by C.S. Reddy, CGAP -
This post is the next in a special blog series on the microfinance crisis in Andhra Pradesh, India. Over the coming weeks we’ll be featuring a variety of voices on the issues raised by this crisis and what it means for the future direction of microfinance. We welcome your participation in this discussion through comments.
The Andhra Pradesh MFI Ordinance 2010 has kick-started a much-needed debate on responsible microfinance and what is needed for poverty alleviation in India.
Going back as far as 2003, there have been concerns about certain practices of MFIs in Andhra Pradesh: splitting Self Help Groups (SHGs) to form Joint Liability Groups (JLGs), charging unreasonable interest rates, carrying-out multiple lending and coercive recovery practices. There was no coordination with the State Government and instead an unhealthy competition brewed among NBFC MFIs.
In 2005-06, these practices resulted in the seizure of some of the MFI branches in Krishna district. During that crisis, MFIs evolved a voluntary common code of conduct, promised to reduce interest rates and not engage in multiple lending and coercive collection practices. APMAS played an objective and supportive role to ensure that SHG movement could withstand the competition from the MFIs.
But the NBFC MFIs did not learn their lessons from the 2005-6 crisis and pursued their growth more aggressively as funds became more easily available to them from banks and other financial institutions.
There was no evidence of putting the agreed codes of conduct into practice. On the contrary, MFIs pursued multiple lending and coercive recovery practices even more vigorously. Profiteering took priority over the mission of “poverty reduction.”
In this post I provide an assessment of India’s SHG movement, which in my view has far greater potential for effective financial inclusion, poverty alleviation, and empowerment of women and other marginalized sections.
Evolution of SHGs
The women’s SHG model is a home grown Indian model. Based on the principles of self-help, self-management, self-responsibility and self-reliance, the groups were mobilized by promoting institutions (often NGOs).
The self help promoting institutions found that saving and loans could be the binding factor for groups to remain active and pursue their own agenda. In the mid 1980s, there were a few pilot experiments, mostly in Andhra Pradesh and other Southern states. In the early years, it was mostly savings-based groups. Groups circulated their own savings as small loans among their members.
The experiments with infusion of credit began in 1987 when NABARD (National Bank of Agriculture and Rural Development) provided one million rupees as a grant to an NGO called MYRADA to lend to its groups. Similar experiments were initiated by other prominent NGOs like PRADAN, CARE and others with assistance from national and international donors. District Rural Development Agencies (DRDAs) also provided revolving funds to SHGs in different parts of the country. In 1992, the Government of India established the Rastriya Mahila Kosha (RMK), a dedicated organization to lend to SHG through NGOs.
NABARD launched a pilot to link SHGs to banks in 1992 which provided these institutions with a boost. The Reserve Bank of India (RBI) permitted banks to open saving accounts in the name of informal SHGs and lend to those groups without cash collateral and without asking for the purpose of the loan. Since 1996, SHG banking has been recognized as regular banking activity. In the process SHGs emerged as mass movement across the country and the largest community based microfinance model in the world.
NABARD’s Microfinance Report 2010 shows that 6.95 million SHGs, with an estimated membership of 97 million poor people, have saving accounts in the banks, with aggregate bank balance of Rs. 62 billion ($1.35 billion). Over 4.85 million SHGs have loan accounts with total loan outstanding of Rs. 280 billion ($6 billion).
APMAS studied SHGs promoted by the NGO MYRADA and found that:
- Members on average have been part of SHGs for about 10 years and each one has been able to create assets worth Rs 150,000 ($3260) and developed diverse livelihoods.
- Women have experienced empowerment within family and society. Members have increased confidence to deal with the outside world especially with banks and officials.
- There was an increase in members’ mobility and their greater involvement in family decisions and access to family income and resources.
- Interest rates in the informal market declined from 60% to 24% and less than 50% of SHG members had loans from informal sources as their credit needs were met by SHGs.
- Money lenders have improved their practices, and they now provide collateral free loans.
Evolution of SHG federations
In the last 10 years SHGs have formed federated institutions at the village and block levels to overcome the inherent limitations of small and informal SHGs, such as limited resource, limited negotiation and bargaining powers, inability to deal with outside world.
By federating, SHGs could reap benefits of economies of scale, inter-group rotation of funds and access bulk loans and grants from external sources. Federations could make the community owned institutions stronger and more sustainable and promote technical expertise amongst members. By July 2010, as per the APMAS assessment, the total number of SHG federations in the country was 163,730.
Many states are now using SHGs to play a key role in various programs like the Public Distribution System, monitoring of works and payments under the Mahatma Gandhi National Rural Employment Guarantee Scheme, distribution of old age and destitute pensions, micro insurance programs, etc. Evidence from different parts of the country suggests that the involvement of SHGs in these schemes has resulted in significant improvement in their targeting and impact.
For example, in Andhra Pradesh about 5.2 million members enrolled in the comprehensive insurance and pension scheme know as YSR Abhay Hastam.
Can SHGs Sustain?
Two decades of the SHG movement has demonstrated positive impact on poverty. The model offers great potential to have millions of member-owned, member-managed and member-used organizations of the poor. However, these institutions face a number of challenges:
Unhealthy competition from NBFC MFIs: It takes 3-5 years to promote a strong and sustainable SHG. However, in their quest for exponential growth the MFIs split well-functioning SHGs to form JLGs. Well trained and active SHG members and federation leaders are lured by MFIs to become their agents. With weekly repayments to MFIs and their strong arm tactics, women find it difficult to repay their loans to SHGs resulting in SHGs defaulting to banks. While the empowering processes of SHG promotion helps them to withstand the pressures from MFIs for sometime, eventually they buckle under persistent pressure of MFIs that offer multiple loans. Lack of regulation & supervision has resulted in MFIs having more than 50% returns on equity and annual growth rates which are over 100%. These institutions are damaging the SHGs, and not helping the poor.
Credit has taken precedence over savings: SHGs are traditionally savings-led organizations. SHG federations registered under appropriate legal forms like Mutually Aided Cooperative Societies (MACS) Act can offer different savings products like voluntary savings, fixed deposits and recurring deposits to the members of SHGs. However, in the last three years or so, there has been undue focus on bank loans. SHGs have become credit management groups that are excessively dependent on banks. They need to return to their roots. SHGs need to improve their bookkeeping systems and conduct regular audits. Governance and management of these institutions and federations needs to improve so that members can have greater trust in their own institutions. Those who promote these SHGs need to have less control and focus on transferring skills to the community.
Banks prioritize MFI lending to SHG lending: Growth rates of Bank loans to MFIs seem to grow at a much faster pace compared to SHG banking. There are wide inter-regional variations. Four southern states got more than three-fourths of the total loan amount administered to SHGs in 2009–10. Banks are reluctant to lend to SHGs composed of scheduled castes and scheduled tribes. In contrast, lending to MFIs is an easier route to fulfill the requirements of priority sector lending. Should bank loans to MFIs be allowed under priority sector lending as MFIs charge very high interest rates.
Sources of SHG promotional funds have dried up: Erstwhile enthusiastic donors, including bi-laterals and multi-laterals have either ceased operations in India or have been attracted by ‘the fortune at the bottom of the pyramid’. Instead it has been up to Governments at Centre and in the States to invest in increasing quality of SHG institutions. While NABARD remains a major donor to NGOs, SHG institutions have been receiving a fraction of required funds for their development.
MFIs have not walked the talk in the last five years, despite plenty of warnings and constant feedback. It is not enough for them to make commitments to responsible codes of conduct in writing. Comprehensive regulation and supervision by a regulatory authority is needed to make them act in a responsible manner.
SHGs are facing the greatest threat from the MFIs today than ever before. In the interest of the poor women who definitely need full range of financial services, including financial literacy, from a variety of sources to overcome poverty, here are some recommendations:
- Savings must be priority for SHGs and SHG federations. Over a period of time, that will reduce the dependence of the SHGs on the banks and increase their ability to deal effectively with MFIs. SHGs’ self-reliance will enable them to move beyond savings and credit to address issues related to health, education, rights and entitlements. SHG institutions must have self regulatory systems to enhance member-ownership and trust in their institutions, to increase savings.
- Investments in institutional capacity building and financial literacy are needed.
- SHGs could have their own apex financial institutions at district or state level that could provide financial services to their members through SHGs.
- MFIs could transform into full fledged banks and provide full range of micro-financial services. MFIs could lend to SHGs and SHG federations after necessary assessments/ratings. Commodity Cooperatives and Producer Companies owned by SHGs could also be financed by the MFIs based on their business plans.
- Banks should understand the benefits of SHG banking and invest in the development of SHG institutions and increase their business with SHGs.
- SHG institutions should be considered a part of social infrastructure much like schools and health centers. Government should invest in the development of these institutions, which could be rally points to mobilize, organize and educate the poor and marginalized sections.
For-profit organizations are more prone to mission drift than not-for-profit or mutual benefit organizations, which may be more suited for poverty lending than for-profits.
The SHG model has tremendous potential to reduce poverty.
MFIs and SHGs should co-operate, not compete, and become partners in the wider mission of poverty eradication.
C.S. Reddy is the founding CEO of APMAS, a national level technical support organization for the self help movement in India.