Presentation on Self Help Groups(SHG)

By Iqbal Madhu Kumar Naveena.M.K Ramachandra Shalini Supriya

What are Self Help Groups (SHG S)?

SHG is a group formed by the community women, which has specific number of members like 15 or 20. In such a group the poorest women would come together for emergency, disaster, social reasons, economic support to each other have ease of conversation, social interaction and economic interactions.

Self Help Groups

The term self-help group or SHG can be used to describe a wide range of financial and nonfinancial associations, in India it has come to refer to a form of Accumulating Saving and Credit Association (ASCA) promoted by government agencies, NGOs or banks. These groups manage and lend their accumulated savings and externally leveraged funds to their members.

Self Help Groups

SHGs have varied origins, mostly as part of integrated development programmes run by NGOs with donor support. The major programme involving financial intermediation by SHGs is the SHG-bank Linkage Programme. This Programme was launched in 1992 by National Bank for Agriculture and Rural Development (NABARD), the apex bank for rural development in India.

Self Help Groups

By March 2002, the programme covered 7.8 million families with 90 per cent women members. NABARD s corporate mission has mad available microfinance services to 20 million poor households as on 2008. However, there is at present a high degree of concentration in the southern states, with just two states, Andhra Pradesh and Tamil Nadu accounting for more than 66% of the SHGs linked to banks.

Self Help Groups

Apart from NABARD, about half a dozen other apex bodies or wholesalers provide loans to financial intermediaries for on-lending to SHGs. These include the Small Industries Development Bank of India (SIDBI), Rashtriya Mahila Kosh(RMK), Housing and Urban Development Corporation (HUDCO), Housing Development Finance Corporation (HDFC) and Friends of Women s World Banking (FWWB).

Objectives Of SHG S
To sensitize women of target area for the need of SHG and its relevance in their empowerment process. To create group feeling among women. To enhance the confidence and capabilities of women. To develop collective decision making among women. To encourage habit of saving among women and facilitate the accumulation of their own capital resource base. To motivate women taking up social responsibilities particularly related to women development.

Impact of SHG-based MF programmes

Comprehensive impact studies on the effectiveness of SHGs are virtually nonexistent even for the best practice NGOs. Programme Management Information Systems (MIS) of NGOs are also generally not geared to providing substantive impact data.

Impact of SHG-based MF programmes

A major NABARD impact evaluation covering 560 members of 223 SHGs linked to banks in 11 states showed that SHG members realized major increases in assets, income and employment. Also, women members were found to have become more assertive in confronting social evils and problem situations. Nearly half the poor member households had crossed the poverty line.

Impact of SHG-based MF programmes

Various other reviews and evaluations of SHG programmes suggest that SHGs have provided access to credit to their members; helped to promote savings and yielded moderate economic benefits; reduced the dependence on moneylenders; and resulted in empowerment benefits to women.

Microfinance in India: apparition

Until the 90 s despite various efforts and achievements by the government, the banking sector was unable to internalise banking to the poor as a profitable activity Financial sector reforms: motivated policy planners to search for strategies for delivering financial services to the poor in a sustainable manner with high repayment rates.

Microfinance in India: apparition

NABARD: empirical observation catalysed by NGOs that poor gather in informal groups SHG-Bank Linkage Programme (92) Recent emergence of MFIs: professionally run institutions specialized in delivering credit with low cost staff and local knowledge Key innovation in both models was to make use of local knowledge, which traditional banking system does not have.

The microfinance promise

New contracts Innovations

New Management structures

New attitudes

Microfinance: what is it?

Often perceived as Micro-credit whereas objectives are Suite of financial services
Thrift / savings Credit Insurance and Investments Transfer Payments and Remittances

Group lending Social/charitable activity

Group and individual lending Sustainable activity

Predominant model of microfinance in India: SHG-Bank linkage model

Efficient use of capital Y Incentive alignment N

Branches assess credibility of SHGs and monitor repayment process

6 months savings Loan to group

Bank
Repayment commission No liability

SHG

NGO
Grants based
Group formation and linkage 15

Recently emerging model: financial Intermediation by MFIs

Efficient use of capital N Incentive alignment Y
MFI on lends

Loan

Loan

Bank

MFI

SHG, JLG or ind.

Bank lends to MFIs based on their capital

MFIs capital sets risk absorption capacity hence limits for TL

On-lending of same fund at Bank interest rate+MFI trans. costs

Double counting of capital by bank and MFI

Organization-based lending: Higher pricing than warranted by riskiness of portfolio

Growth Of The MF Models

With SHGs, relatively low rates of growth resulting from
NGO reliance on grant funds to meet costs Banks wary of large portfolios in the absence of risk sharing structures

With MFI intermediation, although underlying portfolio exhibits very low loss rates, sub-optimal lending structures have resulted in
Lower flow of resources
 Capitalization of intermediary is the constraining factor

Higher pricing than warranted by riskiness of portfolio

 Charge on capital reckoned twice  Bank/FI take into account riskiness of the intermediary

These models could not resolve the paradox of limited supply

A burgeoning segment with very large demand for finance Grass-root agencies capable of providing origination and supervision support in a cost-effective manner Banking system capable of providing large quantum of wholesale finance (owing to priority sector targets) However, there are no natural providers of risk capital for microfinance and this has constrained the growth of several MFIs As a result, supply is still a small fraction of the demand for finance

Hence Needed a model which:

Addresses inability of MFIs to provide risk capital in large quantum, which limited advances from banks Allowed rapid scale-up Separates risk of MFI from risk inherent in the mf portfolio But still provides a mechanism to continuously incentivize partners

The Partnership Model

Loan at 9%-11% to end customer Repayment collection

Service fee

Bank
Risk Sharing FLDG OD

MFI
(servicer)

Service fee

SHG, JLG or Ind.

Origination, monitoring, collection

Reduces capital needs

Intermediary assumes fraction of the credit risk, leading to reduction in capital required Bank prices on basis of underlying asset rather than rating of intermediary ( asset-based lending)

Nature partnership Model:

Leverages each entity s advantage which are complementary

MFI

Bank

Strength

Social Capital Local knowledge Low cost delivery channel Access to financial markets Financial product expertise Technology

Financial volume / expertise Product innovation Technology Low outreach in remote areas Poor local knowledge Inadequate cost of delivery to serve the low income population

Weakness

The Partnership Model structure combines debt and mezzanine equity

MFI estimates individual and overall loan requirement Bank assesses historical loss rates to Arrive at a pricing for the loan Estimate the quantum of FLDG required from the NGO/MFI Objective Keep the pricing on the loan portfolio close to AAA rates Reflect riskiness in the quantum of the FLDG, assuming the character of mezzanine equity MFI accesses an OD limit - equivalent to the amount of the FLDG which is drawn in the event of default up to the specified limit

Portfolio diversification through the partnership model

MFIs
Single product Single customer segment Knowledge of local area Poor included

Banks
Multiple products Large customer variety Large risk apetite Poor / Vulnerable excluded

Partnership
Multiple products Multiple segments Large risk appetite combined with knowledge of local area Poor / Vulnerable included

Pro s And Cons of the partnership model for MFIs

Advantages Limitations

Facilitate growth by reducing MFIs challenge to provide risk capital in large quantum Off-balance sheet FLDG as OD (quasi equity) Improves RoE by equity freed up (leverage from 3-4 to 10-12) Separates institution and underlying portfolio risks Continuously incentivise partners on portfolio quality

Most banks still using TL, hence reducing MFIs diversification of lenders Level of FLDG dependent on one single lender s risk evaluation (vs. public market) Level of FLDG based on processes and PAR* No secondary markets for lenders reduces their own liquidity (microfinance not an asset class)

Micro Finance Institutions (MFI) in India

Currently, roughly 66% of the micro finance supply is via the Self Help Group (SHG)-bank linkage route However, MFIs grow faster now, in terms of number of clients and credit flow The share of MFIs is rapidly growing There are about 800 MFIs in India (NABARD) However the top 15 MFIs account for about 70% of the credit through MFIs

Comparison between SHG-Bank Linkage & MFI model

India annual Microfinance Disbursement
% share in Annual Disbursement 50 45 40 Rs billion 35 30 25 20 15 10 5 0 1996 1999 Year 2002 2005 0 0.2 0.6 0.4 0.8 billion $ 1 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 2001 2002 2003 Year 2004 2005 MFIs SHG

Share in microfinance disbursement by model

Sources : Rough estimate derived from a presentation at a Microfinance Stakeholder Consultation Meeting in Delhi in January organized by the World Bank. Major sources are NABARD Annual Report & Data collected by ICICI Bank. Assumption : MFI disburse 1.5 time of Yr-end O/s loans Ratio from M-CRIL data

MFIs Models and products (credit)

50 weeks tenure Weekly meetings and repayment Joint liability in groups of 5 to 10 members Often given for productive purposes only, often with close monitoring of loan usage Loan size range from Rs. 3000 to Rs. 15,000 increases with loan cycle For new borrowers or star borrowers (most of the time) With or without collateral or guarantors/guarantees Generally, not beyond Rs. 1 lakh Different repayment schedules (for ex, daily or monthly)

Grameen product

Individual lending Emergency loans

Existing clients 1000 to 2000 Rs For emergency purposes such as health etc.

Grameen product is the most widespread So far products have been very standardized (which has advantages but also limits customization for clients)

MFIs Models and products (non credit)

Insurance
Most often as agent of insurance company Most common product is life insurance Bundled with credit Health insurance emerging

Savings

MFIs not allowed to collect deposits Banking correspondent model (few MFIs have adopted it yet) Rare product One MFI in Orissa: Adhikar One MFI in Udaipur: Ajewika Bureau Rare product Focus on individual loans A few MFIs provide housing loans: IASC, ESAF

Remittances

Housing loans

What can banks do?

Delivery channels

Product development

Provide funds to MFIs, either through term loans or partnership model Lend to Self Help Groups Provide grants or long-term loans for infrastructure development Help MFIs with expertise in product development Link MFIs with other companies that have expertise in product development, for ex. Insurance companies Help MFIs with back-end technology Through risk sharing with MFI, help reduce costs of funds

Products pricing and costs

Case Studies: Shri Mahila Griha Udyog Lijjat Papad

Lijjat Is an organization that has acted as a catalyst in empowering poor urban women across India during the last four decades. Starting as a small group of seven women in 1959, today Lijjat has more than 40,000 members in 62 branches across 17 Indian states. Only women can become members of Lijjat, and all of its members, addressed as "sisters own the organization.

Shri Mahila Griha Udyog Lijjat Papad

Lijjat's main product is a thin, round, savory snack called papad, and papad rolling is the major activity of the "member sisters . Remuneration is the same for everyone, and profits and losses are shared equally among the member sisters, so there is no possibility of concentration of assets and wealth. LijJat refuses to accept donations, but instead provides donations to the needy. Besides papad, Lijjat has also introduced other products, such as Sasa detergent and soap. However, papad has remained as its core identity product.

Key Factors for Success of Lijjat

The merging of ownership with membership has encouraged uniform and sustained organizational growth. The consistent quality of the product has been a primary factor in establishing and maintaining Lijjat's brand image in the market for the last four decades. The Sarvodaya philosophy proved vital in forming Lijjat's foundation.

Key Factors for Success of Lijjat

Lijjat has emerged as an innovative organization in which women from any religion, caste, or class can become members. The pledge and all-religion prayer also encourage cooperative work among women, irrespective of caste or religion. Transparency in operations and a nonhierarchical structure has helped in establishing organizational accountability among member sisters. Calling the members "sisters" creates an informal work environment.

Case Studies: HLL s Project Shakti

Through a combination of micro-credit and training in enterprise management, these women from SHGs have turned direct-to-home distributors of a range of HLL products and helping the company plump hitherto unexplored rural hinterlands. Project Shakti was piloted in Nalgonda district in 2001. The ambitious vision of this project is to create by end of 2010 about 11000 shakti entrepreneurs covering one lakh villages and touching the lives of 100 million rural consumers.

HLL s Project Shakti

On an average the shakti entrepreneur is earning a return of 8%. To get started the shakti women borrows from her SHG and the company itself chooses only one person. With training and handholding by the company for the first three months, she begins her door-to-door journey selling her wares. One of the plans of HLL is to allow other companies which do not compete with HLL to get onto the shakti network to sell their products. Talks are on with companies like Nippo, TVS Motors, and Insurance companies.

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