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MFIs: Learning from the
AP Crisis
Unattractive features of the SHG model for borrowers
A third underlying cause of the crisis lay in certain features of the main alternative model of
microfinance available to borrowers, the SHG programme. These features made Velugu less
attractive to many borrowers as a source of microcredit (although they may have continued to
value many of the other services provided through Velugu), and led them to borrow also from
the MFIs. Most of these features are inherent disadvantages of the SHG model itself, although
the disadvantages are dominated by the advantages (see Box 1.1). In the Guntur survey of
Spandana borrowers, two-thirds of whom were also SHG members, inadequate loan size was the
most frequently cited problem in borrowing from SHGs, followed by the long waiting period for
loans. In contrast, timeliness of loans was cited most frequently as an advantage of borrowing
from MFIs. In the second, the Krishna district survey, cumulative borrowing from SHGs was
about 40 per cent of that from the two MFIs (standardised for number of loans), although
there was less difference in loans outstanding given the longer tenor of SHG loans. MFIs
deliver loans of larger average size in a more timely fashion because they borrow in bulk from
the banks for relending, whereas SHGs have to wait for the last member in the group to repay
her loan to the group before the group can repay its loan to the bank, and secondly when they
do get a loan, its size is tied to group savings and depends on the whims of the local bank
manager. (Chapter 2 alludes to some of the difficulties encountered by groups under SBLP).
Interestingly, the Krishna district survey ranked the availability of individual loans as the
most frequent response among reasons for enrolling in MFIs, ahead of timeliness and large
loans. 26 Interestingly, again, the most frequent response (90 per cent) for problems with MFI
procedures was weekly installments, just ahead of the high rate of interest, and well ahead of
"rigidity even in genuine cases" (19 per cent). "More pressure and mental tension" on account
of weekly repayment was an important drawback also reported in the first survey. 27
On balance, given these advantages and disadvantages, only 10 per cent of Guntur district borrowers
said they would discontinue MFI membership after repaying their current loan, a proportion that
increased to 21 per cent in the Krishna survey. However as the survey report explains, many members
who intend to leave, end up "prolonging" their membership because a member who leaves either has to
wait for another drop-out in her original group who she can replace, or organize a new group. In
addition she loses her seniority and is on a par with new members in respect of loan size. So the
incentives are structured so as to keep membership alive.
Likewise despite dissatisfaction with SHG membership as a credit institution, very few members
actually quit and "defect". This is because SHG membership too confers many advantages,
with access to a large number of development programmes, services and benefits being
contingent on membership. 28 Thus there was no "poaching" as such, because both models
were restricting competition by making it costly for borrowers to switch. The impact of
competition is more on regularity of loan repayments and monthly savings in the SHGs. The
Krishna survey found overdues amounting to almost half of outstanding in the SHGs that
members belonged to. The proximate cause of the state government action was the increasing
frustration being experienced by Velugu managers over the effect MFI lending to SHG borrowers
was having on Velugu performance as shown in indicators such as the recovery rate within
groups, and of groups to the banks, and to the Community Investment Fund (CIF). 29
A third
underlying
cause of the
crisis lay in
certain features
of the main
alternative
model of
microfinance
available to
borrowers, the
SHG programme.
These features
made Velugu
less attractive
to many
borrowers as a
source of
microcredit
(although they
may have
continued to
value many of
the other
services
provided
through
Velugu), and led
them to borrow
also from the
MFIs
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