Keya Sarkar: Building an SHG movement

OUT OF FOCUS

For the microfinance sector, the overall idea of the new government to provide a "new deal" to rural India has been heart-warming.

More specifically, Finance Minister P Chidambaram's intention to strengthen the governance of the regional rural banks and the operations of the cooperative banks has made this sector hopeful of more rewarding results for their endeavours.

The minister has also set a new target for setting up self-help groups (SHGs), which are the delivery vehicles of micro credit. While this column last month discussed how the numbers already achieved in India have made its self-help group movement the largest in the world, what Chidambaram is talking about now is accelerating the pace. Historically, the self-help group bank linkage programme (which is basically how non-government organisations intermediate between the poor and the banks) has taken over a decade to link a million SHGs.

Now Chidambaram has set an indicative target of an additional 5.85 lakh in the three years ending March 31, 2007. This has made all those involved""NABARD, SIDBI, banks, microfinance organisations, and donor agencies""start thinking of how this will become a reality.

Besides the sheer dedication required of hundreds of non-government organisations (NGOs) and bankers to set up these SHGs, a big obstacle is the expenses or the promotional cost of setting up them up, which different estimates put in the range Rs 6,000-12,000 per SHG.

The debate that might hold the centre stage if this target is to be taken seriously is who will fund these projects. The options of course are not many:

• The NGO or the microfinance organisation can pass on this cost to the SHG in the form of higher interest cost. But, as highlighted in the last column on this issue, interest rate is a very sensitive issue, and many state governments suddenly take it upon themselves to admonish microfinance institutions for behaving like moneylenders. (Although, and this I am sure will take many readers by surprise, the postal department charges a flat rate of 5 per cent to senders of cash by money order as administrative expenses.)
• The NGO or the microfinance organisation can use aid or grant funds for setting up SHGs such that neither they nor the SHGs have to bear the cost. Like the donor agency, CARE, for example, which works with 25 NGO/microfinance institution partners to set up about 19,000 SHGs, spends to the tune of Rs 12,000 to "support the SHG". But such funds, the NGO sector feels, are few and far between as even large donor agencies press for a self-sustaining model.
• Get the banks to pay for the promotional expenses as start-up cost in building a rural client base. The Dhan Foundation, an NGO which has worked with 180 branches of 29 commercial banks, has been able to demonstrate to the banks that if each rural branch can link with 200-300 SHGs at a cost of Rs 20-30 lakh (at an average of Rs 10,000 per SHG), a branch can build a business of Rs 2-3 crore in two to three years. The Foundation has already convinced Canara Bank and ICICI Bank to fund setting up 1,500 and 2,000 SHGs, respectively.

In fact, as banks like Canara Bank and ICICI Bank, which are seriously looking at building a rural asset base, get more aggressive in building their microfinance books, they will look at the SHG promotion cost simply as a cost of client acquisition.

Just as a bank has to invest upfront to set up costly ATM machines to attract depositors, similarly banks will increasingly take this cost to acquire rural clients in order that they may later cater for all their financial needs.

Of course, the hope that banks will have is that once they pay for promoting an SHG , that SHG, or rather its members, will remain loyal to the bank and will become captive clients for all their products. Some bankers do question this premise and do not believe that promoting an SHG will necessarily imply a captive client base.

But the argument for those bankers who are willing to shell out money upfront is that if a bank works well with an NGO and the SHGs promoted by the NGO, then the SHGs will have little motivation to look elsewhere. In other words, the normal market behaviour of satisfied customers should work in the rural areas too.

In order to give this arrangement a somewhat formal undertone, ICICI Bank and Dhan Foundation have penned a tripartite agreement among the Bank, the Foundation and the SHGs. Although the Bank and the Foundation realise that this agreement cannot bind the SHG members to the bank, it may just form the basis of moral suasion.

For smaller banks like ABN Amro or UTI Bank that do not have a penetration in the rural areas but are still interested in building a microfinance book, a branch-linked programme may not work. This is because it may be difficult to budget for the upfront costs that are required for SHG promotion.

But what is heartening is that both bankers and micro finance practitioners are exercising their minds about various options and structures. If the government sets a backdrop and leaves the remaining to the finance professionals, the largest SHG movement in the world can only get strong.

keyasarkar@yahoo.co.in

The columnist is a former journalist and has worked in the financial sector)