rating will give an objective assessment of the strengths and weaknesses of the SHG federation. This could form the basis for improving institutional capacity and strengthening the systems and processes. APMAS has developed SHG federation rating system and has done rating of a large number of federations. Recovery performance at federation and SHG levels should be improved through regular monitoring and follow-up by strengthening the default management system. The findings from APMAS ratings and grading of SHGs suggests that there is high level of default from members to SHGs if the loans are taken from their own savings. Low repayment of loans from members’ savings would eventually affect the repayment of SHGs to banks and also to the federations. There must be a tracking system in the SHG federations to monitor the repayment of loans given from members’ savings. This would serve as a sensitive indicator to show the health of the SHGs. The grading system and the monitoring of the SHGs have to be practised from time to time for enabling good disbursement and effective recovery rate.


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FOR SECONDARY STAKEHOLDERS

In nine Indian states, there is a liberal cooperative act that is most suited for SHG federations. A similar act may be necessary in other states for SHG federations to emerge as intergenerational organizations having body corporate status. Improving the legal and regulatory framework to facilitate SHG federations and building their capacity so that they can be scaled up. There is also a need for a Self Regulatory Organization (SRO) to regulate and supervise the SHG federations. Building a large number of institutions for the poor requires adequate availability of professionals with adequate knowledge, skills, competencies and experience. The available human resources for facilitating emergence of SHG federations in the form of clusters, village organizations and higher level federations is limited. There is a need to make significant investments in developing professionals and para-professionals to escort the emerging SHG federations. Capacity-building, including on-the-job support and exposure visits, needs to be provided to the staff of the federations and members of the federations on an ongoing basis to enhance the function of the federations. Across the organizations, there is a scope to improve the accounting, information system and internal controls, develop and establish system. For financial institutions to run efficiently and effectively, accurate and up-to-date accounting and reporting is necessary. The capacities of the Board of Directors of federations need to be built so that they can interpret financial statements such as annual balance sheet, receipts and payments and income and expenditure statements. There is a need for suitable software to meet the MIS needs of SHG federations. The SHPI needs to develop a 3–5-year business development plan with the involvement of federation board and staff which would include vision building and articulated withdrawal strategy. Develop formal policies and modules related to Credit, Human Resource, Accounting, Training, Organizational Systems and Internal Control. A participatory monitoring system needs to be developed for the staff. SHG federations also require a self-assessment tool to improve performance. Building up the infrastructure required to support better access, including infrastructure to support small value payments/money

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transfer systems and the credit information infrastructure that can help reduce lending costs associated with information asymmetries and create valuable ‘reputation collateral’ to members and small entrepreneurs that lack significant physical assets. SHG federations require services from a variety of stakeholders. They need to have linkages with government, banks, service providers and private sector. The capacities of the federations need to be built to establish and manage partnerships with a variety of players to further their objectives. This would be a major task for the promoting organizations. Setting of minimum performance standards and benchmarks as per industry norms is necessary.

In conclusion, SHG federations have been evolved as a model that promotes sustainability of the SHGs and provides the much-needed institutional base for women to realize their dreams and aspirations. The SHG federation model has achieved significant scale and considerable acceptance among all the major stakeholders. There is great potential for the SHG federation model to address issues of poverty. In many ways, the model is unique—the women are the owners, managers, users and beneficiaries. This is here to stay. While there are many benefits of the SHG federation model, it has several limitations. The promoters need to be aware of both. Within the SHG federation model there are several variations driven by local considerations and the strategy of the promoting organization. APMAS as a resource organization is deeply committed to support the sustainability of the SHG federations. What makes the task almost impossible is the large number of institutions that need to be strengthened. The present estimates suggest that there are more than 6,000 SHG federations. Considering 30 per cent of India’s poor to be covered under the SHG programme, there will be more than 50,00,000 SHGs in the country. If there is one SHG federation for every 25 SHGs, the number of SHG federations that may develop over the next 5–10 years would be 200,000. Developing these into strong, vibrant and sustainable organizations serving their members is a mammoth task for all the major stakeholders.


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REFERENCES APMAS. ‘Promotion of Vibrant and Sustainable Federations of SHGs’, unpublished report. APMAS. Basu, Priya. 2004. ‘India Scaling-up Access to Finance for India’s Rural Poor’. World Bank. CARE. 2000. ‘State Level Convention on Federations: A Report’. Devaprakash, R. 2005. ‘Balancing Quality and Quantity in SHGs in India’, IBA Bulletin. Fernandez, A.P. 2001. ‘Putting Institutions First-Even in Micro Finance’. MYRADA. Friends of Women’s World Banking. 1998. India’s Emerging Federations of Women’s Savings and Credit Groups. FWWB: India. Harper, Malcolm. 2002. ‘Do We Really Need SHG Federations?’ APMAS. Menon, G.A. and S. Gupta. 1999. ‘From Margin to Mainstream: Building Stakes in the SHG-Bank Linkage Programme’. Swayam Shikshan Prayog. MYRADA. 2001. ‘The MYRADA Experience: A Manual for Capacity Building of SelfHelp Affinity Groups’. Bangalore: MYRADA. Nair, Ajai. 2005. ‘Sustainability of Microfinance Self Help Groups in India: Would Federating Help?’ Washington, DC: World Bank. Rajagopalan, Sashi. 2003. ‘Designing Secondary Institutions of Self Help Groups’, discussion paper. APMAS. Rajasekhar, D. 1994. ‘Savings and Credit Systems of the Poor: Some Non-Governmental Organization (NGO): NOVIB and HIVOS’. Reddy, C. S. and L.B. Prakash. 2003. ‘Status of SHG Federations in Andhra Pradesh’, APMAS assessment findings. APMAS. Sa-Dhan. 2004. ‘SHG Federations in India—Emerging Structures and Practices’. Sa-Dhan. —————. 2005. ‘SHG Federations—Emergence, Roles and Prospects—A Discussion paper series. Satyamuri, V. and S. Haokip. 2002. ‘Microfinance: Concept and Delivery Channels in India.’ All India Association for Micro Enterprise Development (AIAMED). Tamil Nadu Corporation for Development of Women Ltd . 1999. ‘A Guide to SHG Federations’. TNCDW. Tankha, Ajay. 2002. ‘Self Help Groups as Financial Intermediaries in India: Cost of Promotion, Sustainability and Impact.’ Sa-Dhan.

11 Sustainability of SHGs N. SRINIVASAN

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icrofinance has come a long way since its beginnings about 13 years back. What started off as a small pilot experiment in the early 1990s has transformed itself into a large movement. It is no more, a backyard venture of a few committed institutions but a mainstream movement, wherein numerous stakeholders are playing their part. The pace and quality of its growth has made the government, both in the states and at the Centre, sit up and take notice. This in itself may not be an unmixed blessing, but it does bring in sustained support to the movement. In fact, the Central and state governments have made this programme a cornerstone of their approaches to deliver development services and products to the poor and marginalized sections of the population. From less than 500 groups to more than 1.6 million groups linked to the banking system in the last 13 years, the growth has been phenomenal. This is remarkable by any standards. The furious pace of growth does bring in its wake a few concerns and also generates some misgivings in the minds of those who look at the large SHG numbers with considerable alarm. The question that is being asked with increasing frequency in recent times is whether this mode of providing financial services to people of small means is sustainable. The question uppermost in the minds of people is whether microfinance in its present form is getting fatigued. Has the programme been loaded with extraordinary expectations? Is it likely to suffer from a failure of expectations of a tall order when the programme shifts from access to small finance to enterprise finance.

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Sustainability means several things to different people. One concept of sustainability is the continued existence and functioning of groups providing unfettered access to financial services for their members, facilitating access to higher level financial institutions with low costs and high recovery rates. There are two aspects to this; one is the affordability of interest costs to the members of the groups and the second, easy access to services. At the group level it means the ability to maintain integrity of the group without breaking up as it climbs through to higher order financial services. Another factor is the policy environment supporting and incentivizing the microfinance effort at all levels. The government and the central bank have a key role to play in this. Availability of large scale finance and willingness of the banking system to take significant exposure to microfinance clients is an area of concern. The network capacities of the financial system should be in a position to meet the demand for services from microfinance clients; and this has to be done with profits. Availability of quality manpower in banks, NGOs, government and other support levels is a critical issue in sustainability, especially at a time when the programme is being scaled up.

FINANCIAL SUSTAINABILITY The long-term availability of financial backing for the programme is an issue in sustainability. Financial backing is necessary in two different forms. The first is the soft promotion funds that are needed for buildingcapacities of people to organize themselves into groups and become aware of the discipline and dynamics needed to make the group function in a desirable manner. Further, for achievement of financial literacy by the group, there has to be handholding, which requires promotional funds. Non-government organizations, voluntary agencies, financial institutions, and even government functionaries have taken on the task of forming groups nurturing them, and handling the process of stabilization of the group into a financially aware and adept entity. The soft funds for these purposes have come from donors, governments and mainstream financial institutions like NABARD. As the number of groups increases exponentially, funds of a large order would be required to carry out this promotional work. Further, banks have been extending loans to the self help groups (SHGs). So far, the cumulative finance made available by the banks to these groups is of the order of Rs 6898 million. This however, translates to a very low

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per family loan of Rs 3,044. If the per family average loan size increases to Rs 10,000, the additional funds required by the existing groups would be of the order of Rs 15,800 million. Whether financial resources of this order would be committed by banks to the sector is a difficult question to answer. Moreover, in tune with long-term strategies, if two-thirds of the rural poor in the country are covered by SHGs, the overall requirements of finance would be very high. The sustainability of access to financial services for all the groups would then depend on the availability of funds from the banking system to this large segment.

ORGANIZATIONAL SUSTAINABILITY The organizational sustainability of SHGs depends on some key factors. First and foremost is the objective of group formation. Where groups are formed mostly for taking advantage of external benefits such as subsidy or other support, one finds they have a short lifespan. The second is the nurturing and training1 provided to SHGs. Well trained groups that are clear about their role, rules and functions, are able to sustain themselves over time. The third is the availability of need-based services, especially group maintenance services, such as maintenance of records, auditing of books, conflict resolution, etc., that help keep the group active in the long run. Regarding the last aspect, there are some model-specific issues. While in some models, bankers and NGOs respectively are acting as financiers, they are expected to have a long-term relationship with the groups and provide/arrange for group maintenance services. However, where the NGOs are acting as facilitators, they are expected to withdraw from the groups after a period of time. Organizational sustainability of such groups is emerging as an area of concern under this model of linkage. Apprehensions have been expressed whether the groups could ever be on their own managing their affairs once NGOs withdraw from the scene. To address the problem, some NGOs have encouraged formation of federations of SHGs in a cluster of villages. The broad objectives of federating the groups are:

1

To create a structure which will act as a financial intermediary between banks and other formal institutions on the one hand and groups

The training here includes class room training, on the job training and perspective building during group meetings.


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on the other, as bankers may find it difficult to deal with a large number of SHGs. This financial intermediation aspect is optional and some of the federations prefer not to act as financial intermediaries. To build peer pressure: NGOs increasingly find that the peer pressure within a group, which is a substitute for traditional collateral, is ineffective in old groups. Hence they create new peers in terms of other groups working in a federation. To enable the eventual withdrawal of NGOs from the groups by taking over the essential functions of the NGO in group nurturing such as monitoring of groups, audit of accounts, and so on.

On the financial intermediation role of the federations, there are more issues and questions than clear answers even after 10 years of federating experience in India. This issue is beyond the scope of the paper. However, there is a very strong demand from member-SHGs, bankers and other major stakeholders for the group maintenance role of federations, that is, for the non-financial functions. SHGs require maintenance services such as auditing, training and trouble-shooting that cannot be procured from the market by individual SHGs. Through better monitoring and externalizing the peer pressure at federation level, the federations can reduce default levels within SHGs. Some NGOs like MYRADA are promoting community resource centres which provide the group maintenance services such as bookkeeping, auditing, training and linkages with government programmes. The emerging need is for service providers for the group maintenance functions. NGOs are keen to promote community-based organizations such as community resource centres and federations. However, looking to the vast number of SHGs and the criticality of some of these functions, more service providers are needed. These intermediate organizations are set to become increasingly critical in enhancing the sustainability of SHGs.

SUSTAINABILITY OF NETWORK CAPACITY OF THE FINANCIAL SYSTEM The Reserve Bank of India, with its total support and endorsement of this programme, has created a policy environment that would ensure growth of SHG loan portfolio of banks. The keen interest of the Central government adds to the long-term stability of the programme. The policy

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environment is positive which induces greater participation of banks in the programme, improves sustainability and sets the ground for orderly expansion. Banks today have done a tremendous job of linking 2.24 million groups. By end of the current fiscal, this might increase to more than 2.8 million groups. The capacity of the banking system for linking more and more SHGs is not unlimited. Network capacity in the rural branches has not been expanding over the last five years. Staff strength, already reduced through a voluntary retirement scheme, is stretched to the limit with higher demands of productivity. The banks’ ability to service twice the number of groups that are currently in existence by the present network of branches is suspect. More than 4,800 entities are participating in the programme handling the tasks of promotion, nurturance and handholding. If the objective is to cover a larger proportion of rural poor, it would entail doubling the number of groups linked to the banking system. For this new NGOs and other organizations would need to be brought in as the task is an enormous one. This calls for two different sets of challenges. One is to find a large number of committed people to work in this sector in the rural areas. The other is to find training institutions and capacity-building organizations that would take up the job of moulding the manpower in the desired direction.

OPERATIONAL SUSTAINABILITY OF SHGs AND BANKS INVOLVED IN THE LINKAGE Financial sustainability of the SHG-bank banking programme has to be viewed in totality and at the level of each organization involved. The key policy issues centre around the profitability of SHG-bank linkage to the banks as the banks will be interested in lending to SHGs in the long run only if they can make a profit out of it. The methodology for measuring the profitability of linkage banking is an issue. A number of studies have yielded different conclusions. A study conducted by M-CRIL in five RRBs estimates that the cost-covering rate of interest for linkage banking is in the region of 20–22 per cent. As many banks are charging 10–12 per cent for SHG lending, the banks are incurring losses. However, another comprehensive study by Hans Dieter Seibel finds that the banks are making profits out of SHG lending as NPAs are negligible. Seibel assumes that the time of bankers carries zero opportunity cost as there is idle capacity (Seibel and Dave, 2002).


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On pricing of SHG loans, there have been opinions that the groups can afford to pay high rates of interest as access to credit is their concern and not interest rates. The sustainability of the credit at borrower level depends on whether the livelihood activity produces an income that is more than the interest payable on the loan. While in the short run borrowers may be willing to pay high rates of interest out of desperation or the expectation of a windfall gain, over the long term they would not be able to do so. There are not many livelihoods in the margin that the poor pursue that produce extraordinary returns. Sustainability of the programme thus would hinge upon the ability of financial institutions to charge realistic rates of interest and of the groups in turn to fix reasonable terms for loans to their members. Banks’ preference for the SHG-bank linkage model can be gauged from the fact that they are promoting groups of their own at their cost. They are continually expanding their SHG portfolio and are also conducting tailormade training programmes for their staff and SHGs. The share of this model in which banks form and link groups is about 20 per cent of the groups linked. The share of bank-promoted groups in the overall linkage figures has been steadily increasing over the years. Some experts also see the present macroeconomic environment as being exceptional. Interest rates are the lowest in years, which makes other opportunities less attractive. Many banks have excess liquidity and capacity so that even a labour-intensive lending methodology with a low return becomes attractive (Bhattacharjee and Staschen, 2004). However, many banks are looking at SHG banking with enthusiasm as with negligible NPAs, it is a safe lending methodology. Transaction and risk costs are considered to be low under this model. Many bankers report that SHGs have helped in recovering past arrears from other customers in the villages.2 Some of the commercial banks see lending to SHGs as customer development for future business, as they expect three to four members in each group to avail larger loans and become individual customers of banks. However, the group formation costs are at present not borne by the banks but provided by donors and governments under projects and programmes implemented by NGOs and other agencies. There is a concern that the SHGs and the banks that benefit out of microfinance 2 The Chairman of Chandrapur Gadchiroli Grameen bank has advised the branches to bring in defaulter member families into SHG mode so that the repayment ethics are built in them, the past arrears are recovered and they become better customers of the bank.

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services, should bear the cost of group promotion. Some commercial banks are offering incentives to NGOs for linking groups to their branches. For example, State Bank of India provides Rs 500 to the NGO (or other promoter) that opens the SHG account with SBI. Canara Bank has a scheme by which the bank reimburses the costs of promotion of every group linked with it. This is a clear sign that banks view linkage banking as a profitable business. However, how far the group development costs can be fully absorbed by the banks is a matter for further study. While commercial banks may be willing to bear the costs, RRBs and DCCBs may not be able to absorb costs of group formation in the immediate future.

QUALITY OF LINKAGE The quality of linkages and some of the practices that are followed need improvement. The improvement of quality would make some parts of the SHG programme sustainable. Groups are currently compelled to deposit their internal savings with banks. There is hardly any new product development suitable to the savings needs of the women. Further, the time taken for processing of initial loan applications of SHGs is quite long and there is scope for reducing the same. There is also a tendency among branch managers to ration credit among the groups rather than meet credit needs after a proper appraisal. Individuals/households being defaulters is an issue that is hampering credit flow to SHGs. Frequent transfer of branch staff also brings some uncertainties for the groups which look for a familiar face to deal with. The new branch staff needs to become oriented to deal with informal groups in their loaning operations and also achieve familiarity in the local area. Each transfer of a branch manager could slow down the linkage process as well affect the quality of the linkage if proper follow-up or personal relations are not maintained.

POST-LINKAGE FOLLOW-UP There are concerns expressed by bankers about the continuous monitoring needed to maintain the quality of groups. The workload on branches reflected by the ‘per branch number of groups’ is increasing and in some branches more than 200 groups are linked. Bankers feel a distinct need for ensuring quality amd external audit of books of accounts. Postlinkage monitoring of groups is a critical requirement. Early warning systems are needed to ensure the comfort level of bankers is kept high.


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FINANCIAL SERVICES Many SHGs are yet to graduate to offering voluntary savings facilities to the members. Moreover, many groups do not allow withdrawal of savings by members. Loss of liquidity in their own savings proves to be a disincentive for clients who would like to save any surplus cash they have with the group. While the savings and credit needs of members have been satisfied to some extent, formal insurance services to the poor and low-income households are inadequate. Insurance, especially life and health products, are required by the low income groups with which the SHG programme is closely associated. Distribution of insurance products over a large number of people with small cover requirements could be best done through the SHPIs and SHGs themselves. There is a potential for a linkage insurance programme on lines similar to the linkage banking programme. This would make the bonding of the groups better and improve the financial content of the programme.

RECOMMENDATIONS While the programme has grown rapidly, further growth would take it to another orbit in rural finance. Sustainability at those scales of operation would be feasible if the stakeholders approach the programme with realism and sensitivity. There are a few issues that need to be examined and acted upon in future.

LINKAGE

WITH

BANKS

This programme has many advantages for banks like high recovery performance, reduction in transactions costs for banks and clients, market interest rates, reasonable margin and opportunity to the banks for developing quality future clients. In spite of several advantages, some banks are yet to appreciate this as a business opportunity. Some policy-level issues which need to be addressed are:

Banks should develop ownership of the SHG-linkage programme. A corporate vision for the programme should be developed so as to give a clear direction and purpose that would be bank-wide.

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The increasing size of loans to groups calls for a close look at collateral requirements for large-sized loans to SHGs. Federations of SHGs that seek loans on behalf of the member-SHGs are dealing in large size loans. Here too the issue of collateral has to be examined. MIS to be strengthened in order for the financing bank to get periodic information on selected indicators on the health of the SHGs they have financed which can serve as an early warning system. At present, information to amount of savings with the groups, usage of loans, dormancy in groups, impact of government-sponsored programmes on the SHGs, is not captured at higher levels of banks as also policy level. In view of the large size of the programme, growing larger each day, it is necessary to design and implement a comprehensive MIS solution.

BUSINESS DEVELOPMENT SERVICES There have been calls on the NGOs and other stakeholders to provide livelihood skills and linkages to SHGs so that the members could take up remunerative economic activities and truly improve their quality of life. But such a programme design, though comprehensive in terms of dealing with the problems of the poor, goes far beyond financial intermediation. A combination of interventions such as skills training, marketing, networking of input supply and output procurement entities, finance, etc, are involved. The road to be travelled is long-beyond financial services to business development, escort services and stabilization of livelihoods. Whether banks would be willing to travel—and if they do not want to, what are the alternatives—are questions that have to be answered sometime in the near future.

SUPERVISION

AND

REGULATION

The rapid expansion of this programme and the large numbers give rise to concerns about the continued stability and integrity of the movement. A modest failure in any part of the country could have a snowballing effect. Hence there is a need for effective regulation. In small groups where each member knows every other person closely, savings do not appear to be in any danger. But very often savings are entrusted to the NGO or the federation and such other intermediaries based on a continuing relationship of trust. It is here that the need for regulation is felt.


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The Reserve Bank of India should look into the supervision and regulation aspects of the sector in the interests of millions of the poor who access financial services through this mode. It is necessary that a flexible and effective mechanism of supervision which is not top-down but at the same time produces sufficient quality information is introduced at the earliest.

POLITICAL INTERFERENCE A mass-based programme which has managed to bring in large numbers with potential for massive expansion could attract political attention. While the programme has so far managed to steer clear of political interests, the future challenge is to ward off unwanted attention, which would reduce the programme to a votebank with all attendant ills of favoured treatment and subsidies. Several key issues are being raised on the financial intermediation role of federations on the basis of studies and discussions. At federation level, whether it is the individuals or the groups who should be members of the federations is a serious issue as the furtherance of the interests of the primary member is central to the setting up of the additional tier. While the objectives of setting up a federation are varied, the protection of member savings is a key concern that emerges. In some cases, the objectives and activities of the federations and member-SHGs are conflicting and competing. The federation undermines the services provided by the primaries—lending to members is one such area. Illiteracy and insufficient organizational experience constrain the governance capacity and effective performance of oversight functions of Board members of the federation. Many federations are run and managed by promoter organizations and the Boards comprising grassroot leaders do not effectively oversee the affairs of the federation and give a clear sense of direction. The finance, accounts and MIS functions are weak even in well-established federations. Though there is a general claim that the repayment rates in the SHG structure are fairly high, some of the study reports on SHGs and federations indicate that default is a serious issue and is not being reported and monitored adequately. Operating cost ratio in the federations is high—ranging from 11 to 44 per cent and total cost ratio ranges from 15 to 56 per cent. One of the most empowering aspects of SHGs is the way it allows members to pick and choose between financial service providers. Federations can demand loyalty, the price of which is essentially a loss of freedom. Overall, there are more issues and concerns on

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the financial intermediation role of the federations with no clear answers even after 10 years of federating experience in India. However, there is a very strong demand from member-SHGs, bankers and other major stakeholders that federations should play a major role in group maintenance and empowerment. There is space for non-financial functions and a federation is best suited to provide services such as accounting, auditing, capacity-building, literacy, social awareness and business development/escort services. Through better monitoring and externalizing the peer pressure at federation level, the federations can reduce default levels within SHG. Other services like microinsurance can be facilitated. Federations can enable SHGs achieve empowerment beyond that achieved by SHGs, being small organizations. This is rendered possible through better access to information, expertise and ability to move a larger body of people for a public/social cause.

CONCLUSION As a financial services delivery model, the Self Help Group approach is unique; it has emerged as a clearly superior model compared to the Grameen bank or MFI models. By emphasizing savings before credit it takes care of both the legs of basic financial services. People’s participation is fully ensured with autonomy for the groups of poor in credit decisions. Linkage to bank branches enables groups to access loans as also keep their savings safely. The groups have been able to build a corpus through their financial intermediation (arising from the margins between costs of resources and lending rates). The members while paying high interest rates (still lower than moneylenders’ rates) do not lose the same, as it helps the corpus of funds to grow. The banks are far more comfortable in financing the poor through this mode as they find the risk and transaction costs to be low. This would guarantee their sustained interest in the programme. The sustainability of the programme from the point of view of availability of resources is clearly established. The Indian experience has demonstrated that microfinance can be a participatory exercise and the banking system can deliver it sustainably. Instead of creating new institutions to deliver microfinance, it has enabled linkage of groups of poor with the existing banking infrastructure. Though there are emerging issues which need to be addressed to make it sustainable in the long run, it shows that by involving voluntary organizations in


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social mobilization and creating an enabling policy environment, which offers flexibility, autonomy and the space for innovations, microfinance can achieve a vast scale and can become a national movement.

REFERENCES Bhattacharjee, B.R. and Stefan Staschen. 2004. Emerging Scenarios for Microfinance Regulation In India. Eschborn: GTZ. Fernandez, Al, Vijay Mahajan and Aoditi Mehta. 2003. ‘Review of Developments and Issues and Strategy for Future Intervention by IFAD’, paper submitted to IFAD, India. Gupta S.C. 2005. ‘Impact of Rural and Social Banking’, in special issue on Consolidation in Banking Industry: Mergers and Acquisitions, 27(1). Mumbai: Indian Bankers Association. IFAD. 2001. Republic of India, Country Specific Strategy Paper. Rome: IFAD. Mahila Arthik Vikas Mahamandal Limited. 2002. ‘Report on the Interstate Workshop on Federating SHGs’. Mumbai: MAVIM. —————. 2003. ‘Saving Grace, issue 7. Microcredit Innovations Department. Mumbai: NABARD. NABARD. 2005. ‘Progress of SHG Bank Linkage in India’. Mumbai: NABARD. Rajagopalan, Sashi. 2003. ‘Designing Secondary Institutions of Self Help Groups’, discussion paper at national workshop on SHG federations. Hyderabad: APMAS. Reserve Bank of India. 2005. ‘Advisory Committee on Flow of Credit to Agriculture and Related Activities from the Banking System (Vyas Committee) Executive Summary’. Mumbai: RBI Bulletin. Sa-Dhan. 2004. SHG Federations in India–Emerging Structures and Practices. New Delhi: Sa-Dhan Microfinance Resource Centre. Seibel, Hans Dieter and Harishkumar R. Dave. 2002. Commercial Aspects of Self Help Group Bank Linkage Programme in India. Mumbai: NABARD. State Bank of India. July–September 2004. Elephanta, 36(2). Mumbai: SBI. Srinivasan, Girija. 2002. ‘Linking of Self Help Groups with Banks in India’, Small Enterprise Development Journal. Thekkekara, T.F. 2004. ‘Swarnajayanti Gram Swarozgar Yojana—A Critical Review’, unpublished. UNDP. ‘Donor Guidelines for Microfinance International Best Practice’. Available online at www.undp.org/sum/sum_reports/donor_guidelines.html

12 Impact of SGSY on SHG: Bank Linkages THANKSY FRANCIS THEKKEKARA

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he SGSY was launched in 1999 as a successor to the IRDP, which was perceived to have failed in bringing about poverty alleviation in the country. The SGSY drew on the successful experiments of self help groups (SHGs) in Bangladesh through the Grameen model and the IFADassisted SHG programmes launched in Tamil Nadu and Maharashtra. This chapter critically examines the working of the SGSY with special reference to Maharashtra. It uses the Comptroller and Auditor General’s report of the working of the programme for the three-year period from 1999 to 2002 as a base. A comparison with more successful programmes— NABARD SHG-bank linkage programme and the Maharashtra Rural Credit Programme—is also drawn. The chapter points out that subsidy has made the programme less effective. It also shows that the fund flow to promoting agencies has to be more smooth if the programme is to be successful. The paper suggests that the programme be delinked from the BPL list and that subsidies be withdrawn. The selection of the poor must be made by people-friendly Participatory Rural Appraisal (PRA) techniques. Banks must adopt a more pro-active role in the provision of credit to SHGs and although the RBI provides that non-willful defaulters of up to Rs 5,000 under earlier programmes may be provided loans under the SGSY, the RBI must also review its guidelines regarding prohibiting the grant of loans to BPL members who were defaulters under earlier programmes in excess of this amount. The term ‘defaulter’ must not cover defaults by

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family members of the SHG member, since women would be denied loans due to earlier defaults by their husbands, fathers or fathers-in-law or other family members. Women’s need for credit must be recognized as a separate and legitimate right. Women must be acknowledged as distinct entities from their families, responsible and mature in their own right to participate in financial transactions, without being tagged as part of their families. The present policy or its interpretation by banks is gender-biased and needs to be amended in order to make it sensitive to women’s need for credit.

INTRODUCTION The concurrent evaluation of the Swarnajayanti Grameen Swarozgar Yojana (SGSY) by the Comptroller and Auditor General of India (C&AG) for the period 1999–2002 has concluded that the SGSY has not visibly demonstrated superiority in results over the Integrated Rural Development Programme (IRDP), which it succeeded as a rural poverty alleviation programme. The SGSY was intended to be an improvement on earlier efforts in poverty alleviation and to escape the pitfalls encountered under the IRDP. Thus the SGSY was conceived as a holistic programme of microenterprise development, covering all aspects of self-employment, by means of organizing the poor into SHGs, providing for their capacitybuilding, planning of cluster of activities, infrastructure build up, technology, credit and marketing. (SGSY Guidelines, Government of India, Ministry of Rural Development.) This chapter intends to examine why SGSY has not yet lived up to expectations, considering the undoubted success of other SHG programmes in the country. The following issues will be specifically examined:

The role of subsidy in the programme and how it affects bank linkage. Training of groups. Flaws in the implementation strategy. Implications for policy changes in the programme implementation in view of the issues examined above.

In order to do so, the data from the CAG’s evaluation will be used to understand the basic failure of bank linkages, targeting weaknesses and faults in programme design, which have lead to fissures in the programme.

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The evaluation examined Rs 988.41 crore of the Rs 3061.33 crore expended under the programme in the period 1999–2002. A total of 563 districts were covered under the programme, 157 districts were checked, 3,603 beneficiaries, 3,322 individuals and 281 SHGs were contacted to understand the impact of the programme. The conclusions drawn by the C&AG’s evaluation will also be supported with data from the Government of Maharashtra and from MAVIM (Mahila Arthik Vikas Mahamandal), the state women’s development corporation which is a major implementation agency of the programme in Maharashtra.

LITERATURE REVIEW A great part of the governance agenda in developing countries is centred on the issue of poverty alleviation. Poor people are often viewed as the target of poverty reduction efforts instead of involving them and making them central to the planning process. A study conducted by the World Bank,’ Voices of the Poor’ across 60 countries shows that poor people’s lives are marked by a common sense of powerlessness and voicelessness (World Bank, 2002). There is a consensus that successful poverty alleviation programmes should be community driven and involve coalitions of the poor and civil society intervention (Deolalikar et al. 2002). Thus successful programmes are those that are not target driven but those that involve the poor in the process of planning, while facilitating them with support systems that are necessary for them to come out of poverty. The SGSY model was largely inspired by the successful experiment of the Grameen Bank set up in 1977 in Bangladesh by Professor Mohammad Yunus to empower the rural poor by forming savings and credit groups. Grameen Bank, the Bangladesh Rural Advancement Committee (BRAC) and the Association for Social Advancement (ASA) are seen as successful in enabling the poor to access credit and are an example for the developing world (Mavrotas and Kelly, 1999). SHGs (which were initially called credit management groups) were set up through MYRADA in 1984–85 in Karnataka and drew the attention of NABARD in 1986 when MYRADA applied for a loan for the institutional capacity-building of its groups (Fernandez, 2004). The International Fund for Agricultural Development launched a pilot SHG project in 1989 in Tamil Nadu covering two blocks in Dhamapuri district. The Maharashtra Rural Credit Programme was also implemented


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very successfully with IFAD’s assistance from 1994 onwards for eight years to promote SHGs (Maharashtra Human Development Report, 2002). The success of the SHG model has inspired much confidence around the world as a community-driven programme involving the rural poor. Sadoulet and Carpenter (2001) suggest that group lending provides insurance to borrowers. Gariyali and Vettivel (2003) conclude in their study of the SHG movement in Tamil Nadu that the SHGs in the state have changed the mindset of men towards women and that they are becoming a platform that all government programmes want to use, which is a measure of their success. Bokil et al. (2003) in their study on women’s microenterprises in six districts of Maharashtra conclude that while microenterprises facilitated through SHGs have enhanced women’s financial status, it has also increased their work burden and that gender roles and responsibilities need to change for women’s human development. A study on the SGSY covering the Bangalore rural district of Karnataka by Vanitha Chetan B. Krishnamurthy (2002) concluded that 52.5 per cent of the beneficiaries covered by the study took up employment on less number of days as a result of participating in the programme, while 33.33 per cent could get a high number of employment days. Most of the women had a favourable attitude to the scheme since it had resulted in creating additional employment and raising their income. On the other hand, Amita Bhide (2003) concludes in her study covering the districts of Gadchiroli, Nanded, Dhule, Nandurbar and Yawatmal of Maharashtra that while SHGs are being treated as the panacea for women’s empowerment in all development activities, several women’s voices are being silenced in the current top-down agenda-ridden models of SHGs. A study by Robin Burgess and Rohini Pande (2003) concludes that the Indian banks’ rural branch expansion programme between 1977 and 1999 significantly lowered rural poverty in the country. However, the Country Strategic Opportunities Paper of IFAD for India (December 2001) suggests that the formal banking system in the country has not been able to develop sustainable banking services for the rural poor. In spite of clear support from the central bank, the linkages between SHGs and local banks do not occur. This is attributed to banks not yet being convinced about the potential of the SHGs and their capacity to manage funds. Mavrotas and Kelly (1999: 24) point out that banks are more prone to invest in government securities if they perceive that loan demands are more risky than usual, thereby diminishing the availability of private sector credit. Fernandez (2004) points out the slow response of banks in financing SHGs promoted by MYRADA prompted the NGO to float

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Sanghamitra as a microfinance institution to provide SHGs with credit services. Nirmala Banerjee and Joyanti Sen (2003) in their study conducted on the working of the SGSY in West Bengal found that the funding pattern under the programme is not only not transparent but simultaneously involves several agencies without any chain of authority between them. The banks were seen to be wary of the programme. They concluded that the guidelines should be made more transparent and that banks should not only focus on avoiding risks but should be generous in supporting the SHGs with credit. Indira Misra (2003) indicates that although the SGSY permits 10 per cent of the funds to be given to NGOs for the formation of groups, the transfer of these grants can become a constant and continuous process only if the NGOs have the competence and clarity to carry out the programme and the government functionaries have faith in them. It has also been observed that although SHGs have a positive impact on their members, the process of formation of groups is time consuming and needs dedicated voluntary organizations with skilled manpower (Srinivasan).

SGSY PROFILE BACKGROUND Efforts at poverty reduction over the years have led to a considerable decline of poverty in India. The proportion of people living below the poverty line declined from 54.8 per cent in 1973–74 to 26 per cent in 1999– 2000 (CAG Report, No. 3, 2003). In the 1950s, community development programmes marked the first efforts at alleviating rural poverty in India. Programmes such as the Small Farmers Development Agency and the Integrated Rural Development Programme followed these. The IRDP, launched in 1976 in the country, was the first major intervention focusing on the eradication of rural poverty by generating self employment. The programme provided a mix of subsidy and institutional credit to those below the poverty line. However, a concurrent evaluation of the IRDP revealed that only 14.8 per cent of the 54 million families assisted in the period 1980–81 to 1998–99, could cross the poverty line of Rs 11,000 per annum (at 1991–92 prices). In addition, the poor recovery of loans—around 41 per cent—contributed to the bleak financial performance of banks that supported the programme. Since the beginning of the programme till 31 March 1998, bank loans worth over Rs 20,352 crore and subsidy of


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over Rs 10,519 crore were disbursed under the IRDP (India 1999). With a recovery rate of 41 per cent, this made for an enormous default of over Rs 12,000 crore over this period. Following the review of the IRDP, the Hashim Committee recommended in February 1997 that a single self employment programme be implemented, embracing a group approach. This was expected to offset the deficiencies noticed in the IRDP in which loan defaults arose on account of uncoordinated action by supporting programmes such as TRYSEM (Training of Rural Youth for Self Employment), SITRA (Supply of Improved Tools to Rural Artisans), DWCRA (Development of Women and Children in Rural Areas) and poor follow-up by banks and government agencies. The Swarnajayanti Grameen Swarozgar Yojana was launched on 1 April 1999, replacing the IRDP and its complementary programmes (CAG Report, No. 3, 2003).

PROGRAMME STRUCTURE The SGSY was designed so as to focus on cluster-based activity by identifying 4–5 key activities in each block to be taken up by SHGs. The aim was to cover 30 per cent of the poor in each block by the end of five years of the programme. At least half of the groups were to be exclusively of women. Group activities were to be given preference over individual activities. The Gram Sabha was expected to authenticate the list of families below the poverty line identified in the BPL census. The identification of activities was intended to be a participatory process. Training of the Swarozagaris was also intended to be a critical part of the programme. Ten per cent of the funds were to be allocated for training. The programme was also to provide for technology upgradation and institutional arrangements for marketing. Thus the programme expected to bring the poor above the poverty line (expected to be about Rs 22,000 to Rs 24,000 in the Tenth Plan period) by having an income of at least Rs 2,000 per month by the third year of participation in the programme. The programme was envisaged as a subsidy-cum-credit programme. Each group could get a maximum subsidy of up to 50 per cent of subsidy subject to a limit of Rs 1.25 lakh. A central allocation of Rs 2,668.24 crore was provided for the SGSY from 1999 to 2002, of which Rs 1723.62 crore was released. Together with the state share, an amount of Rs 3,995.99 crore was made available to the states. Of this an amount, Rs 3,061.33 crore was reported to have been spent, leaving an unspent balance of Rs 264.83 crore (GOI C&AG Concurrent Review, 2003).

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SOME ISSUES: BANK LINKAGES, TARGETTING AND TRAINING BANK LINKAGE PROBLEMS A major finding of the C&AG’s Evaluation of the programme was that around 53.54 per cent of the SGSY funds subjected to test audit were diverted/misused or irregularly spent. Of Rs 529.18 crore thus diverted, a major part—Rs 108.7 crore—was by inflated reports of expenditure, Rs 225 crore was misutilized, and Rs 58.30 crore was diverted to activities not connected with the programme. This data (especially the inflated expenditure) points to an inability to achieve the disbursal of funds under the programme—which relates to training expenditure, expenditure for subsidies and infrastructure. The report indicates that in Maharashtra subsidy of Rs 53.91 crore was released in nine districts without ensuring the disbursement of loans by banks. This points to the reluctance of banks to provide loans under the programme to the SHGs, which has made the task of expending funds under the programme difficult, considering that subsidies make up about 60 per cent of the fund releases expected to be made under the programme. Banks’ reluctance is borne out by field experience in Maharashtra at district and block level meetings between 2001 to 2004, with Chief Executive Officers of Zilla Parishads and Project Directors of DRDAs implementing the SGSY as well as MAVIM’s district and field staff. There is a consensus among the implementation machinery that with deregulation, the emphasis on making profits and avoiding the large NPAs of the IRDP era, interest of commercial banks in the rural sector and the priority sector has waned. At the state level, the inability of the promotion agencies to keep up to the unrealistic SHG development schedule is seen in Table 12.1: TABLE 12.1 Maharashtra SGSY Funds Absorption (Rs lakh) Year 1999–2000 2000–01 2001–02 2002–03

Total Allocation

Total Funds Available

12,378.81 10,554.64 6,106.87 6,106.87

16,301.88 14,904.02 11,427.31 8,700.27

Utilization of Funds 10,257.28 * 11,330.76 * 102,88.29 ** 5,162.82 **

Source: Government of Maharashtra, Department of Rural Development. Notes: * Figures upto March 2000 and March 2001. ** Figures upto February 2002 and February 2003.


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Thus allocations have shown a declining trend from 1999–2000 to 2002– 03, funds available have shown a similar trend and the utilization of funds has declined from Rs 10,257.28 lakhs in 1999–2000 to Rs 5,162.82 lakh in 2002–03. Since 60 per cent of funds are to be used for the disbursal of subsidies, the unrealistic fund releases expected under the programme to SHGs within six months of their formation has contributed largely to the non-utilization of funds. Table 12.2 on credit and subsidy releases in Maharashtra under the programme elucidates this point further. TABLE 12.2 Maharashtra: Release of Credit and Subsidy to SHGs under SGSY (Rs lakh)

Year

Total Credit Target

Credit Disbursed SHG Ind. Member Total

SHG

Subsidy Member

Total

Per Family Investment

1999–2000* 2000–01* 2001–02** 2002–03**

28,500 28,500 19,740

2,849 2,421 2,763

15,404 17,378 9,132 5,850

1,754 1,812 1,906

5,943 2,953 1,480

6,477 7,697 4,765 3,386

24,866 28,494 28,470 27,506

14,528 6,711 3,087

Source: Government of Maharashtra, Department of Rural Development. Notes: * upto March 2000 and 2001. ** upto February 2002 and 2003.

Thus it is seen that, on the whole, credit disbursed in Maharashtra under the SGSY has declined from Rs 145.28 crore in 2000–01 to Rs 30.87 crore in 2002–03. Subsidy disbursed has also declined from Rs 64.77 crore in 1999–2000 to Rs 33.86 crore in 2002–03. These figures point to the unwillingness by banks to supply credit to the SHGs. The CAG’s evaluation indicates that there are defaults by SHGs in the repayment of loans across states. This has no doubt dissuaded banks from giving further loans to the SHGs, thereby affecting the programmes’s performance. My study of fragmented SGSY groups in Amravati (discussed later) also confirms that poor recovery of loans is a factor which accounts for the declining trend in loan and subsidy disbursals under the SGSY.

SHG GRADATION LOW LEVEL

OF

SHG GRADATION

The data on evolution of SHGs from the C&AG’s evaluation indicates that banks have not been able to grade SGSY groups. Out of 8,17,717

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groups formed, only 3,61,278 groups could clear the first gradation and 1,82,984 the second stage gradation. This is not remarkable as it was incumbent on banks to clear loan proposals within a month of the gradation being done. There is also wide disparity in the performance of states, with AP having the greatest share of 4,27,948 SHGs, of which 2,68,598 cleared grade I and 1,58,794 grade II. Thus an overall percentage of 22.2 per cent SHGs could only get past the second gradation and 44.2 per cent cleared the first gradation. The data pertaining to Maharashtra shown in Table 12.3 reinforces the picture of low level of gradations. TABLE 12.3 Maharashtra SHG formation and Gradation under SGSY Year 1999–2000 2001–02 2002–03

SHGs Formed (Cum fig)

No. Grade I

No. Grade II

No. which Took up Activity

19,470 43,689 49,051

2,375 11,179 6,309

1,036 5,479 4,568

957* 1,485** 1,041**

Source: Government of Maharashtra, Department of Rural Development. Notes: * as of March 2000. ** as of February 2002 and February 2003.

The low number of groups getting graded as grade I is indicative of poor quality groups being formed, groups coming up for being graded at six months, too early a stage of their development and the reluctance by banks to come for the grading exercise in what they see as a prelude to the demand for loans. Thus even well-formed groups may not be graded as grade I by banks, leading to the unintended outcome of the collapse of the SHGs, since the NGO nurturing grant is dependent on the group being graded as grade I by the banks and the NGO may not be able to sustain group training on the initial 20 per cent grant released to it for a period extending beyond six months. This is further seen in the pattern of poor credit release and subsidy release to SHGs in Maharashtra, indicated in Table 12.3.

GRADATION AND RELEASES TO PROMOTION AGENCIES: A CASE STUDY OF MAVIM In MAVIM’s case, out of 5,113 SHGs formed in 32 districts under the SGSY in the three-year period from 2001–02 to 2003–04, while 2,642 groups were well trained and eligible to be graded under the first gradation, 1,711 groups were only graded by the banks and of these only 1,063


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groups actually received the revolving fund of Rs 25,000. Out of 494 welltrained groups eligible for the second gradation, only 266 could get past the second gradation and only 125 groups could actually start entrepreneurship activities with bank loans. Hence, although the scheme provided for Rs 10,000 per SHG as nurturing charges to NGOs over a three-year period, the DRDAs do not release NGOs’ nurturing grants till the bank linkages have been accomplished, though this is not mandatory under the guidelines. Thus in MAVIM’s three-year period under review, after setting up 5,133 groups, it actually could draw 90 per cent of the nurturing grants only in the case of 125 SHGs—2.44 per cent and it could draw up to 50 per cent of the grants only in 1063 cases-20 per cent of SHGs formed. This has implications for the cash flow of promotion agencies since on the average initially around 15 SHGs are formed by a facilitator and in two years around 30 SHGs. Thus to set up 5,113 SHGs at least 170 facilitators are needed. Salary and allowances of a facilitator (Rs 2,300 per month) works out to Rs 27,000 per annum each and Rs 46.92 lakh per annum or Rs 93.84 lakh for two years for 170 facilitators. While it is easier for a facilitator to promote three or four groups in a village, the DRDA normally spreads the SHGs to cover the ‘one village one SHG’ concept. Thus over long distances, with inadequate public transport in remote villages, more facilitators have to be engaged, making it even more unviable for the promotion agency. In addition, the training of SHG groups in SHG concepts, leadership, book-keeping, functional literacy, gender issues, participative gradation and social awareness costs around Rs 3,360 per group and over a two-year period for 5,100 groups Rs 171.36 lakh. Thus a total of Rs 265.2 lakh would be the minimum amount needed in the instant case of MAVIM for training SHGs and having strongly knit groups. Some retraining is needed in the third year on concepts, book-keeping and leadership, which over a three-year period would come to Rs 5,000 per group. The SGSY guidelines indicate that the experience of NGOs involved in the development of SHGs in the country shows that an amount of Rs 10,000 per group would be needed over a 3–4 year period for nurturing SHGs effectively. In practice, the modalities of the programme ensure that this amount is not received by NGOs nurturing SHGs. As against this the release of just 50 per cent of the total nurturing grants to 20 per cent of groups formed by MAVIM comes to an inadequate amount of Rs 53.15 lakh. The programme thus works out to be unviable for a promotion agency like MAVIM, more so for smaller NGOs without a ‘holding’ capacity.1 1

Information for this case study was provided from MAVIM’s records.

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NGO RELEASES

AND

BANK GRADATION

As discussed earlier, the release of nurturing grants to NGOs is tied to gradations in various stages. The failure to make gradations results in the non-release of funds to NGOs. The non-release of funds results in further weakening of SHGs and the ultimate break-up of the SHGs, since the NGO has no money to continue to hire the service provider for training SHGs. Banks are afraid to grade the SHGs since they fear that there will be an immediate demand of high order loans in terms of the guidelines as soon as gradation is done. So they make excuses to stay out of gradation. The ungraded groups then wither away and die as there is no one to pay attention to them in the absence of training and capacity-building. There is a viewpoint that developing SHGs through specially employed facilitators is an expensive proposition. There are several village-level functionaries already being paid from the public exchequer such as Gram Sevaks and Anganwadi Sevikas. The SHG programme model of Orissa is in fact run through Anganwadi Sevikas, who are not paid any additional amount for nurturing SHGs. But the evaluation by the C&AG points out that there was no training of SHGs done in Orissa and only 2,818 SHGs made it to the second gradation out of 27,461 SHGs formed. Further, despite training of 109 SHGs in Maharashtra, none of the SHGs made it to the second gradation. The DRDAs by themselves cannot rise up to the challenge of training and capacity-building and neither can NGOs survive in the complicated programme design pointed out by the C&AG, which makes NGO releases for nurturing SHGs umpired by banks who will withhold gradation in order to avoid what they perceive to be risky ventures.

TARGETING ISSUES—DEFAULTERS UNDER EARLIER POVERTY ALLEVIATION PROGRAMMES The data provided by the evaluation on the impact assessment of the SGSY in table I of the C&AG’s report indicates that SHGs have had to visit banks between one to 100 times in Himachal Pradesh and in other states up to a maximum of 14 times in order to get their loans sanctioned. The reluctance by banks to grade SHGs and sanction loans is linked, among other things, to the issue of defaulter members in SHG groups. In fact, in some districts of Maharashtra such as Nanded, it is hardly possible to form a group which does not have at least two defaulters under earlier programmes. Considering that the IRDP had covered 54 million rural poor families in the country and the programme had a large 60 per cent default


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of loans, there must be around 32.4 million families who are defaulters among the BPL beneficiaries—that is, around 162 million people. As against this, we have nearly 260 million people below the poverty line in the country, of which 193 million are in rural areas. This leaves hardly 30 million rural people or 6 million BPL families for coverage under the SGSY, if a strict view is taken on the issue of defaulters under earlier programmes by the banks. Banks generally adopt the definition of defaulter to include defaults by a family member (Maharashtra SGSY statelevel coordination committee meeting on 5.3.2004, Action Taken Review point no. 5). Hence the impoverished BPL woman or man who is the offspring of a defaulter under the IRDP is unlikely to qualify for a loan under the SGSY. Most banks in practice refuse to grade groups having such members. It would appear that poor families who were ill-equipped in the first place to make a success of their enterprises under the IRDP would be condemned to continue in the poverty trap—and even their children would not be able to benefit from the new scheme. As against this, the evaluation points out that the expected coverage in the period under review should have been 16.7 million families in order to achieve the 30 per cent target fixed for the five-year period under the programme. Clearly, even the arithmetic does not work out under this ambitious programme. The SHG-bank linkage programme has been supported by RBI guidelines since 1991, when the NABARD pilot project was launched for linking 500 SHGs with banks. The 1996 RBI circular letter to banks indicated the benefits of the programme—as nearly 100 per cent recovery of loans taken by SHGs and significant reduction in transaction costs for both banks and borrowers. Thus a new segment was created by the RBI under the ‘priority sector’ to include ‘lending to SHGs’. RBI guidelines also indicate that the defaults by a few members of SHGs and or their family members to banks should not affect the financing of the SHGs provided the SHG itself does not in default. The guidelines only indicate that the loan should not be extended to the defaulting member. RBI guidelines for SGSY also indicate that non-willful defaulters of upto Rs 5,000 under earlier programmes may be given loans under the SGSY. Despite the RBI guidelines, the approach of most commercial banks to the issue of defaulters in the SHGs has been very rigid. This has been brought out in review meetings of DRDAs and MAVIM district offices during the last three years: banks in the villages have repeatedly advised the breaking up of SHGs having a defaulter member—when the group came up for gradation after a span of six months of its existence. The failure to throw out the defaulter member results in the group not getting

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graded. This has led to lowering of group morale and rendered useless the hard work done by field workers in nurturing groups for periods as long as six months to a year. However the list of defaulters is not made known in advance to the field level workers (known in MAVIM as ‘sahayoginis’). The negative attitude by banks and government officials under the programme has also been brought out by Banerjee and Sen (2003: 48, 50, 51) who have concluded that banks are taking decisions not warranted by the original design of the project and hold up the disbursal of loans. They have argued that programme decisions should have flexibility at the local level instead of being very rigid. The negative approach by banks has considerably narrowed the scope of the operation of the SGSY programme.

TRAINING Grameen Bank and other mature SHG movements lay great stress on the recovery of loans (Mavrotas and Kelly, 1999). All members are required to undergo training in understanding the concepts of what the bank stands for and its rules. However, initial assessments on the working of the SGSY reveals that the formation of groups under the programme lacks adequate social mobilization (IFAD, CSOP, December 2001). Out of 17 states, training was provided to SHGs only in four states. Some states such as Orissa form groups through the anganwadi sevikas running the ICDS programme, although the sevikas have no training and are often themselves illiterate. In Maharashtra also the DRDAs have been trying to rope in the anganwadis to do the work of group formation. The SGSY expected the DRDAs to some how develop the ability to train the SHGs themselves or appoint a sufficient number of qualified NGOs to train the SHGs. This is a major flaw in the programme design as the DRDAs (through gram sevaks or anganwadi sevikas) simply do not have the requisite skills to train SHGs in building their capacities. Many of the gram sevaks forming groups have no inkling about gender issues, where as most groups are formed by women and the SHG movement is seen to be developing as a women empowerment programme. Gram sevaks are also not knowledgeable about the ethos of group formation. Organizations like MAVIM, on the other hand, have trained sahayoginis, who are well-versed in the ethos of group formation. It is seen that the DRDAS tend to form the groups by holding out promises of loans and subsidies to the groups. The groups rapidly break up when the promised loan and subsidy do not materialize. In fact in 2002–03, the DRDAS


201

referred 977 broken groups in Amravati district, 325 broken groups in Nandurbar district, 100 fragmented groups in Dhule district and 300 fragmented groups in Solapur district formed unsuccessfully by other agencies, to MAVIM for reformation (MAVIM performance report 2000–03).

STUDY OF FRAGMENTED SGSY GROUPS OF AMRAVATI GENESIS

OF

STUDY

Since SGSY groups were observed to be fragmenting frequently, a study of 18 fragmented groups under SGSY in 18 villages of Amravati district—10 in Chandurbazar taluka and eight in Dhamangaon Railway taluka in November 2004 was taken up in order to understand the reasons for the break-up of SHGs formed under the programme. The talukas and villages were selected randomly and a questionnaire of 14 questions was administered to the groups. The questions covered issues such as method of group formation, reasons for formation, amount of group savings, internal lending, loans obtained from the bank, status of loan repayment, training received by the group, reasons for the break-up of the group and whether they were willing to reform the group.

GROUP PROFILE

AND

METHODS

OF

FORMATION

The two talukas of Damangaon (Railway) and Chandurbazar were selected from Amravati district. The following fragmented SHGs were selected randomly from the following villages selected randomly from among villages having broken SGSY groups: Damangaon (Railway) Taluka Name of Village Name of SHG Hingangaon Zadgaon Giroli Kasarkhed Talegaon Oaknath Mangarool Nimboli

Vaishali Mahila Bachat Gat Ahilya Holkar Mahila Bachat Gat Jai Santoshi Mahila Bachat Gat Fragmented SHG Jai Santoshi Mahila Bachat Gat Vaishnai Mahila Bachat Gat Raghunath Mahila Bachat Gat Rani Durgavati Mahila Bachat Gat

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Chandurbazar Taluka Name of Village 0

Bhramanwada Phatak

0

Bhramanwada Tadi

0 0 0 0

Vani Nanori Karunkhed Kondwardha

0 0

Lakhanwadi Shirgaon Kasba

0

Talegaon Mohana Sonori

Name of SHG Panchsheel Swayamsahay Mahila Bachat Gat Sahyog Swayamsahay Mahila Bachat Gat Savitri Swayamsahay Mahila Bachat Gat Mahila Swayamsahay Mahila Bachat Gat Savitri Swayamsahay Mahila Bachat Gat Panchsheel Swayamsahay Mahila Bachat Gat Maa Vaishnai Bachat Gat Mahalakshmi Mahila Swayamsahay Bachat Gat Pragnya Mahila Swayamsahay Bachat Gat Ambadevi Swayamsahay Mahila Gat

A survey questionnaire was framed covering various aspects of SHG formation. The members of the fragmented groups were asked details (by means of the questionnaire) about their erstwhile groups by investigators (MAVIM’s sahayoginis) through whom the survey was conducted. One of the groups turned out to be a group of men and the rest of them were women’s groups. Thus 95 per cent of the groups were women’s groups. (Around 90 per cent of the SHGs under NABARD’s SHG-bank linkage programme were also women’s groups.) It was seen that 50 per cent of the groups were formed by the Village Officer (Gram Sevak), 33 per cent by the Panchayat Samiti Extension Officer, 5.5 per cent by village Sar Panch, 5.5 per cent by NGO and 5.5 per cent by other methods. Thus the District Rural and Development Agency staff formed a majority of the groups (83 per cent).

REASONS

FOR

FORMATION

The reasons for group formation were looked at together with the methods of formation, since some of the reasons were stated in the answer to the question on method of formation also. No single reason was given, usually a combination of two or three reasons were given.


203

TABLE 12.4 Study of Amravati Fragmented Groups: Reasons for Group Formation under the SGSY No. of Times Reason Cited To get loans To have savings To get subsidy To empower/unify women To solve problems To start business

11 11 9 9 4 1

Reason Cited, as a % of no. of Groups 61 61 50 50 22.2 5.5

Source: Unpublished study report of MAVIM, Mumbai.

It was also seen that under the ‘method of formation’ question, the replies indicated that in 33.33 per cent of the groups the DRDA machinery informed the women that they would get subsidy if they joined the programme. In 27 per cent of the groups they were informed that they would get loans if they joined the programme. Subsidy was cited as the reason for forming the group in another 16.66 per cent of cases, thus making subsidy a motivation in 50 per cent of the cases. Similarly the opportunity to get loans was also cited in 61 per cent of the cases as the reason for forming the group taken together with the information cited in the methods of group formation.

LOANS OBTAINED As against the high group expectation of loans and subsidy, it was seen that only 11.11 per cent of the groups actually obtained loans. There were 100 per cent defaults in the loans received by the groups under the study. Defaults occurred because of:

failure of enterprise; and leader left the village due to illness and took the passbooks with him.

TRAINING RECEIVED No training was received by 16.6 per cent of the groups, whereas in 55 per cent of the cases MITCON was reported to have given the training on entrepreneurship together with Basic and Conceptual training by the Extension Officer, Panchayat Samiti. In 22.2 per cent of the cases training was reported to have been given by the Extension Officer Panchayat Samiti alone and in 5.5 per cent of cases by the Gram Sevak.

204


REASONS

FOR

BREAK-UP

OF

GROUPS

The reasons for break-up of groups have been stated as a combination of reasons and no single reason is adduced for the breaking up of groups. These taken together with the information on whether the group was willing to be re-grouped again gives information about the difficulty groups face because of banks being distant and women being illiterate and being unable to withdraw money from the bank and transact business. The reasons cited are presented in Table 12.5: TABLE 12.5 Study of Amravati Fragmented Groups: Reasons for Break-up of Groups % of Groups Citing the Reason Misappropriation Savings not accounted for Group saving not put in bank Internal savings directly lent by leader/member without group consent Internal disputes/distrust No meetings being held No training/guidance Migration of members Literate members tired of maintaining accounts Business failed Bank far away

22 16.6 11.11 11.11 44 44 16.6 5.5 5.5 5.5 5.5

Source: Unpublished study report of MAVIM, Mumbai.

If the reasons relating to money mismanagement, that is, misappropriation, non-accounting of saving, not putting savings in bank, direct transaction of internal lending without group consent are taken together, 27.7 per cent of groups cited one or all of these as reasons for the breaking up of the group. Internal disputes and distrust was cited in 44 per cent of the groups as a reason. Meetings not being held accounted for 44 per cent of reasons for groups breaking up. Illiteracy and lack of accountancy skills as well as banks being distant were also reasons given for breaking of groups.

REASONS

FOR

NON RE-GROUPING

The reasons for non re-grouping can be seen together with the reasons for breaking of groups. It was observed that 50 per cent of the groups were not ready to be re-grouped, whereas 5.5 per cent had been absorbed into


205

other groups. Banks were stated to be far away in 5.5 per cent of cases, there were too many defaulters in 5.5 per cent of villages, in 16.6 per cent of cases the women stated that they did not feel that they were literate enough to have banking transactions. Some members from 33 per cent of the groups were ready to be reactivated provided there was adequate training provided (11.11 per cent), and there were literate women available in the group who would be ready to write accounts (11.11 per cent).

CONCLUSIONS

OF

AMRAVATI STUDY

The study thus indicates that weak groups were formed without the ethos of group ideology and identity by the DRDA machinery that proved ineffective as trainers. The discipline of internal lending and accounting were not instilled in the groups. The groups were formed with the intention of cashing in on the loan and subsidy. When the promised loans also failed to materialize, the groups disbanded. An important issue which emerged was the necessity to first forge a relationship of mutual trust and reliance before expecting the group to move forward with entrepreneurship. This needs time as well as training and capacity-building. Equally important, is building up of women’s accountancy and literacy skills.

DESIGN DEFICIENCY AND IMPLEMENTATION PARTICIPANT SELECTION METHODS The SGSY programme guidelines state that it is a credit subsidy programme and that credit is the major part and that subsidy is the minor part. Yet in fact the scheme enables a group to get as much as 50 per cent of a group programme—up to a maximum of Rs 1.25 lakh, as subsidy. Thus the high level of subsidy provided by the programme has prompted a mindset of exclusion rather than of inclusion and the whole process proceeds from a premise of suspicion rather than of trust. This is seen in the rigidity in the selection of the beneficiaries and an unwillingness to leave it to communities to select the beneficiaries by a system that remains open. The scheme provides that a three-member team of the BDO, or his representative, the banker and the sarpanch should visit each of the habitations in the Panchayat in order to ascertain from BPL families, the persons who can be covered under the designated activity. The

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prominence given to the sarpanch, rather than the community, in selecting beneficiaries ensures the continuation of feudal systems of exclusion of the poor and the marginalized. The SGSY guidelines indicate that the list of BPL families should be authenticated in the Gram Sabha. The latest selection criteria for the BPL list circulated by the Ministry of Rural Development (September 2002) now have a detailed 13-point checklist. While criteria ranging from housing, drinking water, availability of toilets, food and clothing is an improvement over earlier attempts to enumerate the poor, the identification process has not been foolproof simply because of the absence of wide dissemination of the process and non-participation of the poor and Scheduled castes and Tribes in the process. Many of the poor are left out of government BPL lists (Fernandez, 2004: 4). A perennial cause of complaint during visits to villages is that of poor people who have been left out of the BPL list and the fact of inclusion of the richer families in the village. Organizations such as SEWA, MAVIM and MYRADA with mature SHG promotion programmes have a process of selection that involves the people’s participation in the process. They hold a meeting in which villagers identify the poor themselves. Chapati diagrams, drawing the village resource and households map and other PRA techniques are frequently used (Fernandez, 2004: 63) observes that while conducting Participatory Wealth Ranking exercises in MYRADA, it is seen that people divide the poorest broadly into two categories: that of the old sick and infirm or disabled, who form distinct groups and participate in activities of a social nature and also form savings and credit groups; and another type of the poorest who have the capacity to earn with group support. The latter are able to grow upwards economically and also gain empowerment. Unlike PRA techniques used to identify the poor, the BPL list once finalized cannot be changed until the next survey. However, the BPL identification guidelines provide that the names of those who have crossed the poverty line can be deleted by a resolution of the Gram Sabha! Hence a fundamental flaw in the SGSY is the continued treatment of the poor as ‘targets’ and the continued denial of community participation in programme execution, especially the identification of beneficiaries and the inflexibility and rigidity in identifying a ‘list’ of beneficiaries, instead of having people friendly PRA techniques for identification of the poor which could be used by actual implementing agencies like MAVIM or appointed NGOs. This rigidity can be explained on account of the large financial gains flowing from being on the BPL list in terms of the availability of


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subsidies, together with the loans and quotas for housing, janata saris, dhotis, cheap grains under the PDS, and so on. But this very rigidity has succeeded in keeping out the poor for whom the programme was intended and instead catering to the not-so-poor or even the fairly well off. While the poor were generally covered by programmes like MRCP (these did not attract the rich as there were no large subsidies to be garnered), the rural rich are attracted to large subsidy-based schemes like the SGSY. The adherence to a rigid BPL list which is fixed every five years and which is inflexible in the meanwhile may also be related to the statistical requirements in the government of monitoring the poverty line, having readymade data of those assisted and the numbers who have crossed the poverty line.

THRUSTING BANK CREDIT

ON

IMMATURE GROUPS

The whole approach of the SGSY is oriented to the selection of beneficiaries for loans right at the initial stage, whereas loans are not discussed in successful SHG programmes as the primary motivation for the formation of the group. Groups need time to gel, to develop a spirit of unity and working together. Studies have indicated that groups which were not obliged to keep their savings as bank deposits and which were able to postpone their application for bank loans at least for a year were able to develop a sense of self reliance, solidarity and a repayment culture. In fact it is suggested that no loans should be given till the groups have acquired the habit of regular savings credited to a common fund and they have gained experience in revolving these savings as internal loans (IFAD, CSOP, 2001). The SGSY, on the other hand, with its highly pressurized programme, wants to accelerate this process of group development. It prescribes an age level of six months for the first gradation at which the group is expected to get a revolving grant equal to group corpus of Rs 5,000–10,000 and a loan of upto four times the group corpus. This is described as the ‘microfinance stage’. It may be noted that the release of nurturing and training grants to NGOs is linked to this critical passage rite with banks as the officiating high priests. Thus even before the SHG is adequately trained, the programme expects it to clear a fitness test, failure to clear which will curtail the further release of training funds to the NGO or promotion agency. These conditionalities ensure the premature demise of the SHGs, since their constant training for the first two years is crucial to their very survival.

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INCORRECT ASSUMPTIONS ON INVESTMENT LEVELS NECESSARY FOR POVERTY ALLEVIATION Another aspect is the per family investment envisaged under the programme. This was contemplated to be Rs 25,000 under the SGSY but the C&AG evaluation report points out that in the first three years of the programme the per family investment was only Rs 19,678. (Under the last two years of the IRDP, 1997–99, the per family investment was Rs 17,482). In Maharashtra this was Rs 27,506 in 2002–03. The programme aimed at enhancing the monthly income of BPL families to Rs 2,000 per month or Rs 24,000 per annum with the financial assistance provided under it. This is very unrealistic since there is no investment that can gain over 100 per cent returns. In order to have an income of Rs 2,000 per month, an investment of at least Rs 2 lakh would have to be made per BPL family, assuming an interest rate of 12 per cent. This has to be weighed against the SHG women’s maturity, experience with money handling and credit absorption capacity. Most SHGs in Maharashtra typically save between Rs 20–100 per woman per month (in richer districts in the sugar belt for instance). A group of 10 women would have a monthly saving of Rs 200 to Rs 1,000 and in one year’s time the SHG would have saved between Rs 2,400 to Rs 12,000. Providing a loan even of Rs 1.25 lakh and a subsidy of an equal amount to such an SHG would be exposing it to managing finances of Rs 2.5 lakh—which would be beyond the capability of the average SHG in the initial stages. Thus it would not be at all practical to expect families currently very much below the poverty line to increase their income to levels above the poverty line within a span of three years. Gradual increase of investment over a six to seven year period, along with training and capacity-building in money management and enterprise management can only produce the desired increase in income levels of poor women.

THE IMPORTANCE

OF

INSURANCE

The SGSY has provision for the insurance of livestock purchased under the programme by the SHGs through the General Insurance Corporation. This covers the death of the animals or birds. However, for first time, entrants from among poor, landless and illiterate women into small business activity, the business may fail due to other reasons. In my study of Amravati district, a dairy business set up by SHG women had failed and the women defaulted on their loan. There is no systematic effort to have


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agricultural crop insurance undertaken for the SHGs either and many individual women suffer losses due to untimely or excessive rains. Other business losses can occur also. Hence it will be necessary to tie up a small percentage of every loan and subsidy to a common risk fund as a cover for all cases and to insure every SHG which has taken a loan. The existing crop insurance scheme needs to be revamped. Since these schemes are only effective for widespread losses where there is a reduction of annewari, other insurance schemes covering individual farmers such as ‘rain’ insurance schemes need to be explored in view of the erratic weather and rainfall conditions which affect those with very small holdings very adversely. A suitable scheme needs to be evolved to provide some relief to small businesswomen in the case of failure of enterprise on the same lines as institutions like the BIFR were set up to assist sick units. Although with financial deregulation it is felt that the market should rule, weeding out inefficient players; in the case of the very poor, who are below the poverty line, we need to make some arrangements to enable them to absorb shocks when they take up small enterprises for the first time. There already is a provision under the programme for a risk fund to cover the consumption loans given by banks. These need to be activated as well.

COMPARISON WITH A FEW OTHER SHG DEVELOPMENT PROGRAMMES NABARD SHG-BANK LINKAGE PROGRAMME The indifferent performance of the SGSY can be contrasted with performance under NABARD’s SHG-bank linkage scheme. From 1992 to 2003, 717,360 SHGs have been formed in a partnership of NABARD with NGOs. In some cases banks themselves formed the SHGs (20 per cent). Commercial banks as well as the regional rural banks have come forward to finance SHGs and Rs 20,487 million of credit was provided to the SHGs, around 90 per cent of which were exclusively formed by women. The on-time repayment of the loans was reported as around 95 per cent and no bank had reported any NPA. The NABARD scheme is not as elaborate as the SGSY. It provides a small amount of Rs 1,880 per SHG to the NGO as training costs over a period of two years. This is released in phases. The NABARD SHG-bank linkage programme provides NGO an amount of Rs 1,880 for nurturing SHGs: Rs 375 on acceptance by the

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NGO of terms and conditions, Rs 565 on opening the savings account in the name of the SHG, Rs 375 three months after the opening of the account and after constant SHG–NGO interaction, Rs 375 after achieving credit linkage directly with banks or indirectly through NGO/federations and Rs 375 three months after availing the loan. However, the NABARD programme is essentially a microcredit programme, with the accent on savings and credit. Hence the training costs are low. It does not deal with gender and empowerment issues specifically. There is no subsidy involved. There are no elaborate procedures for checking the BPL status of the members, since any one is permitted to join the SHG. NABARD has a district-level committee of bankers and NGOs which monitors the performance and facilitates the provision of credit to SHGs. Thus the programme is simple and uncomplicated and has helped to bridge the credit gap of the poor through the medium of SHGs.

MAHARASHTRA RURAL CREDIT PROGRAMME Under the Maharashtra Rural Credit Programme, which was assisted by the International Fund for Agricultural Development from 1994 to 2002, around 5,255 groups were formed by MAVIM in 12 districts of Maharashtra. The programme had NABARD as the key implementing agency, with MAVIM implementing the women’s empowerment component of forming and training SHGs having women members. There was no subsidy payable to the groups under the programme. ‘A’ graded groups were entitled to a revolving grant of Rs 5,000. Thirty-nine per cent of the groups were graded as ‘A’, 35 per cent as ‘B’, 14 per cent as ‘C’ and 12 per cent as ‘D’ (IFAD, 2003). A total of 78,888 women were mobilized under the programme, they saved Rs 5.6 crore and generated internal lending of Rs 23 crore. They raised bank loans of Rs 11.5 crore, the repayment rate of which was observed to be 80 per cent. Women took up income-generating activities such as improved agricultural activities, goat rearing, poultry, running flour mills, making leaf plates, dry fish vending, running grocery stores etc. The programme empowered the women to move out of their courtyards and become pressure groups which inquired into matters of health, education of their children and water supply and sanitation. All of 600 women successfully contested the panchayati raj elections and became sarpanchas and gram panchayat members. Some even became Panchayat Samiti members (MAVIM, 2002). These SHGs have emerged as strong community-based organizations and have proved that enhanced income and productive use of credit is possible (Human


211

Development Report, Maharashtra, 2002: 125). In the MRCP, IFAD funds for group formation were received from the rural development department of government by MAVIM as the promoting agency in two annual instalments. This enabled the proper planning of the year’s activities, the recruitment and training of sahayoginis and field staff as well as the training of the groups. The process of building bank linkages was untrammelled, with the groups just going with MAVIM’s facilitator to the bank and opening an account. This can be contrasted with the SGSY under which now banks demand group photos of groups, certificates or authorizations from BDOs, who are invariably away on tour or at meetings when the women go to the BDO office to get the piece of paper which authorizes their entry into the bank. Some bank managers refuse to open SHG accounts, saying that no loans will be sanctioned to the groups as they do not have the staff to follow up on SHG loan cases since the number of staff has gone down after the Voluntary Retirement Scheme for banks has been implemented. The increased burden on banks after VRS and their poor credit support to SHGs has also been commented upon by Fernandez (2004: 51).

CONCLUSIONS THE INHIBITING ROLE

OF

SUBSIDY

What, then, is the crucial difference between successful SHG programmes such as NABARD’s and the MRCP on the one hand and the SGSY on the other? Two things seem to emerge: one is the dubious role of subsidy in promoting the wrong kind of groups under the SGSY. Instead of developing qualitative groups by concentrating on their basic training and capacity-building (made possible by smoothly flowing nurturing grants), by NGOs, the availability of subsidy appears to necessitate the elaborate procedures of BPL identification (often by-passing the poor who have not been vocal enough to get into the list in the first place), bureaucratization of the process with the involvement of the Block-level functionaries at every stage and repeated visits for this to the BDO and banks. These hurdles must be seen in this context: that for the really poor among the women, every visit involves the expenditure of bus fare and the loss of a day’s wages, which they can ill afford. The availability of subsidy also inevitably attracts the wrong type of members, who have little commitment to a loan repayment culture and are out to stage a repeat performance of the

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IRDP. The disbursal of subsidy also casts an enormous strain on the DRDAs, who sometimes simply forward the subsidy money to the banks so as to indicate in their reports to the government that they have ‘fulfilled’ their targets. And as indicated in the evaluation by the C&AG, banks may not always release the loans or the subsidy—in Maharashtra, Rs 2.08 crore was just returned by banks to the DRDAs at the end of the financial year. While on the one hand, thrusting large loans and subsidies on immature groups may not be the answer to the challenge of bringing about poverty alleviation, the expectation that families below the poverty line can be brought above it in a matter of three years and earn an annual income of Rs 24,000,with an investment of Rs 25,000 per family is unrealistic. It is necessary to provide credit at the rate that very poor families can deal with in a responsible manner. The budget available for subsidy under the programme may be utilized to set up marketing and training infrastructure for SHGs in every district and taluka place. This can be done in Maharashtra by organizations like MAVIM or the MIDC. The subsidy funds could also be used to set up a risk fund to cover business losses of first-time entrepreneurs. The existing provision of a risk fund for the consumption loans given to the SHGs by the banks needs to be activated.

REVIEWING AT T I TUDES

TOWARDS

DEFAULTERS

If programmes like the SGSY meant to bring about poverty alleviation are to succeed, banks must revise their attitude to defaulters. RBI guidelines are not followed, as banks take an unnecessarily negative attitude and ask for the expulsion of SHG members who are defaulters under earlier programmes, whereas a number of the IRDP defaulters were not wilful defaulters. The banks have extended the concept of debarring entry to defaulters, even to the family members of these defaulters. Thus the exclusion extends to the next generation of those who are below the poverty line and who defaulted on an IRDP loan or any other loan. As brought out by Banerjee and Sen (2003: 52) banks must consider the development of SHGs to be a nation-building task and have a more positive attitude in extending credit to the rural poor. In fact, RBI guidelines only permitting loans under the SGSY to the non-wilful BPL defaulters of amounts below Rs 5,000 must be amended to allow loans under the programme to any non-wilful BPL defaulter of an earlier poverty alleviation programme. The definition of defaulters must not include defaults by a family member. It is a tragedy that while a sympathetic view is taken of the huge


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defaults running to crores of rupees by large industrial houses, a very strict view is taken when it comes to the defaults of a few thousands of rupees by a woman below the poverty line who is probably a first-time entrepreneur and unassisted by formal schooling and training in the management of her small enterprise. Worse still, she is penalized even if the default has been by a family member such as her husband or a parent. Thus poverty is the only inheritance that a poor woman has and she is condemned to languish in it. Women’s need for credit must be recognized as a separate and legitimate right. Women must be acknow-ledged as distinct entities from their families, responsible and mature in their own right to participate in financial transactions, without being tagged as part of their families. The present policy or its interpretation by banks is gender-biased and needs to be amended in order to make it sensitive to women’s need for credit.

RELEASES

TO

NGOS

Another issue is the system of releasing nurturing grants to the promotion agency. Under the SGSY, this seems to proceed from a position of distrust. This distrust is vindicated when several small-time NGOs obtain the first instalment of Rs 2,000 per group and just disappear. Many persons with political connections/affiliations saw this as a new income generation opportunity for themselves and set up NGOs to ‘develop’ SHGs. The state government’s Rural Development Department (RDD) department in Maharashtra was later obliged to issue a Government Regulation (GR) on 16 August 2004 indicating that NGOs to be selected for training SHGs cannot have management committee members/directors who are sitting MPs, MLAs, members in local self-government or their near relatives. But making the release of nurturing grants to NGOs a tortuous exercise will be self defeating, since SHGs need to be trained by experienced facilitating agencies. The release of SHG nurturing grants is uncomplicated under programmes like those of the Government of India. The promotion agency can thus plan well in advance the selection of service providers, their training, as well as training to the groups, which is what will enable the groups to develop and mature as strong entities.

THE WAY FORWARD It can therefore be concluded that the SGSY has not succeeded because it has not outgrown the IRDP mindset of making subsidy the cornerstone

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of undertaking poverty alleviation. At the same time, the disbursal of subsidies has necessitated the elaborate procedures to protect this disbursal. The formation of SHGs is essentially process-oriented but the target chasing involved under the SGSY has lead to the formation of groups that are bound to fail. Considering the large financial outlays under the scheme, unless the programme flaws are corrected, the programme itself will have a negative impact on the development of the SHG movement in the country. Banks must also revise their attitude towards the SHG members who are non-wilful defaulters under earlier programmes. The definition of defaulters must not be extended to defaults by a family member. The per family investment in poor families will also have to be much above the Rs 25,000 thought of under the SGSY. However, this need not necessarily come from subsidies. Credit should also not be made available before the group matures as an entity. It is wiser to hasten slowly and increase the supply of credit to the poor at the rate that they can handle it.

REFERENCES Banerjee, Nirmala and Joyanti Sen. 2003. Swarnajayanti Gram Swarozgar Yojana, A Budgetry Policy in Working. New Delhi: United Nations Development Fund for Women. Bhide, Amita. 2003. ‘On Women’s Livelihoods and Self-Help Groups: Voices from the Field’, paper presented at seminar ‘Perspectives on Maharashtra’s Economy’. Mumbai: Department of Economics, Mumbai University. Bokil, Milind S., Chaya Kondhalkar, Suvarna Mundhe, Soniya Garcha, Vrinda Purandare, Ulka Kulkarni and Vaishali Chobhe. 2003. Development Support Team: Microenterprises and Gender Division of Labour. Pune: Mudra. Burgess, Robin and Rohini Pande. 2003. ‘Do Rural Banks Matter? Evidence from the Indian Social Banking Experiment’, CMPO working paper series no. 04/104, available online at www.cid.harvard.edu/bread/papers/037.pdf. Chethan, Vanitha and B. Krishnamurthy. 2002. ‘Swarnajayanti Gram Swarozgar Yojana for Empowerment of Rural Women in Karnataka’, in Prasad Kiran (ed.), Communications and Empowerment of Women, Strategies and Policy Insights from India. Delhi: The Women Press. Deolalikar, Anil, et al. 2002. ‘Poverty Reduction and the Role of Institutions in Developing Asia’. ERD Working Paper No 10. Asian Development Bank. Fernandez, Aloysius P. 2004. Sanghamitra—A Micro-finance Institution with a Difference. Mysore: National Printing Press. Gariyali, C.K. and S.K. Vettivel. 2003. Women’s Own—The Self Help Movement of Tamilnadu. New Delhi: Vetri Publishers. Government of India. Swarnajayanti Gram Swarozgar Yojana, Guidelines. New Delhi: Ministry of Rural Development. —————. ‘Amendments in the Guidelines Swarnajayanti Gram Swarozgar Yojana’. New Delhi: Ministry of Rural Development.


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Government of India. 1999. Publication Division, Ministry of Information and Broadcasting, Government of India, Patiala House. —————. September 2002. ‘Identification of Families below the Poverty Line, expert group recommendations. 1999. New Delhi: Ministry of Information and Broadcasting. —————. ‘Report of the Comptroller and Auditor General of India for the year ended March 2002, Union Government Performance Appraisals No. 3 of 2003’. New Delhi: Government of India. Government of Maharashtra. 2002. Human Development Report Maharashtra 2002. Mumbai: Government of Maharashtra. IFAD. 2001. ‘Country Strategic Opportunities Paper’. Rome. Available online at www.ifad. org —————. 2003. ‘Maharashtra Rural Credit Project, Project Completion Review Report’. IFAD: Asia and Pacific Division. Jha, Raghbendra. Rural Poverty in India: Structure, Determinants and Suggestions for Policy Reform. Canberra: Australia South Asia Research Centre, Australian National University. Mahila Arthik Vikas Mahamandal Ltd. 2002. Towards Empowerment–Documenting Success Stories from the Maharashtra Rural Credit Programme 1994–2002. Mumbai: MAVIM. —————. Performance Report 2000–03. Mumbai: MAVIM. Mavrotas and Roger Kelly. 1999. Financial Sector Development and Savings Mobilisation: An Assessment. UK: School of Economic Studies and Institute for Development Policy and Management, University of Manchester. Misra, Indira. 2003. Micro Credit for Macro Impact on Poverty. New Delhi: National Publishing House. Reserve Bank of India Rural Planning and Credit Department. 1996. Linking of Self Help Groups with Banks, Working Group on NGOs and SHGs, Recommendations. Mumbai: RBI. Swarnajayanti Grameen Swarozgar Yojana. ‘State Level Coordination Committee Meeting Mumbai’ on 5 March 2004, agenda papers. New Delhi: Government of India. Sadoulet Loic and Carpenter Seth B. 2001. ‘Endogenous Matching and Risk Heterogeneity: Evidence on Microcredit Group Formation in Gautemala’, paper circulated at the Third Annual Seminar on New Development Finance, Frankfurt. Srinivasan, Girija. Building A Future-Group by Group. Lucknow: Bankers Institute of Rural Development. World Bank. 2002. ‘Empowerment and Poverty Reduction: A Sourcebook’. PREM.

Part IV

SUCCESSFUL MFI MODELS

13 Why Sanghamithra is Different? ALOYSIUS P. FERNANDEZ

The observations made in this article apply only to the Rural Programme of Sanghamithra—not to the Urban. They also apply to the Indian context—and to areas in India where the tradition of banking and banking infrastructure is comparatively well-developed. The author is aware that there are certain ‘atypical’ areas where networks and facilities are weak, or even threatened by a breakdown of law-and-order. Such areas merit separate processes and institutional arrangements. Universal solutions that work under all conditions are rare, if they exist at all. While writing this paper, the author had two options—produce a regular paper on Sanghamithra’s performance or explain why it is different; he chose the latter.

S

anghamithra—an MFI with a Difference is the title of a book published in July 2004 by this author. The reasons for this ‘difference’ will form the major content of this article. These reasons may also serve another purpose, namely, they may help to throw some light, as a first step, on several queries and criticisms related to microcredit/ microfinance, ranging from whether NGOs should be involved in MF to its impact on poverty. It is also hoped that this effort to explain the differences will help to set the framework for further detailed studies to test the assumptions behind the claims to be different and the reasons for these choices. The queries and criticisms are many, but the following will be addressed, however inadequately, given the limitations of this chapter:

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Aloysius P. Fernandez

Why did MYRADA, an NGO, which has been involved in promoting self-help affinity groups (SAGs)1 since 1984–85 and the SAG-bank linkage programme since 1992, decide in 1993 to set up a separate MFI (microfinance institution)—Sanghamithra—instead of lending money itself? Briefly, the answer rests on MYRADA’s assessment that there is a difference in culture of the staff and in the supporting and monitoring systems required by the two types of institutions (the NGO and the MFI). There are other reasons also, that are explained later. Several studies have articulated that the priority of the poor is often to have a safe place to save even more than a place that they can borrow from, and that many NGO-MFIs are unable to fulfil this requirement. Given this shortcoming, they question the ability of NGO-MFIs to provide the full range of financial services. The counter-question that MYRADA has attempted to address is: should the NGO-MFI necessarily be the only institution to fulfil this requirement? Can there be other institutions which people find more accessible, where their savings are more in their control than if they were with the MFI? Are such MFIs that can collect savings for safekeeping necessarily the preferred option of the people if they were not under compulsion to save in the MFI as a pre-condition to get loans? Can it not be inferred, even if it is left unsaid, that NGO-MFIs retain savings to establish a degree of control over borrowers? The brief answer (which is expanded later) based on MYRADA’s experience of over 20 years is that the MFI need not be the only savings institution. MYRADA does recognize the fact that people need a place to save that is safe, convenient and easily accessible. The SAGs—which started by mobilizing savings and lending them to members before any outside finance was provided—have proved that they are capable of performing this savings function in a way that the poor find more appropriate. In the initial two or three years, it may be their only place to save; gradually, they diversify to make individual savings in the bank and/or post office. It is quite common to hear people grumble that the bank which willingly 1 When MYRADA started working in 1984–85 with affinity groups, which emerged when the cooperative societies broke up, they were called Credit Management Groups. When NABARD provided MYRADA with a grant in 1986–87, the name was changed to Self Help Groups (SHGs). When in early 2000, MYRADA discovered that SHGs were being formed on the basis of external criteria, provided with credit just after formation with little or no institutional capacity-building, it changed the name of its groups to SAGs (or Self-help Affinity Groups) in order to stress the ‘affinity’ which binds the members together.

Why Sanghamithra is Different?

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keeps their savings is not so forthcoming when it comes to advancing loans; it is rare to hear them grumble that the MFI that gives them loans is not collecting savings. The corpus of literature on microfinance is growing by the minute—as is the number of international MFIs setting up base in India, often with the assumption that little has been done before their arrival. Alongside this growth there are also several articles that take a critical look at the MF sector, especially the homegrown SAG approach, which they find does not fit in neatly with the models promoted in other countries. This chapter attempts to query the issues they raise by asking the following questions; (a) is the criticism valid that NGO-led microfinance tends to adopt a minimalist approach–that credit suffices for the borrower to take off on the growth path? Credit only or credit first? (Are the NGO-MFIs, the only operators who are vulnerable to the minimalist tag?) And, as a partial consequence; (b) is the criticism valid that NGO-led MFIs can at best achieve consumption smoothing and not true enterprise development? The contention is that they focus on the symptoms of poverty and not on the cause which can be removed only if the NGO-MFI promotes enterprise (business) development. This they do not or are unable to do, either because on the one hand as NGOs, they do not have the resources to build a supporting environment and the skills to promote genuine businesses, or because they think that enterprise/business development will take them away from focusing on the poor, while on the other hand as MFIs the pressure to grow rapidly and become financially sustainable pushes them to promote a portfolio of loans that are small and fast moving, which are largely loans for consumption or at best small trading which, according to the opinions of some, are not truly business enterprises. This in a way takes the discourse back to the first issue—whether the NGO’s programme should be separated from that of the MFI. Doing so would enable the former to retain its poverty focus while providing the latter with the space to grow in response to the demands of business enterprises which may require larger loans, several tranches and which generally tend to gravitate to those above the poverty line who are able to take the risk and establish the linkages required to sustain a business enterprise; and (c) but it does carry this concern/issue a step further—whether the two (the NGO and the MFI)—working as separate legal entities—can be closely meshed so that a balance can be maintained between on the one hand promoting social concerns and a supporting environment while on the other promoting a loan portfolio which includes activities that increase income through productivity, scale and a genuine business initiative.

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This chapter attempts to describe Sanghamithra’s and MYRADA’s efforts to keep their identities so that their respective missions are not compromised, but at the same time, to share a common vision. It describes briefly the strategy adopted to embed credit in a broader supportive framework of service providers and investment that has the potential to lift the poor above the poverty line and keep them there. MYRADA attempted to create this balance when it promoted Sanghamithra and has continued to do so. Whether it has succeeded or not will require further and more in-depth studies; this chapter’s intention is to state what MYRADA and Sanghamithra are attempting to do because this is one of the reasons why Sanghamithra is different. The criticism that microcredit does not support micro-enterprises raises several issues which are discussed later. The present scenario in the microfinance sector (driven to a large extent by sources which are from or have their roots abroad) can be described by the following analogy: The MFI is a steam driven train, pushed to go faster and faster (growth). New carriages are attached (credit, savings, insurance, etc.). There are ticket inspectors (rating experts) who walk through the train, concerned only about whether the ticket is correct; they have no time or interest to look outside the window. The train driver is someone who has seen a lot of trains pass by and always felt that given a chance, (s)he would make a much better driver—in most cases (s)he was running a popular hotel on the platform (an NGO in close touch with people and their needs)—and so (s)he knows how many people to expect on the train, how much of food and drink is required. In some cases (s)he is the Station Master who has experienced the power of stopping trains and letting them go even if (s)he has never driven one (Government Officers with authority but little experience in the financial sector who are put in charge of microfinance companies). But once in the driver’s seat they have no clue about what the signals (the ratios that indicate the health of an MFI) mean as they flash past. The Manual of Instructions, supporting the corporate objective demands an increase in the speed of the train. After all, it has to make many trips back and forth—to earn enough to be a viable (sustainable MFI) route. But once again the train drivers cannot read the curves in the line and they do not know when and how much to slow down and when to accelerate. Some wagons—the lower class ones—get derailed (the MFI’s too rapid grow results in increasing NPAs and opening of branches without adequate support). There is little maintenance and no upgrading of the track (Capacitybuilding of MFI staff and the constant upgradation of supporting systems are usually given last priority); yet faster speeds are encouraged—Station


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to Station (MFI growth YoY, QoQ,); there is little or no attention to or concern for the impact this has on the passengers—who are thrown around and often fall off, especially those in the general/unreserved and lower class compartments (the poor) where the supporting system of protective railings and ‘hand hold’ straps are missing (in the credit alone-minimalist approach).

To elaborate further on each of the three questions/issues raised above: Why did MYRADA promote a separate institution—the MFI called Sanghamithra—to manage microfinance? And how does this make Sanghamithra different? Sanghamithra2 is not an NGO-MFI. It is a separate MFI promoted by MYRADA. MYRADA pioneered the SAG movement and continues to promote the SHG-Bank Linkage Programme. Though Sanghamithra was deliberately set up by MYRADA as a separate institution, it shares the vision of MYRADA—promoting self-governed institutions of the poor— though its mission is more restricted—to provide credit to SAGs. The Chairperson and several of the Board members of Sanghamithra are from MYRADA. The intention of promoting Sanghamithra was that it would provide credit to SAGs (where the banks left gaps) formed by MYRADA in the first phase and then to SAGs promoted by other institutions, provided they met the performance criteria set by MYRADA/Sanghamithra. While, therefore, Sanghamithra functions independently with senior staff who have banking experience, MYRADA continues to guide it so that it continues to share and promote a common vision. Apart from lending to SAGs, Sanghamithra is also now lending to Watershed Management Associations (Area Groups comprising all stakeholders in a micro watershed) formed by MYRADA and other NGOs. 2 Sanghamithra has two programmes: Rural and Urban. The Rural Programme Head Office is in Mysore. It started lending in February 2000. Cumulative disbursements as on September 30, 2005 stood at Rs 43.7 crores. Outstanding client SAG Accounts is 4116. One credit officer serves 187 SAGs; outstandings per credit officer is Rs 82.25 lakhs. Net Operational surplus (after depreciation and prudential provisioning) is Rs 38.36 lakhs. Operation Sustainability Ratio is 239 per cent, Financial Sustainability Ratio is 142 per cent, Financial Sustainability (including imputed cost of net owned funds at 6 per cent) is 120 per cent. Interest on loans to SAGs is 12.5 per cent. The Urban Programme started lending in October 2000. Cumulative disbursements as on September 30, 2005 stood at Rs 15 crores, Outstanding SAG accounts number 2946. One credit officer serves 120 SAGs. Outstandings per credit officer are Rs 68.60 lakhs. Operational Sustainability Ratio is 106 per cent and Financial Sustainability Ratio 92 per cent. Interest on loans to SAGs is 24 per cent.

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With the credibility of SHGs gaining ground in the mid-1980s–due to the good performance in disbursement and repayment through the NABARD-sponsored SHG-bank linkage programme–MYRADA was offered loans by several banks and by one government-sponsored microfinance institution to on-lend to SHGs. The reasons for this offer from banks was related to their priority sector lending requirements, to image-building and to the need to reduce transaction costs involved in lending to SHGs directly; an easy solution was to lend in bulk to NGOs. This also provided the banks with a degree of security since they held (often implicitly) the NGO responsible for repayments. NABARD supported this approach of the banks to use NGOs as intermediaries since it helped to achieve the ambitious targets set by government for the SHGbank linkage programme. MYRADA at that time (and even today) was strongly promoting the SHG-bank linkage programme which took at least four years to take off after it was launched by NABARD in 1992. While NABARD spared no efforts to persuade senior banking staff to promote the programme, MYRADA was a major player at field levels, relentlessly lobbying with Branch Managers and trying hard to remove hurdles which impeded the progress of the programme; it also undertook to train about 3,000 bankers (a large number of them with NABARD support) in the art of relating to and assessing SHGs. But at times this effort was frustrating. Some Branch Mangers were just too comfortable in their ‘box’; some ‘cooperative’ Managers were transferred and succeeded by totally ‘non-cooperative’ persons. Some major banks were responsive and even proactive; others woke up to the SHG-bank linkage programme as late as 2000. As a result, even in the socalled successful South (of India), there were and still are large gaps in SHG-bank linkage. MYRADA decided that an alternative arrangement/ institution was required, mainly to fill these gaps, to provide some degree of continuity in an area but also to introduce an element of competition between the ‘alternate institution’ and the Banks. MYRADA’s position was that even if this alternate institution was promoted, MYRADA would continue to promote the bank linkage programme. The assumption on MYRADA’s part was that competition was required; it would serve to keep both the Banks and the proposed institution (i.e., Sanghamithra) on their toes. Subsequent experiences between 2000 and 2003 proved this assumption to be correct.3 3

Impact Assessment Report by Ms. Girija Srinivasan, September 2003.


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To fill in the gaps left by the banks, MYRADA had three management options: (a) to borrow money and lend through its existing extension staff and organizational structure using the same financial systems (which were computerized and inter-connected at this time); in fact, most NGOs in India who decided to receive funds in bulk and on-lend adopted this approach. (b) To borrow money and to lend under the name of MYRADA but to set up a parallel department within the organization which would function separately from the programme department; the need to collaborate would be present, but the pattern and dynamics would be worked out in the field. There were a few examples of this approach, the most notable one being BRAC of Bangladesh. (c) to set up a separate financial institution, with staff having experience in banking and finance, while ensuring an organizational structure that would enable MYRADA to ensure that the institution shared MYRADA’s vision and sought to promote this vision in its operations. MYRADA decided in 1993, after considerable thought and discussion, on the third option for the following reasons: The first option was rejected because while the financial systems in MYRADA were good and suited its needs of programme management, they did not suit the needs of an MF Institution. For example, MYRADA’s systems were not generated or programmed to throw up the critical ratios that a professional MFI management requires to monitor performance. Besides, the culture of MYRADA staff differed from what an MFI would feel comfortable with. For example, when Sanghamithra required two post dated cheques from the SAGs as an insurance against possible repayment delays, the MYRADA field staff thought that this requirement questioned the integrity of the SAGs, even if this was not the intention. Third the general opinion was that MYRADA’s image as an NGO would be compromised if it entered the business of lending money on interest. The current practice of NGO-MFIs both in other countries and increasingly in India was to lend at real rates ranging from 20 to 35 per cent which was far above the ‘acceptable’ rates expected from an institution like an NGO. While some of these NGOs-MFIs are complimented by donors for achieving financial and operational sustainability and observing internationally accepted standards and norms governing credit delivery, they tend to lose the credibility required to support social and economic change; in many cases, supporting these changes could be seen as undermining the interests to which an MFI gave priority. The second option did not find favour since, even though the departments would be different, cross subsidization in terms of services could not be avoided and this would not help to capture a correct financial

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picture of the microfinance initiative. Further, several in MYRADA suspected that the microfinance department would very soon take priority and overshadow the concerns and priorities of the social/development programmes both in the field (where the agenda and time of groups would begin to be dominated by financial issues to the detriment of social ones) and within the organization. The microfinance department would require regular and precise reporting and feedback mainly related to financial matters which would, in turn, condition the meetings and priorities of the organization and of the SAGs. It was suspected that the SAG meetings which hitherto devoted considerable time to socio/political/gender issues (apart from credit matters) would tend towards devoting most of their time and energy to credit/financial matters related to disbursements and repayment since they would be under pressure to report monthly on the progress in these areas which are critical to the health of a credit programme. Studies and visits also indicated that several NGOs that went into microfinance continued to manage their microfinance initiative within their existing organization, staff and systems; this created a scenario where cross subsidization went unnoticed, where staff who were not equipped with the necessary skills were given charge of managing microfinance and where the warning lights regarding the health of the credit programme were disregarded or their messages not recognized. The results of such overlap of functions are disturbing and have given rise to several developments, which the critics of microfinance have spotted and rightly criticized. This left the third option, i.e., that of starting a separate microfinancial institution. This had to face several hurdles as official policy at that time (between 1993 and 1996) did not favour or support such initiatives. These matters took 3–4 years to resolve. The book referred to above: ‘Sanghamithra—a MFI with a Difference’ records in detail the long process that eventually resulted in Sanghamithra being able to start lending operations in 2000. But the process, though long and tedious, did serve to prove that even the official financial system—the RBI and the Income Tax Authorities—can and will support an initiative if they understand its value to support the poor and are convinced that the promoters have no other agenda. In hindsight, it now appears that while the policy of lending to NGOs and asking them to on-lend did help the official financial institutions to reach the target of lending to SHGs which was set by the Central Government, it surely did not help to professionalize the credit strategy.


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A similar criticism can be made of several programmes supported by Multilateral/Bilateral Agencies including DFID and the World Bank, which include a component of credit which a village association is expected to manage. The more recent initiatives to help these NGO-MFIs to morph into professionally managed MFIs and to even provide them with a transformation loan/grant (SIDBI is an example) to facilitate the process is an effort to correct this aberration. Therefore, the decision was taken to vest the development programme and microfinance functions in legally separate institutions (MYRADA and Sanghamithra). This was a considered step that has enabled each to remain focussed on its priorities, and yet the close collaboration between the two has served until now to manage some of the dilemmas outlined above. Even if the position of several critics and experts that the priority of the poor is to have a safe place to save rather than to borrow is universally valid, should the NGO-MFI necessarily be the only institution to fulfil this requirement? Can there be other institutions which people find more accessible, where their savings are more in their control than if they were with the MFI, which often prefers to retain their savings to establish a degree of control over borrowers—which is often left unsaid? Critics of NGO-initiated microfinance programmes, while pointing out that microcredit alone is not enough, list a number of issues that also need to be addressed in order to make a dent on poverty, development and economic growth: one of these issues relates to savings. They point out that many (majority) of the poor value a place to save just as much (or even more than) access to credit. For good reasons, many NGO-MFIs cannot fulfil this need. The key sub-components include that the savings are safe, liquid, interestbearing and that the savings facility is convenient. They conclude that assisting the poor in protecting and growing their savings is a clear route to financial independence and thus, ‘highly developmental’. MYRADA could not agree more. When MYRADA started identifying and promoting SAGs and building their institutional capacities, the first activity promoted was regular savings. The habit of savings/thrift (regularly, mainly weekly) was projected as even more important than just periodical savings. Loans were promoted only after 6 months of savings and institutional capacity training. As of June 30, 2005, MYRADA has 9,304 SAGs in its projects. They have a total capital Rs 103 crores of which Rs 45 crores is savings and Rs 23 crores interest earned from giving loans to members.

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The evidence that MYRADA’s experience over 20 years provides does confirm that poor households (which have either the husband or wife who wants to get out of poverty and is willing to take decisions—sometimes hard ones—that reduce unnecessary consumption like liquor) want to save in cash provided the savings are in their control (so that they are readily accessible) and safe. They are not inclined to invest their savings initially in banks even if they earn interest. The transaction costs to the poor in dealing with banks just to deposit small amounts of regular savings— which is the only pattern of savings suitable to their lifestyle—are considered to be too high, and the ‘pigmy collection’ system of house-to-house collection of daily savings introduced by the Banks of Dakshina Karnataka in the early 20th century is no longer such a ubiquitous service. MYRADA’s position is that even if the assumption that the transaction costs of savings in an MFI are lower than the cost of savings in banks is valid, why should the poor person be expected—or compelled—to invest in the MFI only? Is it to reduce transaction costs to the saver that MFIs wish to accept savings? Or is it because the MFI sees this as a significant means to augment loanable funds? Is it to enhance the credibility of the MFI as a professional and full-range service provider? Is it because the MFI makes savings with it a condition for lending? Is it because the MFI feels that it helps to establish a degree of control over borrowers? Is this the MFI’s strategy to build in risk coverage? These may be valid reasons and MYRADA has enough experience to know that most MFIs which support a policy that requires the poor to save with them are motivated by one or more of these reasons. True, cheap and ready capital may be an important factor, but this is questionable since many MFIs obtain grants from donors. On the other hand, the group members can often obtain better returns from investing in other financial institutions than in the MFI, so why should they invest in the MFI unless under some degree of compulsion to do so as mentioned above? Besides, given the current spate of Finance Companies defaulting on deposits, the perception of risk of the member investing in an MFI is significantly high. Sanghamithra does not have the licence to accept public deposits but even if it did have this licence, would people freely invest their savings in it when they have banks which surely generate more confidence than a new MFI? This is doubtful, unless of course Sanghamithra applies pressure and conditionalities related to loans. On the other hand, over the last 20 years, the SAGs have proved that they are capable of performing this savings function in a way that the poor find more appropriate at least in the first two to three years of the SAG’s existence. Later, MYRADA’s,


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studies show that they diversify their financial savings, keeping a part in the common fund of the SAG and another part in the local bank. Sanghamithra in turn builds on the strength of the members and the SAGs— namely the willingness and ability of the members to save and their confidence that the SAGs function in a manner that helps them to manage their savings according to their priorities that change from season to season (not just from year to year). For Sanghamithra, the SAGs’ performance in management of savings is an important criterion to extend a loan. For MYRADA/Sanghamithra the priority concern is for the poor to have an institution in which they have confidence so that they willingly deposit their savings over which they have control so that their access to and management of their savings is governed by their own decisions and not by an outside agency like an MFI (which will always have a greater influence on the management of savings than the people’s group). In Myrada’s strategic approach, this institution is the SAG. Sanghamithra, on its part, lends only to SAGs, and since in its assessment of the SAGs, their performance in the regularity and management of savings are important indicators, it is obvious that Sanghamithra promotes not only savings but also the management of savings by the SAG. MYRADA’s strategy has been to build on the strengths of people. One of their major strengths is their relation of affinity that exists between a set of households; this affinity is based on relationships of trust and mutual support including the acceptance of sanctions for deviant behaviour once the rules governing behaviour and credit transactions have been agreed to. These relations in turn help the group to balance the common good with individual benefit and at times—particularly in the initial stages—to place the common good above individual benefit. This common good is the common fund of the SAG into which each member contributes regular savings. Each member realises that his/her contribution to support the common good has its returns to the individual—up to a certain point. Myrada’s experience indicates therefore, that the MFI need not be the only institution that offers a savings instrument for the poor; the SAG could be and has emerged as another instrument and a more appropriate one. A study of the SAGs in Myrada projects shows that the SAG members are able to decide on how much to save and invest in the common fund of the group from which they extend loans. They decide whether to reduce or increase the amount of weekly savings depending on seasonal cash flows. Each member is free to decide to save independently in the bank after the group’s obligations are met—and most start saving independently after 3–5 years of being a member. Many SAGs offer interest

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to their members on the savings in the common fund. Several SAGs after functioning for 10 years have decide to distribute all or part of their common fund and to start over again, sometimes with several new members. Does this mean that the MFIs will have to depend on donor funds to meet their capital requirements? Yes and no. Sanghamithra for instance started with donor funds but thereafter has borrowed from NABARD, Canara Bank, Indian Bank and currently has no problem to meet its capital requirements through bank loans. Does donor funding reduce the professionalism demanded by the MF sector? The initial infusion of grants surely helped Sanghamithra to break even quicker than if it had to depend on loans from the start. However, there is no evidence that the initial dependence on grants weakened or undermined Sanghamithra’s commitment to manage credit/finance in a professional manner with qualified staff paid competitive remuneration and supported by the most appropriate systems. Professionalism in microfinance is not determined by the acceptance or non-acceptance of grants; there are other factors related to the management of this finance that serve as more valid indicators to measure professionalism. Let us take up the points mentioned in the third set of issues separately (a) The Minimalist Approach: Is the criticism valid that NGO-led microfinance adopts a minimalist approach—that credit suffices for the borrower to take off on the growth path? Are NGO-MFIs the only operators who are vulnerable to the minimalist tag? Is the strategy of minimalism adopted because the MFI needs to grow rapidly to achieve self-reliance? There is evidence that some NGO-MFIs believe that credit is the critical and only trigger necessary for growth in the informal sector where the poor operate; therefore, once it is provided, the borrower is capable of finding opportunities to invest and grow in a sustainable manner. Critics say that this is not a valid assumption since their studies show that microcredit can provide only consumption smoothing and at best small activities which do not add value or increase productivity and generate employment; they say that microcredit may increase scale to some extent, but the activities are usually seasonal and not viable; this is not adequate to lay the basis for eradicating poverty in a sustained manner, and for increasing the GDP.


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The reasons why the impact of NGO-led MFIs is limited, however, are not clearly spelt out by many vocal critics: Is it that other supporting services are required for credit to blossom into productive investment (which NGO-MFIs in particular cannot provide if they are to achieve financial sustainability), or is it that the pressures to achieve financial sustainability and growth pushes MFIs into a portfolio that gives priority to small loans with a quick turnover—growth is thus based on new small loans (‘firm births and not firm growth’) rather than on larger loans over a longer period which, critics say, have the potential to increase productivity, income, employment and sustainable growth? Is there a difference in the loan portfolio of MFIs which stand alone (in other words MFIs which started out and remain as financial institutions without linking with organizations that promote all round development in the areas where the MFI provides credit) and those MFIs which work within a broader development context? MYRADA and Sanghamithra’s position is that credit is necessary but not enough; supporting services are required (this is elaborated later). However, these supporting services need not be provided by the MFI; they can be provided by an NGO or come from the all-round growth in the area where the MFI operates. This is one of the reasons why Sanghamithra, even though it provides credit directly to SAGs, nevertheless enters into formal partnership agreements with NGOs promoting the SAGs as part of a broader development strategy. There is some reassurance in knowing that while credit flows to the SAGs from Sanghamithra, other capacity-building and back stopping services needed for the SAG members to improve their livelihood prospects are provided by the NGO partners. In the case of MYRADA for example, SAGs are formed in the context of livelihood support programmes such as watershed development, skills training, linkages with technical and marketing support services and animal husbandry, agriculture, horticulture and non-farm enterprise extension services. Since the risk mitigation measures and improved investment opportunities are created under the programme, credit linkages with banks or Sanghamithra enable greater livelihood security and enterprise development. Once it breaks even and earns a surplus, the MFI can provide funds to invest in certain of these support services (including management and skills training, market linkages and infrastructure development). In fact, it can even raise separate grants for this purpose provided there is clarity on end-use and separate tracking of such funds. This is exactly what Sanghamithra has started to do after three years of functioning. FWWB (Friends of Women’s World Banking) is another microcredit

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provider that has demonstrated a similar partnership approach that engages with its partners to create a supportive environment through capacity-building, leadership development and linkage establishment where credit has a greater chance to be productively deployed and build sustainable livelihoods. (However, the deployment of surplus income for capacity-building and provision of other support services is valid only for MFIs which are not-for-profit and which do not distribute dividends.) In areas bordering small towns and cities which experience all round growth due to investment from private and public sources, there are often adequate opportunities and support services including linkages and market information without the need for NGO intervention in these areas. The priority given by some MFIs to small loans to individuals with a quick turnover in order to reduce risk and increase the number of loans in the rush towards sustainability is another noticeable trend. It is also driven by the model where the MFI controls the size and purpose of loans. In the MYRADA/Sanghamithra model, the MFI (Sanghamithra) does not control the size and purpose of loans to members. The SAG is in control of both. The SAG also negotiates the size of the loan from Sanghamithra. Studies indicate that in the first year or two the loan size from Sanghamithra to the SAG is small (Rs 10,000 to 50,000), but it increases from the third loan where loans of Rs 2 to 3 lakhs are becoming common. Where SAGs do not divide the MFI loan equally between all members (as no well functioning SAG will do—equal division in fact is a sign of a weak SAG which should not have been eligible for a loan in the first place), the average loan size to individual members4 is increasing year on year. A survey in 2005 of the size of loans taken by individual members in 238 SAGs (in MYRADA Projects) shows that 83.6 per cent of loans to individual members are over Rs 10,0005 and 8.3 per cent between Rs 5,001 and Rs 10,000.6 There is adequate anecdotal evidence that this amount provides the borrower with a financial base which he/she can then invest in small enterprises or businesses which earn an adequate income to keep the family above the poverty line. Case studies to provide further insights into this process and on the impact will be undertaken by MYRADA/Sanghamithra.

4

Average number of members in an SAG in MYRADA is 18. In fact, a large number of these loans are for amounts ranging from Rs 20,000 to Rs 30,000 but since MYRADA’s current software stops distinguishing after Rs 10,000 we cannot break this down further. 6 In fact, a large number of loans are over Rs 15,000 but the software was not developed to capture this. 5


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A major feature in the minimalist approach adopted by some MFIs is the trend to lend to individuals. There is evidence that this trend is accompanied by the rapid shift in the borrower profile from those below the poverty line to those above, who have basic assets/resources and can acquire the skills and linkages required to negotiate for a loan and to utilize the credit productively. This trend to raise the profile of borrowers is also evident where MFIs engage intermediaries on commission or incentive basis who in turn try to cut their risks and transaction costs and increase their profits by pushing larger loans to borrowers who can provide proof that they possess adequate resources and productive assets, which are (implicitly or explicitly) offered as guarantee. MYRADA/ Sanghamithra has no quarrel with this trend to lend to borrowers who are above the poverty line since they also do not have access to credit from official institutions which is adequate to start or expand small business enterprises. However to include such initiatives under the label ‘Micro Finance Institutions’ does not exactly reflect the origin of microcredit which began with a clear focus on poverty. The problem arises in remote and neglected areas where MFIs enter with credit provision only and where there is no NGO promoting growth through an all round development programme, and neither is there adequate growth in the area due to public or private investment. Our understanding of growth here includes investment to increase productivity and to reduce risk of existing livelihood activities, undertaking new ones, investment in health, basic education, infrastructure and linkages and above all in the building of people’s institutions appropriate to the resource to be managed (examples being SAGs to manage savings and credit, Micro Watershed Management Associations, Milk Societies, Village Water and Sanitation Committees, functioning Gram Sabhas and Gram Panchayats, etc). In such areas, which are remote and neglected, the evidence indicates that the provision of microcredit/finance alone is insufficient to raise people and keep them above the poverty line. Besides being insufficient, the Non-Performing Assets also increase rapidly which makes it difficult to sustain the MFI. Sanghamithra also differs from other MFIs in its approach to ‘growth’. Unlike the train described above, Sanghamithra does not seek to grow faster and faster; it slows down at the curves, and gathers speed required by the external situation rather than by the internal organizational demands. What does this mean on the ground? Sanghamithra has a clear policy that it will enter an area where MYRADA and other NGOs have functioned for some years; it will lend to SAGs only if the local banks are

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not responsive. In Dharmapuri District for instance MYRADA alone had over 1,000 SAGs eligible for bank linkages, but very few were linked. Sanghamithra opened a branch there. Within six months, the bank managers who were aware of the success of Sanghamithra’s activities since all transactions passed through the banks came forward to lend. The Chairman of the Bank visited Sanghamithra’s Chairman and offered full cooperation in extending credit to SAGs. Sanghamithra therefore scaled down its involvement. A similar situation was encountered in Chitradurga District, where a very dynamic Bank Chairman increased the bank linkage programme by over 100 per cent enabling Sanghamithra to withdraw from SAGs and to look for other people’s groups which were functioning well, like the Watershed Management Associations. However, if the bank’s performance falls, as has happened in the service areas of some branches when the managers were transferred, Sanghamithra enters the area once again. Sanghamithra’s corporate policy is not to grow rapidly or to grow into a mammoth institution. It plans to target an outstanding portfolio of around Rs 30–35 crore and is planning its staff and supporting systems to manage this portfolio effectively and efficiently. MYRADA plans to start other Sanghamithras in other areas. These Sanghamithras will be supported and regulated by a Fund Management Company which, it is hoped, will introduce and implement a regulatory mechanism that is both institutionalized and distinct from MYRADA and Sanghamithra. Both MYRADA and Sanghamithra recognize that credit is important but not a sufficient condition; other support services are necessary; they also recognize that even credit is inadequate if it is not available is repeated and timely tranches and in a adequate size/amount. But they also recognize that it is not necessary for the MFI to provide all these support services in the first phase especially when its energies are focussed on finance management (mobilizing, lending, repayments and building-up the infrastructure and staff to support its operations) and when it has still to break even. As far as Sanghamithra is concerned, after it achieved financial/operational sufficiency, it has invested in institutional capacity-building both of SAGs and NGOs, which with MYRADA’s support it has the capacity to implement. However MYRADA and Sanghamithra still believe that services like insurance, for example should be left to other institutions more capable than the MFI to provide these services.

To conclude the discussion on the ‘minimalist approach’, if minimalism refers to credit provision alone, without attempting to foster an enabling


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environment in which this credit has the opportunity to convert to flourishing enterprise, is it borne out by fact that this tag can be applied only to NGO-MFIs? How many non-NGO Financial Institutions—including large banks—can claim to be doing more than credit provision? Their loan sizes and transaction volumes may be larger than NGO-MFIs but it still amounts to giving loans and doing no more than that. Several recent entrants into the Micro Finance Sector—many of them with previous experience in major banks—tend to view MF institutions in the same frame that they view Banks and other Financial Institutions which are driven by growth and profit and which largely restrict their services to finance provision and to enable transactions to be carried out quickly, at any time and in any place. The major concern of these stand alone, as against NGO-backed, financial institutions, is growth and sustainability (after all they have to keep their shareholders happy). In the final analysis, the MFI comes first—and often last; the impact of the loan may be relevant from a development point of view but it is not a critical indicator of success provided repayments are made on time. This group too is open to the minimalist tag. (b) Is the criticism valid that NGO-led MFIs can at best achieve consumption smoothing and not true enterprise/business development? There is a great deal of variation in the understanding of the terms ‘livelihoods’, ‘microenterprises’ and ‘micro businesses’. This is from where some of the confusion arises. Livelihood activities are understood by experts7 as those which involve only one individual or family. They are small, do not employ others, are not driven by sound business norms, are of low skill, operate out of home or are mobile, with low margins and low growth rates and do not bring the household out of poverty—at least not in a sustained manner; they do not contribute to growth of employment and GDP. These livelihood activities serve to address the symptoms of poverty rather than to eradicate it. An analysis of the purposes of loans given by SAGs in MYRADA’s Projects indicates that, a large number of loans fall in this pattern. They are managed by one family, require low/traditional skills, do not employ others and have low margins and growth rates. (However, it must be noted that ‘low’ margins relate to expectations) Examples of loans falling in this category in SAGs promoted by MYRADA are (a) agriculture; (b) animal 7 According to Thomas Dichter ‘Case Studies in Micro finance: Discussion/Technical Paper—NGOs in Micro finance: Past, Present and Future—An Essay 1999’.

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husbandry; (c) cottage industries; and (d) trading/hiring. But is the assumption valid that these livelihood activities address only the symptoms of poverty? MYRADA’s experience indicates that they go further. Enterprises are distinguished by these experts from livelihood activities. In the early 1980s, enterprises were described as businesses from which the expected outcomes are increased productivity, jobs and purchasing power adequate to lift a poor family out of poverty permanently and to contribute to overall growth, employment and GDP. However by the late 1980s the term microenterprise, they claim, entered the development discourse and came to be associated with the informal sector and with the poor. A summary of microenterprise characteristics drawn from the literature on the informal sector during the 1990s shows that microenterprises are similar to livelihood activities described above. Hence, Thomas Dichter concludes Many micro enterprises (including livelihood activities) are thus hedges, not ways to build sustainable growing business. Few are dynamic firms. In the majority of developing countries only a minority of informal firms with four workers or less experience growth of any sort. Indeed informal sector growth comes not from firm growth, but from net gains in firm ‘births’. This understanding of microenterprises appears to be the common one in India. For example, a recent flier (November 2005) from IRMA announcing a programme called ‘Development and Management of Micro enterprises’ defines microenterprises as tiny businesses employing one or two or a few family members and lying in the informal sector . . . they show marked heterogeneity in size, investment, outputs, viability and survival. With the governments paying little attention to them, they need to be supported by voluntary agencies and donors, at least in their initial stage, and helped to graduate to small viable units’. This removes the distinction between livelihood activities and enterprises and both are considered to be non-viable by themselves. What does viable mean? The dictionary meaning is ‘capable of working successfully or surviving’. For poor people an activity is viable if they feel that they get an income from the activity which they think is worthwhile—or worth the effort put into it, either in comparison to some other income generating activity or (more commonly in the rural area) in comparison to doing nothing that brings tangible benefit. Some of these activities by their very nature are seasonal; therefore ‘survival’ has to be interpreted differently. They survive for a short period every year. Dryland Agriculture is a good example. Further, MYRADA’s data indicates that the activity for which microloans are taken is one of several income


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generating activities that households juggle with to meet their daily needs throughout the year. Given the scarce resources, poor infrastructure and inability to take risks due to lack of supporting systems, poor people tend to opt for a bundle of livelihood activities just as they practice multicropping due to the uncertainty of rain. Does this lower the value of a microenterprise and make it just a non-viable activity or a consumption smoothing one? The critics of microcredit assume that a genuine enterprise should be a business large enough to provide full employment throughout the year to the family, and even to employ others. Such an enterprise, however, has to be the only income generating activity since it demands the full time and attention of the household. Why should the poor be put into this straitjacket of ‘one major enterprise’ throughout the year? Are they not the ones to choose what they find most suitable and ‘viable’? Getting involved in one major enterprise throughout the year may be considered by them as too large a risk which the household is not capable of handling. In this they are not different from large business houses that also do not put ‘all their eggs in one basket’. And finally, why should an activity be downgraded if it does not provide employment to others?8 To go back to the analysis of 238 SAGs related to the purpose and size of loans, which MYRADA undertook recently (2005 September). It indicates that 83 per cent of the loans taken by individual members were over Rs 10,000. The purposes for which members took these loans were for: agriculture/horticulture/sericulture inputs (33 per cent); household expenses like purchase of jewellery, vehicles, health, food, clothing, socioreligious functions (35 per cent); non-farm activities like cottage industries, small businesses, trading, hiring equipment (18 per cent); animal husbandry/poultry/fisheries, insurance (8 per cent); high cost debt release—from personal bondage, mortgaged lands & assets (2.7 per cent); housing related—biogas/cylinders, toilets/bathrooms (1.75 per cent); new opportunities, like training in skills, education, land purchase (1.5 per cent). Some of these activities are seasonal (agriculture related and some nonfarm activities), others continue throughout the year, others are one time purchases partially as savings or for better living conditions (jewellery, 8 Under the IRDP programme one viable activity projected was a sheep unit of 20 (female) plus 1 (male). A poor woman who got this unit had to give up all other livelihoods in order to maintain this sheep unit. How was she to survive? She solved her problem by selling one sheep every month until she felt her flock was of a manageable size that she could juggle with her other livelihood activities. The ‘viable unit’ concept did not survive!

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vehicles, land purchase, release from bondage and land mortgage which makes productive assets available and provides opportunities to people to work for themselves or to be educated). We venture to assume that an investment of over Rs10,000 in these activities—in the context of an overall development programme in the area managed by an NGO or Government/private enterprise—has the potential to provide an increase by 75 per cent to 100 per cent in family income. Besides, the households have in most cases also taken other loans from the groups at other times for other income generating activities. Further data on the impact of these loans is being collected and case studies are planned to assess whether this assumption is generally valid or not. However, at first sight, it does not appear that these loans are only for consumption smoothing or for ‘non-viable’ activities. Thus, MYRADA’s experience indicates that the criticisms related to ‘consumption smoothing loans’ raised by critics cannot be applied to all SAGs or NGO-MFIs. Much depends on the opportunities provided in the area due to investments from NGOs, the private sector and government and if the borrowers are also resource owners (like landowners) which they can improve or utilize more productively by borrowing from microcredit institutions for inputs like assured irrigation. In such cases or in such situations, there is ample evidence to indicate that group members (SAGs, Joint Liability Groups) have borrowed for investments that may not have created additional employment but have surely increased their incomes in a sustained manner through increases in scale and productivity. In the case of loans taken for trading and cottage industries there is also ample evidence that members of groups around cities and towns where there is over-all economic growth have increased their incomes substantially, some by increasing the scale of their enterprise, others through productivity increases (and for the poor person income is important, more than how it is achieved). These households have risen above the poverty line and remained there. It is true that not all the members of the groups have progressed in this manner. But then the ability and willingness to take risks also differs from person to person not just with the poor but also with all of us involved in development. (c) While preserving their separate identities can the two (NGO and MFI) be closely meshed so that a balance can be maintained between, on the one hand promoting a supporting environment for poverty eradication and on the other a loan portfolio which includes activities that increase income through genuine business initiatives?


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This meshing is what MYRADA and Sanghamithra have attempted to accomplish. Can MYRADA preserve its primary objective to assist the poor in building their institutions and necessary linkages so that they have an institution to manage credit/finance as well as a power base to influence change in society and at home while at the same time can Sanghamithra achieve financial sustainability while providing credit in a manner which supports the efforts of the poor to rise above poverty? What is common to both institutions (MYRADA and Sanghamithra) is the vision; both believe in ‘building poor peoples institutions’ and to work with institutions of the poor appropriate to manage finance, namely the SAGs.9 MYRADA’s mission is to assist in building the SAGs to manage their affairs including finance (this requires investment which SAGs cannot provide and therefore comes from elsewhere, usually as a grant) while Sanghamithra’s mission is to provide these institutions with credit—it does not lend to individuals, neither does it lend to individuals in groups (the Joint Liability Model), it lends to the SAGs. Over the past 5 years during which Sanghamithra has been functioning, there is ample evidence that these two institutions have been able to work to support one another, while maintaining their identities.10 Maintaining this balance is not easy. MYRADA attempted to create this balance when it promoted Sanghamithra, and continues to do so. In substantial part it has been made possible by the fact that several of MYRADA’s senior staff are on Sanghamithra’s Board; and there is a regular exchange and sharing of reports and assessments. It also requires that Sanghamithra shares the vision of MYRADA while maintaining an independent mission. This again is not easy to achieve. Sanghamithra is under various pressures—both from external sources—(originating from the prevalent culture in the Micro Finance Sector and the various appraisals that it is subject to by rating agencies and individuals prior to being accepted as eligible for a loan from a financial institution) as well as from internal sources, since the staff tend to slip into the ‘growth/sustainability box’ as the only or dominant organizational objective. These pressures can cause it to drift away from its original objectives. Maintaining this balance requires constant monitoring of Sanghamithra’s operations. Whether it has 9 MYRADA also helps to build other types of institutions like the Watershed Management Associations, Gram Sabhas, School Management Committees, Water and Sanitation Committees, etc. Sanghamithra also lends to Watershed Management Associations. 10 For more on this refer to ‘Putting Institutions First—Even in Micro Finance’ by this author . . . .

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succeeded or not will require further and more in-depth studies; this chapter’s intention is to state what MYRADA and Sanghamithra are attempting to do. Meanwhile, in order to maintain this balance the following signposts guide the decisions of MYRADA and Sanghamithra:

Credit is critical but can be absorbed productively only within a larger development context: While MYRADA does not promote microfinance, neither does Sanghamithra open branches except within a context of over-all development investment and growth which is undertaken by the NGOs who implement an integrated development programme within which formation and training of SAGs is a critical component. Most of this investment is a grant. People’s investment in cash is mobilized and their participation in planning, managing budgeting and implementing these activities and maintaining assets is critical. Within this context, Sanghamithra (or the Banks) are brought in to extend loans. Credit alone is not enough but this does not mean that the Sanghamithra has to become the single-source agency for all financial services. Savings, insurance, marketing, capacity-building, linkages are equally important components necessary to sustain livelihoods. Since Sanghamithra’s focus is only to provide credit, can this be called a minimalist approach? Is it necessary for Sanghamithra to take on all functions? MYRADA/Sanghamithra’s view is that it is not necessary. Other institutions must be brought in. MYRADA/NGOs provide the infrastructure, linkages and training as described above, but not all the other services. For example, when Birla Sun Life came up with a good insurance product that appealed to SAG members, it was decided that this service could well be performed by them. The Company relates directly with the Projects where Sanghamithra is lending. The administration required to support the insurance policies is carried out by the Community Managed Resource Centres (which earn a commission) and not by MYRADA or Sanghamithra. Similarly several insurance agencies have been brought in to cover animal insurance. Health insurance is now being explored. And savings, as already mentioned, is a service managed by the SAGs themselves. Gowth in size of loan portfolio is not the major driving force or measuring stick. True, Sanghamithra had to achieve a certain size in order to achieve operational and financial self sufficiency, which took it 3 years from the date it advanced its first loan. Now that


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this stage is reached, it can resume focus on its original goal to be ‘not the sole one and not the biggest but the best’. It would like to contribute to setting standards in good practices. A portfolio of Rs 30–35 crore outstanding—which is what it intends to remain at for the moment—may not make it a ‘big’ organization but it can still prove itself to be an effective organization. There is no doubt that this came about solely because it was born as, and continues to be a ‘Sister Concern’ of MYRADA. However, this influence extends only to providing the parameters for lending and growth; it does not compromise on the other banking practices needed to make it a self-sufficient organization as long as it chooses to remain in the sector. Not competing but creating competitive conditions. MYRADA has endeavoured to push the SAG-bank linkage programme, while at the same time promoting Sanghamithra. MYRADA thus fosters competition in the sector because it believes that competition plays a critical role in ensuring the best service to the members of the SAGs. Consequently, Sanghamithra has been under pressure to keep its service charges (including interest rates) comparable to the banks and to provide better service—at the doorstep. The results of this competitive environment during the past 5 years are evident. Banks in rural areas filled in the gaps they had left when they found that Sanghamithra’s loans were being repaid on time, they also increased the size of loans to match with Sanghamithra. Bank Managers went to the SAGs and even to the houses of the SAG representatives requesting them to take loans (a totally new experience). Some of them also set up facilities and funds for SAG training. Sanghamithra on its part has had to keep its transaction costs down and to ensure that its services were friendly and at the doorstep in order to remain competitive. True, it has had to mobilize grants in the initial phase so that it could keep the cost of credit low, but this was clearly stated up front by the founders of Sanghamithra and incorporated into the strategic business plan. Whether this pressure from Bankers to link with SAGs will continue in future given the increasing focus on profit and in view of the amalgamations of several Regional Rural Banks, is a major concern at this time.

To conclude, MYRADA’s experience indicates that the pebble of microfinance causes larger ripples than its size leads one to presume.

14 Beyond Microcredit: Building Nested Institutions of Savings and Credit Groups in India—The Kalanjiam Experience* K. NARENDER

D

HAN (Development of Humane Action) Foundation is a grassroots action agency working with poor communities in villages. Enhancing poor people’s livelihoods in a sustainable way and enabling poor communities are the focus of its programmes. The mission of the organization is to build institutions for innovation in development work to bring positive changes in the lives of the poor. DHAN Foundation was established in the year 1997 as a spinoff of Professional Assistance for Development Action (PRADAN) based in New Delhi. DHAN Foundation believes in building the capacity of people in planning, organizing, conflict resolution and implementation of development programmes. This will be possible only when people are encouraged to work on a single thematic focus, either microfinance or small-scale irrigation, for a substantive period to pick-up developmental skills for survival. DHAN Foundation initiatives are aimed at building people involvement around specific themes and linking them with formal systems. After

* Paper presented at the Microcredit Summit +5 held at New York on 10–13 November 2002.

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successful demonstration of the specific activity, these institutions will move into civic programmes like Health and Education to address their member’s needs. Simultaneously DHAN Foundation as a ‘mother’ institution, promotes subsidiaries to upscale interventions and continue the promotional role to sustain the people’s organization which were formed. Our basic premise is that capable and concerned people are the prime movers of social development. Accordingly, our professional staff works directly with the community. DHAN Foundation runs two major programmes called Tankfed Agriculture Development Programme and Kalanjiam Community Banking Programme in the states of Tamil Nadu, Andhra Pradesh, Karnataka and Union Territory of Pondicherry. Human resource development is a distinct and full-time organizational activity, involving selection and induction of young people into the organization, development of functional skills for village work and ongoing professional development. A resource and research centre has also been established to document the change processes for dissemination, learning and policy advocacy. DHAN Foundation has a staff strength of 300, of which 200 are with the Kalanjiam Community Banking Programme. Investments are channelized in the form of loans and grants from various commercial banks and government agencies directly to community organizations. The promotional costs of DHAN Foundation are funded by grants from public agencies and overseas donors for specific projects and contributions towards the developmental initiatives provided by us to complement specific project investments.

KALANJIAM COMMUNITY BANKING PROGRAMME (KCBP) The Kalanjiam Community Banking Programme initiated in the year 1990 focuses on creating access and control for microfinance by poor women through promoting savings and credit groups and forming their nested institutions. Kalanjiam is the name given to the programme and it gives a common identity for all the people’s organizations promoted by the programme. Kalanjiam is a Tamil word, which means ‘prosperity’ and also ‘grainery’ where people store their wealth and grains to use in times of need. The KCBP works only with poor women and reached out to 1,52,384 families as on 30 November 2002. The activities are spread in 65

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locations covering 3,391 villages/slums of 18 backward and droughtprone districts of south India. The programme promoted 9,759 primary groups, 701 cluster development associations and 26 autonomous registered federations, which are owned and controlled by poor women. In addition to mobilizing savings of Rs 309 millions by members, the Community Banking Program has demonstrated large-scale linkages of the primary groups with local commercial and rural banks and federations with apex banks to address multiple credit needs of the poor and ensure sustainability of these organizations. A total of 7,517 groups have linked with 126 branches of 23 commercial banks and regional rural banks (RRBs) and mobilized Rs 30 crore as loans while 23 federations have linked with apex banks to mobilize a loan of Rs 151 million. The programme stabilizes the livelihoods of the poor by providing access to multiple credit needs which include consumption, supporting existing income-generating activities and creating new ones. As part of self-management and sustainability of groups, clusters and federations promoted by the Community Banking Programme share the costs of management out of their own savings and credit operations. The operational costs of DHAN Foundation during the promotional phase are being met out of grants mobilized from various philanthropic organizations. By providing regular access to savings, credit and insurance services, the programme is able to rescue many poor people from the clutches of moneylenders and arrest the income drain. In addition, the programme helped members to enhance their income and create assets. Many older groups and federations go beyond providing savings, credit and insurance services and meet the other social and development needs of members. The initiatives include addressing drinking water, health, education, housing, sanitation, basic infrastructure, alcoholism, gender issues and community development. DHAN Foundation as a member of many policymaking bodies on microfinance and through participating in national and international conferences strongly advocates refocussing of microfinance to address poverty and empowerment of the poor, especially women. As a resource centre, the Community Banking Programme organizes many capacity-building events and training programmes for bankers, government officials and representatives of NGOs within and outside the country on cost basis. So far, more than 3,000 persons have been trained through more than 200 programmes. DHAN Foundation is not involved in delivery of microfinance. Instead, it facilitates promotion of nested institutions of independent

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community development financial institutions (groups, cluster development associations and federations). Products are innovated and developed based on the local context and needs of the clients by these institutions. The present paper focusses on our experience of promoting and sustaining the nested institutions.

NEED FOR PROMOTION OF NESTED INSTITUTIONS OF SAVINGS AND CREDIT GROUPS Reversing priorities—Going beyond microcredit: Building nested institutions to shape the development processes, are guided by the systems and processes necessary to reverse the priorities in favour of poor. The goal of development finance should be primarily to address the issue of reducing poverty on a significant scale in addition to delivering services on a commercially viable basis. Second, the emphasis should be on developing suitable institutions and financial services controlled by the users and then linked with mainstream financial institutions. Finally, providing financial services should be seen as an instrument to address the overall development of the poor. Sustainability can be achieved only when the poor are able to manage their problems through self reliance and mutual cooperation. Promote collective action to create a demand system: The mainstream financial institutions need to be influenced by creating a strong demand system of primary groups at different levels to respond to the needs of the poor. Nested institutions of primary groups at each level provide an opportunity for collective action and promote local leadership among the poor women to support democracy and local governance. Promote self governance—Develop own programmes and products: The poor need to be involved to develop suitable programmes and appropriate products to meet their diverse needs. Sustainability of programmes is achieved when people take on the role of decision-making. Nested institutions promote self governance of members at each level, which would help them to develop appropriate financial products and also go beyond microfinance to address development and poverty. Co-learning among primary groups: Each primary savings and credit group (10–15 members) is an independent organization and goes through

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various stages of development. Promoting nested institutions at different levels provides greater opportunity for co-learning and sharing experiences across groups. This would reinforce best practices and contribute to faster growth of each primary group. Capacity-building to strengthen local management: Developing localized systems and building the capacity of leaders and local functionaries is critical for sustaining primary groups. Federations play an important role in building local capacity and developing appropriate systems for managing transactions at primary group level. Establish institutional linkages and create identity: Federations provide an institutional identity for primary groups and provide opportunity to build institutional linkages with formal financial institutions, insurance companies, local government and other developmental organizations to provide access to other developmental services. Promotion and development of new products: The nested institutions would facilitate the development and innovation of new products to meet multiple needs of members. Various savings, credit and insurance products for housing, health and social development can be developed and field tested by federations. ‘Scale Advantage’—sharing of resources: Nested institutions would provide a viable scale at each level to share the human and economic resources more optimally. The leadership capacity will be shared by groups to address many conflicts and for problem solving. Similarly, due to the scale, the cost of staff can be shared by groups. Promote peer pressure for self-regulation: Nested institutions at each level act as a self-regulating organization to promote mutuality and self governance. Self-regulation enhances peer pressure and brings greater accountability and enforcement of norms to ensure quality standards. Bridge the gap in credit demand and leverage funds from formal financial institutions: Though the primary groups are encouraged to be directly linked with local banks, there are delays and there is huge tap in meeting the credit demand. In order to bridge this gap and to demonstrate to the local banks, federations need to leverage local funds from formal financial institutions.

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Structure of Nested Institutions Women’s Savings & Credit Groups (15–20 members) Primary Groups at village level

Local Banks

Cluster Development Association (15–20 groups) 4–5 nearby villages

Federation of groups (150–200 groups) At the block level

Note: Primary Groups, Cluster Development Associations (CDAs) and Federation are independent institutions with distinct identities. Each is interrelated to the other and they work together for sustainability. As far as financial transactions are concerned, only primary groups handle the savings and loans for individual members. Groups mobilize loans from Cluster Development Associations and CDAs mobilize loans from federations.

FUNCTIONS, MANAGEMENT OF NESTED INSTITUTIONS As part of Kalanjiam Community Banking Programme (KCBP) groups, clusters and federations are promoted as independent organizations owned and controlled by members at hamlet, village and block level. Block is the development and administrative unit in India consisting of about 100 villages. These organizations are promoted as nested institutions with interdependency rather than ‘three-tier’ type of organization. Primary groups control both the clusters and federations. Table 14.1 describes these multilevel community institutions on various parameters.

FINANCIAL SERVICES OF KALANJIAM PROGRAMME The financial services include savings, credit and insurance and all these services are integrated. Primary groups provide all these services and

Primary Group

• To create a separate line of credit for consumption and emergencies • To redeem the poor from the clutches of loan sharks • To strengthen and formalize the indigenous savings and credit practices • To establish a sound mechanism to regulate the household cash flow • To reduce the cost of transactions and link with mainstream banks

• 15–20 individuals—poor women • Poor women, preferably from a neighbourhood in a slum or village • Married/widows/destitute women/ divorcees, in some cases, single women identified through participatory processes

Parameters

Purpose

Members and eligibility

Sl No.

1

2

• 15–20 primary groups • Only primary groups involved in successful savings and credit operations • Groups should be geographically close in a slum or village • There should be interaction between the constituent groups for at least three months before cluster initiation

• To facilitate co-learning and sharing the leadership capacity • To share the costs and services of local worker and achieve scale advantage • To achieve financial viability and sustainability • To ensure quality through selfregulation across member groups • To build the capacity of leaders and local staff

Cluster Development Association

TABLE 14.1 Multilevel Community Institutions on various Parameters

• 120–50 primary groups • Only well performing member groups of clusters in existence for more than six months • Should participate in various preliminary processes and training programmes organized for evolution of the federation • Willing to abide by byelaws and pay the equity and membership fee

• To provide an institutional ‘identity’ for member groups • To relate with the mainstream institutions and represent members interests • To meet civic needs of members (health & education) and go beyond savings and credit • To ensure the quality across clusters through self-regulation • To promote and develop new products

Federation

Formation

Governance

4

5

(a) General Body

Legal status and area of operation

3

• All individual women members (15–20 persons)

• Members are self-selected among the poorest identified by DHAN Foundation staff • First few meetings are facilitated by DHAN Foundation staff where group evolves its own by-laws and operational mechanisms

• Informal group at the hamlet or village level. Association of persons legally recognized by the banks

• Each primary group is an institutional member and represented by three office bearers. The General Body consists of 45–60 persons @ three members/ group representing 15–20 groups

• Six months after groups are formed. The process of formation is facilitated by DHAN Foundation staff • Groups interact to evolve the by-laws and operational systems

'• Informal association of the constituent member groups at cluster of villages or slums

• Willing to abide by the norms and by-laws evolved by member groups

(Table 14.1 contd)

• Each primary group is an institutional member and represented by three office bearers. The General Body consists of 450–600 persons @ three members/group representing 150–200 groups

• After 18–24 months of group formation. Need for federation is evolved by involving groups • Groups across clusters interact and organize workshops before initiating federation

• A legally registered not-for-profit organization under the Indian Trusts Act (1882) or Societies Registration Act (1860) • Block level or cluster of slums in a city or town

6

Sl No.

• Each cluster identifies two-three local staff to work for the groups. The Executive Committee reviews the performance of these local staff. Training and capacitybuilding support is provided by DHAN Foundation and costs are shared by member groups after one year of promotional phase

• Three leaders selected by the group include president, secretary and treasurer. Rotation of leaders is practised once in two years

• Movement associate & group accountants are local persons employed for each cluster and their services are shared by groups. Group accountants to write the books of accounts and movement associates to provide auditing, linkage and promotional, developmental support to primary groups. Cost of this staff is paid by groups after one year of promotional phase

(b) Executive (b) Committee

Management-Staff

Cluster Development Association • Nine members constitute the Executive Committee selected from the General Body and the term of office is for three years

Primary Group

Parameters

Table 14.1 contd Federation

• One Chief Executive and one finance manager who are employees of DHAN Foundation and deputed to federation. Costs are met by federation after three years of promotional phase • Memorandum of Understanding is entered between DHAN Foundation and federation. 2–3 support staff to provide specialized services like health, housing, education and insurance based on the age and needs of the federation

• Nine to 11 members constitute the Board of Directors of the federation. Each Director is selected by the member groups of a geographical area—each slum to represent their interests at the federation. The term of office is three years for each Director. Five members of the Board constitute the executive committee, which include President, Secretary, Vice President, Treasurer and Joint Secretary

Sources of funds

8

• To facilitate linkage for primary groups with banks and other development agencies • Internal auditing and monitoring of systems of primary groups • Capacity-building of members, and leaders for self-management and conflict resolution • Promotion of new groups— reaching out to left out poor people • Acts as a conduit to channelize loans from federations to groups

• Entrance Fee and Equity • Service costs and interest on loan • Loans from federations without spread on interest rate

• Manage savings and credit operations and deal with individual members • Mobilizes loans from Commercial Banks and Cluster Development Associations through direct linkage • Act as a local financial institution for 15–20 members with needed systems

• Savings from members • Interest income on loans • Loans from local banks and clusters at market rates (12% p.a.)

Source: Various issues of Annual Reports of DHAN Foundation.

Functions/Services

7

• Entrance fee and equity • Service costs and interest on loan • Loans from apex/development banks for housing & microfinance • Grants from government and other philanthropic agencies

• Meeting the credit gap at groups housing & business needs • Capacity-building of groups and clusters for self-management and problem solving • Linkages with apex banks, municipality, district administration and development agencies • Promotion and development of new products e.g. housing, insurance, etc. • Promote special programmes to meet civic & developmental needs of members

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directly transact with the individual members. Clusters transact with groups and federations transact with the clusters for providing loans and insurance services. Clusters and federations do not deal with individual members and are not involved in savings mobilization. Savings: Savings is an essential and foremost service offered by the primary groups. ‘Kalanjiams’ have demonstrated that savings would bring sustainability for the microfinance programme. The total own funds mobilized by Kalanjiam contributes 60-70 per cent of the total funds lent out to members. The members in primary Kalanjiams (a group of 15–20 women) are involved in two types of savings. ‘Primary Savings’ is the regular contribution of savings made by members and used for internal lending within the groups. Primary savings is withdrawable only when the member leaves the group. The groups pay an interest of 12 per cent per annum on the savings made by members, while ‘diversified savings’ are contributed by members to meet specific needs in future. The group provides a flexibility of withdrawable in case of diversified savings. The purposes for which these savings are contributed include education, marriage, festivals, social obligations, purchase of jewel, business, assets and housing. Credit for stability: Primary groups would also provide a range of products to meet a variety of credit needs of the poor including consumption, health, education, social obligation, business, asset creation, income generation and shelter. Small consumption loans are provided primarily out of the funds mobilized as savings from members. The loans range from Rs 100–2,000 and repaid over six months to one year. The interest rates range from 24–36 per cent per annum. Support for income generation includes credit for either supporting an existing activity or initiating a new activity. As part of the support, loans are provided for both working capital and asset creation. As own savings are not sufficient, these loans are provided by groups through linking with local banks or Cluster Development Associations. The repayment period and terms of repayment vary with the type of activity and the interest rates vary from 24–36 per cent with repayment periods ranging from six months to three years. The members who have stabilized their income generation activities are provided with loans for shelter. As part of the shelter support credit is provided for construction of a new house, repairs and providing infrastructure. These loans are mobilized through federations by linking with apex financial institutions. The interest rates are 15–18 per cent per annum and the repayment period is spread over 7–12 years.

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Financing of Infrastructure through Microfinance: the SPMS Experience With 100 per cent of Sri Padmavathy Mahila Abyudaya Sangam members living in the slums of Tirupati, the demand for improved infrastructure, including water supply and sanitation services, is tremendous. While the Tirupati Municipal Corporation is primarily responsible for the provision of infrastructure services, a high proportion of slums remain untouched due to lack of land tenure and appropriate legal status. Infrastructure loans, both taken as group loans and as individual loans, are a relatively new phenomenon, with demand steadily increasing for them since 1997. Loans to individuals or to the members of a group have been readily available for on-site infrastructure. These loans have been categorized as special loans under housing (upgradation) programme. Access to a loan of Rs 20,000 from Kalanjiam has enabled Revathi, a member of the Kalanjiam, to sink her own borewell. Access to a steady source of clean drinking water provides Revathi with two extra hours for income generation per day, resulted in increased daily earnings of Rs 30–50, or approximately an extra Rs 1,000 earned per month.

Collaboration with mainstream banks: Commercial banks in India are expected to provide 40 per cent of the credit towards priority sector lending. But the experience of lending to the poor by banks so far has not been positive as many schemes for the poor are target driven and subsidy oriented. However the programme has made efforts to organize exposure programmes and training to orient many bank officials and influence their attitude through interaction with group members and visit to field. Many banks have linked very few groups initially with lot of resistance and hesitation. But after seeing 100 per cent repayment by the groups, repeat support is being provided and the linkage is expanded to many groups. Banks provide the loans at market rates and charge an interest rate of 12 per cent per annum on the loans provided to groups. Through this linkage, the bank is providing a bulk loan to the group and the group acts as a financial intermediary, taking responsibility for managing the loan among members and repaying the bank. This group lending reduces the transaction cost for the bank and helps to reach a large number of clients. More importantly, banks were encouraged to link up with more groups after experiencing the 100 per cent repayment rate.

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Reflections of a Branch Manager on Kalanjiam Linkage M. Panneerselvam, Canara Bank, Manager, Alanganallur When I joined Alanganallur branch in May 1999 and SHG lending was a small part of advances portfolio. On analyzing the advantages and benefits of lending to groups I thought it fit to upscale. Unlike other advances, in case of Kalanjiam we have 15–20 persons who are responsible and liable individually and jointly. This joint responsibility has more value than any other movable or immovable asset. We need to strengthen our relationship with groups by attending group and cluster meetings and interact with leaders and associates who are the real strength of the partnership. Kalanjiam has created the confidence that ‘the rural poor are bankable’. The fact that the linkages made by my branch have tripled from 209 linkages in 1999 to more than 600 in 2002 only shows that lending to groups is not only bankable but also profitable. The federation has played a critical role in preparing the groups for linkage and ensuring 100 per cent repayment.

Direct bank linkage is not always possible, so to meet the gap in credit demand, federations are establishing linkages with apex banks. In order to meet specialized needs for income generation and housing, the federations were linked with apex banks like SIDBI, NABARD, HDFC and HUDCO and credit support is provided at market rates. Insurance: Federations offer insurance services to the members and their families. This insurance service has been in operation for the past seven years and has extended the service to more than 54,000 members during this period. The types of insurance include life insurance for member and husband, health insurance for family, livestock insurance and housing insurance. The federations identify local needs and design suitable products in consultation with insurance companies. Where the number of members is high in case of advance federations, the products are offered and managed on their own, as it is viable and cost effective. In the case of new federations, the products of the existing companies are availed. In both the cases, the federation acts as an intermediary, collects the premium from members, maintains the database and liaises with the insurance companies. The federation ensures timely settlement of claims to members. Out of the premium collected, it recovers the costs of offering these services.

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Accidental Death—Life Insurance (Husband’ death) Paraman was working as daily wage labourer. His wife Packiam, a member of the Petchiamman Kalanjiam for over four years at Kadamalaikundu federation in Theni district of Tamil Nadu, is also wage earner. She took a loan of Rs 12,000 from the Kalanjiam for the purchase of a milch animal. Last year, she joined the insurance scheme offered by the federation and paid a premium of Rs 100 for one year. This premium entitled her to get life cover for herself and her husband. Her husband was riding pillion of a bike when a lorry hit them, killing him and his friend on the spot. She got Rs 25,000 as compensation for the accidental death of her husband from the federation. She repaid the loan borrowed from the Kalanjiam and deposited Rs 10,000 with the Kalanjiam for her children. She cleared an outside debt of Rs 3,000. By paying a portion of the premium collected from 2,341 members, the federation purchased a reinsurance policy covering accidental death claims, while the responsibility of covering natural death claims was taken by the federation.

COST COVERAGE Cost of promotion and sustainability of the Kalanjiam model: The Kalanjiam model has been evolved over the last 12 years and is at present operational in 65 locations. Twenty-six of these locations have reached a stage of promoting autonomous federations and nine of them are fully self-sufficient, able to meet all the costs of operations. Each location is the primary unit of the programme and includes groups, clusters & federation. Each unit would have 200 groups, 10–15 Cluster Development Associations and finally register as an autonomous federation with an outreach of 3,500–4,000 women members. The process of promoting groups, clusters and federation in a location will take three years. Professionals of the DHAN Foundations are involved in promotion of groups, building their clusters and initiating federations to see that they are independent. During the initial periods of formation and stabilization, the programme meets the operational costs at group, cluster and federation level. The costs include the volunteer allowances, travel and training of local staff, training of members, leaders, costs of office administration and maintenance. The costs of DHAN staff is provided till the federation is financially independent. Once the federation is promoted, DHAN staff is provided on deputation to federations.

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From Day One, groups, clusters and federations meet costs out of the surplus generated through savings and credit operations. Normally, costs at the group level are fully met by members. In some cases, the cost of books and the allowances of group accountants are provided for a period of initial six months. The costs of Cluster Development Association include the local associates’ costs for two years on a tapering basis. In the case of federations, support is provided primarily to meet the operational costs for the initial 2–3 years after registration. The total costs required over a five-year period to promote the groups, clusters and federation as part of this model in one location is Rs 25 lakh (US$ 50,000). The break-up is as follows: (i) Promotion of groups & clusters @ Rs 10,000 per group for three years for each of 200 groups (ii) Costs of promoting of federation for two years after registering federation

: Rs 20 lakh : Rs 5 lakh

The breakeven volume of business required to achieve this level of financial self sufficiency is Rs 3 crore worth of loans. The average amount of promotional cost per member to promote Kalanjiam Model is Rs 125 (US$ 2.5) per year. This is probably the lowest compared to other models. In addition to ensuring financial sustainability, this model helps in achieving empowerment of the poor to address poverty. System of collection of service costs at federations: Clusters and federations source loans from banks and other financial institutions at 11–12 per cent interest rate and on-lend it to the groups at the same interest rate. No interest spread is available at the cluster and federation level. All the profits are allowed to accumulate at the group level only. The groups, being the primary members of clusters and federations, would meet all the costs incurred at primary group, cluster and federation level. The total operational costs for one year at cluster and federation level are projected at the beginning of the year and approved by the respective Executive Committees. The budgets are shared by the groups proportionately based on the average loan outstanding during the year. Service charges to be borne by each group are estimated considering the loan outstanding in each group. For example, a federation

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has an operating cost of Rs 6 lakh per year (which includes all costs at the cluster and federation level). The total loan outstanding at the primary group level (for all groups in the federation) is Rs 3 crore. Hence service charges payable by each group for every thousand rupees of loan outstanding will be calculated as below: Þ (600,000) × 1000/30,000,000 = 20 which means that if a particular primary group has a loan outstanding of Rs 10,000, it needs to pay Rs 200 by way of service charge for the year. Each federation has set up a mechanism to collect the service cost from groups once in a quarter based on the outstanding loan portfolio.

PROPOSITIONS FOR PROMOTION OF NESTED INSTITUTIONS Design the primary units first and evolve nested institutions gradually: The institutions designed and promoted should be relevant to the local context, ownership and management should be localized for sustainability. It is very critical to define the size, structure and details of local governance and management systems of the ‘primary units’ to begin with. Once these details are worked out, suiting the local context, a lot of effort need to be put in to promote and nurture these primary building blocks to develop nested institutions from grassroots. For example, primary savings and credit groups of 15–20 members at hamlet level are the ‘primary unit’ for promoting nested institutions in the Indian context. Building Nested Institutions Vs Tier structures: Creation of people’s institutions at different levels is critical to address the issues of powerlessness and isolation which are two important causes of poverty. These institutions need to be created at different levels managed by the local community through building the local leadership. However, it is very important that the primary groups control the superstructure, not vice versa. These institutions created at each level complement the role of the other and each one acts as an independent institution with interdependence on the other for sustainability. In addition to acting as local financial institutions, these institutions would build a strong demand

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system at the local level to address the issues of poverty collectively. They could influence both the local banks and government system in their favour. Emphasis on member ownership, control and decision-making: These institutions have to be owned and controlled exclusively by the poor and benefits are provided only to members. The process of decision-making should be vested with the members only. Members should contribute regular savings and equity contributions to facilitate lending operations. Products and services need to be designed by members. For ensuring effective day-to-day management of financial transactions, accounts and book-keeping, local people need to be hired by the members. This ‘local bureaucracy’ should respond to the ‘local governance’ controlled by members. Promotion of quality groups with the poorest: The focus and emphasis has to be to reach the poorest and promote quality primary groups. Primary groups are the foundation, hence greater care is needed to nurture and develop appropriate systems and mechanisms which would encourage involvement and ownership by members. Identifying and training local associates would help in faster expansion and promotion of quality groups. Invest in grooming local associates and developing local leadership: The growth and sustainability of groups, clusters and federations heavily depend on the quality of staff and leaders promoted. The promoting agency has to evolve suitable processes to promote and strengthen the local leadership. Evolution of groups, clusters and federations over a time by involving the community is one of the key factors for success. The role of the promoting agency needs to be constantly changed to build sustainability. The promoting agency has to be proactive in building the capacity of the local community and keep transferring the older roles and acquire new sets of roles to address the growth of the programme. Hence the promoting agency should have requisite perspective and professional competency to promote and nurture people’s organizations. Encourage good governance and effective management practices from day one: Growth of the federations is greatly influenced by the good governance and quality management systems and practices in place. Identifying good leaders and encouraging the rotation of leaders would help in sustaining the local management, while placing high quality

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professional staff would ensure high standards with growth. Promotional institutions need to play a critical role in evolving good practices and sustaining them, in addition to providing a pool of quality manpower to be employed by federations. Primary groups to be linked with local banks and federations only to bridge the gap: Establishing direct linkages between local banks and groups is a prerequisite for long-term sustainability. The linkage would reduce the transaction costs for the banks and provides timely credit for the poor at an affordable price. Being close and locally available, banks can build sustainable business relationships with the groups and federations only to bridge the gap. Federations should be viewed as promotional and facilitating institutions, hence restrict the financial intermediation role only to provide loans to bridge the gap till the formal banks meet the need of primary groups. Federations should encourage direct linkage between the primary groups and formal financial institutions. Promote collaboration with formal institutions: Federations are people’s organizations promoted by primary savings and credit groups to facilitate development of members. Federations should take on the promotional role of NGOs to strengthen primary groups and initiate various social development programmes like health and education to address the poverty and development of members. Federation will help in addressing poverty and empowering members of primary groups. There is a need to encourage many collaborative projects with formal institutions and various development agencies to provide various services needed for the members. While expanding the concept to reach more of the poor, this process would offer important lessons to influence the mainstream and create identity for people’s organizations. Addressing issues of social development: Promotion of clusters and federations is to go beyond microfinance and take up various social and developmental issues pertaining to their lives. The profits earned at group, cluster and federation level need to be allocated to initiate special programmes to address de-addiction, drinking water, health initiatives and support education and other community development activities. Addressing of social development aspects needs to be preceded by sound financial systems and institutional practices. The people’s organizations need to be supported to build such systems and practices by the promotional

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institution. This is a precondition for sustainability of the institutions and addresses developmental issues of the poor.

CHALLENGES FOR REPLICATION Clarity of promoters: Absolute clarity is required before promoting the nested institutions. Many promoters are not clear about the purpose and principle but more bothered about the ‘form and structure’ of these institutions. This limits the performance of these institutions. From the beginning, the identity of people’s institutions should not be mixed with promotional institutions. Particularly in the case of clusters and federations, the promoting NGOs should not try to run and control them. Developing local staff for people institutions: Local staff always wants to identify with promoting institutions and feels insecure as part of people’s institutions. They may tend to dominate governance of these institutions. Care should be given to develop them as committed workers for people’s institutions. The biggest challenge is to develop the capacity of local leaders to manage and guide the local staff. Promotional cost: The capacity to reach large numbers of the poor is limited by the paucity of funds available for promotion. A major share of the funds at present is mobilized from foreign donors. Though substantial resources are available with government, grants for promotion continue to be a major constraint. Timely credit: Though there is a positive response from many banks in the recent past, there is a huge gap between the credit demand and supply. Many banks need to change their existing procedures and mechanisms to reach and finance the poor. There is a need for many more successful demonstrations to convince the bankers. Hence there is a need for an alternative mechanism to provide credit to groups till the bankers respond. Legal constraint: The nested institutions promoted under KCBP in India require different legal treatment from that of profit-making microfinance institutions. These community financial institutions are part of the demand system and poverty alleviation programme. Hence they have to be provided income tax rebates and treated differently.

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FUTURE DIRECTION Scaling up to reach one million: DHAN Foundation plans to scale up its Kalanjiam Community Banking Programme to reach nearly one million poor families and impact their livelihoods in a significant way in this decade. This is planned to be achieved through strengthening peoples’ movement, setting up thematic organizations, intensifying collaboration with government and other institutions, etc. Support to federations for social sector: DHAN Foundation’s approach to development is through the promotion of people’s organizations. By building the people’s capacity on a single theme (sub-sectoral focus) it builds their confidence to address other needs. Mere improvement in the economic status of the poor does not lead them to a life of dignity and quality. Hence, the people’s organizations (federations) promoted by DHAN Foundation will take up various social sector initiatives in the areas of health, education and pension for the overall development of their members. They would collaborate with other development agencies to fulfil this purpose, in addition to using part of their profits. Establish a resource centre in microfinance: DHAN is strategically placed to take up all functions related to knowledge, namely acquiring, applying and building knowledge. In a decade of work at the grassroots in different social, political, economic, resource and demographic contexts, an appreciable body of knowledge, different perspectives and insights have emerged regarding grassroots (microenvironment). This would be captured, documented and disseminated among various stakeholders in the development sector. Policy intervention: Many policies pursued by mainstream institutions for the development of the poor lack appropriate strategies that can really help the poor, though the goals are in the interests of the poor. Even when the policies are framed well, it does not get implemented in letter and spirit because of inadequacies and shortcomings among implementers, who also cannot be held accountable by the system. Thus there is a need for policy intervention at the local and national level. The focus areas of policy intervention in the coming decade would be on NGO–GO collaboration, policy formulation, local planning etc. DHAN Foundation would continue to do this by documentation and dissemination of experiences, interfacing with media, policy studies and research, networking, creation of pressure groups and other such measures.

15 Banking with Poor Self-employed Women JAYSHREE VYAS

I

n India, 93 per cent of all workers are self-employed. Women constitute more than half of this workforce. More than 96 per cent of women workers are self-employed. Self-employed workers are those who earn a living through their own small business or through their own labour. Unlike workers in the organized sector, they do not obtain a regular salary. These workers are characterized by insecure employment, low incomes, lack of capital assets, lack of access to institutional support and no social security benefits, leading to an extreme level of poverty. The women are generally vendors, home-based workers such as weavers, garment makers, food processors and craft people; and manual labour and service providers, such as agricultural labourers, construction workers, ragpickers, domestic workers and cart-pullers. A small number of self-employed poor women formed their own organization in 1972 when the Self Employed Women’s Association (SEWA) was registered as a trade union in Gujarat. Its main objective was to strengthen its members’ bargaining power to improve their income, employment and access to social security. Self-employed women are caught in the vicious cycle of poverty, indebtedness, no government assistance and low incomes. A possible solution to free these women from this vicious cycle involves linking them with registered banks. But attempts to link self-employed women with national banks through SEWA as an intermediary met with many

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difficulties. The gap between sophisticated bank staff and women in shabby clothes accompanied by noisy children was not bridged, because the banks were not able to relate to these women as their clientele. In 1973 the members of SEWA came forward with an answer; a bank of their own where they would be accepted in their own right and not made to feel inferior. Four thousand women contributed a share capital of Rs 10 each to establish a women’s cooperative bank. In May 1974, SEWA Bank was registered. Since then, it has provided banking services to poor, illiterate, self-employed women and has become a viable financial venture. The main objective of SEWA Bank is to help poor women reserve the process of decapitalization at the micro level and to begin the process of capitalization. This is accomplished by providing financial services like savings, credit and insurance which help women:

to escape from the clutches of moneylenders; to rescue their mortgaged/pledged assets, such as land, ornaments and cattle; to create their own assets, such as house, savings and equipment; to expand their business through productive credit; to cope with losses due to sickness, accidents, death, floods and riots; to increase their bargaining power; to improve their living conditions; and to improve themselves, ultimately.

MAIN FEATURES OF SEWA BANK A woman needs different types of financial services throughout her life. Savings schemes can greatly assist lifetime planning for the education and marriage of children or for old age. Credit is used to repay old debt, to fund working capital for business, to buy equipment and for repairing, extending or buying new houses. Credit and savings are also an insurance against the risks of sickness, accidents, death, floods and cyclones. Poor, illiterate women find it useful to deal with a bank only if its service is suitable for them. SEWA Bank meets their criterion through simple procedures, door-to-door service and credit based on savings performance or loan repayment instead of collateral. SEWA Bank’s integrated financial services respond to members by offering different types

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of suitable products under five categories: savings, credit, insurance, financial counselling and Automated Teller Machine (ATM). As the majority of the women are illiterate, various banking procedures have to be adapted, such as using thumb prints or photographs and helping them fill in forms. Poor people welcome credit, but they also want many other kinds of financial services. Savings, credit, insurance, financial counselling and ATM are integrated financial services offered by SEWA Bank. SEWA bank also mobilizes linkages with other support services such as vocational training, health care, childcare, legal aid, marketing, housing, technical services and other business development services. The poor are vulnerable to all types of crises. Each threatens to put them deeper into the spiral of increasing poverty and vulnerability. To support members in these crises, SEWA Bank has designed its own integrated insurance scheme, which covers 1,00,000 women against loss of house, household goods and tools in case of flood, fire, riots or cyclones, and death, sickness, widowhood and maternity expenses. The bank’s experience is that insurance for the poor can be contributory and linked with savings. SEWA Bank collaborates with the Reserve Bank of India (RBI), state governments, insurance companies, apex institutions such as the National Bank of Agriculture and Rural Development (NABARD) and national housing finance organizations. Since its inception, the bank has been able to meet its operational costs, provide for bad debts and earn a surplus. The bank’s financial resources come almost entirely from its own members, that is, members of SEWA Bank, 6 per cent; deposits owned by women form 82 per cent; ploughed back profits, 8 per cent and borrowing from outside, 4 per cent. Income from net interest meets operating expenses and provides for nonperforming assets. Part of the surplus earned from the banking activity is used to provide support services such as social security and education and the training of members. The remaining part is ploughed back as capital after distributing dividends to members. SEWA Bank is a bank where women are the users, owners and managers. Through identified leaders and organizers, continuous personal contact in the field is maintained with members. As owners, the members elect their own executive committee, make policies, decide interest rates and share profits. They have a right to ask for accounts, and to change the by-laws of the bank. They give the bank its direction. The bank is accountable to members as well as depositors, and subject to audit by RBI and by the Cooperative Department of the state government of Gujarat.


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APPROACH TO BANKING WITH POOR WOMEN Banking for development with poor women requires an approach that meets their particular needs and draws on their capabilities. In its 30 years of experience, SEWA Bank has formulated the following approach: Priority for savings: The worldwide interest in poor women’s finance has restricted itself to microcredit programmes. For SEWA Bank, however, savings are as important. Savings are used as financial products for poor women’s future planning. Most women would like to save even from their meagre earnings, but they have nowhere to deposit their money, as it is much too time-consuming and expensive to go to a bank for tiny savings amounts. However, once they are provided with an easily accessible savings facility, they are able to save small surpluses regularly. Saving has many important implications:

It is a method of ensuring financial discipline, which results in improved repayment rates. It expands the total pool of resources available to the poorest, so that they have more options for their work and life. A bank balance is an asset that raises capacity to borrow as well as status as a breadwinner within the community. Savings are an autonomous means of economic growth for the women. It enables a woman to control the growth of her business and supplement it with loans. Savings are a fallback, a form of social security in times of crises. Whenever cash is urgently needed in time of sickness or death, she has her savings to fall back on.

Women need to ‘hide’ their savings in a ‘safe’ place. Like other women, Savitaben, a ragpicker, used to save a little every day and hide it in her trunk. The savings rose to Rs 300. Once, on returning from work, she saw the money gone. ‘My husband has taken the money. I cried and cried. Because of this incident, I stopped saving in my home, but gave it to a “good” neighbour to keep “safe”. When I demanded the amount of Rs 1,000 from him, he behaved as if I was a stranger!’ Such experiences are all too common amongst poor women, rural and urban. Once they are motivated, the members are ready to save; however, they need the necessary financial services provided in forms suitable to

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them, such as collection at their home and/or in the marketplace and with their photo on the passbook instead of a signature. About 70,000 savings boxes are provided by the bank for their daily savings. Very often, the members want the bank to maintain confidentiality from the men of their families. In villages, they invariably wanted first to test the reliability of SEWA Bank by depositing very small amounts. Now they have learned to invest their savings in long-term bank securities. Savings in any microcredit scheme are the most crucial component, both for the provision of benefits to the poor and for sustainability. Local savings deposits help to provide a capital base from which to begin operations, and then, thanks to interest paid to savers and the increasing availability of loans, they help to maintain the members’ commitment, which is of course, vital to the growth of the banking programmes. They provide for poor women a secure place in which to store and build up their cash assets and at the same time ensure the continuing viability of the bank. Integrated approach: SEWA Bank’s integrated approach distinguishes it from other microcredit efforts. Credit, though very important, is not adequate for sustained and substantial employment. It is becoming increasingly clear that access to financial services alone is not enough for poor people to transform their economic activities into profitable economic enterprises. Access to markets, information, technical know-how and social support services are as important as money if the poor are to share in economic growth. If poor people are going to build incomes, assets and livelihood in substantial ways, they need access to

market information and commercial linkages; technology and methods to improve productivity; market infrastructure; health and social security services; information, know-how to develop entrepreneurial ability; and representation on decision-making bodies.

SEWA Bank works closely with SEWA, the trade union, and with other economic organizations of the SEWA members, such as the Women’s Cooperative Federation and the Women’s District Development of Women and Children in Rural Areas (DWACRA) (producer group) associations. At the same time, the bank itself provides financial services and has set up a contributory work security or insurance fund and a housing services section.


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APPROPRIATE MECHANISMS Banking with the poor and illiterate requires special procedures and mechanisms suited to their culture, their needs and their economy. This requires adopting procedures and designing schemes suitable to them, like collecting daily savings from their places of business or houses or providing savings boxes or photographs on their passbooks. They require special loan procedures and rules that take into account their level of economy (for example, the repayment schedule has to be based on their cash flow), they require savings and credit schemes that allow for small amounts of major savings and banking policies that adapt to their crisis situations. They also require training and assistance in understanding and dealing with banking procedures. Any self-employed woman can open an account with SEWA Bank. As the majority of account holders are illiterate, SEWA Bank has evolved a unique system of identification cards. Each individual’s card has a photograph showing her holding a slate with her account number written on it. Her name and account number are thus associated with her photograph and not with her signature, as is the usual banking custom. Over a period of time, illiterate account holders have learned to sign and read their passbooks.

ASSET CREATION Perhaps the single factor that leads self-employed procedures into the cycle of poverty is lack of assets. For women, the situation is worse when the family does acquire an asset on which she has no claim. Asset creation under the ownership of women has been the priority of SEWA Bank. This includes transfer of agricultural land and houses in women’s names, the acquisition of implements, tools, shops, handcarts and livestock in their own names, their own capital, bank accounts, shares and savings certificates. This also includes rescuing or releasing mortgaged houses and land, or pawned silver and gold.

GROWTH OF SEWA BANK In the beginning, SEWA Bank concentrated on mobilizing self-employed women to save with it, and acted as an intermediary to enable its depositors to get loans from the nationalized banks. Subsequently, the bank

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begun advancing money from its own funds to its depositors, and since that time it has developed into a viable finance unit. The governing body is the Board of Directors, which has elected representation of major trade groups from SEWA Bank’s membership. All the major decisions about the bank are taken by the Board, which meets once a month. It sanctions all the loans advanced and, in the wake of the recent liberalization of interest rates, the Board decides the interest to be charged for different categories of loans. The illiteracy of the members has rarely stood in the way of taking decisions or finding solutions. Since its inception, SEWA Bank has consistently been given ‘A’ grade by the auditors. As Table 15.1 shows, SEWA Bank has grown slowly but steadily over the last 30 years, with a spurt in growth with the liberalization policies of the last five years. SEWA Bank started as an urban bank but in recent years has expanded to the rural areas, serving the growing rural population of self-employed women. Along with offering savings, credit, financial services and financial counselling, SEWA Bank has expanded to offer deposit-linked work insurance schemes and housing services. TABLE 15.1 Growth of SEWA Bank

No. of Members (All Women) No. of Depositors Deposits (Rs in lakh) Advances (Rs in lakh) Working Capital (Rs in lakh) Paid-up Share Capital (Rs in lakh) Profit (Rs in lakh)

2002–03

2003–04

2004–05

29,595 2,027.60 6,239.28 1,335.85 8,490.95 148.72 51.76

34,835 2,566.17 6,196.99 1,669.44 8,723.62 179.53 88.59

44,938 2,766.80 6,247.66 1,841.72 8,914.47 205.98 62.20

Source: Various issues of annual reports of SEWA BANK.

BUSINESS LIFE STORY Name Age Occupation Address Children

OF

: : : : :

HANIFA Hanifa Ramjanbhai Baloch 45 Tea Vendor On Sabarmati river bank Two sons

Hanifa’s husband was a daily wage labourer in a private factory. His work was not regular, so Hanifa took up tea vending on a rented cart, paying a rent of Rs 10 per day, her daily earnings being Rs 20. In 1978, Hanifa was


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introduced to SEWA Bank by Sushila, a ragpicker and member of SEWA. Hanifa opened her savings account with Rs 5 and then saved every day. Soon she applied for a loan.

The first loan of Rs 1,500 was utilized to buy a cart and to repair the roof of her hut with a waterproof sheet. Now she owned her own means of production. A second loan of Rs 5,000 was utilized for buying stocks from the wholesaler on cash payment. Earlier, she bought the stock on credit from a local retailer, the interest being paid at 10 per cent per month. This loan allowed her to save Rs 450 every month on the interest previously paid on borrowing. The third loan of Rs 5,000 was utilized to buy her neighbour’s hut, by which means her earlier domestic space of six feet by five feet was more than doubled. A fourth loan of Rs 10,000 was utilized to buy tin sheets for the roof (earlier, the roof was of jute bags). It was also used to pay tuition fees for autorickshaw driving for her husband. This loan saved periodic recurring expenditure. A fifth loan of Rs 10,000 was utilized to install an electricity connection in her house, costing Rs 7,500. The rest was spent to connect the drain to a stormwater drain during the monsoon. The sixth loan of Rs 15,000 was utilized to build up the cart into a ‘cabin’, adding more room and wider variety of stock, such as biscuits, snack packets and chocolates, in addition to the tea she sold. A seventh loan is planned for: (a) buying another cart to be managed by her son; (b) another cart for herself to serve a hot lunch of ‘dal roti’; and (c) a toilet.

THE IMPACT

Through these loans her income and assets have increased. She has also improved her family’s living conditions, created employment for her son and saved Rs 16,000 which remains in her name in her bank account. Her family eats three times a day now. Her husband earns Rs 50 per day from his rented rickshaw.

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She eventually intends to buy an autorickshaw for him. She paid fees for another son to learn auto repair in a roadside garage. She linked another 100–120 neighbouring women and relatives to SEWA Bank. Twice, her hospitalization was covered under the work security insurance scheme of the bank. She is one of the gold card-holders of SEWA Bank and hence entitled to quick personalized service.

PROBLEMS

AND

CONSTRAINTS

A constant fear of her cabin cart being demolished at any time by the city authorities for want of a license that the authorities will not give her. Regular payment of protection money to the police. The unstable mentality of her husband. A sickly mother.

PERFORMANCE OF SEWA BANK The real performance of the bank lies in the impact it has on the lives of its depositors and borrowers. The following life history is a case in point. Nanuben started life as an agriculture labourer in a village in Mehsana District of Gujarat. She and her husband were both earning Rs 3 per day but, owing to irregular work in the village, decided to migrate to Ahmedabad city in search of work. They entered the city in 1978 with Rs 7 in their pockets. Luckily, her grandfather had one small hut in a slum on the riverbank, which he rented to them at a rate of Rs 5 per month. Nanuben joined her grandmother in the business of trading old clothes, going from house to house with a basket of new utensils that they exchanged for old clothes from housewives. Nanuben and her husband also took lessons in sewing so that they could repair the clothes exchanged for utensils and sell them at a good price. They learned this skill from their neighbour by paying a fee of Rs 125 for six months. At that point, Nanuben was introduced to SEWA Bank by Chandaben, one of the leaders of their community and a long-time SEWA member, Nanuben took a loan of Rs 500 in 1978, out of which she bought a basket at Rs 125, some aluminium utensils worth Rs 125 and also some foodgrain and oil for consumption. She made a profit of Rs 400 out of this small


271

investment, which she employed in business along with a second loan of Rs 1,500. Thereafter, she kept repaying one loan and taking another loan, using the loan money and profit from business to buy a house and household furniture, investing in gold and silver, getting her daughter married and putting savings in the bank. Nanuben recalls that ‘we were living in a hut and were eating only once a day, sleeping on the floor, when we came to Ahmedabad; now we have a pucca house, with bed and fan, stock of foodgrain, groundnut oil, spices, soap and matchboxes. Earlier, I was myself washing and repairing all the clothes. Now we have employed one tailor who repairs the clothes and the washerman comes daily to my house for collecting clothes for washing.’

CONCLUSION From the point of view of the sustainability of the microcredit programme itself, if the people own the institution and participate in its management, the benefit of the small guarantee group approach will extend to the operation as a whole. That is, the collective responsibility covers not merely agreeing to loan proposals and ensuring repayment for a small group but also raising and maintaining capital, including setting interest rates on savings and credits. Thus they ensure the viability of all banking operations. This active participation of the members and the Board is critical to the success of SEWA Bank. In other words, banking should be driven by those who save and borrow, not by the rules of the rule keepers. From the point of view of the poor women themselves, their involvement in a successful institution enhances their collective strength and the quality of empowerment that comes with the organization. Poverty is characterized by vulnerability, powerlessness and dependency, as well as lack of income. Collective organization and wealth, the capital fund and the benefits of a significant economic and social structure, both address the psychological consequences of being poor and help challenge the wider structure of society. From a still broader point of view, the democratic structure and functioning of member-owned or controlled microcredit institutions can help to strengthen the democratic systems of the country. Democracy and development require active and informed participation from the grassroots. Democratic people’s organizations and institutions can provide a valuable learning environment for the poor, leading to their proper participation in wider democratic structures. That is, just as in building a democratic

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Jayshree Vyas

society the political process contributes in expressing the wishes of the voters, so the economic process must also express the wishes of the majority. When this happens, the political economy of nation building becomes an inclusive and constructive process.

ANNEXURE LESSONS LEARNT FROM SEWA BANK BY ELABEN R. BHATT —FOUNDER, SEWA BANK The bank should go to the poor women and not expect the poor women who are busy, diffident and insecure to come to the Bank. The poor women are economically active and therefore they are bankable. They should not be considered unbankable. Since their economic enterprises are small, they could be expected to repay their loan in small instalments. This method has enabled and can enable almost 98 per cent recovery. These poor women are vitally concerned with the livelihood of their households. Therefore, they are the most eligible borrowers though in mainstream banking they have been left out. Bank should look at all aspects of their borrowers and so should be prepared to advance diverse kinds of loans for a variety of requirements. Trust in the poor is the sanction for lending, if trust is there, paper work, legal instruments and collaterals are secondary, most often to be dispensed with. Logically, neither the lawyer nor the court need to be used for recovery. Borrowers are also savers, that we should not forget. Borrowers become greater savers as their small businesses get established. Through microsavings, microcredit and microinsurance, the poor women are set on the path of self reliance. Organization of these poor women is the best guarantor member sisters giving moral strength and confidence to each other. The relationship between the bank and the tiny borrower is not confined to one transaction. It is a continued relationship of mutual trust. Disasters like famine, flood or riots earthquakes, or accidents, deaths and deep illness can completely upset the life of the poor making it impossible for them to be sustainable. In such circumstances the bank should not leave them to their fate but give them the support to get over the setback. Once rehabilitated they are bound to recover their stability. Therefore, banking and financial services should include not only savings and credit but also microinsurance. Development through microbanking can be slow. But it is a sure way to development for the poor.


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To organize effective and successful banking with poor it requires barefoot bankers with sense of commitment. The usual attitude of bureaucrats has to be given up. Such bankers’ work is done very little in office, more in the field. They have to do a great deal of fieldwork with the borrower. The young employee joining such a bank should be properly trained to understand and serve the poor. There should be an atmosphere of open discussion and regular critical self examination in staff meetings. The bank should be open for the poor women of all communities because integration is the essence of poverty alleviation.

16 Good Practices in SHG Book-keeping: Three Case Studies JAN MEISSNER, RAMAKRISHNA

AND

MARIE LUISE HABERBERGER

T

he SHG-bank linkage programme in India today is the largest and fastest growing microfinance programme in the world. As of March 2005, more than 1.6 million SHGs accessed credit from banks. The programme has managed to involve participation of diverse stakeholders consisting of 48 commercial banks, 196 regional rural banks (RRBs) and 316 cooperative banks. It has partnered with over 3,000 NGOs from different parts of India. As the programme is continuously expanding its outreach, which is a very desirable feature, the expanding outreach has thrown up certain critical challenges. Quality book-keeping in the SHGs is one important challenge. Quality would mean different things to different individuals. Based on discussions with the diverse stakeholders, the parameters identified which contribute to quality book-keeping in SHGs are completeness of information, accuracy, up-to-date information and transparency. GTZ-NABARD rural finance programme therefore attempted to document the good practices in book-keeping in SHGs as a move towards identifying challenges involved in promoting quality. Three case experiences have been documented as good practices. These are:

the munshi system of Ibtada (Case 1); the book-keeping system in the Mahakalasm SHGs (Case 2); and the computer munshi project of PRADAN (Case 3).

Good Practices in SHG Book-keeping

275

These cases are among the many good practices that could be found among the many stakeholders involved in the SHG-bank linkage programme. These are not in any way exclusive practices and are not the only ones identifiable. Having identified the good practices, the next step would be to draw lessons from these cases and to locate missing links leading to the challenges to quality book-keeping. It would also be important to disseminate the lessons learnt to a diverse stakeholder group with a view to integrate lessons learnt in subsequent actions of either promoting new SHGs or working with existing groups.

THE SHG-BANK LINKAGE PROGRAMME IN INDIA The SHG-bank linkage programme in India today is the largest microfinance programme in the world. As of March 2005, the programme covered more than 1.6 million SHGs that were bank linked. The linkage programme has managed to involve participation of diverse stakeholders consisting of all 48 commercial banks, all 196 RRBs and mostly all 316 cooperative banks. It has partnered with over 3,000 NGOs from different parts of India. As the programme is continuously expanding its outreach, which is a very desirable feature, the expanding outreach has thrown up certain critical challenges. Quality in the record keeping (books of accounts [BoA]) of the SHGs is one important challenge. The programme has motivated thousands of poor women and men to save and access credit. In any financial programme, accurate recording and reporting of financial information is of paramount importance. The linkage programme is no exception to this principle. More importantly, the programme has mobilized substantial savings from women members over the years. It is therefore important that the micro and the macro management of the financial information of the programme are of good quality. Several stakeholders have different details of information. For example, NABARD-MCID has the macro picture of the programme that monitors the progress and the performance of the linkage programme at the national level every year. Likewise, participating banks would have similar information. All this information is based on the most critical micro-level information, that is, the BoA of individual SHGs. The SHG BoA are the foundation on which subsequent information and analysis of the programme is based. Given the diversity in the programme, it is important that certain minimum standards of

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Jan Meissner, Ramakrishna and Marie Luise Haberberger

accounting practices are followed. There is also a need to link these accounting practices to the Management Information System (MIS) of the programme so that accounting records generate information that is useful in decision making. Hence it is essential that micro-level information recording, namely, book-keeping in SHGs, be of appropriate quality.

WHAT IS QUALITY IN BOOK-KEEPING IN SHGs? Quality would mean different things to different individuals. Hence it is essential that a common understanding is reached. We propose the following parameters in defining quality in book-keeping in SHG-bank linkage programme:

All primary books of accounts are maintained. (Primary records include cash book, ledgers, members’ passbooks, individual members’ ledger, receipt book, vouchers, etc.) The trial balance, income and expense statement, as also the balance sheet, is prepared for all the SHGs. In defining quality, it is also important that the record-keeping is done accurately, without mistakes. The records should clearly state each member’s savings, loans outstanding, interest and principle paid and other such relevant information. It is also essential that the accounts are kept up-to-date and these are not pending beyond one week after the transactions are over (SHG meetings, bank loan disbursements). The financial information should be easily accessible either to the member of the group or to an outsider such as an auditor or a banker. The principle of transparency is important in this context. Another aspect of accessibility is also the facility to retrieve any data at any point of time. The accounting system should allow the data to be consolidated around any parameter as required and made available to any user at any point of time.

Thus, the key words in quality book-keeping are completeness, accuracy, up-to-date information and transparency.

PROVISION

OF

FINANCIAL HEALTH INDICATORS

FOR

SHGS

There is a growing feeling among bankers that monitoring loan repayment alone is not sufficient. A major disadvantage of tracking loan


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repayment is that it only looks into the past. Excellent loan repayment in the past is not a guarantee for excellent loan repayment in the future. For a number of reasons, good clients can turn into bad clients, for example, if there are internal problems within groups. While it is difficult to look into the future, some events can be predicted if the indicators are interpreted rightly. For example, SHGs that stop collecting savings are more likely to default on bank loans at a later stage. Banks are interested in knowing the overall health of the group. Therefore a good book-keeping system is a prerequisite to provide information about the five Financial Health Indicators for SHGs that are:

regular savings; internal and bank loan repayment; regularity in meetings and attendance; proper book-keeping; and participation of group members and unity.

CASE 1: THE MUNSHI SYSTEM OF IBTADA1 PRACTICES

IN

SHGS PROMOTED

OVERVIEW OF IBTADA, IN JULY 2005

THE

SHPI

BY

IBTADA, ALWAR, RAJASTHAN

AND ITS

SHG PROGRAMME

Ibtada was established in 1997 with a non-profit motive to build and strengthen people’s institutions and enable these to address issues that concern them. The NGO is currently operating in the Mewat region of Rajasthan. The inspiration to start the initiative called Ibtada, an Urdu word meaning ‘the beginning’, came from the backwardness of women in this region. Ibtada envisions a society where poor and deprived social groups are economically, socially and politically empowered to take part in development processes and have equal rights and access to resources in order to 1

This section is written by Ajit Kanitkar. This section is based on field interactions the GTZ team had with the SHGs promoted by Ibtada in the Alwar region of Rajasthan. The field visit to the SHGs was made during 13–15 July 2005 by a team consisting of Dr Ajit Kanitkar, Consultant, Delhi and Ms Hemlata Sharma. The team visited 10 SHGs in five villages in addition to interacting with the branch manager of the Alwar Bharatpur Anchalik Gramin Bank, the RRB in Alwar and an SHPI in a village that had promoted an unregistered informal saving and credit group consisting of 45 members and another SHG that was linked to the RRB branch in the village.

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remove poverty, deprivation and discrimination. In order to achieve this vision, Ibtada’s mission is to capacitate communities especially women to play a stronger role to reduce social and economic poverty and inequality. The core strategies adopted by Ibtada are: (i) augment community capacity and promote self-reliant community institutions; (ii) put women and the girl child at the forefront; (iii) collaborate with government agencies for effective outreach; and (iv) build alliances with civil society and Community Based Organizations (CBOs) on issues of common concern. In terms of concrete activities, Ibtada promotes women’s institutions around issues of microfinance. Such institutions are self help groups (SHGs), cluster level Mahila Sabha and block-level federations. Apart from microcredit, these institutions engage in village level issues, female children education and women’s health. The overall approach leads towards women’s empowerment. Promoting education of the girl child is a major initiative of Ibtada. This involves running alternative schools called Taleem Shalas. This is significant in the context of working with the Meo community. Enhancing livelihoods through existing resources of land and livestock is another intervention. According to its published annual report for 2003–04, Ibtada had staff of 19 comprising 12 male and seven female members. Its income for the year 2003–04 was Rs 5.2 million. Expenses for microfinance and livelihood were Rs 1.2 million and Rs 3.3 million for the education programme. Grants from Indian and foreign agencies were Rs 2.6 million and Rs 2.3 million, respectively. The 2003–04 annual report described the philosophy of Ibtada’s community-based microfinance as follows: Ibtada’s microfinance programme is driven by the principle of social justice. Women in Mewat region face high discrimination in terms of opportunities for education, access to healthcare service, participation in social, economic and political decision-making processes. They are heavily burdened with work related to domestic, agricultural and animal husbandry. Still, their contribution to decision-making powers, welfare of the family goes unnoticed and unrecognized. They don’t have any pride within the family and society. The programme aims at building


279

sustainable women-managed financial institutions which would provide women the right to share, participate, raise issues of their concern and take decisions. The programme aims at giving an identity to women in Mewat region.

The SHG programme in July 2005 covered 3,690 households in 69 villages in two blocks of Alwar district of Rajasthan. Till date, Ibtada has promoted 202 SHGs. The SHGs are linked to about 10 clusters and then to the federations. About 100 SHGs are linked to two federations.

HIGHLIGHTS

OF THE

FUNCTIONING

OF THE

SHGS

The following are the highlights of the SHGs promoted by Ibtada: (i)

During the formation stage (first three months), the SHGs meet every week. Towards the end of the third month, meetings are held every fortnight. In all the groups, the initial savings are fixed at Rs 10 every week and later increased to Rs 20 per meeting and subsequently to Rs 40 per month after discussion with members. (ii) All the SHGs meet every fortnight on a predetermined date and time. The group membership varies from 10 to 15 women. Ibtada, in principle, does not encourage groups having a membership of more than 15 women. (iii) The meetings are held in the morning hours, in a community place or at in an individual’s house. (iv) Mature groups have increased savings amount to Rs 50 per meeting (Rs 100 per month). (v) All the SHGs are linked to branches of commercial banks or RRBs. Alwar Bharatpur Anchalik Gramin Bank is the RRB in this region in addition to the State Bank of Bikaner and Jaipur and the Punjab National Bank. (vi) Two members represent the SHGs in the cluster and two members represent the cluster at the federation meeting. Every second and and third day of the month, federation meetings are held in Alwar town and in the village. (vii) In all the SHGs, a book-keeper (munshi) starts writing the BoA from the fourth to fifth month, after the group formation. This work is done by the Ibtada staff during the group formation stage. (viii) In July 2005, Ibtada had eight munshis, one of them female.

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Jan Meissner, Ramakrishna and Marie Luise Haberberger TABLE 16.1 Highlights of Ibtada

Organization2

Ibtada (a word in Urdu meaning beginning) established in 1997 Society 69 villages in two blocks of Alwar district, Rajasthan 202 SHGs, 3,690 households 33,856 in Rajasthan, 2,810 in Alwar district 19 (12 male, 7 female) Rs 52 lakh, of which grants include: Rs 26 lakh from Indian agencies Rs 23 lakh from foreign agencies Microfinance and livelihood: Rs 12 lakh Education programme: Rs 33 lakh Commercial banks: State Bank of Bikaner and Jaipur, Punjab National Bank RRB: Alwar Bharatpur Anchalik Gramin Bank Cluster-federation women empowerment promoting girl child education microfinance and livelihood

Legal Form Geographical Coverage Outreach Out of all SHGs in states3 Staff Income (2003–04)

Expenses Partner Banks

SHG-concept Core Fields of Action

Source: Ibtada (2004): Annual Report 2003–04.

THE SHG ACCOUNTING SYSTEM DESIGN

OF THE

BOOKS

OF

OF

IBTADA

ACCOUNTS (BOA)

Ibtada has maintained a uniform set of BoA for its new as well as mature groups. These are: (i) Cash Book-cum-Attendance Sheet-cum-Minutes Book-cum-Loan usage-cum-Trial Balance. (ii) Individual member’s Savings and Credit Ledger and different Income and Expense Ledgers. (iii) Members’ passbooks containing information both on their savings and loans. (iv) A DCB Register for every month. (v) Loan Receipts Voucher. (vi) Payment and (Saving, Interest, Principal, etc.) Receipt Book. In addition to these six books, there are passbooks (savings and loan) issued by the bank after the SHG is linked to the bank. All 2 3

Ibtada (2004): 2003–04 Annual Report. NABARD (2004): Progress of SHG-Bank Linkage in India 2003–04.


281

these books (except three) are kept in the box along with cash in hand. This box is locked and the key is kept with member other than the one who is holding the box.

THE BOOK-KEEPER (MUNSHI)

IN THE

SHG SYSTEM

OF IBTADA

One interesting aspect of the SHG book-keeping in Ibtada is that this work is done entirely by book-keepers, called munshis. Ibtada identifies possible candidates who could take up this work on behalf of the SHG. These are village youths in the age-group 20–25 years who have passed the school-leaving examination or appeared for college examinations. Most of the book-keepers come from the neighbouring villages in the Mewat region. As a policy, Ibtada does not assign the accounting work of SHGs to a person of the same village. Each book-keeper generally travels about 10 km on bicycle/foot every day to neighbouring villages. Since the work involves moving from one village to another, women are not coming forward to take up this vocation. Ibtada has experienced that it is useful to recruit younger persons rather than mobilizing middle-aged or experienced persons. There is always a risk that group dynamics are influenced by them. At the same time, there are not many qualified men and women in the villages who could take up this responsibility. Retaining book-keepers is another challenge for Ibtada. Those who stay have probably not found an alternative job. The daily wage rate in Alwar industrial area is Rs 70–80 and some youth prefer to work in the town. The munshis are trained mostly on the job. They travel with the Ibtada field executive for the first few meetings, observe the work and after some time are given the responsibility. In the design, all the record-keeping and accounting function is to be performed by paid book-keepers (munshi), often the ‘moral responsibility’ to ensure that it happens still seems to be with Ibtada. The following are some additional facts about book-keepers: (i) There are eight book-keepers, seven men and one woman. (ii) The average workload is about 20–25 SHGs per book-keeper. One munshi has the highest workload (27 SHGs). The women book-keeper has responsibility for one cluster of nine SHGs. (iii) Among the existing book-keepers, three have stayed for more than four years. (iv) Ibtada does not pay salaries to the book-keepers from its budget. All compensation expenses are shared by SHGs through their own contribution.

282

(v)


All the book-keepers are paid compensation according to the following. New group—first year Second year Third year

Rs 30 per month Rs 50 per month Rs 70 per month

(vi)

The yearly increase of Rs 20 per month is based on the assumption that older groups would have higher financial volumes to handle (accumulated savings, internal lending, bank linkage, lending, etc.) and hence more accounting related work. (vii) The proceedings for the compensation of book-keepers are shown in the following diagram: SHG meeting first fortnight

SHG meeting second fortnight

Federation meeting

1. Cash handed over to two women representatives in the SHG meeting. 2. Expenses shown in SHGs accounts for compensation

Compensation disbursement to all book-keepers

3. Cash deposited from all SHGs towards munshi compensation in the meeting.

Source: Ajit Kamitkar together with NABARD-GTZ Rural Finance Programme team, as per field observations/interviews with Ibtada Staff.

(viii) The book-keepers present the trial balance of the groups at every federation meeting. Ibtada then prepares a summary of the presented information. (ix) Currently, the highest compensation a group pays to a bookkeeper is Rs 130 per month. However, the monthly compensation ranges from Rs 1,000 to Rs 1,950. Ibtada mentioned that there is a cross-subsidization involved. Old/mature groups contribute more to the book-keepers’ compensation than new groups. (x) Generally, the book-keeper gets on-the-job training, first along with the Ibtada field staff and later under its supervision.

OBSERVATION OF CHALLENGES IN ENSURING THE QUALITY OF SHG BOOK-KEEPING SHGs, SHPIs and bankers are facing a number of challenges in ensuring SHG quality book-keeping. (i)

The socio-economic situation of the region is influencing the formation and sustenance of the SHGs. Ibtada works in the Mewat


283

TABLE 16.2 Overview of the Book-keeping (Munshi) System of Ibtada Name Record-keeping Book-keeper

Trial Balance (TB) & Balance Sheet (BS)

BoA & Cash Keeping

Training of book-keeper

Who pays all costs incurred?

Book-keeper Training of book-keeper Audit & Supervision

Replicated already? Information on Financial Health Indicators Auditing & Supervision

Ibtada Munshi System BoA written by external munshi Full-time munshi (fee-based income): village youths in the age group of 20 to 25, who have passed the school-leaving examination or appeared for college examinations (not same village) TB at the end of each month Profit and Loss Statement and BS is prepared once a year in the system BoA with book-keeper, except members’ passbooks Cash box with SHG On-the-job training for 3 months by NGO staff, Occasional classroom training by Ibtada and exposure visit in one/two years By SHGs via federation (by cross-subsidization) NGO No external audit is done currently Federation Not yet Available No random or systematic way of checking or auditing

Source: Ajit Kamitkar together with NABARD-GTZ Rural Finance Programme team, as per field observations/interviews with Ibtada Staff.

(ii)

region with the Meo community. While the economic indicators are comparatively better for the Mewat region, in terms of education of the girl-child and women, the region offers a massive challenge. This is reflected in the functioning of the SHGs. Ibtada is faced with a difficulty of recruiting and later retaining good book-keepers.

A book-keeper gets roughly Rs 2,000 every month and is responsible for about 40 meetings (20 SHGs meetings twice) in a month. The wage rate available in nearby towns/factories is Rs 70 to 80 per day. Ibtada has observed that many book-keepers do not stay longer. Those who stay tend to develop vested interest. Ibtada asked a book-keeper to leave as he was found asking for a bribe from women members after sanctioning loans. Some of them were found influencing repayment behaviour of the members.

284


(iii) While it is important and necessary that SHPIs should slowly and clearly withdraw and the SHGs should become independent, this may not happen immediately in contexts such as Mewat as is indicated in the following Box. Sometimes group facilitation is required. There are decisions to be made on cash management, whether to fully repay the bank loan first or make partial payment, etc. In one particular situation, the SHG’s application for the fourth linkage loan of Rs 75,000 was held back by a branch manager because one member had a personal loan outstanding of about Rs 40,000. The group found it difficult to resolve this issue. When the size and volume of financial transactions increase, there is a stronger need of not only good accounting but also skilful facilitation. Can the book-keeper or the leadership within the SHG handle these challenges without the intervention of the SHPI?

(iv) In the current system, Ibtada does not have a systematic supervisory and auditing mechanism. During the field visits by the Ibtada SHG Programme Coordinator, book-keeping records are checked by him. But such visits are not systematically planned. They are working on a system that will ensure regular and on going auditing. (v) Monitoring accountability and performance of the accountants is a concern for Ibtada. Sometimes the group members are not capable and confident enough to raise questions on the performance of the accountants. Some issues for improvement were observed: (i) All the groups did not have an aluminium box to hold BoA and cash. Some were maintaining cash in a cloth bag. (ii) In two groups, old registers were not replenished with new sets. Hence accounting records were made on a separate sheet (till the time new registers were purchased by the SHGs). (iii) In one SHG meeting, loan receipt and repayment receipts were not given to members. The receipt books were out of stock. The members thought that buying stationary (receipt books) was an unnecessary expense. They thought all transactions were done in good faith and trust. (iv) In another SHG, the individual saving ledgers were not updated.

1,2,3,4,5** 1,2,3,4,5,6 1,2,3,4,5,6 1,2,3,4,5,6 1,2,3,4,5,6 1,2,3,4,5,6 1,2,3,4,5,6 1,2,3,4,5,6 1,2,3,4,5,6 2,4

Ö Ö Ö Ö

Ö

Munshi

Ö

Ö Ö

Ö(1) Ö(1)

SHPI

Who wrote the BoAs

SHPI SHPI Book-keeper SHPI SHPI Book-keeper Book-keeper Book-keeper Book-keeper Group

Book with

FIELD OBSERVATIONS

Ö Ö Ö Ö Ö n/a

Ö Ö Ö

Box with group

Cash

Ö(1)

Other method X(1) Ö Ö Ö X Ö Ö Ö Ö X

Complete set available

TABLE 16.3 Summary of 10 SHGs

BASED ON

Book- & Cash-keeping

SHG ACCOUNTING SYSTEM

Record-keeping

OF THE

Ö Ö Ö Ö X(1) Ö X(2) Ö Ö X

Record complete and updated Ö Ö Ö Ö Ö Ö Ö Ö Ö Ö

Accuracy

Quality Dimension

Transparency Ö Ö Ö Ö Ö Ö Ö Ö Ö X

Source: Ajit Kamitkar together with NABARD-GTZ Rural Finance Programme team, as per field observations/interviews with Ibtada Staff. Notes: (1) Cash (1) No receipts after (1) Munshi on * not ** Loan (1) Loan kept in a 10/04, entries in Ibtada recovery recovery leave (apologized) cloth bag member’s passbooks register not register not (2) Records up-toavailable available date till 2003 Ö = fully verified X = not verified

1 2 3 4 5 6 7 8 9 10*

Sl No. BoA

OVERVIEW

OBSERVATIONS

partly yes yes yes no yes partly yes yes no

Financial health indicators fulfilled

Financial Health Check

286


(v) There was a different degree of completeness in the summary statements. Some SHGs had trial balance prepared till the last month (June 2005) while in some other groups, the same was done till 31 March 2005. (vi) Lastly, Ibtada had introduced a system of appointing bookkeepers described earlier. In four groups meetings, the Ibtada field staff recorded all the transactions as the appointed book-keepers had left (in one instance) and another was on leave. Ibtada staff mentioned that retaining a book-keeper was a major challenge for them.

LEARNING FROM THE IBTADA PROMOTED BOOK-KEEPING ACCOUNTING PRACTICES: SOME REFLECTIONS

AND

Design: The SHG accounting system designed by Ibtada is comprehensive and can connect well to information requirements regarding the five financial health indicators. At the SHG level, a trial balance can be prepared for every month. The formats/ ledger designed are simple, easy to understand and transparent. Practice of book-keeping: The practice of book-keeping and its quality varies from group to group. This was observed in 10 groups (out of the 200 SHGs promoted by Ibtada). It confirms again that the beauty of the linkage approach lies in its variety and any imposed standardization would endanger the entire system. Consistency: The accounting records are consistent. Information from the BoA of one SHG for three different points in time was obtained (November 2003, 14 July 2004, and 15 July 2005). Such information is useful in not only knowing about the consistency of the BoA but also in tracing the movement of the SHGs in terms of its members’ savings, loans, absorption capacity and capital formation process, etc. Viability: During the last year, all the SHGs together mobilized a sum of Rs 1.2 lakh towards remuneration for the eight bookkeepers. This is a commendable practice, especially in the context of a state like Rajasthan and a region like Mewat where, on the one hand, there are massive subsidies being extended by government agencies, and on the other hand, there is a huge reluctance from the community and individuals to pay for the services they receive. This Ibtada-promoted approach in the SHG book-keeping system is a positive example.


287

Replicability: Ibtada is invited as a resource agency in training programmes. Ibtada personnel are invited as ‘master trainers’. For instance, Ibtada was recently invited to share their experiences in a sensitization workshop organized by NABARD on 8 July 2005 in Alwar. About 40 branch managers participated in this one-day workshop. Ibtada is in dialogue with the officials of the government of Rajasthan about Ibtada playing the role of improving the quality of SHGs promoted by the Integrated Child Development Services (ICDS) programme of the state government. Transparency: This system has the possibility to offer information to various stakeholders. Individual SHG members can find out information on their cumulative savings, loan outstanding and also the overall financial position of their group. A bank manager can assess performance of the SHG with respect to loan repayment from the accounting records. The SHPI can observe regularity in terms of attendance of members and savings in each meeting. A Trial Balance of a SHG for three to four consecutive years would indicate the direction of the growth of the group as also the indication of the accumulation of the group capital.

CASE 2: THE BOOK-KEEPING SYSTEM IN THE MAHAKALASM SHGs4 THE SHG PROGRAMME DEVELOPMENT (CCD) OVERVIEW

OF

OF

COVENANT CENTRE

FOR

CCD

The Covenant Centre for Development (CCD) is a non-governmental development agency based in Madurai, Tamil Nadu, founded in 1989 by a team of motivated professionals believing in the ideal of collective action. CCD is registered under the Tamil Nadu Societies Registration Act 27 of 1975. It aims at utilizing the Local Resources and Traditional Skills (LRTS) of the community by promoting Community Based Organizations (CBOs). CBOs provide a platform for village people to 4

This section is written by Sasi Kumar and Tapan S. Parikh, Ekgaon Technologies. Ekgaon is interested in sharing the benefits of this work with all interested SHG-promoting institutions and other stakeholders. For more information about the license and how to obtain the toolkit, please visit http://www.ekgaon.com/toolkit.pdf

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solve their own problems through the proper and effective utilization of local resources and human potential. CCD has designed programmes addressing issues of rural migration, poverty, unemployment, agriculture and environment. The overall goal is to bring about positive change in the lives of village people, helping them to lead an independent, satisfied and secured life. CCD concentrates on economic development for poor women, children and their families through developmental and vocational training. Natural resource management, afforestation and organic farming practices are an important part of this programme. CCD seeks to develop economic activities for securing the livelihoods of community members using traditional skills and appropriate technology, making sustainable and judicious use of the local resource base. The following are the major motivating objectives behind CCD’s work: (i) to promote and encourage savings mobilization and credit management by landless agricultural labourer women in rural areas to help attain economic security (these groups are known as KALASM); (ii) to protect and conserve local natural resources of rural farming communities by renovating sacred groves, rehabilitating irrigation tanks, afforestation in wastelands and restoring traditional farming practices for sustainability (this programme is known as VAIREM); and (iii) to bring about positive change in the lives of traditional artisan communities in rural areas helping them lead independent, satisfied and secured lives through their professional activities (this programme is known as SADANA).

CCD’S SHG PROGRAMME Towards these goals, CCD has promoted four self-managed SHG federations, locally known as Mahakalasms. Many similar SHGs and SHG federations require constant guidance and help from their promoting NGOs. In contrast, each of the Mahakalasms strives to adhere to the ideals of independence and community-ownership. In fact, the goal of CCD is to eventually give up its role as promoter and allow the Mahakalasms to become completely independent community service institutions. The success of this model has led many NGOs in the region to visit CCD and the Mahakalasm field areas. CBO federations based on the


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Mahakalasm model have thus far been replicated in nine states of India through the Community Enterprise Forum International (CEFI) network.

OPERATIONAL HIGHLIGHTS Following are some of the operational highlights of the SHGs promoted by CCD: (i) (ii)

The group membership varies from 12 to 20 women. During the formation stage, SHGs meet every week. At the end of 3 months, meetings are held every fortnight. (iii) Group meetings are usually held in the evening hours after the daily agricultural activities, in a community place or in one of the member’s homes. (iv) The per-meeting subscription amount is determined by the SHGs themselves and collected from each member. (v) Matured groups have regular savings amounts up to an observed maximum of Rs 200/- per meeting. (vi) Member loan repayments for loans accessed from external sources are collected at a separate group meeting. (vii) All the CCD-promoted SHGs are linked to the branch of either a commercial bank or a RRB. Pandiyan Grama Bank, State Bank of India, Indian Bank and Canara Bank are the major affiliated banks in the CCD operating area. (viii) Two members represent each SHG in the cluster meeting. Cluster meetings are held once in a month. (ix) Two representatives from each cluster attend the federation meeting. These are conducted twice in a month. (x) The person in charge of keeping the SHG’s books is either a hired staff of the federation or a member of the SHG. In many cases, the SHG is responsible for keeping only a basic meeting record, and the staff completes the rest of the book-keeping after the meeting has been conducted.

SHG BOOK-KEEPING SYSTEM

OF

CCD: THE MAHAKALASM MIS

IMPLEMENTATION HISTORY CCD’s current book-keeping system is the result of an extensive redesign coordinated by Ekgaon Technologies Pvt. Ltd. The project commenced in 2002 with a detailed contextual study of the existing

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Jan Meissner, Ramakrishna and Marie Luise Haberberger TABLE 16.4 Operational Highlights of CCD

Organization Legal Form Geographical Coverage

Outreach Staff SHG-concept Core Fields of Action

The Covenant Centre for Development (established in 1992) Society or Trust 300 villages in seven blocks of Madurai, Virudhunagar, Dindigul, Sivagangai and Natham districts, Tamil Nadu 600 SHGs, 10,000 households 60 (25 male, 35 female) SHG-Cluster federation Microcredit and microfinance Livelihood opportunities Bio-energy conservation Medicinal plants collection and conservation

Source: Sasi Kumar and Tapan S. Parikh, Ekgaon Technologies, as per field Observation/ interviews with staff of The Convent Centre for Development.

documentation practices at the SHG, cluster and federation level. Based on this study, the formats were redesigned to remove redundancies, streamline information flows and plug information gaps. The redesign process started in March 2003 with the support of the Small Enterprise Education and Promotion (SEEP) network’s Practitioner Learning Programme in Improving Efficiency. Before a full-scale implementation, the new system was piloted for three months with 50 SHGs selected from the four different CCD-promoted Mahakalasms. The field officers were first provided an immersive weeklong training to learn the new system. During the pilot, every two weeks the project manager from Ekgaon conducted a thorough review of the SHG records, explaining any errors or oversights to the staff. Also, based on staff and group feedback, required changes to the formats were made before printing the materials for a full-scale implementation. The structure and design of the records were optimized for cost-effective printing. The final cost of the redesigned group records totalled Rs 108 per group. During the full-scale implementation, field staff (who had all been trained in the use of the system) trained SHG-level book-keepers to maintain their own records using an MIS training manual also developed by Ekgaon technologies. The training manual included pictures and detailed descriptions of the documentation process and explained the relevance of each of the new formats. The SHG book-keeper is a capable group member who maintains the BoA. In the absence of such a member the cluster officer or an educated outsider is called upon to maintain the books in exchange for a


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reasonable fee (Rs 25 or as decided by the group). The cluster officer is responsible for training the SHG book-keeper (either an outsider or a member). Staff from Ekgaon Technologies trains the cluster officers. The Mahakalasm pays the training cost of the SHG book-keepers and CCD pays the cost for training the cluster officers. The training manual is issued to cluster officers and SHG book-keepers at the time of training to be used for reference later. The books of all SHGs are being audited monthly by Ekgaon Technologies during the initial period and will eventually be audited by a certified chartered accountant at the end of the year. The full-scale implementation commenced in June 2005. Since then the project manager has been conducting a monthly review of the books for all the 500-odd SHGs included in the implementation. Thus far the results are very positive. The new system simplifies the preparation of financial statements and reports at the SHG level, which were never even prepared previously. Removal of redundancies and overall simplification of the documentation process has reduced the workload on field staff, and reduced the average time of SHG meetings.

HIGHLIGHTS

OF THE

SHG BOOKS

OF

ACCOUNTS (BOA)

The main records included in the system are: (i) SHG Flap-book: a complete group transaction record kept in one ledger. (ii) Member Passbooks: for savings, deposits and loans. (iii) Financial Statements: indicating the financial position of the group. (iv) Group-level Reports: detailed operational, financial and performance reports prepared on a per-group, per-cluster and perfederation basis. All regular SHG transactions are recorded in the monthly Flap-book. The Flap-book is designed to be an all-inclusive, easy-to-use ledger for recording and processing of financial and non-financial information for an individual SHG. The features of this system are as follows: (i) It is designed keeping in mind the needs of semi-literate women. (ii) It is designed to replace complex and cumbersome book-keeping with a simple and easy-to-use record. (iii) It encourages the user to comply with accepted reporting standards of financial institutions and apex agencies.

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(iv)

It captures and presents key data in formats that actively encourage analysis and adaptive management. (v) It is designed to do away with non value-adding paper work and to demystify book-keeping and reporting functions. (vi) It helps effective management by foreseeing pitfalls and threats, allowing for timely remedial action and early resolution. (vii) A bookmark format has been designed with color codes for referencing key records and documents. (viii) All major categories of financial products including subscription, savings, internal and external loan disbursements and repayments are recorded in simple flap-based formats facilitating data entry and reference. (ix) The flap system simplifies aggregation and analysis of data. The results are used for decision-making and control of the programme. The details of the individual records, documents and reports are given in the next section.

DETAILS

OF THE

SHG BOOKS

OF

ACCOUNTS (BOA)

The records are divided into Flaps, Monthly Records, Yearly Records, Financial Statements and Reports. Each of these types of records serves a different purpose in the overall documentation system. Flaps Meeting data is captured through five colour-coded flaps. The book is designed so that it allows the user to quickly identify and access the correct flap by using colour coding and appropriately placed cuttings. (1) Flap-1 Subscription and Attendance: This flap records the subscription received from each member. Attendance is verified by having each member sign the record. (2) Flap-2 Voluntary Savings: This flap records deposits and withdrawals from each member’s voluntary savings. The balance is updated at each meeting. (This flap is not currently in use as the SHGs are not collecting voluntary savings). (3) Flap-3 Internal Loan Repayment & Disbursement: This flap records the loan repayments made by each member for internal


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group loans in terms of principal, interest and penalties. The outstanding loan amount both for the member and group as a whole is updated at each meeting. On the right side, internal loans disbursed to the member are recorded in terms of the loan amount, purpose, number of instalments, scheduled principal payment and the upfront interest collected. (4) Flap-4 External Loan Repayment & Disbursement: This flap records the loan repayments made by each member for loans from external agencies in terms of principal, interest and penalties. The outstanding external loan amount both for the member and the group as a whole is updated at each meeting. On the right side, loans disbursed to each member from the externally availed loan amount are recorded in terms of the loan amount, purpose, number of installments, scheduled principal payment and the upfront interest collected. (5) Flap-5 Meeting Resolutions: This flap records the place of the meeting, the accountant’s name, agenda of the meeting, summary of discussions and the group resolutions that have been decided. This is accompanied by the signature of all the members vouching for the decisions made and for the discussions among the members of the group. Monthly Records The monthly records are for recording infrequent or irregular transactions that do not coincide with normal meeting proceedings. The details of these records are as follows: (1) Advances/Donated Equity-Grants/Deposits/Expenses: This record includes the advances given by the group, the settlement of those advances with individual members, advances received by the group, the settlement of those, loan subsidies, grants received by the group and the miscellaneous expenditures of the group. (2) Bank Savings Passbook: This is a record of the deposits and withdrawals from the group savings account at the bank. (3) External Loan Record: This records details of each loan availed from outside institutions such as banks, MFIs or the federation. The loan issuer name, address, loan amount, interest rate, interest type, repayment details and the subsequent disbursements of the principal among the members are recorded on the left hand side.

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On the right side, the actual repayments of the loan principal including interest, penalties and fees are recorded. Yearly Records The yearly records are used to document the impact of the microfinance programme on the livelihood and economic circumstances of the members. The yearly records include: (1) Member Detail Form: This form consists of the member’s basic information such as her name, address, husband/father name, occupation and the family details including the family income, family occupations and education. This helps to determine the income per head of the family and the overall educational background. (2) Member Economic Indicators: This form consists of the economic details of the member such as housing details, landholding details, animal husbandries, other assets and skills of the family members. This is used to determine the economic status and earning potential of the member. Financial Statements The financial statements are derived directly from the transaction totals cumulated on each flap and monthly record. The totals from these pages are carried over to specific entries on each statement. This process is explicitly and pictorially depicted in the MIS training manual. Many microfinance practitioners and developmental organizations consider the generation of financial statements at the SHG level a difficult task. Through this method of book-keeping we have simplified this process. The financial statements that are generated include: (1) Income and Expenditure Statement: This statement derives the profitability of the group and is prepared by deducting the financial expenditures from the financial income. It indicates either a profit or loss of the group for the particular month. (2) Receipts and Payments Statement: This statement computes the receipts and the payments made by the group for the particular month. This statement is used to reconcile the group receipts and payments with the current cash on hand. (3) Balance Sheet: The balance sheet shows the financial position of the group by cumulating the liabilities and equity (outstanding


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loans, advances, member subscriptions, member savings, reserves and surplus) and the assets (member loans, cash in hand, cash at bank, group deposits and fixed assets). Reports Group reports are delivered from the group to the cluster and then from the cluster to the federation. The following are the major group-level reports included in the system. (1) Member Receipt and Payments: This report includes all the member-wise receipts (subscription, savings, internal loan repayments and external loan repayments) and member-wise payments (savings withdrawal and loan disbursements) for the specified period of time. (2) New Loan Summary: This reports the new loans disbursed to the members of the group including the details of loan amount, purpose, principal repayment schedule and number of instalments. (3) External Loan Repayment and Outstanding: This reports the repayments made to outside agencies for the external loans of the group for the specific period of time. This tracks the status of the external loans availed by the group. TABLE 16.5 Summary of the Records in the Mahakalasm MIS Sl No. Particulars

Item

Details

1

Flaps

2

Monthly Records

Flap-1 Flap-2 Flap-3 Flap-4 Flap-5 Record-1

Subscription and Attendance Voluntary Passbook Savings Internal Loan Repayment and Disbursement External Loan Repayment and Disbursement Meeting Resolutions Expenses/Donated Equity/Advances/ Deposits Bank Savings Passbook External Loan Record Member Detail Form Member Economic Indicators Income and Expenditure Statement Receipt and Payments Statement Balance Sheet Member Receipts and Payments New Loan Summary External Loans Repayment and Outstanding

3 4

5

Record-2 Record-3 Yearly Documents Document-1 Document-2 Financial Statements Statement-1 Statement-2 Statement-3 Reports Report-1 Report-2 Report-3

Source: Sasi Kumar and Tapan S. Parikh, Ekgaon Technologies, as per field Observation/ interviews and according to Ekgaon toolkit: http://www.ekgaon.com/toolkit.pdf

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CHALLENGES SOME EARLY OBSERVATIONS (i)

Earlier, many CCD-supported SHGs were pushed to use seven types of records as prescribed by the Tamil Nadu Womens’ Development Corporation (TNWDC) as part of its Mahalir Thittam programme. The SHGs had difficulty maintaining so many records. The new design is aimed at reducing this complexity. However, the Mahalir Thittam programme does not yet accept the new records and thus many groups are required to maintain two sets of books. This has been a frequent complaint of the groups and staff. (ii) Many rural banks not involved in this programme are happily accepting the Flap-book as proof of the group’s attendance, savings and credit history, etc. (iii) Staff and groups do not understand the benefit of regular bookkeeping and reporting when many banks and other creditgranting institutions are not yet demanding the same. (iv) Rigour and regularity in book-keeping is difficult to enforce. At this point it still requires the consistent supervision of the project manager. (v) Both SHG members and staff commonly make arithmetical errors and careless mistakes in keeping the books and especially in preparing the reports and statements. (vi) Checking the books of all the SHGs can be impractical as that involves each field staff carrying a bulk of notebooks to the federation office for review. Moreover it is time-consuming and expensive to retain regular project staff for this auditing task. (vii) In the future, the books of all SHGs can be audited once at the end of the year. This will reduce the workload of the project staff while retaining some measure of oversight and professionalism. (viii) It is difficult to find literate SHG members who can serve as the local book-keepers. This increases the responsibility of the field staff to maintain the books of accounts for the group. This also introduces delay into the process, for if the field staff cannot attend the meeting it may be three or four days before all the SHG’s books are updated. (ix) More work needs to be done to train SHGs in how to use the data that is generated. They need to learn how to analyze and interpret financial statements and reports in order to make informed decisions.


(x)

(xi)

(xii)

(xiii)

(xiv) (xv) (xvi)

297

Appropriate ratios and indicators need to be developed that inform the SHG about important considerations in a way that is realistic and pertinent to the group operations. Currently the printing cost of the records is Rs 108 per group, on the basis of 500 SHGs. The cost can be reduced proportionately if there is an additional volume of printing. This system is already cost-effective as all the groups have been willing to invest their own money to purchase the new materials. Earlier it was required that groups produce a regular trial balance. It was found to be cumbersome to produce and did not provide any valuable information to the group so it was discontinued. Totals were being calculated for some columns that did not require summation (for example the ‘Member ID’ column). The total cells for these columns were given a different type of shading to indicate that they were not to be calculated. By shading alternate rows in the pages of the book it was easier to remember which row you were referring. The SHG members understand the flexibility and significance of this book and are using it regularly for their account-keeping. Many local banks, after seeing this book, are expecting SHGs to present it for loan appraisal and documentation.

BENEFITS The benefits obtained by the SHG, federation and the CCD respectively are: (i) SHG: The financial statement that depicts the surplus/deficit and current financial position of the SHG is being accepted for loan appraisal by the RRBs. This allows SHGs to access loan capital in an objective, unbiased manner. Members of the group can easily refer to the reports for finding out their loan outstanding and total savings. In the long term, economic indicators of SHG members derived from the system will reveal the impact of the microfinance programme on rural livelihoods and employment opportunities. Members can monitor the performance of loans according to utilization and use that to direct their investment decisions. (ii) Federation: The member-wise receipts and payments are passed to the cluster and federation for internal control of groups. The federation can use this data to monitor the loans it has made and

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pinpoint potential weaknesses. This allows it to give stronger guarantees to external institutions that are lending to groups through the federation. Improved MIS at the federation level improves its accountability and external perception as a community-owned financial institution. (iii) CCD: CCD can observe the functioning of the microfinance programme at the federation, cluster and group level. Earlier data could only be aggregated at the federation level. The increased granularity of data allows CCD to identify direct causes of problems down to the member, group and cluster. This allows them to target remedial action through staff and direct intervention. Data illustrating good performance and loan utilization can also be used for soliciting loan capital from commercial and non-commercial sources. (iv) Banks: If SHGs improve their book-keeping practices, banks will be better positioned to judge the maturity and discipline of individual groups. They can target loans towards groups that have demonstrated better performance. Standardizing documentation and reporting formats across SHGs will help banks standardize their evaluation procedures. Finally, by following our documentation guidelines, and integrating their own formats into our MIS and training materials, banks can directly target services both to SHGs and individual members.

CASE 3: THE COMPUTER MUNSHI PROJECT OF PRADAN5 PRACTICES OVERVIEW

IN

OF

SHGS PROMOTED

PRADAN,

THE

BY

SHPI

PRADAN

AND ITS

SHG PROGRAMME

PRADAN is a voluntary organization registered under the Societies Registration act in Delhi. It currently works in about 3,000 selected villages in 27 districts across seven states. The focus of its work is to promote and 5

This section is written by Ajit Kanitkar and Jan Meissner. This section is based on the field interactions the GTZ team had with the SHGs promoted by PRADAN in the eastern states of Jharkhand and West Bengal. The field visit was conducted during 5–10 September 2005. The team visited four SHGs in Chaibasa, Balarampur and Jhalda blocks in the two states. They had detailed discussions with PRADAN professionals in the field and in Delhi, met five Computer Munshis in addition to meetings with the branch manager of State Bank of India, Jhalda and the District Development Manager (DDM) of NABARD in Chaibasa.


299

strengthen livelihoods for the rural poor. This involves organizing them, enhancing their capabilities, introducing ways to improve their incomes and linking them to banks, markets and other economic services. PRADAN recruits professionally trained people motivated to use their knowledge and skills to remove poverty by working directly with the poor. PRADAN’s current mission is ‘impacting livelihoods to enable rural communities’. Deploying quality human resources for grassroots work is PRADAN’s distinctive strategy. PRADAN has invested considerable effort in developing mechanisms to expand the supply of quality human resources, especially at the entry level. Carefully designed systems for recruitment of young professionals and their early training and grooming have been instituted. The governance of PRADAN is entrusted with its 11-member governing board, nine of whom are honorary members co-opted from its general body consisting of all members of the society, the executive director and two senior staff members. An executive director appointed by the governing board is the chief executive officer of PRADAN. By convention, the executive director serves a fixed term of five years. The work is organized in teams based in specific field locations. Each team is headed by a team leader and has several members. In October 2005, PRADAN had a professional staff of 284 consisting of 33 teams. In 2004–05, it received grants of Rs 14 crore from government and other donors. TABLE 16.6 PRADAN and its Scope of Activities in 2005 State

No. of Districts

Bihar Chhattisgarh

1 1

Jharkhand

15

Madhya Pradesh

3

Orissa

3

Rajasthan

3

West Bengal

1

Activities SHGs, Tussar Sericulture SHGs, Improved Upland Cultivation, Small-scale Irrigation SHGs, Tussar Sericulture, Watershed Development, Improved Upland Cultivation, Rainwater conservation, Small-scale Irrigation, Dairying, Lac Cultivation, Poultry Rearing SHGs, Poultry Rearing, Mushroom Cultivation, Improved Upland Cultivation, Small-scale Irrigation SHGs, Small-scale Irrigation, Improved Upland Cultivation SHGs, Small-scale Irrigation, Improved Upland Cultivation, Watershed Development, Dairying SHGs, Small Scale Irrigation, Improved Upland Cultivation, Watershed Development, CapacityBuilding of PRIs

Source: Pradan (2005): Annual Report 2004–05.

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SHG PROGRAMME

OF

PRADAN

Formation of SHGs is an integral part of PRADAN’s livelihood promotion strategy. PRADAN develops SHGs as independent community-based associations that would accumulate members’ savings and be able to leverage credit from banks without its continuous support and supervision. The SHG is also a platform through which PRADAN can assist poor women take up economic activities to improve their livelihoods. PRADAN continues to promote SHGs during the year to expand the outreach of each project team so that in each project location, there would be at least 250–300 SHGs at work. PRADAN calls it an approach of ‘saturating’ a particular area with large number of SHGs. The approach that PRADAN has adopted requires that the groups become independent from PRADAN in a reasonable timeframe so that its field executives are free for their core task of livelihood promotion. It has consciously chosen a strategy of not carrying out financial intermediation itself, since that requires a totally different organizational structure and culture which would not be in line with the structure and approach required for livelihoods promotion. The plan that PRADAN has prepared for the growth of an SHG presupposes that the group be free of any outside assistance in about 18 months to two years. This requires that for routine maintenance functions such as book-keeping and MIS, the group has to be on its own in the first three to five months. By March 2005, PRADAN had organized nearly 6,000 SHGs across seven states, with a total membership of about 80,000 rural poor women. About 55 per cent of the SHGs promoted by PRADAN have been linked to commercial banks for credit, the size of loans is small except where the groups have been linked through government schemes, such as SGSY. These SHGs have cumulatively generated a savings of nearly Rs 7.5 crore and have mobilized loans worth about Rs 25 crore out of which Rs 8.5 crore is from banks.

HIGHLIGHTS

OF THE

SHGS PROMOTED

BY

PRADAN

(i) The SHGs promoted by PRADAN meet every week on a predetermined date and time. The meetings are held in the early morning or late evening hours, in a community place or an individual’s house. The group membership varies from 10 to 20 women. PRADAN has found that weekly meetings encourage poor women to save regularly rather than scheduling meetings with a longer frequency.


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TABLE 16.7 Highlights of PRADAN as on March 2005 Organization6 Legal Form Geographical Coverage Outreach Out of all SHGs in states7 Staff Income in 2004–05

Expenses in 2004–05

Partner Banks SHG-concept

Core Fields of Action

PRADAN established in 1983 Society 7 states, 27 districts, 3,000 villages 6,000 SHGs covering 86,240 households 358 SHGs in West Bengal out of 51,685 3,754 SHGs in Jharkhand out of 12,647 284 of which 229 men and 55 women Rs 14 crore as grants: Rs 13.5 crore from Indian agencies Rs 50 lakh from foreign agencies SHG-bank linkage and livelihood: Rs 10.6 crore Other programme: Rs 3.4 crore Commercial banks, RRB and DCBs SHG plays four essential roles—Mutual help, financial intermediation, empowerment and livelihood facilitation; SHGs are linked directly to banks to mobilize livelihood finance; SHGs are federated at the panchayat level as clusters Livelihood promotion involves organizing women and men, enhancing their capabilities, introducing new technologies to improve their incomes, linking them to banks, markets and other economic services as well as facilitating financial intermediation through the SHG concept

Source: Pradan (2005): Annual Report 2004–05.

(ii) In all the groups, women begin with savings. The savings amount is not fixed though in most of the cases, women start at Rs 5 per meeting. These remain as voluntary savings but members can make additional savings depending on their capacity. No interest is paid on savings. (iii) Two or three members represent the SHGs in the cluster meeting held at the beginning of every month. (iv) PRADAN would like to see that all the SHGs are linked to the formal financial institutions such as branches of commercial bank and the regional rural bank. Generally, at the end of six months, the groups open their saving bank account. However, as on October 2005, only about 55 per cent PRADAN-promoted SHGs are 6 7

PRADAN (2004): Annual Report. NABARD (2004): Progress of SHG-Bank Linkage in India 2003–04.

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borrowing from banks. Inability of the groups to absorb loans, lack of investment opportunities, difficulty in accessing bank loans are some of the issues that have kept the other groups away from the linkage. In West Bengal, most of the SHGs promoted by PRADAN are linked to the district cooperative banks. (v) In all the SHGs, a group accountant (GA) chosen either from the village community or one of the literate women members is trained to write the primary BoA. A computer munshi (CM) is responsible for the next level of accounting covering about 100 SHGs. This system is discussed later in detail. (vi) In all the SHGs, the auditing of accounts is done a week after the closure of the financial year (April to March). After the audit (done by the PRADAN staff), the net profit of the SHG is calculated (interest and other income in the year minus expenses). The SHG decides as to how much of the net profit (if any) should be kept in the group fund as reserve and how much should be distributed. The amount distributed and received by each member is proportionate to her savings. It is credited to the member’s account or disbursed in cash again depending on the member’s decision.

THE SHG ACCOUNTING SYSTEM OF PRADAN THE COMPUTER MUNSHI PROJECT OVERVIEW

OF THE

COMPUTER MUNSHI SYSTEM

OF

AND

PRADAN

The computerized accounting system in PRADAN is conceived as a community-based system in which a service provider, called the computer munshi8 (CM), equipped with a computer and financial software provides accounting services to the SHGs. The financial transactions of an SHG meeting are recorded in every SHG meeting in a Regular Meeting Transaction Statement I (RMTS I) which is done manually by a GA hired by the SHG. The filled up RMTS I from about 100 SHGs is received by the CM through a collection system (drop boxes, messenger, etc.). After feeding the data of RMTS I into the computer, the CM generates the RMTS II for each SHG which is a financial statement as well as financial transactions plan for the following SHG meeting. RMTS II and a monthly member savings and loan balance statement as well as a trial balance and a balance sheet of the SHG are sent via the same collection 8

Munshi: Hindi for scribe, clerk or accountant.


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system back to the SHG. The RMTSs and the statements are in the local language so that the group members can use them. Both the GA and the CM are paid by the SHG members. The main features of the CM system of PRADAN are presented in Table 16.8. TABLE 16.8 Overview of the Computer Munshi System of PRADAN Name Record Keeping Group Accountant and Computer Munshi

Trial Balance (TB), Balance Sheet (BS) & Member Savings and Loan Balance Statement BoA & Cash Keeping Group Accountant Computer Munshi Training

Group Accountant and Computer Munshi Who Pays all Training of Accountant Costs Incurred? Audit & Supervision Replicated already? Information on Financial Health Indicators Auditing & Supervision

Computer Munshi System BoA written by both group accountant and computer munshi Women from the SHG or village youths in the age group of 20 to 25 year with basic financial literacy are selected for group accountant; person with potential, entrepreneurial drive and other competencies for computer munshi, typically someone who has passed the school-leaving examination or appeared for college examinations TB, BS and member savings and loan balance statement at the end of each month BoA with Accountant Cash box with SHG On the job for 3 months by NGO staff In different phases, about 7 days of formal training after selection, experience sharing workshops and facilitation by PRADAN during the first year First year by PRADAN, later by SHGs for the CM; for the GA, the SHGs pay right from the start PRADAN PRADAN Partly replicated Available Auditing at the end of every year, supervision by PRADAN staff before the cluster meetings

Source: Ajit Kanitkar and Jan Meissner, as per field observation and interviews with Pradan/ field staff.

In March 2005, about 6,000 SHGs promoted by PRADAN are served by CMs. Following are some additional facts about the CMs and the GAs in PRADAN:

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(i) There are 48 CMs. (ii) There are about 2,000 GAs. (iii) Currently, the average workload for a CM is 100–125 SHGs. PRADAN has estimated that a CM’s scale of operations would be at a level of 150–200 SHGs, expandable up to 300 SHGs, resulting in a remuneration of about Rs 2,500 per month, which will attract him/her to adopt this as a viable business to be taken up in the long run. (iv) Among the existing CMs, none have stayed for more than four years. Sixteen CMs have been there for about three years. (v) Each working place of a CM is equipped with a monitor, a printer and CPU that is loaded with standardized software called McFinancier. (vi) The computer is placed in a relatively more developed locality with electricity supply for 5–6 hours a day (department supply plus backup battery). There are various criteria for an ideal functioning and sustainable CM system as understood by PRADAN: (i) books of Accounts and RMTSs in local language; (ii) trained and accepted GA; (iii) functioning and reliable collection system for RMTSs and the statements; (iv) trained CM with a functional working place; (v) supportive role by an implementing agency; and (vi) understanding and awareness of the SHG members about necessity of: (a) Accounting; and (b) Payment to the service providers.

THE SHG ACCOUNTING SYSTEM Books of Accounts (BoA) Each SHG has a set of books as under: (1) (2) (3) (4)

An RMTS I book or a cash day book. A meeting minutes and attendance book. Member passbooks. Bank passbooks if the SHG is linked to a bank.


305

The BoA are kept with the SHG but maintained by the GA. The entries are recorded manually. Book-keeping with Regular Meeting Transaction Statements (RMTSs) In the ideal case, the trained GA of a newly formed SHG starts with recording the RMTS I in the first meeting. In the following meeting, the existing CM generates the RMTS II which serves the GA as a financial statement and a financial transaction plan as on the date of the SHG meeting. The GA checks the data of RMTS II with an entry in the members’ passbooks during the meeting. Both RMTSs are complementary to each other as the data of RMTS I fed by the GA represents the basis for RMTS II and RMTS II serves as a guideline for the financial transactions in the succeeding meeting recorded in the new RMTS I. If the CM system is implemented for already existing SHGs, the consolidated financial data of each member as on date would be entered in a master sheet of McFinancier. Then the member savings and loan balance statements and the first generated RMTS II serve the trained GA as control sheet and financial transaction plan in the first meeting when the CM system is implemented. RMTS I—Recording of financial transactions: The GA records the following features and data for each member in the respective RMTS I sheet for an SHG meeting: (a) (b) (c) (d) (e) (f)

cash in box; attendance; (compulsory/Voluntary) savings amount; other inflow; withdrawal of savings; loan disbursed, loan (serial) number, loan period, loan product and purpose; (g) other outflow; and (h) bank transactions. Cash collection and disbursal are handled by selected SHG members. After recording all transactions of the SHG meeting, the GA sums up the columns of the RMTS I for the whole group and totals the cash in hand column. This figure is tallied with the actual cash in the box counted by one of the SHG members. In case of inconsistency, the mistake can be corrected in the SHG meeting itself.

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Jan Meissner, Ramakrishna and Marie Luise Haberberger FIGURE 16.1 Collection System of RMTS I


The collection system of RMTS I: Every week, after the SHG meeting, a carbon copy of RMTS I is sent to the CM. The RMTS I sheets are deposited by an SHG member in a box accessible to the SHGs. The messenger appointed by the CM then collects these sheets according to a schedule. After receiving the RMTS I sheets and checking the data, the CM enters the data of RMTS I into the computer. The collection system of RMTS I is presented in Figure 16.1. RMTS II—Financial statement and financial transaction plan: The CM generates the RMTS II by the software programme McFinancier. It contains the main information as on the date of the respective SHG meeting for each SHG member such as: (a) the financial statement of loan outstandingl; and as well as (b) a financial transaction plan for the next SHG meeting. By checking the data of each member’s passbook and the cash in the box of the SHG with the data of RMTS II in the beginning of each SHG meeting, this accounting system provides an in-built control mechanism between the accounting at SHG level and the data entry by the CM.


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The distribution system of RMTS II: The software programme McFinancier generates RMTS II. The same messenger before the next SHG meeting returns RMTS II to the SHGs. In the beginning of the next SHG meeting, the data of RMTS II is compared with the entries of the members’ passbook and the cash in the box of the group. After cross-checking, the group accountant writes a new RMTS I based on the data of RMTS II and actual transactions of that meeting. The process continues as discussed earlier. The distribution system of RMTS II is presented in Figure 16.2. FIGURE 16.2 Distribution System of RMTS II


RMTSs—Tasks of the various actors: The tasks of the various actors, that is, GA, messenger and CM in this accounting system are presented in Table 16.9.

REPORTS

AND

STATEMENTS GENERATED

BY THE

COMPUTER MUNSHI

In addition to the RMTS II which is providing various features such as a statement of members’ balance, loan outstanding and amount due on a weekly basis for the SHG meeting, the CM prepares the group and member data consolidation and a trial balance once in a month. The software has the features to generate various financial reports including trial balance, balance sheet and financial ratios for variable time periods. The CM provides consolidated reports of the SHGs to PRADAN professionals for feedback and discussions in the monthly cluster meetings as well. Two representatives of the SHG being part of the cluster, the respective GA and PRADAN professionals join the cluster meeting. Furthermore, the

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Jan Meissner, Ramakrishna and Marie Luise Haberberger TABLE 16.9 RMTSs —Tasks of the Various Actors Group Accountant

RMTS I

RMTS II

Messenger

Fill up the RMTS I Fill up each passbook Write the minutes book

Cross check data of RMTS II with members’ passbook by reading aloud Cross check cash in box of the group via SHG members with amount given in RMTS I of the preceding meeting

Computer Munshi (CM)

Collecting RMTS I from box according to schedule Handing over RMTS I to CM on same day

Checking RMTS I for mistakes

Entering the corrected data into the computer software

Collecting RMTS II from CM on the same day

Give RMTS II to the group via messenger before the SHG meeting (weekly)

Handing over RMTS II to the SHG before the SHG meeting

Source: Pradan (2005): Computer Mumbai: A Self-Sustaining Mechanism to Manage SHG Accounts and MIS, New Delhi, available at http://www.pradan.net

CM supplies consolidated reports to PRADAN for programme management decisions. These reports are also used by PRADAN team in Delhi to interact with the government and donors especially on issues of programme outreach evaluation and the impact assessment. The utilization of the reports by PRADAN professionals at field level is presented in Figure 16.3. FIGURE 16.3 Feedback via Cluster Meeting



309

Features of the computer software used by the CM The system is designed around the basic back-end software called McFinancier. It is a PC-based system using Windows platform. The data entry in the SHG meetings is done manually. So there are manually maintained components in the system. As technology stabilizes there are possibilities that the front end, that is, the data entry in the SHGs also could get automated. The present system would be able to take in such changes in technology without making redundant any of the existing components. The system can be dovetailed with any other data source services (health etc.) for information transfer. The computer software McFinancier is developed by a New Delhi-based service provider named Sharada Computers.

PAYMENT TO COMPUTER MUNSHI, GROUP ACCOUNTANT AND MESSENGER (PEON) In the initial stage of the implementation, PRADAN pays for the CM and the GA. By design, PRADAN does not envisage paying fees to the CMs and the GA indefinitely. The first year is used by PRADAN for preparing the SHGs to take the responsibility for the payment of both CM as well as GA. Ideally, it is anticipated that the SHGs would make full payment to the FIGURE 16.4 Ideal Payment Set-up of Computer Munshi, Messenger and Group Accountant


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CM after one year. In this advanced stage, the messenger’s job is to collect and hand over the fees for RMTS II to the CM. Out of these fees; the CM pays the messenger per group and per week. The payment for the GA is made in the cluster meeting. Two representatives of the SHG collect the money in the SHG meeting and hand it over to the GA in the cluster meeting. PRADAN pays fees to the CM for providing reports and various financial ratios for the cluster meeting and for the HO of PRADAN for programme management decisions.

THE ROLE (i) (ii) (iii) (iv) (v)

(vi) (vii) (viii) (ix) (x) (xi) (xii)

OF THE

PRADAN PROFESSIONALS

IN THE

PROJECT

introduce the books (minutes book, passbook) and RMTS in groups; help the group identify the accountant and thoroughly train him/ her in maintaining RMTS; set up systems in the teams for the weekly data from the SHGs to reach the CM after every meeting; hold monthly training programmes on accounts entry, troubleshooting, etc.; make aware the members of the SHGs on the importance of accounts and transparent maintenance of the system, and also the necessity of paying the accountant; recruit, train and equip the CM to take up the role of the community accountant; establish a sustainable business relationship between the SHGs and the CM; regularly update skills of the CM, counsel him on how to improve services, provide on-the-job assistance; carry out random checks on the financial statements that are produced by the CM for the groups; see that the groups are regularly providing the data to the CM and are getting prompt outputs; see that the groups are regularly paying the CM and solve any conflicts that may be there; constantly monitor the total system through cluster meetings and occasional group visits.

COMPUTER MUNSHI PROJECT: A TIMELINE

OF

IMPLEMENTATION

Table 16.10 highlights the various stages in the evolution of the CM project in PRADAN.


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TABLE 16.10 Timeline of Implementation 1996–97

1996–97 onwards for 2 years

1999–2002 2003

2004

2005

First Initiative by PRADAN for software development for SHG accounting. Software development in progress under the above project.

No significant action on the software development project. Support for CM project by CARE (Rs 50,000 for each computer + printer + UPS/ battery included plus additional Rs 9,000 as stipend for each CM), 16 locations (CMs). Support from NABARD and SIDBI for further expansion of CM project. Till 2005, Software + training costs paid to the service provider.

Financial support of Rs 4,00,000 by CARE under project in Jharkhand. Software development by a New Delhi-based service provider using DOS-based system and using PRADAN’s manual book-keeping as example.

2-year project grant for Rs 8,85,000 for 16 CMs. New software by the same service provider using Windowsä platform. NABARD grant for 10 CMs Rs 6,10,000 and SIDBI grant for 25 CMs Rs 15 lakh. Rs 3.5 lakh for 51 copies, approx cost of each copy of the software Rs 6,000.

Continued discussion with the service provider for additional modules in the existing software. Source: Ajit Kanitkar and Jan Meissner, as per field observation and interviews with Pradan/ field staff. Note: The above costs do not include personnel costs of PRADAN professionals in terms of their professional time plus travel and other overheads.

PRADAN’s Initial Experiences in Replicating CMs

The block officer of the Bara Bazar Panchayat Samiti invited PRADAN’s Balarampur team. The computer munshi (trained by PRADAN) volunteered to train the SHGs in this block. The SHGs were keen only to use his services for maintaining the accounts (RMTS I). PRADAN helped this CM to add a separate drive to his computer system to be used for exclusive accounting for the SHGs in the block. Further implementation of this proposal is under discussion between PRADAN, the CM and the officials of the Panchayat Samiti. In 2005, another CM trained by PRADAN offered his services to the district administration. He gave training of half-a-day duration to about 100 accountants of other SHGs. These groups were formed under the SGSY scheme of the government. The SHGs purchased necessary

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stationery for accounting from PRADAN. A second copy of the software was loaded in the computer system of the CM. The CM entered the master data for all the groups. However, the SHGs did not continue further interaction for using the CM’s service. PRADAN field executives and the Munshi perceive that some of the officials of the district administration might not have been that enthusiastic to continue support. In Jharkhand, a new project supported by IFAD (Jharkhand Tribal Development Programme) has a network of 11 NGOs including PRADAN. PRADAN professionals gave initial orientation and training on book-keeping and accounting to all the stakeholders of this project. All the NGO members are using books of accounts recommended by PRADAN for their SHGs. Similarly, DFID-supported programmes in Orissa and West Bengal have approached PRADAN for advice on the CM project.

OBSERVATIONS OVERVIEW

ON THE

OF THE

COMPUTER MUNSHI PROJECT

COMPUTER MUNSHIS

During the field visit, three CM projects and three CMs were selected for in-depth interviews. Some features of these CMs are presented in Table 16.11. TABLE 16.11 Features of CMs Computer Munshi

Location

Mr Sumanto Balarampur of Purulia District, West Bengal Mr Suresh Jhalda of Purulia District, West Bengal Mr Munna Chaibasa of West Singhbhum District, Jharkhand

Educational Qualification

SHGs Served

Class X

Actual-99 SHGs (out of 125 SHGs) Actual-70 SHGs (out of 85 SHGs) Actual-80 SHGs

Graduate

Class X

Stage of Implementation

Net Income per Month

Since 2001

Approx. Rs 1,800

Since 2002

Approx. Rs 1,200

Since 2004

Approx. Rs 700



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In Chaibasa, SHGs have not yet started paying fee to the CM. PRADAN is in the process of motivating the SHGs to do so. Payment by PRADAN to the CM is approximately Rs 700–800 per month. (For 80 groups at Rs 2 per sheet for 4–5 weekly meetings, approximately Rs 640–800).

Computer Munshi Practices The CM system is operational in Balarampur since 2001, in Jhalda since 2002, both in West Bengal, and in Chaibasa, Jharkhand since 2004.

Sumanto operates from his own house in his village. He has installed a photocopier and STD/public booth that serve as additional income avenue for him. He plans to add a computer-aided photo studio and internet facility in the same premises in the near future. Suresh works from a separate room in the PRADAN office premises in Jhalda. He pays PRADAN Rs 100 every month as rent. This place is convenient to him and to all SHGs as Jhalda is a central location. If he were to relocate this setup to his village, many SHGs would find it remote and difficult to access. Suresh travels 7 km everyday from his village on bicycle to his work place. Suresh would like to add 100 more SHGs to his system in the near future. Mr. Suresh derives his other income from fees by offering coaching class to two students in MS Officeaä software. The third CM, Munna is at Chaibasa office of PRADAN. He uses a part of the office space. SHG members do not yet pay him for his service. PRADAN has introduced this system in Chaibasa 18 months ago. He gets a fee of Rs 700–800 approximately per month from PRADAN. In the case of both Sumanto and Suresh, all SHGs are not yet covered. (e.g. 99 out of 125 and 70 out of 85). The reasons for not fully covering the SHGs are several. Members of some SHGs are still not convinced about making payment to the CM for the services received. PRADAN is in the process of convincing them. Some SHGs are yet to be ‘included’ in the CM system because their statement of accounts (earlier maintained manually) are to be audited and made ‘mistake-proof’ to be ready to enter into the computer. Logistics often is a hindering factor. There are some SHGs whose location is remote and not feasible enough to be covered by a messenger appointed by the CM. All the CMs mentioned that they were occupied for about 40 to 50 per cent of their time, that is, half a day every day during the week. Two other Munshis, Sumitra Kumari and Gorakhnath Bading, both working as CM in field locations of PRADAN in Orissa reported similar practices.

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COMPUTER MUNSHI

AND

CAPACITY-BUILDING

OF

STAKEHOLDERS

The quality of a book-keeping system to a large extent depends on identifying, recruiting, training and sustaining a munshi—the heart of the system. The munshi is expected to possess not only technical capabilities (knowing SHGs, mathematical skills, accuracy, etc.) but also social capabilities (modest, committed, reliable, accessible to SHG members, a person with entrepreneurial drive, etc.). The computer munshi system of accounting involves manual work at several levels and hence it is not 100 per cent error-free. In one SHG meeting, the GA found it difficult to reconcile the actual cash in hand with the recorded entries. In another SHG meeting, mistakes occurred in filling up RMTS I. CMs in Chaibasa mentioned in the focussed group discussions that sometimes they found it difficult to read handwriting of the group accountants and the RMTS I coming from SHGs, the serial numbers of SHG members were found changed by one row, loans disbursed were not recorded and hence it was difficult to record when instalments were received. On the other hand, SHG members found that RMTS II when received had mistakes (data entered wrongly, instalments paid were not recorded, etc.). PRADAN professionals observed that most of the mistakes occurred in interest calculation, due to different loans products and information gaps between SHG members, GAs and the CMs on the exact nature of the loan product. Thus, this system like any other system does not exclude the possibility of acts of omission and commission. If the information and feedback flow is regular (RMTS I and II), it is comparatively easier and quicker to first identify mistakes and then take corrective action. In the PRADAN system, since the SHGs meet every week, mistakes, if any, get noticed within a week’s time and corrections are made. This process of corrections in record keeping was verified during the field visit. The PRADAN system demands heavy commitments from all those involved. This is partly because of the design of the SHG programme, namely, the weekly meeting schedule. This requires time every week from all the stakeholders namely SHG members, the GA, the messenger and the CM. In the initial stage of the implementation of the computer munshi system, there is a lack of willingness to accept fees for the service just as there is lack of willingness to pay. Two group accountants (one man and another woman) mentioned that they find it rather odd to receive money from their own villagers! ‘It is our way of contributing to the development of fellow women in my village’, both of them said. PRADAN has


315

initiated livelihood promotion work in the same village that involves productivity improvement in paddy cultivation. The entire village including the GA is an indirect beneficiary of this intervention. For the CM to establish himself/herself as an independent service provider requires change in the mind set. One PRADAN professional observed: ‘This change is to be seen in the context where the general tendency in villages is to go for wage labour. For this person, she/he needs to see oneself as an entrepreneur and not a wage labourer. That requires entrepreneurial orientation and training. This person must believe that this business offers a good earning potential’. PRADAN envisages a situation wherein the CM functions as a service provider for all bankers and other SHPIs in the region including PRADAN. A residential training and sharing workshop of all CMs was organized in Deoghar in 2004. This workshop provided PRADAN an opportunity to listen to the experiences of all the CMs.

SOFTWARE

AND

HARDWARE

The software has the facility to introduce computerization of accounting information of the SHGs at any point of time. There is no need to enter the meeting-by-meeting record of the earlier meetings. But the consolidated master data entered has to be fully reconciled, that is, every member in the SHG has to agree to the consolidated figures. Introducing the CM system in existing projects is complicated from other points of views. For example, the SHGs are used to one kind of record-keeping system; computerization means an overhaul of the same, leading to possible resistance to change. Second, some groups find it difficult to pay the computer munshi, whose service is too distant to appreciate, compared to paying someone as group accountant who is nearer home. This also leads to reluctance. Third is about using computerized data, which is new for the SHGs. They need to be trained for this. Safety, security of the data and standardization of IT infrastructure: PRADAN has CMs functioning in 48 locations covering about 6,000 SHGs. This involves a massive database spread across diverse locations, containing precious information about the programme. There are risks of tampering with the security of the data (on SHG accounts), damages to the hardware, corruption of files, deletion/manipulation of records, etc. One PRADAN professional mentioned that in the last three years, he experienced crashing of the hard disks on three or four occasions. The

316


system had a backup maintained for every 15 days and hence a crisis was avoided. In another location, it was observed that both the UPS batteries were out of order. The configurations of the computers were diverse, Windows XPä in one location and Windows 98ä in another one. Further strengthening of the software and upgrading: The existing software (called McFinancier) has been a result of a long research and development process in collaboration with Sharada Computers. The software does provide information on the five indicators. Some of the PRADAN professionals had experienced difficulties in working with the latest version of the software. Another senior professional from PRADAN remarked, ‘If I were to do the software again, I will not do it in the current form, maybe it would be open system platform such as Linux or may be internet based’. Another issue related to the software is the consolidation of all the field data into one project level data at the head office. This is needed for monitoring the entire programme as also often required in reporting to external stakeholders. Currently, the software does not have a programme to do this collation and PRADAN is working with the service provider to build in this feature.

ACCURACY

AND

QUALITY

OF

INFORMATION

The Computer Munshi System (CMS) depends on accuracy in both recording by the GA and data input by the CM. Installation of the computer system does not necessarily eliminate the possibility of mistakes occurring in the primary record-keeping and data entry at the next level. It is therefore evident that the members, the CMs and the PRADAN professionals need to be constantly vigilant towards maintaining 100 per cent accuracy in the manual and computer-based record-keeping. The in-built corrective measures in the RMTS I and II cycle and a monthly checking of both the trial balance and members’ balance ensure accuracy and consistent quality of book-keeping.

LEARNING FROM THE PRADAN-PROMOTED BOOK-KEEPING AND ACCOUNTING PRACTICES

Design: The SHG accounting system designed by PRADAN is comprehensive. The software, McFinancier supports the provisioning of the financial health indicators for SHGs discussed earlier. At the SHG level, a trial balance is prepared every month.


317

The formats are simple, easy to understand and transparent. The software generates trial balance and other information required by the professionals. Practice of book-keeping: Of the 6,000 SHGs promoted by PRADAN, amongst in the three groups visited during the field visit, the formats of RMTS I and II were in use. Consistency: In all the 6,000 SHGs, PRADAN is following the same system and hence there is consistency in book-keeping of the entire programme. Auditing: In the current system, at the end of every financial year, auditing is done by a PRADAN professional. There is no external auditor involved in this process. Viability: The effort to train a CM is towards making the system viable over a period of time. In the current context, PRADAN has experienced mixed results. In some field locations, the system is functioning with minimum supervision from PRADAN professionals and the community taking responsibility for paying the CM. In some other locations, the process is yet to become viable. However, in the design of the process, elements of viability are planned. Replicability: PRADAN accounting system based on the CM concept has a good potential for replicability. SHGs promoted by PRADAN are perceived as quality groups. There are some efforts by other organizations in the eastern region to replicate this practice. However, it takes time for any organization to prepare itself before it adapts the CMS for implementation. Benefits from such a system: This system has the possibility to offer information to various stakeholders. Individual SHG members can find out information on their cumulative savings, loan outstanding as also the overall financial position of their group. The bank manager can assess performance of the SHGs with respect to loan repayment from the accounting records. The SHPI can observe regularity in terms of attendance of members and savings in each meeting. A trial balance of an SHG for three to four consecutive years would indicate the direction of the growth of the group as also the indication of the accumulation of the group capital. The munshi can act as a service provider not just to one SHPI but also for different SHPIs in the same region including the banks. The CM could benefit form selling his services at a price.

318


From the three initial replication experiences mentioned earlier, the following lesson might be drawn as regards replication possibilities are concerned.

Compelling Reason for Change

Does the SHPI/NGO/Bank have the compelling reason for introducing a CM in the SHGs? One professional from PRADAN articulated this need in our interaction. He observed: ‘I recall spending many nights with the group accountants in reconciling the SHG accounts. There were several issues in reconciling the SHG accounts. As some of our groups were maturing (more than five years), we realized that improper accounting led to conflicts within the groups especially over calculation of interests. The problem got further complicated when within a SHG, members had multiple loan products. We also realized within PRADAN that as development professionals, our major time was taken away by book-keeping of SHG accounts. As a result, we were able to devote hardly 20 per cent of our professional time to our core vision of promoting livelihoods among poor women and men. We had to do something to set this imbalance right. Hence the computer munshi project. Today, I can say I have been able to release a chunk of my time to focus on the livelihood agenda! The only time that PRADAN professionals attend to the SHG work is joining the cluster level meeting where the information provided by the CM is analyzed, discussed and corrective actions taken by the cluster leaders’.

PAST ACHIEVEMENTS ACHIEVEMENTS

IN

AND

FUTURE CHALLENGES

INTRODUCING

AND

SUSTAINING

THE

CMS

Attitudes and Mindset The important challenge in the implementation stage was facilitating change process in the attitudes of all the stakeholders. For PRADAN professionals, it was important to realize that they could spend more time on their core work (of promoting livelihoods) and not in reconciling SHG accounts. For the SHG members, PRADAN needed to persuade them to pay for the services of the CM and the GA. This was a challenging task and PRADAN had to explain with patience and perseverance that this is sine qua non for a sustainable system. It took quite some


319

energy to prepare the groups first to understand and then to accept the new system. Capacity-Building The second challenge was to identify and to build capacities of CMs as well as GAs. It was not easy to identify literate youths and women from the villages where PRADAN works. PRADAN initiated a comprehensive selection process of recruiting CMs. After a written test and a screening process, the recruited CMs are trained but—as mentioned earlier—the CM is expected to possess not only technical capabilities but also social and entrepreneurial capabilities. This necessitated not only initial training but also further accompanying measures as sharing of experiences and best practices. The GA is as important as the CM in this system. The training of the GA is not so time-consuming as in the case of the CM but the acceptance of the SHG members and their trust in the GA is a strong precondition for the system to become operational. Transition from Manual to the CM System Simultaneously, several apparently smaller steps were required to be taken so as to prepare the organization for this transition from a manual system of book-keeping to the computer munshi system. Some of these steps were: (1) updating and preparing 100 per cent accurate accounts maintained in the manual system; (2) preparation of the master sheet file for loading into the software; (3) selecting the CM; (4) preparing the logistics and accompanying network for the CM, messenger, etc.; (5) capacity-building of the GA and the CM; (6) on-the-job training and accompanying support to the CMs and GAs; (7) persuading the SHGs to pay for the services of the CM and ensuring that perceived benefits from such a system are compensated by users (SHG member); (8) till this transition takes place, supporting the CM financially (paying compensation) and continuing to offer technical support; and (9) to nurture the CM to enable him/her to become an entrepreneur.

320


CHALLENGES IN INTRODUCING AND SUSTAINING THE CMS ON A WIDER SCALE Software Output One of the critical challenges is to ‘adapt’ the software so that it generates ‘optimum’ information for all those in the system. While McFinancier is a flexible and useful software for generating complex and multiple reports, there might be scope for further modifications to the software, specifically regarding reports. A relevant question could be that whether the reports provide information about the financial health indicators for SHGs and could this software provide reports in response to the needs for programme management decisions. Statements, reports and financial ratios should be meaningful and comprehensible for the various existing and potential stakeholders. A balance of ‘maximum’ information and ‘less is more’ should be maintained. The refinement process of McFinancier is an ongoing process between PRADAN and Sharada Computers. Such a process could in future be enriched by an interaction between GAs, CMs, PRADAN professionals and software developers. In this respect it should be kept in mind that the software must be made more and more user-friendly. Hardware Security Another issue in this context is the susceptibility of the hardware in respect to data and system security. The present cycle of data backup and UPS (uninterrupted power supply) are not yet sufficient for a stable computer system. These concerns are already with PRADAN and preventive steps are being taken. PRADAN may prepare a set of comprehensive guidelines in using the hardware as well as the software in the context of the security of data and computer systems. The guidelines would help the CM in handling potential and possible risks. A balance of some sort of standardization and yet decentralization allowing scope for being responsive to regional variations might be useful. A wider scope of services provided by the CM using the same computer, especially internet services, bears additional risks (e.g., viruses). CM as an Entrepreneurship Model The success of the CM system is contingent on a number of factors. It is important that the CM provides quality service of book-keeping and accounting to the SHG members. Simultaneously, it is necessary that the


321

existing SHGs and PRADAN professionals as well as potential users such as government agencies, other SHPIs and banks are willing to pay and actually do pay for the services used. Additional services offered by the CM to the local community enhance the capacity utilization in terms of time of the CM and additional income sources for the CM. This model of entrepreneurship has wider potential for replication in other contexts. The capacities of the CM could be nurtured to enable him/her to become an entrepreneur providing various services, accounting for SHG being one of them.

CONCLUSIONS AND LESSONS LEARNT The SHG-bank linkage programme in India today is a truly national microfinance programme. In the process of its implementation, it has engaged multiple stakeholders over a decade. All the stakeholders such as banks, NGOs, SHPIs, SHGs and the government are increasingly emphasizing the importance of quality dimension of this initiative as the programme has reached a significant outreach. The three case studies presented in this report have demonstrated good practices in achieving quality book-keeping in the SHGs. These three organizations are operating in three different geographical contexts, with a varied socio-cultural and development background.

DOCUMENTATION

OF

GOOD PRACTICES

IN

BOOK-KEEPING

The three organizations have gained rich experiences in the implementation of a book-keeping system under different conditions and in various locations. Each experience is unique. This report should be seen as a part of process documentation for these organizations. It could be linked to the training in book-keeping at SHG level for members as well as for bankers/MFIs/NGOs.

BALANCING UNIFORMITY AND DIVERSITY BOOK-KEEPING PRACTICES

IN

Since this is a national programme, there are a large number of variations and diversities involved in the formats, processes and methodologies adopted in book-keeping practices. It is imperative that while respecting and encouraging such diversity, key principles of quality book-keeping

322


are adhered to. It is important that the book-keeping system is able to lead to MIS-relevant information about the five financial health indicators for SHGs which are as follows:

Regular savings. Internal and bank loan repayment. Regularity in meetings and attendance. Proper book-keeping. Participation of group members and unity.

SHARING OF EXPERIENCES TRAINING INSTITUTIONS

AND

COLLABORATION

WITH

The documentation of good practices should be shared with a wide audience. Organizations such as Ibtada, CCD and PRADAN could take up the role of a resource organization in the districts and states where they are based. Their experiences could be used in sensitizing and training other SHPIs and bankers. All SHG-promoting training institutions could collaborate with potential resource organizations to disseminate these three cases of book-keeping practices which are diversified in respect to geographical areas and socio-economic background.

USE

OF

INFORMATION TECHNOLOGY

Accurate and timely book-keeping is essential to demonstrate the strength of an SHG to outside observers and other stakeholders. To achieve accuracy and timeliness, appropriate use of information technology practices such as computers and other devices needs to be encouraged. Relevant information technology tools with a judicious selection of hardware and software could go a long way in helping promote quality book-keeping.

ONGOING EFFORTS ALL STAKEHOLDERS

FOR THE

CAPACITY-BUILDING

OF

Quality is not an accident but a conscious effort! To ensure quality book-keeping, there has to be continuous capacity-building efforts of all stakeholders as has been demonstrated in the three case studies. Ibtada invested in the training of their munshis, PRADAN had to orient group accountants and the CM so also CCD in their effort to implement a


323

new accounting system. Promoting quality book-keeping necessitates not only skill training but more importantly training in new attitudes and change in the mindset.

ENSURING SUSTAINABILITY BY PROMOTING SERVICE PROVIDERS—THE ENTREPRENEURSHIP MODEL The three case studies have one common thread in the implementation of quality book-keeping practices. They have worked out an arrangement with an independent service provider (group accountant, CM, and so on) and the SHGs pay for the services that these entrepreneurs provide. Such an arrangement has the likelihood of sustainability in comparison to a ‘free’ service provided by an alternative mechanism. The promotion of local entrepreneurs as service providers needs to be facilitated by SHPIs in order to build a sustainable book-keeping system.

17 Attaining Outreach and Viability: Case Study of Bandhan A.K. PARHI

M

icrofinance organizations need to be effective in outreach, efficient in operations, have a sustainable level of operations and yet be capable of rapid replication and expansion. ‘Bandhan’ is a microfinance institution operating in West Bengal since 2001. The organization is registered under the West Bengal Societies Registration Act, 1961, and is at present operating in 14 districts of West Bengal. It started its microfinance operations in July 2002 with technical support from Association for Social Advancement (ASA), Bangladesh. The organization aims to:

establish a vibrant and competent community-based microfinance institution to cater to multifarious sectoral needs; develop a network among the MFIs to facilitate and augment various microfinance-related issues through lobbying and collective advocacy; bring about social and economic empowerment of poor and underprivileged women in rural/urban areas through client– community participation; and eliminate gender biases through promotion of gender sensitization.

Bandhan believes that a consumption loan will only transiently augment the purchasing power and will not serve the purpose of poverty

Attaining Outreach and Viability

325

reduction. Poor women take loans for purchasing food, clothes or repaying loans. What is required is initiation of a forum whereby the poor are equipped to generate income for themselves. Once the extra income is generated, it will automatically meet the consumption needs of the clients. Bandhan lends out for income generation purposes. It started its operations in July 2002 and since then has made rapid progress in terms of outreach and viability. As on March 2005, it had 54 branches catering to 51,586 women members with outstanding loans of Rs 85.64 million and on-time repayment rate of 100 per cent (Table 17.1). TABLE 17.1 Performance of Bandhan Particulars Branches Districts under operation Blocks covered Panchayat or Municipality covered Villages covered Staff Self help groups formed Women members Credit Outstanding (Rs in million) On-time Repayment (OTR) (%) Portfolio at Risk (PAR) (%) Growth of the year (%)

2002–03

2003–04

2004–05

2 2 3 12 61 12 135 2,029 2.18 100 0 11

10 5 15 91 290 46 581 9,282 12.04 100 0 500

54 8 93 374 1,635 234 2,956 51,586 85.64 100 0 611

Source: Bandhan Annual Report of 2004–05.

ORGANIZATIONAL SET-UP The crucial factor in Bandhan’s viable and successful microfinance operations is its professionally designed organizational structure. The general body comprises 15 members, of which seven members constitute the executive committee. The general body directs the operations of Bandhan and enjoys the power to change the activities of the organization. There is an advisory committee consisting of four members. These members are eminent professionals from the fields of business, finance, academics and public service. They guide the management with regard to new opportunities and demands arising from these fields. The executive director is a member of the executive committee and is the head of operations providing policy decisions and leadership. Next to him, is the director, operations, to whom the regional managers report.

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A.K. Parhi

Bandhan has, at present 16 regional managers. The two salient features of Bandhan’s organizational structure are (i) standardization and (ii) decentralization. The organizational structure of Bandhan has three tiers: head office, regional office and branch. Head office: The director, operations, looks after the entire operation. To assist him there are five divisional managers, each of them looking after three regional offices. The divisional manager has to be present in the field for three weeks a month and visit 3–4 branches in each of the regional offices each month. Regional office: Every regional office looks after six branches and about 1,600 borrowing members. The regional manager visits the field operations rigorously and monitors the activities of each branch twice a month. The average salary of the employees of Bandhan is Rs 2,500 per month and average expenses are about Rs 2 lakh per annum. Branch: Each of the 101 branches is headed by one branch manager (BM) and four community organizers (COs). Each community organizer attends a maximum of 400 borrowing members organized into SHGs. The BM supervises the activities of the COs and holds weekly meetings with their respective COs in which field-level problems are identified, tasks are prioritized, and solutions to problems proposed. At branch premises, residence for field staff (CO/BM) is available along with an attendant for cooking food. Cost of commodities is shared between the staff members availing of food services. Every day, after the field visits; the sits with the respective COs and engages in a productive interaction. These interactions are very helpful as they help the staff to develop the skill of problem solving. There are three internal auditors who visit the branches every quarter to conduct audit operations. A monthly core meeting is held at head office presided over by the ED and attended by the DO, DMs of HO staff. Women SHG members serve as resource mobilizers while COs are the fund managers.

LENDING POLICIES Bandhan delivers loans to clients by organizing them into groups. The important features of the group mechanism are:


327

Groups are formed and nurtured by the COs of the organization. Each group consists of 20–30 women members staying in the neighbourhood. Savings of the individuals are termed as security deposit and kept with the organization. The group meets for half-an-hour on a fixed date of the week under the guidance of the CO. The group members mainly discuss financial transactions in the meeting. The group has only an attendance-cum-resolution register. This register is maintained by the COs. Each financial transactions takes place between the MFI and the individual members, and the SHG has no role in the financial transactions.

Bandhan has evolved a lending policy that suits the poor. The main features are:

Non-collateral based: One simply needs to be a member of Bandhan’s organized women group and ensure a minimum level of attendance in the weekly group meeting before accessing loans. Women complying with any of the three criteria are considered for SHG membership: (a) landless and assetless; (b) monthly family income not exceeding Rs 2,000; and/or (c) landholding up to 0.5 acre or capital of its equivalent value. Groups are formed by the COs with a maximum of 30 members and each member is given a loan passbook. After four weeks of continuous deposit of security money (minimum Rs 10 per week), a member becomes eligible for a loan carrying 15 per cent interest rate. For every Rs 1,000 of loan, the borrowing member has to bring in Rs 100 as security deposit and Rs 20 as risk fund (nonrefundable). The principal and interest payable is repaid in 46 monthly instalments at the rate of Rs 25 to Rs 1,000.

Timely and hassle-free disbursement of loans to the clients: The first loan is disbursed after four weeks of membership and deposit of security money.

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A.K. Parhi

Lending small and flexible loans: The first loan is between Rs 1,000 and Rs 5,000 for rural clients and between Rs 1,000 and Rs 7,000 for urban clients. Weekly loan repayment: The weekly loan instalment for a Rs 1,000 loan is Rs 25 only. The loan term is only one year; the total number of instalments is 46. Repeat loans: Encourages repeat and larger loans based on the potential of client’s income generating activity. Grace period: A grace period for repayment of loan is provided.

VIABILITY OF FINANCIAL OPERATIONS Bandhan has evolved a standardized procedure for making the microfinance operations viable. To cover operational expenses of the branch, estimated on an average at Rs 2 lakh per annum, the branch is required to finance 1,600 borrowers with an average loan of Rs 2,500 per borrower. The branch is able to achieve this level of business over a period of one year from the commencement of the business. Effective monitoring and operational systems have been put in place to ensure viability of the branches.

MONITORING SYSTEM Bandhan has evolved an effective Management Information System to promote operational quality:

Each financial transaction is recorded in the member’s passbooks. CO’s register helps manage credit. Collection book cross-checks passbooks and CO’s registers at field and office. Daily sheet accounts for all cash inflows from field and BM is solely responsible to oversee every activity at branch level. All transaction amounts are entered in the cash book and are simultaneously recorded in the ledger book. Summary of daily collection and loan disbursement is recorded in ‘Top Sheet’. The branch register includes weekly, monthly and cumulative disbursement of branch.


329

Each regional manager monitors and supervises five branch offices. Staff meetings are held every month in the presence of senior functionaries. Regional managers send reports to the head office every month. Internal Auditor performs internal audit each month for every branch. Director, operations, and divisional manager visit the field for 15 days and cover one branch each month. Executive director visits at least one branch each month.

OPERATIONAL SYSTEM The sustainability of Bandhan’s microcredit programme can be attributed to its ‘Cost Effective Operational System’ and entails the following processes:

Setting up of realistic ceilings on cost. Standardization of the branch expenses. Facilitation of greater decentralization. Furnishing of offices with simple functional furniture and minimal amenities. Implementation of simple accounting system which is easy to follow. Avoiding unnecessary administrative overheads with office procedure and effective information. Simple system of recruitment of individuals who are otherwise ‘unemployable’. Effective training schedule of the new recruits and good logistic system. Quick follow-up on defaults and serious default management. Having an operational manual which clearly lays down the policies of the organization.

EVOLVING VIABLE MODEL FOR DELIVERING MICROFINANCE Bandhan is in the process of evolving a viable model for delivering microfinance. Within one year, all Bandhan branches start generating operational surpluses. Maslantapur branch is operating in North 24

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A.K. Parhi

Parganas district of West Bengal. The branch was inaugurated on 18 March 2004 and disbursed its first loan on 30 April 2004. It could attain its break-even level of operations on 30 June 2005 (See Box Below). Performance of Maslantapur Branch of Bandhan

Number of Groups Number of Members Number of Borrowers Loan Disbursed Number of Staff Operational Self Sufficiency Financial Self Sufficiency

90 2,013 1,807 Rs 63 lakh 06 101% 95%

Overall, Bandhan has already achieved 70 per cent operational self sufficiency and 67 per cent financial self sufficiency (Table 17.2). TABLE 17.2 Financial Ratios of Bandhan Particulars Operating Expenses Ratio (%) Financial Expenses Ratio (%) Loan Loss Provision Ratio (%) Operational Self sufficiency (%) Financial Self sufficiency (%)

2002–03

2003–04

14 9 2.50 90 64

15 13 2.50 103 92

2004–05 39 10 0.32 70 67

Source: Compiled from various issues of Annual Report of Bandhan.

This quickly replicable and sustainable level of operations has helped Bandhan to receive support from many leading financial institutions such as SIDBI, ICICI Bank and HDFC Bank. Bandhan has shown that it is possible to scale up microfinance operations in rural/urban areas without losing focus on viability of operations and rapid branch expansion. It aims to expand its operations to neighbouring Assam, Orissa and Bihar over the next year. For rapid expansion of operations without sacrificing operational focus and viability, the Bandhan model is hard to beat.

Part V

SUCCESSFUL BANK MODELS

18 Pandyan Grama Bank SHG Linkage Model S. MANICKAM

P

andyan Grama Bank, a regional rural bank (RRB), was established by Indian Overseas Bank on 9 March 1977 under the RRB Act 1976. The main purpose of establishing the bank was to cater to the financial needs of the rural people in its command area to augment their income, enabling them to come out of the clutches of moneylenders and to lead a reasonable, standard life. The bank is operating in six southern districts of Tamil Nadu which are industrially backward. The main occupation in the area of operation is agriculture and allied activities and village and cottage industries. Most of the command area is rain-fed, with no assured source of irrigation. Livelihood of the people depends on seasonal agricultural income and other petty work. The bank has a network of 165 branches of which 111 are located in rural areas and 50 in semi-urban centres. True to its objectives, the bank participated in all poverty alleviation programmes like IRDP, MAPP, and TAHDCO schemes in a big way, concentrating mainly on the target group. In spite of its sincere efforts to promote/generate additional employment in rural areas through credit, there was no desirable impact due to various social, economic and political reasons. Non-recovery of the credit deployed had caused the bank to incur losses year after year until 1996–97, when the accumulated losses had gone up to Rs 33.75 crore.

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S. Manickam

EVOLUTION OF THE MICROFINANCE CONCEPT Though posed with accumulated losses, the bank had to sustain its profitability only through priority sector lending. At this stage, the evolution of the concept of microfinance came as an effective tool for the bank to deliver credit in an efficient manner. Through SHGs, the concept of lending on individual basis has undergone a change to group lending basis. The affinity, cohesiveness, sense of participation and like-mindedness of the members of the group enabled the group eligible to receive the credit to utilize it properly and to repay it in time. Realizing the immense potential of these groups, the bank started credit linking the groups promoted by various NGOs like DHAN, VMSSS, TMSSS, TSS and Thuligal in its area of operations right from 1997–98 onwards. The bank also realized that the SHG concept is a potent mechanism to serve the twin objectives of integrated rural development and also emerge as a profitable business proposition for the bank. The concept was also viewed as a channel for reaching the under-reached and un-reached rural people whereby the very purpose of establishing the RRB could be served in a cost-effective manner. Hence, the bank took a conscious decision in concentrating on credit linking the SHGs and started implementing the concept well ahead of other banks in its area of operation.

STRATEGIES ADOPTED SETTING

UP OF

WOMEN DEVELOPMENT CELL

A separate women development cell was formed with the prime objective of uplift of poor downtrodden women folk. The cell attaches greater importance to microfinance by which it envisages women’s empowerment. All aspects of microcredit, including forming and nurturing new groups, supervision and follow-up are undertaken by this cell. As the volume of business under this concept increased, in order to strengthen the microcredit movement, separate microcredit cells were formed in all the six area offices in the year 2004–05.

Pandyan Grama Bank

IDENTIFICATION

OF

335

POTENTIAL AGENCIES

The bank identified potential NGOs in its command area to act as facilitators for sustainability of groups and thus came across DHAN, TMSSS, TSS, VMSSS, Thuligal and others. With their cooperation, the eligible SHGs were identified for credit linkage. The NGOs were also periodically contacted and encouraged to form new SHGs so that the benefit of microfinance through the system could flow to the rural cluster who were deprived of credit so far.

INTERNALIZING GENDER CONCERNS Initially, the groups comprising women were considered for credit linkage, as the characteristics/principles of an SHG were found to be most effective in such women groups. Training programmes were conducted for all field-level functionaries of the bank to orient them against traditional bias if any, of preferring men to women for credit. Exposure visits were also arranged for on-the-spot training on appraisal and grading of SHGs. In a phased manner, all the 780 staff of the bank was trained in this new concept of lending.

CAPACITY-BUILDING

OF

WOMEN

AND

SHGS

Capacity-building of the women members of SHGs was addressed by conducting the following promotional programmes:

Awareness programme: To bring about awareness among the women about the success of the group concept, benefits of being in the groups, necessity of health and hygiene, necessity of carrying out economic activities, necessity to eradicating social evils, repayment ethics, and other such matters. Vocational training to SHGs: To familiarize SHGs with various income-generating activities in groups as well as individually, in coordination with various line departments of the government and NABARD. Also, exposure visits were organized for active SHGs to other successful SHGs/women entrepreneurs so as to motivate them to work efficiently.

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S. Manickam

SHG exhibitions: As a measure of motivation and assistance for marketing, periodical exhibitions of SHG products were arranged in coordination with SHGs and NGOs. Various products exhibited received good response from the public and started penetrating the consumer market. TABLE 18.1 Performance Highlights (Rs lakh)

Period 1997–98 1998–99 1999–2000 2000–01 2001–02 2002–03 2003–04 2004–05

No. of Branches Participated Out of Total No. of Branches

No. of SHGs Linked

Amount of Credit Linkage

2/158 25/160 63/162 109/164 161/161 162/162 162/162 165/165

4 373 1,800 4,155 7,306 11,496 11,897 13,627

0.60 47.62 304.49 936.21 2,268.21 6,026.86 8,062.43 10,334.10

Source: Annual Reports of the Pandyan Grama Bank.

LENDING STRATEGY After stabilization for six months in convening regular group meetings, maintenance of relevant records, utilization of group’s savings effectively and recovery thereon, the SHGs will be graded by branch officials. The linkage will be extended in the ratio of 1:1 to the size of accumulated savings in the first linkage stage and thereafter in the ratio of 1:2 up to 1:4 of the size of savings or the actual requirements for the activity undertaken by the group. Eligible groups will also be recommended for assistance under SGSY scheme so as to get the benefit of necessary infrastructure provided under the scheme and the subsidy. The groups members are also covered under Life Insurance Corporation (LIC) of India’s group insurance scheme, Janashree Bima Yojana. Children of the members are benefited with scholarships for their education as part of the insurance scheme.

IMPACT

OF

MICROFINANCE

ON

BANK’S PROFITABILITY

Transaction cost minimized: Elimination of cumbersome documentation procedures, reduction in time spent on individual supervision and cost incurred on repeated visits resulted in minimal transaction costs for the bank.

Pandyan Grama Bank

337

Improvement of credit portfolio and profitability: The bank credit disbursement to SHGs increased substantially from a mere Rs 9 crore in 2000–01 to Rs 103 crore in 2004–05 with good interest spread. SHG lending has also given wide publicity to the bank, thereby business in other banking segments and activities also improved considerably. SHG members act as good marketing agents for the bank. Total advances of the bank in the year 2000–01 were to the order of Rs 340 crore, which had increased to Rs 663 crore in 2004–05. The Credit Deposit Ratio of the bank had improved from 68.8 per cent to 98 per cent in the same period.

The client base had also improved as per details in Table 18.2. TABLE 18.2 Grama Bank Client Base Increase As on 31 March 1997 As on 31 March 2003 Percentage of increase Average growth of accounts in the first 20 years of the bank Average growth of accounts in the 6 years ending 31 March 2003

Deposit Clients

Loan/Borrowal A/cs

Rs 3.52 lakh Rs 4.94 lakh 40%

Rs 2.04 lakh Rs 5.12 lakh 150%

17,600

10,200

23,660

51,330

Source: Annual Reports of the Pandyan Grama Bank/Internal statistics taken from Pandyan Grama Bank Head Office.

The refinance provided by NABARD at 100 per cent for this lending had helped improve profitability due to its interest spread. Accumulated losses, after peaking at Rs 33.75 crore, gradually reduced with good recycling of funds in advances, more so under SHG lending and were completely wiped out during 2002–03. TABLE 18.3 Performance of Pandyan Grama Bank under SHG-bank Linkage Programme (Rs crore) Year 1997–98 1998–99 1999–2000 2000–01 2001–02 2002–03 2003–04

SHGs Financed

Amount of Loan

Business Mix

4 373 1,800 4,155 7,306 11,496 11,897

0.006 0.480 3.050 9.360 22.680 60.270 80.620

373 439 549 678 834 1,002 1,183

Profit 2.16 4.25 4.42 5.16 8.16 13.75 19.37

Source: Annual Reports of the Pandyan Grama Bank/Internal statistics taken from Pandyan Grama Bank Head Office.

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S. Manickam

The net profit of the bank as on 31 March 2004 was Rs 4.82 crore and as on 31 March 2005 increased to Rs 10.08 crore. This is after making a floating provision of Rs 12.11 crore for NPAs to bring net NPA to nil during 2003–04 and Rs 3.11 crore in the year 2004–05. The bank, which was struggling with accumulated losses till 1996–97, has emerged as a leading RRB among all 196 RRBs in India and posted nil Net NPA by 31 March 2004. One of the reasons that could be attributed for the excellent results is active participation in microfinance. Good recovery rate: Recovery percentage of SHG loans ranged from 95 to 100 per cent. Moreover, SHGs helped the bank to recover chronic overdues from their villages by proper counselling of the defaulters and enhanced their prospects by bringing them into further banking relationship. Thus, the overall recovery percentage of the bank improved and remained in the range of 90–91 per cent of funds lent. Loss-incurring branches turned the corner: Branches at Keelaeral, Thattarmadam, Marudampudur and Poochikadu, hitherto considered nonviable, were turned into profitable branches by concentrating on SHG lending which was an eye-opener for other loss-incurring branches. The details are given in Table 18.4:

SHG SUCCESS STORIES WORTH REPLICATING

SHG took a plot of land on lease and took up floriculture jointly. SHG purchased a power tiller and started hiring it out. Fisherwomen SHG took up crab culture/lobster fattening activities. SHG operated a departmental store successfully. SHG secured license for quarrying and undertaking the activity, hitherto undertaken only by men. SHG secured contract for running a canteen in an engineering college. SHG, with government assistance, is running a bio-diesel plant. SHG secured permission to run an STD/Xerox centre at the district collectorate complex. SHG fabricating handicraft items out of coconut shells, which has a good market potential. SHG undertaking an SSI activity with entrepreneurial skill by establishing a rice/flour mill unit.

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TABLE 18.4 Turnaround of Loss-making Branches

Deposits Advances Total Profit/Loss SHG disbursement No. of Staff

1999–2000

2000–01

2001–02

2002–03

2003–04 as on Dec’03

137.77 66.63 204.40 L 0.28 3 A/cs 0.55 4

156.99 77.17 234.16 L 0.96 20 A/cs 3.65 4

172.13 111.03 283.16 L 2.40 108 A/cs 31.07 4

200.43 216.94 417.37 P 1.53 219 A/cs 136.71 4

212.04 191.70 403.74 P 2.30 – – 4

1999–2000

2000–01

2001–02

2002–03

2003–04 as on Dec’03

171.66 115.51 287.17 L 7.84 1 A/cs 0.20 4

218.58 175.40 393.98 L 5.69 10 A/cs 1.00 4

269.02 219.15 488.17 L 2.75 147 A/cs 22.02 4

334.22 290.21 624.43 130 A/cs 71.39 4

357.95 339.33 697.28 P 4.76 71 A/cs 34.24 3

1999–2000

2000–01

2001–02

2002–03

2003–04 as on Dec’03

135.29 53.57 188.86 L 3.45 – 4

133.26 54.39 187.65 L 2.23 6 A/cs 0.98 4

141.91 72.03 213.94 L 0.71 24 A/cs 3.56 4

157.78 119.27 277.25 P 0.78 120 A/cs 49.69 3

159.49 138.11 297.60 P 0.38 53 A/cs 32.31 3

1999–2000

2000–01

2001–02

2002–03

2003–04 as on Dec’03

71.17 73.43 144.60 L 1.32 –

80.94 76.57 157.51 L 2.50 3 A/cs 0.46 3

92.59 91.52 184.11 P 2.59 15 A/cs 5.26 3

93.01 110.56 203.66 P 1.56 20 A/cs 12.13 3

104.23 115.15 219.38 P 1.45 12 A/cs 8.69 3

Marudampudur Branch

Deposits Advances Total Profit/Loss SHG disbursement No. of Staff Keelaeral Branch

Deposits Advances Total Profit/Loss SHG disbursement No. of Staff Poochikadu Branch

Deposits Advances Total Profit/Loss SHG disbursement No. of Staff

3

Source: Internal Statistics taken from the Pandyan Grama Bank, Head Office.

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S. Manickam

SOCIAL ACTIVITIES OF SELF HELP GROUPS (SHGs) The SHGs have expressed concern for society in the following instances:

Eradication of liquor menace from their village. Arranging bus transport to their village by contacting the district collector. Road laying by offering Shramdhan. Handling classes for the school children and elders to promote literacy. Arranging piped drinking water for their village.

SHARING

THE

GRIEF

OF

SHGs

The tsunami’s killer waves that lashed the coastline on 26 December 2004 affected most of the groups in the coastal regions in the areas of operation of the bank. The bank immediately arranged the following relief measures:

Relief material mobilized from staff, general public and philanthropists was distributed to affected members of SHG. Consolation meetings were conducted at various affected places. Financial relief measures were provided for rehabilitating the affected SHGs by disbursing fresh credit facilities after rescheduling the existing liabilities. Both new and rescheduled loans were disbursed at 7 per cent to 470 SHGs to the tune of Rs 634 lakh. Bank stood by the SHGs at all times and this gesture was very much appreciated by members.

SIGNIFICANT LANDMARKS

As a mark of recognition, NABARD approved the bank to act as a SHG promoting institution. The bank promoted 549 SHGs, of which it credit-linked 457 SHGs for Rs 354 lakh till 31 March 2005. The bank was nominated for the Asia Pacific Regional Micro Credit Summit of Councils, 2004, held at Dhaka. Malcolm Harper, a renowned resource person in microfinance, visited the bank and appreciated the practices adopted by the bank.

Pandyan Grama Bank

341

The bank stands at number one position in credit linking SHGs among all financial institutions in Tamil Nadu though the bank is operating only in six districts of Tamil Nadu.

EVOLUTION OF JOINT LIABILITY GROUPS Encouraged with the outcome of the group concept of microfinance, the bank evolved another concept of lending to mid-segment clients called joint liability groups (JLG) under group concept with NABARD’s assistance. Two models of JLG attempted were:

Savings-led JLG: In the same manner as in SHG, the linkage is after inculcating savings habit. Credit-led JLG: After forming groups of eligible members of existing clients, credit-linked.

The two models adopted by the bank were well received by the public and appreciated by NABARD/Bank for Agriculture and Agricultural Cooperatives (BAAC) officials, Thailand. NABARD deputed a team of officials from other RRBs, NABARD Regional Office (RO) and cooperative banks for an exposure visit to the bank to study the models adopted by the bank. The team’s evaluation is that the models are replicable in their institutions. The bank-financed 611 JLGs, comprising about 3,000 members, to the tune of Rs 668 lakh under both farm and non-farm sector activities.

BANK’S VISION

Forming groups covering all eligible rural women folk in its areas of operation, thereby credit outreach is improved, facilitating integrated rural development and women’s empowerment. Providing life insurance cover to all members of SHGs. Increasing the loan volume of SHGs based on the actual requirements in case of tangible economic activities undertaken by the groups irrespective of size of savings. Forming more groups under SHPI to create a strong client base— this will act as a marketing force for the bank to reach the unreached.

342

S. Manickam

Forming more VVV clubs and through this medium, forming groups covering all eligible members of the village. To sum up, after its experiences in microfinance, the bank strongly believes that: (a) a woman’s development leads to family’s development; (b) a family’s development leads to society’s development; and (c) a society’s development leads to nation’s development.

19 Prathama Bank: Farmers’ Club Model L.R. RAMACHANDRAN

P

ost-Independence, poverty reduction in all its forms has attracted the attention of our policymakers as a major step towards national development. Initial efforts of policymakers were concentrated on enlarging the institutional framework and adopting a target approach for poverty alleviation. This received a mixed response. Though this approach resulted in a massive banking network in the form of establishment of large number of outlets of commercial banks, cooperative banks and regional rural banks (RRBs), a substantial part of the rural population continued to remain outside the banking fold and hence could not reap the benefits of institutional finance for meeting their microfinance requirements. In its attempt to reach the unreached, NABARD, the apex development bank established in 1982, wanted to make use of the impressive network of delivery outlets while providing greater access to savings, livelihood and economic promotion for the rural poor. The limitations of the target approach for providing financial and other support services to the poor also offered a new vision to attempt a product design approach to suit the need of the poor. The thrust to have an efficient, cost-effective delivery mechanism suited to both the poor as well as to the banks on commercial lines with mutual respect was engineered by NABARD through its SHG-bank linkage programme in 1992. This was an offshoot of successful experimentation based on action research project conducted by NABARD in association with a leading NGO in the

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L.R. Ramachandran

late eighties. The delivery of microfinance services through an appropriate product-process design addressing the needs of the poor as well as to productively use the massive network of banking outlets is the hallmark of the self help group (SHG) approach for microfinance in our country. Further, the role of community-based organizations and NGOs was well recognized and found to be vital in catalyzing local participation to enhance the efficiency and transparency in the delivery of services to poor. NABARD envisioned the potential synergies in the partnerships of governments, the formal financial system and community-based organizations in achieving societal transformation as each one of them had mutually reinforcing roles for creating a win-win situation for all. This realization is manifested in the evolution of the SHG-bank linkage programme. In the beginning, the facilitation of SHGs was considered a specialized social mobilization exercise involving only NGOs but slowly the process spread its wings to accommodate different partners, approaches and models. One such SHG-bank linkage facilitation model is the farmers’ club model of the Prathama Bank.

PRATHAMA BANK BACKGROUND The operational constraints experienced by public sector commercial banks and the cooperative structure in the flow of formal credit for agriculture and rural development, gave birth to a new breed of banks called RRBs in the year 1975, combining the financial and technical expertise of commercial banks and the local feel of the cooperatives. In this process, the first RRB to be set up on the auspicious date of 2 October 1975 was Prathama Bank with its operational area covering the entire Moradabad district of Uttar Pradesh (UP). The bank had subsequently enlarged its area of operation to cover Rampur and JP Nagar districts. The bank is planning to shortly extend its territorial operations to Meerut and Baghpat districts as well. The share capital ratio is 50 per cent with the Government of India, 35 per cent with Syndicate Bank and 15 per cent with the government of UP. At present, Prathama Bank serves 2,730 villages in three districts of UP through its 170 branches and eight extension counters. The bank has extended banking facilities to nearly 13.3 lakh persons in its operational area. Out of 170 branches and eight extension counters, 160 branches have been computerized as on 30 September 2005. The total deposits and the total advances of the bank at the end of the halfyear 2005–06 were Rs 909.93 crore and Rs 836.94 crore, respectively.

Prathama Bank

345

The credit disbursement in the second quarter of 2005–06 was Rs 241.43 crore as against the annual credit disbursement of Rs 544.29 crore in 2004– 05. The credit-to-deposit ratio, recovery performance, gross/net non performing assets (NPAs) and profitability position of the bank are quite impressive when compared to other banks in the state. The bank has sincerely worked for the growth of rural economy by significantly contributing for the development of agriculture, small and cottage industries, housing, and education, indirectly promoted export-oriented activities, imparted training and provided technical assistance to existing and prospective borrowers/clients. The vision of the bank is to position itself as a financially sound, progressive, vibrant, cost-effective and customer-friendly rural bank. The bank commits itself to providing comprehensive financial and other related services to various segments of the society, especially farmers and weaker sections. Further, it aims to provide excellent professional services and improve its position as a leader in the field of rural finance through a motivated team, use of latest technology and high work standards.

NEED FOR FARMERS’ CLUB The concept of Vikas Volunteer Vahini (VVV) introduced by NABARD in 1983 (see Box) as a method of social engineering for inculcating repayment ethics and effecting rural development among the rural masses was adopted by Prathama Bank in 1991. However, the bank had till March 1999 just eight VVV clubs functioning in eight of its branches. The pace of formation of VVV clubs or farmers’ clubs gathered momentum in 1999 after the visit of M.S.K.V. Shastri, chairman of the bank, to one of the VVV clubs in the neighbouring district of UP. The activities of the club left a lasting impression on him, motivating him to float more and more clubs in his bank. The VVV club visited by him had undertaken many agricultural extension services for the benefit of villagers and also had increased the business and improved the image of the bank. The idea of using this as a vehicle to galvanize society and the bank functionaries to achieve greater upward mobility in terms of performance, image and community welfare inspired him the most. The bank got in touch with NABARD for guidance and support to start more VVV clubs in the remaining rural branches and named them Krishak Clubs.

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VVV or Vikas Volunteer Vahini is a programme implemented by the rural financial institutions and voluntary agencies, including a few Krishi Vigyan Kendras (KVKs) and agricultural universities (AUs) under the guidance of and with financial support from NABARD. The VVV programme was conceived by NABARD as a part of an attempt to address the problems posed by mounting overdues of agricultural loans of primary lending institutions. Started as an experiment in social engineering in the field of rural banking in India, it has established itself as a promising tool of social change and economic betterment. The VVV programme is implemented at village level through a group of volunteers formed into a club, variously called a VVV club, farmer’s club, Krishak club, etc. The club volunteers, work voluntarily for the betterment of the village through a participatory approach. They try to establish a better banker-borrower rapport, help the bank in its depositmobilization, credit-dispensation and recovery efforts. As part of the efforts at bringing about attitudinal change in the village, they propagate the five principles of ‘Development through Credit’: 1. Credit must be used in accordance with the most suitable methods of science and technology; 2. The terms and conditions of credit (or techno-economic parameters) must be fully respected; 3. Work must be done with skill so as to increase productivity and income; 4. A part of the additional income created by credit must be saved; and 5. Loan installments must be repaid in time and regularly so as to recycle credit. The club volunteers/designated bank assume respectability in the village through their exemplary behaviour; the activities they organize for the village/villagers; and the NABARD-supported training programmes organized by the club/bank. The cumulative effect of all this is that credit is properly utilized by the borrowers, a part of the surplus is saved and, thus, there are no defaults. Source: Extract from NABARD publication on VVV club.

Today, in Prathama Bank, a farmer’s club is seen as a support system to expand the banking out-reach with built-in quality safeguards through word of mouth publicity and demonstrable behaviour of volunteers. According to branch managers, a farmers’ club consists of those customers of the bank who voluntarily decide to share their own experiences of development through credit with their rural brethren, so as to motivate them for economic development. The volunteers should enjoy local acceptability and goodwill and act as informal ambassadors of the bank to the villages. Moreover, they have to play a catalytic role for the success

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of microcredit by inculcating the habit of self help among the rural poor. The number of farmers’ clubs in the bank has remained constant during the last four years and all the rural and semi-urban branches have on an average at least one farmers’ club per branch but the number of SHGs and the bank business have continued to grow over the years.

EVOLUTION OF FARMERS’ CLUB AS SHPI—PRATHAMA BANK MODEL Since inception, the bank had closely involved itself in the sphere of rural development, particularly of financing the underprivileged as per their mandate. The bank had initiated significant intervention strategies in tune with available opportunities to accelerate the pace of socio-economic development by participating in pro-poor development programmes. The bank joined the bandwagon of SHG-bank linkage programme in the year 1996–97, as UP was a late entrant into the microfinance fold as compared to southern states. The bank had to face a situation of non-availability of good NGOs promoting and facilitating SHGs in its area of operation and the bank was hesitant to try anything different. The enthusiasm to create farmers’club for evolving a right atmosphere for banking culture in their service areas as witnessed during the chairman’s exposure visit to a farmers’ club in 1999 prompted the bank to experiment with the farmers’ club model in SHG promotion. The bank decided to use this farmers’ club for facilitating formation of SHGs in their respective villages apart from other envisaged activities. Realizing the inescapable need for being close to the rural society, the bank took the initiative for the success of microcredit development through people’s participatory programme and developed an innovative tool named Prathama Model which was implemented on the basis of the bank’s past experiences of rural development, field work and research. This low cost model is a synergic combination of bank officers and volunteers of the farmers’ club. Later, the bank also received a green signal from NABARD to utilize these farmers’ clubs as self help promoting institutions (SHPIs). The response from customers, Krishak Clubs and NABARD motivated the bank to take up promotion of these farmers’ clubs, formation of SHGs by these clubs and their linkage as a priority area, included in its corporate plan. In order to popularize farmers’ clubs and the SHG concept in its command area, the bank celebrated the launch of farmers’ clubs with

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much fanfare, giving wide publicity and by inviting dignitaries from government departments and other agencies/organizations. The bank also effectively used local media to spread the message of farmers’ club and SHG, besides giving visibility to the work of bank staff and farmers’ club members. An SHG, according to them, is a concept that correlated the rural ethics, psyche and social organization and was thus envisaged as a successful tool for socio-economic uplift of the rural population. The group may consist of 10–20 members with savings according to their capacity, which could be as meagre as Rs 10–20 per month. This monthly saving of each member is pooled into a group account and the group may provide monetary assistance to its members at the time of need from this group saving through inter-loaning. It may be for consumption or production needs, thus acquainting group members with primary banking habits of saving, lending and repayment. When the group matures and functions smoothly, the group may approach the bank for financial assistance for genuine consumption or production needs. Dissemination of the right values at the field level further strengthened the credibility of the bank in the eyes of the people and the brand image further acted as morale booster to voluntary members of the farmers’ club and the bank staff, who were the real partners in the process. The bank, with the active support of NABARD through financial and other support, provided opportunities for capacity-building at regular intervals; developing in them the right kind of attitude; skill and knowledge among these key players, that is, bank staff, VVV club members and SHG members. Circulars were also issued to branches from time to time to emphasize the importance of quality aspects in formation and functioning of SHGs and their timely linkage with the bank to make their operations sustainable. The concern for quality, the emphasis on selection of suitable VVV volunteers, formation and operation of quality SHGs before linkage paid good dividends to the bank.

PRATHAMA BANK’s STRATEGY According to T.V. Bhat, Chairman, Prathama Bank, the bank has given a pivotal role to this microfinance initiative by incorporating it as a top priority in its corporate plan. All cadres of bank staff, as also farmers’ club volunteers and SHG volunteers, are provided training under SHG-bank linkage programme so as to involve and utilize all the human resources available for success of the scheme. This active combination of

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bank’s human resources with sincere and missionary efforts of volunteers has resulted in a synergic and cascading effect of forming more than 13,170 SHGs and bank credit linkage of 9,120 SHGs as on 30 September 2005. Pictographic representation of Prathama Bank’s farmers’ club model is as follows:

Bank

Credibility + Motivation + Field work

+

Farmers’ Club Volunteers

Acceptability + Ground level feel + Missionary zeal

Magic in Rural Development

People’s participation through SHGs

He further believes that a combination of the bank’s long-standing experience in the area, image of the bank and its government sponsorship makes its approach extremely credible in the eyes of the rural people. Though they have full faith in whatever the bank tells them, they are more convinced when the persons within themselves, whom they respect, explain the utility of the schemes to them. This ground level touch and local dialect is effective only when it is backed by bank’s credibility. Bank has effectively combined these two virtues of its own and local volunteers of Farmers’ club (Krishak Clubs) and this has made a tremendous impact in formation of SHGs and their financial linkages with bank. Both, bank officers and volunteers jointly and also individually visit villages and attend SHG meetings and explain to them the intricacies of SHG movement and various aspects of maintenance of books including accounting procedures and lending among themselves based on priority of need and availability of resources. The entire process includes the following steps:

Identification of active and progressive customers of the service area by branch manager on the basis of required essential traits such as good knowledge about area, acceptability among committee members as opinion leaders, interest and attitude for development, also confidence and faith in the developmental schemes. Among these identified customers, those who volunteer to become Farmers’ club members are selected (numbering around 20).

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These volunteers subsequently select a chief volunteer. Prathama has christened these clubs as ‘Mitra Mandals’ or ‘Abhiyutthan Mandals’ (in case of women VVVs).

Selection Criteria for Chief Volunteer

Role of Chief Volunteer and Farmers’ Club

1. Belief in development of rural people through SHGs 2. Belief in repayment of credit 3. Good communication skills 4. Presence at ground level 5. An aptitude for social work 6. Good and impressive personality 7. Comprehensive knowledge in the field of agriculture and other rural development activities

1. Build rapport with borrowers and farmers 2. Convene meetings of the VVV Clubs 3. Arrange training programme for VVV club members and SHG members 4. Motivate people for promotion of SHGs, attend meetings to guide SHGs 5. Monitor and audit books of SHGs 6. Take interest in giving exposures to fellow volunteers in various developmental areas 7. Act as a link between bank staff and club members 8. Administer oath to serve for uplift of the community 9. Assist branch manager in organizing and soliciting resource persons for training programmes/seminars/workshops 10.Ensure active participation of members while preparing and reviewing of branch business plan

PERFORMANCE FEATURES

Farmers club as a friend of the people and bank: Prathama Bank has formed around 13,173 SHGs (as on 30 September 2005) covering around 2 lakh families under this microfinance fold. The strong base that it has created through 186 farmers’ clubs as SHPIs (of which 15 are women’s clubs) and these 13,173 SHGs form the real community-based informal structure resulting in Prathama Bank’s unique distinction and position among the rural financial institutions in India. The entire microfinance initiatives through SHGs revolve around farmers’ clubs, which remain a singular feat of the bank.

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Starting with just 19 SHGs in 1996–97, the bank progressed steadily from 1999–2000 creating for itself an enviable position in the state of UP through its farmers’ club model popularly known as Prathama Model. The progress under SHG-bank linkage through farmers’ club model of the bank over the years from 1999–2000 to 2004–05 is presented in Table 19.1. TABLE 19.1 Progress in SHGs of Prathama Bank Particulars

1999

No. of farmers’ clubs SHGs formed SHG members SHG linkages Credit disbursed (Rs in Lakh)

2000

2001

2002

2003

2004

2005

8 155 94 1,072 1,036 10,735 7 413

181 2,507 22,563 1,214

186 5,302 47,718 2,502

186 9,300 83,728 4,467

186 12,093 1,14,883 6,250

186 13,883 1,31,888 8,504

1.50

157.82

660.97 1,001.43

531.41

798.0

53.11

Source: Prathama Bank Annual reports as at the end of March each year.

The performance of the bank during the last six years on major parameters reflecting the contribution of farmers’ club and SHGs is given in Table 19.2. An in-depth analysis of SHG portfolio of the bank reveals a picture which is slightly different from the national scenario, as follows: (a) The number of women SHGs formed constitutes around 30 per cent of the total SHGs of the bank and the total number of women SHG members also constitute around 30 per cent whereas the national average is above 90 per cent in favour of women. (b) The number of women SHGs linked to the bank constitutes around 27 per cent, not reflecting any favourable tilt towards women SHGs. (c) The contribution of savings by SHGs to annual credit disbursement by the bank has increased from 27.5 per cent to nearly 50 per cent, thus reflecting a reduced ratio of savings to credit, which is contrary to the belief that the ratio shall increase over time. (d) The bank has linked more than 90 per cent of the SHGs in the respective districts over the years.

A tool to ward off debt trap: Prathama Bank’s low cost model has added a new dimension in the field of rural development, mainly through its awareness creation efforts among rural people

March 2000

Deposits 508 Advances 256 Total Business 764 Disbursement 115 Disbursement under Agriculture 91 Low Cost Deposits 324 Recovery % 67.59% No. of SHGs Formed 1,072 No. of SHGs Linked 413 Loan Disbursed to SHGS 53 No. of SHGs Members 10,725 No. of Kisan Credit Cards Issued 4,376 NPAs Outstanding 51.94 No. of Extension Programmes Conducted 40 CD Ratio 50.46 No. of Farmers Clubs 155

Indicator 568 315 883 170 137 359 76.66% 2,507 1,214 1.58 22,563 19,110 43.73 52 55.60 181

March 2001 645 381 1,046 207 173 412 78.41% 5,302 2,502 6.61 47,718 56,780 36.63 62 59.09 186

March 2002 702 491 1,193 303 210 456 83.5% 9,300 4,467 10.01 83,728 1,02,470 29.86 50 69.97 186

March 2003 818 644 1,462 446 298 555 84.99% 12,093 6,250 15.33 1,14,883 1,84,945 34.88 63 78.76 186

March 2004 966 770 1,736 544 423 716 81.58% 13,883 8,504 23.31 1,31,888 2,12,970 34.64 80 79.82 186

March 2005

910 837 1,747 241 NA 670 NA 13,173 9,120 16.59 NA 28,125 31.50 NA 91.97 186

September 2005

(Rs Crore)

Source: Various issues of Annual Reports of Prathama Bank; Annual Report and unpublished bank’s performance report for the half year ended September 2005.

01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16

Sl No.

TABLE 19.2 Performance of Prathama Bank

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and microfinance. The bank organizes an average of 60 awareness programmes each year. All these efforts have made it possible to encompass more than 2 lakh families to develop a habit of saving for the future. It is learned that because of SHG credit linkages, group members have been freed from the clutches of moneylenders to meet their consumption and contingency needs. Otherwise, they would have been placed in the web of indebtedness and debt bondage, as in the past. A tool for transforming social culture: Another innovative achievement worth mentioning is that this people’s participatory programme has wiped out or curtailed evils of drinking, child marriage and dowry in their area of operation. A new awakening has been created for education, sanitation, tree plantation and a pollution-free environment. The SHGs took on a new initiative of shouldering the responsibility of providing primary education to rural children and at present there are three SHG primary schools running at Taroli, Taharpur and Kota Alinagar villages by the sole efforts of SHGs of Chhapna, Taharpur and Bilaspur branches, respectively. Impressed by the working of SHGs, the administration has allotted a fair price shop to an SHG in Bilaspur. The active participation of volunteers and SHG members in the pulse polio campaign this year has increased the number of children attending such camps as compared to previous years. A tool to develop customer-centric products: The bank has started holding village meets by rotation in each village so as to cover all the villages of each branch with the help of VVV members. This facilitates direct interaction with the rural poor to understand their problems and solve minor problems on the spot. The forum is also used to motivate them by inviting their views on income-generating activities to raise their income level and measures required for business development. The interesting feature of these meets is that they are held in a very informal manner ensuring maximum local touch at a community centre, preferably under a tree without tents, chairs, etc. The meetings are attended by all the staff members of the branch as they are held on a nonpublic working day. The response from the villagers is overwhelming and is beneficial to both the villagers as well as the bank. The bank has launched a novel scheme for providing LPG connection to women in rural areas without any collateral security on very easy terms of repayment (just Rs 65 per month for three years). Besides, the bank has launched a sanitation scheme called

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Prathama Swachhata Yojna for construction of toilets at a cost of Rs 6,500 each, which is advanced by the bank without any security on easy terms and conditions with a repayment of Rs 140 per month for five years. The bank also has launched branded products like Prathama mortgage loan scheme, Prathama special agricultural development loan scheme, Prathama Sarvangin credit card scheme and the Prathama rural credit card scheme to suit the requirements of rural masses based on the suggestions received in customer interactions. As a business strategy: The Prathama model has successfully shown that banking with the poor is a profitable and bankable proposition. The bank could mobilize high share of low cost deposits (74.1 per cent), provide high volume of loans under SHGs, Kisan credit cards and other activities (CD ratio is more than 80 per cent). The overall recovery rate was as high as 84.22 per cent on 30 June 2005 and under SHG-bank linkage programme it is 99 per cent. Moreover, due to social pressure applied through SHGs and volunteers, some hardcore NPA accounts have become regular. The Prathama model has given a great boost to the image of the bank in particular and growth in business in general. The annual profit of the bank after launching of the Prathama model has witnessed profits ranging from Rs 26.17 crore to Rs 51.71 crore with accumulated reserves touching Rs 216.59 crore at the end of March 2005. (6) Unique experience begets new rewards: The conduct of developmental activities like tree plantation, Sanchetna cycle rally, meet and match, puppet shows and awareness training programmes in villages and bank branches for the benefit of customers through farmers’ club and regular meeting on the second Thursday of every month as VVV day have provided a unique bonding experience. This synergic approach has proved a boon for the bank as volunteers, in addition to their efforts in village development, help the bank in expanding rural credit, and more importantly, put peer pressure in reducing NPAs. Successful volunteers have pledged that they will not allow a situation to develop where recovery certificates are issued against any of their brethren. They aim to create ‘no defaulter villages’ and ‘no defaulter branches’. The better recovery climate has paved the way for larger credit flow to the rural sector. Word-of-mouth publicity about the services of the bank has created a climate conducive for customer retention and growth. The farmers’clubs and SHGs of the bank have been appreciated year after year and many of the branches, farmers’

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clubs and SHGs have received best performance trophies, prizes and certificates from higher level institutions. The Prathama farmers’ club model has gained so much popularity in the last five years that international and national consultants, donor agencies, banks, academic institutions and government functionaries have been visiting the bank frequently to study the model, imbibe, replicate or for academic pursuits.

ENLARGING THE SCOPE OF MICROFINANCE: INITIATIVES IN MICROENTERPRISES The bank started conducting Rural Entrepreneur Development Programme (REDP) of 6–8 weeks duration from 2001 onwards in the villages. SHG members are given training by master trainers/craftsmen. Besides knowledge and skill inputs, participants are also given a stipend. These programmes help rural youths, including women, to take up economic activities in their villages, thus checking unnecessary migration and exploitation of the poor. The bank has raised the savings-to-credit linkage ratio from 1:4 to 1:10 for those taking up economic activities on the basis of income-generating capacity. Many of the group members have started microenterprises like dairy, retail shops, spare parts shops, bee-keeping, printing press, vermin-compost, paintbrush manufacturing, bag-making, zari work and silver foil-making. TABLE 19.3 REDPs Conducted in Service Area Villages

Name of Activity Garments manufacturing Painting brush manufacturing Silver foil unit Zari work Patch work Dari weaving Surgical bandage cloth Hand printing Bone and horn work Bee-keeping Bag-making Wire basket Total

No. of REDPs

No. of Persons Trained

No. Availed Financial Assistance

1 1 3 4 1 1 2 1 3 2 1 1 21

29 42 80 105 25 30 55 27 90 235 23 30 771

15 11 43 50 23 21 21 25 41 80 14 15 359

Source: Compiled information from bank’s records.

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The bank and farmers’ club encourages these microentrepreneurs in arranging for input and marketing requirements through sharing of contacts, arranging exhibitions, melas and weekly markets. A few comments of participants in the functions organized by Prathama Bank: Prathama Bank’s exhibition is the real picture of India. Follow the path of Prathama Bank for the survival and development of this important segment of Indian Economy. —Sri. N.D. Tiwari, CM of Uttaranchal

This bank is big bank of relatively smaller people. —Sri Jagdish Capoor, Former DG of RBI

Today, the situation is such that there are markets dominated by products exclusively produced by SHG members of Prathama Bank. The market in Taharpur has a large number of shops of SHG members undertaking printing, tailoring, tea, and motor and generator repairs. The printing press in this market operated by SHG members has its clients from commercial banks, RRBs, NABARD and many institutes from neighbouring districts. Some of the SHG members manufacturing bags and silver foil do get continuous bulk orders from big clients.

CONCLUSION The Prathama Bank farmers’ club model has amply demonstrated that wherever good NGOs are not available, community-based organizations are capable of promoting and strengthening SHGs provided the right environment is created by the banks. Further, it has shown the capability of sustenance and growth of community-based organizations, with good prospects for vertical and horizontal business growth for banks. The model has demystified the pro-gender slant of SHG-bank linkage by promoting and linking more men’s SHGs. Similarly, it has considerably proved that word-of-mouth publicity, cheap and simple, is more effective in retention, growth and responsiveness of customers in a service sector like banking. That the Prathama model is a replicable and viable intervention is rewarding to both the bank and customers, has been reflected in the

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bottom line of the bank established in the business results of the bank. The bank has accumulated profit of Rs 216.59 crore as on 31 March 2005, of which nearly Rs 190 crore has been earned in the last six years and CDR increased from 55 per cent to above 80 per cent in the postmodel era. The Prathama model has created a brand loyalty among customers towards the bank and the sense of belonging is evident in the working of staff as well as customer volunteers. Many RRBs in the country have visited the bank and are replicating a similar approach. It is only a matter of time before the microfinance sector changes its face faster and for the better.

20 Bidar DCCB-PACS Model B.B. MOHANTY

EVOLUTION OF SHG-BANK LINKAGE IN INDIA

N

ational Bank for Agriculture and Rural Development (NABARD) decided to introduce the concept of linkage banking in India, way back in the year 1986, keeping in view the decision of the Asia and Pacific Regional Agricultural Credit Association (APRACA) to experiment with the concept in member-countries. NABARD studied the practices followed by select NGOs in dealing with poor and vulnerable sections of the society and the small financial transactions done at the grassroots level. Based on the available information on the role played by moneylenders in rural areas and the initiatives of NGOs in financial intermediations, NABARD initiated an Action Research Programme in association with MYRADA, a reputed NGO in the state of Karnataka, in the year 1987. The findings of the Action Research Programme on successful financial management by the Credit Management Groups of the poor in rural areas, under the facilitation of MYRADA, encouraged NABARD to start a pilot project of SHG-bank linkage in 1992. The project objective was to facilitate access of the poor to formal credit institutions, thereby taking banking to the un-reached sections of the society through self help groups, a voluntary association of the poor who save small amounts at periodic intervals and use the savings for meeting their emergent credit needs. The pilot project envisaged banks to lend to the SHGs without collateral on the principles of trust-banking. The Reserve Bank of India (RBI), encouraged by the success of the project, issued policy

Bidar DCCB-PACS Model

359

guidelines in the year 1996, treating SHG finance as a priority sector advance. With policy support from the RBI and the government, NABARD gradually expanded the SHG-bank linkage programme. NABARD has been consistently and continuously spearheading the programme by way of multipronged and massive promotional interventions through almost all banks in the country and a large number of NGOs and developmental agencies. NABARD encouraged various models under the linkage programme, namely, (i) banks promoting SHGs by themselves and credit linking them; (ii) NGOs promoting SHGs and facilitating direct credit linkage by banks; and (iii) banks providing bulk finance to NGOs for on-lending to SHGs promoted by them. While the SHG-bank linkage programme was extended to commercial banks in 1992, RRBs were covered in 1993 and cooperative banks in 1996. For the promotion of SHGs, various models have been evolved. The Kudumbashree model evolved in Kerala has a project approach to poverty eradication through women SHGs with active involvement of government, local bodies, NGOs and banks. The Streeshakti and Swashakti Programmes in Karnataka, the MRCP in Maharashtra and the UPLDC Project in UP and the Wadi project in Gujarat are examples of different models in which formation and linking of SHGs have been the focus. By March 2005, over 16 lakh SHGs covering 242.15 lakh poor families have been credit-linked by banks with a cumulative bank loan component of Rs 6,898 crore. The programme has taken India to the number one position in respect of networking and coverage under microfinance in the world. Institution-wise, on 31 March 2005, at all-India level, the commercial banks had about 50 per cent share in the linkage programme. RRBs and cooperative banks shared 38 per cent and 12 per cent respectively. The Bidar DCCB initiative was the first major breakthrough in the cooperative sector in taking steps for formation of groups and linkage. At present, among the states, Karnataka has the maximum number of SHGs linked in the cooperative sector. As against the all-India level of 12 per cent share of cooperatives in SHG-BLP, the share in Karnataka was 28 per cent.

COOPERATIVE CREDIT STRUCTURE IN BIDAR DISTRICT A BRIEF PROFILE

OF

BIDAR DISTRICT

Bidar, a culturally rich but economically backward district of Karnataka, is located in the north-east corner of Karnataka. The geographical area

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B.B. Mohanty

of the district is 541,765 hectares, of which 466,000 hectares are available for cultivation. It has a total population of 15 lakh spread over 600 villages and 300 hamlets. More than 85 per cent of the population is based in rural areas. Over 1.5 lakh families are economically backward, 30 per cent belong to scheduled castes and scheduled tribes. The major occupation in the district is agriculture. Only 10 per cent of the cultivable land is irrigated. The main crops are sugarcane, paddy, cotton and pulses. The district is divided into five talukas (synonymous with blocks) for administrative convenience. Bidar has been identified as a nil industry district in the state. The district is served by 56 branches of commercial banks, 32 branches of Krishna Gramin Bank, 44 branches of the Bidar DCCB, five Primary Cooperative Agriculture and Rural Development Banks (PCARDBs) and branches of financial institutions like Karnataka State Financial Corporation and Karnataka Industrial Cooperative Bank Limited.

THE BIDAR DCCB The short-term cooperative credit structure in the district consists of the Bidar DCCB, established in 1922, with 44 branches and 171 primary agricultural credit societies (PACSs) affiliated to it. It was conferred license from the RBI in the year 1998. The bank is managed by an elected board of directors. The management of the bank is vested with the board of directors and managing director. Day-to-day affairs are looked after by the managing director and the joint registrar of cooperative societies. The bank’s operations are divided into six departments, viz., Planning and Development, Establishment, Loan Supervision, Accounts, Information Technology and Microcredit. A deputy general manager heads each department. A branch on average has 3–5 people on it staff. The total staff strength of the bank was 202 as on 31 March 2005. The bank had deposits of Rs 224.50 crore as on 31 March 2005 and its total loans and advances outstanding on that date were Rs 425.81 crore. To augment its resources, it resorted to borrowing from higher financing institutions like the Karnataka State Cooperative Bank and NABARD. It earned profit to the tune of Rs 2.17 crore during 2004–05. Its share in the total priority sector credit disbursement in the district was 47 per cent during 2004–05, as may be seen from Table 20.1.


361

TABLE 20.1 Share in Credit Disbursement (Rs lakh) Disbursements Made under Priority Sector During 2004–05

Sl No.

Institution

1 2 3 4

Commercial banks Regional rural bank Bidar DCCB PCARDBs Total

9,959 3,803 12,329 10 26,101

Source: Unpublished Lead Bank Report, Bidan.

Under the farmers’ club programme, the Bidar DCCB had secured number one position with 312 farmers’ clubs sponsored by it through its branches and PACSs.

EVOLUTION OF SHG-BANK LINKAGE IN BIDAR DCCB THE BEGINNING No one in Bidar DCCB had any idea about financing SHG till they received the NABARD circular on SHG-bank linkage programme in 1996. In order to get familiarized with the SHG concept, the then vicepresident of the bank, accompanied by the general manager visited MYRADA, a leading NGO, at its Kamalapur project office, in the neighbouring district of Gulbarga. The NGO provided them with the basic tenets of SHG functioning. On seeing the SHGs in action, they were convinced and got inspired to replicate it in their bank. On their return to Bidar, the bank placed an agenda to the board for financing SHGs. The directors had no exposure to SHGs and thus had apprehensions about financing the poor who had no assets to offer as security. The proposal, therefore, was not favoured by the board. To convince the board, yet another visit to MYRADA’s project office at Kamalapur was arranged for all the members of the board. Exposure visit to a few SHGs by MYRADA had brought about perceptible changes in their attitude. The board of directors was convinced that this could be an ideal approach for reaching the poor for providing not only the credit required without the hassles and paperwork associated with the conventional loan sanction but also to provide other support services to bring about improvement in the socio-economic status of the poor. The board

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in its subsequent meeting gave its nod for providing loans to a few SHGs promoted by an NGO (PRAWARDA) in Basavakalyan Taluk. In order to operationalize the board’s decision, amendments in the bye-laws of the bank were submitted for approval to the Department of Cooperation, Government of Karnataka. The latter amended the Cooperative Act to enable opening of SHG accounts by including SHGs as nominal members of PACSs. Initially, 13 SHGs were given bank loans in 1996–97. This was the first milestone of the bank in its journey to reach the rural poor under the SHG-bank linkage programme.

A MAJOR POLICY DECISION TO COVER POOR FAMILIES IN THE DISTRICT

ALL

The bank celebrated its diamond jubilee in 1998. I.K. Gujral, the then prime minister, was the chief guest at the function, during which the bank announced its commitment to cover all poor families in the district under the SHG-bank linkage programme in five years.

ESTABLISHMENT

OF

SHG CELL

IN

BANK’S HEAD OFFICE (HO)

The concept of promotion and financing of SHGs was new to the staff. The main task was to organize the poor families into SHGs by involving all branches and 171 PACSs. This necessitated bringing certain changes in organizational level. It created an SHG cell at its head office on 14 February 1998; three officers from MYRADA were appointed on contract basis to manage it. NABARD Officials and the faculty members of Agricultural Cooperative Staff Training Institute (ACSTI) provided guidance in the bank’s initiatives. NABARD had provided to the bank, on an experimental basis, a grant assistance of Rs 5.54 lakh for establishment of an SHG cell in the DCCB, promotion and linkage of 425 SHGs through PACSs and 250 SHGs through NGOs. The staff of the NGO which joined the SHG cell had a tough time convincing bank staff about formation of SHGs. By way of demonstration, a few villages falling under the command area of the Bhogsa branch were selected. As there was no NGO operating in those selected villages, the SHG cell staff camped in the villages to convince village leaders about forming SHGs. In three months’ time, over 25 SHGs were promoted. An SHG handing over ceremony was organized involving the board members of the bank as also of PACSs. Enthused by this experiment, the bank staff began to realize the potential of SHGs as clients.


363

THE STRUCTURE OF SHG-BLP IN THE BANK AND THE PACS UPGRADATION OF SHG CELL TO MICROCREDIT DIVISION (MCD) IN HO As the number of SHGs formed and credit-linked by the bank gradually increased, the services of more NGO staff were contracted. A separate Microcredit Division headed by a senior officer—deputy general manager (DGM)—was set up at HO in 2000. Similarly, in each of the five taluk-level offices of the bank, Microcredit Cell (MCC) under the supervision of a branch manager was established.

ORGANIZATIONAL STRUCTURE

FOR

SHG-BANK LINKAGE WORK

The current organizational structure for SHG-bank Linkage Programme related work in the bank is as follows: Managing Director General Manager DGM (MCD)/ Team Leader Development Officer Aurad Taluk B. Kalyan Taluk DO, 3 ADOs DO, 2 ADOs 6 branches 7 branches 36 PACSs 32 PACSs Asst. supervisors Asst. supervisors 300 villages and 189 villages and sub-villages sub-villages

FUNCTIONS

OF

MCD

AT

Bidar Taluk DO, ADO 12 branches 39 PACSs Asst. supervisors 172 villages and sub-villages

Bhalki Taluk DO, 2 ADOs 8 branches 36 PACSs Asst. supervisors 153 villages and sub-villages

Humnabad Taluk DO, ADO 10 branches 28 PACSs Asst. supervisors 96 villages and sub-villages

HEAD OFFICE

The MCD is headed by a DGM and has an office superintendent/development officer and two staff members to undertake various responsibilities. The responsibilities of the MCD at HO are: (i) (ii) (iii)

provide policy/operational guidelines to branches and PACSs; extend overall supervision of the taluka-level microcredit cells; undertake capacity-building of DCCB and PACSs staff;

364

B.B. Mohanty

(iv) (v) (vi) (vii) (viii) (ix) (x) (xi) (xii) (xiii) (xiv) (xv) (xvi) (xvii) (xviii)

collect data on SHGs and on all NGOs working in the district; preparing Action Plan, documentation, reporting, etc.; networking with all NGOs and government departments; conducting monthly meetings of MCD staff and review of their work; convening quarterly meetings of Project Implementation & Monitoring Committee (PIMC) and other NGO meetings; undertaking appraisal and sanction of SHG and SGSY loans; evaluating group performance while recommending loan for sanction; collecting information on government schemes and programmes for sharing with NGOs; convening periodical meetings of NGOs to sort out problems with the assistance of the Lead Bank and NABARD; extending support to smaller NGOs in formation, strengthening, capacity-building, linkage of the groups with banks, etc.; convening monthly meeting of PACSs Secretaries to review the progress; attending periodical meetings of Nodal Officers of SHG-bank linkage programme organized by ACSTI, Bangalore; preparing and submitting periodical returns to ACSTI and NABARD; documenting success stories, annual reports, etc., of the microcredit activities; and preparing and submitting refinance applications to the apex bank/NABARD.

TALUKA-LEVEL SET-UP At taluka level, MCC was established under the control of the branch manager. Each MCC has one development officer (DO) and one/two assistant development officers (ADOs). The branch manager is responsible for coordinating the work related to promotion and linkage of SHGs with support from DO and ADOs. The responsibilities of MCC in the Taluka branch are as follows: (i) Undertaking formation, linkage, grading, training of SHGs and follow up. (ii) Conducting/attending meetings, seminars, workshops, etc., as per instructions of MCD, HO.


(iii) (iv) (v) (vi)

365

Visiting the SHGs. Monitoring repayment status and follow up. Solving field-level issues related to NGOs, SHGs and ADOs. Working as link office between MCD at head office and the PACSs/ SHGs.

PACS-LEVEL SET-UP At PACSs level, an assistant supervisor is employed by the PACS on contract basis. The assistant supervisor supports the secretary of the PACS in promotion, linkage and monitoring of SHGs. Training is provided by the DCCB to these officers at Sahakara Rural Development Academy (SAHARDA) and they, in turn, provide training to SHGs. The honorarium paid to an assistant supervisor by PACSs at present is Rs 1,500 and the cost is shared by the DCCB and PACSs as indicated in Table 20.2. TABLE 20.2 Share in Honorarium Sharing of Expenditure towards Honorarium of Assistant Supervisor of PACS between DCCB and PACS Year

DCCB

PACS

1st 2nd 3rd 4th

75% 50% 25% nil

25% 50% 75% 100%

Source: Internal Records of Bidan DCCB.

The bank also provides an interest margin of 1 per cent to PACSs on SHG loans serviced by it as an additional incentive. The responsibilities of the assistant supervisor include the following: (i) promotion of SHGs; (ii) attending SHG meetings and guiding the members in conducting activities like group meeting, book-keeping, etc.; (iii) identifying issues and bringing them to the notice of ADOs and DOs; (iv) assessing of training needs of SHGs and arranging training programmes with the help of ADOs and DOs; (v) following-up of linkage and training; (vi) preparing of monthly reports; and (vii) any other work entrusted by the ADOs, DOs and higher ups.

366

B.B. Mohanty

FORMATION

OF

BIDAR DCCB

SHGS

AS

IN THE

DISTRICT

SHPI

The bank was the first DCCB in Karnataka to attain the status of a self help promoting institution (SHPI) under NABARD’s SHPI scheme. A grant assistance of Rs 5.54 lakh was provided by NABARD for promotion and linkage of SHGs. About 40 per cent of the SHGs in the district are promoted by the Bidar DCCB and PACSs.

NGOS

AS

SHPI

The bank started to network with the various NGOs operating in the district in formation of SHG. Initially, only three NGOs were involved in group promotion activities. These and other upcoming NGOs were supported in promotion of SHGs. The bank provided assistance of Rs 1,000 each (per SHG) for promoting 10 SHGs to such NGOs. They were also provided grants for training of the groups. At present, there are 50 NGOs working in the district and they have promoted 2,607 groups.

PACS

AS

SHPI

PACSs were identified as SHPIs. Initially, it selected Bhogsa branch, with six PACSs for the purpose, where no NGO was working. The MCD assisted selected PACSs in promotion of 28 groups. During this process, the senior functionaries of all the six PACSs were involved. The groups, once formed, were handed over to the PACSs. In the next phase, all the staff of 171 PACSs was trained to function as SHPIs. NABARD supported the initiative by sending resource persons to provide training to the PACSs secretaries.

THE STREESHAKTI PROGRAMME

OF THE

STATE GOVERNMENT

The Streeshakti SHGs were promoted by the Women and Child Development Department (WCDD), Government of Karnataka. Recognizing that banks were not confident enough to provide credit linkage for these groups, Bidar DCCB identified these groups for upscaling through training. All the officials of the department and anganwadi workers have been trained at SAHARDA to form quality groups and improve the capacity of the existing groups for credit linkage. A total of 2,142 Streeshakti Groups in Bidar have been trained and all of them are at present credit-linked.


OTHER INNOVATIVE INITIATIVES

IN

FORMATION

OF

367

SHGS

(i) Farmers’ clubs in the district have formed SHGs. (ii) Ashakirana School for the Blind, run by an NGO, formed an SHG for the blind. It has also brought out a handbook on SHG concept in Braille (Kannada) for the benefit of the visually challenged members of this group with NABARD grant assistance.

SHPI-WISE NUMBER

OF

SHGS FORMED

IN THE

DISTRICT

As on 31 March 2005, a total of 9,235 groups have been formed in the district by different SHPIs as follows: Formed by NGOs (50 NGOs are involved) Formed by DCCB/PACSs Formed by Government Department under Streeshakti Programme Other Cooperative Banks Total

2,963 3,679 2,142 451 9,235

Others 4.90% By NGOs 32.10%

By Streeshakti 23.20%

By NGOs By DCCB/PACSs By DCCB/PACSs 39.80%

By Streeshakti Others

After satisfactory completion of the first SHPI Project sanctioned to the bank by NABARD, another grant assistance of Rs 4.20 lakh was sanctioned during the year 2004 to the DCCB for further promotion of SHGs.

CRITERIA ADOPTED

BY

BANK

IN

SHG FORMATION

BY

DCCB

While promoting groups, the following aspects have been adopted to ensure promotion of quality groups: (i)

Homogeneity and affinity of the members while forming the groups.

368

B.B. Mohanty

(ii)

The number of members in each group should be between 10 and 20. (iii) Only one member per family should be covered in the SHG. (iv) Weekly meetings on a fixed day and time should be made compulsory. (v) All the transactions and discussions should be done in the meeting only. (vi) For the first three months, emphasis is placed on regularity of meeting, 100 per cent participation, regular saving and regular remittance to the bank. (vii) SHG concept training of 3–6 months is arranged for all group members. In this training, emphasis is placed on internal lending and book-writing. (viii) Grading of groups is done before credit linkage. (ix) Bank staff should participate in the SHG meeting, at least once in three months.

MAINTENANCE

OF

BOOKS

AND

ACCOUNTS

The following books have been prescribed by the bank for the SHG: (i) (ii) (iii) (iv) (v) (vi) (vii) (viii)

Membership Admission Register; Receipt Book; Minutes Book; Cash Book; Savings Register; Individual Saving-cum-Loan Book; Loan Ledger; and General Ledger.

Literate members of the group maintain books. In the absence of literate members in the group, an animator from the village maintains the books of accounts. The group pays the animator on a monthly basis. Regular training on book-keeping is organized for SHG members/NGO animators. The books are regularly audited. Monthly financial statement of each SHG is submitted to the financing bank. The bank has introduced the concept of checking the accounts of the SHGs by Chartered Accountants (CAs). In the last three years, the accounts of 3,500 SHGs have been audited by CAs at banks’ cost. The bank got the books printed by incurring an expenditure of Rs 300 per set. The books were supplied to groups irrespective of


369

their promoting and linking agency with subsidized rates of Rs 150 per set.

WORKING

OF THE

LINKAGE BANKING SYSTEM

For opening a savings account by SHG, a resolution regarding the opening of account and photographs of the two representatives are to be submitted along with the application form. The branch/PACSs issues a ‘passbook’ and withdrawal slips to the SHG. Savings are regularly deposited by the SHG members on a weekly basis. Loans to SHGs are sanctioned by DCCB, irrespective of a savings account being maintained at the PACSs or DCCB branch. SHGs are supplied with loan application form (FORM 1) through DCCB branches/ PACSs. SHGs discuss their loan requirement in their group meetings and pass a resolution indicating the name of the member, purpose of loan and amount. In case of SHGs promoted by NGOs, a letter recommending sanction of loan from the NGO is also enclosed. The application is submitted by SHG to the PACS/DCCB branch. It is then referred to the development officer/assistant development officer for grading. Grading is done mainly to assess the level of maturity of the SHG and areas for improvement. An SHG which has completed six months of its existence and scored a minimum of 90 marks out of 150 is considered eligible for its first bank loan. Groups that score less than the required marks are informed about this and are supported to improve their functioning. For repeat loans, a group has to score a minimum of 105 marks out of 150. If the group fulfils this criteria, the DO/ADO recommends the application to MCD of DCCB HO. MCD scru-tinizes the application and loan is sanctioned by the managing director of the bank. The loan is sanctioned to the group and sanction letter is issued to the SHG. A copy of the sanction letter is endorsed to branch/PACS, NGO/DO/ADO. The concerned branch/PACS gets the documentation completed (FORM 4) and credits the loan amount to the SB account of the group. For second and subsequent loans, the DCCB has introduced Kamadhenu card, which has a cash credit limit and is valid for two years. Branch managers of DCCB have been given powers to sanction the limit. For the loan serviced by the PACSs, they earlier used to get 1.5 per cent as service charges, which was recently reduced to 1 per cent. At present, the rate of interest charged to SHGs by the DCCB branch/PACS is 10 per cent per annum. The SHG gives an authorization to the branch/PACS to debit its SB account

370

B.B. Mohanty

whenever loan repayment is due. The weekly savings and loan repayments in the SHG are credited to the SB accounts regularly.

MODIFICATION

OF

SGSY PROGRAMME

The bank was identified by the Zilla Panchayat (ZP) to implement the SGSY programme. In order to ensure that the SHG concept is not diluted in the district, the bank put forth a few suggestions to the ZP. The ZP agreed to extend the subsidy to SHGs where more than 60 per cent of the SHG members were covered in the below poverty line list. It was also agreed that the subsidy would be released to the common fund of SHG.

MONITORING SYSTEMS Bidar DCCB follows two-track monitoring system as under:

Field Monitoring—Assistant development and development officers attend a stipulated number of SHG meetings each month. Such monthly meetings help in developing strong bond between the groups and the bank/PACS. Attendance, regular savings and book-keeping are facilitated through such meetings. In case discrepancies/deficiencies are noticed, such groups are regularly visited by the assistant supervisor concerned to ensure corrective steps. In addition, issues concerning developmental activities undertaken/ to be undertaken by groups are also discussed. Desk monitoring.

MONITORING STATEMENTS The bank has been collecting ground level data in the prescribed format at regular intervals. A Saral Map software has been developed to monitor the key indicators, on quarterly basis. An integrated computerized MIS to capture data from SHG member level to district level on microfinance is being attempted.

MONITORING

AT

VILLAGE LEVEL

The assistant supervisor and secretary of the PACS are responsible for monitoring the overall performance of SHGs in the area of operation of the PACS.


371

MONITORING-CUM-REVIEW MEETING The schedule for monitoring-cum-review meetings, introduced by the bank, is described in Table 20.3. TABLE 20.3 Schedule for Meetings Date

Meeting of

1st of every month 2nd

SHG representatives at the PACS DCCB Branch Manager with PACS Secretaries & Assistant Supervisors All DCCB Branch Managers & Development/Asst. Development Officers in the Taluka Managing Director, Senior Advisor, Director—SAHARDA, with all DGMs, 5 Taluka-level managers, Development Officers & Assistant Development Officers of MCD, at HO

3rd 4th

Source: Internal Circulars of Bidan DCCB.

In these meetings, utilization of loan, maintenance of books by SHGs, extent of participation of members, regularity in repayment of loan by members and by SHGs, training of SHG members and other issues are discussed.

DISTRICT-LEVEL CORE COMMITTEE MEETING A district-level core committee for policy decision and monitoring is constituted. It gets representation from the district collector, ZP, NABARD, Lead Bank and two prominent NGOs. The DCCB is the convenor of the committee.

TRAINING INITIATIVES AT DCCB, PACS AND SHG LEVELS The bank realized that capacity-building of all the players in the field of microfinance is imperative for promotion and linkage of quality groups. Through its MCD, it began imparting training to SHG members and its own staff. The MCD initially concentrated on exposure-cum-training of all the staff of the bank and PACS on a top-to-bottom approach. Some

372

B.B. Mohanty

of the senior officers of the bank were given exposure to external institutions also.

SETTING UP OF SAHAKARA RURAL DEVELOPMENT ACADEMY (SAHARDA) The bank soon felt the need for establishing a separate training centre for undertaking capacity-building programmes on a continuous basis. In August 2000, it established a full-fledged training centre called Sahakara Rural Development Academy (SAHARDA) at its headquarters. The training institute was set up with excellent infrastructure and resource persons with practical experience in the field of microfinance to provide training to its own staff, other bankers, NGOs, government officials and others. The bank also has training halls at five of its taluka-level branches where members of SHG/farmers’ clubs and NGO staff are being trained. The academy has designed a number of training modules on SHG promotion and financing to meet the training needs of banks, NGOs, government agencies, SHGs, farmers’ clubs, etc. In order to replicate the successful initiatives of the bank, NABARD has been sponsoring from 2000–01, a large number of training programmes conducted by SAHARDA for sensitizing non-officials and officials of cooperative banks, government officials and NGO functionaries in the country. A few of the DCCBs, after exposure visits to SAHARDA, have successfully adopted the bank’s model and are reaping the benefits of promoting and lending to SHGs. Organizationally, SAHARDA is a wing of the DCCB, maintaining separate accounts of its income and expenditure. Since the existing infrastructure at SAHARDA was not adequate to conduct all the sponsored programmes, the bank purchased a building on four acres of land and renovated it to set up a SAHARDA at Naubad. Presently SAHARDA has training facilities at two places, namely, Akkamahadevi (rented) and Naubad (owned by the DCCB). The facility at Akkamahadevi is being used to train middle and field level staff of DCCBs/NGOs/SHGs/ farmers. The Naubad centre is used for training senior officials of banks/ government. SAHARDA has designed simple, easy-to-understand modules for SHG members. Training is imparted on the SHG concept, leadership, credit management, book-keeping and auditing. NABARD had provided a grant assistance of Rs 30 lakh to SAHARDA at the rate of Rs 10 lakh per year towards part-funding SHG members’ training programmes during 2002–03 to 2004–05. The details of various training programmes conducted by SAHARDA are given in Table 20.4.


373

TABLE 20.4 Training Programmes on SHGs Conducted by SAHARDA

Type of Programme

Cumulative no. of Programmes Conducted up to 31 March 2005

One-day training programme for SHG members of the district Three-day programme on DCCB as SHPI for DCCB functionaries Training on SHG-bank linkage SGSY training Training on SHG-bank linkage SHG-concept Training to PACSs SHG-concept for anganwadi workers Exposure visit to MCD/SAHARDA staff Trainers training programme on SHGs to NGO/PACSs/MCD staff Capacity-building training to assistant supervisors SHG-concept training to urban Cooperative Bank SHG-bank linkage programme sponsored by other agencies

No. of Participants Programme Who Attended Sponsored the Programmes by

3,962

1,12,459

NABARD

48 16

762 815

158 42 24 40 2

4,108 812 466 1,210 10

8

148

–do–

2

50

–do–

1

15

–do–

55

1,653

NABARD Government departments –do– DCCB –do– –do– –do–

NGOs/Other DCCBs/ RRBs Other institutions

Source: Unpublished Reports of SAHARDA, Bidan DCCB.

PROVIDING CAPACITY-BUILDING TO GROUPS PROMOTED GOVERNMENT UNDER STREESHAKTI PROGRAMME

BY

The bank had conducted a quick study of Streeshakti groups during the year 2001 and presented the study findings to the district collector. The study observed a need for improvement in the quality of SHGs formed by anganwadi workers, who were not aware of the SHG concept. It was agreed to train all the functionaries of the Department of Women and Child Development, involved in the implementation of the Streeshakti Programme. SAHARDA not only trained the functionaries, including anganwadi workers, but also imparted training to SHGs promoted by them. This proactive step of the bank ensured formation of quality groups promoted under Streeshakti Programme.

374

B.B. Mohanty

TRAINING

TO

SHG MEMBERS

A large number of training programmes for SHG members were supported by NABARD. NABARD has so far supported 3,962 one-day training programmes for SHG members through SAHARDA/NGOs involving grant assistance of Rs 32 lakh. This has facilitated as increase in bank loans to SHGs from Rs 2 crore as on 31 March 2000 to Rs 35 crore (cumulative) as on 30 September 2005.

ESTABLISHMENT

OF

SELF EMPLOYMENT TRAINING INSTITUTE

The DCCB felt that SHGs which were more than three years old needed skill upgradation as also new skills for taking up enterprises. In 2002, therefore, it decided to set up Shakara Rural Development and Self Employment Training Institute (SHARSETI) in consultation with RUDSETI, Ujire.

SUPPORT OF NABARD FOR PROMOTION AND CAPACITY-BUILDING OF SHGs SUPPORT

FOR

PROMOTION

AND

LINKAGE

OF

SHGS

Grant assistance under the SHPI scheme was sanctioned by NABARD to Bidar DCCB twice. The first grant was of Rs 5.54 lakh for setting up of a SHG cell, which facilitated the bank in promotion of groups. After satisfactory completion of the first project, a second grant of Rs 4.20 was sanctioned to the DCCB for promotion and linkage of SHGs.

SUPPORT

FOR

SHG TRAINING

NABARD provided Rs 10 lakh each for three years for training and capacity-building of SHGs and DCCB staff through SAHARDA. This is in addition to various capacity-building initiatives like district-level sensitization meets and taluka-level meets organized by Assistant General Manager (AGM), District Development (DD), popularly known as District Development Manager (DDM) of NABARD.


LEADERSHIP

AND

375

COORDINATION

NABARD provided guidance from time to time for SHG-BLP through its AGM (DD). He is a member in the project implementation and monitoring committee of the DCCB and the district-level Streeshakti Committee. Operational problems in credit linkage are taken up by DDM with concerned banks/officials. DDM also interacts with members of SHGs during the visits to SHG/training programmes/branch visits and other meetings.

REFINANCE SUPPORT Refinance support up to 100 per cent from NABARD facilitated increase in bank loans provided to SHGs. Total refinance support for the district under SHG so far amounted to Rs 3,303 lakh. NABARD’s refinance coupled with multi-pronged promotional support for SHG-bank linkage and farmers’ clubs have facilitated excellent performance of the district under both the programmes.

SUPPORT FOR ENTREPRENEURSHIP DEVELOPMENT TO SHARSETI NABARD had so far sponsored 11 REDPs/Skill Upgradation programmes envisaging grant assistance of Rs 4.86 lakh to SHARSETI.

PROGRESS IN SHG FORMATION AND LINKAGE BY BIDAR DCCB AND PACSs Since inception, up to 31 March 2005, a total of 9,235 groups were formed in the districts by different SHPIs. Humnabad taluka of Bidar district has already been declared as an ‘SHG taluka’ by the bank, as all eligible families have been covered under the SHG-bank linkage programme. The bank’s next plan is to declare Bidar an SHG district by covering all the eligible families in the district under the programme. The progress of SHG promotion and financing by the bank and PACSs for the year 2000–01 to 2004–05 is given in Table 20.5.

376

B.B. Mohanty TABLE 20.5 Progress of SHG Promotion under the Bidar DCCB–PACS Model Year

Sl. No. 1 2 3 4

5

Particulars Cumulative no. of SHGs promoted in the district Of the above, SHGs promoted by DCCB and PACSs Total no. of SHGs financed by all banks in the district Cumulative no. of SHGs credit-linked by DCCB Of 4 (i) Own SHG (ii) SHGs promoted by NGO (iii) SHGs under Streeshakti Cumulative amount of loan disbursed annually by Bidar DCCB (Rs lakh) Of 5 (i) Own SHGs (ii) SHGs promoted by NGO (iii) SHGs under Streeshakti

Up to 2000–01

2001–02

2002–03

2003–04

2004–05

3,055

5,005

6,520

8,339

9,235

1,591

1,866

2,224

3,052

3,679

2,252

3,117

5,174

6,639

7,956

1,488

3,117

4,822

6,002

7,187

600 888 –

1,123 1,345 649

1,964 1,890 1,168

2,658 1,965 1,379

3,207 2,074 1,906

412.45

786.78

1,297.74

1,866.21

2,638.15

189.12 223.33 –

312.11 404.57 70.10

461.27 655.77 180.66

726.42 834.21 05.58

1,067.10 1,073.42 497.63

Source: Internal Progress Reports of Bidan DCCB.

It would be observed that DCCB and PACSs had 39.83 per cent share in SHG promotion at the end of 2004–05 while in financing SHGs its share was as high as 90.33 per cent. The bank has been receiving the state-level award from NABARD for the SHG-bank linkage programme consecutively for the last three years. During 2004–05, it got the award for the best SHG Nodal Officer also from NABARD.

FUTURE PLANS The bank envisages handing over the programme to PACSs in due course. The Bidar district has 600 villages comprising 2,80,000 families. The bank proposes to bring all the poor families under the banking fold. Towards this end, it has drawn a plan for the period up to March 2008. The plan envisages the following: (i) each village should have at least three SHGs; (ii) every PACS should have at least 40 SHGs; and (iii) all SHG data should be computerized.


377

A format for house-to-house survey of all the families in the area of the PACSs has been finalized and given to the secretaries of the PACSs. They have been asked to complete the survey and identify poor families which were not yet covered under SHG. Each PACS is asked to provide information on how many SHGs need to be formed in each village to have 100 per cent coverage of families. Branch-level workshops are also being conducted to discuss these details with the branches and PACSs to firm up targets.

IMPACT ON BUSINESS DEVELOPMENT IN THE BANK AND PACSs The business of the bank and the share of SHG business in the overall business in the last five years is given in Table 20.6. The share of SHGs in outstanding deposits and advances was negligible in 2000–01. But during the last four years, it has been increasing. The encouraging factor is that the SHG business, even though small, has TABLE 20.6 Bidar DCCB—Business Progress in Last Five Years and Share of SHGs in its Business (Rs lakh) Item

2000–01

Deposits outstanding at the end of the year 21,183.13 Of which SHGs’ deposits outstanding 0.65 Advances outstanding 27,121.06 Of which advances to SHGs 205.86 Overall recovery rate 84% Recovery rate under SHG 99% Profit 303.02 Profit/loss on account of SHGs 1.29

2001–02

2002–03

2003–04

2004–05

24,904.02

26,745.50

22,893.05

22,450.53

0.85

184.00

206.10

238.85

34,243.38

43,002.74

43,596.76

42,581.00

358.50

540.00

713.67

954.03

89%

90%

62%

70%

98% 328.00

98% 367.43

98% 336.25

98% 216.70

4.97

12.78

3.36

18.04

Source: Various Issues of Bidan DCCB’s Annual Reports.

378

B.B. Mohanty

been generating good income for the bank. In a short span, the SHGbank linkage programme enabled it to build better rapport with its own clients, improved its performance in deposit mobilization, lending and recovery of loans, and thereby decisively proving that financing SHGs can be adopted as a strategic business proposition by banks. The recovery under SHGs continued to remain at 98 per cent. However, its impact on the overall recovery in the bank was not visible.

IMPACT

ON

BUSINESS DEVELOPMENT

IN

PACSS

Operations of four PACSs, at Dhannur, Koutha, Kolar (K) and Andura were studied. Secretaries of all PACSs indicated that overall business of the PACSs had improved with the SHG-bank linkage programme. TABLE 20.7 Performance of Four PACSs (Rs lakh) Particulars Total number of SHGs in the area of operation No. of SHGs having SB accounts with the PACSs SHG deposits outstanding as on 31 March 2005 No. of SHGs credit linked through PACSs Amount of SHG-loan outstanding Total deposits outstanding Total advances outstanding

PACS, Dhannur

PACS, Koutha

120 102 6.02 96 20.72 28.93 157.67

93 72 3.22 65 9.36 24.11 206.33

PACS, PACS, Kolar Andura 38 29 1.7 22 6.9 14.22 90.09

105 29 1.48 22 13.55 22.08 429.74

Source: An In-house Study Report Conducted by Bidan DCCB.

As mentioned earlier, the loaning to SHGs was done by the PACSs as an agency business for which the PACSs earned a commission of 1 per cent on SHG loans. The deposits outstanding in the SHG accounts were low cost resources available to PACSs, which they could effectively utilize for business development yielding interest margin of about 10 per cent. An in-house study conducted by the bank in 2002 had reported the following indirect impact on the business of PACSs:

The growth in total savings of PACSs from 1998 to 2002 was higher than that of the DCCB branches. SHG savings constitute more than 90 per cent of total savings bank deposits of PACSs. The SHG members’ visit to PACSs regularly every week to deposit their savings necessitated improvement in the customer service


379

by PACSs. PACSs started working like banks and other villagers too have started showing confidence to have deposits with PACS; In the post SHG-period, the number of profit-making PACSs increased from 91 to 131; The overall recovery percentage in PACSs improved from 72 per cent to 95 per cent.

IMPACT EVALUATION STUDIES AND THEIR FINDINGS While the bank had made substantial investment in SHG promotion, training and credit linkage, questions were being raised in different quarters about the viability of such investment. The bank, therefore, decided to undertake a few impact studies by engaging external consultants. Following studies have examined the different aspects of SHG-bank linkage initiatives of the bank:

Sample studies conducted by SAHARDA (2001). An impact assessment study by Vijay Kulkarni (2002). Commercial aspects of SHG-bank linkage—a study commissioned by NABARD which covered DCCB, Bidar (2002). An in-house study on impact on SHG movement in Bidar district (2003). Rating of the bank by EDA rural systems, Gurgaon, New Delhi (2003). An impact assessment study by Professor Malcom Harper (2003). Sample studies conducted by NABARD (2004).

The major findings of impact evaluation studies are as follows:

Indirect benefits of SHG banking in the district are pronounced: 38 per cent of the families in the district and 72 per cent of poor families are SHG members with access to financial services. SHG banking is considered the main factor in the turnaround of primary cooperatives from sleepy, loss-making entities, opening for a couple of hours per week, into increasing active membersocieties, with frequent opening hours. At the same time, it has added vibrancy to the bank branches. DCCB has provided data for estimating indirect benefits, comparing data for 1998 and

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B.B. Mohanty

2002, but attribution is virtually impossible, except in the case of passbook savings in PACSs, where the SHG portion has amounted to 93 per cent in 2002. Total deposits in 171 PACSs increased from Rs 266 lakh to Rs 1,367 lakh (414 per cent). SHG deposits in the form of passbook savings in PACSs increased from Rs 3 lakh to Rs 174 lakh. The recovery rate of the branches has increased from 70 per cent to 89 per cent. The recovery rate of the PACSs, where the impact of SHG members is stronger, has increased from 72 per cent to 95 per cent. The number of profit-making PACSs has increased from 93 to 131. Microfinance has helped households. This is reflected in higher acquisition of productive assets by member households, in comparison with non-members. The majority (86 per cent) of members’ children in the age group 6–15 years are going to school, but the proportion drops to just over one third at higher secondary and college levels.

EMPOWERMENT

OF

WOMEN

All studies have confirmed that SHGs had made impact on the village community. Out of 9,235 SHGs in the district, 8,925 SHGs are of women. The regular savings and the availability of credit have provided the muchneeded financial empowerment to the poor women. Attending regular meetings, constant interaction with bank/PACSs functionaries and NGOs, visit by outsiders and attending training programmes have helped in the empowerment of women.

SOCIAL IMPACT

During 1997–98, the percentage of SHG members who were able to sign was about 18 per cent. Now the percentage has increased to 70 per cent. All the poor families are now sending their children to schools and the percentage of school dropouts has come down. Women have come out of the four walls of their houses and started participating in training programmes and other type of interactions and as a result, their awareness, self-confidence, entrepreneurship skills and discipline have improved.


381

Large numbers of SHG women have started to become involved in social and community development activities. Awareness against social evils like dowry, child marriage and child labour is gradually increasing in the villages.

IMPACT

ON

OTHER DCCBS

IN THE

STATE

AND THE

COUNTRY

The Bidar model has shown the way of banking with SHGs to other DCCBs in the state and in the country. More than 100 DCCBs have made exposure visits to SAHARDA to study and understand the Bidar model. In Karnataka, 17 DCCBs have adopted the aspects of the Bidar model. Out of 1,89,217 cumulative SHGs linked in the state of Karnataka, SHGs, constituting 54,979 (29.05 per cent) of the total have been linked with cooperative banks as on 26 December 2005. Hassan DCCB is next to Bidar DCCB in SHG-bank linkage programme. The entire cooperative sector has been inspired by the Bidar initiative. The Hoogly DCCB, after its exposure to Bidar, has redesigned its programme on the lines of Bidar DCCB. The Chandrapur DCCB in Maharashtra made two visits to Bidar and based on what it learnt, evolved its own model of SHG-bank linkage involving anganwadi workers on a large scale.

COST-EFFECTIVENESS OF BIDAR MODEL Table 20.8 gives the financial cost and benefit of the DCCB in the last five years in respect of its SHG-portfolio. For the DCCB, the promotional cost has been high. During the last three years, NABARD had given support to the tune of Rs 10 lakh each year for SHG training. Except in 2003–04, the bank could break even in its SHG business. However, this calculation has not taken into account the depreciation on the assets created in SAHARDA or the income and expenditure of this set-up. The bank was able to make surplus under the portfolio because NABARD continued to support the capacity-building initiatives, thereby reducing the bank’s financial burden. At the PACS level, the cost of assistant supervisors was shared by the DCCB and PACSs. In the four PACSs visited for preparation of this case study, it was observed that the 1 per cent commission received on managing SHG loans was barely sufficient to meet the PACSs’ share towards honorarium of assistant supervisors. However, as mentioned earlier, low cost deposits of SHGs, on average about Rs 2 lakh in each PACS, was

382

B.B. Mohanty TABLE 20.8 Cost and Benefit of DCCB (Rs lakh)

Item 1 2.1

2.2

2.3 2.4 2.5 3 4

Interest income from loans to SHGs Expenditure towards staff (of which cost towards Assistant Supervisors) Expenditure towards training at all levels (including NABARDsponsored training programmes) Expenditure towards resources (Interest on refinance) Other expenditure (interest share paid to PACS) Total expenditure Surplus/deficit on account of SHG business Grant received from NABARD for SHG-training

2000–01

2001–02

2002–03

2003–04

2004–05

11.90

24.16

65.83

57.06

67.78

6.38

16.13 (4.67)

15.77 (2.74)

12.70 (4.10)

13.88 (7.19)

2.86

0.18

10.60

10.70

10.19

0.27

0.78

32.78

36.05

29.37

1.10 10.61

2.10 19.19

3.90 63.05

4.25 63.70

6.30 59.74

1.29

4.97

2.78

–6.64

8.04

–

–

10.00

10.00

10.00

Source: Compiled from Various Records of Bidan DCCB.

utilized for the loan business of the PACSs, which generated a minimum margin of 10 per cent. Once the PACSs undertake loaning to SHGs by themselves and avail refinance from DCCB at about 7–8 per cent rate of interest, their margin will be better and they will be able to meet their SHG-related cost fully from interest income from SHGs.

REPLICABILITY OF THE MODEL The following aspects of the Bidar DCCB-PACS model can be replicated in other districts:

Sensitization of board members by giving them exposure to SHGs promoted by reputed NGOs/other agencies. Suitable changes in the organizational set-up at head office, creation of a microcredit division at HO and taluka-level office of DCCB to enable special focus on microfinance through SHGs.


383

Corporate-level policy decision on promotion and financing SHGs directly and by involving PACSs. Using the services of experienced personnel from NGOs for initial promotional activities like organizing SHGs, training them. The support provided through the assistant supervisors attached to PACSs, selected and appointed by DCCB, initially on a costsharing basis. Focus on constant training at all levels. Treating SHG-BLP as a movement beyond politics/vested interests.

SUMMARY The strategy adopted by the Bidar DCCB in reaching out to all the poor in the district and rejuvenating the PACSs by adopting the SHG concept is summarized as follows:

The Bidar DCCB has a visionary leadership, which has taken SHG-bank linkage programme as a corporate strategy to cover all poor families in the district. The board of the bank gave all out support to the CEO and other staff, advocated the strategy with a lot of zeal but did not interfere in the operationalization. The bank had an integrated approach on aspects like formation, training, linkage with banks, capacity-building of staff and PACSs, members of SHGs and NGOs and entrepreneurship development. It took the leadership role in the district by assuming the role of a nodal agency by roping in resources and guidance from NABARD and networking with Lead Bank, ZP, NGOs, district administration and other government departments. It gave more emphasis on capacity-building of its own staff and that of the PACSs and all partners, set up a separate microcredit division (MCD) and separate training establishment. Its organizational set-up, which included MCD at the HO and taluka level and the assistant supervisor at the PACS level exclusively for SHG-related work and involvement of functionaries of reputed NGO in the initial stages was an administrative innovation. The strategy gave focus on women and their economic and social empowerment. Under the model, once the groups were organized

384

B.B. Mohanty

and trained, they were encouraged to learn by themselves, have their own experiences and develop faith in themselves. Its training establishment, SAHARDA, has provided exposure training to more than 100 DCCBs. The bank could evolve the programme into a movement, credit link more than 7,000 SHGs and show the way to other cooperative banks in the country that the cooperatives too can take leadership in providing credit to the ultra poor. As a result, the functioning of DCCB, its branches and the PACSs has improved. The savings habit is cultivated. The accumulated savings through SHGs reached a staggering sum of Rs 20 crore. Customer service and efficiency has improved. There has been transformation in attitudes and behaviour of the bank and PACSs staff. PACSs have been revitalized and started making profits. Recovery position has improved. There has been increase in lowcost deposits. The promotional cost incurred by the DCCB was very high. However, the support for training and capacity building from NABARD has reduced the financial burden of the DCCB to a great extent. Over a short period of seven years, PACSs, branches and DCCBs have been accepted by the rural people, especially women, as their own financial institutions. The SHG movement in Bidar district has led to socio-economic development of the district. Financial institutions have started showing concern for the poor. The attitude of the administrative machinery is becoming pro-development. People’s concern for productivity and quality is increasing. Work culture in the bank has improved. Village level institutions and functionaries have become active. Increased social awareness has been created.

CONCLUSION The model has proved that cooperatives can effectively include the poor in their business and development activities. It has also proved that credit can be provided to the poor not as a charity but on commercial lines. It has shown that generating demand for banking through SHGs can spur not only economic but also social empowerment in rural areas. At present, the PACSs’ role is that of an agent of DCCB as far as financing of SHGs is concerned. Even this has helped the transformation of the PACSs. When


385

the programme is finally handed over to the PACS as envisaged by the DCCB, the PACS would become stronger. The model has inspired a number of other cooperatives in the state and in the country. Its replicability, with modifications suiting the local conditions, has been proved and it can be the best way to rejuvenate the weak PACS in the country.

REFERENCES Kulkarni, Vijay. ‘Study of Primary Agricultural Co-operative Societies (PACS) in Relation to SHG Work—An Impact Study’. Kurde, B.S. and M.S. Rao. ‘SHG Movement in Bidar District—Study of Impact and Benefit of SHG-Bank Linkage by PACS’. Saharda Rural Development Academy. ‘SHG-Bank Linkage—Bidar DCCB Shows the Way’. Bidar: SAHARDA. Seibel, Hans Dieter and Harishkumar R. Dave. ‘Commercial Aspects of SHG-Bank Linkage Programme in India’. Mumbai: NABARD.

21 Chandrapur DCCB-Anganwadi Model: A Case Study S. SANTHANAM

D

uring the initial phase (1992–98) of the self help group (SHG)bank linkage programme, NGOs were mainly used as self help promoting institutions (SHPIs). With increased awareness among banks of the advantages of credit linking SHGs, the former looked for availability of sufficient number of SHGs in their service areas. Hence, availability of NGOs having experience in microfinance in all rural areas of the country became critical for increasing the stock of SHGs and making them available to the banks for financing operations. However, it was found that there were a number of rural areas where such NGOs were not available to help the banks. Therefore, during the second phase of SHG-bank linkage programme, NABARD encouraged banks, particularly RRBs and cooperative banks, to take up the role of SHPIs. It also encouraged banks to innovate in promotion of SHGs using other modes such as farmers’ clubs (FCs) and others. One such innovation was using anganwadi workers (AWs) as promoters of SHGs by the Chandrapur District Central Cooperative Bank (CDCCB) Ltd in Maharashtra. In Chandrapur district, over the last 5–6 years, the SHG linkage programme has picked up momentum and is being implemented with greater vigour. This is also the first district in Maharashtra to have utilized the services of AW. Chandrapur District Central Cooperative Bank is a profit-making bank established as a society under the Maharashtra Cooperative Societies Act, with 72 branches, seven extension counters, 10 pay offices and

Chandrapur DCCB

387

around 600 dedicated staff. The bank has bagged the ‘Best Performance Award’ for SHG Linkage Programme from NABARD for the last three years. Chandrapur district is in south east of Maharashtra with a population of 2.07 million and its economy is predominantly agriculture-based. It has a banking network with over 220 branches comprising commercial banks, one regional rural bank and one cooperative bank.

RATIONALE FOR USING ANGANWADI WORKERS/ANGANWADI SEVIKAS Three major factors in Chandrapur district enabled the CDCCB to use the services of AWs in promotion of SHG-bank linkage programme. Anganwadis are rural child care centres set up under the Intensive Child Development Scheme (ICDS) of GoI. By and large, each anganwadi is managed by one AW and an assistant. AWs are women workers providing nutritional and health care, pre and post natal services to rural women, running of balwadis (crèche), etc. They work under the overall management of the Development of Women and Child Development (DWCD) and Zila Parishad (ZP) in a district. The only government functionary who is present in practically every village of the country is the AW, also called anganwadi sevika. AWs are women residing locally in villages. They are the grassroots workers who perform myriad tasks. Being locally based, they have unqualified acceptance amongst the villagers. Chandrapur district has around 2,000 anganwadis and about 4,000 AWs and assistants (about 2,000 AWs and the same number of assistants). The AWs are working under the overall management of the ZP. This was the first major factor. The driving force behind the successful implementation of SHG-bank linkage programme in Chandrapur district was Babasaheb Wasade, chairman of CDCCB. His wife Vaisali Wasade was the chairperson of the DWCD, Chandrapur, who later went on to become the chairperson of the ZP, Chandrapur district. Her presence in the ZP greatly helped the bank in using the services of AWs without much bureaucratic interference. As SHG-bank linkage programme had demonstrated the business potential of targeting the rural poor women in other parts of the country particularly in the southern states, he found a big business opportunity for the bank in increasing its outreach to the rural areas through SHGs. So, he was looking for suitable SHPIs to help in increasing the stock of SHGs in the district. This was the second major factor.

388

S. Santhanam

Though the IFAD-supported Maharashtra Rural Credit Project (MRCP)1 had included Chandrapur district in its first phase of the project, it did not include CDCCB as one of the banks for implementing it. Under MRCP, the Village Development Councils (VDCs) had worked in collaboration with Panchayat Raj Institutions (PRIs). It had also recognized Village Development Agencies (VDAs) as equivalent of the Gram Sabhas.2 This was the third major factor. Taking a cue from this approach the chairman, CDCCB, found a competitive advantage3 over other banks and great potential in using the services of AWs for promoting SHGs. The chairman of the bank specifically mentions, ‘CDCCB was the only bank to deviate from the trodden path and align with the DWCD, ZP, Chandrapur, in an effort to reach out to the smallest pocket of rural India, thereby widening the area of operations of the bank’.

SMALL BEGINNING AND STEADY PROGRESS The SHG-bank linkage programme was first introduced in the CDCCB in December 2001. In the last four plus years (2001–05 end-October), the bank has credit-linked 7,018 SHGs in the district. It has a stock of over 12,200 SHGs (SHGs having SB accounts with the bank) and is confident of linking at least 5,000 SHGs during the current year, that is, 2005–06. Though exact data is not available with the bank about the number of SHGs promoted with the help of AWs, it was estimated that AWs were responsible for about 60 per cent of the SHGs promoted and creditlinked with the bank. Year-wise progress in promotion and credit linkage of SHGs by the CDCCB is given in Table 21.1. 1 The MRCP aimed to supplement the efforts of the Government of Maharashtra and establish a new strategy for rural poverty alleviation in the project villages through (a) improving financial services to the rural poor; (b) making a large majority of the rural poor bankable clients; and (c) promoting the savings habit by pooling small amounts saved through facilitation of SHGs. These pooled savings formed the basis of lending to the poor. 2 MRCP Supervision Report, Asia Office, 5 October 2001. 3 ‘Competitive advantage describes the way a firm can choose and implement a generic strategy to achieve and sustain cost and differentiation and the scope of a firm’s activities’ by Michael Porter in his book Competitive Advantage.

Chandrapur DCCB

389

TABLE 21.1 Progress in SHG Promotion and Linkage No. of SHGs Promoted During the Year

Year 2001–02 2002–03 2003–04 2004–05 2005–06 (October)

815 2,201 5,359 5,721 1,159

Cumulative 815 3,016 8,375 11,080 12,239

No. of SHGs Credit-Linked During the Year 72 365 1,705 3,367 1,509

Cumulative

Growth %

72 437 2,142 5,509 7,018

– 507 467 197 –

CDCCB: LEARNING FROM OTHERS Initially, the management of CDCCB had certain apprehensions about financing SHGs. However, after election of the new body of the management under the leadership of the present chairman, the bank looked for new opportunities for increasing its business in a cost-effective way. The chairman and some of the directors visited various places in other states where SHGs have picked up momentum, especially the Bidar DCCB and RUDSETIs in Karnataka to study the SHG linkage programme. Encouraged by the concept as a viable business model, the DCCB took a bold step towards financing SHGs in a systematic way.

STRATEGY

AND

APPROACH

The chairman, CDCCB convinced his board first about the advantages of taking up the SHG-bank linkage programme and the use of AWs for the purpose (Board Resolution No. 18 of 16 May 2002). On the suggestion of the District Development Manager (DDM) of NABARD4 in Chandrapur, an SHG was set up cell at the Head Office to monitor the progress in implementation and also provide support to AWs and others. In developing suitable strategies for SHG-bank linkage programme, the bank decided to involve its staff and provide training to them. On 7 May 2002, the bank issued a circular (No. 1077/202-03) to all their branches to organize meetings using the services of AWs for creating awareness about SHGs. This was followed by another circular on 11 June 2002 (No. 1764/200203) fixing a plan of achieving linkage of 10,000 SHGs by 2005. Again, 4 ‘National Bank for Agriculture and Rural Development (NABARD) is the only Apex Development Bank in India with a mandate for integrated rural development in the country.

390

S. Santhanam

the bank has reiterated its instructions in using the services of AWs for promotion of SHGs by the bank branches. Accordingly, during the initial stages, it trained its staff at the branches and also head office level through a series of training programmes. What is unique about the SHGbank linkage programme of DCCB was its holistic approach towards development in the district and the involvement of various partners in the plan. In short, it can be said that the conscious decision of the bank to involve the AWs and the staff of the bank in the entire process of SHG linkage has paid off over time as a viable banking strategy in a resourcepoor district. Broadly, it has three components:

Mission mode approach of the chairman. Recognizing the need to create awareness and putting in place suitable systems to take care of training, capacity-building. Specific action plan to implement the following strategies: (a) to strive towards the empowerment of the uneducated illiterate rural women; (b) to tap the immense business potential of SHGs through microfinance initiatives within the purview of SHG concept; and (c) Organizing Mahila Melawa and unique mass communication programmes called Sampark Abhiyan (see Box).

Launching Sampark Abhiyan One of the important milestone strategies of the bank under the SHG programme was the decision of the Board to start Awareness Campaign during the month of August 2003. Accordingly, the DCCB launched a Sampark Abhiyan from 1 to 30 August 2003 involving all the staff, PAC secretaries and anganwadi sevikas. Sampark Abhiyan is a direct contact programme with AWs and the rural masses about formation of SHGs. For this purpose, the bank has two vans which carry messages on SHGs. Every morning, a few experienced bank employees and AWs would go to the identified villages and propagate the SHG philosophy among rural women. With the result that over 2,200 SHGs were formed during that month alone. This strategy is still being continued with added inputs keeping in view the overall objective of linking 10,000 SHGs with the bank.

Chandrapur DCCB

ACTION PLAN

FOR

391

OPERATIONALIZING STRATEGIES

(i) It set up a microcredit cell with a set of staff to oversee its operations and provide guidance to the programme. (ii) It took series of administrative decisions for associating AWs and the staff of the bank in the programme. For this, it issued detailed circular instructions to its branches. (iii) It decided to grant cash credit limits to SHGs instead of term loans. Branch managers were given adequate powers to sanction loans to SHGs. (iv) Model rating norms for SHGs as devised by NABARD were adopted for use of branch managers. (v) A set of standard books of accounts devised by the bank was supplied free of cost to the SHGs promoted by AWs and others and linked with the bank.

SHG FORMATION—ROLE

OF

ANGANWADI WORKERS

AWs have played a vital role in mobilizing women and forming groups. They have helped in bridging the gap between government agencies and the bank in providing various financial services to the rural women through formation of SHGs. Under the ICDS, AWs were already trained in organizing groups of women in a cluster of villages. Under ICDS, the Indira Mahila Yojana was in operation in two blocks of the district— Bradrawati and Chandrapur—where AWs were involved in group formation and other related aspects. This skill of AWs was tapped by CDCCB in promotion of SHGs. The bank put a team comprising its branch staff and AWs and provided training to them in various aspects leading to the promotion and linkage of SHGs. NABARD, Maharashtra RO, Pune through its DDM, provided the needed technical and financial support in organizing some of these training programmes. During their regular visits to the villages, the AWs and the staff of CDCCB would convince rural women about the advantages of savings and forming SHGs for the purpose. Initially, it was difficult to make rural women accept the concept of savings by the poor. Gradually, they understood the advantages of savings and started forming groups. The AWs also helped the rural women by attending SHG meetings and guided them in various aspects of group formation, group dynamics and maintenance of books of accounts. Their regular visits to the houses of the rural women

392

S. Santhanam

and discussions with the women greatly accelerated the pace of implementation of the programme in the district. The chairman, CDCCB directly monitored and guided the staff at various levels in forming and linking SHGs with nearby branches. His role as innovator, driving force and monitoring progress has been exemplary and deserves specific mention.

WHAT

IS THE

MOTIVATION

FOR

AWS?

AWs are not government servants. They are attached to the ZP and paid an honorarium for their services. Each AW receives an honorarium of Rs 1,500 per month and each AW assistant receives Rs 900 per month from the DWCD, ZP to which they are attached. Every year they are paid an additional Rs 500 as incentive during the festival period. However, the payment was always late. To mitigate this difficulty, the bank succeeded in getting the honoraria amount credited to the bank and ensured payment of the same to the concerned AW. In addition, it also sanctioned an overdraft facility of Rs 10,000 to each AW to meet contingency expenditure. However, AWs have not utilized this facility. As the AWs get the opportunity to form SHGs, it has helped them to provide other services to rural woman. A brief outline of a success story of one AW is given in Box that follows.

Anganwadi Worker—One Success Story Sandhya Mahendra Maiaskar, an anganwadi worker, studied upto IX standard, is working since 15 years in Kothari village. She is hard-working and participates in various programmes for motivating rural women to come forward to form SHGs. She has helped in formation of 25 SHGs which opened their accounts with the bank. She motivated them to avail loan facility from the bank. During the initial period, she faced several problems. While some men from SHG households gave good encouragement and support, in a number of other households the men objected to their womenfolk becoming members of SHGs. She tackled such issues effectively by pursuing the head of the family and envisaged that the women members formed SHGs with her help. The SHGs had repaid their loans to the bank well before the stipulated time in a number of cases. So drastic was the change that men folk in the rural households in that village are now willing to organize themselves into SHGs.

Chandrapur DCCB

WHAT

ARE THE

393

CONSTRAINTS?

Though the strategy of using AWs has paid rich dividends for the bank by way of large number of rural women clients through SHGs, it has also certain constraints:

The target approach being adopted by the CDCCB has increased the responsibility of AWs without any adequate monetary compensation from the bank. However, the AWs are trying to help in giving their best in the efforts of the bank in increasing its outreach through SHGs. As a corollary to the above, there is no accountability for the AWs in so far as quality of SHGs formed or their monitoring, as the responsibility of AWs ceased once the loan is disbursed by bank to the SHGs.

CONCLUSION The success of microfinance in Chandrapur district can be attributed primarily to the social intermediation carried out by NGOs/AWs. Without this, the phenomenal repayment rates reported today under SHGs would not have been possible. In other words, the poor require the support of those whom they can trust. They require support at least during the initial stages of development in order to take crucial decisions like mobilizing savings, taking loans from banks and others. Here, the services of the AWs have proved to be critical as they are local and recognized persons. Therefore, using AWs for promotion of SHGs has become a model for the CDCCB-ZP partnership in development. This model has aptly demonstrated that AWs have the needed skills in organizing rural women into groups and nurture them to function as SHGs, provided the AWs are given the right type of motivation. Of course, there is need to provide suitable monetary incentives to the AWs by the CDCCB to make them feel committed in undertaking group formation in a more systematic way and also monitor such SHGs after they are credit-linked with the bank. This is a good experiment and with such experience and greater coordination, convergence with various functionaries involved in promotion of SHGs can be achieved. Besides, AWs should also be given incentives to make their functions more accountable and organized. These measures would make the efforts of the CDCCB under the SHG-bank linkage programme sustainable over time. This model also has potential for suitable adoption in other districts.

Part VI

INNOVATIONS FOR GROWTH

22 Role of Technology as a Growth Catalyst in the Microfinance Sector NIKET KAMDAR

AND

PUNEET GUPTA

T

here is a distinct lack of access to financial services in the country for the poor, with some estimates putting the overall number of un(der) banked population at over 500 million.1 While several initiatives have been taken to improve access to basic financial services, including nationalization of banks, branch licensing policy and creation of regional rural banks, the availability of such services to the poorer populations is far below the desired level. The gap for credit alone is estimated at over Rs 1,500 billion.2, 3 Financial services delivery for the poorer segments, in both urban and rural areas is often characterized by high cost of delivery, geographically distant banking infrastructure and poor communication facilities.4 High 1

Mor, Nachiket (2005). Vijay Mahajan, at Micro Finance India, A conference organized by CARE (12–14 April 2005, Hotel Ashok, New Delhi) quoted in the conference report. 3 Equivalent to $34 billion. 4 Banking with the poor is characterized by low value, high volume transactions. The cash handling costs are high. Moreover, in the absence of any documentary proof of income, the costs associated with estimating the repayment capabilities could be extremely expensive, yet highly inaccurate compounding the problem further (information asymmetry). In the event of default, the cost of enforcement may not justify any action from the source of finances. For a more detailed analysis please refer to Ananth, Bindu and Soju Annie George (2003), ‘Scaling up Micro Financial services: An Overview of Challenges and Opportunities.’ 2

398

Niket Kamdar and Puneet Gupta

illiteracy levels and lack of financial awareness further compounds operational challenges, creating in most cases a need for assisted banking. Technology, while having transformed banking for the urban mainstream, has left the rural as well as the urban micro customer untouched. The banking arena in India has undergone a substantial change over the last decade. The concept of banking has evolved, making the client a customer of the bank from the earlier mode of being a customer of a particular bank branch only. This change necessitates each branch making customer data available to all other channels on a real-time basis. Such changes, to a very large extent, have been facilitated by the use of technology-based solutions that in addition to providing data to other branches have made banking transactions possible at non branch locations as well. Internet-based banking; phone banking and ATMs are now important and accepted channels that have made ‘anywhere banking’ possible. Not only have these channels expanded beyond the limited outreach of the branch network, they have also extended similar and convenient services to clients at a fraction of the costs incurred earlier. FIGURE 22.1 Technology-based ‘Anywhere Banking’

Branches

Internet Banking

Phone Banking ATMs

Microfinance India Conference Report (12–14 April, 2005)

Role of Technology as a Growth Catalyst

399

Such high quality technology-aided channels, further assisted by franchisee networks, have bolstered the banking sector, as witnessed in the form of ubiquity of personal finance. This learning can be used to address the challenge of financial inclusion. Over the last few years, the possibility of creating and strengthening independent and complementary low-cost channels capable of addressing the constraints of traditional banking channels are being explored. In our view, such a role can be best played by a local intermediary that understands the context in which it operates, is close to the client, thereby reducing costs to address information asymmetry and is able to interface with the providers of various financial services at the backend to provide a comprehensive suite of financial products. Some such successful collaborations are on between several professionally managed local financial intermediaries (LFIs), community-based organizations, insurance companies and banks. The main models include the self help group (SHG)-bank linkage and the Microfinance Institution (MFI) intermediation models. In both these models, a local entity is responsible for the principal organization at the ground level.

REACHING FINANCE TO THE UN(DER) BANKED The emergence of such well-managed LFIs has given an impetus to the growth of the microfinance sector in India.5 In our view, these LFIs could become a single point to access various financial services and could serve as the primary channel. At the backend, such LFIs will be supported by several financial institutions (FIs), such as banks, insurance companies, and commodity exchanges. The support envisaged from such FIs includes provision of product development capabilities, assuming risk, providing risk capital and sharing of transaction capacities. This arrangement will allow diversification of risk and the benefits of a large portfolio (aggregation of portfolios served by several MFIs). The business model of LFIs centres on providing short-term unsecured credit to the un(der) banked customer segment, who have limited formal documentation for identification and do not provide verifiable proof

5 The MFI intermediation channel already accounts for over 25 per cent of the total microfinance portfolio and has been growing at a CAGR of 115 per cent for the last 5 years.

400


for assessment of repayment capacity. Therefore, most of the models use alternative approaches like group-based lending, using surrogates like savings, close monitoring through personal visits by the LFI agents for assessment, repayment and collection. Since doorstep banking models involve high frequency of field visits, the effort has been towards systematically reducing other costs to ensure a low cost distribution infrastructure.

MICROFINANCE SECTOR: AN INSIGHT The microfinance movement relies heavily on the social group concept (SHG or joint liability group), which is a widely prevalent example of a community construct. The basic operative principle of any communitylevel initiative rests on intricate social networking. The infinite number of interactions resulting out of the relationships encapsulates a huge amount of data on all aspects of human life. When data about predictable human behaviour patterns is recorded, the documented information is invaluable. The microfinance movement thrives on such an ordered information environment, making banking possible with apparently unbankable segments. Group-based models leverage on the information available within the group to assess risk and monitor repayment behaviour. This collaborative activity reduces the cost for the provider while it also solves the problem of information asymmetry and absence of documentation about the borrower. Though such intermediation models have been able to service the credit needs of the sub-prime sector, they have not been able to effectively respond to the demand for liability products6 which necessitate the existence of a local transaction point. With a very large rural bank branch presence, the basic framework for an efficient financial infrastructure exists, but these bank branches are often not easily accessible to the poor, due to the transportation costs involved, loss of wages in order to bank at normal working hours; and high costs incurred by the branch network to service these clients, which in most cases leads to unwillingness of the bank branches to service them.7 6 The term is being used with reference to the financial institutions. Therefore, liability products refer to products such as savings, insurance, etc. 7 On account of high costs to serve relative to the transaction value and attitude-related issues.


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GROWING PAINS Since a majority of the unbanked segments lie in inaccessible rural geographies, MFIs cannot afford to adopt the conventional branch-based philosophy to extend their services. Instead, to be effective, they employ the doorstep-banking approach that maximizes the time spent by each MFI resource interacting with the customer. An army of field agents become the literal feet-on-street and transmit information and funds between the customer and the MFI head office. Activities such as information storage, data analysis, decision-making and cash logistics are centralized to achieve better control. In effect, the MFI operates in a circle of influence with the head office as its centre and the range of the agent network forming the circumference. The chain of participants in this set-up includes the group (represented by a co-ordinator), the MFI agent, the MFI and the bank. For any transaction effected in the chain, each participant creates his/her own transaction record. Since the majority of transactions get initiated at the tail-end (group) of the chain, the information is handed up from the group to the bank via the layers of the agent and the MFI. Thus every single transaction in the chain translates into multiple recording and multiple data hand-offs. When an MFI starts expanding the size of its circle of influence beyond an optimum level (defined by its overall management capacity) with respect to its current processes and technology, its processes become vulnerable. The agent-led information pathways start encountering delays that give rise to information inconsistency. An effort to maintain the information latency adversely affects the efficiency of the doorstep model. Decentralization of information collection points by way of additional branches addresses the issue to some extent. However, as the core activities are centralized at the head office, the information still needs to be sent there. This poses a novel challenge of synchronizing information sets at these designated centres and at the branch level. The problem is further compounded by the multiple data hand-off strategy that in effect presents multiple opportunities for errors to creep in. The overall impact is felt in the decline in availability, consistency and quality of customer information. For a model that has information as the only tool to counter risk perception, such a breakdown of information systems proves debilitating. In most cases, such information is usually not used to its fullest potential and most MFIs end up using it primarily as a record of transactions.

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These challenges are further compounded when other financial products such as savings, insurance and hedging instruments are offered using this channel along with basic credit products. In such ‘liability’ products, an individual takes a risk on the financial system and it becomes all the more critical that information chain is not broken, or there are no undue delays that can lead to individuals being defrauded of their savings. Systems need to be put in place for facilitating delivery of these products that are presently not available. As businesses grow, it becomes imperative for them to be able to identify their core competence and distinguish ‘core’ and ‘non-core’ activities. This is also applicable to the microfinance sector, as it emerges from the domain of a developmental experiment to a mainstream commercially viable sector. We understand the microfinance sector as a combination of several channels where commercial banks and other, FIs are supported by efficient MFIs, credit franchisees and banking correspondents, ensuring that the customer is adequately serviced. At this juncture, it is critical to ensure that the various channels complement each other to provide holistic financial solutions. FIs bring capital, on-lending funds and risk-taking ability; the MFIs, the credit franchisees and the banking correspondents bring outreach capabilities, local information and low-cost transaction abilities. Technology becomes a major enabler to unleash the full potential of these multiple players in servicing this segment.8

A POTENTIAL ANSWER: TECHNOLOGY Cutting-edge technology has the disrepute of being considered as another upgraded computer system that can do a higher number of computations at a faster rate. Though this may be true at a very micro level, the widespread macro impact of technology is rarely understood. Technology in the context of the MFI sector could represent the end-to-end business solutions that are based on intelligent computing devices in various forms. The banking industry worldwide has seen unprecedented changes 8 The common fallacies committed in such a context are either relegating the non-core activities to a secondary status which deprives them of much-needed additional resources and also makes the business prone to repeated disruptions due to failure of support functions. Giving equal treatment to both the core and non-core activities ends up creating an all-is-core enterprise with heavy emphasis on insourcing everything. While growth may be achieved, it is at a rate that is far below the opportunity presented by the market.


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in delivery models that have been made possible by use of appropriate technology. Technology, as we talk of it today, can address the fundamental issue constraining the growth of the MFI sector, that is, customer information systems and management. Technology, in the setting of microfinance, could be applied at two levels. One is the central system, that is, the main computing platform for the multiple channels. The other is the field level, where most of the microfinance client-related transactions are carried out. The field technology helps in standardized information collection and its transmission to the central location. It also helps to reduce the time delay in sending the information and cuts down the need for repeated data entry for a single data point, thereby eliminating multiple hands-offs and opportunities for error. The field technology literally transforms the agent into a decentralized branch with an ability to perform head office functions, if so delegated. The central system provides an ability to handle huge amounts of disparate customer data from various sources and offers processing capability that could carry out analysis of the same. This reduces the turnaround time for all activities done centrally and makes the set-up more agile and responsive to change. The central system could cover both the assets and the liabilities.9 It could provide basic transaction capabilities that cater to all activities and processes through the lifecycle for each product. It could allow generation of customized MIS reports at any desired level of aggregation right down to the most granular level. With the customer being the central focus point, the system could also allow tracking and monitoring of a customer across multiple relationships. Such a system could support transactions through multiple channels such as the branch, the ATM, the Internet and the various field-level devices. The system would also allow operations to be carried out in offline mode from areas where direct connectivity is not readily available. Such aggregation of customer records provides a very rich source of data that allows for the development of new products. The field-level technology today comprises card-based solutions10 that work in sync with mobile devices such as personal digital assistants 9

From the standpoint of banks and other financial service providers. Though several card technologies are available, smart cards allow offline usage that enables them to work in locations that do not have connectivity, it also helps reducing connectivity costs as one does not need to be connected to the central server at all points of time. 10

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(PDAs), handheld computers, simputers and cell phones. Smart cards have a microprocessor-based chip with memory that holds unique customer identity in the form of a biometric thumbprint image.11 This obviates the need for online verification through a huge database and also does not require any PINs/passwords to be issued. The smart card also serves as an e-passbook that can hold information about balances and transactions done in any particular account.

SHARED SERVICES MODEL: A TECHNOLOGY OUTSOURCING APPROACH Outsourcing is an idea that has been in use right since the beginning of the manufacturing age as it moved towards mass production. The acceptance of the idea has been dictated by pure business logic. As businesses mature and enter the high growth phase of their lifecycle, the need to differentiate core from non-core becomes vital for survival. The more that businesses move away from their core activities, the stronger a need for that activity to be a separate business in itself. Before the mass production boom was ushered in by Henry Ford in the United States, manufacturing companies used to perform all activities that were required for their core business. Since there was no power utility to supply a reliable feed, the companies had their own power generation plant. As the power plants were located close to the coal mines and the manufacturing plants near the potential markets, the companies had to set up their own transmission network as well. The location of the manufacturing facility near the cities made it necessary for them to source the raw material from farflung interiors at high costs to prevent the production lines from running dry. This prompted many to invest in their own railroad network, along with rail cars, signalling systems and depots. As the demand for goods exploded, companies found it difficult to meet the market requirements with the inefficient behemoths they had turned into. Since performance of non-core activities was no longer a sustainable competitive advantage, the concept of those being a common utility took shape. Power generation utilities emerged, so also did power transmission and private railroad companies. When any activity does not remain a source of competitive advantage and is not a part of the 11 In other card technologies, this is managed by connecting to a central server to gather this information, instead of using the data store on the card itself.


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core business, it is time to see it as a commodity that should be sourced, on a utility basis. Technology with reference to microfinance is a similar non-core activity requiring a very heavy investment on the part of each MFI. Outsourcing technological solutions like the ones mentioned earlier on a utility basis could be a solution. The microfinance sector decidedly has a unique advantage over the larger banking institutions in that, currently, there are no large investments made in legacy systems. Riding on a technology utility will give each MFI access to state-of-the-art solutions at a fraction of the cost required to set up such a facility for its own use. This can also promote the creation and strengthening of channels for delivering microfinancial services—as in a capital deficient scenario, the heavy initial investment required for setting up a technology solution also acts as a significant deterrent for most organizations. Such an outsourced central system can be made available using customized software for the sector, world class data management and hosting facilities (data-centres) with best-in-class hardware, multiple redundancies and disaster recovery backup services. These facilities could be accessed over the Internet using various connectivity options.12 This model ensures that the cost of all facilities is shared across multiple users bringing in significant economies of scale. The technology utilities just serve as custodians of the data and transactions and do not have any other legal claim over it. The reliability of this model is amply justified considering that many successful companies employ this strategy. Rather than walking a long drawn evolutionary path, the field-level systems could leverage the learning of commercial banks in this space to come up with a low cost, efficient solution. Today, an urban middle class customer is inundated with multiple cards, each meant for no more than one specific application use. Each card issuing institution has a huge setup of technology, operations and helpdesk to support the single use card out in the market. Additionally, every time a fresh card is issued to the same customer, the same set of processes is repeated. These set of activities would be best suited to be provided as a utility for any institution to use. The field-level systems comprising the smart cards and the field devices can be easily modelled on the utility approach. In an alternate scenario, diverse financial products can be loaded on to a single smart card that can be issued by a utility company. This company 12 Some of the means include leased lines, broadband DSL or ISDN, or through VSATs, or even through wireless GSM/GPRS/CDMA.

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could also invest in setting up a network of transaction devices across the geography. Different entities, such as banks, other FIs and MFIs, can all own space on the card. Space on the card can also be used for other services such as delivering social security applications, health related services and livelihood support services. The transaction settlement and operations will be carried out by the utility and appropriate reports be fed into the host systems of the entity using the space on the smart card. This solution cuts through a lot of inefficiencies and complexity and provides a much cleaner environment for the MFIs to operate. The need for multiple cards, repeated documentation and proprietary infrastructure is replaced by a single sharable channel that operates on a utility basis.

AIDING FACILITATIVE INFRASTRUCTURE Technology can also play an important role in the creation of facilitative infrastructure that can propel overall growth of the microfinance sector. This will mainly be accomplished by the creation of mechanisms that allow sharing of information forming the very foundation for provision of all financial services, where documented sources of information are not available. The ability of being able to carry past repayment history can provide the un(der) banked sections an important substitute for collateral in accessing financial services.13 Similarly, it reduces the insistence of financial service providers on traditional verifiable collateral. Efficient technology systems can aid in the establishment of a unique identifier, a credit information bureau and assist in raising capital for the sector.

UNIQUE IDENTIFIER As seen in many developed countries, a unique identifier helps create a repository of customer information backed by authentic documentation. Availability of basic demographic data through a Unique ID opens up the 13 Credit bureaus help MFIs in verifying past credit histories and levels of indebtedness but also help the MFI client to be able to negotiate her/his credit history with other MFIs to access better service and also in geographies if she/he migrates where the said MFI is not operating.


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possibility of delivering multiple product offerings. It also acts as a unique tag to which all relevant information relating to an individual can be linked. The Unique ID can be used to track customer behaviour across multiple relationships making more customized service delivery possible. The smart cards, discussed previously in the note can act as Unique Identity cards.

CREDIT INFORMATION BUREAU The existence of a credit bureau helps convert repayment history to collateral which, in the absence of any physical collateral, is an enabler to access finance. Existence of credit bureaus can result in a significant decline in arrears of FIs.14 Financial histories of clients allow more efficient and cost efficient client screening processes. A credit bureau will also help in developing individual lending models.

HELPING ACCESS CAPITAL Access to individual client-level information will help make the microfinance assets transparent and make them available for verification and scrutiny. The existence of robust information systems will help to develop microfinance assets as a distinct asset class capable of being traded in the primary and secondary capital markets, allowing a large quantity of low cost funds to pour into the microfinance sector. Such information systems will also help attract private capital from individuals and venture capitalists who may want to invest in the sector but are currently unable to do so.

CONCLUSION The absence of information and a financial supply chain capable of addressing the challenge of ‘last mile outreach’ to service the diverse need of financial products for the un(der) banked is one of the principal challenges to achieve financial inclusion. Technology today provides the means to connect to this unbanked segment and weave them into the mainstream. 14 In the context of microfinance clients accessing multiple sources of credit and in the absence of information sharing among MFIs, credit bureau can play a significant role in improving repayment rates.

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REFERENCES Ananth, Bindu, Rupalee Ruchismita, Bastavee Barooah and Aparna Bhatnagar. 2004. ‘Blueprint for the Delivery of Comprehensive Financial Services to the Poor in India’. Available online at www.ICICIsocialinitiatives.org Banerjee, Abhijit, Shawn Cole and Esther Duflo. April 2003. Bank Financing in India. Massachusetts: MIT Department of Economics. Bhatt, Nitin and Y.S.P. Thorat. ‘India’s Regional Rural Banks: The Institutional Dimension of Reforms’, Journal of Microfinance, 3(1). Duggal, Bikram and Amit Singhal. March 2002. ‘Extending Banking to the Poor’. Available online at www.ICICIsocialinitiatives.org Jhunjhunwala, Ashok. 2000. ‘Towards Enabling India through Telecom and Internet Connections’. New Delhi: National Institute of Science Communications. Microfinance India. 2005. Conference proceedings. Mor, Nachiket. 19 March 2005. ‘Expanding Access to Financial Services—Where Do We Go From Here?’ Economic and Political Weekly, 40(12).

23 Leveraging Mutual Guarantees for Gaining Financial Access: Joint Liability Groups as Collateral Substitutes B.S. SURAN

T

he advent of reforms in the banking sector has ushered in significant structural changes over the past one decade. Indian banks have moved into an aggressive phase of competition and are now increasingly looking at products that are attuned to customer needs. These changes which we witness today are apparently more in the commercial banking sector and predominantly by the new generation private sector banks, that too tailored to the needs of elite and better-off segments of urban clients. However, changes in the product profile of the rural credit sector have remained at an ebb. NABARD’s efforts at initiating a pilot project on self help group (SHG)-bank linkage more than a decade back has enabled the banking system to enhance their outreach and build a quality credit portfolio with those segments of the rural population that were either not being banked or have remained on the fringes of a bank’s rural portfolio. The genuine off-balance sheet asset of the bank is its good quality clients. It is therefore important to appreciate the client’s needs and tailor banking products that are flexible and attractive enough to the clients, if one has to retain the good clients. The Reserve Bank in its monetary policy statements has also articulated the need for rural bankers to develop products and innovations in delivery mechanisms so as to effectively and efficiently reach the rural segments using unconventional

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approaches. However, the real constraining factor in enhancing outreach of credit has been the lack of traditional collaterals. Collateral is traditionally defined as an asset pledged to a lender until the borrower pays back the debt.1 The traditional collateral includes mortgage of land and guarantees. This elusive collateral has been the prime determinant for access to financial services, particularly credit. The lender often looks at collateral as an insurance against a multitude of adverse conditions. Therefore, collateral often serves as a comfort for the lender so that in case of default the lender has the right to seize the collateral for realizing the dues. However, the level of comfort largely depends on the nature of the asset, the extent of physical possession and its relation with the underlying debt claim.

DOES COLLATERALIZATION REALLY HELP? Indian banks have predictably sanctioned highly collateralized loans; clean loans were generally restricted to specific areas which were mandated loans under government-sponsored programmes or poverty alleviation programmes. Though this directed approach to lending has succeeded in altering credit allocations, specifically in commercial banks, its impact on viability and sustainability of rural banking left much to be desired. It was traditionally believed that high Non Performance Loans (NPL) were restricted to government-sponsored schemes and other mandated priority sectors (Table 23.1). It may be seen from the tabulation that mechanically attributing high risk to select sectors like government-sponsored programmes or priority sector lending may not be precise. In fact, high appraisal and monitoring costs of well-dispersed loans of different sizes, especially under the priority sector, have often compelled banks to reduce their efforts in loan monitoring and recovery. This has led to poor credit penetration, credit coverage as well as poor recoveries. This issue has been further compounded by low staffing of rural branches and large staff turnover. Thus excessive collaterization is often seen as a means to combating lending risk and overcoming deficiencies in the appraisal and monitoring systems. Indian banks are saddled with Rs 47,000 crore of NPL, a majority of which is affirmed to be fully collateralized. This only proves the point 1 ILO Publications (1996) Collateral, Collateral Law and Collateral Substitutes. ILO Enterprise and Cooperative Development Department—Enterprise Finance Publications.

Leveraging Mutual Guarantees for Gaining Financial Access

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TABLE 23.1 Priority Sector Loans (Rs crore) Priority Sector Year Ended 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

Total Advances

Gr. Advances

NPL (%)

Gr. Advances

NPL (%)

61,794 69,609 79,131 91,319 1,07,200 1,27,478 1,49,116 1,71,185 2,03,095 2,44,456 3,10,093

19,208 (31) 19,106 (27) 20,774 (26) 21,184 (23) 22,607 (21) 23,713 (18) 24,156 (16) 25,139 (14) 24,938 (12)

1,97,351 2,31,321 244,214 2,84,971 3,25,328 3,80,077 4,42,134 5,09,369 5,77,813 7,28,422 9,31,466

38,385 (19.4) 41,661 (18) 43,577 (17.8) 45,653 (16) 51,710 (15.9) 53,295 (14) 51,564 (11.6) 55,390 (10.9) 51,720 (9)

23,397 (12)

47,696

Source: Report on Trend and Progress of Banking in India (various volumes).

that collateralization per se does not help in realizing outstanding debt. This brings to the fore the importance of cost of collateralization, issues in enforcing collateral, as well as the legal and regulatory framework governing it. Despite this, Indian banks continue to take real assets as collaterals.

COST OF COLLATERALIZATION Lenders like banks normally create a charge or hypothecate the primary asset created out of a bank’s loan. This is often presumed to be inadequate and bankers tend to take an additional collateral security, namely, mortgage of land or a building or personal guarantee. This collateral is often stated to be comfort capital, though many banks do recognize the pitfalls in realizing the value of such collateral, especially when it is an immovable asset. Besides difficulty in realization, collateralization is also costly as it involves time and labour in creation of charge, ensuring a priority of charge when the asset is already encumbered and, lastly, the time and cost of realization of dues in the event of a default. India lacks a comprehensive collateral law—in fact, realization of collateral is dependent on as many as 16 different related laws, namely, Transfer of Property Act, 1882; Indian Contract Act, 1898; Indian Stamp Act, 1899; Registration Act, 1908;

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Limitation Act, 1963; Banking Regulation Act, 1949; Negotiable Instruments Act, 1881; Land Revenue Act, Indian Evidence Act, 1872, Insolvency Act, 1909/1920; Bankers Book Evidence Act, 1891; Companies Act, 1956; Motor Vehicle Act, 1939; Code of Civil Procedure Act, 1908, Public Money Recovery Act, Land Reforms Act and Recovery of Dues of Banks and Financial Institutions Act. The multiplicity of laws has added to the complexity of the issue and at times the bankers’ wait has been extended by over 10 years to get a decree in a civil suits for realization of bank dues by selling a mortgaged property of the debtor. Further, there are many sub-sections and clauses under the existing law that prevent a debtor from foreclosing accounts and realizing the dues by selling collateral held. Studies conducted by ILO on the transaction costs of collateralization in India reveal that large costs are often directly or indirectly borne by the borrower. This is despite the fact that there are many exemptions that have made for small loans. TABLE 23.2 Cost of Collateralization for Various Loan Sizes Particulars

Rs 25,000

Establishment of collateral (1) Agreements 110 (2) Equitable mortgage NA (3) Registered mortgage NA (4) Lawyer/Search fees NA Recovery through civil court (1) Legal Notice 250 (2) Court Charges 1,325 (3) Lawyers fees 1,500 (4) Other charges Total Expenses—Money suit/ equitable mortgage 3,185 As a % of the loan amount 12.74%

Rs 50,000

Rs 1,00,000

Rs 2,00,000

110 250 NA 500

110 500 3,000 500

110 1,000 6,000 500

250 2,000 2,000 500

250 2,500 2,500 1,000

250 3,000 3,000 1,500

5,500 11.0%

7,250 7.2%

9,250 4.6%

Source: Patil S.S. and Kaveri V.S. (2001) Property Rights and the Access of the Poor to Capital: The Role of Capital, an ILO Publication.

As is evident from the ILO study, the cash cost of establishing and enforcing collateral is very high for loans. Though banks have made certain relaxations for smaller loans in formalities like stamping and other expenses, the expenses as a percentage of loans availed are still very high. However, provincial governments have made some concessions for loans availed through cooperative credit institutions. The study also clearly points out that these costs do not cover the time spent by staff for the process of collateralization and its enforcement which, if computed, can be heavy.


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COLLATERAL SUBSTITUTES Collateral substitution is a means of replacing the conventional collateral and security forms that are traditional and tangible with non-conventional formats, usually intangible and generally not enforceable through courts. There are many innovations in use of collateral substitution that have been experimented with modified and developed over the last 30 years in the Asia Pacific region. The post-independence era in Bangladesh2 witnessed the emergence of a new phenomenon, mainly in terms of social re-engineering and growing inclusion of the people at large, and womenfolk in particular, who were keen on expanding their economic opportunities. The low intensity of banks and their outreach coupled with collateral-based financing, created a large vacuum in their expectations and left the disadvantaged and the poor dependent on non-institutional channels. Moneylenders, generally being usurious and exploitative in character, serenely fill in the void. However, the innovative and creative experimentations of development activists like Professor Yunus eventually led to the emergence of the concept of ‘microcredit with mutual guarantee’ in the mid- 1970s. Similar innovative approaches were also visible in Thailand, through the Bank for Agriculture and Agricultural Cooperatives (BAAC), which was established in 1966 as a state enterprise. The bank now purveys credit for the agricultural sector in the country and accounts for 92 per cent of credit disbursals to farm families. Most of the credit is being disbursed through joint liability groups and mutual guarantee mechanism, which is a substitute for traditional collaterals. Usually one associates unsecured financial transactions with the informal sector. The literature also suggests and usually associates perfecting a collateral-free lending process with the microfinance sector. However, the Indian experience predominantly is with formal financial institutions like banks through the SHG-bank linkage programme. Years of experience and judicious capacity-building has enabled the conventional banker to appreciate that social collateral, like peer pressure and peer dynamics, can be an effective substitute for traditional collateral while financing the poor and the unbanked. These approaches also serve as a mechanism for externalizing many of the routine and mundane functions of the bank branch. Today, close to Rs 7,500 crore has been advanced as credit by banks to SHGs on the strength of social collateral alone.

2

Part of the speech delivered by Honorable Minister for Agriculture, Shri Sharad Pawar.

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Thus, most of the collateral substitutes that are accepted, rely on substituting real assets by social forms of collateral. But does social collateral always work? Is it free of issues? Can it be blindly accepted? Are there a few conditionalities attached here? Perhaps the literature suggests a flip side too. Further, there are also reported cases of overstating of recoveries, Todd (1996)3 describes how loan officers, in collusion with borrowers, delay recording of interest payments for Grameen Bank loans. The loan officers used the on-time interest payments of some borrowers to cover up repayment problems by others. The records maintained were stated to be foolproof, with double accounting, and the practice was not detected even during visits by superiors/supervisors. Similarly, a study by Valenzuela (1998)4 displays a sample of 14 cases of microfinance institutions’ (MFIs’) fraud (Table 23.3). In some of the cases of fraud reported in the earlier study, it would have been either much harder, or impossible, if the loans had been accompanied by requirements of physical collateral. In a study, Bond and Rai (2002)5 noted that microfinance lending relies heavily on punishments such as social sanctions and credit denial imposed on defaulting borrowers. This is particularly true in MFIs, which are widely perceived to face the twin disadvantages of operating in environments where collateral is scarce and fund diversion is easy. Collateral that serves to reduce the risk of strategic default in these circumstances may therefore be unlikely to be perfect substitutes always. However, successfully imposing social sanctions when defaults occur requires necessary checks and balances. The issue is much more profound when one compares banker’s experiences in collateral-free lending. Some of the factors which have traditionally swayed the lender, namely, commercial bankers, against collateral-free lending, have been:

Poor experience from mandated lending for governmentsponsored and subsidized programmes, which have resulted in poor recovery and has negatively influenced the banker’s mindset that small lendings are highly risky. Even in government-sponsored programmes, when group and mutual guarantees have been taken, it has led to failure of group guarantee mechanism. This is primarily because these groups were

3 Todd, H. (1996). Women at the Center: Grameen Bank Borrowers after One Decade. Westview Press. 4 Valenzuela, L. (1998). ‘Overview on microfinance fraud’. Churchill ed., Moving Microfinance Forward. 5 Bond, P. and A. Rai. (2002). Collateral substitutes in microfinance.


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TABLE 23.3 A Sample of MFI Fraud cases from Around the World Case

US$ Lost

01 Loan officer in rural area program makes fictitious loans. Repayment $100,000 comes from the new loans, although soon the loans become delinquent. Accountant is in collusion. 02 Loan officer sets up 18 fictitious loans for personal use. The loans be- $2,500 come delinquent. 03 Loan officer takes money from petty cash for use over the weekend.

$100

04 Loan officer pays a microentrepreneur to use his name and address to Unknown originate a loan for his own use. Loan officer does not make payments. 05 Loan officer collects repayments from clients and keeps half for him- $500 self. Records only half paid on the books. 06 Loan officer charges his clients a ‘fee’ to apply for a loan. Officer keeps $100 the fee. 07 Loan officer in remote rural area disburses and collects loans in cash. $3,000 Officer keeps some of the repayments. Argues that he lost loan payment receipts. Most clients do not demand receipts. 08 Loan officer, in conjunction with supervisor and regional internal audi- $900,000 tor, set up ghost groups in a very ‘successful’ high growth branch. Loans were repaid from new loans. 09 Highly trusted credit manager makes 13 large loans to microentrepre- $6,000 neurs and takes back a major portion of the loans for personal use. Manager has authority to approve loans. 10 MIS specialist issues fictitious loans on smart cards, withdraws the loan $67,000 funds from participating banks, and records non-existing payments on the information system. 11 Cashier steals last group loan repayment of the day. Does not record $100 payment on the system, yet stamps client’s receipt. 12 Branch manager (also loan officer) in rural area gives out loans to rela- $10,000 tives. As delinquency rises he issues more poor loans to reduce his delinquency rate. As delinquency rises again, begins to steal from petty cash to repay loans. 13 Highly trusted administrative officer purchased computers and furniture Unknown at higher than market prices—receiving a kickback. Officer leaves to take a better job. 14 Highly trusted finance manager, who controls all program accounts, trans- $10,000 fers funds to his personal bank account, with the apparent intention of repaying soon. Source: Adapted from Table 13 in Valenzuela (1998).

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formed mainly to borrow and the group concept in credit deployment was not effective in creating peer pressure in repayment of the loans and the negative effect of non-repayment by a few on others, was more pronounced. Thus, the experience of the bank in lending under such group-oriented schemes has not been very encouraging. In the earlier projects financed by bankers involving group loans, non-repayment by one member of the group led to banks denying repeat loans to other members, though they may have repaid the loan in time. This has led to negative signals amongst group members, leading even to disintegration of groups.

These experiences clearly showcase that the system lacked the necessary checks and balances; bankers were driven by their past experiences and were apprehensive of their recurrence. Some of these factors have been effectively used in products like SHG-bank linkage programme and some mutual guarantee programme through which term loans were dispensed. There are many other forms of collateral substitutes that have been used by new generation lenders, namely, linking savings with borrowing, involving village-level organizations, providing incentives for credit discipline, including spouse as a co-obligant for a loan, loaning through intermediaries, tie-up with production units, using post-dated cheques and adopting a credit plus approach. Overall, findings from the field have shown that lending without traditional collaterals need not always be risky. Similarly, it should not be perceived that lending without traditional collaterals is security-free lending. Therefore, it is important for the lender to clearly appreciate what are the real substitutes to traditional collaterals.

MUTUAL GUARANTEE, AN EFFECTIVE SUBSTITUTE Any credit delivery mechanism involves four basic elements:

A good information gathering system about the client. A good credit monitoring mechanism. A good incentive system, which distinguishes the quality borrower from others. An enforcement system.

Normally, lending institutions would incur expenses for all these basic prerequisites. A cost-effective credit delivery mechanism attempts


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to minimize the costs in these basic elements. A sensitive and responsive group lending mechanism does possess certain distinct efficiency gains due to its induced interdependence between borrowers. Besides this, group lending substantially reduces the transaction costs in handling a large number of borrowers at different stages and taps the local information system effectively to transfer part of screening, monitoring and enforcing costs normally incurred by the lender on to borrowers. The group members possess a distinct advantage over the lender in doing those jobs at a low cost owing to better information, social cohesion and peer pressure. Thus, drawing on innovations like SHG-bank linkage programme that brought in tremendous reprieve for bankers, especially while dealing with the assetless or very poor, NABARD initiated a small pilot project in a few rural banks to test the feasibility of bankers financing group loans through joint liability groups based on social collateral as a substitute to the conventional formats. The client groups that it attempted to address were the mid-segment clients, who normally have access to financial services but often require doses of credit larger than that given by microcredit agencies; some also require credit for longer durations basically for investment purposes. Some of the major issues that were posed prior to the start of the experiment and the general consensus among various practitioners were: Major Issue

What does the Field Evidence Suggest

(i) Could joint liability serve as social collateral while serving midsegment clients? Would it have to be pitched as a collateral enhancer rather than collateral substitute?

(i) Anecdotal evidences show that social collateral like peer pressure could work for mid-segment clients also. Though traditionally this form of security has been used for addressing credit needs of the poor and unbanked, however, the BAAC experience of using Joint liability as a principal form of security, with individual ceiling of 1,50,000 baht ($3,400) as the outer credit ceiling per individual in a JLG has proven its feasibility. In the Indian context, such amounts can be considered as a need for mid-segment clients. However, there are a few checks and balances and basic characteristics that need to be ensured.

(ii) If JLGs could serve a collateral substitutes are there any pre-requisites

(ii) A smaller group size (around 5–7) is desirable

Homogenous groups are more cohesive Members should be from the same

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Major Issue

What does the Field Evidence Suggest

that need to be ensured?

neighbourhood and should know each other High degree of trust levels between JLG members is a must with clear demonstration of peer dynamics. It is better if the JLGs don’t function as financial intermediaries.

(iii) Should this be a savings-led programme or should saving be at all a component of JLGs?

(iii) Experience from the field suggests that this product need not be a savings-linked product and could be offered as a pure credit line. Even though saving is an important and legitimate activity that the bank should pursue, linking this credit product with savings, makes it less customer-oriented and at times obstructs privacy, which is critical while dealing with this particular segment of the population.

(iv) Who ensures the group formation? Do we need social intermediaries? Can the banker serve this cause? Is banker facilitation possible—if so, what are the inputs needed?

(iv) There was a general consensus that the group formation process should be attempted by the bank rather than other intermediaries. Experience has shown that it takes about 2–3 meetings followed by intensive scheduling that allows the potential client enough time to understand the benefits of the process and also appreciate this. The banker uses this contact for information gathering and character check of the client. The experiences of practitioners have shown this is possible and building direct linkages with clients helps the institution to ensure quality of its portfolio in the long run.

(v) What should be the size of the group?

(v) Unlike SHGs, where thrift precedes credit and where it is critical to have 10–20 members pooling their frugal resources, the JLGs in the project aim at providing credit primarily to mid-segment clients. Experience has shown that peer monitoring is better and effective with smaller groups. BAAC has experimented with larger groups, ranging from five to 30, with an average group size of about 10 members. Experiences of practitioners suggests that smaller groups of about 5–7 farmers enables


Major Issue

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What does the Field Evidence Suggest better and close interaction between members which is critical for generating the peer dynamics which is the hallmark of the JLG approach.

(vi) What incentives can be offered to clients to come together as JLGs?

(vi) As new clients would be preferred to existing ones, the best way to persuade the client is by ensuring progressive and continued lending to clients. Interest concessions could also serve as a tool to entice customers.

(vii) What is the basis for assessing credit need? Should credit be need based or eligibility based?

(vii) The BAAC has been fixing individual ceilings for its JLG clients. A similar approach of fixing outer ceilings per borrower has been made by other practitioners also.

Sustained access to the bank and progressive credit expansion can serve as good enticement tools for borrower to form into JLGs. Internal studies by BAAC have shown that the rationale for members (72 per cent cases) to continue in JLGs was that they have sustained and continued access to finance at relatively cheaper rates from BAAC. This is also borne out by the fact that 78 per cent of JLG members are active borrowers from BAAC.

ESSENTIALS OF A SUCCESSFUL JLG MECHANISM A is an assembly of 5–7 member clients undertaking to a lender to jointly receive a loan for pursuing any individual or joint activity. The main purpose of JLG is to facilitate mutual loan guarantee and execution of joint liability agreement, making the members severally and jointly liable for payment of interest and repayment of loan obtained from the bank. Some essential features are: Homogeneity: Members should be of similar economic status and preferably running similar enterprises/farming activities and residing in the same neighbourhood. This is a precursor to ensuring better peer dynamics in the groups being formed.

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Self-selection: Self-selection of JLG members enables a positive matching, that is, groups self-select members of the same risk type ensuring homogeneity. This is a critical ingredient in stable and affirmative groups. Ideally there should be at least five interested members, who agree to function as a JLG, reside in the vicinity and who trust and know each other well. It is preferable that members from the same family join the same group. Inputs at formative stage: Though self-selection of members has distinct advantages, it is essential that the lender ensure a proper screening and interview schedule to weed out potential defaulters from becoming JLG members. This also enables better rapport-building with the potential members of JLGs. Attempts at leveraging client associations like traders association are useful inputs in better screening of the clients for JLGs. These established sources often serve as pressure points in case of an eventuality. These inputs at the formative stage ensure that only motivated and genuine members in a group remain as members. Ensuring group dynamics: As group behaviour changes over time, there should be some implicit strategies which are undertaken to overcome potential problems. Group members normally devise appropriate strategies, including strengthening of the group’s collective benefits, group monitoring, monthly meetings and creating a group fund, to reinforce social relationships and reduce potential conflicts.

EXPERIENCES FROM THE FIELD The experiences quoted in the following paragraphs are drawn from the pilot experiment of NABARD in formation and financing of joint liability groups by formal banks. Size of group and background of clients: The participant banks had generally promoted JLGs consisting of around five members each. However, there were marginal variations. Banks predominantly enlisted farmer groups and non-farmers groups like traders. The farmer JLGs financed by banks had landholdings ranging in size from two to 30 acres. About 5–10 per cent of the farmers studied were found to be tenant farmers. Most of the JLGs formed by the bank were of new members who had not


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borrowed from institutions thereto. JLG members were normally required to open a savings account in the financing branches, which often served as a conduit for channelizing the loan amount. Normally, group members were from the same neighbourhood and also from the same village. Members knew each other—they may not be related, but were still friendly. According to branch managers, this would ensure the sustainability of the groups. With members being in the relatively non-poor strata of the village community, they were fully aware of individual liabilities under the guarantees executed in favour of all other members of the group. Gender: Most of the groups financed by banks were exclusively male groups, which were engaged in agriculture or trading activities. This was partly because the landed properties were in the name of the male members (though mortgages were normally not taken) and the bank staff felt that this was mainly a product pitched for male borrowers, especially as the SHG mechanism was aimed at women members. However one redeeming feature was that there were also mixed groups and exclusive women JLGs that were financed by the banks (though in lesser numbers), suggesting that the product was gender neutral. Purposes: The product served as a versatile credit line leaving a great degree of suppleness and flexibility at the hands of the credit user. The purposes for which credit was used varied substantially from farm to non-farm and from production to investment credit. Credit was also advanced for innovative farming activities like anthuriam cultivation and lobster culture. The vast variety of client needs and the way such a product could tackle this was evident from this initiative. A small extent of farm finance did reach sharecroppers and tenant farmers through the JLG mechanism. Lending methodology: The participant banks adopted different models for lending through JLGs: (a) Financing individuals in a group with individual documents and mutual guarantee. (b) Financing the group without tracking individual details on the strength of mutual guarantee contract. Credit provided to members in a JLG were unequal in most of the cases and loans advanced to other members on the strength of the minimum mortgage taken from one or two of the members in a JLG.

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(c) In cooperative banks, lending is based on mortgages only, as per by-laws pertaining to them. Therefore the bank had only taken a token mortgage not covering the entire loan. Quantum of credit: The average loan sanctioned ranged from Rs 10,000 to Rs 50,000 per member in a JLG. The participant bank sanctions loans to the group or individuals in a group based on the individual member’s requirements. The individuals themselves make the repayment separately. Repayment terms and security: The loans were sanctioned for periods ranging between three to five years. Repayments were normally fixed on monthly intervals. Besides the existing primary security like hypothecation of assets/standing crops, banks also took mutual guarantee contracts from JLG members to bind them with the liability of repaying not only their loans but also other group member’s loans. A Case Study: Kinkiny Joint Liability Group The Kinkiny JLG consisted of members who failed to avail loan for dairying from the local bank and had subsequently organised themselves into a JLG at the behest of PCARDB, Irinjalakuda, a cooperative bank. The lukewarm response of the local commercial banker and the high interest rate 10–11 per cent per annum deterred them from availing loans from the local commercial bank. The Kinkiny JLG has six members comprising Parmeswaran, Kunju Ayyapan, Dhanaseelan, Shoba, Grijia and Sathidevi. The area being conducive for dairy farming with veterinary facilities and fodder and a milk society nearby, the group decided to take up dairy farming and also enrolled themselves with the local milk society. After availing Rs 50,000 each, today the members own 2–4 cross-bred milch cows with an average yield of 10 litres per day. The milk is sold to the local milk society and members earn around Rs 1,000 net income from each milch animal per month and are very prompt in repayments. The account is a zero NPA account. The JLG financing has enabled the members to supplement their family incomes and has enabled a better standard of living. Source: IPCARDB, Kerala.

BENEFITS OF THE PRODUCT Bankers in general were appreciative of the product and its positive features such as ability to reduce transaction costs and the possibility of externalizing a part of its functions like monitoring the group, as it normally


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liaises with one contact person in a group. Further, the risk perceived by the branch staff is less as peer education and peer pressure did play a part in enforcing credit discipline. A majority of clients under the JLG mechanism were new borrowers. For example, the local cooperative bank supports the view that marketing and village meets enabled it to bring in 200-odd additional clients through about 40 JLGs formed and financed in the last one year. For the local cooperative bank, which had been in existence for over 30 years and had a borrowing membership of 16,000, this is a sign of success. In fact, most of the earlier efforts at enrolling new members were limited and they generally had walk-in clients. Bankers did feel that clients were better served beyond a minimalist credit approach as it binds the clients emotionally and enables peer education and better understanding of the product. The individual members of JLGs also benefitted from timely credit, peer education and sharing of efforts in completing various formalities to avail loan. There were also substantial savings on account of stamp duty charges and other documentation charges while availing loans under JLGs. Besides, clients appreciated the flexibility in the credit given and termed this as a multipurpose credit product. The banks were also passing on an interest incentive, as the repayments were regular.

CONCLUSION Products like SHGs and JLGs have demonstrated that traditional collateral-free lending should not be viewed as security-free lending. In fact, it has confirmed that social collateral is a better substitute; but the key to establishing strong social collateral should not be forgotten. As the chapter suggests, the four basic tenets of a good credit delivery technology are a good information-gathering system, a monitoring mechanism, an incentive system and an enforcement system. It is important to realize that all elements incur costs to a lending institution and a good lender never skips/overlooks anyone. These products have demonstrated that an information-gathering system is a key element in building trust in the credit dispensation system. A cost-effective credit delivery mechanism attempts to minimize the costs in these basic elements without compromising the basic requirements. Building an understanding and responsive group lending mechanism does take a bit of the lender’s time upfront but eventually the mechanism has some distinct efficiency gains by inducing greater interdependence between borrowers.

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REFERENCES Bhaskaran, R. Jindal and P. Das. 2001. ‘Study of collateralization cost in small scale financial transactions in India’, Property rights and the access of the poor to capital: the role of capital, an ILO Publication. Ghatak, Maitreesh. 1999. ‘Group lending, local information and peer selection’, Journal of Development Economics, 60(1): 27–50. Marr, Ana. 2001. Studying Group Dynamics: An Alternative Analytical Framework for the Study of Microfinance Impacts on Poverty Reduction. Patil, S.S. and V.S. Kaveri. 2001. ‘Property rights and the access of the poor to capital: the role of capital’, ILO Publication.

24 The ‘Credit Plus’ Approach for Tribal Development K.G. KARMAKAR

O

AND

N.P. MOHAPATRA

ver the last one-and-a-half decade, NABARD’s microfinance initiatives through its self help group (SHG)-bank linkage programme have passed through various phases: pilot testing, mainstreaming and expansion. The programme has assumed the shape of a microfinance movement in the country. It has started making inroads in resource-poor regions of the country as well. During this movement, many innovations have taken place in the credit delivery system. There have been innovations in tribal areas, where the process of book-keeping and loading of interest rates have utilized unusual methods like use of symbols. Participatory management has played a crucial role in joint forest management (JFM). Grain banks, which were informally catering to the needs of the tribal people, have been linked to mainstream banking. Similarly, the SHG-bank linkage programme has also facilitated land development programmes, watershed programmes and orchard developments through Wadi approach. Community management of tank-water resources in Tamil Nadu is another dimension to the innovations carried out in the last few years. In Andhra Pradesh, tenant farmers have come together and formed groups to have access to credit in the form of Rythu Mithra groups. An attempt has been made in the following paragraphs to document the various experiences in credit innovations as well as ‘credit plus’ activities in the rural areas, especially for the marginalized tribal people.

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K.G. Karmakar and N.P. Mohapatra

JOINT FORESTRY MANAGEMENT: EMPOWERING TRIBAL PEOPLE In order to translate the National Forest Policy’s vision into reality, the Ministry of Environment and Forests issued guidelines in June 1990 to facilitate involvement of forest communities in the protection and management of forests. This led to the JFM programme under which the state Forest Department (FD) and the village community enter into an agreement to jointly protect and manage forest lands adjoining villages and to share the responsibilities and usufructuary benefits.

JFM: THE COMMUNITY PARTICIPATION SOLUTION TO DEGRADATION The JFM programme has led to regeneration of degraded forests, reduction of frequency in conflicts, vacation of encroached forest land and improved livelihoods. JFM is not a scheme or a project to be implemented for a certain number of years. It is a shift in governance towards decentralization of powers to local communities and their institutions; it is basic to improving the quality of the forest wealth of the country and its sustainable management, to serve not only the ecological functions but also livelihood needs of millions of people living in 1,00,000 settlements in and around forests. There are two major reasons behind introducing JFM: one, the government’s management system did not succeed in arresting forest degradation and deforestation; second, a new management paradigm was evolving in which local people’s participation was to be an appropriate and promising tool in arresting forest degradation.

PROGRESS

OF

JFM

IN

INDIA

There were around 25,000 JFM committees before October 1989 in India and around 4 millon hectares were covered under JFM. The number of revenue villages covered under JFM was 61,347 while forest fringe villages was 1,64,063. The community participation mechanism was devised for forest development and the JFM approach was initiated in 1990 to allow the participation of nearly 15 per cent of total population of the country. Community participation was initiated in 1990–95 at a slow pace but speeded up thereafter. At present, all states have adopted the concept of JFM. So far, 84,000 JFM committees have been formulated

The ‘Credit Plus’ Approach for Tribal Development

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and benefit-sharing mechanisms are being evolved in different states. Statewise progress till 2003 indicated that 1.7 crore hectares of forest area was under JFM, more was to follow.

NABARD’S EXPERIENCE IN SUPPORTING JFM THROUGH RURAL INFRASTRUCTURE DEVELOPMENT FUND (RIDF) NABARD has taken the initiative to involve state governments and other stakeholders in the process of empowering people through JFM. Under RIDF, in Andhra Pradesh, 2,148 projects have been sanctioned with a financial outlay of Rs 127.36 lakh, which is the highest in the country. In West Bengal, six projects with a financial outlay of 22.52 lakh have been sanctioned. In Tamil Nadu and Jammu and Kashmir, a beginning has been made.

EXPERIENCE

OF

JFM

IN

ANDHRA PRADESH

In Andhra Pradesh, JFM has taken off rapidly. The salient features of the JFM in Andhra Pradesh are:

Covering all households in the village/hamlet and providing membership to two per family, with a mandatory clause of one woman member in the general body (GB) of the VSS. Automatic membership to families belonging to the scheduled castes and scheduled tribes, to ensure that these communities were not left out for any reason. Thirty per cent reservation to women members in the managing committee of VSS. Hundred per cent usufructuary rights to the VSS, excluding beedi leaf. In case of timber and bamboo, 50 per cent of the income goes to VSS and the rest is ploughed back for development of the forest under the VSS. The benefit is extended only on fulfilling the obligation of forest protection. All funds for development of a forest are deposited in a bank account. The VSS president and secretary, represented by a section officer of the FD, operate the account jointly. For better coordination with other departments and holistic development of the village under JFM, a District Forestry Committee chaired by District Collector and a separate committee,

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Integrated Tribal Development Agency (ITDA), has been constituted in tribal areas. All issues related to forest and village development are discussed in these committee meetings. It may be mentioned that members are paid 7.5 per cent of the net revenue obtained through the beedi leaf collection in VSS area and 8.5 per cent of the amount collected as fines in forest offence cases detected by VSS. One of the major activities under the JFM programme is soil and moisture conservation work. The government of Andhra Pradesh has launched an innovative scheme called Neeru Meeru for creation of massive water harvesting structures to collect the basin water runoff. All the forest areas were covered under the scheme and the members were involved in the selection of sites for percolation tanks, rockfill dams and gully plugging. Water harvesting has not only assisted the natural regeneration of degraded forests but has also helped increase agricultural production. Dryland agricultural techniques were replaced by irrigated crops.

THE WEST BENGAL EXPERIENCE West Bengal has been the pioneering state in evolving and implementing the principles of JFM in India. JFM first struck root in the southwestern parts of the state in the early 1970s and gradually spread elsewhere. To understand the role and importance of JFM in West Bengal, one needs to look back into the history of forest management in the state for the genesis of the idea. As the once lush forests of the state gradually depleted due to increasing population and the demands of development, the tussle between the FD, guardian of the forests, and the ‘ecology people’ who were dependent on these forests for their sustenance, intensified. It slowly dawned upon everybody that the traditional custodial system of management of forests was not effective and forest protection was not possible unless the people who were dependent on forests were involved and had a stake in the protection of forests. The Arabari model was launched in Midnapore district in 1971 with the participation of 11 villages and 618 families for rejuvenation of degraded sal forests in the region. A special socio-economic project was launched to facilitate this project and the government issued an order to share 25 per cent of usufructs with the people. This was thus the first serious official attempt in the country to involve local people in the management of forests in


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Jalpaiguri district, as three of the five proposed projects are from this district. The Arabari model faces the following problems:

There is a major problem of elephant attack in all the areas. All the Forest Protection Committee (FPC) members expressed utter helplessness at this menace and desired some assistance from the project. Even the single crop that is grown by the villagers is regularly damaged by elephants, resulting in reducing the villagers to abject poverty. It was expressed by all the FPC members that searchlights/energized fencing would go a long way to alleviate their problems. Another problem that is widespread across the entire area is the problem of water, both for drinking and irrigation purposes. Though the area receives good rainfall, the runoff is fast leading to erosion and negligible recharge of ground water. This, together with the fact that nearby tea plantations are responsible for heavy discharge of ground water, has led to widespread shortage of water. There are just not adequate pumps to lift the available ground water. Therefore, controlling of jhoras (small streams/waterfalls), is gaining strength. Channelizing jampois (small irrigation channels) and providing pumpsets with tubewells would go a long way in providing relief to the populace and increasing agriculture. Moreover, this would have a multiplier effect on the entire local economy. The primary livelihood of the villagers in all the areas is agriculture and the important single crop is paddy. During the discussion, it was seen that everywhere the desire is to increase the cropping intensity by taking up multiple cropping of vegetables. There is also a felt need for taking up alternative income generating activities as in all the villages visited, the FPCs had echoed similar sentiments. Activities of choice include dairy, piggery, poultry, excavation or desilting of ponds for pisciculture works, and sericulture. It was felt that such support activities, if promoted in small groups in the project areas, would have a positive impact on the economy. This aspect assumes all the more significance in the light of the fact that the neighbouring tea estates are either sick or are non-operational. The vast population of workers in these tea estates would fall back upon the local forests, if there are no alternative avenues for income generation. The FPC members in all the areas are highly enthusiastic about the concept and prospects of JFM. They have been regularly supporting

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the cause of the FD and keep a strict vigil on forest areas. They also accompany the forest officials during night vigilance of the forest area on many occasions. A case in point is the FPC at Rydak, where the participation is so spontaneous that the villagers and the FPC members do not accept any incentive for reporting cases of theft, smuggling or poaching. The fact that the villagers have reached a stage where they cooperate with the FD on these issues without monetary considerations goes to show the commitment and sense of purpose with which they view their role vis-à-vis the forest areas. The forests of Bankura and Midnapore are a tremendous incomegenerating asset in the form of sal leaves, used for making plates, which sustain a few thousand families in the adjoining areas. Therefore, the forests in these areas need to be protected not only for the reasons of ecology, timber and wildlife but also for the protection of the livelihood of the people, without which pressure is sure to mount on adjacent forest areas. The assets created during the project are managed by the concerned FPC after the withdrawal of the FD from the project area. It has also been decided by all the FPC members that individual members would contribute 25 per cent of their earnings (from daily wages or any form of economic activity arising from the project) towards a common maintenance fund. This corpus would be maintained and used by the villagers for the maintenance of assets created by the villagers from the project finances. A United Nations sponsored pilot project for protection of forests has been implemented in Chilapata Range a few years back. The assets created during this period (tubewells with pumpsets, embankment of jampois or irrigation channels) have been maintained very well by the villagers. Moreover, the FPC was found to be conscious of its reponsibilities as it has built up a corpus for the sustenance of these assets and teams for safeguarding them.

ACCUMULATION

OF

CAPITAL

AND

MICROCREDIT

Accumulation of capital is another fallout of the JFM. The intervention has helped in three areas:

One is the nature of JFM regulations made by the government. For example, in Kerala, the regulations provide that the community


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has to compulsorily accumulate a part of the income derived by it from the compounding forest offences, collecting 50 per cent share of the final felling. The money is to be used for forest and village development. Another method initiated by the Andhra Pradesh FD and enthusiastically accepted by the women groups, is to accumulate a part of their wages earned in JFM works. This fund is later used to give loans to women in the same groups. This innovation has been able to keep away local moneylenders who used to charge exorbitant interest rates. Another experience encouraged by the Ramkrishna Lok Shiksha Parishad is the ‘musti vikshya method’. Each family in FCP is requested to keep aside a handful of rice daily which is then collected every week, sold in the market and then deposited in a bank as a collective fund. This method of accumulation could be done even in non-JFM areas, but JFM has facilitated the process.

The JFM programme has led to several positive outcomes. Besides creating common property resources and increase in the income of the local people, the other benefits are: change in the attitude and relationship of local communities and forest officials towards each other and the forests; improvement in the condition of forests; reduction in encroachments; and involvement of NGOs. One of the important elements of participatory system relates to the use of indigenous capacity and local knowledge about different aspects of conservation, development and use of forests. Rural people, particularly women and the tribal community have an intimate knowledge of plant species, their growth characteristics, utility and medicinal value. They are also well informed about the species that need to be planted in a given locality to satisfy the specific needs. This knowledge needs to be utilized under the JFM for the benefit of the community. Participatory forest management as an effective means of protecting and regenerating degraded forests has been gaining ground in India. The active and willing participation of the community under JFM has been considered neccessary for forest regeneration. The programme needs to be given a thrust by designing appropriate institutional and financial mechanisms. The role of the participating community in decision making, access to benefits and linking of Village Protection Committees with the sale of JFM produce to industries has to be ensured.

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GRAIN BANK: AN INNOVATION IN CREDIT PLUS APPROACH Grain bank or grain ‘gola’ refers to the contributing and storing of grains in community storages by cultivators to secure seed and food during the lean season (monsoon) for the members. It may also check seasonal migration, control exploitation by moneylenders, inculcate saving-investment behaviour and nurture entrepreneurship skill among the members. The members jointly contribute some portion of grain, preferably paddy and ragi, during the harvest season to raise a village-based grain fund. Members of the grain bank borrow the required amount of grain during the lean season and repay the loan along with interest in the form of grain during the next harvest. When the fund becomes large, the surplus fund may be issued to needy people of the neighbouring villages with higher rate of interest in order to earn profit. Some portion of the surplus fund may be sold when the price of the grain goes up. The money earned by selling the surplus grain and remaining fund may be considered as savings/security for sanctioning loans to members of the grain bank from formal banks. Tribals are called ‘adivasis’ or ‘aboriginals’, which means the original settlers of the place or region. They generally live in remote areas, have similar language and kinship systems as well as a general lack of social stratification and are totemistic. Tribal development has become synonymous with deprivation, breeding widespread ‘discontent’ (Singh and Jabbi, 1995). Despite the guarantees enshrined in the Constitution of India (Article 46), the tribals have the lowest health, education and income standards. There are 20 countries with substantial tribal population, India having the largest in the world. The 1991 census of India had recorded the tribal population to be 67.8 million and they constitute 8 per cent of the national population. Tribal groups are very heterogeneous. In Jharkhand there are 30 tribal groups, including eight minor tribes, known as primitive tribal groups (PTG).

EXPERIENCE OF ORISSA IN KALAHANDI, BOLANGIR AND KORAPUT (KBK) REGION The grain bank scheme was an age-old practice among the tribal cultivators of KBK as well as Jharkhand. The grain bank scheme was prevalent among the Munda tribe of Chotanagpur (now in Jharkhand) in earlier


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days as well as tribals of KBK districts. NABARD has taken the initiative to link these grain banks with banks under the SHG-bank linkage programme. This is conceived as a food security arrangement, besides addressing the availability of seeds for cultivation. The tribal population is known to use the concept of grain golas for saving grain during the harvesting seasons and use it to meet their consumption requirements during lean/dry periods. They also borrow the grains for seed purposes at the time of sowing. It was felt that there is a need for evolving a participatory food security system for backward tribal regions. In the KBK region, group savings as well as borrowings are in kind, which makes it similar to the SHG-bank linkage programme in significant ways. Therefore, NABARD thought of an intervention through SHGbank linkage programme so as to facilitate monetization of savings and loans in kind and integration of the traditional approaches into the microfinance model so that it will enable the poor tribal population to access need-based financial services and also address issues of food and seed security. It was felt that association of grain banks with SHG-bank linkage programme can achieve the following objectives.

Facilitate savings in kind, in the form of grains. Build synergy between SHGs and the grain bank at village level. Develop participatory management of grain banks. Help in improvement of food security on a sustainable basis to avert malnutrition, starvation and consequent migration. Enable availability of seeds in the sowing period particularly for marginal and small farmers.

With a view to achieving these objectives, an initiative was taken to involve 17 villages in Thuamul Rampur block of Kalahandi district of Orissa. In this remote area, the average food stress period stretches over nine months in a year. The nearest RRB branch is situated at a distance of 25 km. Most people are small and marginal farmers and many are landless. DDM, NABARD played a key role in establishing the entire concept. The board of Kalahandi Anchalik Grameen Bank (KAGB) was motivated and perceived to pass a board resolution to support and participate in the project. It was also decided by the bank to extend loans to SHGs against the stock of grain banks and cash savings of the groups. The participating SHGs were motivated to take bank loan and use the fund to procure grains when the price is low and for repayment of loan taken from the grain bank.

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It may be mentioned that Antodaya, the leading NGO of Kalahandi, which has been supported by NABARD for promotion and linkages of SHGs, was motivated to play a pivotal role in grounding the concept. The NGO played a key role in the following areas:

The NGO promoted SHGs. It was responsible for capacity-building and training of SHG members. It supported the establishment of and running of the grain banks. It monitored the operation of SHGs and grain banks.

It was envisaged by NABARD that continuous monitoring of the project is a must and therefore a committee was formed consisting of DDM, NGO, RRB, BDO and CDPO. NABARD implemented the pilot project of associating grain banks with the SHG-bank linkage programme in collaboration with KAGB, ITDA and Antodaya. Initially, 29 SHGs were promoted and the members were from poor households. Such SHGs were motivated to form grain banks. Three grain banks at Silet, Sikerguda and Maltipadar were constructed. On an average, one grain bank was assigned to every 100 households. These SHGs have saved a total quantity of 963 kg grain consisting of 299 kg rice, 196 kg ragi, 160 kg paddy and a millet variety called kosala, 308 kg. They have also cash savings to the tune of Rs 55,761. They received RFA from ITDA to the tune of Rs 1.35 lakh. The KAGB has provided a loan of Rs 1 lakh to these groups. The repayment is regular. The income-generating activity of SHG members has been diversified. They are engaged in procuring, processing and marketing of NTFPs. A few have taken to trading in tamarind. Some others have started growing vegetables. Social issues are also being discussed in the SHG and grain bank meetings.

MONITORING Antodaya, an active local NGO, was assigned to implement and monitor the project. Apart from savings in cash, banks were motivated to take savings in kind as also potential savings and consider loans to SHGs against their stock of grains. Such grain banks were provided assistance in the form of grains at the initial stage because the volume of agricultural produce only meets the


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food requirement of the people for three months. Therefore, it was envisaged that subsequently members can replenish the stock in the bank with savings in kind and also by repayment to the grain bank in the form of grains. It was also envisaged that such grain banks could be linked with the public distribution system and other government programmes. It can also be empowered to go in for other income generation programmes as and when the concept matures. It was envisaged to establish three grain banks consisting each of eight SHGs, in which about 100 households would be benefitted. It was also envisaged to form a management committee consisting of representatives from all participating SHGs and NGOs. The salient features of the grain bank—SHG-bank linkage programme are as:

the members can save both in cash and/or kind at their convenience; members can draw loans both in cash or/and kind. The existing stock of grains can be given as loan; SHGs are to decide the quantum of grain loan to individual members based on their savings; grain bank to sanction and release loans in kind to the member SHGs depending on their contribution to the grain bank and/or as loans on cash payment; SHGs have to ensure repayment of grain loans by members to grain banks; and grain golas are of traditional/improved designs and guarded from rodent/pest attack.

IMPACT The impact of the grain gola linkage with the SHG concept has been very good. The SHGs are availing of grain loans and repaying them along with interest in terms of grains. Eligibility for bank credit is computed on the basis of the balance available in the savings bank accounts and the value of grains advanced as corpus consists of both cash and monetized savings. The MIS has also stabilized and various returns for the use of bank are being generated for smooth implementation of the scheme. Most importantly, the much required food security has been achieved. Relationship banking with the RRB has been established. The poor tribals are coming out visibly from the clutches of moneylenders. Small and

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profitable ventures have found favour with the SHGs. Starvation deaths are not taking place where grain golas have been built.

EXPECTED BENEFITS The linkage programme is expected to harvest the following benefits:

This will enable the poor to save in kind, raise resources against the savings, provide access to self-managed participative food security system and also provide access to seeds for sowing purposes in the time of distress. The grain banks will offer the possibility of monetizing savings in kind through the SHG-bank linkage programme. The rural poor through such SHGs will not only be able to get food during distress periods but also may avail small loans in cash for their consumption/emergency needs and later on for income generating activities as well. Financial resources of SHGs including bank loans will be helpful in sustenance of the grain banks.

THE JHARKHAND EXPERIENCE The total tribal population in Jharkhand was 6,16,914 according to the 1991 census, which happens to be 27.67 per cent of the state population. In Orissa and Jharkhand, the adivasi population is predominant. They need development intervention which has to be rural oriented. The Mundas of Jharkhand are considered the original settlers of the region. Along with the Mundas, Oraon, Santhal, Ho, Kharia and some other tribal groups arrived in the area, cleared up virgin forests and made lands cultivable. Thus the major tribal groups of Jharkhand are settled cultivators. They hold at least 4–5 acres of cultivable land. Due to erratic monsoon, inadequate irrigation facilities and inferior quality of soils, agricultural productivity is very low. Although agriculture is the main occupation of the tribals of Jharkhand, it cannot provide them with food for the whole year. Their lands produce foodgrain only for 5–6 months in a year. Hence, they suffer from acute shortage of foodgrain during the lean season and seed for sowing during cultivation. They supplement their food requirement and other necessities through daily wage earnings as casual labour in the nearby urban centres and on other construction works with the contractors. The life of the tribal cultivators of Jharkhand is miserable and precarious.


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Tribal cultivators used to contribute some portion of paddy and marua (ragi) during the harvest season to raise a grain fund called ‘dhan gola’ to combat hunger and starvation during the lean season. Once the fund was raised, needy members used to borrow the required amount from the fund. A committee of three or five members was formed for the management of the grain bank. The elderly members were elected as committee members. The management and operation of the grain bank was carried out on a democratic fashion. Men and women both were eligible for the membership of the managing committee. The loan was repaid along with the rate of interest during the next harvest season in the form of grain. The rate of interest determined by the members in the group meetings was very low, namely, 3–5 per cent of the total borrowed fund, because the purpose of raising funds was to help needy members avoid starvation during the lean season. This practice does not flourish now even among the tribals of Chotanagpur due to some reason or the other. Poor management, negligence in payment of loans and interest, absence of proper records and unscientific account-keeping were some of the reasons. In Jharkhand, the major tribal groups are settled agriculturists. The geographical distribution of the major tribal groups is as follows: Tribe

Area

Santhal Oraon Munda Ho

Santhal Parganas, Hazaribagh, Singbhum, Dhanbad Ranchi, Gumla, Lohardaga, Palamau Ranchi, Hazaribagh, Singbhum, Palamau, Dhanbad Kolhan, Singbhum

The tribals in Jharkhand may be classified broadly in the occupational categories, namely: Tribes

Occupation

Birhors, Korwas Sauria Phariyas Hill Kharai, Santhal, Munda, Oraon, Ho Karmalis, Chik-Baraik, Several Tribes

Forest, Hunting Hill Cultivation Asur (iron smelters) Agriculture Artisans Urban-Industrial

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Currently, three groups can be identified in Jharkhand’s tribal villages:

The successors of original settlers or the families who cleared the forest and are named as khuntkattidars (Munda) bhuinhars (Oraon) tribals. The raiyats: who were tenants settled by the original founders of the villagers primarily the relatives on the female side belonging to the same tribal group. Artisan groups who could perform services for these settlers namely chikbaraik (weavers), lohars (blacksmiths), gowalas (cow herd tenders), kumhars (potters), ghasis (scavengers), some of them being non-tribals.

As the major tribal groups are primarily settled cultivators, the family holdings and land rights are well settled. Certain clauses of illustrative tenures are identified as follows:

Mahatoi land for the village headmen. Pahanai land for the village priest. Panbhara land for the assistant to village priest. Khuntkatti land, Bhuinhari land—descendants of original settlers. Raiyati land with the raiyats settled by the descendants of original settlers.

LANDHOLDINGS The majority of landholdings in the area happen to be below 1 hectare. Although there are variations in landholdings among the tribals of Jharkhand, around 60 per cent of the holdings are below 2 hectares, termed as marginal and small. Around 20 per cent of the holding are of medium size, ranging from 2 to 10 hectares. Around 5 per cent of the holdings are above 10 hectares in the area. Another fact worth mentioning is that 40 per cent of the holdings are low paddy land and 60 per cent medium and uplands. Hence, the ownership of large holdings does not give a distinct advantage unless the land is of good quality. There are areas in which even large holdings beyond 5 hectares are not sufficient to meet the needs of the families round the year. Most of the cultivable area (around 90 per cent) is cropped during kharif. Paddy happens to be main crop in the low lands. There are limited areas (60 per cent) in which maize, ragi, oilseeds and pulses are cultivated. Three methods are broadly adopted in rice cultivation in the area, namely, buna (sowing), lewa (broadcasting) and ropa (transplantation).


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The lifestyle attitudes of the tribals of Jharkhand may be listed as follows:

(i) (ii) (iii) (iv) (v) (vi)

Positive Attributes

Negative Attributes

Community living Equality Loyal Friendliness Honest Hardworking

Tradition bound Superstitious Taboo ridden Alcoholism Conservative Poor self-image with ‘dikus’ (outsiders)

Constraints in development, as perceived by the tribals, are: (i) (ii) (iii) (iv) (v) (vi) (vii) (viii) (ix) (x) (xi)

frequent sickness; illiteracy; ignorance; excessive consumption and non-saving; alcoholism; deforestation; prone to luring away and misguidance by outsiders; modern fashion entering into dress, food habits; continuous exploitation by contractors/agents; lack of irrigation facilities; and poverty.

Methods to remove these constraints may be as follows: (i) (ii)

providing irrigation facility; afforestation: tribals prefer fruit, fuel, fodder and timber trees; in this order of preference; and (iii) provision of proper education for their children and health facilities by the government.

INTERVENTIONS With a view to helping the marginal tribal cultivators, it was felt that the the grain bank will be helpful in various ways. The objective of the scheme is as follows: (i)

to explore the traditional grain bank scheme in the tribal villages of Jharkhand;

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(ii) to study the traditional grain bank scheme among the different tribals of Jharkhand and to make an attempt for the revival of the traditional grain bank scheme; (iii) to protect the tribal community from exploitation by moneylenders and outsiders; (iv) to check and control the seasonal migration among the tribals; and (v) to promote saving-investment behaviour and to develop entrepreneurship skills among the tribal cultivators.

THE TASKS AHEAD As a concept, the grain bank has been popular among the tribals for a long time. Now it is time to blend the grain bank concept with the formal banking system. The SHG-bank linkage programme can be the launchpad for such a drive. The success of the project will depend upon factors such as capacity-building of the members, proactive approach of banks towards the concept and its acceptability by other tribal hamlets for replication. The grain bank concept is passing through a transitional phase and still in the evolution stage. Isssues like difficulty in arriving at the exchangable value of non-traditional grains for monetization and slow recovery on account of low productivity and non-realization of remunerative prices may crop up.

COMPREHENSIVE TRIBAL DEVELOPMENT PROGRAMMES THROUGH WADI APPROACH The tribal population constituting around 8 per cent of the population is mainly dependent on forests, livestock and agriculture. But the dwindling forest resources, shrinking water table and poor fuel and fodder supply have jeopardized its agriculture and livestock productivity. The small and marginal, fragmented and un-irrigated holdings capable of raising a mono crop and low productive livestock population do not provide adequate resources and incomes for their livelihood. Such factors, including their bigger family size, force them to starve or migrate to nearby towns and many a times to distant localities for subsistence. Efforts are being made by the government and NGOs to provide financial and technical assistance to tribals through various schemes and development programmes in the country since 1947. These existing development schemes offer some relief to them but there are recurrent relapses into poverty due to various reasons. As a result, more than half


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of tribal population is still below the poverty line and unable to join the mainstream. Among the various initiatives, Comprehensive Tribal Development Programme commonly known as Wadi programme introduced during the 1980s in Vansda, Gujarat by an NGO, BAIF Development Research Foundation, Pune, has left a visible impact in a short span of time and stands out as a demonstrative and sustainable model suitable for replication in other tribal areas too. The Wadi programme sponsored by Kreditanstalt fur Wiederaufbau (KfW), Germany, is being implemented in two states: Gujarat since 1995:

Valsad (Dharampur and Kaprada blocks) and Dangs Maharashtra since 2000: Nasik (Peint, Triambak and Surgana blocks) and Thane (Mokhada block) The programme area is inhabited mainly by tribals. It is characterized by steep, undulating, inaccessible terrain, heavy rainfall with high run-offs. Remote and scattered habitations provide harsh living conditions. Only onethird of the area is cultivable, with negligible area under irrigation. The harsh livelihood conditions lead to high morbidity and vicious cycle of poverty.

WHAT

IS

WADI ?

The Wadi model of tribal development is holistic in approach addressing production, processing and marketing of the produce and also other needs. The core of the programme is Wadi and other development interventions are built around it. Wadi in Gujarati means ‘small orchard’ covering one or two acres. The Wadi as an effective tool for tribal development evolved gradually out of two decades of concerted efforts made by BAIF in Vansda (Gujarat). The Wadi may be of mango or cashew or amla or any fruit crop suitable to the area or a combination of these tree crops, with forestry species on the periphery of the landholdings. Two or more tree crops are selected in the Wadi model to minimize the climatic, biological and marketing risks. Tribal families having less than 5 acres land are given 1 acre Wadi each for raising 60 fruit plants suitable to local area and 600 forestry plants on the boundary. Other development interventions in the areas of environment, gender and health, viz., soil conservation in the Wadis, water resource development, agriculture development, women development and healthcare are woven around the Wadi programme.

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Water resources development: Even though the programme area receives an annual rainfall of 2,500 mm, because of steep slopes and rocky terrain, water retention is poor resulting in severe soil erosion and nutrient loss. As existing water resources are not sufficient to irrigate Wadi plots, run-off water is harvested through construction of temporary check bunds across river streams and development of perennial springs. The spring water is used for drinking as well as irrigation purposes. Pot drip irrigation is provided for the fruit plants in the initial three years of plantation as protective irrigation. Soil conservation: Measures namely, bunding, tree platforms, the combination of these two and trench-cum-bund based on field-level requirements have been introduced from the first year. The participants are paid for the soil conservation and plantation work done by them in their fields. Health programme: Some of the basic problems faced by the tribal families are related to malnutrition, illness and inaccessibility to health care. Community health programme focuses on mother and child health care (MCH) as well as primary and preventive healthcare. The participants are educated on sanitation and hygiene issues. The local youth, especially women, called Village Health Guides (VHG) are trained in diagnosis and treatment of common illness and serious cases are referred to appropriate facilities. Women development: There has been an increased emphasis on women’s participation in the programme. The major activities taken up are promotion of SHGs, income-generation activities, drudgery reduction along with awareness generation about reproductive health and development aspects. The income-generating activities included fruit and forest plant nurseries, vegetable cultivation, produce collection, papad-making and vermicomposting. In order to reduce drudgery for women, three major activities are taken up in the field. They are smokeless stoves, use of ballbearings in the traditional grinding stones and pedal threshers for paddy. Support to landless: Besides landholding families, the programme has supported the landless by providing microenterprises in farm and nonfarm sectors and employment opportunities in processing units. Processing and marketing: The programme has been designed to ensure assured market and remunerative prices for the Wadi-related produce.


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Decentralized processing facilities for cashew and mango are established under the cooperative fold at two levels, namely, village and cooperative (central). This has facilitated creation of employment opportunities for landless tribal families in the project area and also ensured appropriate price for the farm produce by providing captive markets for the raw material and better returns through value addition.

PROGRAMME PARTNERS Under the bilateral cooperation between the governments of Germany and India, Ministry of External Affairs acts as a regulatory and linkage body between donor and receiver countries. The development partners in Wadi programme and their respective roles are described as below:

Kreditanstalt fur Wiederaufbau, a German development bank, is providing grant support of 30 million euro (Rs 130 crore) for a period of 10 years for each programme in Gujarat and Maharashtra. NABARD is responsible for channelizing funds, coordination, monitoring and evaluation. DHRUVA for Gujarat/Maharashtra Institute of Technology Transfer for Rural Areas (MITTRA) for Maharashtra are the principal implementing agencies supported by BAIF Development Research Foundation, Pune. Village Ayojana Samitis (VAS—people’s organizations) are executing the programme at village level.

IMPLEMENTATION STRATEGY Tribal families having less than 5 acres of land, willing to stay in the village, willing to contribute family labour for orchard development and free from bad habits like drinking are selected. The Wadi programme lays emphasis on people’s participation throughout the implementation process. The establishment of village-level people’s organizations called VAS has been the strongest grassroots level institution for planning and implementing the programme. The VAS is a village-level committee comprising of representatives elected from amongst the Wadi participants for planning and executing the programme.

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PROGRAMME FUNDING The programme is supported by a grant assistance of Rs 130 crore by the German Development Bank, namely, KfW. The core Wadi and other components are supported with grant assistance. A unique feature of the funding mechanism is blending of grant with credit not only to ensure participants’ stake and involvement in the programme, but also for self reliance of the participants. As the programme progressed with Wadi establishment and income generating activities, loan assistance is given to the tribal participants to support income generating activities, microenterprises, water resources development and other emergent needs under alternative credit delivery systems in far flung unbanked areas. This innovative credit programme is being implemented through NGOs, people’s organizations and SHGs. TABLE 24. 1 Wadi Programme at a Glance (as on 31 July 2005) Sl No.

Particulars

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17

Programme area Launched in Target (tribal families) Villages covered Participant families Area brought under Wadi (acre) Water resources developed Soil conservation (Wadis) Landless supported No. of people’s organizations Savings by POs (Rs Lakh) No. of SHGs No. of SHG members Savings by SHGs Internal lending Production of mango (MT) Production of cashewnut (MT)

Gujarat

Maharashtra

Valsad & Dangs 1995 10,000 162 13,663 12,732.5 4,435 8,947 371 171 74.00 366 3,162 13.70 15.10 500 350

Nasik & Thane 2000 12,000 194 12,100 11,300 591 8,000 137 550 8.40 162 2,037 5.50 2.13

Source: Development Policy Department Farm Sector, NABARD, Mumbai.

PROGRAMME ACHIEVEMENTS The programme has completed nine years in Gujarat and four years in Maharashtra. In this short span, it has made significant socio-economic and ecological impact. The programme has been recognized by national and international agencies for the change it has brought about in the lives


445

of tribal families. Arresting migration and soil and water erosion are the major benefits derived so far. Other major achievements are:

Wadis spread over 24,000 acres on the private land of 25,700 families have been established. These lands considered as wastelands and non-productive assets, have become productive and sustainable assets. The availability of protective irrigation through water resources development has increased cropping intensity. A shift in cropping pattern towards commercial crops such as vegetables and pulses has resulted in generating regular income. The production of vermicomposting and NADEP compost and emphasis on bio-pesticides in the programme have opened up avenues for production of organically grown produce. Seasonal migration has been reduced to a great extent as the Wadi provides year-round employment opportunities to tribal families. This has also resulted in increased attendance in schools. The production of around 250 million tonnes of cashew and 500 million tonnes of mango has opened up avenues for processing activities. There is a substantial rise in employment opportunities for landless in procuring and marketing of farm produce and processing of cashew and mango as well as other income-generating activities in non-farm sector. The health programme has reduced the incidence of infectious diseases in the area and has improved health and sanitation in the villages.

The successful functioning of VASs and SHGs has developed confidence among the participants in asset and fund management:

The SHG movement has provided a voice to tribal women and brought out their entrepreneurial skills, demonstrated by microenterprises and income generating activities, such as nursery management and vermicomposting, undertaken by them. Initiation of informal credit delivery system (credit through VASs and SHGs) has increased access of tribals to credit for income generation. It has inculcated savings and repayment habits. Non-participant families have started adopting the Wadi model in the programme area.

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The project was presented as a successful replicable model for poverty alleviation in developing countries at the UNDP forum of ministers for poverty and environment in New York in 1999 as well as at the global dialogue in Hanover, Germany. This project was also exhibited in the ‘basic needs pavilion’ at the Expo-2000, Hanover.

NABARD’S INITIATIVES

FOR

PROGRAMME REPLICATION

CONSULTATIVE MEETS NABARD organized two consultative meets during October 2001 based on the experience of implementing the Wadi programme in Gujarat. The objective of the meets was to spread the message of the Wadi model facilitating its replication in other potential areas. Participants for the meets included district-level government officials, tribal development commissioners, NGOs and NABARD officials. Fifty-six delegates from eight states having a predominantly tribal population—Andhra Pradesh, Orissa, Madhya Pradesh, Chhattisgarh, Rajasthan, Maharashtra, Gujarat and Jharkhand (two districts each)—attended the meets.

TRIBAL DEVELOPMENT FUND The Wadi model has been found to be very effective in creating sustainable livelihoods for tribal families. In order to support similar deserving tribal families in other parts of the country, NABARD has created a dedicated fund called the Tribal Development Fund (TDF) by making a contribution of Rs 50 crore as approved in the 139th meeting of the board of directors of NABARD held on 10 April 2004. The Fund will be used as loan/grant to support Wadi and other sustainable microenterprises undertaken by tribal families in areas where tribes are predominant. This is to ensure that tribal people are not bypassed in various developmental efforts. The objective of the Fund is to spread the message of the Wadi model of tribal development. The Fund will be utilized to create the necessary framework condition to replicate and consolidate successful initiatives under the Wadi programme in the government, semi-government and non-government sector. The Planning Commission and Ministry of Tribal Affairs have been requested to augment the Fund so as to cover more tribal families under this programme.


PREPARATION

OF

447

PROJECT REPORTS

Impressed by the Wadi programme, the National Scheduled Tribes Finance and Development Corporation (NSTFDC), under the Union ministry of tribal affairs requested NABARD Consultancy Services (NABCONS) for preparation of detailed project reports for replication of the Wadi model in six tribe-dominated states, namely, Andhra Pradesh, Chattisgarh, Gujarat, Jharkhand, Madhya Pradesh and Orissa. Accordingly, project reports for the six states have been prepared and submitted to NSTFDC which are under their consideration for funding and implementation.

FUTURE OUTLOOK In India, 70 per cent of the rural population depending on agriculture for their livelihood is either unemployed or underemployed for most part of the year. The dependence on agriculture, which is largely rainfed, makes for insecurity and unreliability of livelihood. To counter this, the Wadi programme, though targetting only tribal communities, stands tall among other such programmes implemented so far. The philosophy, approach and strategy of the Wadi model is replicable and applicable to all rural poor. The model so tested deserves to be supported in other states and in other regions within the state. With adoption of the principles and approach of Wadi programme, the quality of life of rural poor on a sustainable basis can be ensured through converting their wastelands/ unproductive lands into productive orchards.

ACKNOWLEDGEMENTS Dr. B.P. Nautiyal, NABARD, Regional Office Orissa, NABARD, Regional Office, Chhattisgarh, NABARD, Special Projects Department, Head Office, Micro Credit Innovations Departments, Head Office.

REFERENCES Constitution of India: Part III: Article 46, Promotion of educational and economic interests of Scheduled Castes, Scheduled Tribes and other weaker sections. Singh, A.K. and Jabbi, M.K. (eds.). 1995. Tribals in India: Development Deprivation and Discontent. New Delhi: Har-Anand Publications.

25 Innovations in Credit Delivery Systems K.G. KARMAKAR

AND

N.P. MOHAPATRA

I

nteresting innovations have been tried out in different states and regions around the self help group (SHG) concept to meet the specific requirements of the people. These innovations have been the result of need-based interventions and reflect the flexibilities possible in the SHG model of credit delivery.

RYTHU MITHRA GROUPS IN ANDHRA PRADESH A large number of small, marginal and tenant farmers are yet to access credit from banking institutions for various reasons which include, inter alia, very small landholdings, inability to serve more number of clients due to perceived increase in work load, higher transaction cost and apathy of bankers. This being the situation and as this category of farmers belong to the vulnerable section of the farming community, they need to be assisted not only to increase growth in agriculture but also for increasing their income levels. Further, mere extension of credit facilities may not translate into increased incomes as support services like transfer and adoption of technology, harnessing collective advantages in purchase of inputs, obtaining market information and market of produce are considered essential for development of poorer category of farmers. Considering this, Rythu Mitra groups have been formed in the state by the agriculture department, which is a nodal department. Under the circumstances, the role of NABARD assumes paramount importance

Innovations in Credit Delivery Systems

449

as it offers a good opportunity to innovate and suggest alternative credit delivery systems, as also to evolve an inclusive financial system to reach poor farmers. It is therefore fitting that we shoulder the responsibilities of making the programme a success, as it is not only advantageous to farmers (enabling timely and adequate availability of credit even to uncovered farmers) but also to banks, as it would considerably reduce transaction costs. It can be stated that the Rythu Mitra approach is a comprehensive effort aimed at integrated development involving technology, credit and the market, so vital for the rural economy and for a better image of NABARD.

NEED

FOR

CAPACITY-BUILDING

The state government issued an order in June 2003 for formation of RMGs with SF/MF and tenant farmers. Accordingly, the agriculture department, which is a nodal department for implementation of the scheme, formed about 2.03 lakh RMGs in the state. The department formed the RMGs in a campaign mode and these RMGs were promised some assistance in the form of revolving funds. However, the new state government is not keen on extending such financial support but is making efforts to implement some schemes like seed village, farm mechanization and supply of inputs through the RMGs. It also needs to be mentioned that farmers belonging to the large farmer category also joined the RMGs in many groups. However, it is reported that they are not in very large numbers. The department is making efforts to ensure natural weeding out of such category of farmers from RMGs. These RMGs, though formed, have not been given any training except in some cases where officers of the department on individual basis made some efforts. In the earlier set-up, about 1,000 multi-purpose extension officers were taken on contract basis. They also nurtured and monitored the functioning of RMGs. However, as a large number of them did not have requisite qualifications, their services were terminated by the current government. The regular staff available with the department is not in a position to shoulder the responsibility of capacity-building of RMGs or their monitoring, except technology dissemination and other support. The RMG members are better off than SHG women in terms of literacy, awareness and ability to take up farming activities; it is

450


appropriate to build up capacities of these RMGs to the extent that they know the group process, its importance and role of RMGs in overall development. The process has to be a self-supporting structure as no funds will be made available for the purpose and therefore hand holding support for a long term is not feasible— more so because the quantum of funds handled is high, which is expected to generate income for RMGs in meeting this type of expense. Moreover, they are into some form of farming activity and will be in a position to bear expenditure for the purpose of sustaining groups. The government is also proposing to form another one lakh RMGs during the year, and the building up and strengthening of the groups on desired lines would give proper signals to many more RMGs.

APPROACH

AND

COVERAGE

Keeping in view the aforementioned aspects, NABARD took the initiative to upgrade capacity-building of RMGs in a big way involving individual rural volunteers, farmers’ clubs, NGOs and RRBs/DCCBs. A multi-pronged approach is suggested, as it would enable NABARD to roll out the project through the state and also measure efficacy of different approaches. The effort envisaged includes strengthening of existing RMGs, if necessary by reorganizing groups and facilitating the formation of new RMGs like tenant farmers. If marginal farmers are not in sufficient number, they will be grouped with other marginal farmers. There are large numbers of marginal farmers who need to be formed into RMGs. These proposals are discussed hereafter: The effort will be phased over a period of two years each with a nested plan for one year (from the date of implementation) and will be focusing broadly on the following aspects.

Building of RMGs with proper group dynamics. Forming/reorganizing RMGs with more homogeneity. Creating more awareness on various schemes of government/ banks. Co-ordination with banks and other agencies concerned. Creating a self-supporting structure at the end of the project period.


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The state government will be impressed upon to form new RMGs with focus on tenant/oral lessees and marginal farmers, as a large number of marginal farmers exist in the state. While identifying farmers for formation into RMGs, focus will be on the farmers belonging to poorer sections and NABARD would coordinate the effort with the state government. For capacity-building and reorganizing RMGs, only those RMGs with predominance of poor tenants/oral lessee farmers and marginal farmers will be identified. Considering the need to broadbase the effort with a view to impact more areas of the state as also to make NABARD more visible in innovation of new products, it is proposed to strengthen/reorganize about 8,000 RMGs in the state over a period of two years at the rate of 4,000 RMGs per year but while financial estimates have been made for one year period at 4000 RMGs per year. It is proposed to involve four types of agencies, namely, IRVs, NGOs, farmers’ clubs and RRBs/DCCBs as SHPIs covering all the districts through farmers’ clubs, while other agencies will be restricted to a few districts. Identified banks which are keen to partner with NABARD in this endeavour could function like SHPIs for promotion and nurturing of RMGs. Farmers’ clubs could play a key role in the process. However, options may be kept open to have flexibility with regard to the RMGs to be strengthened by different agencies. The effort will be made in coordination with all the banks in the areas identified for implementation and funds will also be routed through them to facilitate better implementation. Necessary support will also be elicited from the state government. It is proposed to cover 10 backward districts and about 5–10 mandals in each district depending on number of RMGs existing and proper geographical spread within the district also will be explored to ensure impact and demonstrative effect on the RMGs in surrounding mandals and villages. In the second year, another 10 districts will be identified for the purpose. These aspects are further discussed hereafter:

PARTICIPATION

OF

FARMERS’ CLUBS

(i) A study conducted by the R.O. on financing RMGs as also feedback received from the Cuddapah district proved that farmers’ clubs can a play a key role in strengthening of RMGs. The role of farmers’ clubs in technology dissemination and other support for development of villages is well documented. It is therefore apt to involve them in strengthening of RMGs in all the districts.

452


Farmers’ clubs could be a better medium to promote and nurture RMGs over a period of time. (ii) About 1,000 good farmers’ clubs of the 1,647 existing clubs could be involved in reorganizing and capacity-building of RMGs throughout the state. It is expected that each farmers’ club would serve about 10 RMGs in the area of operation of each club and thus 1,000 RMGs would be benefitted in the first year. In the process they also would facilitate formation of more RMGs in each village, as huge scope exists for the same by spreading awareness— no fund support is envisaged for the purpose. The farmers’ clubs will be identified in consultation with banks and LDMs concerned. (iii) The assistance made available to FCs for promotion and nurturing of an SHG is Rs 900 excluding the cost of training of branch managers and chief volunteers. Keeping this in view, the following financial requirements are worked out (Table 25.1). TABLE 25.1 Requirements for Promoting SHGs Sl No. Item of Expenditure 1 2 3

Available for SHG

Proposed for RMGs

500 200 200 900

200 200 Nil 400

Cost of promotion of SHGs/training Incentive for monitoring Cost of stationery Total

Source: Internal Circulars of NABARD, Mumbai.

As may be seen from Table 25.1, each FC can be given Rs 400 per RMG for training and monitoring. For 1,000 RMGs to be reorganized/ nurtured through FCs each year, the total expenditure will be Rs 4 lakh per year. The scheme will be operated through bank branches concerned.

RRBS /DCCBS: ROLE IN CAPACITY-BUILDING OTHER AREAS OF RMGS

AND

(i) One of the objectives of RMG financing is to reduce transaction costs while ensuring timely and adequate credit to farmers. Effort is, therefore, necessary to bring all the loanee members in the category of SF/MF/tenant, who have accessed loans in their individual capacity through group mode so that it will lead to reduction in workload connected to loan appraisal, documentation and monitoring. Further, it is expected that these procedures will


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enable bank branches to concentrate on expanding the loan business and better monitor their loan portfolio. As the mainstay of any rural branch is crop loan business, banks will be keen to involve themselves in the project. It will also enable NABARD to measure the impact of RMG financing on overall business profile and cost reduction. (ii) About 50 bank branches at the rate of five branches per bank will promote/nurture/monitor 40 RMGs in three or four villages identified. Thus, about 1,000 RMGs will be benefited in the first year. Banks and branches will be identified in due course in consultation with banks, AGM (DD) and the department. The branches would take steps to reorganize the functioning of the RMGs. It is envisaged that all the identified branches would make efforts to bring all the eligible existing loanee members into group mode through persuasion at no extra cost to facilitate assessment of impact on workload and monitoring. (iii) The assistance available to banks functioning as SHPIs is at Rs 1,350 per SHG for a period of two years, excluding the cost of training of staff. Training cost will be minimal as formation cost is not involved. (iv) The total expenditure for 1,000 RMGs will be to the tune of Rs 5 lakh. The expenditure on book-keeping is excluded as the RMGs are expected to bear the same. Funds required for training of branch staff of identified banks will be met out of budget allocated for training. The banks will ensure that animators are placed for maintaining books of accounts and other works and have proper coordination with them.

PARTICIPATION

OF

NGOS

NGOs are being involved in the implementation of comprehensive land development programme (CLDP) and other watershed programmes in the state and a few of these agencies could be identified in consultation with LDMs. NGOs could be involved for capacitybuilding of about 1,000 RMGs in the state in 10 districts at the rate of 100 RMGs per NGO in the first year. It is expected that each NGO would train about 1,000 RMGs, each covering about 10 villages or one or two mandals. On the whole, about 10–15 NGOs will be identified for the purpose. A mechanism will be instituted for withdrawal of NGOs to make the system self-

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sustainable. NGOs will be identified in consultation with LDMs, the agriculture department and others concerned. TABLE 25.2 Funds Available to NGOs Sl No. Item of Expenditure 1 2 3 4 5 6 7 8

Pre-formation activities Training to group leaders Training, monitoring and MIS Stationery and cash box Attending meeting of groups Support for facilitators Miscellaneous Refresher training, book-keeping etc.’ Total

Available to SHGs (Rs)

Proposed for RMGs (Rs)

150 200 700 200 200 900 150 500 3,000

Nil Nil 200 Nil 100 200 Nil 200 700

Source: Internal Circulars of NABARD, Mumbai.

As may be seen from Table 25.2, the total cost of nurturing 1,000 RMGs in two years works out to Rs 7 lakh at the rate of Rs 700 per RMG. The role of NGOs in building up capacity of RMGs and their liaison with the agriculture department and banks will be spelt out clearly. The NGOs will be working under the guidance and supervision of DDMs/LDMs.

INDIVIDUAL RURAL VOLUNTEERS

Two IRVs are being encouraged under the SHG-bank linkage programme for promotion and nurturing of SHGs. It is felt that IRVs in case of RMGs would be very helpful as IRVs would not only be able to cater to the needs of RMGs locally but also can liaise with the officials of the line department and banks as well. In this context, it is pertinent to mention that earlier multi purpose extension officers (MPEOs) employed by the state government on a contract basis with a pay of Rs 5,000 per month were attending to the RMGs. The MPEOs were reported to have been trained on matters connected to RMGs and therefore are well versed with the concept. Some of them have been given training on technical inputs and are therefore capable of technology dissemination. Under the circumstances, IRVs would be very helpful and would facilitate proper functioning of RMGs. It is, therefore, proposed to identify two JRVs from the erstwhile MPEOs in consultation


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with the department/concerned bank. The focus of IRVs will be on capacity-building of RMGs. It is proposed to identify about 20 IRVs in five districts, at the rate of two per district, who will be able to build up the capacities of 1,000 RMGs in the first year. The total outgo per SHG is Rs 1,800 to IRVs. However, if compensation to bank at the rate of Rs 400 per SHG is excluded, this works out to Rs 1,400. Incentive available to IRV is at Rs 1,200 per SHG for a one-and-a-half year duration excluding the cost of stationery and cash box per RMG, as it is expected that RMGs will purchase the stationery from the department. It is also expected that the remuneration for book-keeping will be paid by the RMGs themselves to the IRV (presently, in some cases, RMGs can have their own book-keepers). IRV would facilitate maintenance of books through an animator. If the amount, that is, Rs 480 per RMG per year (12 × 40) is reduced, the next funds requirement per group will be Rs 720 per RMG, say Rs 700 per RMG for a one-year period. Netting other promotional expenses, the expenditure per group may be about Rs 600 per RMG. Compensation to banks may not be necessary as banks in any case are expected to sanction crop loans to farmers. It is expected that each IRV would be able to nurture about 40–50 RMGs in about 4–5 villages and the outgo will be Rs 30,000 per year per IRV at the rate of Rs 600 per RMG. In other words, each IRV would be able to earn about Rs 4,500 per month for the first 12 months (including remuneration for book-keeping from 50 RMGs at Rs 40 per month) and thereafter Rs 2,000 per month. The total outgo works out to Rs 6 lakh. The scheme will facilitate promotion of new RMGs in the villages serviced by them in coordination with the agriculture department at no extra cost, as the incentive will be honorarium at about Rs 40 per month per group. The IRVs would be functioning under the overall supervision of the branch concerned and DDM, in coordination with the agriculture department. If required, IRVs will be trained by us and for this purpose, separate provision is necessary for incurring expenditure. Two programmes may be required for training IRVs.

The agency-wise break-up of RMGs proposed for strengthening/reorganization and fund requirement for a one-year period from the date of implementation is summarized in Table 25.3.

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K.G. Karmakar and N.P. Mohapatra TABLE 25.3 Agency-wise Break-up of RMGs

Sl No. Type of Agency 1 2 3 4

Farmers’ club Banks NGOs IRVs Total

No. of Agencies

No. of RMGs

Cost per RMG (Rs)

Total Cost (Rs lakh)

100 50 branches 10 20

1,000 1,000 1,000 1,000 4,000

400 500 700 600

4.00 5.00 7.00 6.00 22.00

Source: Internal Study of NABARD, Regional Office, Andhra Pradesh, Hyderabad.

In addition, two training programmes, including a refresher programme for IRVs and NGOs, three programmes for bank staff and about 10 programmes for farmers’ clubs need to be conducted. Training expenditure for the purpose may be permitted out of the existing budget. The total funds requirement therefore, will be about Rs 22 lakh for the entire exercise for one year.

OUTLAY

VS.

OUTCOME: INDICATORS

On the whole, it is expected that the effort will help about 4,000 RMGs covering about 60,000 tenant, marginal and small farmers will be benefited. In addition, such an effort will also enable other RMGs to emulate the best practices and also may result in formation of new RMGs on the expected lines on their own with the support of the agriculture department, banks and farmers’ clubs.

CONCLUSION The project to bring tenant farmers into the fold of banking was welcomed by both farmers and bankers. Timely and adequate credit from the banks empowered the farmers to a great extent. They also feel that, after formation of RMGs, technological aspects of agriculture are being emphasized. Their immediate requirement is to activate other line departments along with the agriculture department, which will bring synergy in overall development. For bankers, it reduced the workload as well as transaction cost. It was felt that the group approach was better suited for continuous monitoring of crop loan portfolio and recovery performance is better.


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NABARD’s EXPERIENCES IN WATERSHED DEVELOPMENT Rainfed agriculture is the major future challenge for the country’s agricultural economy. The rainfed areas account for approximately 105 million hectares, that is, nearly 70 per cent of the country’s arable land. Even after realizing the full irrigation potential, 50 per cent of the arable area will forever remain rainfed. At present, rainfed areas contribute to the production of approximately 90 per cent of oilseeds and pulses, 70 per cent of coarse cereals, and supports 66 per cent of cattle and 40 per cent of our population. Rainfed agriculture is the major source of fluctuations in foodgrain production. This area is most prone to soil erosion and subjected to erratic, uneven rainfall and meagre moisture retention. The rainfed area also accounts for a significant proportion of the rural poor in the country. It is estimated that about 80 per cent of landholdings in rainfed areas do not produce marketable surpluses, making the farming enterprise subsistence-oriented. The poverty in these regions is caused and compounded by severe resource degradation. The farmers of rainfed areas are caught in a vicious cycle of poverty. Within short- or mediumterm time horizons, there is no possibility of a shift of the population eking out a meagre level of income from the degraded rainfed areas to alternative non-land based occupations. Continued degradation of the rainfed areas through overuse is an environmental and social hazard. Watershed development is the long-term answer to this problem. Since the 1970s, treatment of dryland areas on a watershed basis has been adopted as a comprehensive approach for the development of dryland agriculture. This concept is embodied in the centrally sponsored National Watershed Development Project for Rainfed Areas (NWDPRAs) launched in 1990–91 under the aegis of the Union Government’s ministry of agriculture. The project is being implemented in 25 states and two union territories in the country. During the Eighth Plan, the project was implemented in 2,554 micro-watersheds spread over 115 agro-climatic zones and covering an area of about 4.6 million hectare. The other major watershed development programme implemented is the Drought Prone Areas Programme (DPAP) under the ministry of rural development. Besides, the Desert Development Programme, Wasteland Development Programmes, River Valley Projects and many programmes

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of the state governments cover watershed development with slightly differing objectives. In addition, during the same period, over 1 million hectares of rainfed area have been treated under externally funded projects. It has been estimated that by the end of the Eighth Plan period, about 16.5 million hectares had been covered under various watershed programmes. The ministry of agriculture accounted for nearly 7 million hectares. Within the ministry, two-thirds of the area coverage was under the NWDPRA (4.6 million) whereas the Externally Aided Projects (1 million) and Soil and Water Conservation Schemes (1.3 million) contributed to the remainder. A significant number of externally aided projects were also under implementation during the Eighth Plan. Many of them continued into the Ninth Plan. These projects are primarily funded by the World Bank, DANIDA, Swiss Development Cooperation (SDC), EEC, KfW, FAO/ UNDP and government of the Netherlands. The principal objectives under these complementary programmes are special problem area development and a dynamic process of community participation with support from NGOs. During the Ninth Plan period, contiguous areas of the existing watersheds from 500 up to 5,000 hectares as well as eligible uncovered blocks are being taken up with an outlay of Rs 2,500 crore for the country. It was estimated that a further area of 10 million hectares would be covered by the end of the Ninth Plan in addition to 16.5 million hectares covered till the Eighth Plan.

THE 25-YEAR PERSPECTIVE PLAN GOVERNMENT OF INDIA

OF THE

The 25-Year Perspective Plan on coverage of rainfed area through watershed development has been prepared taking the average unit costs estimated at the rate of Rs 5,000, Rs 7,500, Rs 11,000, Rs 15,000 and Rs 20,000 per hectare from the Ninth to the Thirteenth Five Year Plans respectively. The approximate cost involved in treating 63.40 million hectares rainfed areas (predominantly arable land) during Five Plan periods, will be as in Table 25.4. It is clear that to treat 63.40 million hectares of rainfed land an investment of Rs 75,800 crore will be required over the next 25 years. It will be possible to tackle the problem in any meaningful extent only if the creative energies and resourcefulness of the local communities are effectively harnessed for the purpose.


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TABLE 25.4 Cost of Coverage of Rainfed Areas Plan period

Area Proposed Treatment for (million ha.)

Per ha. Cost (Rs thousand)

Total Cost of Treatment (Rs crore)

10.00 12.00 15.00 15.00 11.40 63.40

5.00 7.50 11.00 15.00 20.00

5,000 9,000 16,500 22,500 22,800 75,800

Ninth Plan Tenth Plan Eleventh Plan Twelfth Plan Thirteenth Plan Total

Source: Development Policy Department Farm Sector, NABARD, Mumbai.

ROLE

OF

COMMUNITY

IN

WATERSHED DEVELOPMENT

When the environment gets degraded, the quality of life of the community also gets affected. Watershed development therefore aims at renewal of the environment in an integrated and comprehensive manner to achieve increased resistance to drought and floods, increased supply of food, agricultural produce, water, fuel, fodder, timber so as to ultimately achieve an improved standard of living for its population and reduced povertyinduced migration to the urban areas. There is a close relationship between the environment and human inhabitants. When the economic condition of a community deteriorates, it leads to over-exploitation and resultant degradation of natural resources. For example, when agriculture becomes a low return, risky gamble, people may expand their cattle herds for financial security. This may lead to overgrazing and, in turn, to soil deterioration and erosion, especially in ecologically sensitive regions where the biomass cover is already fragile. It is therefore necessary for people to see the relationship between their poverty and the degraded environment they live in. However, they have to be provided with a better economic alternative today, in order to willingly let go their immediate claims on the environment in favour of benefits that will accrue in the long run from environmental regeneration and its appropriate management. For this to happen at the grassroots level, the village community should be involved in the project planning from the very beginning and should have an effective say in its implementation and maintenance. The successful implementation model will therefore call for:

Recognition of the fact that water is a scarce and critical resource, not amenable to human control. Its conservation and effective utilization is possible by:

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(a) treatment of non-arable lands, including wastelands falling within the watershed by grass plantations, afforestation; (b) treatment of arable lands; (c) treatment of drainage lines; (d) appropriate range and livestock management systems; (e) adoption of a scientific cropping plan (land use plan) based on the land capability; (f) timely and adequate provision of inputs and extension to the farmers to encourage them to adopt new technology; (g) adoption of full package of agronomic practices and alternative land use in tune with the new technology; and (h) availability of scientific manpower to provide on-the-spot and timely guidance.

A project approach, with specific timeframe, envisaging development of the entire watershed. Adoption of an integrated, multi-disciplinary approach covering all sectoral components of dryland technology: soil and water management, cropping pattern, cattle, land use and technology. Assigning multi-disciplinary project-specific staff, more specifically training local youth in the ground work.

NABARD’S ROLE: A HISTORICAL PERSPECTIVE Ever since the inclusion of dryland farming and watershed development as a thrust area in the Prime Minister’s 20-point programme in the early 1980s, NABARD has attempted to evolve policies and models on watershed development for involving banks. NABARD’s efforts included:

holding policy workshops with ICRISAT, CRIDA and other research institutions; providing 100 per cent refinance for watershed-based dryland farming; concessions in branch eligibility for watershed project financing; arrangements for sympathetic treatment of past defaults; holding regional- and district-level workshops for bankers; running pilot projects on ‘cyclical credit’ model; and other educational and promotional efforts: production of ‘Ridge to Valley’ video and publication of Dry Land Banker newsletter.


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NABARD’s initiatives and the lessons learnt were reviewed and published as follows:

Despite NABARD’s many enabling efforts, the banks could not play an effective role in watershed development. Except in stray, isolated cases, credit flow did not pick up as desired. Even at ‘research farm’ yield levels, a large proportion of the small dryland holdings do not produce a marketable surplus of traditional crops. These farmers were not bankable in the traditional sense. Different loan products need to be introduced for them on the lines of SHGs, portfolio or homestead financing. This would also require a ground-level community organization. A large gap existed between technology developed on research farms and that actually practiced by farmers. Profitable agriculture under uncertain moisture conditions required greater, not lesser technological and managerial sophistication than under assured irrigation conditions. Risk of failure due to erratic monsoon was high. Confidence was lacking among the community and the bankers; Very strong support systems for input and technology supply and marketing are necessary if farmers have to adopt appropriate land use (agriculture-horticulture, agriculture-silviculture systems). In pilots, farmers, with or without credit, selectively adopted some aspects of dry farming technology (such as improved seeds) but did not adopt recommended farming systems such as contour cultivation, broadbed and furrow technique and fertilizer application. Credit by itself had little role to play in adoption of dryland farming technology by farmers. Extension, demonstration and education were the important factors. In well-treated watersheds, where farmers have gained confidence for taking up private investments, the credit demand is witnessed for wells, water lifting devices, water conserving irrigation systems, dairy, horticulture and draft-power. Credit business to the extent of 40 per cent of the basic investments on soil and moisture conservation could be generated. FRR on basic investments could be as high as 25 per cent to 35 per cent.

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More than the existing banking network, SHGs and other village-level community organizations may be appropriate to respond flexibly to the credit needs of dryland farmers.

Despite NABARD’s many enabling efforts, the banks could not play a very effective role in watershed development. Except in stray and isolated cases, complementary credit flow did not pick up as desired. One of the major reasons for low participation of banks was the high risk inherent in rainfed agriculture and the absence of the necessary conditions whereby the community and banks developed the mutual confidence to take up private investments. The conditions were conducive in a few successful watershed projects in the NGO as well as in the government domain. However, the isolated successes could not be replicated on a wider area. The typical issues faced by bankers while financing rural development projects, witnessed more sharply in the watershed project areas, are:

Problem of past defaults. Unless the banker is assured of responsible banking behaviour from the community, he would be wary of giving fresh loans in villages where past defaults exists. The existence of a village-level community organization could facilitate building of the mutual confidence between banks and borrowers. Lack of updated land records is a major hindrance for land-based activities. The scale of operation in credit dispensation in dryland areas may not always match with the economic scales normally considered by banks. Loaning through an intermediary structure such as an SHG or village watershed committee could be possible solutions.

INDO-GERMAN WATERSHED DEVELOPMENT PROGRAMME (IGWDP) IN MAHARASHTRA In these circumstances, an opportunity arose when NGOs in Maharashtra and the KfW of the Federal Republic of Germany, approached NABARD for partnership in designing and implementing a watershed programme. The Indo-German Watershed Development Programme (IGWDP) was conceived and built on the principles of community self-help, NGO involvement, environmental regeneration and poverty reduction.


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The programme was financed by KfW of the Federal Republic of Germany as bilateral, external grant-in-aid and its implementation commenced in 1992.

OBJECTIVES

OF

IGWDP

to develop micro-watersheds in a comprehensive manner, so as to create adequate and sustainable livelihood opportunities for the inhabitants of that area; to catalyze the formation of village groups for mobilizing their degraded environment through participatory self-help initiatives; and to facilitate the arising and unfolding of a people’s movement for sustainable economic development along watershed lines.

The Government of Maharashtra (GoM) has permitted the watershed community to treat the common property resources including forest lands and also provided for the sharing of benefits. It has advised line departments to extend all cooperation to the projects.

THE PROGRESS The programme is at present implemented in 24 districts covering 67 NGOs, 118 projects and an area of approximately 1,22,311 hectares. Out of 118 projects taken up, 64 projects are completed after implementation of participatory watershed interventions over a period of four to five years. At present, there as 24 ongoing watershed projects being implemented by different NGOs and VWCs. Grants disbursed for the projects till 30 September 2003 aggregate to about Rs 70.71 crore. The per hectare cost of treatment of the completed projects comes to Rs 5,970. Workshops and training programme are conducted regularly for the NGOs, VWCs and women SHGs to build their capacities to enable them derive maximum benefits from the programme. At the individual project level (where the project is nearing completion), credit plans are being prepared involving the service area bank branches and the district development managers of NABARD. The watershed community, bankers and government officials are brought together through workshops. At cluster level (Ahmednagar, Aurangabad and Nagpur) workshop for NGOs and VWCs are conducted to review progress and to get ground level feedback on issues like technical, implementation and credit linkage. At programme level, workshops are conducted with bankers and government officials for information sharing and to involve line agencies

464


in the overall development of the watershed. Workshops are also conducted for VWCs and women’s SHGs exclusively on post-watershed management issues to guide them on proper utilization of resources created out of the programme.

THE IMPACT Besides regular monitoring, NABARD has commissioned five project evaluation studies. The results are very encouraging. The summary reports from the five studies, namely, (i) Mendhwan Watershed, Ahmednagar district; (ii) Rajani Watershed, Yavatmal district; (iii) Shedashi–Wavoshi Watershed, Raigad district; (iv) Bhangedewadi Watershed, Ahmednagar district; and (v) Kachigatti, Aurangabad district reveal that:

the financial rates of return (FRR) range between 25 per cent to 35 per cent; drinking water scarcity in the villages has been overcome; villages which used to see off season migration, now report nil or minimum migration; there are secondary effects, like visible improvements in housing and increase in school attendance; increased number of wells have perennial water, and there has been a rise in the water levels of almost all wells; increase in agricultural production: increase in rabi area, increase in kharif output, diversification of cropping (e.g. to horticulture) and reduction in yield fluctuations; improvement in the condition of the landless due to continuous wage availability during project implementation, in their village itself and through increased agricultural activity post-project; improvement in the green cover, grass production and dairy activities; the demand for credit has gone up significantly (the credit business has enhanced up to 40 per cent of the amount invested in soil and water conservation); and with strong community involvement loan repayment has improved.

STRATEGIES

FOLLOWED IN

IGWDP

While a micro-watershed is identified by its physical characteristics, it is the peoples’ commitment that decides the inclusion or


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exclusion of a watershed, Krishi Vigyan Kendras and research organizations in the programme. It is, in effect, a ‘self selection’ process. People are asked to demonstrate their willingness/eagerness to undertake the watershed project by visiting a nearby watershed for experience/exposure and agreeing to contribute 4 days of shramdan (voluntary labour) initially without any support from the programme. Villagers agree to bring down the cattle population within the carrying capacity of the land; ban free grazing and tree felling and eschew crops which are dependant on assured irrigation. A pilot project of 50–100 hectares is taken up for treatment where the competence and willingness of the community/villagers and the ability of the NGO to mobilize and work with the villagers are put to acid test. This phase lasts for 12–18 months and affords the right opportunity for learning while doing. Technical skills required in soil and water management are demonstrated, practiced and refined in the field itself. A people’s organization called Village Watershed Committee with adequate representation of women is formed for planning, implementing and eventual maintenance of the treatment measures/structures. VWC is responsible to Gram Sabha or the entire village community. The village community is asked to partner the process of watershed development through its contribution of one-day-a-week free labour contribution (shramdan of nearly 17 per cent of project measures). Of course, as an incentive for its participation, the programme envisages ploughing back 50 per cent of free labour contribution to the maintenance fund of VWC. The treatment measures follow a ‘ridge to valley approach’. The ‘net planning’ approach adopted demands survey of each of the plots in the watershed and suggests appropriate technical measures for conservation and improvement thereof in consultation with the farmer and his family. Efforts are made to encourage VWC to think of ways and means to involve the landless in project acitivities and design appropriate systems of benefits arising from common property resources. Women in the community, besides being represented in the VWC, are encouraged to form SHGs and undertake project-related activities like raising nurseries and kitchen gardens in addition to

466


inculcating the habit of thrift and funds management/rotation of funds amongst themselves. Besides, women promotion/development activities are undertaken through a specific fund—Women Development Fund—by earmarking 5 per cent of project funds. The village community and NGOs are allowed to implement the full-scale watershed project only on successful completion of capacity-building phase (CBP) of the project. This strategy has to a large extent eliminated the incidence of failure at a later stage. The village community in association with NGO manages the entire fund meant for project measures. The management costs of NGOs are funded separately. A maintenance fund is created out of people’s contribution, ploughing back 50 per cent of voluntary labour and also an end-of-the project incentive, for future repairs and maintenance of structures. The village community is made aware of the exit requirements of NGO towards the later part of the project so as to allow VWC to take charge of future maintenance, development and possibilities.

INSTITUTIONAL ARRANGEMENTS

IN

IGWDP

The Village Watershed Committees: The ultimate responsibility of planning and implementing watershed projects rests with a village-level organization called the Village Watershed Committee. It ensures that the watershed community has effective say in the project. VWC is further empowered by transferring project grants to its bank account. People, for the first time, have financial control over the projects. As a counter check, the account requires the joint signature of the supporting NGO. Technical Support Organization: As the programme expanded, adequate and timely technical support came up as a limiting constraint. This led to the establishment of the Watershed Organization Trust (WOTR)—an NGO to provide technical and managerial support for the projects. The preparation, capacity-building activities and identification of the smaller NGOs, are now done with the assistance of WOTR. The Programme Coordination Unit: The Programme Coordination Unit comprises a representative each of WOTR and NABARD and is responsible for coordinating the identification of new NGOs and projects; promotion and training, liaising between NGOs, government agencies and NABARD, besides


helping NABARD in monitoring and evaluation of ongoing projects. The Programme Coordination Unit comprises two officials each from WOTR and NABARD to broad base the decision making and coordination. The Project Sanctioning and Steering Committee: The involvement of NGOs in programme strategy and project sanctioning and steering was formalized by having five representatives of NGOs on the Project Sanctioning Committee constituted. It plays the role of approving authority for individual projects as well as an advisory body for the entire Programme. Apart from NGOs, the Committee also comprised three representatives of the Government of Maharashtra and a representative of the Union ministry of agriculture and is chaired by NABARD. Structured NGO Workshops: Half-yearly workshops of all the participating NGOs, spanning two to three days, are held for discussing operational and strategic issues. This provides an interface between policy makers, monitors and grassroots implementing personnel. Monitoring and Feedback: Officers of NABARD visit the projects at least once in six months which is also the frequency of funds disbursement. The coordinator plays a very important role in the feedback process and information flow. A half-yearly progress report is sent to the Central government and KfW.

MAJOR LESSONS

467

FROM

IGWDP

People’s participation is an essential component of watershed development. With commitment and conviction, people can discipline themselves for their betterment. Villagers need to contribute their stake/share (voluntary labour, etc.) and feel the ownership of the project. Creating people’s organizations like VWC for planning, implementing and maintenance is a must for success and sustainability. Having a pilot phase for proof tests the abilities and motivation of community and NGO during the CBP phase insures against most future chances of failure. Women and the landless need to be integrated into the project design appropriately. Technical considerations and skills for soil and water management, based on ‘ridge-to-valley’ principle can be understood by

468


villagers through learning-by-doing, demonstration/exposure visits and other means. The village community should manage the funds for project measures through the VWC for total transparency and cost effectiveness. However, timely availability of funds in adequate measures in advance is a critical requirement for watershed projects.

LOOKING AHEAD At present, watershed development is being funded and supported by various agencies of the government following different guidelines. For some time now, the need has been felt in the government to bring about convergence and harmonization in the implementation of various watershed development projects. The major watershed development projects, namely, NWDPRA and WDSCA of the ministry of agriculture and Drought Prone Area Programme (DPAP), Desert Development Programme (DDP), Integrated Watershed Development Project (IWDP) and Employment Assurance Scheme (EAS) of Ministry of Rural Development account for about 70 per cent of funds and major geographical coverage. These schemes were considered for arriving at a common approach which was developed by both the ministries. The ministry of agriculture released new guidelines for NWDPRA in October 2000. The ministry of rural development is also expected to release its new guidelines by June 2001. The common approach emphasized an incorporation of lessons from the successful projects, namely, mandatory community participation in project design, implementation, monitoring and maintenance—a welcome departure from the past. Community participation at all stages is set to make the projects more sustainable. It may be pertinent to maintain that the new NWDPRA guidelines incorporate the concept of CBP from IGWDP which is a matter of pride for all involved with the IGWDP. The National Agricultural Policy of the government released in September 2000 seeks to promote the integrated and holistic development of rainfed areas through conservation of rainwater and augmentation of biomass production through agro and farm forestry with the active involvement of the watershed community.


469

This new approach will certainly bring in required dynamism in rainfed agriculture enhancing the productivity and production on a sustainable basis through an enduring people’s involvement for watershed development.

ACKNOWLEDGEMENT Micro Credit Innovations Department, National Bank for Agriculture and Rural Development.

About the Editor and Contributors . EDITOR K.G. Karmakar presently holds the position of Managing Director at National Bank for Agriculture and Rural Development (NABARD). He started his career in banking in the year 1975 and has worked in premier institutions such as State Bank of India and the Reserve Bank of India before joining NABARD in August 1983. His deep understanding of rural and development banking stems from his grassroots level experience in Bihar, Orissa and Andhra Pradesh where he implemented various innovative strategies for the development of the rural poor. At Head Office, NABARD, Dr Karmakar was instrumental in the implementation of the District Credit Plans (592 districts) on an annual basis, which is now recognized by policy planners all over the country as an important planning tool, and in the process of setting up the network of District Development Manager Offices (presently 392) at the district level in each state of the country. He has worked tirelessly towards forging an enduring relationship between the formal banking system and informal community based organizations in order to establish the inclusive microfinance model spearheaded by NABARD–SHG-bank linkage programme. The moment of truth came in March 2004 when Commercial Banks, Regional Rural Banks and Cooperative Banks reported lending to more than one million self help groups (SHGs), which, in fact, was the target set by NABARD for March 2007. The acceptability of the SHGbank linkage programme amongst practitioners and clients alike was proved beyond doubt. Dr Karmakar has served on various boards set up by the Central and state governments. He has written five books on rural credit/economic development and contributed important papers in prestigious national and international journals.

About the Editor and Contributors

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CONTRIBUTORS Priya Basu is currently Senior Financial Economist in the World Bank’s South Asia Region Finance and Private Sector Development Unit, with responsibility for the Bank’s financial sector and private sector development work in India. Previous positions held by her at the World Bank include the position of Economist in the Bank’s Europe and Central Asia Region, where she worked on financial and private sector development in Russia, Armenia and Georgia, and in the Bank’s Finance Vice Presidency, where she worked on the Indonesian financial restructuring programme. She joined the World Bank Group as a young professional in 1998. Prior to joining the Bank, Ms Basu worked in the emerging markets group of ING Barings Investment Bank in London. She has also worked as an Economist at the International Monetary Fund in Washington, focusing on first the Philippines and later, Turkey, as well as at the Asian Development Bank in Manila, where she worked on the China desk. Priya Basu is the author of a book titled Creating Resilient Financial Regimes in Asia: Challenges and Policy Options published by Oxford University Press in 1998. She did D.Phil from Oxford University and holds an M.Phil in Development Economics from Oxford University as well as a B.A. (Hons.) degree in Politics, Philosophy and Economics from Oxford University, the UK. She can be contacted at [email protected] H.R. Dave was member of a small team set up by NABARD in 1997 under the umbrella of Micro Credit Innovations Department, mandated to promote sustainable microfinance programmes in India and was instrumental in shaping microfinance Vision-2008 of NABARD to provide microfinance access to over one third of the rural poor under SHG-bank linkage programme. An MBA from IIM, Ahmedabad, he is currently General Manager of Arunachal Pradesh office of NABARD and can be contacted at [email protected] and [email protected] Aloysius P. Fernandez entered the ‘development’ field by accident when he returned from abroad to take charge of the Bangladesh Refugee Programme supported by a number of NGOs in the Caritas network. Since then, he has tutored in Development Studies in the UK, worked in the World Bank and in the Canadian International Development Agency and since 1982 been the Executive Director of MYRADA and the Chairperson of Sangamithra, an MFI which was promoted in 1994 but started opera-

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tions only in 2000. NABARD provided MYRADA with a sum of Rs 1 million in 1986–87 to match the savings of 300 Self Help Affinity Groups (SAGs) and to train them in institutional capacity-building. These SAGs emerged when the large cooperative societies promoted by MYRADA broke down in 1983–84. Puneet Gupta has been working with ICICI Bank since 2001. He is a commerce graduate with a Master’s degree in Rural Management from Institute of Rural Management, Anand (India). He started his career in the field of education with the Social Initiatives Group (SIG) of erstwhile ICICI Limited. The SIG is a not-for-profit department within ICICI Bank that works towards ‘identifying and supporting initiatives designed to improve the capacities of the poorest of the poor to participate in the larger economy’. Towards this end, the group works in the areas of health, education and microfinance. Puneet coordinates the work of the microfinance practice within the SIG. His current responsibilities in ICICI Bank include identification and development of new channels and products for reaching out microfinancial services to the poor. His team also works towards the creation of facilitative infrastructure for the delivery of microfinancial services and actively engages in advocacy for the promotion of the sector. Marie Luise Haberberger is a Programme Director of the GTZ-NABARD Rural Finance Programme in India since end of 2004. She has working experience in the field of financial system development, Microfinance and rural finance, development banks and savings mobilization for more than 25 years. As a financial economist by profession, she has lived and worked in other countries like Thailand, Indonesia, Malaysia, Philippines, Cambodia, Vietnam, China, France, England and USA. Ramakrishna holds a Masters in Business Administration and is a Senior Professional working with the NABARD-GTZ Rural Finance Programme. He has been associated with the field of Rural Finance and Microfinance since the last 15 years with experiences in India, Bangladesh and South Africa. He has co-authored several articles on Rural Finance in India in the Economic and Political Weekly and in the Financial Express. Jan Meissner holds a Masters in Financial Economics and a diploma in Political Economy. He works with the GTZ-NABARD Rural Finance


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Programme in India and is associated with viability assessments of SHGbank linkage. He has working experience in the field of financial system development and economic research in India, Germany, Switzerland and Sri Lanka. Krishan Jindal works as General Manager in NABARD. He has over two decades experience in rural development banking. He has contributed extensively in the field of Microfinance as a trainer, researcher and consultant. Niket Kamdar has worked on various cutting-edge technologies in the banking space that include mobiles, smart cards and biometrics. He has conceptualized multiple innovative solutions that enable delivery of financial services to the last-mile. He was part of the founding team in Financial Information Network & Operations (FINO)—a company that provides a shared technology platform to the micro-customer—and played a major role in designing the overall solution. A rank holder in his postgraduation in management from NITIE, he is a university ranker in Biomedical Engineering. He is currently working with ICICI Bank. Pradeep Kashyap is CEO, MART, India’s leading livelihoods promotion and rural marketing agency. He started the highly successful ‘Gramshree melas’ for sale of rural products. Three hundred melas have already been held. He innovated the comprehensive 3M microenterprise model. He is also a recipient of Jamna Lal Bajaj Endowment Award and has served at PMO, CM, NABARD, KVIC, CAPART and RBI national committees. Known as Father of Rural Marketing, his career spans 37 years. Vijay Mahajan studied at IIT-Delhi, the Indian Institute of Management, Ahmedabad and the Woodrow Wilson School, Princeton University. After working in the corporate sector for five years, in 1983, he founded PRADAN, an NGO, which works with 1,00,000 rural poor households (www.pradan.net). In 1996, he founded BASIX, a group of companies including a local area bank, which has supported 2,80,000 poor households with microcredit worth Rs 650 crore, in addition to savings and insurance, agricultural/business development services and institutional development services (www.basixindia.com). Vijay Mahajan serves on several GoI policy advisory bodies such as the IRDA and the Ministry of Finance’s Committee on Financial Inclusion. He is on several NGO boards.

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He was selected as an ‘Outstanding Social Entrepreneur’ by the Schwab Foundation, at the World Economic Forum (WEF), Davos in 2002. He is also a member of the CGAP Executive Committee. S. Manickam joined Indian Overseas Bank in 1971 and served the bank in various capacities. Before assuming the post of Chairman of Pandyan Grama Bank, he was heading the Tanjore region of the Bank. He has served as Chairman of Pandyan Grama Bank for 4½ years. During his tenure the entire accumulated loss of the bank was wiped out and all the 167 branches were computerized. Bimal Jalan, the then Governor of RBI, gave away ‘All India Best Rural Bank’ award to Pandyan Grama Bank. He was one of the nine delegates who attended the ‘Asian Convention on Micro Credit’ held at Dhaka. B.B. Mohanty is at present Chief General Manager, Department of Supervision (DoS) at the Corporate Office of NABARD, Mumbai. He has to his credit more than three decades of experience in Reserve Bank of India and NABARD. During his stint of three years (2003 to 2006) as Head of the Karnataka Regional Office of NABARD, he had spearheaded various developmental and promotional initiatives, interventions and innovations in the state under the aegis of NABARD, specially for microfinance and microenterprise promotion, watershed development and Farmers’ Club movement, etc. He was deeply involved in the upscaling of SHG-bank linkage programme through cooperatives in the state. During his 25 years of illustrious career in NABARD, he has made significant imprints with regard to non-farm sector development, microcredit innovations, HRD and supervision of Rural Financial Institutions (RFIs) while working in the related departments at NABARD head office in various capacities. He has received intensive training and field exposure in India and abroad in various facets of rural credit/development. N.P. Mohapatra was sub-editor in the Sambad, a prominent Oriya daily and worked with Late Surendra Mohanty, the famous Oriya writer and Sri Soumya Ranjan Patnaik, Editor, Sambad (of Eastern Media Limited). He had the opportunity to work in news agencies and the sports magazine, Sports Information. He was founder member of Sandhya Tara Sahitya Sansad, Dhenkanal. He has written Bhinna Ratrira Akasa,Vinna Balaya,Vinna Swara—collections of short stories in Oriya. He was Cultural Secretary of Lucknow Oriya Samaj, Lucknow. He was a faculty member, Bankers’ Institute of Rural Development, Lucknow (www.birdindia.com)


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from 2000 to 2005. He had the opportunity to visit the Philippines, Bangladesh and South Africa to study microfinance and microfinance regulations. Currently, he is posted as AGM, NABARD, Bandra Kurla Complex, NABARD (www.nabard.org), Mumbai. K. Narender is associated with the grassroots development work for more than 15 years, and has been especially instrumental in strengthening the Kalanjiam enabling model of DHAN Foundation in India. He is also one of the founders of DHAN Foundation and currently part of the strategic team guiding the organization. A.K. Parhi holds an M.Phil degree and joined NABARD as an entry level officer in 1985. He served in the state offices of Orissa, West Bengal and in the head office at Mumbai. He is deeply familiar with the entire gamut of functioning of NABARD. The article was written by him during his association with the SHGs, MFIs and banks in West Bengal for upscaling the microfinance programme through SHG-bank linkage. He is at present the District Development Manager, Koraput, Orissa. L.R. Ramachandran is a post-graduate in Bank Management and has 25 years of working experience in a commercial bank and NABARD. He has wide exposure in national and international microfinance operations because of his association with NABARD and as faculty member of BIRD. His areas of specialization in BIRD have been Finance and Microfinance. Presently, he works as Assistant General Manager, NABARD, Kerala Regional Office. K. Muralidhara Rao is a General Manager in the Micro Credit Innovations Department of NABARD, Mumbai, is a post-graduate in Agricultural Economics and a Certified Associate of Indian Institute of Bankers. He has development banking experience of over 25 years in the areas of project appraisal, monitoring and evaluation of projects, training and microfinance. C.S. Reddy is the founding Chief Executive of APMAS, based in Hyderabad, a technical support organization for the promoters of SHGs and SHG federations in India. His areas of expertise include institutional development, microfinance, livelihood promotion, self-regulation of community based microfinance institutions, project design, monitoring & evaluation and organizational strategy. He has

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worked with CARE International in India for a period of 12 years prior to APMAS. He has provided technical and consultancy services to DFID, the World Bank, IFAD, CARE International and many other international and local organizations, including various government departments engaged in community based microfinance. He has a Masters in Statistics and Operations Research and an M.Phil in Operations Research. C.S. Reddy can be reached at [email protected]. To learn more about APMAS, please vist www.apmas.org. S. Santhanam is a post-graduate in Economics, a Certified Associate of Indian Institute of Bankers and works as General Manager, NABARD at its Maharashtra Regional Office, Pune. He has development banking experience of over 27 years. He has conducted a number of studies on SHGs and worked closely in developing various policies relating to implementation of the SHG-bank linkage programme. He was also associated with the Task Force on Regulatory and Supervision of Microfinance set up by NABARD. In addition, he has worked as a Consultant for international agencies like APRACA and UNOPS. P. Satish has an MBA (Finance) from Osmania University in Hyderabad, India, an MS in Economic Policy from University of Illinois at UrbanaChampaign, USA and has been trained in Project Appraisal and Risk Analysis at Harvard University, USA. He is the Chief General Manager of NABARD, the apex financial institution in India for agriculture and rural development. He is at present in charge of finance, resource management and treasury functions of the bank at its head office in Mumbai. He was earlier General Manager at NABARD’s Chandigarh office looking after the states of Punjab and Haryana. He was a faculty member at Bankers’ Institute of Rural Development (BIRD), Lucknow and has grassroots level experience, having worked as NABARD’s District Development Manager in the state of Andhra Pradesh. He has also worked with Reserve Bank of India, the central bank of the country. Mr Satish was involved with several consultancy and action research projects including those for SDC, IFAD, DFID, UNOPS, USAID, Government of India and UNDP and has studied and documented Rural Finance and Microfinance programmes in nearly a dozen countries across Asia, Africa and Latin America. He has published more than 50 research papers and articles in national and international journals and periodicals, and 6 books in the fields of Rural Finance and Microfinance. He has


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also presented papers in several national and international conferences and seminars. Sukhbir Singh is presently Chief General Manager heading the Uttar Pradesh Regional Office of NABARD at Lucknow. He is M.Sc. in Agriculture and has 33 years experience in agriculture and rural lending sectors. He has vast experience in project lending and RIDF projects, rural nonfarm and microfinance sectors. N. Srinivasan is a development economist who was a Chief General Manager with NABARD till recently. He has handled corporate planning function for the bank and headed a large regional office of the bank where he facilitated the growth of the SHG-bank linkage programme. He has wide ranging interests and a passion for Rural Finance. He has jointly authored a book on Savings Services for the Poor, edited by Madeline Hirschland and published by Kumarian Press. B.S. Suran is a Ph.D and a Certified Associate of the Indian Institute of Bankers (I). He presently serves NABARD as a middle level executive. He has professional experience in microfinance and rural development spanning over two decades. Having been associated with NABARD’s microfinance programme since its early stages, he has been instrumental in undertaking national level studies on informal savings and credit groups, designing financial products for the poor and also strategizing the expansion of the SHG-bank linkage programme. He has also initiated a few pilot projects in microfinance and other related areas. He presently heads the Department of Supervision in NABARD’s Regional Office in the state of Gujarat. He can be contacted at [email protected] Thanksy Francis Thekkekara has done MBA and LLB and has been leading the SHG development programme in Maharashtra from May 2001 as Managing Director of the Mahila Arthik Vikas Mahamandal (MAVIM). She belongs to the 1978 batch of the IAS Maharashtra cadre and is of the rank of Principal Secretary to the state government. Today there are 53,425 SHGs formed through MAVIM under various SHG development programmes and its 120 partner NGOs. The savings of the SHGs are Rs 63.45 crore, internal lending is Rs 135.16 crore and bank credit obtained is Rs 98.63 crore. Mrs Thekkekara has registered for her Ph.D in Microfinance with the Department of Humanities and Social Sciences, IIT.

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Jayshree Vyas, a professionally qualified chartered accountant has been working as the Managing Director of Shree Mahila Sewa Sahakari Bank, Ahmedabad since 1986 which has more than 2,00,000 women clients. Some of her key appointments include being a Trustee in Indian School of Microfinance for Women, Ahmedabad, Board Member in Women’s World Banking, New York, Member of the Task Force on Housing Finance for the Poor, and Board Member of National Housing Bank, New Delhi.

Index

3M: application of, 140; approach, 136 Abhiyutthan Mandals, 350 accounting records, 286 agricultural economy, 457 agriculture, rainfed, 457 Amul, 139 anganwadi workers (AWs): 373, 386, 392; role of, 391 anti-money laundering safeguards, 63 Antodaya, 434 APMACS Act, 146, 170 APMAS, federations rated by, 160 arabari model, 429 Area Development Societies (ADS), 152 Asia and Pacific Regional Agricultural Credit Association (APRACA), 358 Asmitha Microfin Ltd, 104 ATM, 398, 403 BAIF Development Research Foundation, Pune, 441 balance sheet, 294 Bandhan: 324, 327–28; financial ratios of, 330; performance of, 325 Bangladesh Rural Advancement Committee (BRAC), 190, 225 Bank for Agriculture and Agricultural Cooperatives (BAAC), 413 Bank Linkage Programme, 224 bank: account, procedures to open, 29; branches, village-based network of, 68; commercial, 42, 58, 67, 23; cooperative, 58, 67, 422; credit-

creating role of, 27; credit, eligibility for, 435; credit on immature groups, 207; direct, linkage, 254; financing, 85–86; linkage with, 183; nationalization, 37; nationalized, 35; new private, entry of, in rural finance, 30; operational and financial autonomy of, 21; partnership model, 88; privatization, 21; rural cooperative, 20, 31; rural, government-dominated, 26; rural, losses in the income of, 27; share of, 22; SHGs financed by, 40 Bankers Book Evidence Act, 1891, 412 Bankers’ Institute of Rural Development (BIRD), 92 Banking Regulation Act, 1949, 412 banking: anywhere, 398; arena in India, 398; concept of, 398; correspondents, 89; doorstep, 29; Indian, 22–25; Internet-based, 398; phone, 398; with poor, 82; with poor and illiterate, 267; rural, institutions, 36; social, 21, 37; system, 21; system, formal, 33–34, 68, 114; system, governmentdominated, 21; system, induction of SHG networks into the formal, 47; traditional, channels, 399; with women, poor self-employed, 262; women, with poor, 265–66 Bhartiya Samruddhi Finance Ltd, 103 Bidar District Central Cooperative Bank: 360, 383; evolution of SHG-bank linkage in, 361; PACS Model,

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358–85; as SHPI, 366; strategy adopted by, 383; structure in, 359 book-keeping: compensation of, 282; parameters in defining quality in, 276; practice of, 286; practices of SHGs, 50; quality of SHG, 282; quality, practices, 323 SHG, in Ibtada, 281 SHG, system of CCD, 289 system of Mahakalasm SHGs, 287 system, Ibtada-promoted approach in the SHG, 286 books and accounts, maintenance of, 368 borrowers: profile of, 233; small, 26 borrowing: bank, 87; formal, 23; informal, 25 BRAC of Bangladesh, see Bangladesh Rural Advancement Committee branch licensing policies and procedures, 31 brand building, 139 Bulk Lending Scheme, 117 Business Correspondents, 65 business development services, 184 Cable TV and transport operators, 33 Canara Bank, 230 capacity-building: 141; need for, 449–50; phase of the project, 466; of women and SHGS, 335 CAPART, 138, 142 capital: asset formation, 48; working, for business, 263 CARE, 92, 145 cash: collection and disbursal, 305; crops, 33; flows, seasonal, 229 Cashpor, 104 Catalyst Fund, 104 CBO federations, see Community Based Organizations CCD, see Covenant Centre for Development Chandrapur District Central Cooperative Bank (CDCCB): 386; Anganwadi Model, 386; management of, 389 cheques, post-dated, 416 clients: bad, 277; good, 277

cluster development approach by UNIDO, 140 Cluster Development Associations, 252, 255 Code of Civil Procedure Act, 1908, 412 collateral: 25, 87, 263; conventional, 413; innovations in use of, substitution, 413; physical, requirements, 63; social, 423; substitutes, 413 collateralization: 410, 411; cost of, 411–12; cost of, for various loan sizes, 412 collective marketing, 139 commercial financial institutions, 79 commercialization: of agriculture, 33, 34; of federation, 167 commission agents, 33 Committee on Empowerment of Women, 45 communication, two-way, 165 Community Banking Programme, 244 Community Based Organizations (CBOs), 287–88 Community Development Societies (CDS), 152 Community Enterprise Forum International (CEFI) network, 289 Community Managed Resource Centres (CMRCs), 152 community: financial institutions, 260; participation mechanism, 426 Companies Act, 1956, 412 competition: in rural banking, 30; in the banking sector, 21 composite financial services, 29 Comprehensive Land Development Programme (CLDP), 453 Comprehensive Tribal Development Programme: 441; through Wadi Approach, 440 Computer Munshi (CM): 302; and capacity-building of stakeholders, 314; as an entrepreneurship model, 320–21; practices, 313; project, 302, 310; project, observations on, 312; reports and statements generated by, 307; system of accounting, 314;

Index system, transition from manual to, 319 computerization of accounting information of the SHGs, 315 consultative meets, 446 consumption: credit, 34, 41; loans, 34 convergence, SHG-based, of basic services, 51 Cooperative Development Foundation (CDF), 103 Cooperative Societies Act, 37 corporate governance, 85 corporate sector, closer link with, 142 cost: of cluster development association, 256; operating, 101; of outreach to the poor, 43; promotional, 260; total operational, 256; transaction, of dealing with the poor, 26 Covenant Centre for Development (CCD), 287–88, 298 credit: access to, from a formal source, 23; bad, decisions, 27; based on savings performance, 263; costeffective, delivery mechanism, 423; delivery mechanism, 416; delivery system, 425; disbursement, 345; formal, institutions, 34; information, 25; information bureau, 407; innovations, 425; innovations in, delivery systems, 448; markets, 34; monitoring mechanism, 416; nonrecovery of, 333; planning, 21; plus approach, 416; plus approach for tribal development, 425–47; primary, societies, 37; priority sector, requirements, 21; quantitative, targets and subsidized credit, 21; quantum of, 422; rationing, 27; rural, 33; rural, agencies, 36; rural, planning, 21; for stability, 252; timely, 260; women’s need for, 213 CRIDA, 460 CRISIL, 92 cultivators, marginal tribal, 439 dairy business set up by SHG women, 208 Dastkar, 139, 142

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debt, bad, 101 decentralization, challenge of, 169 defaulter: 188; attitude to, 212; defaults, problem of past, 462; list of, 200; under earlier poverty alleviation programmes, 198; willful, 212 democracy and development, 271 Department for International Development (DFID), 138 Department of Women and Child Development, 373 deposit mobilization, 62 Desert Development Programme (DDP), 457, 468 Development of Humane Action (DHAN) Foundation: 45, 53, 145, 243–44, 261, 334; costs of, staff, 255; operational costs of, 244 Development of Women and Children in Rural Areas (DWCRA), 193 DHAN Foundation, see Development of Humane Action (DHAN) Foundation DHRUVA, 443 District Central Cooperative Bank: 35, 148, 365; financial cost and benefit of, 381; promotional cost incurred by, 384 District Forestry Committee, 427 District Poverty Initiatives Project (DPIP), 138 documentation, standardizing, and reporting formats across SHGs, 298 Drought Prone Area Programme (DPAP), 457, 468 dryland agricultural techniques, 428 ECB, see External Commercial Borrowings economies of scale, 139 EDA Rural Systems, 107, 379 efficiency: and profitability, 166; of rural finance markets, 31 Ekgaon Technologies, 291 Employment Assurance Scheme (EAS), 468 employment, insecure, 262 External Commercial Borrowings: funds, 63; proceeds, 63

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Fab India, 139 farmers clubs: 354, 451; participation of, 451; volunteers of, 349 federation: clusters and, 256; meaning of, 146; need for, 146; support to, for social sector, 261 finance: access to, 25; formal, 25; formal, for rural households, 23; poor access to, 25; role of, in promoting equitable growth, 20; rural, 30 financial operations, viability of, 328 Financial Self Sufficiency (FSS), 161 financial sustainability, 99, 177 of the SHG-bank banking programme, 180 financing: collateral-based, 413; objectives of RMG, 452; RMG, on overall business profile, 453 forest: management of, 428; officials, relationship of local communities and, 431 Friends of Women’s World Banking (FWWB), 231 Gandhi, Indira, 20 good book-keeping system, 277 good practices: documentation of, 322; documentation of, in book-keeping, 321; in SHG Book-keeping, 274 GoodWell Fund, 104 grain bank: 425, 432–33; features of, 435 grain golas, 435–36 grain loans, repayment of, 435 Grameen Bank: 108, 186, 190; model, 114; in Bangladesh, 29; loans, 414 group formation, reasons for, 202 GTZ-NABARD rural finance programme, 274 guarantee, mutual, contract, 422 Gurjari, 139 Ibtada: 285–87; book-keeper (munshi) in the SHG system of, 281; munshi system of, 277; SHG accounting system of, 280 ICICI Bank, 30 ICRISAT, 460

IGWDP, see Indo-German Watershed Development Programme (IGWDP) implementation, design of systems and, 165 income generation, support for, 252 Income Tax Authorities, 226 indebted households, rural, 67 Indian Bank, 230 Indian banking system, achievement of, 58 Indian Evidence Act, 1872, 412 Indian School of Livelihood Promotion, 107 Indian School of Microfinance for Women, 107 Indian Trust Acts, 1882, 102 Indira Mahila Yojana, 391 Indo-German Watershed Development Programme (IGWDP): 462; institutional arrangements in, 466; objectives of, 463 information: accuracy and quality of, 316; decentralization of, collection, 401; gathering system, 416; systems, breakdown of, 401 infrastructure, facilitative, 406 initiatives: NABARD’s, 117; NABARD’s, for programme replication, 446 innovation, risk-taking and, 26 Insolvency Act 1909/1920, 412 Insurance Regulatory and Development Authority (IRDA), 99 Insurance: for the poor, 264; importance of, 208; scheme, work security, 270; schemes, deposit-linked work, 268; services, 254 Integrated Rural Development Programme (IRDP): 37, 39, 125, 189; defaulters, 212 Integrated Watershed Development Project (IWDP), 468 Intensive Child Development Scheme (ICDS), 387 interest: payment of, on savings mobilized, 132; rate, 30, 63; rate regulation, 42 International Fund for Agricultural Development, 190, 210

Index Internet, village, kiosks, 88 investment: foreign, 62; in government securities, 28 IRDP, see Integrated Rural Development Programme IRMA, 142, 236 JFM, see joint forest management Jharkhand, tribal population in, 436 JLG, see joint liability groups joint forest management: 425; experience of, in Andhra Pradesh, 427; principles of, in India, 428; programme, 426; programme is soil and moisture conservation work, 428; progress of, in india, 426; role and importance of, in West Bengal, 428 joint liability groups (JLG): 101, 341, 419; credit-led, 341; savings-led, 341 Kakathiya Grameena Bank, 133 Kalahandi Anchalik Grameen Bank (KAGB), 433 Kalanjiam Community Banking Programme (KCBP) groups, 243, 247, 261 Kalanjiam Model, cost of promotion and sustainability of, 255 Kalanjiam Programme, financial services of, 247–255 Kalanjiams, 252 KALASM, 288 Karnataka Industrial Cooperative Bank Limited, 360 Karnataka State Financial Corporation, 360 Kerala, Shreyas in, 81 Khadi and Village Industries Corporation (KVIC), 138, 140 Khan Committee, 99 Khosla, Vinod, 104 Kinkiny Joint Liability Group, 422 Kisan Credit Card: 354; holders, 34 Know Your Customer (KYC) guidelines, 63 Kreditanstalt fur Wiederaufbau (KfW), 441, 443–44, 462 K-REP in Kenya, 83

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Krishak Clubs, 345, 347 Krishna Gramin Bank, 360 KVIC, see Khadi and Village Industries Corporation landholdings, 438 Land Reforms Act, 412 leadership: and coordination, 375; second line, 164 lending: methodology, 165, 421; to NGOs, 226; policies, 326–27; priority sector, obligations, 30; rates on small loans, 21; small and flexible loans, 328; to smaller clients, 27; strategy, 336–38 liabilities, individual, under the guarantees, 421 liberalization: competition and, in the Indian financial sector, 21; of interest rates, 268 Lijjat, 139 Limitation Act, 1963, 412 liquidity management support (LMS), 91 livelihood: home-based, initiatives, 48; objectives, non-timber based forest produce-based, 48; promotion, approaches towards, 136–37 livestock wealth, development of, 48 loan: extended by commercial banks, 24; purpose and size of, 237; recovery performance of the, through MFIs, 86; and repayment, 48; repayment capacity, 73; repayment in the future, 277; repayment in the past, 277; repayment, weekly, 328; repeat, 328; Sanghamithra’s, 241; service agents, 88; and subsidies, 200; to SHGs, 433; timely and hassle free disbursement of, 327 Local Area Banks, 35 local financial intermediaries (LFIs), 399 Local Resources and Traditional Skills (LRTS), 287 Mahakalasms: 288; CCD-promoted, 290; summary of the records in, 295 Mahalir Thittam programme, 296 Maharashtra Cooperative Societies Act, 386

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Maharashtra Institute of Technology Transfer for Rural Areas, 443 Maharashtra Rural Credit Programme, 152, 190, 210, 388 Mahasemam Trust, 104 Mahila Arthik Vikas Mahamandal (MAVIM), 190 Mandal Samakhya, 146 market support agencies, 139 Marketing and Research Team (MART), 136, 138 MAVIM, see Mahila Arthik Vikas Mahamandal M-CRIL, see Micro Credit Ratings International Limited member: detail form, 294; economic indicators, 294; receipt & payments, 295 MFDEF, see Microfinance Development and Equity Fund Microfinance Institutions (MFIs): 69, 233; appraisal of, 92; as banking correspondents, 65; borrower, 63; cooperative, 61; development of a network of, 64; equity fund for, 65; expansion of the operations of, 84; external commercial borrowings (ECB) by, 62; financial sustainability, 100; governance of, 105; human resources in, 106–07; in India, 59; and legal forms, 59; linkage of, and bank branches, 86; linkage of, with the banking system, 86; linkage programme, 87; linkage programme of SIDBI, 90; loanable funds requirements with, 86; minimum performance standards for, 77; model of doorstep delivery, 100; mutual benefit, 70, 82, 103; NABARD’s linkage with: 91; NBFC, 62, 70; nonprofit companies as, 82; non-profit, 102, 105; not-for-profit, 61, 69, 73; ownership of, 102–05; private, 63; private, in India, 66; for profit, 61, 70, 82; for-profit, in India, 103; rating of, 77; risk evaluation of, 42; sector in India, 78; start-up, 107; supervision of, 75

Michael and Susan Dell Foundation (MSDF), 104 Microcredit Cell (MCC), 363 Microcredit Ratings International Limited (M-CRIL), 92, 153 Microfinance Development and Equity Fund (MFDEF): 76, 118; Advisory Board of, 76 microcredit: 50; accumulation of capital and, 430; concepts, 36; concept of, with mutual guarantee, 413; critics of, 237; delivery system, 43; demand for, 97, 98; efforts, 266; evolution of, into microenterprise, 46; initiatives, 90; institutions, 271; needs of poor people, 40 micro-deposits, 48 microenterprises: 41, 48–49, 135, 222; development, 36; movement from microfinance to, 141; promotion, 122; rates of return on capital in, 97; setting up of, 41 microentrepreneurs, 97 microfinance: 28, 36–38, 186, 272; activities of NGOs, 72; assets, 407; concepts in banking institutions, 37; concepts, 37; development and Equity Fund, 66; emergence of private, industry, 58; evolution of the, concept, 334; financing of infrastructure through, 153; history of, in India, 96; Ibtada’s, programme, 278; impact of, on bank’s profitability, 336; initiative in the private sector, 58; innovations in India, 93; lending, 414; movement, 400, 425; net owned funds requirement for NBFCs engaged in, 75; organizations, 324; outside SHG-bank linkage, 81–83; private sector rural and, operators, 58; professionalism in, 230; role of technology as a growth catalyst in, sector, 397; in rural areas, 38–41; scope of, 108, 355; sector, 400; sector in India, 70; service providers, 58; through SHGs, 59; status of, in india, 114; success of, in Chandrapur

Index district, 393; technology with reference to, 405; training institutions, 90; World Bank model of, 43 microentrepreneurship model, 52 microfinance institutions (MFIs): 57, 69; fraud, 414; in India, 57–66; issues facing, 42; specialized, 27 microfinancing by ‘non-formal’ financial organisations, 80 microinsurance: 186, 272; provision of, to the SHG members, 123 micro-loans, 37; appraisal machinery for sanction of, by rural bankers, 53 micropayments system, 101 microsavings, 48, 272 MicroVest, 104 Mitra Mandals, 350 MITTRA, see Maharashtra Institute of Technology Transfer for Rural Areas money transfer, 36 moneylenders: 33, 413, 435; exploitation by, 432; share of, 22; and traders, 37 monitoring: 166, 433; cum review meeting, 371; desk, 370; documentation and, 452; and feedback, 467; field, 370; grading system and, of SHGs, 172; postlinkage, of groups, 182; of Sanghamithra’s operations, 239; statements, 370; systems, 370; at village level, 370 mortgages, 422 multi purpose extension officers (MPEOs), 454 Musti Vikshya method, 431 mutual benefit trusts (MBTs), 103 Mutually Aided Cooperative Societies (MACS), 61, 70 Mutually Aided Cooperative Societies (MACS) Act, 82 MYRADA, 58, 126, 145, 152, 179, 190–91, 206, 222–25, 234, 239–41 NABARD Consultancy Services (NABCONS), 447 National Bank for Agriculture and Rural Development (NABARD): 26–27, 39,

485

41, 45, 58, 62, 68, 80, 126, 128, 138, 142, 230, 264, 357, 360, 374, 417, 421, 433, 443, 450–51; SHG-bank linkage programme, 209; task force, 1998, 74; research and development fund of, 115; setting up a microfinance development fund in, 118 National Credit Cooperatives, 70 National Forest Policy, 426 National Microfinance Equity and Development Fund, 104 National Scheduled Tribes Finance and Development Corporation (NSTFDC), 447 National Watershed Development Project for Rainfed Areas (NWDPRA), 457, 468 nationalization, 20 Negotiable Instruments Act, 1881, 412 nested institutions: promoted under KCBP, 260; propositions for promotion of, 227–60 New Loan Summary, 295 NGO: engaged in microfinance activities, 63; formal partnership agreements with, 231; MFIs, 60, 72, 75, 81–82, 104; MFIs, registration of, 74; MFIs, regulation and supervision of, 74; practitioners, 47; promoted SHG federations, 146; releases and bank gradation, 198; as SHPI, 366; structured, workshops, 467 Non Banking Financial Companies (NBFCs): 70, 73; accepting public deposits, 83; engaged in microfinance activities, 73; foreign equity investments in, 73; institutions registered as, 64; minimum capital requirement for, 73; new types of, 77; registered under Section 25 of the Companies Act, 1956, 76 Non Performance Loans (NPL), 410 non performing assets (NPA), 26, 35, 345 non-bank finance companies, registration as, 103 non-timber forest produce (NTFP), 139 NPAs, see non performing assets

486


Omidyar Network, 104 Operational Self Sufficiency (OSS), 161 organizational structure for SHG-bank linkage work, 363 Outreach, 152 PACS, see Poorest Areas Civil Society Pandyan Grama Bank, 333 Participatory Forest Management, 431 Participatory Management, 425 Participatory Rural Appraisal (PRA): techniques, 188; techniques for identification of the poor, 206 partnerships, public private, 138 PLR, see prime lending rate point of sale (POS), network of, 101 Poorest Areas Civil Society (PACS): 153; impact on business development in, 378; as SHPI, 366 poverty alleviation: 47; programmes, 114 power generation utilities, 404 Practitioner Learning Programme in Improving Efficiency, 290 PRA, see Participatory Rural Appraisal PRADAN, see Professional Assistance for Development Action Prathama Bank: 343, 346, 350; farmers’ club model, 349, 356; performance of, 352; SHG members of, 356; strategy, 348 Prathama model, 351, 354 precondition for sustainability of the institutions, 260 Primary Agricultural Cooperative Societies (PACS), 35, 148 Primary Cooperative Agriculture and Rural Development Banks (PCARDBs), 360, 422 primary stakeholders, 170 prime lending rate (PLR), 21, 27 PRODEM in Bolivia, 83 Professional Assistance for Development Action (PRADAN): 145, 242, 298, 299, 309; Computer Munshi System of, 303; computerized accounting system in, 302; and its scope of activities in 2005, 299; initial experiences in replicating CMs, 311;

professionals, 307, 314–15, 318; professionals and software developers, 320; professionals, utilization of the reports by, 308; promoted SHGs, 301; role of the, professionals, 310; SHG accounting system of, 302; SHG accounting system designed by, 316; SHG programme of, 300; SHGs promoted by, 300; the Computer Munshi project of, 298 profitability, improvement of credit portfolio and, 337 Programme Coordination Unit, 466 Project Sanctioning and Steering Committee, 467 public call booths, 33 Public Money Recovery Act, 412 quality: of linkages, 182; and regularity of book-keeping, 165 Quantitative Performance Indicators, 155 Ramkrishna Lok Shiksha Parishad, 431 Rashtriya Mahila Kosh (RMK), 58, 62 RBI Act, 1934, 60, 72 Receipts and Payments Statement, 294 Recovery of Dues of Banks and Financial Institutions Act, 412 Refinance: support, 375; window for banks, 92 refinancing through securitization, 88 reforms in the banking sector, 409 regional rural banks (RRBs), 24, 31, 58, 67, 297 Regular Meeting Transaction Statement (RMTS I), 304, 305, 306 regulation: issues in accessing public deposits and, 83–84; linkage as a surrogate for, 85–86; of NGO-MFIs, 75; and supervision, 64 regulatory mechanisms, 51 repayment: loan, and disbursement, 292– 93; external loan, and outstanding, 295; of loans in cash, 47; by members to SHGs, 119; terms and security, 422; to the grain bank, 435

Index Revolving Fund Assistance (RFA), 91 River Valley Projects, 457 RMGs, formation of, 456 RRB, see regional rural banks rural banking, advancement of, 35 rural banks, restructuring of, 31 Rural Development Department (RDD), 213 Rural Entrepreneur Development Programme, 53, 355 rural haats, market access through, 137–38 Rural Infrastructure Development Fund (RIDF), 427 Rythu Mithra: 425; approach, 449; groups, 448 SADANA, 288 Sahakara Rural Development Academy (SAHARDA): 365–66, 372, 374, 384; depreciation on the assets created in, 381 sahayoginis, MAVIM’s, 202 Sampark Abhiyan, 390 Sanghamithra, 220, 222, 226, 228–31, 233–34, 239, 240–41 Sarvodaya Nano Finance Ltd, 103, 106 Sasha, 142 savings: diversified, 252; management of, in shgs, 129; need for, products for members/SHGs, 133; primary, 252; priority for, 265; safety of, mobilized, 132; SHGs and, mobilization, 125; voluntary, 292 SCBs, 35 Section 25 of the Companies Act, 1956, 73, 103 security, social, 265 Self Employed Women’s Association (SEWA), 80, 139, 206, 262 Self-employment Training Institute, 374 Self Help Groups (SHGs): 49, 59; accounting system, 304; accounting work of, 281; bank linkage, 28; benefits obtained by the, 297; CCD-supported, 296; concept, 68; credibility of, 224; delivery mechanism of, 39; deposits, 43;

487

details of the, books of accounts (BoA), 292; disadvantages of promoting, federations, 148; emergence of, 68; federations, 43–44, 146, 148; federation model, 147; federation, objective(s) and activities of, 149; federations rated by APMAS, 159; federations, emergence of, 144; federations, emerging, and challenges, 143; federations, piloting of, 144; federations, promoters of, 151; federations, status of, 153; financial health indicators for, 276; financial parameters of, formation, 54; formation of, 347; formation by DCCB, 367; functioning of, 279; fund availability to, at federation, 165; grading of, 120; grading system, 162; growth of, in India, 53; growth rate of the, 40; impact on the development of, movement, 214; indirect benefits of, banking, 379; livelihood promotion among, 135–42; loans, 43; mature, 46; member awareness, 167; monthly meetings in, 162; movement, 40; movement in Bidar district, 379; movement in India, 143; movement, potential of, in tapping untapped savings, 131; NABARD programme on, 37; networking of, 144; NGOpromoted, model, 96; operational highlights of, 289; operational sustainability of, 180; other innovative initiatives in formation of, 367; performance, 162; policy framework for savings mobilization by, 129; popularity of, 39; programme, 52; progress of, promotion and financing, 375; progress of, promotion under the Bidar DCCB-PACS Model, 376; promoters, 127; promoting training institutions, 322; quality of, 41, 122; reasons for promoting federations of, 146; recovery performance at federation and, levels, 172; savings mobilization by, 131–32; services to, 161; services to constituents, 166;

488


social activities of, 340; success stories worth replicating, 338; successful functioning of VASs and, 445; women and, 45; women, model, 143 Self Help Promoting Institution (SHPI), 41, 116, 386 self-regulation, 43, 51 self-employed workers, 262 self-help affinity groups (SAGs), 220 self-management and sustainability of groups, 244 self regulatory organisations (SROs), 64 service costs, system of collection of, at federations, 256 settled cultivators, 436 SEWA, see Self Employed Women’s Association SEWA Bank: 103, 105, 264; features of, 263; growth of, 267; members of, 263; objective of, 263; performance of, 270; reliability of, 266; success of, 271 SGSY, see Swarnajayanti Grameen Swarozgar Yojana Shakara Rural Development and Self Employment Training Institute (SHARSETI), 374 share of commercial banks and cooperative banks in rural household debt, 22 sharecropper: 34; tenancy terms between the owner and, 34; working capital requirements of, 34 SHG, see Self Help Group SHG-bank credit linkage programme, 38 SHG-bank linkage: 116–17; expansion of the, programme, 59; genesis of, programme, 114; model, 69; model, banks’ preference for, 181; movement, 38; patterns, 53; programme, 59, 68–69, 91, 119, 127, 129; programme of DCCB, 390; programme in india, 275, 321 Short-Term Cooperative Credit Structure, 360

Shri Mahila SEWA (Self Employed Women’s Association) Sahakari Bank, 58, 80 Shyam Ahuja, 139 SIDBI, see Small Industries Development Bank of India SIDBI Foundation for Micro Credit (SFMC), 90, 104 SKS Microfin Ltd, 104 SKS, the AP-based MFI, 101 Small Farmers Development Agency, 192 Small Industries Development Bank of India (SIDBI), 27, 39, 58, 62, 90 smart cards, 404 SMILE Microfin Ltd, 104 Societies Registration Act, 1860, 102 South Asia Poverty Alleviation Project, 145 Spandana Sphoorty Microfin Ltd, 104 Sri Padmavathi Mahila Abhyudaya Sangham (SPMS), 145, 253 Sri Sri Ravi Shankar Centre, 138 staff efficiency, 161 staffing policies, 29 stakeholders, secondary, 173 starvation deaths, 436 State Bank of India (SBI), 35 State Cooperative Acts, 82 State credit cooperatives, 70 statements, financial, 294 Streeshakti Programme: 373; of the State Government, 366 subsidies: back-end, 39; capital, 39; impact of government programmes with, component, 42 Supply of Improved Tools to Rural Artisans (SITRA), 193 Sustainability: 166, 177; of access to financial services, 178; of Bandhan’s microcredit programme, 329; of demand, 97; of the groups, 421; institutional, 170; of microcredit programme, 271; of microfinance institutions, 95, 107; of network capacity of the financial system, 179–80; organizational, 178–79;

Index organizational, of an MFI, 102–07; organizational, of SHGs, 178; of SHGs, 41, 149, 176; with Outreach, 43 Swarnajayanti Grameen Swarozgar Yojana (SGSY): 37, 39, 42, 189; impact of, on SHG-bank linkage programme, 122; modification of, programme, 70; profile, 192; programme guidelines, 205; RBI guidelines for, 199 Swashakti project, 152–53 Swayam Krishi Sangha, 104 Swayamsidha, 153 Swiss Development Cooperation, 458 Syndicate Bank, 37 Tamil Nadu Corporation for Women Development (TNCWD), 152 Tamil Nadu Womens’ Development Corporation (TNWDC), 296 Tamil Nadu Women Development Project, 152 Tankfed Agriculture Development Programme, 243 Task Force on Microfinance Regulation, 86 Technical Support Organisation, 466 Tenancy Act: 34; tenant farmers, 456; Thuligal, 334 TMSSS, 334 traders and commission agents, 33 Training of Rural Youth for Self Employment (TRYSEM), 193 Tribal Development Fund (TDF), 446 tribal: of Chotanagpur, 437; cultivators, 437; groups, 432; in Jharkhand, 436, 437; population, substantial, 432 trust-banking, principles of, 358 umbrella brands, 139 unique ID, 407 United Nations International Year of Microcredit 2005, 20, 79

489

Vaidyanathan Committee Report 2005, 35 VAIREM, 288 VELUGU project in Andhra, 139 Vikas Volunteer Vahini: 345, 346; members, 348 Village Ayojana Samitis, 443 Village Protection Committees, 431 Voluntary Retirement Scheme, 211 volunteers, Successful, 354 VVV, see Vikas Volunteer Vahini Vyas Committee, 84 Wadi model of tribal development, 441 wasteland development programmes, 457 water resources development, 442 Watershed Development in Shifting Cultivation Areas (WDSCA), 468 watershed development: 25-year perspective plan on coverage of rainfed area through, 458; dryland farming and, 460; NABARD’s experiences in, 457–68; people’s involvement for, 469; role of community in, 459–60 West Bengal Societies Registration Act, 1961, 324 Women and Child Development (WCD), 153 Women and Child Development Department (WCDD), 366 women development cell, setting up of, 334 Women Development Fund, 466 Women’s Thrift Cooperatives (WTCs), 103 workers in the organized sector, 262 Working Women’s Cooperative Societies in Tamil Nadu, 81 Working Women’s Forum, 80 Yunus, Professor, 413

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