Micro 1

ROYAL COLLEGE OF ATRS, SCIENCE AND COMMERCE ACADEMIC YEAR: 2008-2009 Principal: Prof. A.E Lakdawala Project Guide: Prof. Renu Khandelwal Project Submitted By: Rahul Salian (T.Y.B&I) Project on: MICROFINANCE and SELF- HELP GROUPS Date of Submission: 20th September, 2008 Place Visited: NABARD Office, Pune.

Microfinance & Self-Help Groups

Acknowledgement I would like to thank our respected Principal Sir, Prof. A.E Lakdawala and our Vice Principal Mrs. Kamala Arunachalam for giving me an opportunity to put forth my study over this intriguing topic of Microfinance. Having said that it does not take any credit away from Mrs. Renu Khandelwal who as a project co-ordinator has done ever so well in highlighting and stressing on various aspects and specifics which have given shape to my project. Credit must also be given to the robust management of Royal College for providing books with sufficient data relevant to my subject. As far as practical data is concerned I would like to thank Mr. Gaikwad (Head of Microfinance Department) and Mrs. Balwinder Kaur (Staff) from NABARD Head Office, Pune, who have gone out of their way and taken pains to entertain my queries.

Declaration I, Rahul Salian from Royal College T.YB&I declare that all the data collected and information gathered is true to the limits of this subject and I have adhered to the criteria which was recommended with regards to the length, font size, data sequencing and primary data collection. All the magazines referred, sites visited and the individuals interviewed are authentic and are suitable for the project of this level. 2

Microfinance & Self-Help Groups

Signature of the Student (Rahul Salian)

Certification I, Prof. Renu Khandelwal would like to certify that all the matter collected by Mr. Rahul Salian is true within the parameters of this topic. All topics dealt by him are true and original to the origins of this topic.

Signature of the Principal

Signature of the project guide

(Prof. A.E. Lakdawala)

(Prof. Renu Khandelwal)

Executive Summary This project is prepared with an intention to methodically study the developments in microfinance witnessed in India. I have tried my level best to understand the topics covered in this project and tried to put my personal efforts to understand the practical aspects of SHGs and their contribution to socio-economic welfare of the poor. How the Microfinance sector has changed the outlook of the poor and how women in general are empowered are the integral parts of my study. Following are important points of my project which hold significant relevance to its character and preparation: •

The NABARD task force report defines Micro Finance as “the provision of thrift, credit and other financial services and products of very small amounts to the poor in the rural, semi-urban or rural areas for enabling them to raise their income levels and improve living standards”.

•

The group approach has the potential to provide affordable credit to poor as it reduces the transaction costs and lowers the default risks.

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Microfinance & Self-Help Groups

•

Due to reform in banking industry and restructuring of financial institutions, commercial banks are required to integrate micro finance within a larger bank culture and structure to gear towards high volume, small loan size business;

•

NABARD is set up by the Government of India as a development bank with the mandate of facilitating credit flow for promotion and development of agriculture and integrated rural development.

•

NABARD has been sanctioning financial assistance by way of grant to NGOs for promotion and credit linkage of Self Help Groups.

•

So far, the micro finance sector has been funded by donor money. In some cases voluntary deposits also form funding source. The donor money and voluntary deposits have proven to be inadequate to meet not only the current but also growing demand for microfinance.

•

The emerging sources of funding are private capital- local and foreign, venture capital, debt and equity capital, and other funding sources like securitization, etc.

•

To address the problems a number of SHPs have encouraged formation of federation of the SHGs. The federations are playing an important role in nurturing of groups, in increasing bargaining power of group members and in livelihood promotion.

•

Primary Data from NABARD Head office in Pune provided icing on the cake as we were acquainted with certain facts about NABARD and SHGs which in itself was a revelation.

•

SHGs are very useful customers for banks as they are repaying the loans advanced and also were satisfying the norms of financial inclusion. Banks are ready to offer credit to SHGs without collateral up to Rs. 500000.

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Sr.

Index

Pg

No. 1 2

Chapter 1: Introduction Chapter 2: Microfinance

3

Methodologies and Tools Chapter 3: Operational Issues

16 17-

Chapter 4 : Pricing of Microfinance Products

18 19-

5

Chapter 5: Successful Micro Credit Operations

20 21-

6

22 Chapter 6: Social Empowerment through Self Help Groups 23-

7

25 Chapter 7: National Bank For Agriculture And Rural 26-

8

Development (NABARD) Chapter 8: Assessing a Self Help Group

28 30-

Rating Of Self- Help Groups

37 38-

4

Impact

No. 7-11 Assessment- 13-

41 What is Unique About SHGs and Linkage 429

10

Programme Chapter 9: Commercial Microfinance

44 45-

Microfinance sector in Retrospect

46 46-

Status Quo and the emerging Paradigm

47 48-

50 Chapter 10: Trends towards Commercialisation: New 51developments and concerns 5

54

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11 12

Chapter 11: Survey On SHGs in India

55-

Chapter 12: Need for Microfinance by Banks

64 65

International Experience Indian Experience 13

66 67-

68 Chapter 13: Strengths of the Microfinance Programs in 69 India

14 15 16

Weaknesses of the MF Program

68-

Capitalising On challenges

69 71-

Primary Data on NABARD

73 74-

Concluding Summary Bibliography

75 76 77

Chapter 1

Introduction Micro-Finance India is the seventh largest in terms of area and second most populous country in the world. More than two thirds of her population lives in rural areas, making out a livelihood directly from agriculture or engaged in agriculture based occupation. While substantial progress has been made in recent decades in terms of increasing national income, its impact has been diluted by the rapid increase in population. As a result, a large segment of the population continues to be illiterate, uneducated, undernourished and without access to productive assets and employment. In this scenario, reaching the poorest, whose credit requirement is very small, was found to be difficult. Since the beginning the emphasis was on providing credit rather than providing financial products and services, including savings, insurance, etc, to the poor to meet their simple requirements. The mismatch in perception, regarding how the poor use and value financial services, even resulted in some undesirable adverse impression in the minds of service providers regarding the credit worthiness of the poor. Moreover the systems and 6

Microfinance & Self-Help Groups

procedures of the banking institutions with emphasis on complicated qualifying requirements, tangible collateral, margin, etc., resulted in a large section of the rural poor shying away from the formal banking sector. The commercial banks too experienced that the rapid expansion of the branch network was not contributing to an increasing volume of business to meet high transaction cost and risk provisioning norms, which even threatened the viability of banking institutions and sustainability of the operations. At the same time, it was not possible for the prudent bankers to allow a major chunk of population, even if poor, to remain outside the fold of its business. The search for an alternative mechanism for catering to the financial service needs of the poor was thus becoming imperative.

Emergence of Micro Finance The NABARD task force report defines Micro Finance as “the provision of thrift, credit and other financial services and products of very small amounts to the poor in the rural, semiurban or rural areas for enabling them to raise their income levels and improve living standards”. As per Robinson, “Micro-Finance refers to small scale financial services for both credit and deposits, that are provided to people who farm, fish or herd: operate small or microenterprises where goods are produced, recycled repaired or traded, provide services, work for wages or commissions, gain income from renting out small size of land, vehicles drought animals or machinery and tools and to other individuals and local groups in developing countries both in rural and urban areas”.

In a strategy of poverty reduction by means of credit support to the poor, equitable gains for development on a sustainable basis and ensuring viability of financial services are key elements. As microfinance is considered to be an approach addressing these concerns effectively, it has assumed significance in all the developing countries as an effective tool in fighting poverty. Credit to the poor by banks and microfinance institutions are usually extended without any collateral requirements. As the loans are based on subjective assessments of the borrowers’ repaying capacity, sometimes high interest rates are charged based on the risk profile of the loans.

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Micro Finance scene in India Micro-Finance is dominated through the linkage called Self Help Groups. As the formal banking model has a vast branch networking rural areas, it was perhaps wise to find ways and means to improve the access of the rural poor to the existing banking network. This was tried by routing financial services through self help groups, formed as a grass root level institutions for socio-economic development of the poor. Drawing lessons from experiments carried out in various part of the world, particularly by the well known Grameen Bank of Bangladesh, an attempt was made to develop financial relationship between informal groups of people and formal agencies like banks for catering to the financial service requirements of the poor, especially belonging to the marginally down trodden category and women. Over the years these linkage model has emerged in India as a core strategy for the banking system to extend their outreach to the poorest among the poor. Though self help groups existed before the linkage programme, the banks could not recognize their business potential as both operated independently without recognizing the strength of each other. Intervening to forge a linkage, the apex bank NABARD was instrumental in the emergence of a very strong microfinance growth in the country.

The Linkage Approach The linkage programme was conceived with the objectives of developing supplementary credit delivery services for the unreached poor, building mutual trust and confidence between the bankers and the poor and encouraging banking activity both on thrift as a well as sustaining a simple and formal mechanism of banking with the poor. The linkage programme combines the flexibility, sensitivity and responsiveness of the informal credit system with the technical, administrative capabilities and financial resources of the formal financial sector. It is a design relying heavily on collective strength of the poor, closeness of the nongovernmental organisations to people and large financial resources with banks. Moreover, the self help groups have also undertaken effective social mobilisation functions thereby 8

Microfinance & Self-Help Groups

contributing to an overall empowerment process. The banks have externalised what would otherwise have been high cost of mobilising savings of the poor, of appraisal and sanctions of loans and of improved loan recovery to them through the financial intermediaries’ role played by the Self Help Groups. The Benefits of Group Approach The group approach has the potential to provide affordable credit to poor as it reduces the transaction costs and lowers the default risks. Individually, a poor person tends to be rather vacillating and uncertain is his behaviour but group membership smoothens the rough edges of this behaviour pattern, thereby making him more reliable as borrower. As the approach towards poverty is based on the principle of self-help, this brings about the necessity for organizing the poor in the group by which they can get the benefit of collective perception, decision making and collective implementation of programmes for common benefits. Group savings serve a wide range of objectives other than immediate investment such as: •

Imposes discipline among group members about savings habit.

•

Enhance self esteem of individual member in the group.

•

Demonstrate strength of unity of the group members.

•

Covers risk against natural calamities and business loss.

Multiplier Effects The multiplier effect of the micro credit can be distinctly demonstrated for the rural poor through the continuous expansion of their economic base. Income rise with additional credit through borrowing. The vicious cycle of “low income, low investment, low savings can be broken by injection of optimum credit in the cycle. The new cycle would be “more investment, more income, more savings” through proper credit intervention. It is assumed that those who save and those who borrow are two separate groups of people. Savers put their deposits in the bank while the borrowers borrow the savings of others at a price. However, often a saver himself is a borrower and it is more usual in case of poor people. His credit requirements are calibrated in small instalments and can be disbursed over a period of time. The peer pressure keeps the group members in line and contributes to the collective strength of the group.

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Microfinance & Self-Help Groups

It has been experienced in several countries that micro-finance can improve the livelihoods of poor and low income people in a significant manner. This system of credit delivery helps poor people to have access to savings, credit, insurance and other financial services so that they are able to cope up with every day demands more resiliently and confidently. Moreover, with the help of micro credit, poor people can set up their own micro-enterprises. Thus, it helps in alleviating poverty by providing a regular source of livelihood, creating jobs, allowing children to attend school, enabling families to obtain healthcare and the empowering the members to make their choices that best serve their needs. Since majority of the beneficiaries of microfinance are women, empowering the lady of the house does more miracles in uplifting the living standards of the poor and enables them to integrate with overall economic development of the nation.

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Chapter 2 Microfinance Impact Assessment-Methodologies and Tools Impact Areas of Microfinance Microfinance primarily targets poverty reduction as its key impact area. Poverty reduction is intended to be achieved through debt redemption, by freeing the clients from the clutches of the moneylenders who charge various interest rates, which often keep the poor entrenched in the debt trap, and b) lively hood promotion through financing promotion of micro and small enterprises by clients. Another area which has been central to microfinance activity around the globe is women’s empowerment. Women, from the very inception of microfinance program have been the target clientele for two reasons: a) They are perceived to be more disciplined in utilization and repayment of loans, and b) The woman is at the fulcrum of the family, and hence, best placed for development intervention to achieve hose hold level impacts. While poverty reduction and women’s empowerment are the primary impact areas of microfinance, it also influences several other related areas both at the household levelchildren’s education, for instance-and at the community level-the sense of solidarity that the self help group endows its members, which often gets reflected in collective actions such as setting up of healthcare and sanitation facilities in their locality.

Units in Impact Assessment of Microfinance Impact assessment in microfinance can be undertaken at different levels-individual, household, community, enterprise and institution. This is consistent with the fact that any development intervention, including microfinance, impacts a range of players in different ways, though not unrelated. An impact assessment exercise will need to determine its units so that methodologies and tools to be used are accordingly adopted. Each unit has its own advantages and disadvantages through the impact assessment exercise.

Methodologies and Tools for Impact Assessment The most common methods used in assessing the impact of microfinance programs include: a) Sample surveys; b) Rapid Appraisal; c) Participant observation; d) Case studies; and e) Participatory learning and action. The methods can be used in combination, which will not only enable data collection on different lines, but also verification and validation. 12

Microfinance & Self-Help Groups

Sample Surveys The sample survey is perhaps the most commonly used method in impact assessment; it serves well in microfinance as well. The key of the efficacy of this method is the sample selection –its size and representativeness. Statistical methods are available to determine the sample. Random sampling method very often is used. Impact assessment using the sample survey method necessitates both a ‘before’ and ‘after’ sample with respect to the intervention. For microfinance programs, the ‘before’ sample can be drawn from the new entrants into the program, while the after sample could be drawn from clients who have availed the program services for a certain duration-in the case of a micro credit program, this duration could be even defined in terms of number of loans that a client has availed. Sample surveys are most appropriate when: a) The program has a large number of beneficiaries; b) The population is heterogeneous in nature, and it is not easy to separate the influence of factors not related to the project; c) project impacts need to be accurately estimated; d) Groups need to be compared over time periods or across locations; e) The program is being implemented smoothly. Rapid Appraisal As the term suggests, Rapid Appraisal (RA) aims at collecting information about a community or a geographical area in a fast and succinct manner. Implied in the use of this method is the intention to save on time and monetary costs. RA combines a variety of tools and techniques in practise, used originally as Rapid Rural Appraisal (RRA). These include focus group discussions, semi-structured interviews with key informants, case studies, participant observation and secondary sources.

Advantages of Rapid Appraisal Methods •

RA methods are low cost and consume less time compared to survey based methods.

•

They can be easily adapted to suit different contexts.

•

Close interaction with the local community being intrinsic to RA method enables exploration of difficult subjects that require significant amount of qualitative data for analysis.

Disadvantages •

Information provided by informants might be inadequate or distorted, which can affect the quality of analysis. 13

Microfinance & Self-Help Groups

•

Findings of the study may be difficult to generalize.

•

Focus on collection of general information limits analysis, when more quantitative information may be required.

Participant Observation It is a method where field researchers reside in the area of the program community and use qualitative techniques and sample surveys to conduct the impact assessment. As can be seen, the key in this method is the extended period of interaction that the researchers have with the community which enables close contact and therefore significant data collection. Participant observation is most appropriate when: a) Other methods will not serve in capturing the opinions of minority groups or women; b) There is a need to assess whether the felt needs of the beneficiaries have been addressed; c) Institution building is a key component of the program.

Case Studies It is a very common method in impact assessment. Indeed, a great number of case studies investigating several dimensions of the impact assessment provide detailed information on a program participant or the program community. Case study of a microfinance participant usually provides detailed background covering her family, education, occupation, asset ownership and the changes in her social and economic conditions following case studies of microfinance program participants has been the impact on women’s empowerment.

Participatory Learning and Action Participatory learning and action is a method where the program participants are actively involved in the data collection process and assessment; the data collection tools include impact flowcharts, village and rescue maps, wealth ranking etc.

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Microfinance & Self-Help Groups

Chapter 3 Operational Issues Like any alleviation programmes, micro financing also suffers from certain constraints in implementation. Therefore appropriate attention needs to be focussed on operational issues, both institutional and non-institutional, confronting the self help groups. Institutional Issues 1. Commercial banks during the last two decades aimed at target oriented approach to attain statutory stipulations for alleviation of poverty. However institutional mission is required for banking with the poor by linking, financing and capacity building of self help groups rather than targeted approach of financing through government sponsored self employment programmes; 2. Due to reform in banking industry and restructuring of financial institutions, commercial banks are required to integrate micro finance within a larger bank culture and structure to gear towards high volume, small loan size business; 3. The financing strategies to reach the poor should be understood by most branch

managers and micro financing should not be considered as a second class activity.

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Microfinance & Self-Help Groups

4. Banks are required to compete in open markets and cover operating costs, risks and opportunity cost of capital in view of interest rate ceiling on small loans and targeted credit schemes; 5. Collaboration among banks, non government organisations, government agencies

should be effective and efficient, because role of the latter is waning and there are inherent failures in the mechanism to direct, monitor and lead the groups towards common goal. 6. Insistence on collateral securities for loans by banks and insistence of minimum balance for opening of savings bank accounts are to be resolved while linking with the self-help groups; 7. As a consequence of directed credit programmes and the declining volume of agricultural credit, there is a shift from farm credit to microfinance. This shift should not lead to negligence of the specific financial demand and requirements of small farmers for farm credit.

Non Institutional Issues 1. Often, rating norms for self help groups are not followed. These groups are to be rated as per the laid down norms and efforts are required to rectify their weak areas. Sometimes, haste lead to wrong selection of activities for beneficiaries; 2. Usually there are large numbers of heterogeneous women groups with regard to age and literacy level. Yet, on the other hand increasing number of caste based homogenous groups need to be discouraged; 3. Efforts should be made to link the revolving fund assistance as per the lending norms as presently no uniformity exists on release of this assistance; 4. The credit limits are to be assessed based on the credit absorption by the group and

the proposed activity should be linked to the skills of the group members; 5. Due to high illiteracy among the group members, dependence on the literate persons

is high which results in incomplete updating and incomplete factual projection of group activities. 6. Counselling sessions and training on procedures on internal lending, capacity building

and record maintenance are conspicuously lacking in most of the self help groups Such activities should be made mandatory in certain cases.

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Microfinance & Self-Help Groups

Chapter 4 Pricing of Micro Finance Products Micro-Finance business is always confronted by the question of micro finance products. The particular bone of contention is the high rate of interest charged by micro-finance institutions or the self help groups from each individual with respect to loans granted to him. In this context it may be mentioned that the intermediate cost of micro finance operations is extremely high .Quantum of individual loans is very small and this has to be collected through collection of savings from individual borrowers going to them door to door and collecting repayments also in very small amounts. Thus the intermediation cost of running these operations could be anywhere in double digits depending upon the nature and professionalism of operations .However, as far commercial banks are concerned, lending to microfinance institution is a viable business position due to the following reasons:

•

Lending at slightly higher rate provides adequate margins to bank particularly since NPA’s from micro-credit operations are usually low .If the risk of recovery is at a lower level, business remains viable proposition if the returns are above or in line with general yield on advances;

17

Microfinance & Self-Help Groups •

In the era of retail lending, adopting group approach in rural areas is better than considering individual loans of small amounts. Since repayment behaviour of the individual affects the entire group’s credibility, the peer pressure ensures regular payment.

•

It is also important to take into account the fact that more than two thirds of bank branches are located in rural and semi-urban areas and these branches would necessarily require to move in tandem with the needs and developments taking place in the rural sector. Since there is little scope for corporate business and even in agriculture the bad debts are higher, there is enough scope and opportunity available for micro- credits.

•

As regards direct lending to self help group, it needs to be considered that even if the group charges high rate of interest to individual members on borrowings, the money is ploughed in the group itself which is to be used for their collective welfare. The reserves which build up on this account can subsequently be used for mobilizing more bank borrowings and also setting up micro enterprises which would benefit each member of the group and their families .Further, micro-credit has to be looked upon as a movement which empower rural poor to stand on their own feet .Once the groups grow with the bank support and graduate to small scale enterprises, many more opportunities would emerge for the banks to develop their business

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Chapter 5 Successful Micro Credit Operations •

The banks should integrate micro credit into the main stream business model and put in place appropriate policies, targets and incentives to branches in financing self-help groups. Banks should identify nodal officers and delegate adequate power to them to form and link self help groups;

•

Micro finance should not be seen as end in itself but a means towards sustainable development and poverty reduction. To this extent, the role of the banks should not be limited only to the disbursement of loans, but towards attainment of social change through community participation;

•

The criteria for evaluation of self help groups need to be evaluated at each bank level. It is not enough to evaluate their success only on economic basis of savings and loan disbursements .Banks should enlarge their role in solving the problems of the community and their contribution in making members more self-reliant and empowered;

•

While fixing the targets for opening self help group accounts and linking them with credit, the performance should be monitored at monthly performance review meetings and well performing branch managers should be honoured and awarded;

•

Since banks’ capacity to set up self help group is limited, there is a need to focus more on approaching self help groups through micro finance model. For this purpose there is need to develop and nurture micro finance institute, do their capacity assessment rating and build their capabilities. Eventually they are required to develop as strong partners helping in up-scaling assistance significantly over a period of time;

•

Banks should adopt more flexible approach with regard to quantum of assistance and collaterals and try different variants of models with innovative approach keeping in view of the local requirements;

•

Banks should help in spreading awareness by educating people about the benefits of these programmes and there after encouraging them to form self help groups and get 19

Microfinance & Self-Help Groups

them credit linked .Besides meetings of target groups, it would be important to bring out suitable brochures and leaflets which should be circulated widely; •

Maintaining close coordination with other agencies involved in this initiative including NABARD,RBI, RRB’s ,NGO’s, Cooperative Banks, Central and State Governments and other micro-finance bodies involved in micro credit;

•

Associate themselves with central, State governments and RBI in the endeavours to develop a better regulatory framework for microfinance institutions and self help groups. Efforts should be made to integrate micro credit with micro-insurance and savings products;

•

Exploring possibilities of getting concessional funds from multi lateral agencies which are generally keen to provide such assistance has emerged as a thrust area at most international foray;

•

Encouraging approach should be followed for encouraging self help groups to set up micro enterprises which would eventually migrate to small scale enterprises. In this connection, banks may accord special focus on vocational based promotions keeping in view the area specific potential.

Chapter 6 20

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Social Empowerment through Self Help Groups It is very difficult to find a solution to hunger and rural poverty without providing secure and gainful employment to the people, irrespective of their profession .Development studies focus more on rural areas where there is poverty and hunger. It is essential that one should not ignore the strategies involved in poverty alleviation schemes and should give priority to those who are in informal sector employment. Informal economy also exits in the urban economy, which includes activities of squatters or unlicensed street vendors struggling for survival in environments constrained by extreme poverty and deprivation. Credit availability is one of the strategies through which the rural poor can be empowered. This is one of the best methods to improve their standards of living. However, barring a few exceptions, efforts to provide credit to the rural poor has not been very successful. Many banks avoid lending to the rural poor and mostly confine themselves to the urban, formal sectors. They are expensive, bureaucratic and accessible only to the upper classes of the rural society. Foreign fund aided credit schemes targeted at the poor do not reach the poor but get diverted to others. State run credit cooperatives have left only bitter memories for the poor. This is a result of corruption and outright theft. In short, access to credit has proven to be difficult, costly and often ineffective for the poor. But some of them may argue that credit is not as important to rural poor as it is commonly believed. The issue of credit distracts their attention from important questions related to the retention of surplus production by households and communities and to the general capacity of the poor to access market and public institutions. These two aspects give rise to larger questions related to empowerment of rural people for a sustainable living.

The government sponsored programmes help to reduce social evils like dowry. They support the beneficiaries to fight against their landlords and promote literacy and infant nutrition programs. They work well, especially in case of women. Hence, empowerment of women should be one of the explicit objectives. Similarly, lack of public infrastructure facilities, particularly roads and market outlets, may limit income generating options. As a result, even if potentially profitable activities are 21

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promoted, people can still be incapable of benefiting from them. The cost of providing such infrastructure is usually beyond the capacities of poor communities and local organisations. Hence, it requires the involvement of the state and donors.

The Linkage Approach The linkage programme was conceived with the objectives of developing supplementary credit delivery services for the unreached poor, building mutual trust and confidence between the bankers and the poor and encouraging banking activity both on thrift as a well as sustaining a simple and formal mechanism of banking with the poor. The linkage programme combines the flexibility, sensitivity and responsiveness of the informal credit system with the technical, administrative capabilities and financial resources of the formal financial sector. It is a design relying heavily on collective strength of the poor, closeness of the nongovernmental organisations to people and large financial resources with banks. Moreover, the self help groups have also undertaken effective social mobilisation functions thereby contributing to an overall empowerment process. The banks have externalised what would otherwise have been high cost of mobilising savings of the poor, of appraisal and sanctions of loans and of improved loan recovery to them through the financial intermediaries’ role played by the Self Help Groups.

The Benefits of Group Approach The group approach has the potential to provide affordable credit to poor as it reduces the transaction costs and lowers the default risks. Individually, a poor person tends to be rather vacillating and uncertain is his behaviour but group membership smoothens the rough edges of this behaviour pattern, thereby making him more reliable as borrower. As the approach towards poverty is based on the principle of self-help, this brings about the necessity for organizing the poor in the group by which they can get the benefit of collective perception, decision making and collective implementation of programmes for common benefits. Group savings serve a wide range of objectives other than immediate investment such as: •

Imposes discipline among group members about savings habit. 22

Microfinance & Self-Help Groups

•

Enhance self esteem of individual member in the group.

•

Demonstrate strength of unity of the group members.

•

Covers risk against natural calamities and business loss.

Chapter 7

NABARD is set up by the Government of India as a development bank with the mandate of facilitating credit flow for promotion and development of agriculture and integrated rural development. The mandate also covers supporting all other allied economic activities in rural areas, promoting sustainable rural development and ushering in prosperity in the rural areas. With a capital base of Rs 2,000 crore provided by the Government of India and Reserve Bank of India, it operates through its head office at Mumbai, 28 regional offices situated in state capitals and 391 district offices at districts. It is an apex institution handling matters concerning policy, planning and operations in the field of credit for agriculture and for other economic and developmental activities in rural 23

Microfinance & Self-Help Groups areas. Essentially, it is a refinancing agency for financial institutions offering production credit and investment credit for promoting agriculture and developmental activities in rural areas. Objectives The rural financial system in the country calls for a strong and efficient credit delivery system, capable of taking care of the expanding and diverse credit needs of agriculture and rural development. More than 50% of the rural credit is disbursed by the Co-operative Banks and Regional Rural Banks. NABARD is responsible for regulating and supervising the functions of Co-operative banks and RRBs. In this direction NABARD has been taking various initiatives in association with Government of India and RBI to improve the health of Co-operative banks and Regional Rural Banks.

NABARD today •

Initiates measures toward institution-building for improving absorptive capacity of the credit delivery system, including monitoring, formulation of rehabilitation schemes, restructuring of credit institutions, training of personnel, etc.

•

Coordinates the rural financing activities of all the institutions engaged in developmental work at the field level and maintains liaison with the government of India , State governments, the Reserve Bank of India and other national level institutions concerned with policy formulation

•

Prepares, on annual basis, rural credit plans for all the districts in the country. These plans form the base for annual credit plans of all rural financial institutions

•

Undertakes monitoring and evaluation of projects refinanced by it

•

Promotes research in the fields of rural banking, agriculture and rural development

•

Functions as a regulatory authority, supervising, monitoring and guiding cooperative banks and regional rural banks

NABRD Role And Functions

Credit Functions Introduction NABARD's credit functions cover planning, dispensation and monitoring of credit.\ This activity involves: •

Framing policy and guidelines for rural financial institutions

•

Providing credit facilities to issuing organizations

•

Preparation of potential-linked credit plans annually for all districts for identification of credit potential 24

Microfinance & Self-Help Groups •

Monitoring the flow of ground level rural credit

Development and Promotional Activities Credit is a critical factor in development of agriculture and rural sector as it enables investment in capital formation and technological upgradation. Hence strengthening of rural financial institutions, which deliver credit to the sector, has been identified by NABARD as a thrust area. Various initiatives have been taken to strengthen the cooperative credit structure and the regional rural banks, so that adequate and timely credit is made available to the needy. Supervisory functions As an apex bank involved in refinancing credit needs of major financial institutions in the country engaged in offering financial assistance to agriculture and rural development operations and programmes, NABARD has been sharing with the Reserve Bank of India certain supervisory functions in respect of cooperative banks and Regional Rural Banks (RRBs).

Supporting NGOs for Self Help Group Linkage NABARD has been sanctioning financial assistance by way of grant to NGOs for promotion and credit linkage of Self Help Groups. In addition, services of NGOs are also utilized for capacity building of SHGs and other stakeholders. Of late, NGOs, that have promoted a large number of SHGs under SHG Bank Linkage Programme, are expressing difficulties in maintaining proper database of the SHGs under their control. This has led to poor monitoring of the groups and decline in the quality of SHGs in a few areas. Computerized MIS of SHGs is expected to facilitate proper maintenance of database and effective implementation of SHG-Bank linkage programme.

Major Steps initiated by NABARD are: •

Conceptualizing and introduction of Pilot Programme for linking 500 SHGs with banks. 25

Microfinance & Self-Help Groups

•

Introduction of bulk lending Scheme for encouraging the NGOs which were keen to try group approach and other financial services delivery innovations in the rural areas.

•

Developing a conducive policy framework through prevision of opening Savings Bank Accounts in the names of SHGs, relaxation of collateral norms, simple documentation and delegation of all credit decisions and terms to SHGs.

•

Training and awareness building among the stakeholders.

•

Provision of capacity building support NGOs/SHGs/Banks.

•

Mainstreaming the SHG Linkage Programme as part of corporate planning and normal business activity of banks and internalizing training, monitoring and review mechanism.

•

Encouraging regional rural banks Co-operative Banks to act as SHgs promoting institutions.

•

Support to NGOs for promotion of SHGs.

•

Dissemination through seminars, workshops, occasional papers and 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 microfinance sector.

•

Setting up microfinance development and equity fund in NABARD for meeting the promotional costs of up scaling the microfinance interventions and contributing to their equity to enable them to leverage funds from banks.

•

Assisting NGOs/MFIs by way of grant support for getting rated themselves by accredited rating agencies to have easy access of commercial loans, and

•

Introduced scheme for support to federations.

Chapter 8

26

Microfinance & Self-Help Groups

ASSESSING A SELF HELP GROUP For any financing institution, appraisal is very important for ensuring the utility of the loan and repayment of the loan. Bankers generally appraise the project and the borrower. In case of SHG financing, most of the project appraisal norms like assessing the cost benefit and profits will not be workable due to the peculiarities of SHG financing. For considering a loan application for financing the Financer has to evaluate the capacity and character of the prospective borrower. SHG’s also being customers have to be appraised before extending credit facilities. But then assessment of creditworthiness of a SHG is very different from that of an individual. SHGs are not to be assessed in terms of their ability to provide collateral or guarantees of net worth. The SHGs have to be assessed in terms of Group dynamics like cohesion, vibrancy, and goal-oriented action, participation of members, democratic decision and collective leadership. The appraiser has to see whether the group is functioning, actually as a group, why the members have come together, whether it is for obtaining loan from bank or the group sees other purposes, what is the group discipline and whether it is sustainable. The basic principles on which the SHGs function are: 27

Microfinance & Self-Help Groups i The members of the groups should be residents of the same area and must have an affinity. Homogeneity of relationship could be in terms of caste/occupation/gender or economic status (which is critical). iiSavings first, credit thereafter

Iii SHGs should hold regular meetings vi SHGs should maintain record of financial and other transactions V They should have norms regarding membership, meetings etc. Iv Group leaders should be elected by members and rotated periodically vii Transparency in operations of the group and participatory decision making viii Rates of interest on loans should be decided by the group Ix Group liability and peer pressure to act as substitutes for traditional collateral.

For assessing a Self Help Group the important aspects that a financer should look into include; 1 Norms for functioning : The SHG should have developed some kind of norms for its functioning the norms should be covering major areas of its functioning as well as the decision making processes, leadership etc., Norms generally relate to A Membership B Meetings - time, periodicity C Savings - amount, periodicity, rate of interest (return) D Credit - procedure for sanction, ceiling amount, purposes, rate of interest to be charged, repayment period etc. E Fines - in case of default in attending meetings, savings and credit repayment. Group may also levy fines for any deviant behavior etc. F Leadership - election or nomination of leaders, rotation of leaders etc. g Personal/social improvement - minimum literacy level to be achieved, social work to be done etc. 28

Microfinance & Self-Help Groups

The above norms may be written or oral. They may be decided in the initial meetings or they may evolve over a period of time depending upon the need of the group. The important aspect to be looked into are : •

How norms evolved, whether by the consensus of the whole group.

•

Whether the members are aware of the norms (even if they are oral) and understand them,

•

Whether the norms are implemented.

2 Meetings The group decides the periodicity of the meetings i.e., weekly, fortnightly or monthly. They also decide on the time of the meeting. Decision on time and periodicity helps in regular conduct of meetings. The regularity in the holding of the meeting and the attendance during meeting gives an indication bout groups functioning. Therefore a Financer should see whether. •

The meetings have been held regularly

•

The attendance in the meetings

•

The members are punctual and stay till the end of the meeting

•

Are there any sanctions for the delinquent members ?

The Financier can use his observations during the meetings and the meeting register to get data on this appraisal aspect. 3. Maintenance of Books Whether group is maintaining the basic books that will give details of its functioning and accounts of the group is an important criterion to be judged. The books should give the details of number of meetings held, decisions taken in the meetings, amount of savings of the members and credit availed, the total savings of the group and repayments. Who maintains these books is another important criteria for judging the group. Do members maintain it, if not are they making efforts to achieve basic numeracy or literacy so that they can start doing it themselves. Financer has to verify : 29

Microfinance & Self-Help Groups • Whether details of meetings, proceedings, and attendance are maintained. • Whether member-wise record of saving and credit are maintained. • Whether the records are upto date. • Whether all members are kept informed of their savings and credit balances from time to time. • In case of illiterate groups whether what is the system followed, does the group verify the books maintained by NGO/outsider. • Whether systems have been developed to ensure safe custody of cash. 4. Leadership Two or three group members are elected as leaders/ book-writers. Initially the opinion leaders may be the leaders and over a period of time they are expected to be take turns. The group leaders are expected to a) regularly convene and conduct the meetings, b) help the group members in taking decisions, c) resolve conflicts, d) maintain books of account and e) approach bank branch for operation of accounts. • The aspects that are to be seen are : • Whether the leaders have been elected and rotated • Whether they help in democratic functioning of the group • Whether there is a conscious attempt to groom other members to take up leadership • Are they marginalising the benefits (especially loans)

5 Participation and Awareness of Group Members Are the Members aware of the purpose of group formation, the operations and activities of the group viz. The savings and the credit of the group as well as the individual member’s savings and credit details. • Do they participate in group discussions and decision making • Do they help solve the problem that are raised in the meetings • Do they work cohesively and have transparent dealings The democratic character of the group may be judged by attending one or two meetings and talking to individual members. The awareness level of members helps in healthy functioning of the group and resolution of conflicts 30

Microfinance & Self-Help Groups within the group. 6. Savings : The group decides on the amount of savings as also its periodicity. It has to be seen whether the saving, as decided upon, is regularly made, how the defaults are dealt with and whether the system is modified as per the requirements of the members. 7. Credit : • The following aspects to be looked into while assessing the credit function of the group : • The decision making process of selecting loanees. • The system followed in assessing credit requirement of individual members and the amount to be sanctioned. • The system of monitoring the credit. • The repayment performance of members and incidence of defaults besides the effectiveness to deal with such defaults; whether the concept of `peer pressure’ is working. 8. Self Reliance of the Group Can the group function on its own without the support of the NGO is an important criterion for assessment? The level of dependency on the NGO/promoter of the group and impact of withdrawal of NGO/promoter on the group is to be assessed.

RATING OF SELF HELP GROUPS SL.N CATEGORY

CRITERIA

MARK

Membership is homogeneous

10

No homogeneity in membership

5

One year and above

10

O 1 2

COMPOSITION AGE OF THE GROUP

Six months and above but less 5 than a year 31

Microfinance & Self-Help Groups

3

WEEKLY

GROUP Four meetings per month

MEETINGS

4

5

6

ATTENDANCE

MINUTES BOOK

PARTICIPATION

2-3 meetings per month

8

1 meeting per month

5

More than 90%

10

Between 70% and 90%

5

Less than 70%

3

Written in detail

10

Maintained, but not in detail

5

IN Participation

GROUP DISCUSSION

10

by

only

a

few 5

members Participation

by

majority

members 7

SAVINGS (FREQUENCY) 4 times a month ( by majority

of 10 10

members) 4 times a month (but not by majority)

8

2-3 times a month (by majority members) 2-3 times a month (but not by majority)

8

1 time a month day (by majority members)

5

1 time a month (but not by majority)

3 1

8

SAVINGS

&

LOAN Collected in group meetings

RECOVERY (MODE

House - to house collection

10 5

OF

COLLECTION) 9

STYLE FUNCTIONING

OF Democratic and Transparent AND Decisions taken by few dominant 32

10

Microfinance & Self-Help Groups GROUP DECISIONS

member / members / group

0

leaders

10

SANCTION

AND Selection of borrowers in group

DISBURSEMENT

2

OF meetings

LOANS

Sanction and disbursement of

2

loans in group meetings Loan terms and conditions

2

discussed in group meetings and recorded in minutes

2

Utilisation of loans reviewed regularly in group meetings

2

Recovery of loans reviewed regularly in-group meetings. 11

INTEREST

ON

SHG Uniform rate irrespective of source

LOANS

of funds

5

Different rates depending on

3

source of funds Interest rates vary according to the 5 purpose of loan Uniform interest rate for all

3

purposes 12

13

UTILISATION OF SAVING Above 80%

10

FOR LOANING

Above 50% and upto 80%

5

RECOVERY OF LOANS

Dues not recovered in respect of

10

10% or less of total no.of loan accounts Dues not recovered between 10% and 30% of total no.of loan accounts. 33

5

Microfinance & Self-Help Groups

14

15

BOOKS OF ACCOUNTS Attendance cum minutes book

BYLAWS

/

RULES

3

Savings Register

3

Loan Ledger

3

Bank Passbook

1

GROUP Known to all members

10

Known to most of the members

5

Not known to many members

0

TOTAL MARKS

150

SELECTION CRITERIA OF SHG FOR LINKAGE TO BANK LOAN 1. SHG scoring more than 120 marks out of maximum of 150 marks could be chosen for credit linkage 2. SHG scoring less than 120 marks will have to be further developed before linkage. The areas for taken up after 3 months.

34

Microfinance & Self-Help Groups

“United we stand divided we fall”

What is Unique about the SHGs and Linkage Programme? Decision making

Members make decisions collectively. SHG concept offers opportunity for participative decision making on conduct of meetings, thrift and credit decisions. The participative process 35

Microfinance & Self-Help Groups

makes the group a responsible borrower. SHGs provide the needed financial services to the members at their doorstep. The rural poor needs different types of financial services, Financial services

viz. Savings, consumption credit, production credit, insurance, remittance facilities etc. The platform of SHG provides the possibility to converge these services.

Supplementary formal banking

to

SHG linkage does not supplant the existing banking system, but it supplements it thus taking full advantage of the resources and other advantages of the banking system. SHG linkage cuts costs for both banks and borrowers. In a study sponsored by FDC, Australia, it was observed that the reduction in

Cutting costs

costs for the bankers is around 40 % as compared to IRDP loans. The poor have a net advantage of 85 % as compared to individual borrowing. Similar finding was also observed in a NABARD study.

NPA Savvy Peer

pressure

collateral

The Linkage mechanism has proved that the repayments are as high as 95% - 100 % as The SHG linkage emphasises peer pressure within the group as collateral substitute. The SHGs are turning out to be quality clients in view of better

Quality clients

credit management, mobilisation of thrift, low transaction costs and near full repayments. The members of the SHGs could over a period of time, very

Client preparation

selectively graduate to the stage of micro entrepreneurship and have been prepared with requisite credit discipline. Available statistics indicate dependency of 35%-40% of rural households on non-institutional sources for credit needs. SHG Linkage offers a better way of dealing with the magnitude of social

Social agenda

agenda. Many NGOs/ Governments have recognized the SHG as a vehicle for carrying and deepening of their developmental agenda/ delivery of services. SHGs have exclusive focus on absolute have-nots, who have been

Exclusive poor focus

bypassed by the banking system. Social banking does not have any meaning if the lowest strata and the unreached are not focused.

No-subsidy-

The programme does not envisage any subsidy support from the 36

Microfinance & Self-Help Groups

government in the matter of credit. The issue is to build capabilities dependence syndrome

and enterprise of the individual members, blending with group cohesion and solidarity through training provided by a SHPI to set the ball rolling for the SHG.

Chapter 9 Commercial Microfinance The involvement of the private sector has been encouraging. Indeed microfinance offers effective platform for private-public partnership in which everyone wins. Poor people get more choices and chances to increase their wealth. Societies succeed in their efforts to defeat hunger and achieve other development goals such as children education, better nutrition and gender equity. Private business benefits from access to new markets and, not least, from the boon to their reputations that comes with offering services that have a positive social impact. Microfinance, an idea rediscovered by Nobel Laureate Muhammad Yunus, has traversed three decades of development. It has touched the life of millions, uplifted the lives of millions, uplifted many poor families and has improved their living standards with respect to nutrition, housing and education. It has reduced income inequalities by funding the entrepreneurial spirit of low income groups. The poor man’s finance has been successful in leading the real ‘inclusive financial system’ by providing micro credit, micro insurance and deposit services to the marginalised and the neglected sections of the society. Microfinance has been primarily driven by philanthropic objectives, funded by subsidised credit, grants and donor money, and was run by non-government organisations or charities. Microfinance Institutions have been successful in reaching funding scarce pockets of the economy through the conventional model. They have made capital available to those sections 37

Microfinance & Self-Help Groups

of the society which for profit set-ups of mainstream banking /non-banking financial sector considered unworthy of finance. The sector has witnessed considerable evolution in the past three decades; it has undergone a transition from an informal sector to a regulated formal sector. With the expansion of operations, net work and its presence, the sector achieved a global outreach of nearly 100 million clients in 2006. The micro finance sector is embracing a dynamic shift in the model followed by its conventional players. The donor money or subsidised credit as the sole source of funding is being replaced with private equity and debt-capital. More sophisticated ways of funding and insurance-like securitisation of loan portfolios have also entered the sector. The sector has also received recognition from mainstream finance as an investment-worthy sector. Dedicated regulatory bodies have been established or are in the making in many countries of the world where the sector has gained a considerable maturity.

Micro Finance Sector in Retrospect The existence of microcredit can be traced back to 16th century pawn shops which provided small loans though against collaterals, or 18th century Irish loan fund system, or 19th century financial cooperatives in Germany. However, the service sector finally came into existence with the first major effort put in the form of Grameen bank in Bangladesh by the banker for the poor-Prof. Mohammed Yunus. According to a study conducted by Prof. Yunus, in a village named Jobra, some 42 odd poor people needed funds totalling 856 taka, i.e., only $27, for their micro business activities. And due to the lack of these funds at economical rates, they were unable to break free of the debt circle. He then created world’s development wonder, Grameen Bank. The decade of 1970s witnessed fragmented introduction of microfinance in different parts of the world. Accion International, a Brazilian MFI, issued its first microloan in 1973. The same decade saw the emergence of Self Employed Women’s Association in India, which was dedicated to funding women micro entrepreneurs/workers. The Foundation for International Community Assistance (FINCA) international followed suit and after the first successful pilot program, it conceived its own microloan program in 1984 and popularised the ‘village banking’ model. Bank Rakyat Indonesia (BRI), which has the worlds largest sustainable micro banking system, also started rural credit program in 1970s, though it failed and had to undergo a turnaround to attain the status quo. 38

Microfinance & Self-Help Groups

The experimental micro credit program showed that the marginalized sections, which were considered least credit worthy by the formal banking institutions were, in fact, highly credit worthy as they displayed great commitment towards loan repayments. Moreover, such loans were made at interest rates which in most cases helped the MFIs to recover their costs. AS a result the decade of 1990s saw more MFIs attain long term sustainability and realize greater outreach in terms of number of clients. For the first few years, micro finance included micro credit, i.e, small collateral free loans, but in 1990s the sector evolved to include micro savings/deposits, micro insurance and micro money transfers. The term micro credit was replaced with a broader term and service called ‘micro finance’. The financial system in most of the countries in the first two decades of introduction of micro finance was rigid and close. Financial sector reforms carried out by developing economies in the 1990s allowed the entry of foreign banks, deregulated interest rates, eased exchange rate policies and developed international linkages of capital markets. These structural changes facilitated the flow of foreign capital in capital scarce economies and led to innovations in financial product offerings. These innovations and changes affected the micro finance sector and led to its convergence with mainstream finance.

39

Microfinance & Self-Help Groups

The Status Quo and the emerging Paradigm Outreach today, after 30 years of its existence, the sector has attained a remarkable global outreach of nearly 100 million clients. But the conventional model followed by MFIs has certain inherent limitations which have confined their outreach. The outreach is phenomenal in absolute terms and can be considered to have had a positive impact on living standards of millions. But in relative terms, as per the world bank statistics, this outreach caters to only 4% of the world’s demand for microfinance and moreover, microfinance is not accessible to almost half a billion of the world’s poor. The region specific penetration has not been noteworthy; as per the consultative group to assist the poor (CGAP) estimate, the service has achieved 2.5% penetration in the South-Asian countries and only 0.5% penetration in Central Asia and Eastern Europe. Trends in Demand As per Meta-analysis with Interactive Explanation (MIX) market analysis of the top 100 MFIs, these MFI’s are witnessing a year-on-year increase in the client base by 26%. From a larger perspective, the current demand for microcredit is $50 bn and it is also expected to grow by 15-30% per annum. This demand comes from about 500million people, largely micro entrepreneurs, seeking micro funds. There is a substantial large group of people, almost half of the world’s population without access to basic financial services. Sources of Funds So far, the micro finance sector has been funded by donor money. In some cases voluntary deposits also form funding source. The donor money and voluntary deposits have proven to be inadequate to meet not only the current but also growing demand for microfinance. Donor money is sufficient to create a demonstration model for a pilot phase. But for a more practical business model of an MFI, the said source of funds is not sufficient. Hence, the emerging sources of funding are private capital- local and foreign, venture capital, debt and equity capital, and other funding sources like securitization, etc. Mainstream finance has appreciated the investment worthiness of the sector and the same is reflected in private equity deals, debt issues, securitization deals and some successful Initial Public Offerings in the recent past.

Sustainability and Scalability

40

Microfinance & Self-Help Groups

The microfinance sector has not yet attained efficiency with factors like high operating costs, inefficient branch networks and concentration of services in smaller pockets plaguing the industry. The conventional method of funding microfinance hinders the sustainability and the scalability of MFIs. The MFI with donor money or deposits as sole funding sources, though successful so far, suffer from lack of scalability. This reason can be attributed to the limited presence of most of the MFIs. Most of them exist in specific regions of the country and suffer from inferior branch network. These intermediaries charge high rate interest rates to cover their costs, operating expenses, etc. But with the growing convergence of the capital markets with the microfinance sector, alternative and cheaper funding sources are gaining popularity and the same has started having a positive impact on the net effective interest rate charged. All the more, the transformation has increased the profitability of respective MFIs. Thus, the changing scenario is favouring the long term sustainability of the MFIs. Portfolio Quality The portfolio quality of the sector as a whole has been bitter than the banking or the nonbanking funding sector. The community lending/group or the Self- Help Group model has ensured timely repayments and least delinquencies. The delinquency rates in some MFIs has been less than one percent while the not so successful participants too have registered delinquency rates in the range of one to five percent. Commercialisation has strengthened the position of MFIs on the portfolio quality front and has ensured that the trend continues. Dominance of Governments As per the CGAP researchers Adrian Gonzalez and Richard Rosenberg, “governments dominate the microcredit industry as the major funding source.” This phenomenon has allowed even the loss making programs to obtain funds. However, in the recent past, the sector has witnessed dramatic increase in the share of International Financial Institutions (IFIs) and Microfinance Investment Vehicles as new funding sources. IFIs are the private arm of public finance institutions, while the MIVs are the private micro finance funds. Institutions like European Bank for reconstruction and Development, International Finaancial Corporation belong to the IFI category, while institutions like ProcRedit Holding, Oikocredit, Dexia belong to the MIV group.

Interest Rates and Branch Networks 41

Microfinance & Self-Help Groups

The interest rates charged by MFIs are very high. In some countries such interest rates vary from 12 to 30%. While in some countries, the govern have placed a cap on the interest rates charged by micro finance providers. However, it is considered to be extremely high in case of Mexican MFIs. In fact the average interest rate charged by MFIs in Mexico is 82%. The operating expenses incurred by the MFIs, as they operate in the smaller pockets or regions as they don’t have efficient branch networks, are very high. To cover these costs and to make their business sustainable, they charge high interest rates. Currently there exists more than 2700 MFIs across the world. Though their operations are concentrated in smaller pockets, the convergence of capital markets with the sector may improve their scalability in future. These will lead to increased competition for the share of market and the same will have an effect on interest rates charged. The situation will demand sourcing of reliable capital at competitive rates to withstand the competition. The MFIs also have insufficient branch networks. Here, the commercial banks have significant roles to play. Either the existing MFIs can form a strategic alliance wit commercial banks and avail themselves of the benefit of latter’s larger presence through their branch network, or the commercial banks can down scale, from a dedicated microfinance division and make optimum use of favourable branch network available with them to enter the new market segment.

Regulations The sector was not regulated since its initial set up. However, the emergence of a larger number of participants and the influx of private capital has warranted better regulation of the sector. Now, many Latin American countries and some Asian economies have desired regulations and a dedicated regulatory bodies while in some countries like India, the establishment of a dedicated regulatory authority is yet to take place.

Chapter 10 Trends towards Commercialisation: New developments and concerns The microfinance sector is witnessing commercialisation in a fragmented manner. Commercialisation of the sector is altering all the equations of sourcing and delivering models in microfinance.

42

Microfinance & Self-Help Groups

The microfinance sector has so far been under leveraged. But the commercialisation transformation has made the MFIs to increase their base of debt and borrowings and leverage their positions further. Leading participants are involving themselves in innovative deals for procuring funds at competitive rates and increasing their leverage. Banco Comapartamos of Mexico, Developing World Markets (DWM) and Blue Orchard, ProCredit bank of Bulgaria, Building Resources across Communities (BRAC) Swan Krushi Sangam (SKS) Microfinance and SHARE Microfin of India, are some prominent MFIs, which have tapped capital markets and private equity funding sources. Banco Compartamos has been the first- ever MFI in Mexico and the third ever in the world to make Initial Public Offering (IPO). It made a secondary market offering of 30% of its equity stake, and the IPO was oversubscribed by 13 times. This offering has enabled Compartamos to enter the league of top MFIs in terms of assets held and clients served. Equity bank, Kenya, made an IPO, the first microfinance IPO in Africa, and got listed on the Nairobi Stock Exchange in 2006. It also raised funds worth $10mn from private equity deal in 2004. In early 2007, SKS Microfinance of India-the third largest MFI in India in terms of number of borrowers-reported the largest-ever private equity deal in the microfinance sector in the country. The MFI received a private equity investment $11.2mn and the deal was led by Sequoia Capital and other private equity funds. SHARE Microfin, another leading MFI in India, followed and announced a larger private placement of $27mn with Aavishkaar Goodwell and Legatum. The above deals and many such successful deals suggest that mainstream investors, including venture funds, private capital, insurance and pension funds, has recognised microfinance as an investment worthy sector. Microfinance is an emerging asset class and investors with corporate social responsibility objectives. However, there are concerns that hover over the commercialization debate and prevent MFIs from completely revamping their models. The innovative deals in the microfinance sector, and more so, the sources of Banco Compartamos IPO have drawn a lot of criticism from the sector participants. The major concern is that the commercialised MFIs favour investors at the cost of vulnerable borrowers. However, considering the growing demand for microfinance and insufficiency of grants or savings, the equity and debt capital are the most economical and reliable sources of funds. There is a growing concern on the exchange listing of MFIs for offering equity capital in the form of an IPO. The concern is that the exchange listings will pressurize the MFIs to 43

Microfinance & Self-Help Groups

demonstrate better performance in the short term. The stock price of MFIs will be monitored on a daily basis, and will be expected to appreciate faster. This will lead to subordination of its primary goals to commercial interests of investors. But a point to be noted here is that investors attracted to this sector comprise largely organisations seeking to fulfil their CSR objectives. Such investors investing in the sector focus on the long term value creation rather than short-term gains. Exchange listing comes with its own benefits. Such listing provides an exit route to investors wanting to liquidate their investments. Availability of an exit route for an investment works in its favour by attracting a large number of investors. Also, dedicated exchanges for the MFIs will enable investors to compare an organisation with its peers in the same sector.

Sophistication: The Way Forward Commercialisation on a large scale may require MFIs, other participants and other regulatory bodies to address other new issues. Commercialised MFIs may require dedicated exchanges for listing and trading. Many countries do not have dedicated regulatory bodies; commercialisation will mandate forming new regulatory bodies, and the sector will witness introduction of new policies and guidelines. Commercialisation will demand better support system with respect to information exchange and tracking of performance. Introduction of new participants like ‘credit-bureaus’ will make the appraisal of clients and respected portfolios more sophisticated. The performance tracking will require services of ‘credit rating agencies’. They will have a larger role to play, with introduction of more complex offerings and higher risks associated with innovative methods like securitization. The credit bureaus and the credit rating agencies will help the commercialised sector attain sophistication by addressing concerns of information irregularity and lack of credit history. Some of the efforts required increased sophistication of the sector is already under way. Standards and Poor’s, a rating agency, has worked out a new methodology for credit analysis 44

Microfinance & Self-Help Groups

and rating of MFIs. There exists a dedicated stock exchange for microfinance participants named MFDAQ which went live in London in 2007 and is in its pilot phase. Such niche exchanges offer commercial MFIs a comfort zone where they will be compared only with their peers. If such a support system is not provided, the MFIs which list on exchanges will be required to meet regulatory prerequisites designed for the other for profit entities. Specialised exchanges with softer regulatory requirements for MFIS will overcome this problem.

Conclusion: Philanthropy has driven the microfinance sector to its current status. But the equations are changing and philanthropic aims are giving way to double bottom line objectives. In fact, the purpose of philanthropy is to seed an idea, support it through its incubation stage, and if the idea is viable and able to attract the investors, ‘philanthropy should change its role midway or in some cases should also exit the stage. Considering the attractions of the sector, i.e. the profitability and the repayment rates, and also the downside like lack of scalability and sustainability of existing models, commercialisation is an ideal option for microfinance to secure its successful existence.

45

Microfinance & Self-Help Groups

“How are you managing household chores along with SHGs?”

Chapter 11 Survey on SHGs in Orissa 46

Microfinance & Self-Help Groups

The Institute of Management and Information Science (IMIS), Bhubaneswar, has undertaken a survey of SHGs, incidentally, all women SHGs, in Puri District (Orissa).

OBJECTIVES: •

To study the changes that took place in the economic status of the SHG members after credit linkage with the bank.

•

To examine the nature of the economic activities undertaken by the SHG before and after credit linkage.

•

To examine the efficiency of credit provided by the bank.

Methodology:  The study is based on a primary data collected through a questionnaire. The questionnaire consists of different aspects. General Information about SHGs: Initial credit-linkage and subsequent repeat

➢ finance. ➢

Management Aspects: Leadership, maintenance of books of accounts, grading

of the financial group. ➢

Economic Aspects: Income before and after linkage, size of the assets,

economic activities undertaken, end use of loan. ➢

Socio-political Aspects: Social initiatives taken by SHGs, political

consciousness awareness of group members. ➢

SHG linkage with Non-Government Organisation (NGO), village panchayats,

etc. ➢

Future Plan-Land based activities and ancillary business activities,

miscellaneous works such as SBI’s recovery agent. ➢

Response of other villagers to the activities of SHGs.

 The questionnaire is supplemented by a door-to-door interview of the members of SHGs. Random method is employed to conduct the survey in 52 SHGs spread over 47

Microfinance & Self-Help Groups

five Gram Panchayats and one National Advisory Council and having 662 members. Statistical tools such as percentage, average, etc, are used to analyze the data. Techniques like frequency distribution, cumulative frequency distribution, and pie charts are used for the analyses.

Hypothesis  SHGs has eliminated moneylenders and reduced the cost of debt which ranges from 60% to 100% per annum in the countryside.  SHG has provided productive employment to hitherto unemployed women.  Repeat finance has improved the economic conditions of the members- at least in

lifting them above poverty line.  Co-operation- ‘Synergy’ effect is evidenced.  An improvement is seen in communication skill.  Members of the group have developed a futuristic vision. Some of them displayed leadership qualities.  NGOs have played helpful role vis-a vis SHGs.  Block and government officials have played supportive role with SHGs, particularly in relation to the marketing of products.  National Bank for Agriculture and Rural Development (NABARD) and government have provided adequate training to the members of the group.

Analysis and Observations  Moneylenders have been successfully eliminated by all the SHGs as mentioned in the report. The members lend among themselves, the current rate of interest being 36% per annum. Institutions should not look at askance at this rate as this is basically market based. One of the members of the Nuasasan village commented: “We are grateful to the bank that the loan enables us to lend and borrow. The rate is immaterial. We are at least giving the interest to ourselves, not outsiders.”

48

Microfinance & Self-Help Groups

Another SHG met a member’s medical expenses which would have required outside borrowings. No major social functions like marriage or funeral rites were conducted in the houses of the members. Hence, they were not under the pressure of moneylenders.  In Orissa, 96% of the members of the SHGs are women. All the SHGs which were

surveyed consisted of women SHGs. Women, who were once unemployed were now employed. They suffered from liquidity crunch. Now, the liquidity position has improved in most of their cases. Fifty percent of the women had the capacity and were confidently willing to take economic decisions.  Of the total number of SHGs covered under the survey, 60.87% belonged to the families below the poverty line. Majority of the families were marginal farmers with less than one acre of land and a reasonable number of families were landless daily labourers without any regular source of income. The landless families were unable to express their income statement in monetary terms as they did not get employment throughout the year. Those families which depend on handicrafts had to depend on seasonal income. Only 10% of the families were financially sound. The average annual loan liability of the groups with a fund of Rs 80000 is about Rs. 32480 and the loan liability of the groups with more than Rs 1lakh is Rs 35000. The smaller amount of loans had been repaid with the hope of acquiring a bigger size loan with subsidy. Twelve percent of the SHGs improved their economic conditions. There was an improvement in case of food security among all the SHGs. None of the SHGs experienced reduced economic position.

 Cooperation is visibly evidenced as the SHG president and secretary interviewed spoke in terms of ‘We’ rather than ‘I’. Dissension was observed in 2 out of 52 SHGs that were surveyed. They proposed to exclude one member in each group to bring about cohesion.  Low income customers had small accounts and transactions. Computerised service at a central village for a small fee will be a financially viable proposition. This will reduce transaction costs and help in regular maintenance of books of accounts. At present, books are maintained at quarterly or half yearly interval. 49

Microfinance & Self-Help Groups

 Block and government officials, in spite of pronouncements, do not play a supportive role with the SHGs. All the SHGs are not invited to the fairs and craft melas organised by them. Block level committees does not organise such melas regularly. Marketing is the bottleneck for the SHG products. The SHG members are left to their own devices. The government should set up credit reference bureau by collecting a part of the cost from the SHGs. In order to reduce the initial cost of establishment, the government may partly subsidise the NGOs operating such a bureau. A part of the cost may be recovered by offering their services to the companies that sell goods and services to consumers who have a readymade database. ➢

Youth SHG:

Keeping in view the unsatisfactory experience of banks,

particularly in case of self employment scheme for Educated Unemployed Youth and Prime Minister’s Rozgar Yojna loans which were literally taken as political grants by the beneficiaries, banks, encouraged women SHGs. Unemployed youth is a reality in the Indian landscape. There is risk in the formation of SHG exclusively among the males because of:

➢ Their individualistic orientation. ➢ Search for a secure job, preferably urban- oriented low skilled job. ➢

Easy susceptibility to political designs and needs.

Since the

society consists of unemployed youth, there is a need to co-opt them in the mainstream of microfinance. As a result, they can engage themselves in productive work rather than entertainment or unnecessary socio-political conflicts. They can also indulge in practises such as short term saving and group productive activities. As a result, they will experience harmony and cohesion in diversity. 

Participation in Fairs or Festivals: Most of the SHGs which

were surveyed expressed their interest in joining block/district level fairs/festivals for selling their products. But very few has a chance to participate. Favouritism, including illegal gratification are the allegations made against some government agencies, particularly Orissa Rural Development & Marketing Society. Will reduce favouritism, if any, on this score. 

Group Dynamics:

The group had a leader with good interpersonal

skills, information skills which included liaison with customers, bank and others 50

Microfinance & Self-Help Groups

who were outside the organisation. He also played a mojor role indecision making which included analysis os issues, taking risks, handling disturbances, resource allocation for efficient utilisation, negotiating like dealing with others which will not disadvantage the group and acted like an arbitrator in identifying and settling conflicts. 

The following characteristics are delineated in SHG leaders in varying

degrees. 1. Intelligent 2. Confident

3. Integrity 4. Sociable 5. Positive Outlook 6. Good Judgement 7. Willing to learn 8. Solves problems 9. Decisive 10. Determined 11. Communicate 12. Attentive 13. Courageous 14. Includes not excludes 15. Realistic  Training: Capacity-building training was organised by NABARD, and also

occasionally by banks like the SEBI. This has to be done on a regular basis. Training that is provided by the government is inadequate. Even, central village level or block level fair is not organised regularly. Off late, the SEBI has organised training camps for some of the SHGs. basically this being a Committee should organise several training programs for activities as dairy, fishery and duck rearing can be explained from the stage of planning to implementation for the SHGs as per their needs and convenience. For this, the group as a whole can make a worthwhile contribution by doing such activities and saying what support it requires. In this context we recommend participatory rural appraisal method. It may be carried out whereby the facilitator asks a series of questions to stimulate conversation among the participants. The technique is flexible, exploratory, interactive and responsive to issues raised 51

Microfinance & Self-Help Groups

during the process. Both the facilitator and the members learn from, with and through local people. The government or the NABARD sponsored NGO trainers should adopt action learning method for training the SHGs. The members are not quite literate, but they are intelligent and experienced enough and do not require a classroom method for their training. One of the groups described how it coped with a medical case of a member through self-help and cooperation. This is quite a lesson on disaster management. But a false step or non-cooperation among them would have resulted in breakdown

of

the

group

or

economic/social

ruin

of

that

member.

Marketing/leadership training can be imparted through Reg. Revan’s , founder of action learning for managers, fundamental equation: L= P+Q+A+R Where L= Learning P= Program learning Q= Questioning A= Action R= Reflection The members will learn with and from one another, so also the NGO trainer. The inner experiential cycle would be as given below: Desire to change-> Risk-taking, (courage and responsibility)->Insight-> Transformation. This is the essence of women empowerment. The method helps: ➢ When we are in a new situation with whom we have never been before ➢ When human resources around are untapped. Process Model  The process model of the SHG is given below 1.

Members of SHG

2.

SHG as a group

3.

Village community

4.

The Panchayat

5.

Higher bodies-District, State

6.

NGO

7.

SBI 52

Microfinance & Self-Help Groups

The intersection on the concentric circles represents the environments that get influenced 1

by the SHGs.

Member SHG Group 2

Village Commun ity 3

have not interacted with social issues such as: ➢ Alcoholism ➢ Dowry problem ➢ Financial indiscipline of men folk. They have bypassed the issues like:

4

Panchay at 5

 At the village community level the, the women SHGs, in general,

District

➢ They are beginners. ➢ They have to develop economic routs. ➢ They require community approval, if not support, to start with.  Few members of the group participated in gram Sabha. They could

not recall any benefits, tangible or intangible accruing in the process. Pipli, located in Orissa, is a politically surcharged block, with two dominating politicians dividing the society vertically. Hence, lower political involvement of women groups is not a weakness in the formative stage. The villagers support women SGs, they feel no animosity even if they do not get loan and the SHGs get the same.  Sujog, an NGO is active in the area. It has explained to a large number of surveyed

groups about the nuances of bank finance. It’s representative was found in the bank helping the SHGs and the bank in areas such as filling up forms, maintenance of accounts quarterly, counselling the SHGs in bank finance and repayment.  SBI is a major link in the process. All the credit-linked SHGs acknowledged the

helpful role of the bank. While discussing with them, on epoint emerged that MFIs charge higher interest rate but receive and deliver funds at loanee’s doorstep. The suggestion for bank at this point is to collect repayment of dues in a central village once in a week, preferably Tuesday, which is declared as the SHG day by the bank. This will help the bank to become popular.  What is banks response to the SHG? A top executive of the SBI thinks that microfinance is not only a government program, but also a desirable strategy for long 53

Microfinance & Self-Help Groups

term growth. A senior executive feels that it is the bank’s policy and its scope is vast. The local branch manager says that it is the only way to serve the poor.

Chapter 12 Need for Microfinance by Banks There are many reasons why rural people remain outside the realm of banking services. The high transaction cost to be incurred by the banks, complex formalities involved, lack of suitable and ideal products, hassles of the formal system and the general impression of indifferent attitude of the banks deserve special mention. In the present day context of the credit deposit ratio of banks having gone up to more than 100% and with the growth of the untapped rural potential there are plenty of scope for the banking sector to play a lead role in the extension of financial services to the rural demanders of credit for various purposes which would also help the banks to increase their business besides spreading their risk. There has been a wide recognition of the fact that there is a very good opportunity for the banks to do retail loan business

. With the growth of the NGOs

and the SHGs and their linkage with the bankers, there is ample scope to facilitate micro financing activities in the rural areas. On these lines the Union budget 2005-06 contains the finance minister request to the RBI “to examine the issue of allowing banks to adopt the 54

Microfinance & Self-Help Groups

“agency model” by using the infrastructure of the civil society organisations rural kiosks and village knowledge canters, to provide credit support to rural and farm sectors. “The Finance minister has also stated that “commercial banks may appoint MFIs as “banking correspondents” provide transaction services on their behalf.”

International Experiences There has been a wide recognition among the academicians, bankers, researchers and policy makers regarding the need for deepening and widening the financial services to the rural poor. The Bangladesh Grameen Bank Model and the microfinance programs of BRAC and ASA in Bangladesh have been studied and the microfinance experience of Philippines has been familiarised with and though they represent the path breaking and innovative efforts” they have been used in some form or the other in India. The most talked about experience appears to be that of Brazil. “ The Brazilian model is largely technology driven aand uses kiosks or Automated Teller Machines (ATMs) by such agents to accept payment, opening of accounts, without a cheque book, collection of small deposits, provision of microcredits, selling of savings bonds and insurance”. Another initiative indicated is that “Post offices network and Post office staff to deliver banking services through Banco microfinance program by allowing banks to draw on 2% of the reserves deposited with them and lend it to individuals and small businesses at concessional interest rates”. The international experienceindicate that micro savings are important to micr-credit. BURO Tangail an MFI of Bangladesh uses a unique saving product” Contractual Saving Agreement”. Kenya has developed the “Jijenge Savings Account” a contractual Saving’s Product. Further there is the facility of mobile subscribers making micro payments made possible by the Commercial Bank of Africa.

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Microfinance & Self-Help Groups

The Indian Experience General Analysis of schemes in India The Pigmy Deposit Scheme of collection at the door steps on daily/ weekly basis has been resulting adversely in cash leakage, frauds and accounting and reconciliation problems and ultimately closure of such schemes. The mobile banking schemes also did not seem to have worked well because of the manpower constraints and inadequate volumes to cover cost. Regional Rural Banks (RRBs) continue to be still the leading Microfinance Institutions in the rural areas-196 RRBs covering 196 districts and serving a client base of 6.27 cr. The local Area Banks (LABs), four in number in the private sector and regulated by the RBI seem to be providing “efficient and competitive financial intermediation “in their area of operation. Except for one such LAB, Krishna Bhima Samruddhi, the others do not have the refinance facility.

OBC Grameen Project: Oriental Bank of Commerce (OBC) was one of the first Commercial Banks to pioneer microfinance under their “OB Grameen Project” in Uttaranchal and Rajasthan. What is considered to be a unique feature and also a revolutionary approach of this system is that the bank officials go to the groups on the pre-determined dates. The NGO/MFI bulk lending model represents SIDBI, friends of Women’s World Banking and the Rashtriya Mahila Kosh (RMK) working along with some Public Sector and Private Sector commercial banks providing online facility directly to SHGs or groups in German mode or even to individuals.

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Microfinance & Self-Help Groups

The partnership model: The new generation private banks were responsible for the assistance in as much as they could overcome the constraints of capitalization of the MFI and the problem of double exposure faced by the banks.

Kisan credit card: Currently, Kisan Credit Card is most popular across and considered to be a financial product innovation of far reaching, significant of recent times. The main advantage to the farmers is the flexibility in the management of the cash flow along with the reduction in the documentation cost besides transport cost. There are also advantages to the banks in terms of reduced work load and reduction in paper work. Above all, there is the maintenance of banker client relationships. Many banks seem to have innovated on these lines and developed variants by “integrating Term Loans and Crop. Laons and providing other features akin to ‘ General Purpose Credit Card’.” The National Council of Applied Economic Research while highlighting the benefits of the scheme has also pointed out the restrictions imposed with regard to the issuance of the cards.

The SHG-bank program is considered to be a successful one with the percentage coverage of 1.4 million groups with a cumulative credit flow of Rs 6,300 at the end of March 2005 from the banking system. The linkage program seems to have the advantage of combining the flexibility, sensitivity and responsiveness of the informal credit system with the technical administrative capabilities and financial resources of the formal financial sector. Considering the advantage in terms of better business and identification of risks, most banks have a corporate policy to expand their Micro-Credit operations under the SG-Bank Linkage Mode. In some of the states like Bihar, Uttar Pradesh and the North-East Region, which concentrates more on poor people, the major problem is the absence of NGOs. But the banking institutions seem to be the votaries of this program making this a part of a large movement in the years to come. The success, however, depends to a great extent on the collective strength of the poor, the attitude of the NGOs and their closeness to people and huge resources left with the banks. With the prominent role of the SHGs in the social mobilising functions and in the empowerment process, also the financial intermediary role played by them in the banks, seem to be relieved of the pressure and responsibilities with regard to the sanction and recovery of loans.

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Chapter 13 Strengths of the Microfinance Programs in India There is a scope for designing gender specific strategies. Great care and deliberations are taken with regard to the practices in the cases of projects of new age programs. More prominence is enjoyed by women challenging inequality at the household level. There are measures available to monitor and evaluate the systems. There are different models practised at different places and in some places there is an adoption of the mixture of all and there is also the scope for the distribution of new products like insurance for institutions who become members of some associations like Sa-Dhan.

Weaknesses of the MF Program Gender specific strategies are not possible especially in the initial stages of designing. Women are not always consulted with regard to the products of their requirements. There is also the limitation due to the absence of the skills to handle participatory methods and tools for indentifying the gender issues at the community level. There is the continuity of the traditional practice of men engaged for professional and fro only supportive roles. Organisations do not possess gender experts to keep the members aware of the gender issues. MF institutions are not proactive in promoting women’s empowerment. There is no baseline data to facilitate any possible comparison. Gender related information is also not available in detail for drawing any useful conclusion. Lack of adequate measures for evaluation make it difficult to measure some factors in some projects. The importance attached to women clients makes men to be indifferent in the process of development. Women do not get adequate services in a number of aspects, which pose a major problem for them to get means of livelihood through these MF institutions.

Conclusion: The banks will be more active in the provision of Microfinance activity through the SHGbank linkage program. With careful planning and decision making the banks can overcome 58

Microfinance & Self-Help Groups

any kind of weaknesses. From the initiatives taken in India and abroad it has been observed interfacing NGOs/CSOs and other socially conscious organisations, between the banks and the ultimate customers would prove rewarding in the philosophy of “Financial Inclusion” With the support and guidance of the government and the apex bank, all measures taken in this direction will prove to be beneficial both to the providers and the receivers. There would be an extension of diversified activities covering large sections of the rural community. This in turn could lead to the “socioeconomic empowerment” of the less advantaged sections. The continued support of the banks along with the cooperative banks in the provision of credit and credit related services including MF activities with renewed vigour and innovation in the rural areas appears to be the imperative need for the present day Indian Economy.

Capitalising on Challenges The SHG bank Linkage programme launched by NABARD as pilot project in 1992 with policy support from Government of India and the RBI has emerged as the largest microfinance programme in the world. As on 31st March 2007, 41,60,584 SHGs were maintaining savings bank accounts with the banking sector with outstanding savings of Rs. 3512.71 crore, thereby covering more than 5.8 crore households within its fold. The outstanding loan from the banking system stood at Rs.12366.49 crore in respect of 28, 94,505 groups as on31 March 2007.

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Microfinance & Self-Help Groups

The programme has proved its efficacy as a mainstream programme for banking with the poor who mainly comprise of the marginal farmers, landless labourers, artisans and craftsmen and others engaged in small businesses. However, the furious pace of growth and the involvement of various stakeholders (Government, NGOs, Banks, Farmers clubs, Rural Volunteers etc), in the programme have thrown up a number of issues which have policy implications for up scaling and sustaining the programme in the long run. Important among such issues are: Quality and Sustainability of SHGs With diverse partners entering the field, ensuring the quality of SHGs promoted has emerged as a major challenge. Nonetheless, the intrinsic strength of the SHGs depends on several key factors. •

The first and foremost is the objective at with which a group is promoted. In case of groups formed taking advantage of external benefits such as subsidy or other support, generally they have a short life span.

•

The second is the nurturing and the training 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 handholding services that help in sustaining the group in the long run.

Emergence of Federations To address the problems a number of SHPs have encouraged formation of federation of the SHGs. The federations are playing an important role in nurturing of groups, in increasing bargaining power of group members and in livelihood promotion. Their main objective is to build up leadership among its members and make the SHGs self –reliant. Book Keeping In SHGs Quality book keeping and accurate recording and reporting of financial importance in the linkage programme. Besides, the principle of transparency is important. Excellent loan repayment in the past is not a guarantee for excellent loan repayment in the future. Banks are interested in knowing the overall health of the group. Engaging the mature SHGs 60

Microfinance & Self-Help Groups

A growing sense of boredom is being noticed among a majority of matured SHgs. This is because the challenges have diminished. This is a serious challenge for sustainability of the movement. To take care of the skill up gradation needs of matured SHGs and for the development for sustainable livelihoods among them, NABARD has been supporting the conduct Micro-enterprise Development Programmes since 2005-06. As on 31st march 2008, 674 such MEDPs had been supported covering 16,761 participants. Link up with Corporates High level of competency and professional approach is essential to survive in a competitive market. Corporates are strong in marketing andhave excellent distribution reach. A win-win partnership is possible where producer groups make products that are branded and marketed by companies. An example is ITC, which markets ‘mangaldeep’, a premier brand of agarbattis that are supplied by several tiny units supported by KVIC and Sri Sri Ravi Shankar Centre. Collective Marketing Economies of scale can only be achieved by producing large volumes of the same product (Demonstrated by Lijjat or Amul) or a large production in a district engaging in the same activity to gain competitive advantage. SHPAs SHGs should concentrate on a limited number of economic activities in each district. Collective marketing in agriculture products is a way to fetch better prices by taking goods to the terminal markets. The success of Amul and Lijjat can be attributed largely to collective marketing and a centralized quality system. Building a Brand Due to high costs, small producer groups like SHGs 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 a s Gujari, SEWA, Dastkar, SHyam Ahuja and Fab India that have created strong umbrella brands that have helped products made in remote villages expand their reach to city and export markets. SHPAs/Government agencies need to hire the services of professional marketers to help them build strong brands so that these agencies can provide the much needed support to our SHGs. Promoting Activity Clusters Isolated enterprises are unable to achieve economies of scale, they lack negotiated power, find it difficult to specialise and have limited access to credit, strategic information, technology and markets. Small enterprises like those pursued by SGs grow best in clusters. The co-existence of many complementary enterprises across the value chain of a sub sector 61

Microfinance & Self-Help Groups

helps each other to grow. NABARD has been supporting the cluster approach in India over a decade and some of the benefits experienced are enhanced turnover, new market linkages, quality up-gradation, efficient sourcing, technical improvements and creation of better infrastructure. The cluster ensures economy of scale because of production at one location which otherwise is not possible with individual producers scattered over a large geographical area.

Conclusion: The Indian experience has demonstrated that microfinance can be participatory exercise and the banking system can deliver it. Though there are emerging issues, which need to be addressed to make it sustainable in the long run, it shows that by involving voluntary organisations in creative mobilisation of the poor and creating and enabling policy environment., which offers flexibility, autonomy and the space for innovations, microfinance can achieve a vast scale and do wonders.

Primary Data on NABARD Objective of Visit: To collect information on Microfinance and SHGs Date of Visit: 9th September, 2008. Interviewer: Rahul Salian, Rupantika Singh, Shenur Dhamani (Class T.YB&I) Interviewee: Mr. S Gaikwad HOD Microfinance Department, Mrs. Balwinder Kaur Staff Microfinance Section. Place Visited: NABARD OFFICE, Shivaji Nagar, Pune. Department of Visit: Staff Section, B-wing, Second Floor. The Report: Educational Visit to NABARD In order to collect Primary data for my 100 marks project and also to get an insight into the actual working of NABARD I, had visited the Head Office of NABARD, Shivaji NagarPune on 9th of September, 2008. After reaching the city we headed towards NABARD office which was just a stone throw away from the station. After getting the required permission from the concerned authority we headed to the staff section wherein we had to meet Mr. Gaikwad who headed the Microfinance Department. Mr. Gaikwad was an astute gentlemen who greeted us with a smile and asked us to fire in any doubts or queries we had brought with us. He asked us to study the charts clipped to the bulletin boards. Those charts were based on Self help Group concept, wherein each step, be it formation, deposits, lending, opening a bank account, maintaining records, audit etc. were 62

Microfinance & Self-Help Groups

bifurcated in phases. Each phase had three colour buttons on it namely green, yellow and red. Green indicates a good rating, yellow signifying a satisfactory conduct, whereas red was conceived to be a caution. These colour buttons had columns below the chart wherein each stage of SHG formation was rated. Mr. Gaikwad then explained us in detail the significance of having such charts by stressing that they were indicators for NABARD in judging a particular SHG. After that he gave us a bird’s eye view of Microfinance concept in a summarized way. He stressed on the fact that NABARD as an organization was spearheading a drive to empower women and remove poverty by allowing a village or a group to make their own rules of credit, offer it to the group members, and select a president, chairman and so on. He said that each SHG is judged by NABARD on term basis i.e. for 2 year period wherein the SHG has to go through all the phases mentioned in the chart and should satisfy them without any adverse comments, which would automatically qualify the SHGs for financial assistance, be it re-finances loans or any other assistance form NABARD. After the departure of Mr. Gaikwad, we were told to interview Mrs. Balwinder Kaur who was also an expert in the area of Microfinance. She articulately spoke over the subjects dealing with SHGs and Microfinance with great finesse. She spoke about various aspects starting with the basic objectives of NABARD which was to impart training to IRVs (Individual Rural Volunteers) who would in turn form a group to finance themselves. She also explained the nature of help given by NABARD. It is not financial help, but also training which was considered as an objective prime by NABARD. When asked about MFIs she said that any institution with interest, be it an NGO, bank, corporate etc can form an MFI to assist the SHGs to enable them to raise their living standards. She explained that SHGs are very useful customers for banks as they were repaying the loans advanced and also were satisfying the norms of financial inclusion. She explained that banks are ready to offer credit to SHGs without collateral up to Rs. 500000. She also gave us an insight into the new concept of joint liability groups which are prepared by landless labourers who were offered small credits at affordable rates and in which each one of them is responsible for the entire group so formed. She also linked SHGs with the booming insurance sector by addressing the efforts of NABARD in getting the insurance companies to go rural and get the group insured under their schemes. She mentioned that NABARD promotes microenterprises of SHGs by keeping a yearly exhibition in its office known as Gram Sampada. This is how NABARD takes care of marketing of products.

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In the end she told us to visit the NABARDs website to know more about its functions. With that we ended our interaction and we left the office with a new outlook towards the SHGs and NABARDs role in providing assistance and support.

Concluding Summary In a country like India, it is necessary to focus on extended financial services both in urban and rural areas for ensuring financial inclusion for all segments of population. At the same time, the temptation of creating one set of banking and financial institutions to cater to the poor and the unorganised and another for the rest should be avoided. The medium to long term objective should be to ensure inclusion of all the segments in the mainstream institutions while taking advantage of the flexibility and multiplicity of models of delivering a wide range of financial services. Micro-Finance strategies need to be explored further. Both the central bank and NABARD recognize the growing importance of micro finance and are committed to facilitate its healthy growth .To benefit fully from its coverage, several issues, both with regard to regulation as well as development need to be considered and must be comprehensively addressed. A very well crafted balance between the regulation and growth objective is warranted for the future, keeping in view the big challenge of financial inclusion of a large segment of the Indian population. Finally, if the constraints whatsoever are identified on an ongoing basis and appropriate remedial measures are initiated both at institutional and non-institutional level, the SHG approach will definitely prove as a realistic alternative to borrowing money from informal market at an interest much higher than market rates .It has been proved beyond doubt that banking with the poor is a profitable business opportunity for both the poor and the financial institutions.

Bibliography 64

Microfinance & Self-Help Groups

Magazines: Professional Banker Microfinance World SHG handbook (NABARD) Reference Book: Microfinance and Poverty Alleviation Visit to NABARD for collection of Primary data: 9th September, 2008

Venue: NABARD Office, Shivaji Nagar, Pune. Sites: http://www.nabard.org http://www.pdfcoke.com

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