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Box 1.1 The SHG and MFI models Self Help Groups (SHGs) are informal associations of up to 20 women (their average size is 14) who meet regularly, usually once a month, to save small amounts (typically Rs 10 to 50) a month. While they are formed with the encouragement of NGOs and other self-help promoting agencies (SHPAs) such as government agencies and the banks, they are expected to select their own members, and are therefore sometimes called affinity groups. After saving regularly for a minimum of six months, and using the funds to lend small amounts to each other for interest, which is ploughed back into group funds, and satisfactorily maintaining prescribed records and accounts, they become eligible to be "linked" by the local bank branch under a NABARD-sponsored programme called the SHG Bank Linkage Programme (SBLP). Norms are laid down for the maximum size of the initial and successive bank loans as an increasing ratio of the group's own-funds. SHGs and the SBLP are discussed extensively in Chapter 2. On-time loan repayment to the banks has been very high, above 90 percent, and there have been no defaults so far. The programme has grown rapidly, and the savings component in particular has been a success, with an increasing number of groups having reached loan absorption limits based on the existing menu of activities open to them, mostly animal husbandry and trading, given limitations in support services and infrastructure. Thus the SBLP may be running into a second generation problem, whose solution depends on the ability of rural development programmes generally to increase opportunities for productive investment, and thereby increase loan demand. However, large parts of the country are still underserved. Record keeping in the groups is another challenge. The SBLP is a home-grown model and unique to India, at least on the scale at which it is carried out. It differs from the Microfinance Institution (MFI model) found worldwide in which the MFI acts as an intermediary, much as the SHG does, but borrows in much larger amounts from the banks (in India mostly the private banks who do not have rural branches to conduct SHG lending) for a much larger number of members (going up to one million in the case of the largest MFI in India). These members are also organized into groups (whether the classic five-member Grameen Bank-type group, or larger "joint liability" (JLG) groups, or even SHGs). Lending to groups, whatever they are called, entails the joint and several liability of all members, which is more moral than legally enforceable, and exercised through peer group pressure and the prospect of being denied future loans. The essential difference is that in the case of SHGs the loan is a single loan to the group as a whole, which decides how to allocate it to its members, while in the case of other groups the MFI records and tracks loans in the name of individual lenders, although the task of disbursement and collection is made easier and cheaper by the group mechanism. Thus interest rates charged by MFIs to SHGs are usually lower than on loans to members in other types of groups. Moreover, MFIs also make a few larger, individual loans to "graduating" members. Loan repayments to MFIs are in the upper 90s. The major advantage of the SHG model is the empowerment and participation it has engendered in millions of rural women (currently 31 million) of which half are below the poverty line. It also has the advantage that it can spread much faster, taking advantage of India's huge network of bank branches, and potentially, of PACS. Ironically, in view of what has been said above about credit absorption limits, the main disadvantage is that average loan size goes up much more slowly than in the MFI model, because it is tied to savings performance, and because loan cycles are much longer (the average tenor of bank loans to SHGs is 2.5 years as opposed to the usual 1 year under the MFI model) so that every member has to wait till the last member has repaid her loan to the group, so that the group can repay its loan to the bank. Turn-around time among the bank branches also varies, and can often take six 20
Overview and Summary of Main Recommendations Box 1.1 Continued months depending on the manager's perception of the credit-worthiness of the group for a repeat loan, and of the profitability of the programme at existing lending rates. Despite this, as Chapter 2 discusses, the proportion of repeat loans is increasing, and the average size of repeat loans is beginning to approach the average size of MFI first loans. Conversely, MFIs have the advantage that they can borrow huge amounts from the banks and increase loan size according to demand. By enabling prepayment of existing loans, they enable borrowers to access the next loan before the existing loan has run its full one year cycle, although at a penalty for prepayment. The higher average loan size this enables allows borrowers to invest a higher proportion of loans in income generating as opposed to consumption activities (essential though they may be). Neither model is exclusively focused on those below the poverty line (although some individual SHPAs and MFIs are). However, the SBLP seems to do slightly better in this respect, even though there is no poverty targeting under the SBLP, and a large number of poor women can not afford even the small regular savings and repayment obligations, given the uncertainties and seasonality of their incomes, and prefer to exclude themselves. The SHPAs have not been able to introduce the flexibility that would improve inclusion of the poor above about 51 percent of the total membership, according to the most recent large-scale survey of SHG borrowers (EDA and APMAS (2006)). The last large-scale survey of MFI borrowers (EDA (2005)) found that on average only 43 percent of the borrowers of a sample of 20 MFIs were below the poverty line, despite the fact that many MFIs lending to Grameen groups tend to be particular about lending only to BPL women, using in one well-known case an easy to administer housing index test, and that the more time consuming procedures of MFIs such as weekly instead of monthly meetings, encourage self-targeting, A disadvantage of the MFI model (unless the MFI is a cooperative) is that it does not provide for savings, but this is purely a function of the regulatory environment in India (savings are allowed and indeed encouraged as an essential service for the poor in most other countries). The biggest disadvantage of the MFI model however is that it is less participatory and empowering, since the "banking" functions and procedures are taken care of entirely by field staff of the MFI, who disburse and collect loans. In the SHG model million of poor women deal with the banks and do their own accounting and cash handling. However, some MFIs argue that this is actually a disadvantage of the SHG programme (because most women do not want to get involved in the banking function), and that it is more efficient to focus on achieving one objective effectively, which in the case of "minimalist MFIs" (the vast majority) is delivering financial services. Also they point out that given the millions of poor women in SHGs who have to be trained in book keeping and accounting, the training requirements of the MFI model are a little less daunting. Finally, they point out that MFIs lend to SHGs too, and in fact have more members in SHGs than in the other types of groups, thereby sharing in the empowerment benefits of SHGs. 21
Page 3: Microfinance in India A State of th
Page 6 and 7: List of Tables Page No Table 2.1 Gr
Page 8 and 9: Preface and Acknowledgements This r
Page 10 and 11: Abbreviations ABC ADB BC BF CAR CAG
Page 13 and 14: CHAPTER 1 Overview and Summary of M
Page 15 and 16: Overview and Summary of Main Recomm
Page 21: Overview and Summary of Main Recomm
Page 27: Overview and Summary of Main Recomm
Page 30 and 31: 1 1a 1b 2 2a 2b 2c 3 3a 3b 3c 4 4a
Page 32 and 33: The Light and Shades Study A major
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Page 36 and 37: their profitability after accountin
Page 38 and 39: allow the programme to grow organic
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Page 42 and 43: Endnotes 1 It is very hard to compa
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Page 46 and 47: linkages", 11 percent 3rd, and 5 pe
Page 48 and 49: References APMAS (AP Mahila Abhivru
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Page 53 and 54: Progress Under the MFI Model is fun
Page 55 and 56: Table 3.4 Comparative performance i
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Page 59 and 60: Progress Under the MFI Model 4 Howe
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Box 4.1 Continued 4. MFIs will coll
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Endnotes 1 There will be many disag
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19 The base suicide rate in AP is 1
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References APMAS, 2005, "A Report o
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(such as cattle and houses), and co
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The advantage of the provider model
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Some lessons learnt from experience
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Box 5.2 VimoSEWA: Synergies between
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86 Table 5.1 Main Feature of Health
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Endnotes 1 While the microinsurance
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16 A little less than a fifth of th
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29 The rationale for transfer progr
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Roth, James and Vijay Athreye, 2005
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Issues and priorities for action re
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Endnotes 1 See for instance CGAP (2
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100
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such as Chaitanya who soon became s
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money to support operational expens
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finance, and the microfinancial ski
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Box 6.1 Continued in experts and to
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Endnotes 1 In a sense it always was
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16 Examples are Margdarshak in Luck
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114
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Table 7:1 Commercial bank exposure
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The main constraints to the expansi
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further review, RBI has modified th
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9 Thus ICICI has sold some of its b
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B. Equity Investments by the Ventur
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Figure : The Bellwether triangle Lo
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Despite the weaknesses the public s
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Box 7.1 Continued foreign sources o
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Endnotes 1 At this point they will
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References ACCION, 2003, "The Servi
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SIDBI Foundation for Micro Credit (
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categories, depending on the amount
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The distribution of total disbursem
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Endnotes 1 It should be noted that
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B. Donor Participation in Indian Mi
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this has dropped to 8% on the curre
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and poor populations. More directly
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and expansion of available retailer
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11 SDC through various programs for
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154
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1.1 Impact evaluation of Spandana's
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in the loan tenure of 24 months. Th
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There are two main motivations of a
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compensation structures used by Ind
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Endnotes 1 By Annie Duflo, Anvesha
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29 The main components of direct tr
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