nmf conclave papers 2014

NatioNal Micro FiNaNce coNclave 2014

Taking Rural India >> Forward

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Published ByMicro Credit Innovations Department (MCID)National Bank for Agriculture and Rural Development

ContactP Satish, Chief General Manager

Micro Credit Innovations Department (MCID)National Bank for Agriculture and Rural Development

4th Floor, ‘D’ Wing, Plot No. C-24, “G” Block Bandra Kurla ComplexP B No. 8121, Bandra (E)Mumbai – 400 051

Telephone – 022 -2653 9031Email : mcid @nabard.orgHomepage : www.nabard.org

ResponsibleKaushal Kishore

AuthorsP. Satish, A K Singh, Kaushal Kishore and Rajat Mohanty

Technical AssistanceNitin Jindal, NABARD-GIZ Rural Financial Institutions Programme

Design/ LayoutAnshul Sharma/Artworkstudios.in

Cover PhotographEnrico Fabian

Mumbai, 13 November 2014

“The findings, interpretations, and conclusions expressed in this paper are those of the authors and do not necessarily reflect the views of NABARD. NABARD does not guarantee the accuracy of the data included in this document.”

NatioNal Micro FiNaNce coNclave

2014

venue

auditorium, Ground Floor, NaBarD Head office, Bandra Kurla complex, Mumbai

NatioNal Micro FiNaNce coNclave – 2014

contents

SHG BlP and JlG Scheme of Financing - Status, issues, innovations and roadmap for the future ....................................5 A K Singh, Kaushal Kishore, Rajat Mohanty

MFis - role in serving the poor, access to funding sources, fair lending practices and need for self-regulation ...........................................21P. Satish

enabling environment - Governance, regulation and technology ..............................................................27P. Satish

1. introductionOf late, there have been wide spread apprehensions in certain quarters regarding the SHG-BLP hitting a plateau and fast losing its relevance in serving the poor. Even a few mandarins of microfinance belonging to this section have gone overboard in highlighting the programme be-ing heavily skewed in favour of four southern states of Andhra Pradesh, Karnataka, Kerala and Tamil Nadu, poor off take of credit in non-southern states, rising NPA level in SHG financing, bankers losing faith, need for new programmes / approaches etc. Actual data, however, sug-gest otherwise. NABARD’s publication ‘Status of Microfi-nance in India during 2013-14’ reveals that more than 74 lakh SHGs were having savings deposits with banks to the tune of Rs.9,897 crore as on 31 March 2014. Though the number of savings linked SHGs increased marginally by 1.5 % (1.12 lakh) during 2013-14 over previous year, the savings deposit with banks shot up by 20.4 % (Rs.1,680 crore) during the same period. It assumes greater impor-tance in view of the fact that approximately 70 % of the savings mobilised from members by SHGs is used for

SHG BlP aND JlG ScHeMe oF FiNaNciNG StatuS, iSSueS, iNNovatioNS aND roaDMaP For tHe FutureBy a K Singh, Kaushal Kisore and rajat Mohanty

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cial assistance to the tune of Rs. 3,717 crore from various banks. The above figures bear the testament to the fact that the relevance of SHG-BLP in serving the poor has now grown even more than ever before. However, instead of basking in the glorious achievements of SHG-BLP and JLG-BLP, it will be worthwhile to trace the objectives behind launching SHG-BLP, how far these has been achieved and im-provements that may be required in achieving the non-negotiable task of serving the poor.

2. evolution of Self Help Group Movement In mid-eighties, MYRADA started working with groups of resource poor in rural areas and

internal lendings. As such SHGs have been able to mobilise untapped deposits of about Rs 33,000 crores from their members with monthly collection of small amount ranging from Rs 10 to Rs 100 per member. Further, 13.66 lakh of these SHGs received credit sup-port to the tune of Rs.24,017 crore from vari-ous banks during the year 2013-14. The credit disbursement to SHGs during 2013-14 grew by Rs. 3,432 crore (16%) compared to the pre-vious year. The gross NPA in SHG financing by banks during 2013-14 declined to 6.83% from 7.08% during the previous year.

Another offshoot of SHG-BLP, the JLG scheme of financing, targeted at mid-segment clients among the poor, which leverages on social collateral offered by the members, has also recorded an impressive growth during 2013-14 with 2.5 lakh JLGs receiving finan-

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3. Mainstreaming of SHGsThe pilot was successful and 4,750 SHGs were credit linked with different banks by the end of the three years phase with bank loan of Rs.6.06 crore covering 28 commercial banks, 60 RRBs and 7 cooperative banks.

Quick studies conducted by NABARD in a few states to assess the impact of the linkage project brought out positive and encourag-ing features including nearly 100% recovery, significant reduction in transaction cost of banks and shift towards production activi-ties. Subsequently, a Working Group con-stituted by Reserve bank of India, under the Chairmanship of Shri S.K. Kalia, to study the functioning of SHGs, clearly came out with the findings that rural poor could save, they were not concerned much with cost of credit, only wanted timely and adequate credit and were making prompt repayment of credit in group. The SHG-BLP also evolved as a supplementary credit strategy for banks for reaching the poor, built mutual trust and confidence between banks and rural poor and encouraged banking activities among poor. The working group viewed the linking of SHGs with banks as a cost effective, trans-parent and flexible approach to improve the accessibility of credit from the formal bank-ing system.

As a follow up of the recommendations of the group, financing to SHGs was mainstreamed into the operations of the banks by Reserve Bank of India in April 1996. It was stipulated that micro credit extended by banks to indi-vidual borrowers directly, or through any in-termediary, would be reckoned as part of their priority sector lending.

NABARD had suggested three models for SHG-BLP and supported all the three models depending on the demand and supply envi-ronment in a particular region . These models were:

termed them as Credit Management Groups. These groups were taught the importance of cultivating weekly savings and extending loan facility to group members out of the corpus so created. In 1987, these groups were renamed as “Self Help Groups”. MYRADA provided fund to such groups matching their corpus under the Action Research programme sanc-tioned by NABARD. Capacity building train-ing was also provided to the groups and the success of Action Research encouraged NAB-ARD to launch a pilot in 1992, which envis-aged linking of 500 SHGs by the end of 1994.

Self Help Groups were conceived as informal groups of 10-20 members having homoge-neous socio-economic background coming from a small contiguous area, to operate on the principle of self-help, solidarity and mutu-al interest. They are encouraged to make com-pulsory thrift of the uniform amount as decid-ed by them and pool resources so created to extend interest bearing loans to its members to meet their emergent needs. SHGs are given the freedom of charging interest from their members at the rate as decided by group con-sensus. Recovery is to be a mechanism of peer pressure. The process helped SHG members imbibe the essentials of financial intermedia-tion, including prioritization of needs, setting terms and conditions and maintaining books of accounts. This was their learning ground before they could be in a position to handle bigger size funds by way of credits from banks.

It is interesting to note and remember that the three radical innovations were introduced through the RBI/NABARD guidelines during the pilot phase:

• Acceptance of informal groups as a client of banks – both deposit and credit linkage

• Introduction of collateral free lending, and

• Permission to lend to group without specifi-cation of purpose/activity/project.

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members as entrepreneurs. The project aimed at setting up of micro enterprises through the members of matured SHGs using the ‘3M’ approach - Micro finance, Micro mar-ket and Micro planning. The project was im-plemented through 14 NGOs having a good track record and designated as MEPA (Micro Enterprise Promotion Agency). Based on the learnings from the pilots, NABARD initiated ‘Micro-Enterprise Development Programme’ (MEDP) for skill development in March 2006 with the objective to enhance the capacities of matured SHGs to take up micro enterprises, both in farm and non-farm sectors, through appropriate skill upgradation. More than 2,90,900 SHG members have been benefitted so far under this programme and a substantial percentage of them have since turned into mi-cro entrepreneurs.

4. Suggesting product level changes in SHG-BlP under SHG-2For making SHG Bank linkage programme more client friendly and addressing some emerging issues, NABARD suggested cer-tain product level changes by reiterating thrust on savings with introduction of vol-untary savings, smooth flow of credit with sanction of cash credit limit to SHGs, im-proved risk mitigation mechanism, lever-aging second level institutions like SHG Federations for sustained hand holding sup-port, promoting JLGs out of SHG members, strengthening the monitoring mechanism, etc. The impact of this initiative was visible during the year 2012-13 and 2013-14 with growth in savings of SHGs to the extent of 25 per cent and 20 per cent respectively. Similarly, the flow of credit from banks to SHGs recorded a growth of 24% and 17 % respectively during 2012-13 and 2013-14 over the previous year.

• SHGs promoted by banks and linked by themselves,

• SHGs promoted by NGOs and other SHG promoting agencies and linked by the banks directly, and

• SHGs promoted by NGOs and other SHG promoting agencies and financed by them through bulk lending provided by the banks to them.

During the pilot phase, major issue was sen-sitization of bankers for acceptance of the linkage programme. On mainstreaming, ad-ditional challenge faced by NABARD was en-suring formation of quality SHGs. NABARD accepted the challenge of the capacity build-ing of various stake holders giving empha-sis on capacity building of NGOs, who were otherwise involved in various other types of social activities and SHG concept was new to them. Capacity building support on continu-ous basis was also provided to SHG members, banks, government officials, etc. Since the in-ception of the programme, about 31.6 lakh individual stake holders have been trained. Apart from capacity building interventions, NABARD, being the anchor in SHG-BLP, has also been involved in extending promo-tional grant to Self Help Promoting Institu-tions (SHPIs), which included NGOs, Banks, Farmers clubs, Individual Rural Volunteers, etc. NABARD also extended 100% refinance assistance to banks for lending to SHGs. As on 31st March 2014, NABARD has sanctioned a grant assistance of Rs.452.29 crore to various SHPIs for formation and nurturing of SHGs. In order to support SHG linkage under model “C”, NABARD initially provided need based Revolving Fund Support to NGO for on lend-ing to SHGs, wherever they could not avail bulk lending from banks.

SHG members, after having access to cred-it support for consumption and emergent needs, existing income generating activities need to graduate towards more sustaining livelihood. A ‘Pilot Project’ launched during 2004-05 aimed at facilitate graduation of SHG

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Region No. of SHGs savings linked with banks (No. Lakh)

2009-10 2010-11 2011-12 2012-13 2013-14

Northern 3.52 3.73 4.09 3.73 3.65

North Eastern 2.92 3.25 3.67 3.24 3.16

Eastern 13.74 15.27 16.26 14.71 14.69

Central 7.66 7.86 8.13 7.02 6.86

Western 9.46 9.61 10.62 9.06 8.97

Southern 32.23 34.89 36.83 35.41 36.96

Total 69.53 74.61 79.60 73.17 74.29

5. the status now5.1 cumulative progress in SHGBlP

NABARD suggested three models for SHG-BLP and monitored the progress model-wise till 2005-06. There were 22,38,565 SHGs hav-ing bank loan of Rs 11,398 crore till 2005-06. Model-wise composition was 73% through model “B”, i.e. SHG promoted by SHPI and linked by banks directly, 20% through model “A” i.e. SHG promoted by banks through their staff, Farmers clubs and Rural volunteers and linked by the banks themselves. The third model “C” of bulk lending to SHG promoting NGO by banks for on lending to SHGs pro-moted by these agencies constituted only 7% of the total linkage.

Considering the exponential rate of growth of SHG-BLP, resulting in difficulties in obtaining data about first time/multiple time lending data and the fact that the bulk lending to MFIs by bank was not necessarily for SHG model (MFIs were now lending through JLG, Grameen and

1 Northern Region – Haryana, HP, J&K, Delhi, Punjab, RajasthanNorth Eastern Region – Assam, AP, Manipur, Meghalaya, Mizoram, Nagaland, Sikkim, TripuraEastern Region – A &N Islands, Bihar, Jharkhand, Odisha, West BengalCentral Region – Chhattisgarh, MP, UP, Uttarakhand Western Region – Goa, Gujarat, MaharahtraSouthern Region – AP, Karnataka, Kerala, Tamilnadu

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individual models also), MIS was modified to align with the data available directly from CBS of the banks from 2006-07 onwards. Data regarding model “C” was now clubbed with banks financing to MFI during the year and collated separately.

As of 31 March 2014, there were 74.30 lakh sav-ing linked SHGs with a bank deposit of Rs 9897 crore and 41.97 lakh credit linked SHGs with bank loan outstanding of Rs 42928 crore. During 2013-14, 13.66 lakh SHGs were provided credit assistance amounting Rs 24017 crore by banks. All these are pointers to the sheer outreach of the SHG movement.

The Self-Help Group movement in India is sui generis because it is a savings-first programme with credit being its logical corollary. Touching over 9.44 crore households, it has become the largest Microfinance programme in the world.

5.2 region wise - savings linked SHGs

Region wise1 number of SHGs savings linked during the last five years is furnished in table 1.

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Region Savings deposit with/ credit outstanding from banks (Rs crore)

2009-10 2010-11 2011-12 2012-13 2013-14

Savings Credit Savings Credit Savings Credit Savings Credit Savings Credit

North-ern

342 815 329 903 253 1178 291 1161 283 1101

NER 121 673 131 695 153 993 130 797 129 754

Eastern 1120 3695 1408 4203 947 4630 1393 5538 1527 4944

Central 514 2463 603 2365 613 2780 624 2776 790 2697

Western 927 1369 829 1246 872 1364 696 1468 930 1640

South-ern

3174 19023 3716 21809 3713 25395 5083 27635 6238 31791

Total 6198 28038 7016 31221 6551 36340 8217 39375 9897 42927

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It can be observed that after exploiting the available potential for promotion of SHGs, the progress in southern states has more or less remained stagnant. It is ironical that despite the sizeable rural poor population available for coverage in the other regions, they also continued to maintain the status quo and joined the southern states by freezing their progress as well.

5.3 region wise - credit disburse-

ment to SHGs

The region wise number of SHGs which re-ceived credit assistance from various banks during the last five years is furnished in table 2.While southern states ensured that a substantial

number of SHGs receive credit support from banks, the other regions had a small share.

5.4 region wise - savings deposit

and credit outstanding

The region wise details of savings deposit of SHGs with banks and credit outstanding from banks during the last five years is furnished in table3.

5.5 region wise - savings to credit

ratio

The region wise credit to savings ratio, fur-nished in Table 4, could be a good measure in understanding the extent to which the savings

taBle 2

Region No. of SHGs financed by banks during the year (No. Lakh)

2009-10 2010-11 2011-12 2012-13 2013-14

Northern 0.37 0.42 0.31 0.31 0.24

North Eastern 0.49 0.39 0.51 0.25 0.16

Eastern 2.77 2.48 2.01 1.83 2.97

Central 0.78 0.49 0.58 0.64 0.66

Western 1.49 0.92 1.01 0.70 0.88

Southern 9.96 7.26 7.05 8.46 8.75

Total 15.86 11.96 11.47 12.19 13.66

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taBle 4

taBle 5

Region Credit to savings ratio

2009-10 2010-11 2011-12 2012-13 2013-14 Avg. of last 5 years

Northern 2.38 2.74 4.66 3.99 3.89 3.53

North Eastern 5.56 5.31 6.49 6.13 5.84 5.87

Eastern 3.30 2.99 4.89 3.98 3.24 3.68

Central 4.79 3.92 4.54 4.45 3.41 4.22

Western 1.48 1.50 1.56 2.11 1.76 1.68

Southern 5.99 5.87 6.84 5.44 5.10 5.85

Total 4.52 4.45 5.55 4.79 4.34 4.73

Region 2009-10 2010-11 2011-12 2012-13 2013-14

SHG fin%*

Gross NPA%

SHG fin%*

Gross NPA%

SHG fin%*

Gross NPA%

SHG fin%*

Gross NPA%

SHG fin%*

Gross NPA%

Northern Region

10.51 6.61 11.26 7.05 7.58 6.92 8.31 11.19 6.58 13.67

North Eastern Region

16.78 5.51 12.00 8.42 13.90 5.17 7.72 8.56 5.06 8.88

Eastern Region

20.16 3.21 16.24 4.31 12.36 7.28 12.44 10.30 20.22 11.07

Central Region

10.18 8.07 6.23 10.74 7.13 13.20 9.12 17.28 9.62 18.87

Western Region

15.75 4.46 9.57 7.26 9.51 8.22 7.73 8.63 9.81 11.11

South-ern Region

30.90 1.87 20.81 3.79 19.14 4.98 23.89 5.11 23.67 4.64

Total 22.81 2.94 16.03 4.72 14.41 6.09 16.66 7.08 18.39 6.83

* Indicates the percentage of savings linked SHGs that received fresh finance from banks during the year

amount of SHGs were leveraged by banks for disbursing the credit to SHGs during the last five years.

While the banks in southern part of the coun-try extended credit support at an average rate of 5.85 times of the savings pooled by the SHGs, the same figure dropped to a very discerning low level of 1.68 times in Western Region of the country comprising important states like Gujarat, Maharashtra and Goa.

Similarly, the figures were not very encour-

aging for northern (Haryana, Himachal Pradesh, Jammu & Kashmir, Punjab, Rajas-than) and eastern (Bihar, Jharkhand, Odisha, West Bengal and A & N Islands) regions.

5.6. region wise - gross NPa in SHG

financing

The region wise trend in percentage of savings linked SHGs receiving fresh credit and gross NPA in SHG financing by banks during the last five years is given in table 5.

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Bank States Gross NPA % Avg. gross NPA in last 5 yrs.

2009-10 2010-11 2011-12 2012-13 2013-14

State Bank of India

AP 1.06 3.10 4.72 5.73 5.83 4.09

Odisha 2.23 9.80 22.71 35.27 34.98 21.00

MP 7.79 27.30 28.01 30.46 35.38 25.79

Maharashtra 3.34 9.00 14.14 20.64 24.33 14.29

Rajasthan - 19.50 16.85 18.98 38.20 18.71

UP 3.71 19.60 26.91 34.71 39.65 24.92

Andhra Bank AP 4.54 1.40 3.75 2.83 1.52 2.81

Odisha 5.17 22.90 28.46 40.12 40.62 27.45

MP - - - - - -

Maharashtra 0.06 6.50 5.23 2.46 1.52 3.15

Rajasthan - - - - 0.00 0.00

UP - - - - 0.00 0.00

Central Bank of India

AP 66.05 6.50 6.47 6.47 2.09 17.52

Odisha 0.89 5.00 4.95 4.92 6.55 4.46

MP 9.04 7.60 7.62 7.56 5.23 7.41

Maharashtra 7.38 5.20 5.23 5.20 7.19 6.04

Rajasthan 34.59 29.8 15.07 14.96 1.52 19.19

UP 0.52 0.70 0.65 7.48 3.20 2.51

Punjab Na-tional Bank

AP 0.74 1.40 2.05 4.02 5.48 2.74

Odisha 2.35 0.00 4.15 7.87 4.05 3.68

MP 9.40 2.50 7.39 12.64 8.75 8.14

Maharashtra 17.77 8.10 12.61 19.45 23.41 16.27

Rajasthan 6.09 6.80 0.79 16.21 13.94 8.77

UP 7.25 5.40 3.15 12.27 12.77 8.17

Bank of India AP 0.10 0.00 2.02 1.12 0.23 0.69

Odisha 5.88 6.60 11.37 4.13 5.44 6.68

MP 13.81 4.30 25.06 25.83 12.62 16.32

Maharashtra 2.00 11.80 8.01 22.92 5.86 10.12

Rajasthan 1.20 0.90 18.88 45.73 18.81 17.1

UP 3.04 51.00 21.07 2.15 31.70 21.79

taBle 6

The above data reveals that there is a general trend of rise in NPA in all regions of the coun-try wherever there was decline in fresh financ-ing by banks. However, the point to ponder here is whether lack of assurance of subsequent

doses of credit after the loan is repaid led larger default in repayment of bank loans and thereby causing a spurt in rising NPA or the defaults by a few SHGs was taken as a pretext by the banks to reduce their financing to SHGs.

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5.7. Performance of major banks in

managing NPa in financing the SHGs

A few banks have sometimes raised concerns about the rising NPA in their financing to SHGs. It will be interesting to analyse the gross NPA of a few major banks in financing the SHGs across several states during the last five years. For this, a few major banks were select-ed in terms of their presence across different regions. The banks selected are State bank of India (pan India), Andhra Bank (Southern re-gion), Central Bank of India (Central region), Punjab National Bank (Northern region) and Bank of India (Western Region).

Table 6 data reveal that most of the banks with the exception of Central Bank of India (owing to 2009-10 position) have been able to man-age their NPA to an acceptable level in case of SHGs financed in the state of Andhra Pradesh. However, same is not the case in respect of other states where the state patronage is either

absent or not available to the extent in Andhra Pradesh. It is astonishing to observe that, with the exception of Andhra Pradesh, the State Bank of India has not been able to contain its NPA in SHG financing below 10% in all five states indicated above. At the same time, while the Central Bank of India and Punjab National Bank have been to a certain extent successful in containing their gross NPA in states like Odisha and Madhya Pradesh, the other major banks have failed to do so in these states. The above trends clearly indicate that the issues re-lated to NPA have more to do with the states and the banks involved rather than weakness in the programme itself.

6. ‘SHGs’ - the cog wheel of policy planningThe success of SHG-BLP also attracted the attention of state governments. Many of the

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state governments, over a period, undertook, through departmental initiatives, major pro-grammes of SHG promotion. Notable among the state governments was Andhra Pradesh with Podupulakshmi programme, wherein, during two years period from 1997-99, 2 lakh SHGs reported to be formed. Indira Kranti Patham programme of AP, Jeevika Project of Bihar, TRIPTI and Mission Shakti projects in Odisha were some of the other projects imple-mented by state governments. Now, certain State Governments have separate department for SHG promotion and development and have contributed substantially in intensifica-tion of SHG-BLP.

The recognition for Self-Help Groups as a vehicle for purveying microcredit as a tool for poverty alleviation came in April 1999 when the Government sponsored Integrated Rural Development Programme (IRDP), the largest poverty alleviation programme in the world was amalgamated with other govt. pro-grammes like DWCRA, SITRA, TRYSEM, GKY to be rechristened as SGSY (Swarna-Jayanti Gram Swarojgar Yojna) where group mode of financing was recognised. In the past also GOI had toyed with the concept with DWCRA groups but SGSY was the first large scale programme to do so. Though there were many dissimilarities with NAB-ARD’s concept of group, particularly subsidy as source of cheap money introduced under the scheme, it introduced the policy frame-work for group-oriented poverty alleviation approach.

Though SGSY was the holistic approach to eradicate poverty and had many positive fea-tures like group approach, credit linkage, in-volvement of NGOs, line departments, banks, PRIs, etc., it faced problems at implementa-tion stage. Some of the difficulties encoun-tered were due to its design while some of the basic assumptions were flawed. SGSY was perceived as a large scale program, covering all BPL families but it was not consistent with other developmental programmes.

To overcome these issues, SGSY was restruc-tured in 2011 to form National Rural Liveli-hood Mission (NRLM) to be implemented in mission mode across the country. While in SGSY, there was provision for both individual as well as group loans for capital subsidy based asset creation, NRLM is an entirely group centric, group driven poverty alleviation pro-gramme. NRLM’s components are: formation, federation and financing of women SHGs; livelihoods programme for rural women farmers and agricultural labourers; value ad-dition in non-timber forest produce in tribal districts; gender rights issues and various skill development programmes. It aims to cover all the rural districts in the country intensively, in phases.

7. Joint liability Groups (JlGs)The SHG-Bank Linkage, spearheaded by NAB-ARD, has proved to be a successful instrument in providing access to financial services from the formal banking sector for asset less poor. Taking this learning of collateral free lending further, NABARD piloted and developed an effective credit product for mid-segment cli-ents- “Joint Liability Groups” (JLGs). Unlike the conventional JLGs normally nurtured by microfinance Institutions, this product fa-cilitates hassle-free credit which is of longer term; fulfilling seasonal needs of credit larger in quantum. The product however, relies on mutual guarantee of clients like small /mar-ginal/ tenant farmers, oral lessees and share-croppers, micro-entrepreneurs, who have no conventional collateral to offer. Objectives for introduction of the product were:

• To augment flow of credit to farmers, espe-cially small, marginal, tenant farmers, oral lessees, share croppers / individuals, for tak-ing up farm activities, who have no collateral to offer.

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• To serve as collateral substitute for loans to be provided to the target group.

• To minimize the risks in the loan portfolio for the banks through group approach.

• To reduce transaction cost to the banks by substituting individual lending with Group Lending and also conventional collateral with social collateral/peer pressure.

• To enhance agriculture production / produc-tivity and livelihood promotion through JLG mechanism.

A Joint Liability Group (JLG) is an informal group comprising of 4-10 individuals com-ing together for the purpose of availing bank loan against mutual guarantee. Generally, the members of a JLG would engage in a similar type of economic activity in the Agriculture /Allied / Non-Farm Sector from the near vi-cinity. The activity/activities can be pursued in group or individually. The members would offer a joint undertaking to the bank that ena-bles them to avail loans. JLG members are expected to provide support to each other in carrying out occupational and social ac-tivities. Since the launching of the concept in 2006-07, till the end of March 2014, 6.72 lakh JLGS have been promoted across the coun-try with cumulative loan disbursement of Rs.6,776 crore from banking sector. NABARD has sanctioned grant assistance of Rs. 76.13 crore, so far, for promotion of JLGs. The an-nouncement in Union Budget for 2014-15 for financing of five lakh Joint Farming Group of ‘Bhoomi Heen Kisan’ (Landless farmers) has further given credence to efforts of NABARD in innovating and reaching out to the landless farmers through JLG scheme of financing.

8. issues and challengesOver the years, the SHG-Bank Linkage pro-gramme has emerged as a viable model for fi-

nancial inclusion of hitherto unreached poor households particularly in rural hinterlands. Despite the laudable achievements, there are issues like skewed growth, inadequate out-reach, poor credit off take and delay in credit dispensation, etc. Major issues and challenges may be listed as follows:

• Against the estimated potential for promo-tion of about 67.81 lakh SHGs, we have an existing stock of about 74 lakh SHGs. Four southern states of Andhra Pradesh, Kar-nataka, Kerala and Tamilnadu account for about 36 lakh SHGs out of 74 lakh SHGs savings linked, so far. Resource poor states like Madhya Pradesh, Uttar Pradesh, Bihar, Jharkhand, Chhattisgarh, Rajasthan account for more than 42% of the estimated poten-tial for formation of SHGs, but account for only 18% of the SHGs formed. To address the observed skew ness and the regional im-balances the programme has witnessed in fa-vour of southern states, greater focus of the programmes is required in lesser-endowed regions.

• Large variation in average amount of loan disbursed per SHG was observed during the last year. The variation ranged from Rs. 2.15 lakh per SHG in Andhra Pradesh to Rs.0.50 lakh per SHG in West Bengal.

• A sizeable number of the poor families of the country continue to be out of the cov-erage of the programme. The Committee on Financial inclusion (2008) which had at-tempted an analysis of the district wise gaps in financial inclusion suggested that critical exclusion (in terms of credit) is manifest in 256 districts in the country, spread across 17 States, where the credit gap is of 95% and above. Thus, poor households continue to face challenges for seeking financial services from banks because of the continued risk perception and doubt about their bankabil-ity.

• The thrust on promoting SHGs for the sake

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of getting various benefits under Govern-ment schemes like SGSY, interest subvention / waiver, subsidized finance in certain states, and non-availability of required hand holding support to SHGs in certain area, have resulted in ‘Pancha Sutras’ of SHG promotion (regu-lar meeting, regular saving, internal lending, timely repayment, proper book keeping) not being followed in promotion of SHGs. This re-sulted in instances like misutilisation of bank credit, default in loan repayments, rise in NPA, etc. in certain area.

• Even though NABARD has scaled up its train-ing interventions at retail level, due to lack of adequate thrust from the Management, the controlling offices and branches of banks do not perceive SHGs as a business proposi-tion for the bank. Besides, frequent shifting of bank branch officials posted in rural areas has resulted in poor banker interface with rural clients and lack of sensitivity to their financial needs.

• Financial inclusion efforts have improved the outreach of banks in the rural areas. Still, the banks are not able to serve the SHGs ad-equately, mainly because of lack of adequate bank staff, lack of proper attitude and inabil-ity to use the BC/BF outlet properly for the purpose.

• The availability of Bulk customers for micro-finance in the form of MFIs, which are at par with the SHG-BLP both in respect of Prior-ity sector status and availability of refinance from NABARD, is gradually making SHG-BLP less attractive to bank.

• The information technology could not be leveraged to the desired extent so as to im-prove the quality of service to the SHGs, their book keeping and also monitoring sys-tem. Interventions in this front have been sporadic without any serious efforts for up-scaling.

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• Lack of scope for pursuing income generat-ing livelihood opportunities, has not helped the growth of income level of the majority of SHG members.

• The issue of sustainability of SHGs has at-tracted attention in recent past. Exit of initial support mechanism has resulted in several SHGs failing to get further credit support from banks - more so after the transfer of bank staffs initially connected in their link-ages. Several NGOs/ projects have experi-mented with the mechanism of federations of SHGs as their exit strategy, however, even after the creation of such federations, SHGs have failed to maintain sustained credit link-ages with the banks.

• The sustainability of SHGs had further been affected by the Government sponsored de-velopment programmes like SGSY, which required specific proportion of BPL fami-lies in the SHGs forcing the existing SHGs to disintegrate and form new ones to com-ply with the guidelines. The restructuring of SGSY into National Rural Livelihood Mission (NRLM), a flagship programme of MoRD, GoI, from 201-12, has yet to make any concrete impact, except implementa-tion of Interest Subvention Scheme in cer-tain districts/ states from 2013-14. In many states like Uttar Pradesh, the NRLM has so far been almost non-starter.

9. innovations and road Map for the futureThe SHG-Bank Linkage programme in itself is a very innovative saving led credit model. Most essential aspects of SHG-BLP linkage programme were and still are, first the “infor-mal” nature of group not requiring any type of registration and second, the flexibility al-lowed in operation of SHGs and in lending methodology of the bank. The guidelines of

NABARD and RBI provide the basic frame-work only stressing on both these aspects and also giving complete freedom to banks to de-sign their SHG-BLP methodology so as to cater to the needs of the SHGs in the best possible mutual beneficial way. Guidelines have also ex-plained, the way SHGs become strong and their grading methodology to support banks in their appraisal. While attempting any innovations, one needs to be careful that the basic aspects of SHG-BLP are kept intact.

Large numbers of SHGs are required to be pro-moted and linked to bank branches, thus the role of the branch manager is extremely impor-tant. The banks need to be convinced about the fact that SHG-BLP makes business sense, and percolate this message down to the branch level. The SHG-BLP forming part of corporate plan of banks and periodical monitoring by control-ling authorities may help in providing required linkages to all eligible SHGs. As regards prod-ucts, largely saving bank deposit, term loan and cash credit limits have been provided to SHGs by banks. A wide range of deposit and credit products suiting to the requirements of poor need to be designed and offered by banks through SHGs.

India needs a very large number of institu-tions/ organisations to promote and nurture SHGs. But no institution shall take up the task of promoting SHGs unless they appreciate its usefulness for themselves. These organisations can take up the task of promoting SHGs and facilitate their linkages provided they find a value in doing so. They need to be motivated, convinced, and supported to attract them to group approach which may also provide them opportunities in delivering a host of activities otherwise being undertaken by them for the ru-ral poor. It is always more cost effective to work with groups of poor rather than dealing with individuals.

Another innovation is required to ensure sus-tainability of SHGs, post exit of SHG promot-ing agencies, including GOs, NGOs and others.

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Mostly the issue has been tried to be tack-led through formation of federations of the SHGs. While most of these federations have only non-financial functions, some have been conceived as financial intermediaries. How-ever, in both the types of institutions, there are issues of viability of federations and most of the original proponents of SHG-BLP have apprehension about the shift towards formali-zation of the process from a non-formal and flexible system to a rigid rule based one. They are afraid as they have experience of three-tier formal cooperative system in the country and feel that such formalization would bring polit-ical interference and SHGs will lose their par-ticipative democratic decision making capac-ity. Moreover, structure based formalization of developmental process is breeding ground of unfair practices.

The goal of universal coverage of poor house-holds for creating livelihood through the mechanism of SHG-BLP requires several in-novations. Some of these may be attained through leveraging technology and some oth-ers would like innovations in designing the products. Accordingly, Road map for further development of SHG-BLP may include:

• More focus on resource poor states having lower financial inclusion like Assam, Bihar, Chhattisgarh, Jharkhand, Odisha, Madhya Pradesh, Maharashtra, Rajasthan, Uttar Pradesh and West Bengal.

• The focus of the approach may shift from the State as a whole to ‘Districts in a state’ and ‘Blocks in a district’ as a unit so as to ensure that the spread and outreach of the programme is balanced and complete.

• Efforts to be undertaken in reviving the dor-mant SHGs through effective capacity build-ing and hand holding supports.

• Efforts in close coordination with NRLM to be undertaken to form and nurture groups by involving NGOs, community based or-

ganizations, community resource persons, secondary level institutes, State Government Departments, etc.

• Effective steps to build capacities in financial literacy at the SHG level to be taken up si-multaneously to ensure that over-indebted-ness at the member level is avoided.

• Momentum created after the launch of PM-JDY, to be leveraged to ensure opening of new saving accounts to expedite the process of universal financial inclusion. Conver-gence of SHG-BLP with FI initiatives of the Govt. of India and RBI and also other Gov-ernment programmes to be ensured.

• Training and capacity building support be-ing extended to the stake holders to be up-scaled for greater appreciation of SHG-BLP and JLG mode of financing. However, focus to be on sensitizing bankers at senior level as well as branch level about the need for fi-nancing through SHG and JLG.

• Mere access to finance does not help SHG members in poverty alleviation and devel-opment of livelihood activities. Therefore, specialized investments in human capital are needed to facilitate their growth to take up larger investments, yielding adequate in-comes. Hence, closer attention to be given for handholding support from specialized institutions.

• Requisite skill for undertaking livelihoods to be imparted to the matured SHG members through convergence with Skill develop-ment programmes of GoI.

• The SHG members with higher credit needs may be encouraged to graduate as members of JLGs for undertaking livelihood activities. Such JLGs / SHG members to be encouraged to aggregate into Producers’ Groups.

• Efforts to be made to encourage Community Based Organizations (CBOs) as the nodal

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• Existing training modules to be redesigned with apt training tools, case studies and ap-propriate field interfaces to ensure the de-sired impact of the training programmes.

• Digitisation of microfinance sector, includ-ing that of SHG-BLP is very essential. At the SHG level, since book keeping has been an area of concern, integration of informa-tion technology will be useful for improving efficiency and monitoring. Technological interventions at different levels i.e. at SHG level, SHPI level, Bank level and at National level are envisaged. While using technology, efforts to be made to keep it simple and user friendly so as to enhance client comfort, ac-curacy and ease the work process at branch level.

• Alternative delivery channels and support mechanisms are to be encouraged to pro-vide the SHG members timely banking ser-vices at a reasonable cost. The ‘NABFINS” model by NABARD has proved that how an MFI can provide adequate and timely credit to SHGs at reasonable rate of inter-est in a transparent manner without using coercive methods of recovery and still con-tinue to be a profitable entity. Efforts need to be undertaken to scale up this model to the other areas of the country.

points for promoting livelihood activities of members of SHGs. The role of such CBOs will include identification of members of SHGs willing to take up livelihood activities and facilitate their capacity / skill building process, providing marketing facilities and a host of activities that can add value to the process.

• To enable the SHG members to reach scale of economies, it may be essential to aggre-gate the demand for raw material as well as produce for appropriate market interven-tion. Thus it is envisaged to assist the SHG members with the help of CBOs to graduate as producers so that they could be nurtured into Producers’ Organizations (PO) of farm and non-farm activities. This facilitation will have to be intermediated with smaller village level collectives of SHGs.

• Studies / Action Research need to be taken up to find out reasons for dormancy, disinte-gration of SHGs, need for continuous hand holding for long period of time, likely sup-port emanating from SLIs, apathy of formal credit agencies and possible convergence of SHG-BLP with development programmes of Government / Development agencies / NGOs / Philanthropic institutions. Such findings may be used for re-strategising the approach under implementation towards holistic empowerment of rural poor.

PaPer ii


The MFI model in India is characterised by diversity of institutional and legal forms. The first well-known MFI SEWA Bank was incorporated as an Urban Coopera-tive Bank in 1974 and paved the way for microfinance in India by showing that the poor were bankable. In the 1980s, a number of registered societies and trusts commenced group based savings and credit activities on the basis of grant funds from donors. The others, from the beginnings of 1990s began replicating the Grameen Bank based initially on donor funding but increasingly on funding from domestic apex financial institutions such as NABARD, SIDBI, FWWB and RMK. As the profitability of microfinance got established, the in-centive to access equity capital with which to leverage the funds becoming available from the banking system grew stronger and this led to the transformation in the late 1990s of several of the larger and medium MFIs into NBFCs and Section 25 companies and one local area bank, all of which enable the MFI to attract invest-ments as shareholder equity. The passing of MACS Acts in several states in the mid-1990s led to an increase in the number of cooperatives registered under the new Act and an increasing number of SHG federations being registered as MACS.

The sector which was experiencing a fast pace of growth encountered a setback due to crisis in Andhra Pradesh,

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MFiS - role iN ServiNG tHe Poor, acceSS to FuNDiNG SourceS, Fair leNDiNG PracticeS aND NeeD For SelF-reGulatioNBy P. Satish

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first in 2006 and later in 2010. Four years since the crises in Andhra Pradesh have seen major changes relating to the sector. RBI has come out with a range of guidelines to improve the functioning of MFIs, especially the NBFC-MFIs. As such post-crises era is the new normal for microfinance sector. The pre-crises era witnessed unjustified and non-transparent pricing, over indebtedness and coercive recovery methods leading to crises. Post crises, suitable and structured regulations have given a new framework to the industry reducing the potential risks for clients as well as lenders. The code of con-duct, fair practices code, etc. have brought necessary checks and balances resulting in client protection and productivity enhance-ment. As such, the sector is itself in a correc-tive mode. With the revised guidelines and categorisation, RBI has more control over the MFIs in restricting the exponential growth in portfolio, leading to a more disciplined busi-ness environment for the sector. MFIs are now more transparent in their business and overall it has brought radical change in mi-crofinance sector. Many of the NBFC-MFIs have regained their confidence during the period as banks have started lendings to the MFIs and investors have shown their interest in them. Thanks to the regulatory guidelines issued by the RBI, the sector has begun to behave in orderly fashion that brought in a fresh perspective about it as being transpar-ent and less risky.

The NGO-MFI sector also referred as the non-profit or community based microfi-nance sector, in which most of the institu-tions are small and local in terms of their op-erational focus is finding it difficult to attract loan funding as well as equity funding. With the rising optimism among the players and confidence in the funding and policy envi-ronments, the NBFC-MFIs appeared to have done well operationally over the last couple of years. This is explained by the overall improvement in the operational parameters in the last two financial years. The financial

ratios of the two categories of MFIs, NBFCs and NGOs reveal more about the patterns in the growth experience of different sizes and classes of MFIs. In many quarters, the expec-tation seems to be that the sector is heading steadily for consolidation to gain from the economies of scale. It is worth noting that majority of the non NBFC-MFIs have lim-ited outreach and moderate portfolios. The data suggests that the outreach of almost half of such MFIs is less than 10,000 clients with portfolio size in the range of Rs. 150-700 lakhs.

Therefore, it is a clear indication that this subsector is on the path to recovery after the different phase that followed the unfortunate events in Andhra Pradesh. The continua-tion of the tendency towards settling down under the umbrella of regulatory guidelines has been observed. The flow of funds cannot be said to have smoothened but banks and financial institutions have become more ac-cessible and responsible.

However, it is disturbing to know that lop-sidedness in the distribution of the micro-finance facilities has continued during the years, with the south having a dominating presence in the sector. While states such as Karnataka seems to have saturated the dis-tricts with microfinance, there are other states like Bihar, Chattisgarh, Jharkhand that are yet to have MFIs reaching their interiors. As far as NBFC MFIs are concerned, as of 31 March 2014, they have provided credit to over 28 million clients with a gross loan port-folio of Rs.279.31 billion. During 2013-14, the gross loan portfolio grew by 35 per cent for the entire industry of which NBFC MFIs grew by 51 per cent. The loan amount dis-bursed in the year increased by 48 per cent for the entire industry and 56 per cent for NBFC MFIs. Funding to NBFC MFIs grew by 49 per cent. The portfolio at risk for MFIs (excluding the Andhra Pradesh portfolio) re-mained under 1 per cent for 2013-14.

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MFIs render their services in 28 states and 5 Union Territories of India. They have pres-ence in 573 districts of the country in pro-viding financial services. MFIs have services in backward states like West Bengal, Odisha, Chhattisgarh, Madhya Pradesh, Assam, Ut-tar Pradesh, Bihar and Rajasthan apart from the pioneering southern states. Two-thirds of MFI clients live in rural and semi urban areas and around 95 per cent of them are women, majority of whom are unbanked. This indicates microfinance sector’s ability to focus on women’s’ empowerment. The total number of clients of MFIs stood at 275 lakhs as on 31 March 2013. The number of clients of MFIs had been growing phenomenally till 2010-11 reaching over 300 lakhs. This trend had a slump in 2012. MFIs now serve 275 lakh borrowers. As usual, NBFC-MFIs have larger share of the client base. MFIs have in-creasingly become prudent to use financial innovations to enhance their income and re-

duce risk. The securitisation model is being used as such for the purpose of overcoming the capital constraint. The loan amount per borrower is an important criterion to under-stand the general profile of the clients bor-rowing from MFIs. It has also implications for operating costs. In 2013, the average loan outstanding for all MFI borrowers has been Rs.8112 showing an increase from Rs.7481 in 2010-11. MFIs have been consolidating their operations to cope with the effects of transition in the sector. One such manifesta-tion is occurring in the form of shrinkage of branch network. There was a contraction of branch network by 7 per cent during 2012-13 as compared to previous year. As of March 2013, the reporting MFIs had 10,700 branch-es spread across India. The sector has also brought down the work force significantly from over one lakh in 2011 to around 75,600 in 2012-13.

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Funding for MFIs has largely been from one of these two sources – borrowings (84%) and securitisation/ portfolio sale (11%)-though other forms do exist to some extent. The other forms include subordinated debt, over-draft, bonds, non-convertible debentures, external commercial borrowings, savings and deposits from borrowers/ members. Banks are major lenders to MFIs followed by bulk lenders and other financial institu-tions. Banks in general have positive notion on supporting MFIs and on their contribu-tion to priority sector lending. Their credit appraisal norms to fund MFIs have under-gone significant change, knowledge of which would help MFIs to readjust their system to ensure bank’s continued support. The role of bulk lenders is also crucial for funding MFIs. Banks need to patronize bulk lenders also, so that they can on-lend to, and nurture small MFIs.

Feedback from grassroots and a number of studies reveal that despite the comparatively

higher rates of interest on loans, clients pre-fer MFIs over branches of commercial banks, RRBs or cooperatives due the ease of proce-dures and documentation, fast credit deci-sion and door step delivery of credit. In many areas MFIs are the only institutions purvey-ing financial services. Thus, MFIs can play a vital role in bridging the gap in demand and supply of financial services if the critical challenges confronting them are addressed. These are;

1. Sustainability :The first challenge relates to sustainability. It has been documented that the MFI model is comparatively costlier in terms of delivery of financial services. This is explained by the fact that while the cost of supervision of credit is high, the loan volumes and the loan sizes are low. It has also been commented that MFIs pass on higher cost of borrowings

25


funds from banks after 2000 when RBI al-lowed banks to lend to MFIs who treat such lendings as part of their priority sector fund-ing obligations. Many banks especially the Private Sector Banks have designed innova-tive products to fund MFIs and have started viewing the sector as good business propo-sition. However, the crises in the MFI sec-tor in Andhra Pradesh first in 2006 and later in 2010 has dampened the growing flow of funds to MFIs.

4. capacity building of MFis :It is now recognised that widening and deep-ening the outreach to the poor through MFIs has both social and commercial dimensions. Since sustainability of MFIs and as also their clients’ livelihoods complement each other, it follows that the building of the capacities of the MFIs and their primary stakeholders are preconditions for successful delivery of flex-ible client responsive and innovative micro-finance services to the poor. Efforts towards training and capacity building of MFIs and their human resources have to be upscaled from the present levels.

to their clients who are not interest sensi-tive for small loans but may not be so as loan size increases. It is, therefore, necessary for MFIs to develop strategies for increasing the range and volume of their financial services. Besides, MFIs may also make conscious ef-forts to guide and educate their clients so that they make informed and judicious decisions about size and purpose of loans and their terms and conditions.

2. lack of capital :

The second area of concern to MFIs which are on the growth path is that they face the paucity of own funds. This is a critical con-straint in their being able to scale up. Many of the MFIs are socially oriented institutions and do not have adequate access to financial capital. As a result, they have high Debt-Eq-uity ratios. Presently, though the India Mi-crofinance Equity Fund exists in SIDBI, there have to be more broad based mechanisms for meeting the equity requirements of MFIs.

3. Borrowings :In comparison with the initial years, MFIs had found it relatively easier to raise loan


PaPer iii

The orderly growth and development of microfinance sector requires suitable enabling environment in the form of policy support, regulatory systems, govern-ance, technology and other support services. Microfi-nance activities globally have come under the close gaze of banking regulators and governments over the past two to three years. In India, MFIs are registered under a variety of laws like the Companies Act, Societies Act, Trusts Act and the Cooperatives Act for the various states. Only MFIs which are for-profit companies (i.e. NBFCs) are covered by RBI’s regulation. Other forms of MFIs remain under regulatory vacuum.

The regulatory response in India was trigged by the de-velopments in Andhra Pradesh during 2010 culminat-ing in the Andhra Pradesh Microfinance (Regulation and Moneylending) Act, 2010. This Act curtailed the activities of MFIs and prescribed several restrictions on functioning of MFIs. The central government and the banking regulator responded to the crisis and the action initiated by the state government. The Ministry of Fi-nance prepared a draft legislation to regulate the sector nationally, while the RBI came up with a series of steps to guide the working of for-profit companies engaged in microfinance activities. The Microfinance Institutions (Regulation and Development Bill 2012) was intro-duced in Parliament in May 2012. After discussions on

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eNaBliNG eNviroNMeNt - GoverNaNce, reGulatioN aND tecHNoloGyBy P. Satish

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the floor of Parliament, it was referred to the Standing Committee on Finance. The draft bill was returned by the Standing Committee with the comment that it cannot be accepted in its present form. It lapsed on the dissolu-tion of the last parliament. The government has now sought comments on draft bill from all the stakeholders.

RBI appointed the Malegam Committee to look into various aspects of the sector con-sequent to the crisis. On the basis of this committee’s report, it created a separate category of non-banking companies called NBFC-MFIs and put in place detailed guide-lines for them. These include restrictions and safeguards with regard to minimum stand-ards of governance, management, customer protection, financial health and regulatory systems. Self-regulation is an integral part of the regulatory arrangements that RBI has put forth. RBI has maintained a stand that prin-ciple based regulation, including self-regu-lation, is better than rule based regulation as the former is less prescriptive with lesser compliance costs attached. RBI has indicated the need for Self Regulatory Organisations (SRO) for monitoring the regulatory compli-ance. All NBFC-MFIs will have to become member of at least one SRO recognised by the Reserve Bank of India and will have to comply with the code of conduct prescribed by SRO. The Industry Association/ SROs will also have to play a key role in ensuring com-pliance with the regulatory framework.

In addition, banks’ lending to NBFC-MFIs would also ensure that lending practices are aligned to the regulatory framework. Earlier NBFC MFIs were not under any financial regulation. The microfinance business was unique and there were no performance indi-cators available for MFIs to benchmark upon and for outsiders to judge MFI operational efficiency. The MFI financial performance standards have to be a balance between cost efficiency and financial sustainability on one hand and development initiatives on the oth-

er. Sa-dhan and MFIN came together facili-tated by SIDBI and IFC under the banner of responsible finance forum to harmonise the Sa-Dhan code and MFIN code and came out with unified code of conduct.

The lenders forum was established under SIDBI with 12 leading banks as members to coordinate their activities and bank’s lending to MFIs. The periodical meetings of the fo-rum discuss the issues in microfinance sector and precautions to be observed while lending to the sector. The forum prescribed common loan covenants that the banks and borrow-ing MFIs need to follow. Lenders associa-tions and other stakeholders have come to-gether to form responsible finance forum to ensure fair and sustainable financial services through MFIs. This forum is hosted by IFC and actively participated by SIDBI, Associa-tions and independent experts. The forum monitors activities in the microfinance sec-tor and conducts various studies to under-stand client response and the delivery of mi-crofinance services. It primarily focusses on building robust client protection framework for microfinance borrowers. Microfinance Institutions largely realised that it was of ut-most importance to detect and prevent over leveraging/ over indebtedness of borrowers. MFIs and their Associations have worked for the setting up of MFI Credit Bureau as a joint venture with High Mark. MFIs must make full use of the Bureau Report to take proper credit decisions and lower future credit risks. The use of the Bureau has resulted in marked improvements in repayment behaviour and collections in general.

The regulatory focus of the last couple of years has been on NBFC-MFIs with some attention to modifying SHG-Bank Linkage Programme. No framework or guidelines have been evolved for the other important component of MFI sector in the country-the not for profit MFIs. Many of them have been following the RBI directives for NBFC-MFIs, while others are confused about their status

29


and future in the sector. Probably enactment of MF Act is the only way forward for them to feel integrated into the larger ecosystem of microfinance.

While regulatory and supervisory practices are a must for any financial institution, the aspects of governance and transparency both in the internal functioning and in dealing with the external environment are necessary for microfinance sector. Most of the corpo-rate governance norms which the Companies Acts prescribe for corporate entities could be looked at by the microfinance sector also. These would include, a well dispersed and bal-anced Board of Directors, avoiding concentra-tion of operational powers with the promoter CEO and keeping managerial responsibilities away from the promoter CEOs and/ or their family members. Transparency in setting the rates and charging them to the clients, infor-mation on the costs and source of the resourc-es for the Institution should all be in the public domain to be freely accessed by all, especially the clients and market players.

In the entire financial inclusion arena, tech-nology has been a great leveller in provid-ing and taking the services forward. Earlier technology use was mainly for MIS. Gradu-ally, Microfinance Institutions have benefited also from using technology platforms for their loaning operations and also maintain their contacts and interaction with the cli-entele. There is a noticeable change in the technology orientation of MFIs currently, though the status of technology adoption and preparedness vary among them. Chang-ing regulatory arrangements are a trigger for technological upgradation. In order to report individual data to credit bureaus, to ensure compliance to codes of conduct, detailed and regular data and information flow is required. In recent years the primary objec-tive of technology adoption has been to au-tomate the transaction processing activities. This has to be seen in the light of the entire banking sector coming on the board for CBS

so that there is a smooth and seamless flow of data, information and transactions across the banking system. The MFIs also should be able to work in synchronisation with this sys-tem. The Self Help Groups have more or less remained outside the technology platform except for the pilots taken up by NABARD and a couple of other institutions. There is a view that the client data reporting require-ments must be made applicable to SHGs to enable lenders to have a realistic picture of individual indebtedness and financial vul-nerability at individual level. The time, there-fore, is now opportune for Self Help Groups to get their entire data onto a digital form and also get their operations linked to their banks through this form. The costs and the rolling out of these initiatives will also re-quire greater attention from all the players in the sector. There are many constraints to technology adoption-cultural, institutional and infrastructural-that limit the impact of technology driven solutions in the microfi-nance sector. They may be overcome mainly by making committed efforts to enhance the financial and technical literacy of the poten-tial users; and designing appropriate mecha-nisms to improve and broad-base the capa-bilities of the human resources engaged with technology in microfinance operations.

The industry requires financial support from apex institutions like NABARD and SIDBI. After the closure of Microfinance Develop-ment and Equity Fund, NABARD has been funding the SHG promotional programmes through the Financial Inclusion Fund. Its funding support covers financial support to SHPIs for promotion of SHGs, training and capacity building of various players in the sector and innovations. The India Micro-finance Equity Fund set up with SIDBI in 2011-12 with budgetary support of Rs 100 crores aims at making investments in so-cially oriented NBFCs with less than 250,000 borrowers and all non-NBFC-MFIs. The al-location to the fund had been increased in 2013 budget. The Fund is meant to be offered

30

to MFIs to improve their equity base, meet capital adequacy requirements, and leverage additional debt from banks and social inves-tors. Lack of a clear cut approach to capacity building for all players in the sector includ-ing MFIs, SHPIs, SHGs and mutually aided cooperatives has been a perennial issue of complaint. In case of SHGs, adequate pro-motional assistance is crucial as the process of formation of groups is an important de-terminant of group quality. NABARD’s en-thusiasm in sanctioning promotional grants has been dampened by lack of credit linkage for the groups already formed. Industry ex-perts are of the view that it is high time that we recognise the significance of investing substantial resources in increasing the effec-tiveness and efficiency of the microfinance sector to facilitate its integration into the mainstream financial market. Such invest-ment has been lacking in the sector. As the sector provides substantial business poten-tial with quality assets and returns, banks should also invest in the capacity building in the microfinance sector. Support strategies of donor institutions need to be geared to-wards locally grounded initiatives, focussed

on enhancing the overall capacity of the mi-crofinance sector rather than on supporting discrete activities of individual entities. And associations are best suited to carry out sec-tor wide capacity building activities. How to develop the necessary infrastructure for up-grading the capacities of the sector-all chan-nels included-is a question that must bother the policymakers.

The entire microfinance sector requires the guidance and hand holding of bigger NGOs, bulk lenders, resource NGOs so that the smaller players in the sector, especially the non-profits can strengthen their financial as well as operational capabilities. Further, the role of industry associations like Sa-Dhan, MFIN and INAFI has never been greater than at present juncture. It is time that, avoid-ing internecine quarrels and one-upmanship, these institutions should focus on industry-wide problems, coordinate their activities and present a broad common platform to state and central governments, regulators, apex organisations, financial institutions and donor agencies.


Micro creDit iNNovatioNS DePartMeNt (MciD)

NatioNal BaNK For aGriculture aND rural DeveloPMeNt

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nmf conclave papers 2014

Documents

shg financing

contentsshg blp

relevance of shg

views of nabard

jlg scheme of financing

kaushal kishore

savings deposits

tune of rs