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Overview and Summary
of Main Recommendations
at local and higher levels. Even before the massive expansion of state government involvement in the
SBLP (much of it through projects sponsored by multilateral agencies such as IFAD and WB) 12 resentment
and suspicion was often reported from the field on the part of DRDAs who felt that the self-help
promoting institutions (SHPIs) were "hiding" their groups from them, to save them from being poached
and getting corrupted by the culture of subsidized credit of SGSY and similar programmes (although
some SHPIs claimed that they had succeeded in "co-opting SGSY).
Today the competition is much more severe, especially in certain pockets of the country, and it is the
MFIs who are being accused of doing the poaching. As both models grow, the potential for conflict will
increase, and the need to evolve a harmonious modus vivendi will become increasingly urgent. MFIs will
have to show greater sensitivity to the need not to affect credit discipline in SHGs. It would not seem
unreasonable to expect an MFI to satisfy itself before lending to an existing SHG member that she will
be in a position to repay not only the MFI loan, but also any outstandings she might have to the SHG.
At the same time, DRDAs should respect the right of borrowers to exercise choice. There are many
borrowers who genuinely need the kind of larger and more timely loan MFIs have a comparative advantage
in offering (see Box 1.1) There can not be a blanket prohibition on MFIs extending their activities to
existing SHG areas, although MFIs would be adding more value by expanding operations to areas
underserved by both models (as many of them are doing).
Greater information sharing and much closer contact will have to be part of the solution. Some of the
issues are discussed further in Chapter 4. It is essential though, that no matter how closely a state
government is associated with the SBLP, it remembers it is not only a player, but has the duty to play the
role of neutral umpire between the two models in the event of conflict. It should respect the fact that
as financial institutions MFIs are crucially dependent on public confidence, which is very hard to
restore once damaged, and any action against erring MFIs should be taken by the proper authority
according to law. The sector should be prepared to challenge the legality of the actions such as that
taken by the AP government in Krishna district in March 2006 in the courts if necessary. 13 It needs, of
course, also to put its own house in order.
…and of putting its own house in order
Discussions of transparency in the MFI sector have tended to focus on issues such as the need for more
detailed, accurate and timely disclosure in financial statements and annual reports, or in other words on
issues of financial transparency. 14 Sa-Dhan, the association of MFIs, is finalizing with the Institute of
Chartered Accountants of India a standardized set of reporting formats compatible with both MFI
requirements, and Indian accounting conventions and law. However, the AP crisis has highlighted the
importance of another aspect of transparency – transparency in dealings with borrowers, or "consumer
protection" issues. Some of these are discussed in Chapter 4. Here too Sa-Dhan is working on a more
detailed code of conduct" (which will replace those framed in a hurry after the AP crisis, in Box 4.1).
There is considerable variance in the extent to which MFIs have been sensitive to both aspects of
transparency. Hopefully there will be considerable progress on both fronts, which will greatly strengthen
the MFI sector's moral position in dealings with other stakeholders.
It is essential
though, that no
matter how
closely a state
government is
associated with
the SBLP, it
remembers it is
not only a
player, but has
the duty to play
the role of
neutral umpire
between the
two models in
the event of
conflict. It
should respect
the fact that as
financial
institutions
MFIs are
crucially
dependent on
public
confidence,
which is very
hard to restore
once damaged
Growing seeds and saplings: the importance of
maintaining diversity
As noted earlier, a trend that has picked up pace in the last couple of years has been that towards
formalization, as NGO-MFIs increasingly seek to transform themselves from unregulated, not-for-profit
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