Keya Sarkar: Building a framework

OUT OF FOCUS

For the micro finance sector in India, very soon it will be time to celebrate. The number of self help groups (the delivery channel for micro credit) that have been set up are currently around 960,000.

It seems that the 1-million SHGs target that Nabard had originally for 2007-2008, will be a reality far sooner. It terms of outreach, this makes the Indian programme the largest in the world.

Nabard's website traces this phenomenal achievement over the last decade. I quote: "Research studies conducted by NABARD in the early nineties had shown that the most important and immediate banking needs of the poor were to keep safe their occasional surpluses in the form of thrift. They also needed consumption loans to meet emergent lifecycle needs. The banking service and products needed to be hassle free. Based on its experiences and the findings of these studies, NABARD initiated a pilot project in 1992 that aimed at financing 500 Self Help Groups across the country, through the already existing banking network. The banks had financed about 600 SHGs by 1993."

An SHG is a small voluntary association of poor people, preferably from the same socio-economic background. They come together for the purpose of solving their common problems through self-help and mutual help. The SHG promotes small savings among its members. The savings are kept with a bank.

This common fund is in the name of the SHG. Usually, the number of members in one SHG does not exceed 20. According to Nabard, more than 90 per cent of the SHGs have exclusively women members.

Ten years from 1992, the informal delivery strategy developed for the banking system by Nabard in collaboration with non-formal development agencies through the vehicle of self-help groups has grown into the largest micro finance programme in the world, in terms of its outreach.

Most importantly, many banks have started accepting micro finance as normal and sustainable banking business operated at market rates of interest. With on-time repayments well above 95 per cent, collateral security has been progressively replaced by mutual trust.

While critics will argue that many of the SHGs set up are in name only, it would be unjust and unwise to taint the whole movement with the same brush. For every SHG that is not ideal there are probably 10 times those which are. And even a cursory understanding of the process of setting up an SHG and keeping it alive, reveals what a task it is.

These include first

• conducting a survey of all households prior to admission, based on which a group is formed.
• this group would then have to be trained daily for a week or two before a formal recognition of the group.
• this training has to encompass teaching illiterate members to sign their names to giving the group inputs on management and leadership skills
• after the group is ready to receive credit, make loan applications and cash disbursements in the group setting and subsequently track loan utilisation and make collections
• go beyond financial assistance to counsel members on educating girl children, abstaining from alcohol and tobacco.

If in order to finance an SHG, all or a whole host of the above is involved, then the logical question that comes to mind is how much does all this cost and who pays for it? And herein lies a tale of friction between banks and NGOs turned financial intermediaries or NGO MFIs (micro finance institutions) as they are best known.

Many bankers still hold the MFIs in great suspicion, often questioning the "administrative cost" that MFIs pass on to the SHGs as interest cost.

While there is banking prudence in ensuring that the NGO MFIs are not over burdening the SHGs with high interest costs which would affect repayment, MFI practitioners argue that bankers are incapable of pricing the service they provide.

They argue

With average loan sizes of about Rs 2,000 - Rs 3,000, which would be one hundredth of the average loan size of a bank, transaction costs as a percentage of loan size are naturally far higher than that of a bank.

Unlike banks which have customers typically coming to them, MFIs go to the project members' door steps and carry out all credit related transactions such as taking loan applications, getting group approval for loans, making loan disbursements, making collections of weekly loan instalments, etc.

Many MFIs lend directly to members of the SHGs, rather than to SHGs themselves. These loans are on group recommendation and group guarantee. All accounts on every loan to every member have to be maintained with a copy for each member. This adds to costs.

Unlike banks which work during banking hours, MFI staff often have to conduct SHG meetings in villages and these start as early as 6 am before the members leave for their work.

The number of illiterate members (often as high as 75 per cent) that MFIs have to deal with are far higher than the proportion of illiterate customers of banks. Taking them through the loan process requires more administrative time.

Even though micro institutions make micro loans, they have to contend with all the risks and control mechanisms that operate in any financial institution of any size.

It could be a possibility that bankers accept that NGO MFIs would be funded by grants and somehow these grants from bilateral or multilateral donor agencies should fund these high but legitimate administrative costs.

Then the poor SHG women members would not be over burdened by high interest costs. But as we know subsidies are never for long and therefore it is in the interest of all to build a framework which is viable in itself.