Socio Research & Reform Foundation

Today’s  issue covers Support to SHGs / JLGs

Support to SHGs / JLGs

A study sponsored by SIDBI over 7 year period (2001-07) states that there was a unanimous demand from group members in all the villages, that skill development and training are imparted to the members of the group for undertaking any income generating activity and that only a loan was not sufficient for the purpose.

Microfinance India 2010 report points out that after the formation of groups, handholding is required to ensure that the group functions within the framework of group discipline and financial discipline. In fact the report states that the past success of SHG-Bank Linkage Programme (SBLP) was largely due to NGOs who worked with zeal and motivation, but this handholding is conspicuous by its absence in recent times. In a communication dt 22 Nov. 2006, RBI has also noted that many MFIs supported by banks were not engaging themselves in the capacity building and empowerment of the groups to the desired level.

Min. of Rural Development has suggested that in order to make branchless banking models work, banks need to re-engineer front end processes and establish a support architecture. National Rural Livelihood Mission has offered to co-invest in this concept.

Recommendations

§          Both under SBLP model as well as MFI model greater resources be devoted to professional inputs both in the formation of SHGs/JLGs as also in imparting of skill development and training and of handholding after the group is formed.

§          This would be in addition to and complementary to the efforts of the State Governments.

§          Architecture suggested by Ministry of Rural Development to be explored.

…………to be cont’d

Please do initiate your comments / queries to further broaden the understanding of the developments in the sector.

Particularly, we invite your comments on following

Are the recommendations adequate, considering that the report itself has acknowledged the contribution of the NGOs in making the success of past micro-credit and SHG-Bank Linkage Programmes?

Today’s  issue covers Credit Information Bureau and Coercive methods of recovery

Credit Information Bureau

As mentioned in the previous issue, MFIs need to be made responsible for curbing multiple-lending. For this it is essential that a data-base is available which provides information about the existing outstanding loan/s of a borrower, as well as the composition of existing SHGs and JLGs.

Micro Finance Institution Network (MFIN) formed in Nov’09 is an industry association which has almost membership of 50 organisations, constituting 80% of the MFI industry. Sa-Dhan is an association of community development finance institutions which also includes MFIs within its members. Both these institutions are in the process of building a Credit Information Bureau with requisite systems, whereby MFIs can report all the necessary information. It may be added that function of the proposed bureau would not be to determine the credit-worthiness of the borrowers.

Recommendations

§          One or more Credit Information Bureau be established and all MFIs be required to become members of the same.

§          In the meantime, MFIs individually will be responsible to ascertain existing borrowings from the borrowers.

Coercive Methods of Recovery

Issue of coercive recovery is linked to multiple/over lending as well as recruitment of untrained staff as well as remuneration structure of MFIs recovery agents (which is often based on recovery rates). Ultimately MFIs have to ensure that coercive recovery does not take place and hence any instances of coercive recovery determined, should result in severe penalties on them. In this regard one could learn from experiences of banks in respect of their retail portfolio which also faced similar situations in past. There should be an ombudsman like structure, which borrowers can approach for their grievance Redressal. These ombudsmen should be located within easy reach of borrower.

AP Micro Finance Institutions (Regulations of Money Lending) Act 2010 includes a list of actions which constitute ‘coercive action’. This includes ‘frequenting the house or other place where such person resides or works, or carries on business’. It also provides that all repayments shall be made by the SHG or its members at the office of the Gram Panchayat or at a public place designated by the District Collector. However committee is of the view, that a collection place which is far off from the borrower’s residence would result in additional burden to the borrower.

Recommendations

§          MFIs will be responsible to ensure that coercive methods of recovery are not used and if used management of MFIs should be severely penalised.

§          Regulator will monitor if MFIs have proper code of conduct / training of their employees to ensure no such coercive methods are used.

§          All recoveries be made at the Group level at a designated central place.

§          Each MFI must establish a proper Grievance Redressal Procedure.

§          RBI to recommend an appropriate mechanism to the lead banks on the lines of Independent Ombudsman.

…………to be cont’d

Please do initiate your comments / queries to further broaden the understanding of the developments in the sector.

After a bit of interregnum, series on MFI – Malegam Report continues…

Today issues relating to Multple-lending, Over-borrowing and Ghost borrowers

Multiple Lending / Over-borrowing

General perception for multiple lending / over borrowing

– A deluge of loan funds available to borrowing resulting in excessive borrowing

– Emergence of ring leaders as key intermediaries between MFIs and potential borrowers distorting market discipline

Other reasons as ascertained by the Committee include:

– Period of moratorium between disbursal of loan and commencement of repayment schedule is inadequate, particularly considering the loans are for income-generation activities. Often resulting in repayments being from the loan itself, leaving inadequate amount for investment.

– MFIs use existing SHGs as target for new borrowers, since this minimises MFIs costs.

Recommendations

§          A borrower cannot be a member of more than one SHG/JLG.

§          MFIs should lend to an individual only if member of a JLG.

§          MFIs need to ensure that a borrower is not a member of another JLG.

§          Not more than 2 borrowers should lend to the same borrower

§          There must be a minimum period of moratorium between grant of loan and commencement of repayments.

§          Recovery of loans given in violation of the regulations be deferred till all prior existing loans are fully repaid.

Ghost Borrowers

Ghost borrowers generally arise in two circumstances, one when borrower on record is benami for the real borrower, and second when actually ficitious loans are recorded in the books.

Recommendations

§          All sanctioning and disbursement of loans be done only at a central location and more than one individual be involved in this function.

§          There should be close supervision of the disbursement function.

…………to be cont’d

Please do initiate your comments / queries to further broaden the understanding of the developments in the sector.

Most of us would be aware that RBI had set-up a committee under the chairmanship of Shri YH Malegam. The Committee has submitted its report. Major contents of the report including the recommendations are being shared with the SRRF Dialogue e-group. Comments in bold are recommendations. This is the second part of the continuation of the series on the subject….

Further Information about the MFI Sector

§         As at 31^st March 2010 : Number of outstanding loan accounts serviced by MFIs were 26.7 million. (increase of more than 2.5 times within 3 years)

§         Loan amounts outstanding as at 31-3-10 : 18,344 crores from Rs 3800 crores within the same period. An increase of almost 5 times.

Restrictions on Non-MFI Institutions

Aggregate loans of any such institution which cannot be classified as a MFI-NBFC should not exceed 10% of its total assets.

CHARGES BY MFIs

Interest rates & Profit margins for MFIs

Following conditions have been recommended with a view to limit the profit element of MFIs to a reasonable amount, while keeping the incentive for such MFIs to remain in business and provide credit access to people to whom formal credit channels otherwise remain inaccessible.

Recommendations

§          Interest rate on individual loans must not exceed 24%.

§          A ‘margin cap’ of 10% in respect of MFIs which have an outstanding loan portfolio at the beginning of the year of Rs 100 crores and above and a margin cap of 12% in case of MFIs which have an outstanding loan portfolio of upto Rs 100 crores at the beginning of the year.

Other charges

In addition to above, different MFIs could be charging other service charges of one nature or other. In past these have included upfront registration or enrolment fee, loan protection fee, etc. Several MFIs also recover insurance premiums as well as insurance administration charges to cover the risk of borrower’s death. Some MFIs have even resorted to practice of taking security deposit, which is deducted from the loan amount.

Recommendations

§          There should be only three components (i) processing fee (not to exceed 1% of the gross loan), (ii) interest (iii) insurance premium.

§          No security deposits to be recovered and if already collected must be returned.

TRANSPARENCY

To enhance transparency, the committee has given specific recommendations so that borrower is aware of the costs and terms.

Recommendations

§          MFI to issue a card to each borrower, which should give complete details of charges, effective rate of interest, other terms & conditions, details of instalments paid by the borrower, etc.

§          MFI to display effective rate of interest prominently in all its offices and literature, website, etc.

§          No security deposit to be recovered.

…………to be cont’d

Please do initiate your comments / queries to further broaden the understanding of the developments in the sector.

Most of us would be aware that RBI had set-up a committee under the chairmanship of Shri YH Malegam. The Committee has submitted its report. Starting today, major contents of the report including the recommendations would be shared with the SRRF Dialogue e-group. Comments in bold are recommendations.

MFI Institutions

MFIs have been classified in the sector into three main groups:

§          SHG-Bank Linkage model – 58% of the outstanding loan portfolio. Mainly working with SHG model.

§          NBFCs – 34%. Typically working with Joint Liability Groups (JLG). This a group, where loans are given to individual members of JLG only. However main difference is that generally each loan given is jointly and severally guaranteed by all the members of JLG.

§          Others including trusts, societies, etc – balance 8%

The above does not cover primary agricultural coop societies as well as Thrift & Credit societies.

Recommendation

A separate category be created for NBFCs operating in the MFI sector – could be designated as NBFC-MFI.

The above category not to include S.25 companies, thus in effect it appears that Malegam recommendations are to cover for-profit MFIs.

A company will not be designated as NBFC-MFI, unless 90% of its assets (other than cash, bank & Money Market instruments) constitute MFI loans.

Conditions for a loan to be qualified as an MFI loan:

§          Borrower should be a member of a household whose annual income is not more than Rs 50,000.

§          Loan amount should not exceed Rs 25,000. Total indebtedness at the time of giving loan, including the current loan should not exceed Rs 25,000. Tenure of Loan should not be less than 12 months, if loan amount is upto Rs 15,000 and in other cases (i.e. above Rs 15,000) tenure of loan not less than 24 months. This is to keep the loan instalment within the borrower’s repayment capacity.

§          No charges for prepayment of loan by the borrower.

§          No collateral to be taken against loan. This is to ensure that borrower who has meagre resources does not loose his possessions in case of default.

§          Repayable on weekly, fortnightly or monthly basis at the choice of the borrower.

…………to be cont’d

Also do initiate your comments / queries to further broaden the understanding of the developments in the sector.

Rangarajan, government admonish MFI model

A Business Standard report – November 16, 2010, 1:30 IST

The business model of the microfinance sector must change, emphasized C Rangarajan, chairman of the Economic Advisory Council to the Prime Minister, at a conference on the sector here today.

He said the microfinance movement must have as its ultimate goal the desire to help the poor and enable them to come out of poverty. Providing credit for productive purposes at reasonable rates of interest must be the goal, he said.

He said two initiatives could provide a significant surge for microfinance institutions (MFIs). One, the growth of the bank self-help group linkage programme. Two, expansion of the programme for business correspondents (the intermediaries who help expand a bank’s business, for a fee). The two will constitute the main pollars of the future development of bank-related microfinance even as other forms of microfinance institutions will continue to grow, Rangarajan said.

He was speaking at the Microfinance India summit, organised by ACCESS, a non-profit organisation (NGO).

He asked MFIs to be transparent on the interest rates they charged. He said it was necessary for MFIs to keep the overall cost to the borrowers at a level consistent with the repaying capacity of borrowers.

Regulation needed
K V Eapen, senior official in the Union finance ministry, recalled how Mohammad Yunus, winner of the Nobel Prize for his work in spreading microfinance in Bangldesh and elsewhere, had remarked that what was being done in India can be called anything but microcredit. He said the government and the sector had to decide together on the regulator and the type of regulations needed. Most states were already treating the sector on par with money lenders, said Eapen, and unless there was an agreement on regulations, the sector would suffer.

He said the proposed microfinance bill for non-banking finance companies should be ready in another three months, around the same time as the report of the Malegam committee on microfinance.

The conference was marked by a sense of gloom, with suicides in Andhra Pradesh triggered by the micro credit burden being the sub text of most presentations. While the annual report of the sector released by Microfinance India called for comprehensive regulation, image-rebuilding and the weeding of deviant institutions.

The report also said the sector had moved far away from the poor. it noted the number of microfinance clients was 10 times the number of poor households in Andhra Pradesh. So, the loans had transformed into consumer finance from micro finance. In Orissa, for instance, the ratio of MFI clients to poor households was better, at 1.8. It was 4.0 in Tamil Nadu and 2.8 in Karnataka and Bengal. In sum, the non-poor customers were at least two to four times more than the number of poor households in the population.

Defensive reactions
Reacting to these figures, David Gibbon, chairman of Cashpore Microcredit, said: “I feel embarrassed to be identified with the sector.”

“It is nothing but human greed that has caused the downfall of this sector,” said C S Reddy of APMAS, an Andhra NGO that provides technical support to self-help group federations. “What prompted the MFIs to charge huge interest rates, when they are now bringing it down?” he asked. “There was a competition between MFIs to keep the interest rates high. No one wanted to miss the profits that the poor were giving.”

Others defended MFIs. Said Vijay Mahajan, founder of BASIX, an chairman of the MFI platform, MFIN: “I cannot abandon the sector when it is in trouble. I am Bhishma Pitamah and will forever defend the Kauravas,” he said, with wry humour. MFIs may have been greedy, may have erred but that is not enough reason to criticise the principle of sustainable financial inclusion, he said.

Mahajan said it was hypocrisy to expect all the poor should get financially included and also also be charged at the rate of three to six per cent. A few did the wrong thing, but the sector was not to blame.

Some top names opted out of the meet at the last minute. Vikram Akula, founder of SKS Microfinance, in controversies since it floated a public offer, did not turn up and his office also refused to engage with the media. Naina Lal Kidwai, country head of HSBC India, was scheduled to come but did not.

__________________________________

Socio Research & Reform Foundation

(A Non Government Organisation)

512 A, Deepshikha, 8 Rajendra Place, New Delhi – 110008

Tele/Fax: +91-11-25821088, 25817157, 25722044

e-mail: socio-research@sma.net.in

website: www.srr-foundation.org

Evolution of Microfinance sector in India

While a large number of thrift & credit societies existed in the organised sector employees, microfinance sector ‘to serve the poor and out of formal credit sector’ mainly came into being in India in late seventies & eighties, mainly supported by donors through grants.

The Govt. was a late entrant to the sector. One of the first Govt. supported program in India was NABARD’s SHG Bank Linkage programme which was started in 1992. Banks included nationalised banks, cooperative banks and RRBs. The programme mainly worked through development of SHGs. Most popular model still continues to be where SHGs have been promoted by NGOs/ Govt. agencies and are financed by Banks. Banking institutions have also been allowed to use the services of SHGs/NGOs/MFIs (not being NBFC) to facilitate their activities for lending under the sector.

MFIs have been working in the sector, for sometime now, however these organisations have gained momentum only in the recent past.

Legal & Regulatory Framework

NGOs many of whom also undertake MFI related activities, are registered as a Trust or a Society and hence are subject to a very rudimentary from of regulatory framework. RBI has permitted S.25 companies not to register as a NBFC as long as the entity does not accept ‘public deposits’. Even funds garnered through IPO route does not make a company NBFC, since ‘a share’ is not ‘a public deposit’. RBI also allows MFIs to access External Commercial Borrowings of upto $5 million per year.

Most MFIs are not NBFC and thus not subject to stringent regulatory provisions applicable to NBFCs. Although NBFC disclosure & regulatory framework was never devised with an eye to protect the borrower, but more to protect the shareholders and depositors. In fact central Govt. introduced a bill [Micro Financial Sector (Development and Regulation) Bill, 2007] on Microfinance sector in Lok Sabha in 2007 without much progress. Maybe the current imbroglio in the MFI sector would hasten the process.

AP Ordinance

After the recent spate of suicides reported in Andhra, AP Govt brought in an ordinance [Andhra Pradesh Microfinance Institutions (regulation of money lending) Ordinance 2010] to regulate the activities of various MFIs and to ensure that no person would use coercive methods in collection of loans. The Ordinance requires that all MFIs working in the state shall register within 30 days at district level specifying the villages /towns they are operating or propose to operate in. It also limits that interest cannot be more than the principal amount. It may be noted while Andhra already has a legislation entitled ‘Usurious Loans Act 1918’, prohibiting charging of any excessive interest rates. However it has been observed that the concerned act has been used very rarely, although this Act with certain variations has been in place in many states.

It may be noted that already MFIs are planning to challenge the legality of the above ordinance in the courts on the grounds that they are not NBFCs and hence the ordinance cannot apply to them (as reported in some sections of the press).

Conclusions

§         Huge demand exists for making credit accessible to the last person.

§         Presence of a number of MFIs with ‘maximisation of profits / targets’ has allowed multi loans being given without proper assessment of borrower’s repayment capacities.

§         In many cases, SHGs which formed the social group for assessment of a borrower’s situation are missing or are not effective.

§         While expansion of MFIs should be welcomed as they will find innovative ways to reach as many as possible, however presence of proper Legal and Regulatory framework is the other side of the coin for balanced development of the sector.

__________________________________

Socio Research & Reform Foundation

(A Non Government Organisation)

512 A, Deepshikha, 8 Rajendra Place, New Delhi – 110008

Tele/Fax: +91-11-25821088, 25817157, 25722044

e-mail: socio-research@sma.net.in

website: www.srr-foundation.org

We thank both Mr Mathew Cherian and Mr Pradeepta Nayak for their contribution to the debate. This is what ultimately enriches the knowledge, as we get more views and members share their perspectives. Below we continue with the sectoral issues and look at the issues of sustainability of the sector.

Mainstreaming of any sector always is regarded as an important event as it brings sustainability in the sector, however considering this brought out problems of plenty (I am sure many will call it greed), there is a need to understand what could have prevented the same. We all are aware that micro-finance activities have been going on for a number of years (admittedly at a much smaller scale), but such widespread abuses of over-lending never occurred, simply because the sector always worked using social dimension. Instrument of this dimension has been, NGO, which ensured that there were mechanisms of assessing the need and paying capacity of borrower through the SHG Groups. Since the groups represented the community in which the borrower lived, SHG had a clear understanding both of the need of the borrower as well as her/his paying capacity. Clearly the models followed by the MFIs of present genre just ignored this vital mechanism.

One could argue that problem is too quick expansion of the sector. That is a point, however it is worth comparing what happened in the Telecom which has seen enormous growth with tariffs touching to record lows, enabling a large number of people with low incomes, both from urban and rural areas getting access to the mobile telephony. Thus competition does work. Of course, there were several issues which affected the sector, as it was expanding and more and more players joined the sectors. Some of the issues which immediately come to mind included high tariffs, lack of transparency in charges by various players in the sector, DOT (Dept of Telecommunication) being the dominant player in the sector tried to nip the competition through various restrictive practices, including delay in providing interconnection to the private players. Even among private players disputes arose on access of each others’ interconnections. Had these issues been not resolved in a timely manner, the competitive growth of the sector could have been affected. TRAI was able to resolve these issues as well as fix tariffs for such inter-connections. It developed framework which helped create rules for the different players in the sector in a competitive spirit.

There is no such regulator in the MFI sector which can set framework to ensure that the spirit of microfinance is maintained. Perhaps this has been the bane of the problem. Appointment of the regulator would not only streamline the sector but could usher in healthy growth.

——- next series would look into legal aspects of MFI sector indicating turf battles, perhaps one of the reason why the sector does not have a regulator.
Continue reading →

Lately MFIs (Micro Finance Institutions) have lot been in the news for wrong reasons. Sacking of MD & CEO of SKS Microfinance, one of the largest MFI, Andhra Pradesh Govt. passing an ordinance to capping activities of MFIs in the state, arrest of 3 employees of MFIs, etc. So what is going wrong in the sector?

The importance of microfinance cannot be overstated for the laudable objective of making credit available to the rural poor who otherwise have remained untouched by the vast reach of nationalised banks. Microfinance through SHGs provided the answer, Govt. extended credits to various agencies through NABARD or other similar agencies. Several donor agencies encouraged livelihood programmes which provided facility of credit to the poor women who otherwise did not have access. However their impact remained limited, due to limited reach of these organisations. An estimate puts that there could be a need of close to $50 billion dollars all over India !!!

AP has been at the forefront of the developments in the microfinance sector. Vijay Mahajan, pioneer in the sector who conceptualised Basix is well known in the development sector. Basix was the first institution which took commercial debt and equity investments, both internationally and from within India. Vikram Akula also saw the potential in the sector and converted his non-profit SKS Microfinance (1998) to ‘for-profit’ operations in 2005. His IPO was one of the most successful, garnering over Rs 1600 crores which was oversubscribed several times. Other known MFIs which have sprung into action, include Sharemicrofin, Spandana, L&T, Asmita, among others.

As the sector got crowded and ‘profit maximisation’ became the mantra, the MFIs fell over each other in giving loans to poor house-wives. Normally a microfinance loan is around Rs. 5,000 – Rs. 20,000 per family, basically to help a family set-up a small enterprise or meet some urgent need. However repayment capacity was always the basis of these micro loans. However to meet their targets, MFIs started giving multiple loans to the same ‘individual’. This resulted in many of these women having accumulated loans anywhere from Rs. 70,000 – Rs. 100,000. Facing crop failures, and no income to return the money, coupled with coercive tactics of loan collectors, borrowers came under severe mental pressure and there were reports of spates of suicides in some of the worst affected districts.

——- to be concluded

_____________________________________

Socio Research & Reform Foundation

(A Non Government Organisation)

512 A, Deepshikha, 8 Rajendra Place, New Delhi – 110008

Tele/Fax: +91-11-25821088, 25817157, 25722044

e-mail: socio-research@sma.net.in

website: www.srr-foundation.or