Grameen Style Bank
The Grameen style of microfinance consists of banking units which are usually groups of give, with separate groups for men and women.. Individuals receive loans, but the entire group is liable for repayment. If one member defaults, other group member will not be able to receive additional credit. This group pressure helps to ensure social and financial discipline among Grameen Bank members. However, in order to mitigate the entrenchment of vested interests and constellations of power, and to prevent individuals from taking antigroup actions, six to eight groups are organized into a community called the “center” . Such two-tier peer monitoring and transparency in transactions eliminate possible problems of group collusion among self selected groups.
Grameen Bank usually lends small amounts of loans to an individual member for a year. The loan is repayable in fifty equal weekly installments to ease the pressure on the poor to pay at once. The loans are provided for activities identified and selected by each member of the five-member group, and members help each other in selecting the activity. Both selection activities and amounts of loans are discussed in group and center meetings. To enable smooth operations and to oversee the group activity, a Grameem Bank worker will visit each center on a weekly basis.
A comparison between the two modes of delivery
Outreach of Models
India in recent years has seen a substantial growth in the outreach of microfinance. This is partly due to the phenomenal growth of Bank –SHG linkage programme promoted by the NARBARD, but also the growth of MFIs pioneered by Grameen organizations. Yet there is still room for growth in the sector as the combined efforts of SHG and MFIs cover around 20 million of the poor out of the 70 million poor in India.
In terms of model and legal forms, Grameen organisations have accounted for an increasing amount of memberships, reaching to 78% of total membership of microfinance in 2008. In 2003 the SHGs linked with NGOs accounted for the majority of microfinance coverage as in the initial microfinance experience in India, most organisations such as IRDP, SGSY and later NABARD’s SBLP started off as multi-service NGOs to support government initiatives.
However in recent years microfinance institutions are starting to realize the potential for greater growth through transforming to for-profit entities and adopting the Grameen model to meet their growth requirements and to become self sufficient.
Many lenders that began as non-profit organizations such as ASIX, SHARE, SKS, and Spandana have transformed into commercial microfinance institutions. As compared to SHG-Bank Linkage, these institutions have posted faster growth rates and reached far more borrowers. The for profit legal form has the advantage that it can attract both equity funding from venture capitalists and loans from commercial banks which helps to facilitate their rapid growth.
A reason for the slow growth of SBLGs is that there are no clear margins built into the program to take care of the cost of building, managing, and scaling the program, except through grants, subsidies and other provisions made by government.It is up to NARBARD operating on grants and NGOs to set up and promote SHGs. Another factor that has lead to the relatively slower growth of SBLG is that it takes around three years for a healthy SHG to develop self-governing capabilities. SHG themselves have to be responsible for book keeping and rotating loans among a relatively larger group than that of the Grameen system.
Figures have shown that, the percentage of SHG programmes lending to clients through SHGs rather than the joint liability groups of the Grameen methodology has declined from 63% of membership in 2003, to 47% in 2005, 32% in 2007 to just 19% in 2008.
MIX Data 2008
Staff Productivity
There are two key indicators to measure the efficiency of human resource utilization. One is the staff productivity ratios, which is the clients to member of staff. The other ration is the outstanding portfolio per member of staff.
In 2008, it is the Grameen model in which per staff serves the largest number of borrowers (252) and a portfolio of Rs 11.5 lakh ($28,800). Grameen institutions have shown that it can become one of the most competitive MFIs in India by becoming more efficient. Staff productivity has increased from 146 in 2003 to 252 in March 2008.
SHG are relatively inefficient serving just 175 borrowers per staff member who services a portfolio of Rs 8.2 lakh ($20,000). However it has to be noted that this figure incorporates only the clients that are currently borrowers, but not those who are savers and dormant clients. The SHG groups are usually two times larger than that of the Grameen system, which accounts for a larger amount of dormant clients.
The average staff productivity of SHG programmes is much higher than that of the Grameen mode in terms of total client members served when including both borrowers and savers. Moreover, the relatively low productivity of the SHG model is also due to the intensive staff inputs required in the initial years of developing the self-governance capabilities of client groups. This cost however decreases after the SHG is on track and able to govern itself.
Note:
BS: Borrowers per staff
LS: Loan portfolio per staff (Rs lakh)
Operational Efficiency
For the purpose of analysis, operating expenses include four components – personnel expenses, travel costs, depreciation and other administrative expenses. With the operating expense ratio (OER) measuring the total of these expenses as a proportion of average outstanding portfolio over a one year period.
The Grameen had an OER of 25.2% in 2003, which reduced to 12.4% in 2008. SHGs on the other hand recorded an OER of 18.5%, which decreased to an incredibly low amount of 6% in 2008.
Better operating efficiency has also resulted in a reduction in cost per borrower and is directly related to the push for growth in outreach that has occurred over the past years, resulting in growth rates in excess of 80% per annum in the number of borrowers served. The overall improvement in operating efficiency can be attributed to improved staff productivity and economies of scale the Indian MFIs have achieved over the years.
What is interesting to observe that the typical average that represents the current performance of Grameen modes decreased by 51% from in the period of 2003 to 2008. However the SBLG mode showed a decrease of 67% in the same period. This larger decrease in operation cost shows that SHGs tend to show a higher decrease in operation costs once it is on track and running. As of 2008, the OER of SHGs was only half of that of Grameen institutions, which clearly demonstrates that SHGs can be a low cost way of delivering credit to the poor.
Note:
WA: Weighted average represents the future trend that could be achieved
TA: Typical average represents the current performance
Cost Per Borrower
The Grameen model showed a continuing decrease in cost per borrower from Rs 605 in 2003 to Rs 442 in 2008, showing a decrease of 27%. The SHG model showed a similar decrease from Rs 362 to Rs 287, a decrease of 21%. It can be seen that the SHG model costs 35% less than the Grameen model on average to provide loans to the poor even when we look at the absolute cost for managing a loan.
Portfolio Quality
Portfolio quality is also an important indicator of the healthiness of the MFI. A healthy portfolio would mean lower costs in follow up of clients and lower costs from bad debts.
Grameen organisations in India have been the best performers with Portfolio at Risk (PAR60) in the previous years, except in 2007 when PAR60 rose to 8.4% owing to the political problems that occurred in South India. This better performance of Grameen organisations can be attributed to the small 5-member group structure and to better group discipline maintained through deployment of significant resources by the MFI and strong delinquency management efforts.
Though overall SBLG performance on portfolio quality remains relatively weak, they have improved considerably over the past few years as reflected from PAR60 of 20.3% in 2003, to PAR30 of 2.2% in 2008. This further shows that SHGs improve significantly in both cost reduction and portfolio quality as it matures.
Interest Rate
The interest rate charged on the loan is of obvious importance to both the borrower and the bank. A too high rate would defeat the purpose of microfinance to provide affordable credit to the poor, while a too low rate would render the MFI unsustainable. Interest earned on portfolio has been the major source of income for the microfinance sector.
Interest rates offered by MFIs on loans varied from MFIs, certain MFIs offer flat rates while others calculate interest on a declining balance basis. Many MFIs also take upfront charges like processing fee which adds to the overall income from portfolio. For the purpose of analysis, the Annual Percentage Rate (APR), which includes interest, fees and commission is used. The interest rate is then calculated into an annualized figure on the loan principle.
From the figures it can be seen that the Grameen MFIs charge a higher interest rate in comparison to the SHGs. This can be explained by the higher operational cost of the MFIs and its legal structure. A higher interest rate is needed by Grameen MFIs to become self sufficient. Moreover it has to be noted that there is an ever increasing amount of for profit microfinance institutions adopting the Grameen model. The SHG model on the other hand has been mainly operating on the grant of NARBARD and by the not-for-profit entities. Moreover the operational costs of SHG model are relatively lower, allowing room for lower interest rates.
Sustainability of Organization
Ultimately MFIs have to be self sufficient to be less susceptible to external shocks such as a decrease in donor funds. Only then can it be able to expand healthily and sustain itself with proving credit to a growing number of poor.
Operational Self Sufficiency (OSS) measures the ability of an MFI to meet all its operational and financial costs out of its income from operations which includes subsides and grants. Financial Self Sufficiency (FSS) measures however exclude the calculation of subsidy in its income. Therefore FSS is the approximate indicator to assess whether an MFI is sustainable or not.
The Grameen institutions had a high FSS of 90.5 % since 2003 and have increased to 116.2% in 2008. This means that overall Grameen institutions are actually earning a profit from microfinance. This can be largely attributed to the growing number of for-profit microfinance institutions that adopt the Grameen form.
On the other hand SHG had a low FSS of 55% in 2003, but have improved significantly to 98.5% in 2008. This means that as of 2008, SHG are largely self-sustainable indicating that without grants and subsidized funds, the organizations are effectively able to cover just all of their cost.
Conclusion
When we look at the various indicators such as staff productivity, cost per borrower and operational efficiency, it can be seen that SHG have a distinct advantage over Grameen style microfinance organizations. This advantage becomes even more pronounced after the initial resource has been inputted to get the SHG started and running. After a SHG has gain the capacity to govern itself such as being able to keep its own records and rotate funds among its group, data have shown that SHGs are extremely efficient.
It is therefore a pity to see that SGHs have posted a much slower growth in comparison to Grameen Style MFIs in recent years. SHGs are simply no match for the explosive growth that Grameen banks have recorded.
This can be attributed to the higher set up costs and longer time for new SHGs to be established compared to Grameen groups. SHGs rely largely on the grants through NARBARD and NGOs to finance the cost of the initial setting up and management of SHGs. On the other hand, the for-profit nature that some of the Grameen Banks adopted, for example BASIX, gives them access to funds from the market to finance their expansions, where NGOs promoting SHGs rely on donor funds.
Challenges faced by SHGs
Two decades of the SHG movement have demonstrated that it can have a positive impact on poverty reduction. The model offers the opportunity millions of poor engage in member-owned, member-managed and member-used organizations. However the SHGs are seriously challenged by both external and internal factors as follows.
Unhealthy Competition from NBFC
One of the greatest challenges that SHGs face is the rise of for-profit microfinance institutions that have been expanding aggressively. According to the State of the Microfinance Sector report of the ACCESS alliance, the MFI operations expanded by 13 times in four years to end the year 2009 at Rs 117.9 billion ($2.6 billion) in outstanding loans. Whereas there was only one for-profit MFI in the country in the beginning of the 1990s, this number had rocketed to 149 registered micro finance institutions by 2009.
More competition is not necessarily a bad thing, but unhealthy competition could end up hurting the poor. It takes years to promote a strong and sustainable SHG capable of self governance and receiving loans from banks. However in their quest for exponential growth the MFIs split well-functioning SHGs to form joint liability groups modeled after the Grameen system.
Going back as far as 2003, there have been concerns about certain practices of MFIs which involved splitting SHGs to form Joint Liability Groups of the Grameen model. SHG members and federation leaders are lured by MFIs through higher salaries or multiple loans to group members. Moreover group members have specified that being part of a Grameen unit has its advantages such as ‘doorstep service’ and faster loan processing.
Fewer choices available from SHGs
The growth in loan portfolio of SHGs has been limited as compared to the growth rates registered by the Grameen mode of microfinace. Limited growth and ability to meet the needs of member’s leads to member dissatisfaction especially in the southern part of India where there is a concentration of microfinance organizations in operation and wider choices are available. SHGs due to its inherent nature takes longer for a member to receive a loan as the group has to be functioning well for a period of time for banks to be willing to lend a loan. Moreover the larger group size of around 15 people means its takes a long time for group members to wait for a loan. Thus making them easy targets for Grameen banks that lure them into splitting up into joint liability groups and recieve loans sooner.
The way forward
What needs to be done is two folds. On one hand, the Indian government through the Reserve Bank of India should impose more stringent conditions on the establishment of these non-banking finance companies. Regulations looking to reshape the microfinance institution have just been passed in October 2010, however it is highly opposed by Microfinance Institutions Network which have even resorted to filing a court order to challenge it.
On the other hand, SHGs have to increase their competiveness to meet the increasing challenges presented by these for profits organizations. SHGs have to be able to process loans sooner and come up with a greater variety options. Moreover the Indian government should step up its grants through NARBARD to finance the initial costs of setting up SHGs and promoting it.
An immediate re-focusing of MFI operations on the double bottom line balancing of financial returns and social values is essential to ensure the future of Indian microfinance as an instrument of financial and social inclusion, and not as another means of exploiting the poor for financial gain.
Andhra Pradesh Microfinance Ordinance 2010
Whether the ordinance will be overturned is not yet entirely clear as it is being judicially challenged by MFIs. However what is clear is that the Indian government is determined to impose a new set of regulations in face of the increasing complaints against the practices of certain MFIs.
The Ordinance makes it mandatory for all private institutions engaged in micro-lending to register with the district Registering Authority. MFIs have to specify their areas of operations, the rate of interest, and their system of operation and recovery. Further, they cannot seek security from a borrower by way of pawn or any other means. The Registering Authority may, at any time, either on its own initiative or upon receipt of complaints by SHGs or the general public, cancel the registration after assigning sufficient reasons.
A very interesting point is that the bill, section 3(2) clearly rules that MFIs may not lend loans to SHG members without the permission of the Registering Authority. This would directly protect SHGs from predatory practices of MFIs. MFIs have criticized the bill as favoring SHGs and this could be understandable as SHGs are funded heavily by the state NARBARD. It would be reasonable for the Indian Government to not want to see SHGs being lured off by MFIs after investing heavily in setting them up.
Although this could be said to be an intervention of the market, I do however feel that the Government should set up regulations in a market to prevent unhealthy competition. Given the lower cost structure of SHGs once it is on track and the lower interest rates it offers, I believe that this is a right move from the Indian Government. However SHGs themselves have to increase their competiveness too in order to expand and retain clients.
Greater Promotion by NARBARD
Donor funds including bi-laterals and multi-laterals allocated to SHGs in India have been on the drop or have been attracted by ‘the fortune at the bottom of the pyramid.’ Instead it has been up to the Federal Government and the States to step up it’s investment in increasing quality of SHG institutions. While NABARD remains a major donor to NGOs, SHG institutions have been receiving a fraction of required funds for their development.
SHG institutions should be considered a part of social infrastructure much like schools and health centers as it holds enormous development potential to combating poverty. The Indian government should step up its invest in the development of these institutions, which could be rally points to mobilize, organize and educate the poor and marginalized sections.
Refocus on role of savings
SHGs are traditionally savings-led organizations, under appropriate legal forms like Mutually Aided Cooperative Societies (MACS) Act, SHGs can offer different savings products like voluntary savings, fixed deposits and recurring deposits to the members of SHGs. However, some critics say that SHGs have become too reliant of bank loans. It is criticized that they have become credit management groups which are excessively dependent on banks. They need to return to their root which is mobilizing greater savings to pool into a reserve to lend among themselves.
Savings must be priority for SHGs as it reduces its dependency on bank loans and it is a potential source of cheap credit. SHG institutions must have self regulatory systems to enhance member-ownership and trust in their institutions with an aim to increase member savings. Over a period of time, that will reduce the dependence of the SHGs on the banks and increase their competiveness against MFIs. Moreover SHGs’ self-reliance has the potential to enable them to move beyond savings and credit to address issues related to health, education, rights and entitlements.
Increase organizational capacity
SHGs need to improve in their governance and management so that members can have greater trust in their own institutions. Organizations such as NARBARD have traditionally held staff training courses for NGOs to develop the capacity of SHGs. Institutes such as the Asian Institute of Technology can also play a role in the capacity building of SHGs to better prepare them for the challenges ahead.
Investments in institutional capacity building and improve in their bookkeeping systems and conduct regular internal audits. These programs could increase the efficiency of SHGs by finding ways to increase the productivity of its existing capacity. This may be possible through technological innovations, such as refining the lending methodology, and improvements in the utilization of capacity, such as increasing loan officer productivity.
Conclusion
SHGs are a powerful tool to empower the poor and they are arguably a better source of credit to the poor. SHGs have a lower operation cost and most importantly, they charge a lower interest rate than their Grammen counterparts. It is a shame to see then facing an uphill battle against the spiraling market share being gobbled up by for profit microfinance institutes. However this tide may be reversed starting with the new Andhra Pradesh Microfinance Ordinance that aim at regulating MFIs and protecting SHGs from predatory practices.
However SHGs themselves have to rise to the challenges of the microfinance industry too. It is necessary for the SHGs gain a better understanding the member needs and address them. SHGs also need to increase their organizational capacity and adopt more modern management techniques such as utilizing management information and conducting regular internal control. Member rootedness in terms of processes, products and governance is able to contribute to the sustainability of SHGs in the longer run.
SHGs should focus on its inherent competitive advantage such as in designing and offering a range of savings services to the members. Voluntary savings and insurance products can be unique selling points. Continuing long term promotional efforts and technical guidance is needed by SHGs to improve its processes, products and governance which is key to its success.
It is hoped that SHGs can improve and adapt to meet the new challenges posed by the rising breed of for profit microfinance institutions. I have seen first handed how microfinance can transform a village through empowerment and I hope that SHGs which provides microfinance at a relatively lower cost to be able to continue thriving in India and continue to empower the needy.
Reference
Andhra Pradesh Microfinance Ordinance 2010
Asian Development Bank, Financial Services for the Poor, 2005
Assessing The Factors That Led To The Success Of Microfinance In Bangladesh: A Case Study On Grameen Bank, Chowdhury Abdullah Al Mamun (2009)
Commercialisation of Microfinance in India, M S Sriram, INDIAN INSTITUTE OF MANAGEMENT (2010)
Grameen Bank: Impact, Costs, and Program Sustainability ,SHAHIDUR R. KHANDKER (1996)
Grameen Bank: Taking Capitalism to the PoorEvaristus Mainsah, Columbia University, 2004
GROWTH OF MICRO-CREDIT IN INDIA: AN EVALUATION Dr. Md. Tarique* & Ranjan Kumar Thakur, 2007
Indian Microfinance Crisis of 2010: Turf War or a Battle of Intentions? An Intellect White Cap,2010
Is Microfinance Outreach Sustainable? A Case ofMicrofinance Institution Model in India, Ajay Tankha, 2011
Learning from the Indian Crisis: Client Focused Microfinance needs to start at the Frontlines. Peg Ross, CPAG (2010)
Micro Credit in India:Overview of regulatory scenario Vinod Kothari and Neha Gupta, 2008
MIX Markets –“Microfinance at a Glance – 2008
”
Self-help groups and Grameen Bank groups: What are the differences? Malcolm Harper ( 2003)
SHG Federations: Development Costs and Sustainability, Girija Srinivasan, ACCESS Development Services (2010)
State of Microfinance in India, Institute of Microfinace, 2009
Will the Indian SHG movement withstand the Competition offered by MFIs? C.S. Redyy, CPAG (2010)
http://indiamicrofinance.com/download-andhra-microfinance-ordinance-908172.html
http://www.cgap.org/p/site/c/template.rc/1.26.1302/
http://www.rbi.org.in/scripts/NotificationUser.aspx?Id=199&Mode=0
Grameen Bank: Taking Capitalism to the PoorEvaristus Mainsah, Columbia University, 2004
http://www.cgap.org/p/site/c/template.rc/1.26.1302/
Asian Development Bank, Financial Services for the Poor, 2005
MIX Markets –“Microfinance at a Glance – 2008”
State of Microfinance in India, Institute of Microfinace, 2009
State of Microfinance in India, Institute of Microfinace, 2009
SHG Federations: Development Costs and Sustainability, Girija Srinivasan, ACCESS Development Services (2010)
SHG Federations Development Costs and Sustainability Girija Srinivasan,, (2010)
Assessing The Factors That Led To The Success Of Microfinance In Bangladesh: A Case Study On Grameen Bank, Chowdhury Abdullah Al Mamun (2009)
Grameen Bank: Impact, Costs, and Program Sustainability ,SHAHIDUR R. KHANDKER (1996)
Self-help groups and Grameen Bank groups: What are the differences? Malcolm Harper ( 2003)
State of Microfinance in India, Institute of Microfinace, 2009
Micro Credit in India:Overview of regulatory scenario Vinod Kothari and Neha Gupta, 2008
Commercialisation of Microfinance in India, M S Sriram, INDIAN INSTITUTE OF MANAGEMENT (2010)
Indian Microfinance Crisis of 2010: Turf War or a Battle of Intentions? An Intellect White Cap, 2010
Is Microfinance Outreach Sustainable? A Case ofMicrofinance Institution Model in India, Ajay Tankha, 2011
Micro Credit in India:Overview of regulatory scenario Vinod Kothari and Neha Gupta, 2008
Assessing The Factors That Led To The Success Of Microfinance In Bangladesh: A Case Study On Grameen Bank, Chowdhury Abdullah Al Mamun (2009)
Indian Microfinance Crisis of 2010: Turf War or a Battle of Intentions? An Intellect White Cap,2010
SHG Federations: Development Costs and Sustainability, Girija Srinivasan, ACCESS Development Services (2010)
Will the Indian SHG movement withstand the Competition offered by MFIs? C.S. Redyy, CPAG (2010)
Learning from the Indian Crisis: Client Focused Microfinance needs to start at the Frontlines. Peg Ross, CPAG (2010)
Will the Indian SHG movement withstand the Competition offered by MFIs? C.S. Redyy, CPAG (2010)
http://www.moneycontrol.com/news/cnbc-tv18-comments/the-new-mfi-bill-challenges-before-rbi_564060.html
Indian Microfinance Crisis of 2010: Turf War or a Battle of Intentions? An Intellect White Cap,2010
Copy of the bill may be retrieved at the following site http://indiamicrofinance.com/download-andhra-microfinance-ordinance-908172.html
Will the Indian SHG movement withstand the Competition offered by MFIs? C.S. Redyy, CPAG (2010)
Will the Indian SHG movement withstand the Competition offered by MFIs? C.S. Redyy, CPAG (2010)
GROWTH OF MICRO-CREDIT IN INDIA: AN EVALUATION Dr. Md. Tarique* & Ranjan Kumar Thakur, 2007
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derricklui (student)
