By Dr.Venkatesh Tagat, CGM, NABARD and R.Bharath Kumar, AGM, NABARD, Bangalore
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On the sidelines of Microfinance India 2010 Summit in New Delhi, Dr.C.Rangarajan, Chairman of The Economic Advisory Council to the Prime Minister said that ‘greater linkage between banks and Self Help Groups (SHGs) and expansion of the Business Correspondent (BC) model were likely to bring a surge in the microfinance sector.’ He added, ‘I believe the Bank-SHG linkage programme has an important role to play with the addition of the BC model.’
Let us understand the SHG-Bank Linkage Model. SHGs are small, cohesive and participative groups of the poor, who pool their thrift regularly and use it to make small interest bearing loans to members and in the process learn the nuances of financial discipline. Subsequently they graduate to access bank credit to augment their resources for lending to their members in need of financial assistance for meeting their credit needs. Over the years the pooled resources of the SHGs become a sizeable corpus, which complimented by higher volume of bank loan enables them to take up livelihood activities which results in improving their standard of living.
What has the above model achieved? According to the Status of Micro Finance in India 2009-2010 released recently by National Bank for Agriculture and Rural Development (NABARD) there are 69,53,000 SHGs in the country savings linked with banks and 48,51,000 SHGs having loan outstandings as on 31 March 2010. The estimated number of families covered under this model is about 970 lakhs. The total savings amount of all the SHGs with banks as on 31 March 2010 amounts to Rs.6198.71 crore and the total amount of loans outstanding against SHGs as on 31 March 2010 is Rs.28038.28 crore. The SHG-Bank Linkage Model is the largest financial inclusion programme in the world. How did it happen? What are the merits in this model? Let us ponder.
Incentive to save
Members of SHGs are encouraged to make voluntary savings, regularly. Women, whether rich or poor are good savers of money. Small savings of rural poor women which were hidden in pots, jars, etc. where brought out in the open through the platform of SHGs and found a way to the bank or utilised for internal lending among the members of the group. Thus, the money lying idle in the household earns interest.
Money saved by the members are lent internally among the needy members of the group and the interest charged vary between 12-24-36%. Some might say the interest rates or high. But one has to understand that the interest rates are decided by members and not by any outsider. Further, the interest earned on internal loans remain within the group and becomes part of its corpus. It is not sucked out.
A SHG after completing a period of 6 months is rated by the Branch Manager of the bank to which it is savings linked, on certain parameters. If the SHG passes the rating exercise, the bank extends it a loan which is known as credit linkage. SHGs are rated by banks every time they take a loan from the bank. Therefore, it calls for continuous best practices by SHGs for getting repeat dosage of credit.
The rate of interest charged by the bank for a loan to SHG is the Prime Lending Rate (PLR) of the bank (the rate at which the bank lends to its best customers) which is in the range of about 12% per annum. This is one of the positive impacts of the programme in reducing the interest burden of the members and avoiding the exploitation of the poor by informal agencies, particularly money lenders, commission agents, etc. Furthermore, members of groups are aware of the rate of interest they pay to the group and the rate of interest paid by the group to the bank the loans they have availed.
SHGs in some of the States in the country enjoy the benefit of interest subvention. SHGs in Andhra Pradesh pay only 3% interest on bank loans and the balance 9% is reimbursed by Government of Andhra Pradesh. Similarly, SHGs in Karnataka also enjoy the benefit of interest subvention besides waiver of stamp duty on loan documents.
The recovery performance of banks varies from region to region. According to Status of Microfinance in India 2009-10 published by NABARD, 203 banks out 302 banks have reported recovery of more than 80% of SHG loans as on 31 March 2010. Eight Public Sector Banks have reported a figure of more than or equal to 95% recovery and 10 Public Sector Banks have reported a figure between 80-94%. While the bankers are generally happy about the recovery performance under their SHG portfolio what is more gladdening is the fact that there are no coercive methods in recovery of loans.
Training and capacity building
Members of SHGs undergo various training and capacity building programmes. At the time of formation, members are trained in concepts of SHG which includes importance of savings, internal lending, calculation of interest, conduct of meetings, maintenance of books and above all financial discipline. Training at the time of formation is mandatory because it enables a financially excluded rural poor woman to understand the world of finance, to which her access was denied due to multiple reasons. Other trainings, like training on book-keeping, income generation, etc. are only optional. Further, these trainings and the regular meetings of the groups are conducted during the non-productive hours of the members. Hence there is no truth in the belief among a few that SHG members loose ‘opportunities to earn’ while attending meetings and trainings. Whenever, the members attend training programmes sacrificing their opportunity to earn, they are adequately compensated monetarily besides learning a new skill.
Social Impact and Empowerment
SHG Bank Linkage Model pioneered by NABARD was not just meant for financial inclusion for rural poor women who usually belong to backward classes, scheduled castes and tribes. It had an holistic approach, i.e. besides financial inclusion, economic and social empowerment of poor women.
Various studies conducted by NABARD, National Council of Applied Economic Research (NCEAR) and Institute for Social and Economic Change (ISEC) speak in one voice about the paradigm change in the ways rural poor women think and act in the post-SHG phase. SHG members could undertake tasks like travelling alone to the next town or city, going alone to hospitals, handling certain amount of money, addressing a forum, etc with confidence in post-SHG phase. In behavioural changes, studies found that more than 70% of women respondents reported improvement or even significant enhancement in their ability to face problems. Overall findings indicate that the decision making capacity of women members with various SHG activities has improved from pre-SHG situation. SHG members were part of the decision making process in children’s education, purchase of assets, marriage of their daughters, etc. Members also reported in changing undesirable habits of their husbands. Recent panchayat elections in Kerala brought to focus the active participation of women from Kudambashree project. In another instance, while revamping the Public Distribution System (PDS), the Chathisgarh Government entrusted PDS outlets to community based organisations, panchayats and SHGs.
Therefore, it is apparent that over the years, the SHG-Bank Linkage Model has invested sufficiently in building social capital in the countryside. This investment in the form of training and capacity building has enabled the rural poor woman to undertake responsibilities which she was not capable of taking up in pre-SHG situation.
Costs in formation and capacity building
True there is significant cost in formation and capacity building of SHG members but the costs are not borne by members of SHGs. These costs are shared by Government, Development Financial Institutions (DFI) like NABARD and the Civil Society. It is the duty and responsibility of the Central and State Governments to socially empower the poor in terms of health, education and livelihood and there is no better conduit available other than SHGs to accomplish the task.
Benefits to Banks
Till the early 1990s, the feeling among the bankers was that rural women do not have ability to save or borrow. SHG-Bank Linkage Model opened the eyes of many including the bankers towards rural poor women. It brought about an attitudinal change among the banking community and they no longer look SHG Bank Linkage Model as social sector banking. On the contrary, the nation has realised that loans to SHGs is one of the most profitable portfolios of any bank.
Banks while fulfilling their financial inclusion duties by extending the banking services to the rural poor have found SHG as a platform for reducing their transaction and risk cost. Imagine a scenario where all the members of 69,53,000 SHGs to be individually linked to banks. The cost of transacting with this huge segment would have been a big drain on banks’ human and financial resources. By adopting the group approach, banks have reduced their transaction cost to a significant extent while dealing with the poor.
Risk cost, usually associated with any type of loan extended by banks, is mitigated in the group approach. Mutual guarantee and peer pressure acts as the best collateral or security while doing business with the poor through SHG model.
Further, a portion of the groups’ savings lying with the banks, estimated to be Rs.6198.71 crore as on 31 March 2010 is a significant source of low-cost deposits available with the banking community for profitable deployment.
The MFI model
It is given that MFIs are not the pioneers in microfinance. They have come into existence only after the SHG-Bank Linkage Model proved that poor are bankable. Further, the practices followed by most of the MFIs in the country are discussed below.
MFIs are not reaching to the unreached as they claim to be. Most of the MFIs are operating in places where the banking density is quite high in the country and credit to deposit ratio is satisfactory. MFIs are focussing more in irrigated areas of Andhra Pradesh, Tamil Nadu and Karnataka for their lending activities rather than reaching out to the poor in other regions of the country.
MFIs do not spend time and resources in formation of groups and their capacity building. They usually poach members from established SHGs and form groups only to lend and recover loans. There is no capacity building to make them aware about the benefits of savings, smart borrowings, intelligent investments and financial discipline. In this method, the MFIs do not incur any cost in formation and capacity building of groups. Therefore, the high rates of interest charged by MFIs even to these groups is totally unjustified. In the SHG-Bank Linkage Model, capacity building gains precedence over credit. This has resulted in strengthening communities through investments in social capital.
The biggest bane in MFI model is transparency in interest rates. Borrowers are not aware of the actual rate of interest they pay to the MFIs on their loans. Apart from the interest, which is often at a flat rate, there are other charges like document charges, upfront fees, etc. MFIs and their defenders argue that a member of SHG may be charged an interest rate of 12-24-36% on the loans taken from SHGs. But what they miss to see is that the interest paid by the members only accrues to the corpus of the group. Whereas, the high interests paid by the rural poor on loans from MFIs, do not stay within the group as in SHG-Bank Linkage model, but enriches the bottomline of the MFIs. According to Vijay Mahajan of Basix, ‘the return on assets in microfinance are unjustifiable. It is four times the returns even a bank would have made in its peak profit making days’. As MFIs scaled up and made profits, only their executives and shareholders benefitted at the cost of rural poor.
All Commercial Banks (Public, Private and Foregin) together had disbursed Rs.3718.93 crore and Rs.8038.61 crore during 2008-09 and 2009-10, respectively to NGOs and MFIs for their onlending to groups. The year on year growth is a phenomenal 116.2%. Apart from Commercial Banks, Small Industries Development Bank of India (SIDBI) had disbursed an amount of Rs.2665.75 crore to NGOs and MFIs during 2009-10. Growth of 100% or more, year on year, had not happened in any industry during a global recession except MFI Sector. Powered by cheap credit from banks, MFIs expanded their business at a scorching pace to maximise their profits rather than to help the poor.
Keeping in view the recent upheaval in microfinance sector, The Economic Advisory Council to the Prime Minister called for a regulatory mechanism for the microfinance sector. The panel also called upon the MFIs to reform their practices. Which is why Dr.C.Rangarajan, Chairman of the Economic Advisory Council to the Prime Minister remarked, ‘I believe the Bank-SHG linkage programme has an important role to play with the addition of the BC model.’ Taking a cue from the above, it is time that Government of India and Reserve Bank of India should exert pressure on banks to lend to SHGs more liberally and discontinue the practice of considering loans to MFIs as priority sector loan.
(Opinion expressed in this article is of the authors and not of the Institution they work with)