Poor borrowers avoid banks because of delay in access to loans: Survey
This is despite the higher interest rates charged by these lenders and the loan often not covering the full requirement. But with microfinance institutions (MFIs) abstaining from new loans in the State ever since the Microfinance Institutions (Regulation of Money Lending) Ordinance in October 2010 was introduced, there seems to be no other option.
A new study by financial services solutions provider MicroSave found that 59 per cent of the people surveyed in group sessions in Telangana, Rayalaseema and Coastal Andhra covering a total of four districts said they have taken loans from moneylenders in the absence of loans from MFIs.
Moneylenders have increased lending in the past eight to 10 months in areas with higher penetration of MFIs, according to the study. Furthermore, 37 per cent of the respondents had taken loans from self-help groups (SHGs) and 29 per cent from “daily finance corporations”, another form of moneylenders.
In terms of interest rates, SHGs were the most accommodating lenders in the State, charging 12-13 per cent. However, the amount disbursed by SHGs was often too small to meet the borrowers’ requirement. In contrast, the MFIs used to charge 27-45 per cent annually, including insurance. But compared to pawnbrokers charging 30-36 per cent and moneylenders or direct finance corporations demanding 36-120 per cent, MFIs were still a better option.
The difficulty in securing funds has put a damper on the business plans of many rural folk in the State. While 24 per cent of the respondents said they have postponed their expansion plans because access to credit was difficult, 32 per cent said they reduced the scale of their businesses in the absence of an alternate credit source.
Another 12 per cent resorted to the sale of assets such as houses, vehicles, cattle or jewellery to meet agriculture-related expenses, besides non-productive expenditure such as school fees or marriages.
The study also found that despite a good banking network in the region, most respondents did not like to source credit from them on account of inordinate delays, cumbersome procedures and complex documentation. But when it comes to accessing credit from alternate sources, about 66 per cent of the respondents at group sessions conducted by MicroSave in the State said exorbitant interest rates were the biggest “pain point”.
Furthermore, 41 per cent said loans taken from SHGs and banks were often inadequate. In addition, the time taken for loan processing by SHGs and banks was cited as a constraint by 24 per cent of the respondents, with a minimum wait time of one month that could stretch to six months.
In this regard, a majority of the respondents indicated that they liked some of the features of MFIs and denied being harassed by them, even though they had heard of suicide deaths attributed to harassment by MFI staff. While 80 per cent cited timely delivery of loans as the best selling point of MFIs, 26 per cent liked the doorstep-delivery model. At the same time, 39 per cent asserted that the inflexibility in loan repayments to MFIs was a sore spot, since not even a single day’s grace period was given.
Whether there is scope for MFIs to make a comeback in the State is a moot point for the time being. Almost 90 per cent of the respondents said they were willing to repay their loans to MFIs if they start disbursing new loans and other members of the community start repaying. But the repayment rate for MFI loans is very low at present, ranging between 6 per cent and 12 per cent.
Most MFI clients stopped repaying as other members of the group and community stopped repayment.
There have also been instances of wilful defaulters putting pressure on prompt payers to stop repaying their loans. What is more, the media, local activists and influential members of the community have also played a major role in encouraging borrowers to default, leaving MFIs wary of the State, says the report.
By G. Naga Sridhar, The Hindu Business Line
Microfinance institutions are now increasingly routing loan applications through credit bureaus. And, a number of these applications are being rejected on the grounds of defaults/higher outstanding and multiple loans.
A credit bureau collects information from various sources and provides information on an individual’s credit history for a variety of purposes. It needs a licence from the Reserve Bank of India to do so.
“As per the self-imposed mandate of Microfinance Institutions Network, all our member NBFC-MFIs are using credit bureau data from June 1, 2012,” Mr Alok Prasad, Chief Executive Officer of MFIN, told Business Line.
MFIN members, who account for over 90 per cent micro-lending in the country, are regularly uploading data to credit bureaus — High Mark and Equifax.
“Use of credit bureau benefits the poor as well as MFIs. The general rate of rejection of loan applications is 8-14 per cent,” Mr S. Dilli Raj, Chief Financial Officer, SKS Microfinance Ltd, said.
As of now, the credit bureau records are being consulted to take a call on loan applications of 30 million MFI clients from across the country.
“As we move on, more data on defaulters will be available with increasing number of transactions,” Mr P. N. Vasudevan, Managing Director of Chennai-based Equitas Microfinance said.
The loan proposals are being turned down if the outstanding loan from any applicant is over Rs 50,000. “New loans are also not being extended if the applicant has more than two existing loans,” Mr Dilli Raj said.
Public sector banks, however, are not routing loans to self-help groups through credit bureaus.
As per MFIN data, the gross loan portfolio on the balance of MFIs was Rs 15,400 crore during 2011-12
By Sam Olukoya, Inter Press Service
LAGOS – In an open space near her home in Makoko, a crowded suburb of the sprawling city of Lagos, Latifat Agboola sits in the midst of bags of charcoal, attending to her customers. Some of them call her “the charcoal woman with the dirty job, but she sees herself as a businesswoman on the rise.
Less than a year ago, 35-year-old Agboola was minding shop for someone else, but she set up a business of her own last September, after she got a 20,000 naira ($130) loan from the Gumi cooperative society in her neighbourhood.
“It was a bad start because very little money was left for the actual business after I used the bulk of the money to register as a member of the charcoal sellers’ association,” she told IPS. “I was only able to buy one bag of charcoal at a time and I resold it in little packs.”
Agboola made progress all the same and by January she had repaid the loan, and she was qualified for another 200 dollar (30,000 naira) loan. “This second loan provided the additional funds needed to improve the business as it enabled me to buy charcoal in much larger quantity, so my profit went up,” she says.
Her profit from charcoal sales in a good week can go as high as 60 dollars (9,000 naira), equivalent to her monthly salary as a shop attendant. “With a better income, I no longer have to beg people for money, now I can buy what I want to buy, I can eat what I want to eat at anytime, but as a shop attendant, I had to wait until the end of the month before I could spend money.”
Agoola got the money from a local savings and loan cooperative. The Gumi cooperative pools money from its members to make loans on which it charges as little as 15 percent interest.
“The group is made up of small women who are into small-scale business, says Tosun Jimoh, head of the group. “We deal mainly in small loans of between 20,000 naira and 40,000 naira ($270) and members can pay within six months. Members don’t require require any collateral, so long as they can get a guarantor we can trust.”
Gender analyst Emem Okon, says Agboola’s rapid progress is exactly the kind of transformation microcredit can enable in the lives of poor women like Agboola.
“Where microcredit is properly managed, it helps to improve the income of poor women, whether they are involved in petty trading or farming it provides the money to acquire the much needed inputs,” says Okon, who is the head of the Kebetkache Women Development and Resource Centre, a non-governmental organisation based in southeastern city of Port Harcourt.
Agboola says her choice of what to invest the loan in was crucial to her success. “Charcoal business is a dirty job and that is why many people are reluctant to do it, but the secret is that it is a very lucrative business if you are determined.”
It is the right business to get into in Makoko, with its high poverty and dense population. “With the high price of kerosene, many of the residents here are too poor to cook with [other kinds of] stoves, thus charcoal is a very cheap alternative for them,” says Agboola. “There is a high demand for charcoal in this neighbourhood, but no one sells it. I am the only one currently selling it here.”
Agboola is looking forward to taking out another loan which she hopes to use to rent a shop and buy charcoal in very large quantities, so she can operate as a distributor rather than a retailer. She dreams of a business that will eventually provide funds with which she will buy land and build a house.
Vital to the informal economy
“Microcredit schemes are important in Nigeria because it takes care of the needs of the vast majority of the poor populace who have no access to formal banking,” former banker, Kwekwu Brown told IPS. “The poor end people who form the bulk of the population cannot meet strict bank requirements like collaterals and a history of a consistent cash flow so this informal system is the only option open for them when they need loan.”
Nigeria’s Central Bank recognises the important role microcredit plays in the country’s informal economy, the practice having a history dating back centuries in some places.
Only 35 percent of the economically active population has access to the formal financial system, according to the Central Bank, while the remaining 65 percent “are often served by the informal financial sector like microfinance institutions, money lenders, and credit unions.”
“Because of the limited opportunities they have, women form a large segment of the populace that has no access to the formal financial system,” says Okon. She adds that from her experience there is the added burden that these women face numerous problems in accessing loans from the informal sector.
“We restricted Gumi’s membership to women only so as to enhance their chances of getting small-scale loans,” says Jimoh.
Agboola, a mother of two in a polygamous household, says she spends a substantial part of her income on her family. But Okon says diversion of funds to maintain the household can be a potential problem for many women who take microcredit loans.
“Culture is one of the problems. Women are sometimes denied microcredit loans out of the cultural belief that they are less likely to be successful in whatever business they do, so they are seen as a high risk group,” Okon says.
The Central Bank says it has a policy to develop microfinance institutions in order “to cover the majority of the poor but economically active population by 2020 thereby creating millions of jobs and reducing poverty.”
By Rajiv Shah, The Times of India
GANDHINAGAR: At a time when controversy surrounding microfinance institutions charging higher-than-usual interest rates from its poor borrowers – mainly womenfolk – refuses to die down in Andhra Pradesh and some other parts of India, Gujarat government claims to have resolved the issue, coming up with a new model envisaging, to quote a document, “a strategic partnership” between large industries and over two lakh state-sponsored self-help groups (SHGs), said to have been formed all over Gujarat.
While there is no independent confirmation of so many SHGs having been created, already, Gujarat government has signed agreement with 32 industrial groups, including Reliance Industries, Tata Motors, Godrej Agrovet Ltd, Arvind Limited and Fab India, who will provide market linkages to lakhs of women taking micro-loan to do small business.
“Several nationalized banks have come forward to provide micro-loan to SHGs at the maximum interest rate of 11 per cent per annum,” a senior official said.
The move comes after sharp criticism of SKS Microfinance of Andhra Pradesh raising IPO funds and giving loan to poor at 28 per cent rate of interest. Nobel laureate Mohammad Yunus, who runs Grameen Bank in Bangladesh, first raised voice against IPO saying the high rate showed SKS was committed to its shareholders rather than the poor, thus negating its purpose – of empowering women. SKS experiment allegedly also led to several farmers’ suicides after they failed to pay back loans.
In fact, officials assert, the state model – called Mission Mangalam – in which big houses will take care of market risk and nationalized banks will provide micro-loan, is all set to outsmart the Bangladesh’s Grameen experiment, too – though being projected as the best in the world.
“In Bangladesh, they provide micro-loan at 18 per cent per annum, that too on the basis of soft loan provided by international financial institutions. Here, we will offer loan between 9 and 11 per cent rate,” the official said.
The sectors for which SHGs will be provided loan are to be selected by industrial groups and may include areas like animal husbandry, agro-processing, food processing, garments, handlooms, hosiery, packaging and assembling of products, to name a few.
“Banks, which shied from micro-loans, will be guaranteed a safe return, women will be empowered, and industrial houses will take care of the market risk,” the official underlined, adding, “Banks have expressed readiness to provide loans up to Rs 18,000 crore.”
By Vrishti Beniwal, Business Standard
The Micro Finance (Development and Regulation) Bill proposes to cover all types of microfinance institutions (MFIs).
The Bill’s 2007 version covered only MFIs not regulated by the Reserve Bank of India (RBI). As a result, banks and a few categories of non-banking finance companies (NBFCs) were outside its purview.
The Bill is likely to be tabled in the monsoon session of Parliament.
The players in the sector comprise Self-Help Group-Bank linkages, which account for about 58 per cent loans, followed by NBFCs (34 per cent) and others such as trusts and societies (8 per cent of the total portfolio).
Banks and NBFCs are regulated by RBI. There is, however, no separate category for NBFCs operating in the microfinance sector.
An RBI committee under Y H Malegam that was set up to suggest microfinance reforms had said the Bill should apply to only MFIs not covered by RBI.
“All stakeholders, including the industry and banks, feel there should be a Bill to regulate all MFIs. The new Bill will cover all kinds of MFIs, including NBFCs, non-NBFCs, trusts and societies,” a finance ministry official told Business Standard.
The MFIs could be regulated by the National Bank for Agriculture and Rural Development, or RBI, or both, said the official.
The Bill may also restrict MFIs from taking deposits. The earlier Bill had a provision for deposit-taking NBFCs. The Malegam committee has also expressed concern over MFIs collecting deposits.
The finance ministry is also debating whether an interest rate cap should be provided in the law itself or should the regulator be empowered to specify interest rate limits from time to time. The Bill, officials say, may either cap the rate on individual loans or limit the difference between the amount charged to the borrower and the cost of funds to MFIs.
The official said the Bill would be in harmony with RBI’s regulation for NBFCs. He added the final call on these issues would be taken after receiving RBI’s comments on the Malegam panel report.
The committee has recommended an average margin cap of 10 per cent for MFIs with a loan portfolio of Rs 100 crore and of 12 per cent for smaller MFIs, besides a cap of 24 per cent on individual loan rates. Most MFIs are at present charging over 24 per cent.
By Rajaram Dasgupta, Express India -
Microfinance has been in the headlines for last few months, for both positive and negative reasons. The latter constitutes (i) Shriram’s investigative case study on how the promoters of successful microfinance institutions (MFIs) siphon off money, (ii) clash between Vikram Akula and Gurumani, and sacking of the latter, (iii) ordinance against MFIs in Andhra Pradesh for charging high rates of interest and adopting coercive recovery mechanisms, (iv) public sector banks slowing down the lending to MFIs and (v) ex-RBI Governor YV Reddy’s warning about MFIs.
The major controversies revolve around the (i) desired motive of MFIs, (ii) price of microfinance product, (iii) recovery method and (iv) misuse of fund in the business of microfinance. There are no two opinions regarding the last two aspects, which need to be monitored regularly by an appropriate authority. It is important to note that, until recently, private and foreign banks in India were accused of coercive recovery methods and the central bank had to intervene. To tackle the misappropriation of resource in Satyam, the government intervened. This illustrates that appropriate regulatory, supervisory and legal systems are required to prevent and/or correct self-interested motives and greed.
So far as the motive is concerned, altruism is definitely welcome. Doubts about its penetration power and sustainability, however, exist. If financial inclusion is a minor issue, the social welfare approach is fine. But when it is a major economic problem, a serious economic solution is required. NGOs have definitely made a substantial contribution in the field of microfinance.
It was, however, of an experimental nature, and to prove to the professional financial sector that the business of microfinance is profitable. This is the reason that the financial sector has shown great interest in microfinance. That is why, MYRADA, the originator of Self Help Groups (SHGs), has carved out Sanghamitra for carrying out its microfinance business. BASIX has a for-profit financial institution and a no-profit development institution under its umbrella. These two pioneers realised that this business cannot be expanded seriously and passionately through NGOs with a not-for-profit approach. They belong to a rare species, which could continue development and sustainability efficiently.
Until now, only about 60% of low income households have access to microcredit from the combination of SHG-bank linkage programmes and MFIs; the average outstanding credit level is a meagre Rs 4,000 per account
. There is a need of (i) more number of institutions, (ii) large size of skilled manpower and (iii) huge amount of capital, which are difficult to be obtained through the no-profit approach. In the words of Adam Smith, “it is not from the benevolence of the butcher, the brewer or the baker that we expect our dinner, but from their regard to their own interest”. Profit and profiteering, however, need to be distinguished. A system needs to be put in place that allows the former but prevents the latter.
Profit levels at any organisation can be increased by bringing efficiency and having the right to charge the appropriate price, which is supposed to lie between the upper limit of affordability of the market and the lower limit of the cost of operation. Although both need discussion, the controversy today revolves around the upper limit, and there is no doubt that the upper limit needs to be reduced.
If one compares the MFI rate of interest of about 30% per annum, it is much higher than the interest rate offered by public sector banks say 15% per annum, but much lower than 8-10% per month (or 72% per annum) charged by money lenders in rural and semi-urban areas; or 1% per day in informal metro markets. As both MFIs and moneylenders provide services at the doorstep, there is no transaction cost for the borrowers; similarities, however, end here. In the absence of the business correspondent service, the price for banking service available at the branch may turn out to be costlier than the MFI price at the doorstep.
The interest rate, whether high or exorbitant, can be effectively reduced only by encouraging and ensuring competition, and making market friendly policies for tapping cheaper fund and smooth functioning. This will help the poor to get microfinance at a lower prices. On the other hand, if the interest rate is unreasonably capped through non-market process and the MFIs do not find the activity decently profitable, they may close down the shop. The poor will then be forced to go back to old moneylenders and unscrupulous and unregulated financial organisations that charge much higher rates. Raghuram Rajan in A Hundred Small Steps has very clearly shown how the capping of interest rates reduces the flow of microcredit. He even argued that the reduction of interest rates below market rate makes it costlier for poorer segments because of the element of bribery creeping in. A growing feeling in some quarter of vested interest groups being behind the ordinance in Andhra Pradesh may also not be completely ruled out.
A ceiling on interest rates through fiat is, therefore, no solution. Adequate lending, not over-lending; financing the need, not luring with money; recovery not coercive recovery on the part of lenders must be business ethics.
Borrowers need to be literate enough to calculate the burden and adequately educated to properly use the money and understand the importance of repayment. Policymakers on the other hand need to appreciate that some of the non-production loans like for food in the lean period, medicine, school fees or retiring old moneylender’s debt are not wasteful expenditures but long-term investment loan. In the absence of proper safety net and meaningful public system for health and education the poor will be compelled to either resort to money lenders for expensive money for short-term relief or forgo the long-term benefit if formal and semi-formal institutions are advised to lend for so-called productive purposes only.
These contradictions need to be addressed by an appropriate policy framework that (i) defines microfinance clearly, (ii) distinguishes between microfinance and other financial institutions, (iii) brings all the newly defined microfinance institutions under one and only one supervisory system, and directly or indirectly under the regulation from RBI, (iv) specifies prudential norms as well as ethics of lending (v) ensures competition, (vi) differentiates capital requirement for different MFIs on the basis of their expected geographical spread and potential business volume, instead of blanket requirement, (vii) provides scope for tying up with a commercial bank for providing money transfer service, (viii) allows to work as business correspondent also for deposit mobilisation, (ix) makes provision for 100% deposit insurance (assuming total deposit does not exceed Rs 50,000), (x) ensures rigorous auditing and (xi) makes the environment friendly for the flow of cheaper resource to this sector (xii) and puts a strong supervisory system in place.
MFIs need to be defined in such a way that they not only provide small financial services to the financially excluded but are encouraged to provide all the necessary non-financial services for improving the productivity of credit, which (i) puts both the service provider and the service user in a win-win situation and (ii) prevents micro credit turning into micro debt.
The author is a professor at National Institute of Bank Management. This article was written before the release of the Malegam Committee report
By Naveen Kumar, Times of India -
VARANASI: Is the formation of self-help groups (SHGs) driven by microfinance– the magic bullet to manage sustainable development of rural economy in the country?
While SHGs in rural pockets have emerged as significant tools for empowerment, particularly among women promoting agri-business, experts still feel that the formation of the group bolstered by microfinance is not sustainable in the long run, especially in Indian conditions.
“The SHGs and microfinance are not the panacea for managing sustainable development of rural economy as their impact is limited and restricted to specific area,” US expert on sustainable development of rural economy Ralph Brown informed TOI on Friday. “In Indian conditions where the society is fragmented in multiple layers and ridden with caste and sub-caste system, the task is all the more difficult. The SHGs only help in empowering a particular section of the society working in unorganised sector but it is not sustainable in the long run due to its limited influence,” he said.
It may be mentioned here that Ralph Brown has already formed World Sociological Society (WSS) to study organisational behaviour of SHGs in developing countries including India. Saying that bureaucratic hurdles were proving to be major stumbling block in providing momentum to sustainable development of rural economy in the country, he also said need for alternative models that not only facilitate linkages between various SHGs but also reduces dependency on bureaucracy.
“There is huge potential for agri-business in the country that is spread over six lakh villages. If bureaucratic hurdles are removed, the country can look forward to managing sustainable development of rural economy beside strengthening the SHGs through microfinance,” said Brown.
By Neelasri Barman, Daily News & Analysis -
After burning their fingers with microfinance institutions (MFIs), banks plan to speed up lending to self-help groups (SHGs) instead.
The view changed after collections by MFIs in Andhra Pradesh deteriorated considerably and there were initial signs of the contagion spreading to other states.
An SHG is a group of around 20 people who come together voluntarily and make savings of small amounts regularly. The saved money is used to provide loans with an interest to the group members.
Once the SHG gathers some stability, it gets linked to a bank, which starts providing credit to it. This is called the SHG-bank linkage programme, after which the SHG becomes accountable for repayment of the loan to the bank.
“We are going through a time when we feel more comfortable in lending to SHGs rather than MFIs. Earlier, we used to lend to MFIs who in turn used to lend to these SHGs at very high rates of interest, which were 25-30% per annum. But as a bank, we can lend to them at rates as low as 13-14% per annum,” said T R Bajalia, executive director, IDBI Bank.
The RBI too wants banks to step up lending to SHGs, though it has also asked them to the need for maintaining funding lines to MFIs on merit, to prevent contagion.
Further, banks are more comfortable lending to SHGs as the recovery rate of loans disbursed to them is far better than those disbursed to MFIs.
“As on date, we have lent Rs2,023 crore to SHGs and exposure to MFIs is only Rs73 crore. By the end of this fiscal, lending to SHGs will touch Rs2,200 crore and lending to MFIs will touch Rs80 crore. This is because the recovery rate in SHGs is 99.5% compared with a recovery rate of around 95% in MFIs,” said T M Bhasin, chairman and MD, Indian Bank.
And it’s not just the SHGs, but also individual farmers and micro-enterprises in villages that the banks are lending directly to rather than to MFIs.
“The transaction costs of MFIs are very high… We go for lending directly by way of business correspondents and this also helps us keep the costs low,” said N Seshadri, executive director, Bank of India.
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.