CASES IN MICROFINANCE

CASES IN MICROFINANCE

Edited By:

H.S. Shylendra Prabal K. Sen

Smita Mishra Panda

(Submitted to SIDBI Foundation for Micro Credit, Lucknow)

Institute of Rural Management Anand

2003

Institute of Rural Management Anand Cases in Microfinance

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CONTENTS Preface I. GETTING STARTED 1. To Diversify or Not Into Microfinance?: The Case of a 1-6

Multi-Activity NGO (J.N.Poddar with Aseem Hasnain) 2. How to Get Started ? (B. Raghini) 7-23 II. CREATING LINKAGES AND INSTITUTIONS 3. SHG-Bank Linkage: A Case of ANARDE Foundation 24-32

(Naresh Singh) 4. The Nandipet SHG Federation (S. Rama Lakshmi) 33-42 5. The `Bank’ (H.S. Shylendra) 43-52 III. MICROFINANCE PRODUCTS 6. MD’s Dilemma: A Case on Rural Electricity and 53-61

Microfinance (A. Umarani with Dharmraj) 7. Loan Product For Daughter’s Marriage (K.C. Sharma) 62-67 8. Microinsurance: Is it a Viable Solution? (Nidhi Ranjan) 68-77 IV. DELINQUENCY MANAGEMENT 9. Containing Delinquency Virus (K.C.Sharma) 78-84 V. PERFORMANCE ANALYSIS 10. Link Metrics To Your Mission: Performance Measurement 85-96

System of FWWB (Keyur Thaker)

11. Attaining Self-Sufficiency: The Case of Credit and Savings 97-107 Programme of RGVN (Krishan Jindal)

12. Do You Deserve More Funds ?: The Case of MVS 108-123

(Swandip Sinha)


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VI. SCALING-UP 13. BHASS Micro Credit Mission (N.V.Namboodiri) 124-131 14. Scaling Up of An MFI: The case of Village Welfare 132-141

Society (Prabal K. Sen) VII. SYSTEMS AND OPERATIONS OF MICROFINANCE INSTITUTIONS 15. Introducing Incentive Based Remuneration (Rahul Mittra) 142-151 16. Systems and Processes of Credit Operations : The Case of 152-171

BASIX (Samar K. Datta)

LIST OF CASE-WRITERS


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PREFACE

The volume ‘Cases in Microfinance’ is a compilation of cases which were developed as a part of the multistage ‘Workshop on Developing Cases and Other Training Materials in Microfinance’ held at the Institute of Rural Management, Anand (IRMA) during 2002. The Workshop was sponsored by SIDBI Foundation for Micro Credit (SFMC), Lucknow. The primary objective of the Workshop was to develop appropriate training materials needed for conducting quality short-term and long-term training programmes for microfinance professionals and for use in Training of Trainers. The Workshop also aimed at enhancing the capacity and expertise for case and training material development in the country which could be tapped in future for the benefit of the microfinance sector. There were 15 case writers from all over the country representing various management schools, training institutions and practicing Microfinance Institutions (MFIs). Given the varied nature of the emerging training needs in the microfinance sector, it was necessary to involve both academicians and practitioners as case writers. The Workshop aimed at developing cases, which are relatively shorter in length so as to ensure wider reading and applicability. The cases included in the volume satisfy this norm. The case writers were given orientation in case method before they went back for writing their cases. Also as a part of the Workshop, all the cases have been tested in the presence of practitioners and experts so as to ensure the minimum rigour required of cases. Another major feature of the volume is that the cases developed capture the lessons and experience of many well known and leading microfinance institutions in the country. In terms of topics, the cases cover all major areas of microfinance such as strategy and policy of MFIs, governance and organizational issues, operational aspects, financial ratio analysis, delinquency management, design of microfinance products and HRM issues. A separate Training Guide has been prepared as a supplement to the main volume so as to enable the trainers to make best use of the cases. The entire exercise has been made possible by the generous support of SIDBI Foundation for Micro Credit, Lucknow, who are aiming at mainstreaming microfinance as a major tool for poverty alleviation in the country. We would like to thank Mr. Brij Mohan ED, SFMC and his colleagues Mr. Anil Vidyarthi, Ms. K.C. Ranjani for their constant encouragement and support. We would like to wholeheartedly thank Prof Malcolm Harper, Consultant to SFMC on Training, who not only encouraged IRMA to undertake this exercise as a project, but also, participated actively in the case testing process by offering his valuable comments. We are extremely grateful to Prof. B.M. Desai (formerly with IIM, Ahmedabad) who provided his expertise in training the participants in case methodology and also facilitated the testing of the cases.


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A major part of the credit for the successful completion of the Workshop goes to all the case writers who wholeheartedly participated in the multistage workshop and contributed cases for the volume. We would like to thank all the case writers and their organisations who allowed them to take part in the case writing exercise. We also thank all those organisations which enabled and facilitated writing of case on their experiences. We thank the present Director of IRMA, Professor K. Prathap Reddy and the former Director Dr. Katar Singh for providing all the institutional support and encouragement in various stages of the Workshop. We would like to thank the faculty members of IRMA who enriched the Workshop by contributing their expertise. They are Professors K.V. Raju, V. Ballabh, G. Krishnamurthy, Haribandhu Panda and Kameshwar Choudhary. We are also thankful to the staff of various departments of IRMA who helped in many ways in successfully conducting the Workshop. The case writing Workshop has been a major effort towards filling the need to develop indigenous training material. We hope the present volume and the Training Guide would serve as useful training materials in the field of Microfinance in particular and Development Management in general. 2003 HS Shylendra Anand Prabal K Sen

Smita Mishra

GETTING STARTED


1

TO DIVERSIFY OR NOT INTO MICROFINANCE?: THE CASE OF A MULTI-ACTIVITY NGO1

• The basic reason for rural underdevelopment is the paucity of funds

and lack of information. Because of lack of funds the entrepreneurial

activity of the households is adversely affected keeping them away

from proper education and health care. If financial support could be

made available to them, the major problem of underdevelopment would

vanish. Once the poor get financial support for agriculture and other

activities they are able to improve their economic condition. This

would ensure a minimum income security helping them to strive for

obtaining better education and health for their family members.

In the Board Room

The core functionaries of a multi-activity NGO have gathered for an important

strategic meeting in June 2002. The issue involved is:

Should we diversify into microfinance or remain as we are?

Microfinance intervention basically involves providing the poor easy and

informal access to savings and credit facilities. There are two strong opinion

groups in the organisation. One group is of the view that the diversification

into microfinance is a necessity; while the other is very critical of this line of

thinking.

The Group for diversification (Group I) has the following arguments:

• The experiences from Andhra Pradesh and Karnataka within and

Bangladesh outside the country show enough evidence that when

1. Case prepared by Prof. J.N. Poddar with Ms. Aseem Hasnain, Indian Institute of Forest

Management, Bhopal, under the aegis of the `Workshop on Developing Cases and Training Material in Microfinance,’ sponsored by SIDBI Foundation for Micro Credit, Lucknow.


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microfinance is provided to the poor women, it has brought about the

desirable changes. The women have become economically

independent and have even forced others to listen to them while

making decision on various issues. The women as a matter of fact

have been able to organise successfully big social events and

interventions after gaining economic independence through

microfinance.

• If microfinance could elevate the status of women, why not it should be

extended to all the needy and poor so that they can engage

themselves in gainful activities to break the vicious cycle of poverty? If

we can take up microfinance activities, credit can be provided to the

needy for investing in gainful activities which would ultimately generate

them enough income to meet health and education needs also.

The other group lobbying against diversification (Group II) has the following

arguments:

• As an organization our basic commitment is to work with the whole

village community or the entire social spectrum. It is not the

strengthening of women alone in the village which can build the social

capital. We cannot just stop all other programmes of social upliftment

and start working as a Microfinance Institution (MFI).

• MFIs in their present form necessarily depend on business principles

and stress on the factors like Return on Investment (ROI) and Internal

Rate of Return (IRR). They behave more like a typical lending

institution. Further, the investments in health and education are long-

term strategies which cannot be justified on the basis of returns in

monetary terms. All the present financial studies show unfavourable

ROI. and IRR on such social investments. So where on the earth will

we find money to pump into these fields?


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• We are primarily working for human development, where social capital

building is the prime concern. For this, we need to invest more in

health, education, community development, people's institutions and

social security measures. Microfinance can be a good support only for

livelihood enhancement. It is likely to force us to think purely on

financial planes and may diffuse our basic philosophy. The

microfinance activity would drag the organisation towards adopting

business like approach making it less human development oriented.

• There are various institutions providing financial services. But once

NGOs like us give up the cause for which we have been existing and

take up financial activities, the cause is likely to suffer seriously.

The Organisation

'Sakshar India' was founded in the early 1980s by a group of very committed

and urban educated young people to provide mass education that could

bring about rapid social development. They were some of the best brains

available and had left behind enviable careers before they collectively decided

to live with the poorest people in the remote villages of Madhya Pradesh.

The earlier interventions of the organization were in primary education,

classroom experiments, curriculum development, teachers’ training and

related co-curricular activities. The organization of late has diversified into

various other activities like natural resources management and women’s

empowerment.

Health is another important area in which the organisation has been working

for quiet some time. Under health, the emphasis is on creating community

managed health centres including providing mobile health vans. The

organization has been doing a lot of interaction and networking with the

government functionaries of the health department particularly at the local

level.


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The basic philosophy of the organization is that quality education will build

social capital which in turn will bring about human development. Here

education is not taken as mere schooling alone. The organization believes in

providing education pertaining to health, natural resource management and

other aspects of life also.

The values of the organization rest on the principles of equity, participatory

development and democratic decision-making. These values guide all the

programmes as well as the internal decision making process. All the people

in the organization, in one way or other, are fully involved in the decision-

making system.

The total staff strength of the organization comes to around 35 including 10

professionals and 25 other staff posted in the field areas. The professionals

visit the field regularly while the other staff stay in the field for most of the

time. Several government and private funding agencies have been

supporting the organization. Because of the reputation of the organisation, the

funding has never been a problem. Though foreign funding agencies have

also offered to support, the organisation till now has avoided taking these

funds even though there is no policy to refuse foreign funds.

For quite some time the members of the organization have been debating on

their achievements and failures. The current debate on diversification into

microfinance is an outcome of their recent thinking.

The Field Situation

The participants of the meeting have spent considerable time in the villages

interacting with the community. They have a fair understanding of the

problems and challenges that the poor face in their day to day life.

The area is drought prone and is poverty stricken. Agriculture is the main

stay of the local economy. But agriculture being rainfed, the majority of the

people in the area cannot be sure about getting two square meals a day


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throughout the year. Irrigation being the privilege of a very few who are

generally outside settlers and moneylenders, the economy has remained in a

tattered situation. The households, majority of whom are tribals, have been

into cultivation for virtually two or three generations. Almost every household

has some land to till, no matter how poor the quality is. Credit and inputs are

available but on a very exploitative terms.

The forest resources are in a poor shape. Given their state of depletion, the

local needs of the people are only partially satisfied. The alternative livelihood

opportunities available are very few though some activities with potential for

employment generation have been identified in the area.

The people migrate to distant areas twice a year for at least a month each

time. They go in search of labour work. The lean period sees a mass

exodus from the villages when all the education and schooling comes to a

halt.

The area in question is generally poor in terms of transport facilities and

roads. Reaching the nearest bank costs Rs. 20 for the round trip; while the

wage rate in the area is around Rs. 40 per day. The moneylenders are the

major source for both credit and agricultural inputs. The interest rates

charged by the moneylenders vary from 50 percent to 120 percent

depending on the season, credibility of the borrower and the demand

situation.

Apparently, lack of minimum level of income is proving to be the biggest

hurdle in the development process. The people are not able to participate

fully in the self-governance and in other interventions for education and

health as they always keep struggling for subsistence.

The pressure on the organization is to provide them with some alternative

livelihood avenues along with making the agriculture more dependable. This

would let people to stay back in their villages for a longer period. Then they


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would be able to organize themselves, think about their development and

plan for some productive ventures.

The External Environment

The World Bank, international and national funding agencies, mainstream

policy advocacy groups, the Central and State governments are all lobbying

for and pushing microfinance through the vehicle of women’s Self- Help

Groups (SHGs). These agencies seem to consider microfinance as the

ultimate solution for underdevelopment in India especially in the rural areas .

Funds are made available easily and there is a ready support system for

capacity building and infrastructure development of NGOs if they choose the

microfinance intervention. There is also a lot of publicity available to any

developmental agency working with the microfinance model.

There are a lot of NGOs and government agencies which have taken up

microfinance dispensation through women SHGs. This has created a hype

and seemingly an atmosphere that microfinance works wonders. There is a

presence of considerable number of success stories both from within and

outside the country. There are a number of documented case studies of

empowerment and development of women through SHGs and microfinance.

These are also acting as motivational factors for adoption of the microfinance

programme.

With this, we now move back to the meeting room where a decision has to be

taken by the NGO to enter into microfinance or not.


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HOW TO GET STARTED?1

Mr. Viswanath is the Chief Executive of the Pragati Foundation an NGO

working in Theni district in Tamil Nadu. The Pragati Foundation is involved in

implementing an agriculture development programme to improve the

livelihoods of the farmers for the past five years. Mr. Viswanath had visited a

few NGOs which are implementing the microfinance programme in their

areas. These NGOs are of the opinion that it is a very good programme and

has the potential to benefit the poor people. The farmers with whom the

Pragati Foundation is working had also indicated that lack of credit was one

of the problems they were facing. In the last Board Meeting of the Pragati

Foundation held in June 2002, the members had suggested to Mr. Viswanath,

to explore the feasibility of initiating a microfinance programme in their

working area. Since the Pragati Foundation is implementing only agriculture

development programme which has got stabilized to some extent, it was time

to think of new programmes for the people.

Prakash and Siva are two fresh agriculture graduates who have recently

joined the Pragati Foundation. Mr. Viswanath decided to assign them the

task of doing an exploratory study of the savings and credit system in a

village in which the Pragati Foundation operated. Prakash, Siva and

Kalaiselvi, another young staff member in the Foundation, took up this task

under the guidance of Sumathi, a senior staff. They decided to take up the

Valayapatti village for their study. The following is an account of what

happened over the next few days.

Siva: Let’s go to Boothipuram. Valayapatti is just 3-4 kms from there. Let’s

find some means of transport to reach there.

The three boarded the rickety corporation bus. The bus with its groaning and

creaking noise rattled along the pot-holed road and left them at Boothipuram.

1. Case prepared by Ms. B. Raghini, DHAN Foundation, Madurai, under the aegis of the

`Workshop on Developing Cases and Training Material in Microfinance’, sponsored by SIDBI Foundation for Micro Credit, Lucknow.


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Prakash: Is there any auto or vehicle that can take us to Valayapatti village?.

Even if any tractor or goods van go at this time, we can ask for a ride.

Villager: There’s none. You have to either wait for the next bus or walk.

Siva: What? Walk down?. The four kilometres will take an hour or so.

Villager: It isn’t four kilometres. It is a little over a kilometre only. Just go

down this road (pointing to a path) and you will reach there.

On the path that had once upon a time been a tar road they went walking.

There were hills on the three sides only a few kilometres from the road. A lot

of dry lands with just a few pockets of greenery around the wells met their

eyes.

Siva: Thank god it’s not as hot as it was yesterday. It would have been very

difficult to walk otherwise. I saw the PRA map done two years ago by the

Foundation. The village had around 250 houses.

Kalai: Seems like we have reached the village. It looks quite big. That place

looks like a veterinary hospital.

After some small talk with the villagers, they introduced themselves as

students interested in learning about the village. They got a few villagers

interested in drawing the village map. Rajan, one of the villagers, started to

draw the map. Soon the villagers started arguing among themselves about

the number of houses, whose house etc. Finally Siva, Prakash and Kalai left

the place with 2-3 villagers to draw different parts of the village as part of PRA

exercise. They planned to create the entire village map by joining the different

parts. Along with the map, the small teams also gave serial numbers to the

houses and noted down the names of the couple living in the house. They

found it hilarious writing down the names against the serial numbers. As

almost all the persons had some nickname or the other, the villagers tried

hard to recollect the original names but met with only partial success.

On their way back to the town Siva, Prakash and Kalai shared their learnings.


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Siva: Here agriculture is the main source of livelihood. About 90 percent of

the people own some land, of which only about 10 percent have wet lands.

The remaining are landless. Those with well grow paddy in a small portion of

the land for their own consumption. The major area is then used for raising

sugarcane. Depending on the availability of water, they grow different

vegetables round the year to get some additional income. If the monsoon is

good, others can raise sorghum, ragi or groundnut in their dry lands. Only

during the crop period some agricultural labour work is available.

Prakash: Many of them go as labourers for sugarcane cutting in this area.

The women are paid Rs.25-40 wage per day, while the men are paid Rs. 70-

100 per day. For the other agricultural activities, the wages paid are less by

Rs.10-20 as the time of work is less and the work is also not as tedious as in

the case of sugarcane cutting.

Kalai: There is a labour contract system called Kothu here. Under Kothu

there is a leader who has under his fold about 20-25 labourers who would

come for work when called. The leaders negotiate for getting the work and

disburse the wages to the labourers with a small fee for themselves. There

are 5 or 6 such kothu groups in this village.

Siva: Did you notice? There are many milch animals in this village.

Prakash: That explains the fodder grass grown in small pockets here and

there.

In the evening after the dinner they sat in the office for consolidating the map.

Siva: Take a look at my list. There are 87 households. How many in yours?

Kalai: Nearly 106. I think either a few households are left out or repeated

twice. I need to check that. In Prakash's list there are around 150 households.

The next day they decided to spend some time in studying about the savings

and credit system in the village. They had made quite a few friends from

among the villagers while doing the village map. They decided to gather

information regarding the occupation of different households, loans taken


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from outside, terms and conditions of the loans, purposes for which loans are

taken and the present status of savings sources used by them.

The three went to different parts of the village and asked for the information.

Some of the households declined to give answers, some gave vague

answers, some of them answered after some probing and light hearted banter

and some explained freely. This exercise took them almost the whole day.

They reached back to the office fully tired but were happy that some work had

been completed. They sat down and consolidated the information available

with them. A number of households had to be deleted as the information

obtained was either not clear or inconsistent. Out of 343 households in the

village, they had collected information from 209 households. Of the 209

households surveyed, 56 households were without any loans. Siva was the

one with an interest in computers. He got the data entered and brought out

the following table about the borrower households.


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Table 1: Loans availed by occupation category at different interest rates (Amount in Rs.)

Occupation <3% 3% 5% 10% Total

No. Amount No Amount No. Amount No. Amount No. Amount Agricultural Labourers 4 2,30,100 5 68,000 53 5,04,000 116 14,62,000 178 22,64,100 Labourers - - - 6 1,35,000 6 70,0000 12 2,05,000 Farmers 7 7,85,000 6 1,91,000 2 19,000 11 2,55,000 26 12,50,000 Mill labourers - - - - 1 1,000 3 15,020 4 16,020 Others - - 1 20,000 1 6,500 3 20,000 5 46,500 Total 11 10,15,100 12 2,79,000 63 6,65,500 139 24,22,020 225 37,74,620 Note: The rate of interest charged is per month.


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Sumathi: The three of you have been immersed in your work. It’s half an hour

since I came into the room. None of you noticed me. How was your field visit?

Siva: We have done a village mapping exercise and a quick survey of loans

borrowed from various sources in the village. These are the consolidated figures.

We have to go and do some detailed case studies to understand how the credit

system operates in the village.

Prakash: Have a look at the map. This village is located at the end. There are no

other villages nearby. You have to cross this river and go for two kilometres to

reach the village. But during the rains it is not possible to cross the river. The

other two sides are hills.

Sumathi: What are the main sources of livelihood?

Kalai: Agriculture labour, agriculture, dairying, carpentry and mill work are the

major occupations. You said that there are only 250 families from your earlier

PRA exercise. But according to the PRA done by us, there are 343 households.

Perhaps we may have missed some households.

Sumathi: That’s interesting. We need to find out why it is so. Also it is such an

interior village and dairying is an important activity. Let’s take a look at it.

On the third day all four of them went to the village. Since they had become

familiar faces several villagers greeted them on their way. They sat down with a

few women who were waiting near the water tank.

Sumathi: Why is it that not many youngsters, both male and female, are to be

seen moving around in the village?

Village Woman: Most of them are working in the nearby spices company or in

the cotton mill. They do not remain idle. They find some work either here or in

Theni, the district town. Some accompany their fathers who work as carpenters.

Some are working as apprentices to tailors in Theni. That is why you do not find

them loitering around here at this time of the day. They earn about Rs.800-1600

depending on their age and experience.


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Prakash: How’s that within three years the number of households in your village

has increased from the 250 to 343?

Village Woman: It is due to setting up of new houses by the sons who are

moving out after the marriage. A few of the girls who are married have returned

to the village with their husbands due to lack of opportunities in their places. Also

the relatives of the few villagers have come and settled here. This is the (pointing

to the map) new settlement area.

Siva: What are the other occupations followed by the people here?

Village Woman: Earlier in addition to the agriculture, a majority of the people

here earned their livelihood by cutting and selling firewood from the nearby

forests. But there are no trees now in the forests. The Forest Department does

not allow us even to pick twigs for cooking. We are also not allowed to graze our

animals though we were getting permission earlier. In the last 15-20 years,

dairying has become another major occupation of the people. A few people go

for 8-10 kilometres to collect firewood and sell them for their livelihood.

Siva: What is it that lady carrying on her head?

Village Woman: It is a creeper plant found in the nearby Bodi area. When there

is no work the women go and cut it and bring it here. After a process of soaking,

drying and cutting it is made into brooms. The brooms are sold to the agents who

come here for collection.

Siva: How much would they get for a load this woman is carrying?

Village Woman: Oh, from that load she will make about 10 brooms and each will

fetch six rupees. She will not process this bundle alone. After collecting 3-4

bundles only she will process. Also the sale is possible only when the agent

comes.

Siva: How many women are involved in this activity?


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Village Woman: May be around 10-15 women. Usually they are the ones who

cannot do strenuous work in the field. Some women are also involved in making

brooms from the palm trees found in the nearby area.

Sumathi: Tell me something more about your village?

Village Woman: Presently, the sixth generation is living here. More than 175

years ago, six families from four villages came and settled down in this village.

Those who are living here are the descendants of these families. The six families

belonged to the Valayar community. Nearly 80 percent of the people belong to

this community. There are about 50 Scheduled Caste families living here. They

are mostly Christians. There are two churches and seven Hindu temples each

worshipped by the respective clans.

Oh, Murugeswari why don't you come here? You have milch animals.

This girl here is interested to talk with you.

Kalai: How long are you doing this activity?

Murugeswari: I am doing it for the last 10-12 years. During

M.G.Ramachandran's (the ex-chief minister) period, they gave loans to some of

us for buffalo. The village Panchayat President helped us to get it. I got a buffalo

for Rs. 2,400. A milk cooperative was formed for procuring the milk. Due to poor

management, slowly all the members left the cooperative and started supplying

the milk to Chinnakalai who started a private dairy farm. The co-operative dairy

has closed down since the last two years.

Kalai: How much do you get paid for a litre of milk?

Murugeswari: Seven rupees per litre.

Kalai: What, just seven rupees? In Kodangipatti they are getting nine rupees per

litre. Why don't you sell it over there?

Murugeswari: I have been very loyal to Chinnakalai so far. How can I change

just like that? Besides I do not have anyone to take the milk there.


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Kalai: Don't you think you are being exploited?

Murugeswari: What exploitation?. Now I have only one animal, 10 years ago I

had 7-8 animals. Even at that time I supplied milk to him. My three daughters

were young and were going to school.

Kalai: What happened to all the animals?

Murugeswari: I sold two animals and got my elder daughter married. After 2-3

years, I again sold 2-3 animals and got my second daughter married.

Kalai: Was that money alone enough?

Murugeswari: I used to borrow money from Chinnakalai whenever the need

arose, be it small or big amount. The loan repayment would be adjusted in the

milk payment.

Kalai: What about the interest?

Murugeswari: The interest also in a way adjusted in the milk rate and payments.

See, here Rs. 7 is paid against Rs. 9 outside. When he started the dairy many

years ago, he had no land and house. But today he has got 10 acres of land with

a well, a big house and all the facilities. Tears of blood will come if I narrate the

hardships I took to rear those animals and supply the milk.

When my children were very young, I had to do the entire household work and go

to the fields to cut grass for the animals. There were days when I went very early

in the morning to get grass. After coming back I did the household work, took

care of the animals and sent the children to school. Sometimes I went three

times in a day to the field for getting grass.

Today I have no wealth after having laboured so hard these many years.

Kalai: What is the use of having worked so hard?

Murugeswari: Nothing. The only consolation is that I got my daughters married.

Kalai: Is it only marketing and credit support you get from Chinnakalai?


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Murugeswari: Someone who is interested to rear animals can pay Rs.4000-

5000. Chinnakalai will pay the remaining and get you the animal. The loan will be

adjusted against the milk supplied. The payment for milk supply is made once in

a month after making deductions for loans. Some flexibility is shown in making

monthly loan deductions. Like, if I am expecting a big expenditure this month, I

will ask him to deduct only a small amount from the milk payment and give the

balance. There are nearly fifty of us supplying milk to him. Many of them have

purchased their animals in this manner only.

Kalai: Is your animal insured?

Murugeswari: No. When I had more animals I had them insured. Chinnakalai

used to do it for all of us. But now he has declined saying that whoever is

interested can get it done on their own. He says, “Why should I pay the insurance

premium in lump sum in the beginning of the year for you, when the milk

payments will come in a trickle over the year?”

It is time for me to go and take care of the animal.

Lakshmi: This woman's husband died long ago. She has single handedly

managed the family and got her daughters settled. Just like Chinnakalai,

Veluswamy is also doing this dairy business for quite a long time.

Kalai: Does that veterinary hospital in the village function?

Lakshmi: Yes it does. The doctor here is responsible for three villages. He

comes twice a week early in the morning. He is here for a few hours and then

leaves.

While this interchange was going on Sumathi was interacting with a small group

of labourers who had just returned from work.

Sumathi: Are your returning from the sugarcane fields?

Villager: Yes. Probably this work will be there for another 15-20 days. The cane

is almost over. This year the mill may shut down for more than 2-3 months due to

less cane production.


17

Sumathi: After that what work will you do?

Villager: After that we have no work. The rains also seem not to be in favour of

us. Otherwise, we will have work in the dry fields. Some of us own small pieces

of dry land.

Sumathi: How will you meet your family expenditure during this period?

Villager: Somehow we manage by doing whatever work comes our way. There

is some income from our children who are working and we also borrow from our

neighbours or moneylenders. Sometimes to meet an emergency need we

mortgage our land and get loan from big farmers at low interest rate of 3-5

percent per month. The interest rate also depends upon our relationship with

the big farmer who is lending. Unfortunately a few were unable to repay the

money and after a period of time had to forfeit their land.

Sumathi: Are there no other opportunities available for you?

Villager: Some people go to Kerala to work in the tea and coffee estates. About

6-7 years ago 15 families have migrated and settled there permanently. Others

go and work when there is a peak demand. A few others go to the coffee and

cardamom plantations in Bodimettu and come back here during the lean season.

We have to find some way to get our daily food.

Sumathi: What about the education here?. Are the children encouraged to

study?

Villager: There is a primary school here up to fifth class. Earlier the teaching was

very poor. Now we have three excellent teachers who are doing a good job. Up

to fifth class every child goes to the school. Next, they have to go to

Boothipuram. Mostly they drop out after the eighth class. A few of them study up

to 12th class. We have only two graduates in this village. One of them is doing his

Ph.D and is working as a lecturer in a college.


18

Meanwhile Kalaiselvi and Siva were interacting with Palani, a sugarcane farmer

at his house.

Palani: I have 10 acres of land. For 2.5 acres, well irrigation is available in which

I cultivate sugarcane. My father got a loan for a tractor from the Union Bank of

India, Theni in 1984. All the land documents were in different names i.e. his

name and his father's name. He had to register all the documents in his name

and give the surety document as a single document. Also he was asked to make

a deposit of Rs. 30,000 in the bank.

The loan of Rs. 1,35,000 was obtained and a tractor was purchased. The deposit

of Rs.30,000 was also withdrawn. My uncle was using the tractor. For three

years he had paid only the interest. The bank asked for repayment of the

principal. Immediately, my father took over the tractor. Over the next 12 years he

paid Rs. 54,000 in addition to the Rs.18,000 paid earlier.

Soon he realized that the loan was growing. He sold a piece of 25 cents land for

Rs. 50,000 and paid it towards loan in 1998-99. In early 2001, the bank sent a

letter stating that the loan amount to be paid was Rs. 1,06,000. If the account is

fully closed he can get Rs. 50,000 discounted. He wished to use this opportunity

to get out of the debt. He sold his tractor for Rs. 63,000 and went to the bank. At

the bank he was told that the current due was Rs. 75,000. He then sold some

jewels to get the remaining amount. The account was settled in June 2002. He is

now awaiting the return of the documents.

Palani offered them tea and said at least in his well there is some water.

Chinnakalai who recently deepened his well is in a soup as the bore failed. He

had spent nearly Rs. 80,000 which was borrowed at 3 percent interest per

month from a moneylender.

Kalai went over to the Scheduled Caste (SC) Colony where the Asaris

(carpenters) lived.

Villager: More than 15 Asari families are living in this village. We go out for work

to Theni, Bodi, Kerala and other places. We go as a group if we get a contract.

Otherwise we go individually. On an average, in a month we get work for 15


19

days. I can earn about Rs.100 -150 per day depending upon the nature of the

work. If we can buy some wood and do the work the income will be increased

due to the margin we get in the sale of wood. But most of the time that never

happens.

Kalai: If you go to Kerala where do you stay there?

Villager: See, if I leave early morning by 6.00 am I can reach there by 8.00 am

Similarly in the evening, I reach here by 8.30 pm at the latest.

Kalai then did a detailed study of one of the carpenter families.

Arogyasamy (40 years) and Muthumani (32 years) live in Valayapatti.

Arogyasamy is a carpenter by profession. He has three sons. Two of them after

finishing schooling up to the 5th standard now work with him. The youngest one

is studying in the 5th class. The two older boys did not continue their education

due to lack of interest, insufficient financial means and their father needing an

extra pair of hands to support him in the work. They want to educate their

younger son at least up to 10th or 12th standard. Arogyasamy gets work on an

average for 10 -15 days in a month. The combined monthly earnings of the family

ranges from Rs.3,000 to Rs.4,500 depending on the availability of work, available

outside the village only. For meeting any emergency needs, they have to

depend on the local moneylenders.

Muthumani shared the situation in which her family is compelled to borrow

money. Four years ago, her father died at Kumbum. They borrowed Rs. 2,000 at

10 percent interest for the funeral. So far they have paid Rs. 3,000 as interest.

They still have Rs. 1,800 outstanding as interest with the principal amount of Rs.

2,000 remaining as such. Two years ago in order to meet their festival expenses

and interest dues she borrowed Rs. 3,000 from another moneylender. So far she

has paid Rs. 3,000 as interest and still has some interest and the entire principal

outstanding. Last month, to meet an emergency, she got a loan of Rs. 2,000 to

be repaid in daily instalment of Rs. 20 per day for hundred days. She has repaid

Rs.450 in the last 25 days. In between many times when the need for credit

arose they had borrowed at an interest rate of Rs.10 per week for every Rs.100


20

borrowed. “We earn, pay the interest, eat and sleep. We cannot dream of coming

out of this circle of debt and interest. We toil hard each day just to pay the

interest. This is the way our life goes on,” said Muthumani.

After these discussions in the village the four of them left to the office. Siva and

Prakash decided to go to Bodi and talk to the Canara Bank Manager about this

village and his experience.

Siva: How come Valayapatti falls in your service area in spite of the fact that it is

18 kilometres away from here?

Manager: It is a long story. When the government introduced various

programmes for the poor, the bank mangers at Theni had issued loans. But the

repayment was very poor. Only a few people cleared the loans and that too after

a very long time. When the service area concept was introduced, all the nine

bank branches in Theni declined to cover Valayapatti and few other neighbouring

villages under their fold. They felt that the people there are not fit for banking.

Since we are the Lead Bank for this district we had to take it under our fold.

Prakash: What is your experience with this village?

Manager: We have issued various loans in these villages. But the repayment

performance is poor except for a few farmers. The loans issued under PMRY, a

self-employment programme, are in a bad state.

Thanking the manager the two returned to Theni. On their way back they met

Palani again. Seeing them he stopped.

Palani: Is your enquiry in the village over?. Are you going to give us any loan? If

so, give me a loan. I am on my way to Kodangipatty to meet a farmer to pledge

these jewels. I need urgently a loan of Rs.5,000.

Siva: We are doing only a study. How much interest will he charge you?

Palani: He will charge me 3 percent per month. Since I regularly borrow from him

he will just take these jewels and give me a loan. No hassles here. Any time I go,

I get the loan. Even if I am late in repaying, it is not a big issue. In the bank, I can


21

get a loan at a lesser rate. But every time there is a formality. They will verify if

the jewel is actually gold or not and will send me a notice at the end of the year

for auction if I do not pay the loan.

Siva: Can you not get it within your village itself?

Palani: Yes, it is possible. But I do not like some of those fellows. I prefer to

come here. Most of the villagers usually get loan from within the village. Quite a

few farmers and others who have a little surplus lend money. My bus has come.

Will you come again to our village?

Kalai met the Union Bank Manager at Theni. He explained that after the service

area was demarcated there have been no transactions with the village except for

a few big farmers who come regularly and some who borrow jewel loans.

At night the four of them sat down discussing the events of the past four days.

Prakash: I tried to gather some information regarding the social aspects of the

village. Here, it appears, they are very much united. When there is a threat to the

village in any form they organize the villagers to do patrolling and guard the

village. If any person from the village is accused of any crime, they hand over the

person to the police, if it is true. Otherwise, they help the person to escape.

Similarly, most of the conflicts in the village are resolved by bringing them to the

notice of the family which has been traditionally handling conflicts. They have

faith in the judgment and accept it. Many a times it is resolved among themselves

as they are mostly related to each other.

Similarly, there is practice of collecting a tax on all items that go out of the village

for sales. The right to collect tax is given to a person through auction in the

village. The tax is added to the village fund. Whenever there is a death in the

village, a contribution of Rs. 2 per family is collected towards the funeral

expenses. One can voluntarily contribute more than Rs.2 in case of death in a

poor household.

Sumathi: What about the marriage systems and other things?


22

Prakash: Here the family is a nuclear one. The old people live alone even after

the death of one of the spouses although the children are living nearby. There

are 25 such women living by themselves. The reasons seem to be either due to

the incompatibility between the women and their daughters-in-law or the sons not

interested in taking care of them.

Dowry is not a major issue here. Many of them go for second and third marriage.

After the marriage, the couple register a bond in which the details of separation

and the monetary implications are mentioned with the elderly as witnesses.

There are a very few arranged marriages and also marriages without a bond.

Siva: I did not have the idea to look at these kind of things.

Prakash: That’s not all. I came to know that nearly 20-25 percent of the men

here are habitual drinkers. They drink either at the nearby town or buy from the

lady who sells liquor at the village corner in the evening. Also, the desire to get

rich quick is making at least 20 percent of the men to spend on lottery and the

like. Playing cards for money is another favourite pastime amongst a section of

the men.

Kalai: I discussed with them regarding the village festivals. Here each community

celebrate their temple festival on their own. However, all the villagers celebrate

the Karuppasamy temple festival in a grand manner for two days during March-

April. Similarly in September-October they celebrate another festival by offering a

goat sacrifice while praying for rain. The expenses for both these festivals are

met through funds raised from the village. Another festival celebrated is the

temple festival at Veerapandi which is about 20 kilometres from here. All the

people in the village celebrate Christmas.

Sumathi: All these details are fine. Did anyone of you get information about the

savings systems here?

Kalai: Savings with banks and post office are not prevalent except by a few rich

who keep their surplus money temporarily. They have lost money in local chits

which are the informal savings and credit associations. Recently, ten people lost

their money up to Rs.20,000 to a person. The person claimed that that he was


23

working in an enterprise from where household items such as cots, cupboards,

grinder etc., can be purchased. The goods would be delivered after they have

paid 30 percent of the cost in instalments. When he did not turn up for a few days

they enquired at the shop. They realized that they were duped as the shop had

no such person employed with them.

Similarly, six months ago a person came to the village in a car with a map and

survey tape. He informed them that he had been given the contract for

construction of free houses for the poor and that he was supposed to start the

work on the basement of the proposed houses. The individuals would have to

give him Rs. 5000-10,000 per house based on the size. This way he

accumulated more than one lakh rupees by fooling the people.

The four of them shared their experiences with Mr. Vishwanath. He was

supposed to present before the Board some thing concrete about the

microfinance programme. He asked them to do a detailed analysis of the data

and address the following questions:

1. What are the major characteristics of the village?

2. What are the various informal sources of savings and credit available in the

village to different categories of households?

3. How is the formal banking system functioning in the village?

4. List out the advantages and disadvantages of the both formal and informal

sources of savings and credit?

5. Is there a need for microfinance intervention in the village?

6. What is the target group they should reach out in case there is a need for a

microfinance initiative? What kind of features should it have in order to attract

the people? What kind of financial products could be offered to the people?

7. In what way the various livelihood options available to people and the social

factors in the village have a role to play in the design and implementation of

the microfinance programme?

CREATING LINKAGES AND INSTITUTIONS


24

SHG-BANK LINKAGE: A CASE OF ANARDE FOUNDATION1

The SHG-Bank Linkage Programme

The Self-Help Group (SHG)-Bank Linkage Programme has emerged as a major

approach for the promotion and development of micro-finance sector in India.

Started by National Bank for Agriculture and Rural Development (NABARD) in

1992 as a pilot experiment, it has undergone changes from the pilot phase to

the scaling up phase. The Linkage Programme is based on the simple

preposition that the Non-Government Organisations (NGOs) or banks motivate

the poor to form the groups for mobilising savings and to link them with the

banks for credit support to start income generating activities. There are three

models in the Linkage Programme: i) Banks directly promote the SHGs and

provide credit to them, ii) NGOs promote SHGs and link them with the banks

for credit support, and iii) NGOs promote SHGs and act as intermediaries for

on-lending to the SHGs by taking bulk-lending from financial institutions.

SHG-Bank Linkage Programme of ANARDE Foundation

The ACIL-Navsarjan Rural Development Foundation, Mumbai (ANARDE

Foundation) is one of the leading Self Help Promoting Institutions (SHPI) in India.

The ANARDE Foundation has taken up group linkage in North Gujarat since

1997 with the support of NABARD. The ANARDE Foundation was

established in 1979 under the Bombay Public Trust Act of 1950. It was

established for the purpose of promoting integrated rural development with

financial support provided by Aegis Chemical Industries Ltd. The ANARDE

Foundation has identified a set of programmes as their priorities based

on weightages given in terms of percentage. The weightages given to

different programmes are: economic development programmes - 60%, health 1. Case prepared by Dr. Naresh Singh, Narsee Monjee Institute of Management Studies, Mumbai

under the aegis of the `Workshop on Developing Cases and Training Material in Microfinance’’ sponsored by SIDBI Foundation for Micro Credit, Lucknow.


25

programmes-10%, educational programmes- 10%, environmental programmes-

10%, and social development programmes- 10%. The objectives ofthe ANARDE

Foundation are: i) inculcation of self-help among the rural people, ii) provide

management inputs in the use of natural resources, iii) coordination of the

programmes through grassroots level management team, and iv) create

involvement of beneficiaries to ensure effective participation.

The SHG-Bank Linkage Programme in North Gujarat has been implemented by

the North Gujarat Zone branch of the ANARDE Foundation. The North Gujarat

Zone branch operates and coordinates activities in the seven districts of Gujarat,

namely, Sabarkantha, Banaskantha, Panchmahal, Kheda, Mehsana,

Ahmedabad and Gandhinagar. The districts in the Zone are further desegregated

into 61 talukas encompassing 3000 villages. The Zonal headquarter is located at

Himatnagar in the Sabarkantha district.

The Zonal Co-ordinator, Mr. S.S. Patel, who holds a management post graduate

degree and having work experience in the development sector, realised the need

for streamlining the credit delivery system in the rural areas. His first job was to

ensure intensified flow of credit for economic growth of the rural people and

reduce their dependence on the informal sources of credit. In the initial stages,

he convinced the donors based locally and in Mumbai to allocate funds for

promoting SHGs. In the year 1996-97, NABARD granted a sum of Rs. 5 lakh to

ANARDE Foundation for promoting SHGs. With this support, the ANARDE

Foundation promoted 150 SHGs in the area. NABARD provided a further grant of

Rs. 23 lakh to the ANARDE Foundation during the year 1997-98. By 2000, in all,

ANARDE Foundation promoted 3,216 SHGs in the seven districts of North

Gujarat (see Exhibit 1).

The ANARDE Foundation believes that there are three stakeholders in the SHG-

Bank Linkage Programme. They are: i) primary stakeholders i.e. the rural poor

and the women, ii) secondary stakeholders i.e., the ANARDE Foundation

consisting of project staff, volunteers and other networking NGOs, and iii) tertiary


26

stakeholders i.e., the funding agencies, financial institutions and government

agencies. The ANARDE Foundation further believes that an effective Linkage

Programme can be evolved only in the presence of a fruitful association between

the various stakeholders.

The ANARDE Foundation works in four stages for the implementation of the

Linkage Programme. These stages are, forming, storming, norming and

performing. At the forming stage, the field workers of the ANARDE Foundation

concentrate on selling the idea of SHG to the people. Initially it takes a

considerable amount of time to motivate the people. But subsequently the time

required for forming SHGs decreases in the presence of proven information

about the functioning groups. In the norming stage the basic rules for the smooth

operation of the groups are laid down. In the performing stage, groups are left

on their own to hone up their skills of self-help. The grassroot level workers of

the ANARDE Foundation remain in constant touch with the SHGs to ensure the

smooth working of the SHGs.

Working of SHGs

The members of the groups are not eligible for loans for the first six months.

They keep saving and do not borrow. Each SHG has a President and a

Secretary. The SHGs hold meetings at predefined intervals and the President

records the minutes of the meetings. Every member saves per month at least

Rs. 20. The monthly savings per member across groups varies from Rs. 20 to

Rs. 60. But the saving amount is common for all the members in a group. Each

SHG creates a common fund, which is built up from the fee and the members’

contribution by way of regular savings. The interest accrued on internal lending,

fines collected from members are also added to the common fund. After saving

for six months, the group starts internal lending. The common fund becomes a

revolving fund from which the loans are advanced for consumption and

emergency requirements. A box is maintained called dibba to pool the common

fund.


27

All the terms and conditions are documented in the byelaws of the SHGs. The

different books to be maintained by the SHGs are: admissions register,

attendance register, resolution register, visitor’s book, meetings register, receipt

book, voucher book and loan register. A record of the monthly savings and

receipts is maintained. Irregular attendance of meetings, irregular saving and

irregular repayment of loan, each entails a fine of Rs. 5/-. The fines, interest,

donations are all equally distributed among the members of the group once in a

year.

After completing one year of operations, a group is linked to a bank for

borrowing purpose. The bank linkage is the most vital part of the credit

intensification mechanism. The bank linkage helps a SHG to avail loans after

saving regularly for a minimum of six months. The ANARDE Foundation’s

approach comes under the second model of linkage of NABARD mentioned

above. After linking of a SHG by the NGO, the bank provides credit directly to

the group. The group in turn would undertake lending to its members on terms

agreed upon mutually by the members as per the byelaws. The quantum of

credit given to a group is in proportion to the savings mobilized by the group.

The savings-credit ratio varies from 1:1 to 1:4 depending upon the assessment

of the capabilities of a SHG by the bank. The rate of interest on the bank loan

to the SHG is 12 percent per annum. The SHGs are, however, free to decide on

the rate of interest to be charged on the loans given to their members. The

SHGs normally charge between 24 to 36 percent per annum. The repayment

period from members to the SHG is one year; while the bank lends to the SHGs

for 3 to 5 years. The SHGs are following one year repayment period for the

members with the purpose of using a single bank loan to lend to a large number

of members.

The Strategy of ANARDE Foundation

As evident from the Exhibits given at the end, the ANARDE Foundation

undertook the SHG-Bank Linkage Programme in a big way in North-Gujarat


28

The North-Gujarat Zone is headed by a Zonal Co-ordinator. At the district level

there are District Co-ordinators in each district who directly report to the Zonal

Co-ordinator. At the taluka level there are Taluka Co-ordinators in each taluka

who report to the District Co-ordinator. Below the Taluka Co-ordinators, there

are Supervisors who implement the projects at village level. Each Supervisor

overseas the work of a cluster comprising 5 to 10 villages.

Before launching the project of SHG-Bank Linkage, the ANARDE Foundation

provided training to its District and Taluka Co-ordinators on Microcredit Delivery

System at Entrepreneurship Development Institute of India (EDI), Ahmedabad.

Subsequently, the District and Taluka Co-ordinators developed the teaching

material in Gujarati language to train in turn the Supervisors. They also designed

credit records and other information systems for the SHGs in Gujarati language.

The Supervisors started implementing the SHG-Bank Linkage Programme. To

provide mouth-to-mouth publicity to the project and to develop confidence

among the people about the SHGs, the ANARDE Foundation organized

exposure visits of the potential SHG members to other villages where SHGs

are working. The Supervisors also provided training to the SHG leaders.

Mr. S. S. Patel realised that to speed up the Linkage Programme it is beneficial

to involve the leading banks in the region as they can easily understand the

socio-economic needs of local people. The ANARDE Foundation started

motivating officials of the Bank of Baroda, a major bank in several districts of

North Gujarat, by organizing a series of two-day orientation programmes on the

SHG-Bank Linkage Programme. The staff members of the ANARDE Foundation

because of their good relations with the people in villages also started helping

the bank officials in the recovery of delayed loans of the banks. These two

initiatives, brought the ANARDE Foundation and the Bank of Baroda closer to

each other. The Bank of Baroda showed considerable interest in the SHG-Bank

Linkage Programme of the ANARDE Foundation. Besides organising orientation

programmes for the leaders of the SHGs and the bank officials, ANARDE


29

Foundation also organised a series of one-day interface workshops of bankers

and members of the SHGs to bring mutual confidence and trust between them.

In all from 1995 to March 2000, the ANARDE Foundation formed 3,216 SHGs in

seven districts of North Gujarat. The total membership of these SHGs is 39,649,

On an average there are 12 members per SHG. The SHGs accounted for a

cumulative savings of Rs. 26.06 million with the average savings per group and

per member, respectively, being Rs. 8,104 and Rs. 657. Out of the 3,216 SHGs,

2,167 SHGs (67.4 percent) are linked with the banks for credit support. About

22.3 percent of the members (8,843) have borrowed bank loan from their SHGs.

A total loan amount of Rs. 26.03 million has been disbursed to these 2,167

SHGs by the banks during the above period. The average loan amount per

SHG and per member, respectively, comes to Rs. 12,011 and Rs. 2,943.

Along with establishing the linkage, the ANARDE Foundation conducted a

series of Rural Entrepreneurship Development Programmes (REDP) for the

selected SHGs so that members of the SHGs can start their micro-enterprise

activities. These REDPs were conducted in collaboration with EDI, Ahmedabad

and were supported by Khadi and Village Industries Commission (KVIC),

NABARD and Small Industries Development Bank of India (SIDBI). Later on, the

ANARDE Foundation started conducting REDPs independently with the support

of NABARD as it was having a cadre of REDP Trainers trained at EDI.

The ANARDE Foundation is now not implementing the SHG-Bank Linkage

Programme in North Gujarat. The Programme was closed, once the duration of

the NABARD supported grant was over. There are no records available either on

the recovery of the loans from the SHGs or on the impact of the Programme in

helping the poor to improve their economic conditions. The association with the

Bank of Baroda also seems to be not working as cases of default or poor

recovery have surfaced.


30

The ANARDE Foundation did not make any plan for sustainability and for

withdrawal before closing the project in North Gujarat.

Response from the Banks and NABARD

The SHG-Bank Linkage Programme had offered a great opportunity for a closer

interaction between the banks and group members. In most of the cases, the

branch managers were visiting the groups before initiating the linkage process.

The bankers had relied mainly on the strength and reputation of the ANARDE

Foundation in extending their services to the SHGs. The bankers were happy

with the performance of the grassroot level workers of the ANARDE Foundation.

But this relationship could not be continued as there was no clear plan for

sustainability and withdrawl from the project once the grant was over.

NABARD is concerned about the sustainability of the Programme implemented

by the ANARDE Foundation as the experience in other parts of India has shown

that SHGs may disintegrate after the withdrawal of NGO. According to NABARD

officials, the ANARDE Foundation should emphasis on the sustainability of the

SHGs by imparting training to the group members. The ANARDE Foundation

should think about a gradual withdrawal by forming alternative arrangements for

backup support to the SHGs. Otherwise the whole concept of the SHG may get

diluted. The other suggestion by NABARD is that the ANARDE Foundation

should avoid geographical expansion in diverse areas. As the strategies of

success are not generic, the expansion may dilute the resources the ANARDE

Foundation currently possesses.

The ANARDE Foundation is implementing the SHG-Bank Linkage Programme in

13 states covering 49 districts with the financial support from apex agencies like

NABARD, Rastriya Mahila Kosh (RMK), SIDBI and Swa-Shakti Project. The

states covered are Gujarat, Madhya Pradesh, Maharashtra, Tamilnadu, Andhra

Pradesh, Haryana, Himachal Pradesh, Rajasthan, Uttara Pradesh, Bihar, West

Bengal, Orissa and Jharkhand. It has also taken a bulk loan of Rs. 10 million


31

from SIDBI for on lending to the SHGs. As per the records of the ANARDE

Foundation as of March 2002 they have formed 13,170 SHGs with a total

membership of 1,95,955. These SHGs have mobilized a total savings of Rs.

149.61 million. These figures also include the SHGs that are formed by the

network of NGOs supported by the ANARDE Foundation in different states.

Exhibit 1: Progress of SHGs of ANARDE Foundation (1994-2000)

Sr. No.

District / Year 1994-1995

1995-1996

1996-1997

1997-1998

1998-1999

1999-2000

Total

1. Sabarkantha - 22 141 286 98 55 602

2. Banaskantha 1 13 52 271 170 163 670

3. Mehsana - 18 48 213 253 105 637

4. Kheda 1 15 63 168 70 45 362

5. Ahmedabad - - 23 134 106 55 318

6. Panchmahal - 10 95 242 155 117 619

7. Gandhinagar - - 4 4 - - 8

Total 2 78 426 1318 852 540 3216

Exhibit 2: Membership and Savings Details of SHGs of ANARDE Foundation (2000)

Sr. No.

District / Year Total no. of SHGs

Total Members

Cumulative Savings

(Rs.)

Average Member per

SHG

Average saving per member

(Rs.)

Average Savings per group (Rs.)

1. Sabarkantha 602 7223 4671404 12 647 7760

2. Banaskantha 670 7840 4504821 12 575 6724

3. Mehsana 637 7796 5287650 12 678 8301

4. Kheda 362 5242 3522142 14 672 9730

5. Ahmedabad 318 4289 2649437 13 618 8332

6. Panchmahal 619 7121 5266699 12 740 8508

7. Gandhinagar 8 138 161833 17 1173 20229

Total 3216 39649 26063986 12 657 8104


32

Exhibit 3 : Bank Linkage Details of SHGs

Sr. No.

District / Year Total no. of SHGs

Total Members

SHGs linked with

banks

Total members with bank

loans

Cumulative Loan Amount

(Rs.)

Average loan Amt per group

(Rs.)

Average loan Amt

per member

(Rs.)

1. Sabarkantha 602 7223 430 1715 3548100 8251 2069

2. Banaskantha 670 7840 435 1387 4989100 11469 3597

3. Mehsana 637 7796 382 965 5123280 13412 5309

4. Kheda 362 5242 271 1062 3619500 13356 3408

5. Ahmedabad 318 4289 242 1000 2714600 11217 2715

6. Panchmahal 619 7121 401 2694 5974000 14898 2217

7. Gandhinagar 8 138 6 20 60000 10000 3000

Total 3216 39649 2167 8843 26028580 12011 2943


33

THE NANDIPET SHG FEDERATION1

GRAM

Gram Abhyudaya Mandali (GRAM) is a non-profit rural development

organization registered under the Andhra Pradesh Public Societies Act. GRAM

which is working since 1980 has been focussing on resolving the issues

affecting the Dalit community. It is currently operating in fifteen mandals (an

administrative unit comprising of 20-30 villages) in Nizamabad district and four

in Adilabad district in Andhra Pradesh.

GRAM’s initial approach was to organise its target groups into informal village

level institutions called sanghas to resolve common socio-economic problems.

However, as it moved into agricultural initiatives, the approach seemed to shift in

the direction of service delivery and facilitation. Since the beginning of 1990s,

GRAM has moved strongly in the direction of forming Self-Help Groups (SHGs)

to promote savings and credit and federate them as larger institutions at mandal

and district levels. The federation, in turn, would provide a platform to its target

group for articulating their needs and creating an armour for shielding them from

offensive practices of dominant socio-economic groups.

GRAM entered the Nandipet mandal in 1994 and started promoting sanghas.

After several rounds of discussions with the women in the villages, it took about

four months to form the sanghas. Initially the sanghas have taken help from

GRAM’s staff for record keeping and to conduct meetings. GRAM facilitated

each sangha to open its bank account with a sangha representative and a

GRAM’s staff as joint signatories. After one year GRAM provided Rs 5,000 as

revolving fund to these sanghas to increase their resources. The sanghas

appointed GRAM trained book-keepers by paying a small honorarium.

1. Case prepared by Ms. S. Rama Lakshmi, Mahila Abhivrudhi Society, Andhra Pradesh

(APMAS), Hyderabad under the aegis of the `Workshop on Developing Cases and Training Material in Microfinance’, sponsored by SIDBI Foundation for Micro Credit, Lucknow.


34

Apex Body

After implementing its programme in ten villages, GRAM found it difficult to

expand further into new villages. To resolve the expansion problem and also to

promote the idea of forming an apex institution comprising all the sanghas,

GRAM organized meetings of the representatives from village sanghas. An

Apex body came to be formed for the purpose. The Apex body in turn formed a

sub-committee of 5 members to promote sanghas in new villages. The Apex

body also took up issues like untouchability and anti-arrack movement. After one

year, a cultural team was formed to mobilize more women with the help of

GRAM. GRAM gave Rs.100/- as incentive under the `Intideepam’ scheme for

those women who came forward to join the sanghas. The practice continued for

18 months and led to high expectations among the women. The members of the

Apex body were trained by GRAM on their roles and responsibilities. The

members of the Apex body decided to meet once in six months to discuss the

common issues facing the sanghas.

In 1997, in order to meet the norms stipulated by National Bank for Agricultural

and Rural Development (NABARD) for bank linkage, the village sanghas were

split into smaller SHGs with 10 to 20 members. All the SHGs in a village were

brought together under the sangha, which acted as an advisory body. The Apex

body at the mandal level continued to address the common socio-economic and

political issues. The Apex body along with GRAM also started gaining

credibility and reputation with the government departments and financial

institutions.

Creation of MACS

Meanwhile, GRAM started envisioning the promotion of sustainable and self-

reliant community based financial institutions. The purpose of such institutions


35

was both to provide financial services and to take up livelihood promotion and

community development activities.

Towards this, GRAM organized workshops for members of the Apex body and

village level SHGs. The idea was to form a federation having the legal status of

a Mutually Aided Co-operative Society (MACS) under the MACS Act. The

members of the Apex body were taken on exposure visits to similar institutions

functioning successfully in other places. The core staff of GRAM met several

times to get clarity on the concept of incorporation and for preparation of a model

byelaws for the co-operative.

The Apex body was formally registered on May 6, 2000 as the Nandipet

Intideepam Mutually Aided Co-operative Thrift and Credit Society Limited. The

Nandipet MACS was constituted and capitalised initially by taking SHG members

as shareholders. The membership in MACS is allowed only for individual

members of SHGs. MACS thus became a parallel membership-based structure

along with the existing SHGs.

The process of enrolling all the SHG members in MACS took two years. Initially

resistance for enrolment came from the old SHGs. They were not willing to part

with their funds to be deposited in MACS. GRAM staff and the board members

of MACS jointly conducted village level meetings with such SHGs to encourage

them to join MACS.

Governing Structure and Functions of MACS

The governing structure of MACS consists of a 32 member Representative

General Body (RGB) of 32 village sanghas, and an 11 member Board of

Directors (BoD) elected from the RGB (Diagram 1). One director is elected for

every cluster consisting of 3 or 4 villages. The BoD is elected once in three

years with one-third of the members rotated every year as per the byelaws.


36

The BoD meets once in a month and takes decisions on various matters

including loan appraisal and sanctioning. Each Director is responsible for

supervising a cluster. When problems like bad debt arise, they are brought to the

notice of the entire Board for discussion and appropriate action.

Table 1: Progress of SHGs

Year SHGs Members SHG borrowings from

banks during the year

No. of SHGs Amount (Rs.)

1997 97 1541 1 15,000 1998 114 1763 12 2,20,000 1999 129 2002 17 4,10,000 2000 183 2809 94 16,15,000 2001 222 3291 106 25,74,000 2002 239 3491 128 28,25,000

The services of MACS include providing loans for both production and

consumption purposes, mobilising savings, disbursing relief under Death

Relief Assurance Scheme (DRAS) and providing training to the leaders of the

SHGs. The idea of DRAS was introduced after an exposure visit to a successful

MACS. The members have to save compulsorily Rs.30 per month with their

SHGs. The SHGs in turn will deposit annually Rs. 120 per member with MACS.

MACS pays 6 per cent interest on members savings. The members and the

SHGs are also depositing their excess cash with the MACS in their savings

account on which MACS pays 4 percent interest. MACS has recently introduced

voluntary savings scheme both for the members and the SHGs.

In the initial stages, the group members saved and lent out small amounts among

themselves. With a rise in their credit requirements, the SHGs started mobilising

loans from the financial institutions with the help of GRAM in the beginning and

then with MACS. MACS claims 2 percent margin from the SHGs as its service

fee for linking them to the banks. Previously, GRAM used to recommend such


37

Diagram 1: Structure and Governance of Nandipet MACS

Board of Directors (One from each cluster) Representative General Body (One from each sangha)

(One representative from each group)

10-20 members 10-20 members 10-20 members 10-20 members

applications of the SHGs to the banks for loan. The rate of interest charged by

different banks to SHGs varies from 12 to 13 percent per annum. Nearly 87

percent of the SHGs are now linked to banks under the SHG-Bank Linkage

programme. 27 SHGs are linked to BASIX, a microfinance institution working in

AP.

MACS has started direct lending to those members whose loan applications

are recommended by the SHGs. The members of an SHG can get loans both

from their SHG and also directly from MACS. To meet direct loan demand of

members, MACS borrows from commercial banks and BASIX.

SHG SHG SHG SHG

MACS

Vill. Sangha

Vill. Sangha

Vill. Sangha

INDIVIDUAL LENDING

SHAREHOLDERS


38

MACS has received a loan of Rs. 11 lakh from BASIX at 18 percent interest

per annum on which it has received 2 percent rebate for prompt repayment.

MACS also has got a loan of Rs. 5 lakh from the Indian Overseas Bank (IOB) at

10.5 percent per annum.

Table 2: Particulars of MACS (March 2002)

1 No. of Staff 7 2 Total Savings Rs.36, 91,950 3 No. of Groups Linked to Banks 209 4 Cumulative Bank Loan Rs. 77,69,000 5 No. of Groups Linked with BASIX 27 6 No. of Members Taken Loan from

MACS 1006

7 Total Loans Taken from MACS Rs.63, 39,000

MACS initially released loans to its members after they fulfilled the criteria of

minimum period of membership and credit worthiness based on their savings. A

member gets a loan at 1:8 ratio of her savings. In case of lending to members of

a new SHG, MACS keeps the particular SHG under scrutiny for 3 months to test

its creditworthiness and then starts lending out small loans. The second loan to a

member is sanctioned only after she clears the outstanding loan with MACS.

MACS lends directly to the members at 24 percent interest per annum. The

members repay their loans through their SHG. Out of the 24 percent interest

paid by members on their loans, the SHGs retain 3 percent with them and the

remaining 21 percent goes to MACS.

MACS adopts a stringent recovery method to keep default low.

In case a member is not able to repay her loan on time, it becomes the group’s

responsibility to recover the loan and repay to MACS. Cumulatively, MACS has

been able to recover 99 percent of the loan amount due. The recovery rate of

the current loan amount due comes to 93.85 percent.


39

Challenges before MACS

The vision and objectives of MACS are widely shared by the Board and the staff.

The Board members are adequately aware of all the operational aspects of

MACS and have good exposure to microfinance. Their involvement during the

Board meetings is good. There is active participation during agenda setting and

decision-making. However, a major role in decision making is played by old

Board members and staff of GRAM, as one third get newly elected every year.

The Board of MACS is trying to evolve its operational strategy through a process

of experimentation. For ex. DRAS became a loss-making product due to

unexpected death of four members within a year. The members feel that there

was no clarity about the age requirement (18 to 55 years ) prescribed for

DRAS. Several aged members are now demanding that they also be covered

under the scheme.

GRAM has deputed a manager and field staff to MACS. The staff have also

been trained by GRAM in accounting system and record maintenance. GRAM is

of the view that MACS will succeed only when the staff become accountable to

MACS and its members. There were many challenges and difficulties during this

transformation. In the first year MACS found it difficult to manage book-keepers

for each SHG because of high expectation and exploitation. To resolve this

problem, GRAM with the approval of the Board of Directors of MACS selected

four candidates and appointed them as Community Based Workers (CBW) to

manage the SHGs,

Being currently dependent on GRAM for technical and financial support, MACS

would like to attain self-sufficiency. GRAM is bearing the salary of all the staff.

Only recently MACS started paying the salaries of two CBWs. Though during

2001-02, MACS has earned profit (see Exhibit 1), it is yet to achieve operational

self-sufficiency fully. MACS is unable to meet all its operational costs out of its

operational income. Including salaries and travel expenses of the staff which

are met by GRAM, MACS is able to cover only 77.7 percent of its operational


40

costs. The operations at MACS are not generating enough income to cover all

their costs.

MACS has attempted to test its business skills to generate some surplus income.

It has started a fair price shop and saris trading for the purpose. The Manager

of MACS looks after these two activities. However, the Manager has found it

difficult to allot full time to manage them along with the primary activities of

MACS.

MACS is trying to forge links with external agencies for availing various

benefits. Since MACS is emerging as a direct lender, the focus of the financial

institutions is getting diverted more towards MACS than SHGs to reduce their

transaction costs. The lending relationship of MACS remains only with the

individual members through SHGs which are able to access funds from various

sources. MACS provides training to the Board members about their role. But

training has to be provided frequently as one-third of the directors get elected

newly every year. There is high level of commitment and involvement by the

staff. The records are fairly well maintained and regularly updated though the

information flow between the SHGs and MACS is inadequate. MACS also

wants to emerge as a livelihood promoter and a facilitator for community

development though the SHGs perceive it as a financial intermediary.

Pursuing members to borrow for various income generating activities has been

a major challenge to MACS. MACS is trying to play only a passive role in

resolving any caste-based conflicts within the community.

The idea of promoting a district level federation of all the 14 MACS promoted by

GRAM has been mooted in the Board on which the SHGs are yet be taken into

confidence.


41

SHGs’ view points

There is a feeling among the SHGs that the formation of a federation like MACS

should take place only after two years of SHGs’ formation. GRAM management

feels that the formation of federation can be taken up when the SHGs are at

least one year old and have been given intensive training for capacity building.

The SHGs which were hither to mainly borrowing from the banks are now

looking towards MACS for the purpose. In a participatory assessment exercise

carried out, 12 SHGs gave highest rank to MACS as compared to other

institutions like the District Rural Development Agency (DRDA), banks, BASIX,

GRAM and the Scheduled Caste (SC) Corporation both on the basis of

importance they attach and the frequency with which they interact with these

institutions. Both the old and the new SHGs gave similar kind of ranking in the

exercise.

Questions for Discussion

1. What is the approach followed by GRAM in forming the federation?

2. What is the organisational and governance structure of the federation?

3. How is the Nandipet MACS performing as a federation?

4. Whether GRAM was right in promoting the SHG federation?

5. How to make the Federation self-reliant ?


42

Exhibit 1: MACs’ Income and Expenditure Statement for the Year Ending 31.03.2002

EXPENDITURE AMOUNT INCOME AMOUNT

Registration/Administration/ visiting fee

3,300.00 Membership fee 13,725.00

Stationery expenses 15,210.00 Documentation fee 14,675.00 Board of Directors TA/DA 43,271.00 Interest on Loans 328,211.00 Documentation/Bank charges 7,380.00 Interest on SB

Account 4,713.00

Meeting expenses 11,839.00 Contribution/ Visitors fee

5,850.00

Office maintenance/ Telephone

20,778.00 SHG bank linkage sponsorship fee

45,980.00

Audit fees 1,000.00 Training to SHG leaders 2,616.00 Interest on loans 32,781.00 Incentive paid to members 2,400.00 Interest on deposits 54,612.00 DRAS Fund 56,060.00 CBWs Honorarium 4,793.00 Excess of income over expenditure (surplus)

157,114.00

Total 413,154.00 Total 413,154.00

Exhibit 2: Sources and Uses of Funds of MACS

PARTICULARS As on 31.03.2002

SOURCES OF FUNDS: Authorised Share Capital 450,000.00 Issued & Subscribed Capital 346,300.00 Reserves 40,535.00 Administrative Self-reliance/ Deficit Cover Fund 364,810.00 Loan from Financial Institutions 1,863,673.00 Total 2,615,318.00 APPLICATION OF FUNDS: Fixed Assets 12,547.00 Deposits 268,000.00 Income Generation Programme 29,655.00 Debtors (Loans to members) 2,295,589.00 Cash in hand & Bank 9,527.00 Total 2,615,318.00


43

THE `BANK’1

The Name of NGO Disappears

“The name of our organization as promoter has been removed from the two

name boards of the Co-operative `Bank.’ This has been done by the `Bank’ at

the insistence of the office of the district registrar of co-operative societies,”

remarked Mr. Kunal of the NR Foundation who worked as an Extension Agent in

the International Labour Organisation (ILO) sponsored Project under which the

`Bank’ was promoted.

The disappearance of the name of the Non-Governmental Organisation (NGO)

from the board appeared symbolic of the real separation that has taken place

between the `Bank’ and the NGO. As remarked by the Director of the NGO,

“We have no links with the `Bank’.” They are working on their own. We cannot

support them any more.”

The separation that has taken place between the NGO and the Co-operative

`Bank’ seemed to be a touchy issue. The NGO is known for its capacity to build

strong village level co-operatives and maintain a long-standing relation with them

through continued support and guidance. The NR Foundation is a non-profit

organization working since 1974 in Western part of India for the upliftment of the

tribal community. The main thrust of NR Foundation is to improve the capacity of

the local natural resource base for supporting livelihoods on a sustainable basis.

In order to attain its objective, the NR Foundation takes up interventions like lift

irrigation schemes, construction of checkdams, watershed development, forestry

and income generating programmes in the villages of its jurisdiction. The NR

Foundation also promotes savings and credit self-help groups (SHGs) mainly for 1. Case prepared by Dr. H.S. Shylendra, Institute of Rural Management, Anand, under the

aegis of the `Workshop on Developing Cases and Training Material in Microfinance,’ sponsored by SIDBI Foundation for Micro Credit, Lucknow.


44

the women in the intervention villages. The formation of co-operatives to be

managed by the participants is the major strategy adopted by the NR Foundation

for attaining success and sustainability of its various interventions. In all the co-

operatives, the NR Foundation formally maintains ex-officio representation on the

executive committee in order to provide the necessary guidance and support. Till

March 2002, the NR Foundation has promoted over 260 village level co-

operatives under various interventions.

The `Bank’

“It is actually a co-operative credit society. But all of us have been calling it a

`Bank’ as it was visualized that the co-operative society would emerge as a major

women’s bank in the area,” narrated the Director of the NR Foundation referring

to the vision they had for the Co-operative.

The `Bank’ which is actually known as the Adivasi Mahila Savings and Credit Co-

operative Ltd., was established in March, 1999. The establishment of the `Bank’

was the culmination of the efforts to hand over 24 women’s SHGs formed since

1994 to a local co-operative managed by the members. These SHGs had been

formed under an ILO supported Project implemented by the NR Foundation

during 1994-99. The Project aimed at promoting self-reliance among the tribal

community through co-operatives and self-help organizations. The Project was

implemented in nine villages of one taluka where the NR Foundation had already

made interventions through lift irrigation schemes and checkdams. Besides the

formation of the SHGs, the ILO Project also supported the formation of four

women’s dairy co-operatives, capacity building of the lift irrigation co-operatives

through training, implementation of income generating schemes and promoting

non-formal education.

The 24 women SHGs had been promoted with the main purpose of encouraging

savings and credit for attaining self-reliance. The SHGs with nearly 500

members had started initially with a monthly savings of Rs. 10 per member. By


45

1999, some of the SHGs had increased their monthly savings instalment to as

much as Rs. 50. Being able to mobilise capital through members’ savings, the

SHGs went in for internal lending utilising their own funds. The members’

savings were supplemented by additional capital provided to each SHG from the

revolving loan fund created under the Project. All the SHGs were recording 100

per cent recovery of the loans lent to the members. The members and the

leaders of the SHGs were trained by the NR Foundation in various aspects of

SHG management. While the SHGs were making impressive progress, the ILO

Project was approaching its end by 1999. It was visualised under the Project that

the SHGs would be taken over by a co-operative to be formed for the purpose.

The exploration for creating such a local institution had started much before the

termination of the Project.

The members of the SHGs were taken on exposure visits to two organizations

which had created women’s’ credit co-operatives. Inspired by the exposure visit,

the members decided to go in for the creation of a co-operative by pooling the

savings of all the 24 SHGs from nine villages. The effort which started in

November 1998 finally ended with the registration of a co-operative credit society

in March 1999. The office of the Co-operative was located in a nearby town

called Simdi. Ms. Savitaben and Ms. Kantaben were selected by the members

as the Chairperson and the Secretary of the Co-operative. These two leaders

were found to be quite articulate and talented by the SHG members. Before the

creation of the Co-operative, the SHG members used to meet every month at the

NR Foundation to discuss their progress and problems.

Ms. Savitaben who has been the Chairperson of the `Bank’ since its inception

remarked, “We decided to form a co-operative based on the idea we got during

the exposure visit. Our purpose was to meet our members’ need for loans by

pooling the savings of the SHGs and mobilizing funds through borrowing. Though

our SHGs had savings accounts with a commercial bank, the bank would not

give us any loan.”


46

While the Co-operative came to be established, some of the plans the NR

Foundation had for the Co-operative did not materialize. As Mr. Kunal said, “The

SHGs were functioning only in nine villages. Our idea was to form a co-operative

which can have jurisdiction over a large area. However, this required taking no

objection certificates from a large number of credit co-operatives in the area.

The district registrar of co-operative societies limited the area of the co-operative

only to the nine villages. At the same time, the district registrar refused

permission for ex-officio representation of the NR Foundation on the executive

committee of the co-operative. The reason given to us was that the Co-operative

is for the adivasi (tribal) women and the NR Foundation does not have the status

of an adivasi person.”

“The refusal for the ex-officio representation was surprising as the NR

Foundation is represented on the committees of all the co-operatives promoted

by us in the tribal areas”, said the Director of the NR Foundation. He further said:

“We could have insisted with the district registrar for our representation, but some

how we did not pursue it.” As Ms. Savitaben, Chairperson of the Co-operative

said, “Even we wanted the NR Foundation to be on our committee but the

registrar refused it.”

There was all-round enthusiasm when the `Bank’ started functioning. The NR

Foundation staff and the women leaders wanted to take the Co-operative to new

heights through their joint efforts. Though the ILO Project came to an end and

staff were withdrawn from the Project, the NR Foundation decided to continue

with its support for the Co-operative as per the `continuation strategy’ followed

with respect to all its interventions.

The staff working under other projects continued to interact with the ‘Bank’ on a

regular basis. The NR Foundation was reimbursing the Co-operative’s monthly

rent for the building and the honorarium for the staff. Ms. Sujatha, a social work

post-graduate who had joined as the Project Manager of a new government


47

project was entrusted with the task of co-ordinating with the Co-operative. Ms.

Sujatha remarked, “The leaders of the `Bank’ were regularly approaching us for

help and guidance on various issues; we actively helped in getting a site allotted

to the Co-operative for the construction of a building.”

The NR Foundation also sanctioned a sum of Rs. 2.5 lakh to the Co-operative

from the revolving loan fund (RLF) of the ILO Project for meeting its additional

working capital needs. The ILO Project had visualised that the RLF would be

finally transferred to the local institutions created. The cash transactions of the

Co-operative were carried out through a joint account held with a commercial

bank in the name of the Co-operative and the NR Foundation.

The Separation

The collaboration between the `Bank’ and the NR Foundation which was going

quite smoothly took a `U-turn’ within a year. The leaders of the `Bank’ refused to

take any honorarium for their staff from the NR Foundation and decided to be on

their own. The long partnership which had started with the formation of the SHGs

came to an end as many differences cropped up between the leaders of the

`Bank’ and the staff of the NR Foundation. By July 2002, the `Bank’ and the

Foundation had totally lost touch with each other. As Ms. Parameet, a Senior

Programme Executive of the NR Foundation remarked, “It had even become

difficult for us to obtain the annual balance sheet of the `Bank.’ We had to argue

with the district registrar to get a copy of the recent balance sheet.”

How is the `Bank’ doing?

To Ms. Parameet, “Going by the balance sheet there seems to be some problem

with the `Bank.’” She further elaborated, “Most of the loans of the Co-operative

seem to have gone only to two villages from where the Chairperson and the

Secretary of the Co-operative come. Also there seems to be some internal

conflict and the leaders have come under local influence. The overdues are also

growing. It is not good if the `Bank’ gets derailed.”


48

Mr. Kunal said, “When we were supporting it, the `Bank’ was nicely managed.

Now even the premises is not well kept”. The Director of the NR Foundation said,

“I am not sure whether they would be able to get the government funding for

constructing their building. We would have given them the necessary support.

But if the co-operative is able to function well on its own, we are happy. Our

ultimate purpose is to create an institution which can become really

autonomous.”

Ms. Savitaben and Ms. Kantaben assessed the performance of their co-operative

in the following way:

“We have expanded our area of operation recently to six more villages to admit

300 more members. The Co-operative has got a cash credit loan of Rs. 50,000

from the District Central Co-operative Bank (DCCB), the limit of which has now

been enhanced to Rs. 80,000. We use both the members’ savings and the loan

from the DCCB. We sanction loans on a yearly basis as we are a co-operative.

A member is given a loan up to Rs. 10,000 based on the purpose and her

savings with the Co-operative. The members have to apply directly to the Co-

operative for loans with two guarantors. The loan is approved by the Executive

Committee. The members save and repay through their SHGs. Different SHGs

have different savings rate. Many members have been able to take up dairying

and other income generating activities through the loan support received from the

Co-operative.”

“The same Executive Committee is continuing for the second time. The Co-

operative has implemented a government housing scheme for some of the

members. A watershed scheme also has been sanctioned to the Co-operative.

We will recruit new staff for the watershed project. Currently, we have six staff

members and pay a monthly rent of Rs. 800 for the building. The Co-operative

has made profit every year. The auditor has given a `B’ grade to the Co-operative


49

(meaning doing reasonably well). We have sanctioned loans for 400 members

this year. The co-operative has a total outstanding loan of Rs.7.14 lakh at the

end of March 2002. The loan recovery which was 100 per cent in the earlier

years has come down to 70 per cent during 2001-02 because of the drought.

Some of the staff of the NR foundation have also instigated our members in a

village not to repay the loan of the Co-operative.”

Table 1: Progress of the Co-operative (Amount in Rs.)

Particulars 1998-99 1999-00 2000-01 2001-02

Share Capital 11,900 11,900 1,38,520 NA

Reserve Fund 595 595 595 NA

Revolving Loan 3,79,228 2,36,828 NA NA

Members Savings 3,25,749 3,89,597 2,83,669 2,90,544

Loan Outstanding 4,27,201 5,50,915 6,54,698 7,14,198

Why the Separation? “We have received so much support and help from the NR Foundation,”

acknowledged Ms. Savitaben, who is the Chairperson of the co-operative since

inception. Continuing further she said, “But we got separated because we had

so many problems with the staff of the NR Foundation who were dealing with us.

After our Co-operative was registered, the staff of the NR Foundation started

telling us that we have to follow only their suggestions and systems. The district

registrar was telling us that we must follow the co-operative procedures. They

were not able to understand our problems. We had to change all our ledgers and

make new entries. We opened our own savings account with the DCCB. All

these steps were questioned by the NR Foundation staff. We felt insulted.”


50

“We made a complaint to the NR Foundation to change the staff. A meeting was

held at the NR Foundation to thrash out the differences. But nothing changed

despite the promise. Hence we decided to part company.”

Currently, the Co-operative has changed the bye-laws to suit the co-operative

system. The original bye-laws were framed by the staff of the NR foundation. The

auditor has made a suggestion to close the savings account jointly held with the

NR Foundation. The leaders are now taking guidance from the DCCB and the

district registrar.

The reasons given from the side of the NR Foundation for the separation are as

follows:

Ms. Sujatha, the Programme Manager of a Government Project who was co-

ordinating with the Co-operative disagreed with the views expressed by the

leaders. She said, “All the things have been pre-planned, be it the changeover

into the co-operative system or opening a savings account with the DCCB only in

the name of the Chairperson and the Secretary of the Co-operative. The

revolving fund given to the Co-operative and the SHGs has to be repaid. They

were not repaying it. By insisting that it has to be repaid, I was only doing my

duty, though I was new. The two leaders never changed and they started

dominating the whole ‘Bank’. Moreover, the staff of the NR Foundation, the

‘Bank’ leaders and the registrar never held any joint meeting while framing the

rules. Hence there is also lack of some clarity and consensus.”

The Co-Director of the NR Foundation said, “The women leaders seem to have

come under some local influence. They are not interacting with us probably

because they have not repaid the revolving loan fund to us. They must be

thinking that we will insist on repaying that money.”

To Ms. Parameet, the Senior Programme Executive, the reasons for the

separation are two-fold: First, there were frequent changes in staff of the NR


51

Foundation dealing with the Co-operative. The new staff were not able to deal

with the Co-operative. Differences came up between the Project staff and the

leaders. Secondly, the leaders must have been influenced by some local

elements. The current Chairperson has become very powerful. She has also

become a member of the District Rural Development Agency (DRDA).

The Director of the NR Foundation summed up the whole episode in the

following way: “To be fair to everybody, our staff have not handled the

relationship well. There was frequent change of staff. The ILO Project had

stopped, we could not continue with all the staff. We wanted to support them as

our own institution. We wanted it to expand to cover larger area. Some local

people and politicians would have influenced the women leaders by telling them

that it is an adivasi institution and hence they would get all the government

support. Moreover, the women leaders must have thought that they may lose

control over the Co-operative, if the area of operation is expanded as planned by

us.”

New MFI

The NR Foundation has now promoted a large number of SHGs under various

programmes. They are planning to promote a new microfinance institution (MFI)

to serve all the SHGs in the entire district. They are exploring whether it should

be a co-operative institution or a Non-Banking Financial Company (NBFC).


52

Questions for Discussion:

1. What seems to have gone wrong between the NGO and the MFI (Co-

operative)?

2. Who is to be blamed?

3. How to sort out the difference and re-establish the relationship between the

MFI and the NGO?

4. What precautions the NGO needs to take if they launch a new MFI?

MICROFINANCE PRODUCTS


53

MD’S DILEMMA (A CASE ON RURAL ELECTRICITY AND MICROFINANCE)1

Part - 1

Posers to EMVS’ MD by SHG members from Malukan Village

Poser 1: “I am Sumathi, I have a five-year old son studying in a primary school.

We belong to Scheduled Caste. I have studied up to 10th standard. My parents

were unable to send me for further studies due to financial constraints. After two

years I completed 10th standard. I got married at the age of 18.”

“Government has allotted this house to us. We are living in this house for more

than five years. My husband is a wage labourer, who gets employment for ten

days in a month. Sometimes he gets fishing job and sometimes he does palm

mat weaving. Till last year, he was doing the work of climbing palmyrah trees to

cut palm leaves. One day he fell down from the tree and broke his legs. He

stopped the climbing activity. He earns Rs 500 to Rs 1,000 per month depending

on the work available as a wage earner.

“I do not know agricultural work but I know tailoring. As I have a child to look

after, I can’t afford to take up any full time work other than tailoring. But I want to

engage myself in some work to earn income to support my family. We live

frugally. We do not have many facilities including electricity connection. In the

evening after it is dark, I cannot do any work. I cannot move out of my house. In

this area snakebite is common. I have to do something about it. But I do not

know what to do?”

Poser 2 : “I am Poomayil. I have two sons and one daughter. They are

studying, in 7th, 9th and 10th standards. My husband and I do only agricultural

1. Case prepared by Ms. A. Umarani with Mr. Dharmaraj, DHAN Foundation, Madurai, under

the aegis of the `Workshop on Developing Cases and Training Material in Microfinance’, sponsored by SIDBI Foundation for Micro Credit, Lucknow.


54

labour work. We get employment only in the agriculture season. During the lean

season, we make and sell 7-8 palmyrah mats and earn Rs. 30-35. In a year we

get 160-180 days of employment.”

“We are living in a mud hut for over 17 years. There are 22 families like us living

here on one side of the tank bund. It is our own land. As we live in one corner of

the village, we do not have much interaction with the other villagers who live in

the centre of the village. Our hamlet gets very dark in the evenings as there is no

electricity for the past 45 years. We cannot move out of the house to interact

with others due to darkness. If we want to watch TV, we have to pay Re 0.50 to

the TV owner. We do not get any worthwhile support from the better off in the

village. After it is dark, my children cannot study for long hours. Neither I can do

any household chore nor take up any income earning activity. All the 22 houses

are located little away from an electric pole. Even then we have not got

electricity connection. I cannot imagine bearing the heavy cost of getting the

electricity connection.”

Part - 2

The Genesis of EMVS

Malukan is a village which has 164 households. It is 11 km away from the

Mapadnam block headquarters in the Danmar district. It has a hamlet of more

than 30 Valayar families located in the outer periphery close to the tank bund.

More affluent households live in the centre of the village with facilities such as

potable water, electricity, TV and transportation. As the Valayar families belong

to lower caste, they do not get any support from the villagers. They are engaged

in fishing and in making palm mats. Rarely they get employment in agriculture.

Some of them work as permanent labourers in coconut gardens.

The livelihood of the people in the Danmar district depends more on coastal and

marine resources. Fishing and palm mat weaving are the major sources of

income for the poor families. As agriculture is a seasonal activity, the income of


55

poor families wildly fluctuates. Moneylenders support these families by providing

credit at 120 to 180 percent interest. Because of drought, many families have

migrated to other villages.

In this context, the HAND Foundation, a Non-Governmental Organisation (NGO),

came into operation in 1992 to provide the poor women with access to credit at

reasonable interest rate to support their livelihood. Self-Help groups (SHGs) with

15-20 women members came to be formed for the purpose. The HAND

Foundation encourages women to save and pool their income to lend to the

members. The SHGs can also borrow from the commercial banks. The purpose

of loan and the rate of interest are decided by the SHGs (see Exhibit 4).

To sustain the whole initiative, the members of the SHGs have promoted a

federation of SHGs in 1995 called the Earth Mahalir Vattara Sangam (EMVS)

with the HAND Foundation’s support. The aim of EMVS is to enable the poor

families to cross the poverty line and bring about desirable changes in their

standard of living. EMVS is a people’s organization managed by the leaders of

the affiliated SHGs. It is a registered body under the Societies Act of 1983. The

long term aim of EMVS is to gradually move out of savings and credit activity by

leaving it to the SHGs and to become a community development organisation.

Presently, EMVS is operating in 26 panchayats consisting of 105 villages. It has

promoted 176 self help groups, called sangams, with a total membership of

3,153 women. It has mobilised savings to the tune of Rs. 8.8 million from the

poor women members who have stakes in EMVS with ownership rights. Apart

from providing security and ownership, the savings also serve as a means to

attain self-respect for the poor. Besides regular savings, EMVS offers various

need-based savings products through which it has mobilized over Rs.0. 9

million.


56

EMVS has now reached a stage where other financial institutions and banks

have come to recognize it as a prestigious people’s organization. Because of

this reputation, it could mobilize a loan of Rs 0.5 million from the Housing and

Development Finance Corporation (HDFC). Till March 1998, EMVS has

disbursed a total loan of Rs 73.92 million to 6160 borrowers. To meet the

various credit needs of its members, EMVS offers nearly ten types of loan

products. EMVS charges 15 to 18 percent rate of interest per annum on its

loans to the SHGs.

To carryout its various functions, EMVS has appointed six staff directly at the

federation level and 17 staff at the cluster level. There are 80 part-time workers

who help the SHGs in their management like accounts keeping. The salaries of

the staff at different levels are met by the organizations at respective levels (see

Exhibit 2). Through the income earned from its microfinance activity EMVS has

created a reserves and surplus fund of Rs. 0.65 million.

The Electricity Problem

Sumathi and Poomayil are the members of two SHGs affiliated to EMVS. Along

with them another 45 members expressed the need for electrification of their

houses. In Malukan village, the 22 Valyar families living near the tank bund

have put continuous efforts to get electricity connection but in vain. They are

located little far away from the main village and are without electricity. As the

school going children cannot study in the evening hours, their standard of

education has been affected. The women who come back from work in the late

evening find it difficult to cook and do other household chores. This has been

the case for the last 45 years.

During the lean season these families do mat weaving. In the evenings they

take all the leaf materials to one of the houses having electricity to continue with

mat weaving till 10 p.m. During the rainy season the situation is even worse.


57

These 22 families have approached the government officials in the Danmar

district to get the electricity connection freely under some government scheme.

As these households rejected the demand for payment of bribe, the officials

took no interest. They approached the village president for help. None of the

four presidents in the village in the last 45 years have been able to solve their

problem.

When they approached the Electricity Board (EB), the officials of the EB replied

that the area in which the families are residing do not have even a single

electricity pole. Though near by there is a school with electricity connection but

it is located little over 110 feet away. As per the EB officials they have to satisfy

three norms for getting the electricity connection, viz, (i) an electric pole should

be within 110 feet, (ii) the wiring should not cross others’ land, and (iii) each

family should obtain from the Village Administrative Officer a title certificate for

the house owned. As they were unable to satisfy any of these norms, they could

not get any positive response from the EB. One of the engineers said that it

would involve a cost of more than Rs 10,000 to install a minimum of three poles.

They approached all the concerned persons which involved frequent travel and

submission of numerous applications. They had to spend nearly Rs 5,000 which

was shared by all the 22 families. But they failed to make any breakthrough.

These 22 families are members of four SHGs functioning in the village. The

financial status of the four SHGs as of March 1998 is given in Exhibit 3.

MD on a Wild Goose Chase

One day in their regular meeting the members of the Malukan SHGs raised the

issue of electricity and discussed it threadbare. They brought the issue to the

notice of the EMVS Managing Director (MD), Mr. Vel. Similar demands started

surfacing from other SHGs. The MD started taking more interest to address the

issue. He organized a meeting in June 1998. All the members who needed

electricity connection, the cluster level leaders and the board members of EMVS


58

were called for the meeting. The issue was discussed at length. The members

asked the MD to explore the ways of getting the connection.

The MD sent one of the staff members to assess the need for electricity

connection in the entire block. It took nearly 15 days to carry out the survey. It

was found that nearly 1200 women members were living without electricity and

900 of them expressed immediate need for connection. The MD felt miserable

as he had failed to notice the gravity of the issue in the area.

On August 4, 1998 he wrote to the Director of the EB on behalf of EMVS

requesting to provide electricity connection to all the needy members in the

block. He had four rounds of discussion with the Board. The result was not too

positive. Some petty officials of the Board demanded Rs. 1000 as bribe per

family. To get the connection the following procedures are involved: Electric

poles should be erected wherever they are not there; ensure purchase of quality

electrical materials; identify a private contractor who is authorized by the EB to

carry out the works for all the houses, and ensure the completion of work.

The MD also approached a number of local contractors. The lowest reliable

estimate given for getting connection to one house with five points was Rs

2,900. The total cost varied from Rs. 4000-5000 which included material cost

and also the bribe. The members expressed difficulty in meeting the estimated

cost. They enquired with their MD whether it was possible to reduce the cost by

Rs 1,000. They were also particular about the use of quality material and

completion of the work within a short period of time. Also the SHGs did not have

sufficient money with them to sanction new loans to their members.

EMVS strictly adheres to the principle of not giving bribe to anybody. This took a

good deal of time and soul searching by EMVS. The MD remained worried and

tense all through this period. After long persuasion, the EB officials agreed to

relax the norms and provide connection to the members by taking a service


59

charge of Rs. 100 per connection as a large number of households are involved.

The MD still has to find the solution to help the SHGs in overcoming their

problem of insufficient funds and ensure quality work at affordable cost to the

members.


1. Should EMVS take up the responsibility of tackling the electricity problem

of its members?

2. Suggest ways to MD to find the best solution to help the SHGs in

overcoming their problem of insufficient funds and ensure quality work at

affordable cost to the members?

3. What specific role EMVS can play as a microfinance institution to help the

SHGs in tackling the problem?


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Exhibit 1: Simple Balance Sheet of EMVS as on March 1998

Assets Rs. Liabilities Rs. Cash in hand Cash in Bank Total deposits Deposits outside Rent advance

62,495.70 32,029.35

500,000.00 607,329.75

2,400.00

Excess rent Loans outstanding Bad debts Welfare fund Health fund Loan outstanding with HDFC

59,012.80 56,700.00

565,078.00 20,385.00 3,079.00

500,000.00

Total 1,204,254.80 Total 1,204,254.80

(The EMVS Balance Sheet does not include groups’ savings and lendings)

Exhibit 2: Organisational Structure and Processes Organisation Leaders/

Representatives No. of Staff

Processes

SHG

Three leaders in each group

80 (part time)

- Weekly Meetings for savings, lending and recovery

Cluster Development Association(CDA)

15-20 SHGs from 4-5 nearby villages promote CDA. Three leaders from each group form into CDA. A 5-7 member Executive Committee (EC) take care of the activities of CDA

17 - Monthly meeting of leaders

- Monthly EC meeting

- General body meeting held once in six months of all SHG members in the cluster.

EMVS All SHGs are members of EMVS. One leader from each cluster is represented on Board consisting of 13-15 members

6 - Monthly Board Meeting

- Special Meetings

- Annual General Body Meeting


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Exhibit 3: The Status of Four SHGs in Malukan

Particulars Vinayagar Sangam

Kamatchi amman Sangam

Kailasamuni Sangam

Annai Sangam

Total Members 21 22 20 20

Members demanding electricity connection

2

9

6

3

Total Savings by members (Rs.)

35,787

43,288

31,346

22,057

Special Savings (Rs.) 2,748 27,717 4,200 1,579 Loan outstanding with members (Rs.)

NA

65,148

58,864

22,420

Exhibit 4: Purpose wise Loans issued by SHGs

Purpose Share(%) Rate of Interest

Consumption loan Redeeming outside debt Medical expenses Festival and social obligation Income generating activities Housing Education

43.3 18.6

10 13 6.4

3 3

24 – 36% 24 – 36% 24 – 36% 24 – 36%

24 % 15 % 36 %


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LOAN PRODUCT FOR DAUGHTER’S MARRIAGE1

Part - 1 The Need for a New Loan

The daughter’s marriage is one of the biggest family expenses in our society.

People have to borrow money from their relatives, friends and many a times

from the moneylenders with rates of interest ranging from 3 to 10 per cent per

month. To obtain a loan from the moneylenders, the borrowers have to

mortgage their land, jewellery and other assets.

The Executive Chairman of the CASHPOR Financial and Technical Services

(CFTS) Limited is repeatedly told by the clients during his field visits and the

meetings with them about the felt-need for a loan to pay off the expenses of their

daughters’ marriage. The CFTS is a microfinance institution (MFI) registered as

a company, initially as a private company in October 1996 and later as a public

limited company in 1999. It is following the Grameen Bank of Bangladesh

approach. The Grameen Bank approach involves forming groups of five

members, providing collateral free loans, adhering to weekly repayments and

giving exclusive focus on poor women. The potential clients are encouraged to

form groups of five members. The groups are then organised into centres

consisting about six to eight such groups.

The CFTS operates in the backward district of Mirzapur in the eastern Uttar

Pradesh. Keeping in view the extent of poverty, large proportion of backward

castes and classes, and very low repayment rate in respect of formal bank loans,

the management of the CFTS felt that if the experiment could succeed in

Mirzapur district, it would succeed elsewhere also. The mission of the CFTS has 1. Case prepared by Dr. KC Sharma, Banker’s Institute of Rural Development, Lucknow, under



63

exclusive focus on poor women in rural areas and it aims to become a financially

sustainable institution while working for the poor. The mission of the CFTS is to

deliver financial services to its clients in an honest, timely and efficient manner. It

is operating since September 1997.

The management of the CFTS rests with the Board of Directors, which comprise

four members. Professor David Gibbons, a pioneer in replicating Grameen Bank

model in Malaysia, is its Executive Chairman. The CFTS plans to serve about

25,000 households by March 2003 when it will be able to become operationally

self-sufficient. By then it would have covered about 25 percent of the poor

households of Mirzapur district.

The CFTS provides two kinds of service – financial and technical. The financial

services include lending, savings and insurance services and the technical

services relate to Management Information System (MIS), monitoring and

evaluation, training, special research and income generating projects for the

poorest.

The most common loan product of the CFTS is the General Loan. It is repaid in

50 weekly instalments. The average size of the general loan comes to Rs.

5,433 and the range of loans taken so far varies from Rs. 500 to Rs. 20,000.

The amount of loan sanctioned can be from Rs. 500 to Rs. 8,000 in the first

cycle; the second cycle of loan is up to Rs. 15,000 and the third cycle of loan is

up to Rs. 25,000.

The rate of interest charged on loans is 20 percent flat and is based on the

Consultative Group to Assist the Poorest (CGAP) method of setting economic

rate of interest. The economic rate of interest is basically the rate of interest

which covers the cost of funds, administrative expenses, loan loss provision and

a margin for future growth. Nearly fifty per cent of the loan portfolio of the

CFTS is devoted to animal husbandry, mainly buffaloes, followed by trading


64

which accounts for about twenty five per cent. The other activities for which loans

are taken include carpet making, transportation and agriculture. Much of the

agricultural loan is borrowed for leasing-in land by the clients. All the loans are

given for income generation activities except the emergency loan. All the loans

are of 50 weeks or less in duration. The loan outstanding of CFTS in March

2002 was Rs. 55 million.

The repayment procedure in the CFTS is dictated by a high sense of credit

discipline. The repayment is done in weekly instalment for 50 weeks and

irregular repayment is not permitted. The amount due but not paid in any week

by a client must be paid by the group and the centre members at the same

centre meeting. However, the CFTS faced a serious repayment problem in July

1999 and it assumed an alarming proportion by October 1999. However, by

taking judicious measures based on incentives to clients and the staff, the

repayment problem was contained. By June 2000, the situation came under

control. The overall recovery per cent of the CFTS loans during the period April

2000 to June 2002 has been more than 98 per cent.

The issue of marriage loan was bothering the management and the staff of the

CFTS as it was the felt-need of the clients. Therefore, the issue was further

discussed with the women members of the CFTS at the branch level. They

showed great interest in the proposed loan product. The CFTS decided to launch

a loan product for the marriage of daughters in October 1999. The product was

launched in two branches of the CFTS on a trial basis. Subsequently, all the

branches started offering it.


1. How would you market this loan product in terms of the eligibility criteria,

loan size, repayment schedule and loan approval and disbursement?

2. Does this product raises any social issues?


65

Part - 2 The Marriage Loan

The eligibility criteria, loan size, repayment schedule and loan approval and

disbursement details of the product are outlined below:

The eligibility criteria for the loan :

i) The centre should have a perfect repayment record at least for the last 12

months.

ii) There should be at least 6 groups in a centre with no split in any group.

iii) The clients should be all second cycle borrowers with perfect repayment.

iv) The clients should have proper loan utilization record and should not have

more than 4 absences from the weekly centre meetings in a year.

v) The client should not have more than one loan outstanding.

vi) The loan is only for the marriage of client’s own daughter.

vii) The client should have life insurance wherein the CFTS is a beneficiary by

way its loan being secured (optional only).

The Loan Amount Linked to Saving:

i) The client should have maintained a minimum weekly savings of Rs.10 for at

least 25 weeks. The single deposit paid should not be more than 10 percent

of the total savings amount.

ii) Based on her savings, the CFTS will provide four-times of her savings as

marriage loan but not exceeding Rs.4,000. In April 2001, it has been made

as 8 times of her savings but not exceeding Rs. 8,000.

iii) After the settlement of one marriage loan, the client will be eligible for the

second marriage loan.


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Repayment Schedule:

i) The marriage loan is for a maximum of 4 years. However, the client can

settle it earlier.

ii) The principal and the total interest due should be recovered by weekly

instalment with in 200 weeks. The interest amount will be spread over in

equal instalments along with equal instalment of principal.

iii) The interest will be charged at 20 percent flat per annum on a declining

annual balance basis.

Loan Approval and Disbursement:

The loan is for medium term and is meant for consumption purpose. The

approval and disbursement procedures to be followed are as under:

i) The loan proposal should be approved by the centre with a resolution signed

by the centre chief with the consent of all the centre members.

ii) The marriage loan should be finally approved by the Financial Services

Manager or General Manager of CFTS at headquarters. Since April 2001,

the Deputy Financial Services Manager is authorised to approve the loan.

The Deputy Financial Services Manager is also located in the head office but

visits the branches and centres regularly.

iii) The Branch Manager of CFTS should be present at the time of loan

disbursement in the centre meeting. This is not mandatory since April 2001.

The following Table shows the marriage loan off-take by the clients of CFTS:


67

Table 1: Marriage Loan off-take in CFTS

(October 1999 to June 2002)

Period

No. of Clients

Loan Amount Disbursed (Rs.)

Principal Outstanding (Rs.)

1 October, 1999 to 31 March, 2000 0 0 0

1 April 2000 to 31 March, 2001 1 4,000 2,700

1 April 2001 to 31 March 2002 21 1,06,000 56,950

1 April 2002 to 31 June 2002 82 4,89,000 4,76,305

Grand Total 104 5,99,000 5,35,955


1. Evaluate the Marriage Loan Product of CFTS in comparison to your

marketing strategy arrived earlier ( Part 1 of the Case).

2. What could be the reasons of poor loan off-take initially?

3. There is a sudden increase in the loan off-take during April-June 2002.

What could be the reasons?

4. Do you foresee any recovery problems?


68

MICROINSURANCE: IS IT A VIABLE SOLUTION?1

The Cashpor Financial and Technical Services (CFTS) was started in 1996 by

Prof. Gibbons (a pioneer in replicating the Grameen Bank Model in delivering

savings and credit to the poor) and Mr. A. Hasan in the Mirzapur district of the

eastern Uttar Pradesh (U.P.). The organisation was setup with the purpose of

providing microcredit to the poor women. Being a backward district, the main

occupations of the households are agriculture and wage labour. The

dependence on unpredictable rainfall is one of the main reasons for poverty and

agricultural backwardness. As a result, a large number of poor households face

difficulty in making both ends meet. More often they are driven to the doorsteps

of the moneylenders. The poor turn to the moneylenders as not many

formalities are involved in their system. The formal system of banking does not

reach the poor due to remoteness of the area and low literacy rate. Given the need of the area, the CFTS soon started expanding its work. In

March 2000 it became a Public Limited Company working both in the urban and

the rural areas of the district. The aim of the CFTS is to reach 25,000 clients by

2003 and become operationally self-sufficient. The CFTS operates on the

Grameen Bank model using five member group for delivering unsecured loans

linked with weekly compulsory savings and loan repayments. As of May

2002, the CFTS has 10 branches with a loan outstanding of Rs.57.9 million

covering about 15,000 clients.

Part - 1

The CFTS initiated its work with two types of financial services- savings and

credit. While credit was directly delivered; savings, was started in collaboration

with the Mirzapur Mutual Benefit Savings Trust. The CFTS started realizing the 1. Case prepared by Ms. Nidhi Ranjan, Friends of Women’s World Banking (FWWB),

Ahmedabad under the aegis of the Workshop on Developing Cases and Training Material in Microfinance’, sponsored by SIDBI Foundation for Micro Credit, Lucknow.


69

inadequate resources of its clients to mange their risk. Their inability to cope up

with the loss of assets like livestock or even loss of life of either the client or her

spouse was noted. The loss of life was found to be either because of

complications during pregnancy or due to some illness or malnutrition. Even

inadequate health service facilities were found contributing to the problem.

Under such circumstances, the CFTS faced a difficult situation due to the sudden

demise of one of its client. Parvati, a client of CFTS from Gyanpur who had

taken a loan of Rs.5000/- for setting up a small readymade garment shop expired

all of a sudden during the time of her delivery. She had repaid just four

instalments till that time. Her husband, Sunderlal, is a carpet weaver and works

for the big traders. He does not get regular work due to the increasing

competition in the market and due to the introduction of new labour displacing

technology. Much of the income of Sunderlal was being spent on the medical

expenses of his wife.

Parvati had set up a garment shop using the loan money. She had to face some

initial set back in the business. Being a small town, her place did not have a

regular market for the readymade garments. However, during the festival season

the business had started gaining momentum and she started getting enough

profits. Her work was going on fine till the early stage of pregnancy. As the days

passed by, complications developed. She had to make regular visits to the

district hospital for check up and each time she had to spend heavily on various

tests and medicines. She was not only spending all her earnings from the shop

but also had to even sell off the items in the shop to other merchants at a very

low price. She was unable to repay the remaining instalments of her loan. Her

husband had to skip his work frequently as she needed constant care and

attention which resulted in loss of work and income. They faced a huge

financial crisis. Parvati’s condition deteriorated further and she had to be

hospitalised. The doctors could not save her. By then their financial condition


70

was so bad that even for her funeral, Sunderlal had to borrow money from his

friends and relatives.

Sunderlal was in no position to repay the loan Parvati had borrowed from CFTS.

Including interest Parvathi owed Rs. 5,520 to CFTS. The only option left for her

husband was to approach the local moneylender for a loan which would only

push him further into the vicious circle of debt.

Though CFTS has the provision for providing emergency loans but it is found

inadequate to address this kind of a situation. Emergency loans are short

duration loans specifically given for purposes such as marriage. The CFTS also

has the provision to write off loans in case of death of first time borrowers.

However, this was also not feasible for the organisation as it involved a risk to a

larger extent. In case of any calamity striking the region, the CFTS may have to

write-off loans for large number of borrowers. This may put the organisation in

a difficult situation.

Part - 2

The CFTS started exploring the possibility of providing insurance services to its

clients. However, it could not decide which type of insurance would serve the

purpose. Considering the interest of the organisation, a number of private and

public insurance companies approached CFTS and offered to launch their

services.

The CFTS decided to launch on a pilot basis two types of insurance services, life

insurance and livestock insurance to its members. Four insurance companies

introduced the products in different branches of CFTS. The first company to offer

its product was the HDFC Standard Life Insurance Company, which began life

insurance venture in August 2001. Initially it was started in three CFTS


71

branches. The ICICI Prudential Life Insurance and the Life Insurance Corporation

of India (LIC) introduced their services in three more branches. The National

Insurance Company (NIC) also started the livestock insurance to the clients of

CFTS. The life and general insurance products offered by these companies

varied in their coverage, premium, sum assured, benefits offered and claim

settlement procedures. As a result each scheme had its own advantages and

disadvantages. The major features of these different schemes are given in

Exhibit 1.

The main reason why CFTS decided to work with different companies was to

experiment and pilot test the schemes before expanding further with the best

one. It has now been one year since the different schemes began and the

practical issues and problems of implementing these schemes are also clearly

visible.

The procedural requirements of all the companies are different.

ICICI: Working in two branches- City and Gyanpur, requires a minimum group

of 100 clients. The premium is collected in the months of March, April, and May

in the City Branch and March and April in Gyanpur branch.

HDFC: Working in three branches, Maharajganj, Rajatalab and Bihasara. The

policy is taken only twice a year, with a minimum group of 500 clients. The

premium is collected in the month of July and November.

LIC: Working only in one branch of Ahraura. The policy is taken in a minimum

group size of 25 clients. The premium is collected in the months of February,

March, and May. In all 3000 clients have been covered under different life insurance schemes till

May 2002. HDFC scheme has attracted 1323 clients; LIC scheme has


72

attracted 373 clients, and ICICI scheme has been subscribed by 1304 clients.

Only one claim is settled so far by HDFC in the branch of Rajatalab.

When the CFTS was asked as to what would be their next step, they were in a

dilemma. First of all, they have to decide whether to continue with the insurance

schemes or not. If they have to continue then the question is which of three

companies they should choose to continue? To answer these questions a cost-

benefit analysis was carried out based on the income and expenditure incurred

by CFTS. This was done for the insurance products offered by three

companies -- HDFC, ICICI and LIC. The two schemes of ICICI have been taken

together for the purpose of calculating income and expenditure. For the purpose,

the following information was collected from six branches of CFTS where

insurance is being offered.

The Expenditure/Costs include the following sub-heads:

The salary of the staff and the Branch Manager

The salary and perks of the Insurance Officer

Administrative expenses such as courier, stationary, phone and bank

charges.

Expenses on Claim Settlement

Staff Trainings expenses

All the expenses are based on the actuals.

The Income/Benefits include the following sub-heads:

Administrative and Service charges reimbursed from the company to

CFTS on getting the premium. LIC does not reimburse the administrative

charges.


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Benefits obtained from insurance i.e. the loan money at risk secured.

During the study period only one claim was settled. Thus the amount of

money secured was the loan amount.

The final cost-benefit analysis based on the above calculation for each company

is given in the following table. The total expenditure is subtracted from the total

income. At the current level of coverage of clients and the costs incurred, CFTS

has incurred losses during the period July 2001 to May 2002 on all the

schemes. The HDFC scheme has the least loss and the maximum loss is

incurred in the case of the LIC scheme.

HDFC LIC ICICI No. of Clients 1323 373 1304 Income (Rs.) 23,663 1,865 20,495 Expenditure (Rs.) 46,472 36,127 45,182 Loss (Rs.) -22,809 -34,262 -24,687

After seeing the above result, CFTS was worried as they were in loss in the

case of all the three companies. They tried to analyze the situation by calculating

the break-even point for all the three schemes to know when they would be in

a no loss or no profit situation.

The cost calculation for break-even analysis is done on the basis of following

assumptions and information:

Salary: The number of staff on an average is 7 per scheme. The time devoted

or contributed by a staff is 8.3 percent on insurance activity per month for an

average of 10 clients per day. The average salary of a staff is Rs.2,861 per

month. The accountant’s salary is same as that of a staff but the time contribution

on insurance is half that of a staff (4.15 percent). There is one Branch Manager

(BM) per scheme and the time contribution on insurance on an average is 6.25

percent. The average salary of a Branch Manager is Rs.4,255. There is one


74

Insurance Officer (IO) for each scheme getting a monthly salary of Rs. 7,000

inclusive of all allowances. A cost of Rs.1, 000 is incurred per year on staff

training for each of the schemes.

Other costs: The administrative expense per client varies across companies.

For ICICI it is Rs. 2.3; HDFC Rs.1.6 and LIC Rs. 0.32. The per client expense

incurred on claim settlement for different companies also varies. For ICICI it

is Rs.250, for HDFC Rs. 250 and for LIC Rs. 20.

The income calculation is done on the basis of following information. The

administrative and service charges taken together per client and reimbursed by

different companies come to Rs. 15.7 for ICICI, Rs.15 for HDFC and Rs. 5

for LIC. The average size of loan claimed per client is Rs. 3,818.

The break even analysis can be carried out for different group sizes of

members to be insured like 1000 or 2000 or 4000 for different time durations

like 6 months or 1 year or 2 year. The average number of claims to be settled is

calculated based on the prevailing death rate in the area. The death rate in the

district is 10.3 per 1000 population as per the Census Department.

Based on the above information the break even point was calculated for each of

the Companies as given in Exhibit 2. From the calculation it can be seen that

insuring 1000 clients in a time period of 6 months with each company would

result in earning profit from HDFC.


75


1. What are the advantages and disadvantages one can identify from the

major features of insurance schemes being offered by different companies

through CFTS?

2. Should CFTS continue with all the three companies for some more time?

3. Should CFTS choose only one company for providing insurance service to

its clients ?

4. If so, which of the three companies is most beneficial to CFTS?


76

Exhibit 1 : Main Features of the Insurance Schemes

HDFC Standard Life Insurance

LIC of India ICICI Prudential Life Insurance

ICICI Lombard General Insurance

1. Age Group 18-50 Years 18-60 Years 20- 60 Years 20-60Years 2. Premium per client.

Rs.95 p.a. Rs100 p.a. Varies from Rs.15 to Rs288/. p.a (In case of CFTS, average premium comes around Rs30/.)

Rs. 6 p.a.

3. Minimum no. of Clients

500 25 100 -

4. Premium collected July and November February, March and May March, April and May -

5 Coverage Natural and accidental death

Natural Death, accidental death, PTD & PPD

Natural death only Accidental death, PTD & PPD due to accident

6 Benefit Rs.10,000 in case of natural death. Rs15000 in case of accidental death.

Rs.20,000 in case of natural death. Rs.50, 000 in Accidental death, Rs.50,000 in PTD, Rs.25,000 in PPD

Rs10,000 in case of natural death.

Rs.10, 000 in accidental death, Rs.10,000 in PTD & Rs.5,000 in PPD

7. Formalities Required on Claim

In Natural Death: Death certificate from Gram Pradhan. In Accidental Death: 1. Copy of FIR 2. PM Report If client is having any problem to get the above two, certificate from CFTS is accepted.

In Natural Death: Death Registration certificate In Accidental Case: 1. Copy of FIR 2. PM Report 3. Police investigation Report 4. Police Final Report 5 Doctor's report in case of disability.

Only death certificate from Gram Pradhan.

1. Death certificate 2. Doctor's report 3. Police report

6. Commission to CFTS Rs10/ Per client No Commission 20% of the Premium No Commission

Note: PTD= Permanent Total Disability, PPD= Permanent Partial disability


77

Exhibit 2 : Solution to the Exercise on Break-Even Analysis

Particulars ICICI HDFC LIC

GENERAL NFORMATION 1.Number of clients

1000

1000

1000

2. Duration 6 months 6 months 6 months 3. No. of Staff 7 7 7 4. No. of working months 6 1 6 5. No. of clients per month 166.67 1000 166.67 6. No. of clients per staff per month 23.71 142.86 23.71 7. Staff Time Contribution per month (%) 8.3 8.3 8.3 8. No of claims as per death rate 10.3 10.3 10.3 A. COST 1. Salary of Staff (2861x7) (.083x6) =9973 (2861x7)(.083x1)=1662 (2861x7)(.083x6)=9973 2. Salary of Accountant (2861)(.0415x6)=712 (2861)(.0415x1)=118 (2861) (.0415x6)=712 3. Salary of BM (4255)(.0625x6)=1595 (4255)(.0625x1)=261 (4255)(.0625x6)=1595 4. Salary of IO (7000x6)=42000 (7000x6)=42000 (7000x6)=42000 5. Administrative cost (2.3x1000)=2300 (1.6x1000)=1600 (0.32x1000)=320 6. Claim settlement (250x10.3)=2575 (250x10.3)=2575 (20*10.3)=206 7. Training 1000 1000 1000

Sub-Total (Rs) 60,155 49,216 55,806 B. INCOME 1. Administrative & Service costs Reimbursed

(15.7x1000)=15700 (15x1000)=15000 (5x1000)=5000

2. Loan Claim 3818x10.3)=39325 (3818x10.3)=39325 (3818x10.3)=39325 Sub-Total (Rs.) 55,025 54,325 44,325

Profit (B-A) (Rs.) -5,130 5109 -11,481

DELINQUENCY MANAGEMENT


78

CONTAINING DELINQUENCY VIRUS1

(i) To hold weekly centre meetings that are supervised by the MFI staff

member who maintains the financial records of saving and loan accounts

of the members. The savings and repayments are collected by the group

leaders and handed over to the MFI worker in front of all the members

during the centre meeting.

The CASHPOR Financial and Technical Services (CFTS) Limited is a

microfinance institution (MFI) registered as a company, initially as a private

company in October 1996 and later as a public company in 1999. It is following

the Grameen Bank of Bangladesh approach. The Grameen Bank approach

involves forming groups of five members, providing collateral free loans, adhering

to weekly repayments and giving exclusive focus on poor women.

In the Grameen approach, potential clients are encouraged to form groups of five

members. The groups are then organised into centres consisting about six to

eight such groups. The members make weekly savings with the MFI and they

also take loans. All the clients have individual saving and loan accounts with the

MFI. The main responsibilities of the groups and centres are to facilitate the

financial intermediation process. The following functions are performed by the

groups and the centres:

(ii) To provide group guarantee for loans to individual members by accepting

joint and several liability. In this regard the group has to raise group fund

for the purpose of default management and has to accept that no member

1. Case prepared by Dr. KC Sharma, Banker’s Institute of Rural Development, Lucknow, under



79

of a group will be able to take a new loan if any member of the group is in

default.

(iii) To appraise fellow members' loan applications and to ensure that they

maintain regular saving contributions and loan repayments.

The CFTS operates in the backward district Mirzapur in the eastern Uttar

Pradesh. Keeping in view the extent of poverty, large proportion of backward

castes and classes, and very low repayment rate in respect of formal bank loans,

the management of the CFTS felt that if the experiment could succeed in

Mirzapur district, it would succeed elsewhere also. The mission of the CFTS has

exclusive focus on poor women in rural areas and it aims to become a financially

sustainable institution while working for the poor. The mission of the CFTS is to

deliver financial services to its clients in an honest, timely and efficient manner. It

is operating since September 1997.

The management of the CFTS rests with the Board of Directors, which comprise

four members. Professor David Gibbons, a pioneer in replicating Grameen Bank

model in Malaysia, is its Executive Chairman. The CFTS plans to serve about

25,000 households by March 2003 when it will be able to become operationally

self-sufficient. By then it would have covered about 25 percent of the poor

households of Mirzapur district.

The CFTS provides two kinds of service – financial and technical. The Financial

services include lending, savings and insurance services and the technical

services relate to Management Information System (MIS), monitoring and

evaluation, training, special research and income generating projects for the

poorest.

The most common loan product of the CFTS is the General Loan. It is repaid in

50 weekly instalments. The average size of the loan in CFTS comes to Rs.


80

5,433 and the range of loans taken so far varies from Rs. 500 to Rs. 20,000.

The amount of loan sanctioned can be from Rs. 500 to Rs. 8,000 in the first

cycle; the second cycle of loan is up to Rs. 15,000 and the third cycle of loan is

up to Rs. 25,000.

The rate of interest charged on loans is 20 percent flat and is based on the

Consultative Group to Assist the Poorest (CGAP) method of setting economic

rate of interest. The economic rate of interest is basically the rate of interest

which covers the cost of funds, administrative expenses, loan loss provision and

a margin for future growth. Nearly fifty per cent of the loan portfolio of the CFTS

is devoted to animal husbandry, mainly buffaloes, followed by trading which

accounts for about twenty five per cent. The other activities for which loans are

taken include carpet making, transportation and agriculture. Much of the

agricultural loan is borrowed for leasing-in land by the clients. All the loans are

given for income generation activities except the marriage loan and the

emergency loan. All the loans are of 50 weeks or less in duration except the

marriage loan which is lent for 200 weeks. The loan outstanding of CFTS in

March 2002 was Rs. 55 million.

The repayment procedure in CFTS is as follows. The weekly repayment is 2 per

cent of the principal and the interest per week commencing from the second

week after the disbursement of the loan. The repayment continues for 50 weeks.

Irregular repayment is not permitted. The amount due but not paid in any week

by a client must be paid by the group and the centre members at the same

centre meeting. It is the responsibility of the group and the centre leaders to

know in advance if any member is likely to default and ensure that full

repayment is made at the centre meeting.

The role of the Customer Service Representative (CSR), the CFTS’ field staff, is

very crucial in resolving the repayment problem. When any repayment due is not

made, the CSR is to immediately advise the group and the centre that it is a


81

challenge that they must face to grow stronger. It is to be conveyed to them that

it is their problem as they have admitted the person into the group and that they

have agreed to take collective responsibility for her. Further, the CSR is to make

sure that credit discipline in the group and the centre is maintained through

persuasion. The verbal contract between the CFTS and the clients through CSR

is the moral binding force and it is to be respected by both the sides. The verbal

contract or pledge that is repeated at the beginning of every centre meeting, in

essence, is about timely repayment on the part of the clients and timely

disbursement of loan on the part of the CFTS. More significantly, the CFTS staff

members get incentives for containing the delinquency problem.

The delinquency management is crucial for continued functioning of any MFI as

well as for its clients. Also, the issue of measurement of delinquency is important

as there are a variety of measures used. These measures are meaningful if the

formulas for measuring are clearly defined. One popular measure of

delinquency is the Portfolio at Risk (PAR).

PAR is defined as a proportion of loan outstanding past due by more than 30

days to total loan portfolio outstanding on a particular date. It is the experience

of MFIs worldwide that PAR represents the most comprehensive measure of

delinquency. PAR of not more than 5 percent is an international standard for

measuring loan portfolio quality. However, PAR may be defined variously by

considering past due as 'past due by one week', 'past due by two weeks' etc.,

i.e. breaking down arrears by age. It is important to note that only the principal

amount of loan is considered for PAR calculations.

The problem of delinquency as it was noticed in CFTS was as follows. PAR in

CFTS rose above 6 percent in July 1999. It kept on rising in August and

September and it went above 11 percent in October 1999 ( see Table 1 and

Figure-I).


82

Table 1: PAR in CFTS (March 1998 to October 1999)

Month March 1998

March 1999

April 1999

May 1999

June 1999

July 1999

August 1999

Sept. 1999

Oct. 1999

PAR (%)

0 4.0 4.7 4.2 4.5 6.1 7.5 10.8 11.3

The management of CFTS got worried as its mandate was to become financially

self-sustainable as early as possible and its funds position was tight. The

situation was reviewed by the management of CFTS. It was found that in April

1999, the CFTS had rotated all the branch managers in older branches and in

turn most of the new branch managers rotated their CSRs. The problem of

delinquency initially surfaced in some of the older branches in May 1999 when

there was little agriculture work and no surplus funds available with the clients to

make weekly payment. Then the problem spread to other branches.

The institutional arrangement to take care of delinquency in the CFTS was the

implementation of the Collective Responsibility Fund (CRF). The CRF is

expected to come in force automatically once any weekly repayment is dropped.

It is Rs. 2 per week for members of the affected group and Re. 1 per week for the

Figure-I PAR in CFTS (March 1998 to October 1999) (%)

0

44.7

4.2 4.5

6.1

7.5

10.811.3

0

2

4

6

8

10

12

Mar-98

Apr-98

May-98

Jun-98

Jul-98

Aug-98

Sep-98

Oct-98

Nov-98

Dec-98

Jan-99

Feb-99

Mar-99

Apr-99

May-99

Jun-99

Jul-99

Aug-99

Sep-99

Oct-99

Month

PAR

(%)

PAR (%)


83

other members of the centre. The CRF would not settle the arrears but it would

remain in force until the arrears are completely repaid. Once the arrears are

settled by the client, the CRF would be returned to the respective members who

had contributed. The purpose of CRF is just to demonstrate the group members’

collective responsibility against delinquency of a fellow client.

The CRF in the instance presented above was not implemented properly. The

matter was taken seriously by the management of CFTS. In October 1999, the

CFTS took measures to contain the problem of delinquency.

In November 1999, PAR did not rise further. Then it fell down every month and

by June 2000 it came down to 5 percent (see Table 2 and Figure II).

Table - 2: PAR in CFTS (November 1999 to June 2000)

Month Nov. 1999

Dec. 1999

Jan. 2000

Feb. 2000

March 2000

April 2000

May 2000

June 2000

PAR (%) 11.3 11.2 10.3 9.1 7.2 6.4 5.6 5.0

Figure-II PAR in CFTS (Nov. 1999 to June 2000) (%)

11.3 11.210.3

9.1

7.26.4

5.65

0

2

4

6

8

10

12

Nov. 1999 Dec. 1999 Jan. 2000 Feb. 2000 Mar-00 Apr-00 May-00 Jun-00

Month

PAR

(%)

PAR (%)


84

Questions for Discussion 1. What are the possible reasons for the delinquency problem faced by CFTS?

2. What measures do you think the CFTS took to contain the delinquency

problem?

PERFORMANCE ANALYSIS


85

LINK METRICS TO YOUR MISSION: PERFORMANCE MEASUREMENT

SYSTEM OF FWWB1

Introduction

The Friends of Women’s World Banking (FWWB) was established in 1982 as a

non-profit organization with the purpose of promoting the direct participation of

women in economic development. An affiliate of the Women’s World Banking,

the FWWB works with a network of organizations providing financial services to

the poor in eight states of India. Initially, the main activity of the FWWB was

confined to capacity building of partner organizations which was later on

extended to include credit support as well. The current activities of the FWWB

include, among other things, providing regular loan fund to microfinance

institutions (MFIs), capacity building and training, staff development and

publication. The FWWB acts as a sub-wholesaler channelising funds from apex

financial institutions and donors to local MFIs.

The participants of the FWWB’s training program include the leaders and

managers of MFIs as well as leaders of the women savings and credit groups. It

networks with important national and international agencies that are active in the

microfinance sector including government agencies, donors, bankers, academic

organizations, private sector agencies and technical assistance providers. More

specifically, the FWWB’s current program of activities include:

1. Providing revolving loan funds to partner organizations that provide

financial services to the poor.

2. Support the partner organizations through institutional development

programs to expand their capacity to manage credit and savings activities.

1. Case prepared by Mr. Keyur Thaker, National Institute of Cooperative Management,

Gandhinagar, under the aegis of the `Workshop on Developing Cases and Training Material in Microfinance’, sponsored by SIDBI Foundation for Micro Credit, Lucknow.


86

3. Pursue broader policy advocacy activities to improve the policy

environment for the growth of microfinance sector both in India and at the

global level.

4. Take up awareness building on microfinance issues particularly related to

women through research, publication and wider information dissemination.

Mission, Strategy and Objectives

The mission of FWWB is to assist in the formation and strengthening of people’s

organization by bringing them into the mainstream of the economy and thereby

participating in the process of nation building. The strategy of FWWB focuses on

identifying and building the capacity of promising and committed microfinance

institutions to play a leading role in providing financial services to the poor.

The objectives of the FWWB are:

- Ensure women’s leadership in the local economy by increasing their

access to financial services through appropriate and sustainable delivery

mechanism.

- Support and strengthen microfinance institutions, which have a clear

vision towards providing financial services to the poor on a sustainable

basis.

- Promote high performance standards among its partners.

- Support innovations and best practices in areas of microfinance and micro

enterprise development.

- Expand and strengthen the network of institutions working for women and

active in financial policy making aspects.

- Enhance the FWWB’s capacity to retain its niche as an institution builder

in the microfinance sector.


87

During the year 2001-02, the FWWB has reached 81 partner organizations

through its credit programme with an outreach of 46,753 women. It has

achieved a gross loan outstanding portfolio of Rs.169 million during the same

year (see Exhibit 1). FWWB provides capacity building support by creating

awareness about the self-help groups (SHG). This is achieved mainly through

training programmes organized for the SHG leaders.

Governance

The governance structure of FWWB consists of a Board of Trustees headed by

the veteran social worker Ela.R.Bhatt. The Chief Executive Officer looks after the

day-to-day operations. There are six departments or sections looking after the

various activities of FWWB (see Table 1). The Credit Program Department,

headed by a Manager, is responsible for credit disbursal and institutional

development. Loans are sanctioned based on the approval given by the Credit

Committee consisting of Board representatives and experts. The Special Projects

Department works on sponsored projects like SHG federation formation,

promoting micro-insurance and encouraging investment for community

infrastructure. The Research and Documentation department takes care of

research publications and their dissemination; while the Training Programme

section handles training programmes meant for capacity building and leadership

development.

Table 1 :Organizational Structure Board of Trustees

Chief Executive Officer (CEO) Credit Program

Special Projects

General Administration

Finance and Accounts

Research and Documentation

Training Program

Programme Manager

Programme Manager

Administrative officer

Finance Manager

Programme Officer

Programme Officer


88

Performance Measurement System The Performance Measurement System plays a key role in developing a

strategy, exercising management controls, evaluating the achievement of

organizational objectives and in compensating managers. In a non-profit

organization, a financially oriented performance measurement system does not

work adequately even though a major emphasis is placed on financial

sustainability of such organizations. The FWWB from the very beginning has

been using global norms developed for microfinance sector as the criteria for its

performance measurement. Over the period, they have adopted and modified the

norms to suit their requirements. The performance measures of FWWB in

relation to vision, mission and objectives may be depicted as given in Table 2.

The actual performance of FWWB in relation to various indicators are presented

in Exhibit 3.

The Credit Program Manager opined that these norms are inadequate and are

still evolving. They need to be customized to meet specific country needs and

scenario. She added that there are certain objectives of Credit Program

Department which are not adequately measured by the existing performance

measurement system.

The major decisions taken by the Credit Program Manager are:

- Which organizations should be approached for support?

- Credit appraisal and loans granting decisions.

- What type of non-credit assistance for capacity building and institutional

building should be given to the organization?

- Whether to continue or bring change in current credit policy?

- What should be the pricing of loans and other services provided by

FWWB?


89

Table 2: Mission and Metrics of FWWB

Vision To promote direct participation of women in the economy through access to financial services

Mission To assist in formation and strengthening of people’s organization by bringing them to mainstream

Strategy Building capacity of MFIs to play a leading role in providing financial services to the poor

Objectives A. Ensure women’s leadership through access to financial services

B. Support and strengthen MFIs with focus on providing financial services to poor on sustainable basis

C. Promote high performance standards among partners

D. Support innovation and best practices. Network for policy making

E. Capacity enhancement and retain its niche as institution builder

Actions/Drives A B C D E

1.Increase women’s access to financial resources 2. Ensure end use of fund

3.Ensure appropriate and sustainable delivery mechanism

1.Provide training and other capacity building support

1.Monitoring and extending financial and non- financial support

1.Identification, Documentation Development of innovations 2.Propagation of innovations 3.Networking and Partnering

1.Operational efficiency 2.Financial efficiency 3.Human Resource Development 4.Differentiation

Indicators/Measures

A B C D E

1.Outreach 2.Average loan size 3.Operational and financial sustainability of delivery mechanism 4. Loan portfolio at Risk 5.Recovery rate

1.No of MFIs supported 2.Sustainability of supported MFI

1.Progress and performance of the partner organizations 2.Comprehensive measure of performance

1.No of innovations and best practices supported 3.Networks developed

1.Sustainability and Growth 2. Niche Activity 3.No.of MFIs developed 4.Human resource development 5.Equity Multiplier

Section / Department Primarily Responsible A B C D E

Credit Program

Credit Program and Training

Credit Program

Credit Program and Special Projects

Credit Program, Administration and Finance


90

- Determining the fund requirements for the credit program and mobilizing

the resources

- Devising strategic or long term plans

- One-year business development plans

- Evaluating performance of credit officers and decide about their

compensation and rewards.

- Review of partners’ performance, assessing problems arising in advance

and work out amicable solutions for troubled MFIs.

The information required for such decisions are generally requested from the

Credit Program team. The information sources include statements about portfolio

status and client database. However, it is felt that the information and reports

received form the clients cannot be fully relied upon as they are incomplete, not

uniform and irregular. Since the information generated to aid in decision making

are not detailed enough, judgment has to be exercised. Further, certain

objectives which are qualitative in nature are difficult to measure. For ex.

measuring FWWB’s capacity to retain its niche as an institutional builder, extent

of development of partner organizations and community development are tricky.

The FWWB focuses on providing credit and capacity building support to mainly

small and infant MFIs and units without net worth. The services of FWWB are

unique in the sense that it offers collateral free loan and identifies NGOs for

development with at least one year of operation.

The Finance Section lead by a manager is involved in taking following decisions:

- Investment of surplus funds

- Budgeting viz., how much to spend on what activity? Expenses budget

under various heads

- Cost allocation or transfer pricing

- How much of owned and external/borrowed funds are to be made

available to various credit programs?


91

- Mobilization of funds by way of loan and/or grant from domestic and

multilateral financial agencies.

- Cash and working capital management, and bank relationship

- Product pricing

- Ensuring financial and operational self-sufficiency and sustainability

Various information and reports to aid in above decisions include: Funds position

report; Cash flow statements; Grant utilization report; Financial Ratio Analysis;

Annual Budget; Variance analysis; and Financial statements and audit reports.

The Finance Manager has to say the following on the issue: “Since the data are

available on electronic spreadsheet, tailor-made information reports and

performance measures can be generated. However, the client database is not

adequately computerized and we do not get timely information in uniform format

from the clients. We are still not able to adequately devise non-financial

measures of performance which are equally important for management controls.

Being an enabling type of MFI, the FWWB’s success primarily depends on the

success of the client organizations which is difficult to measure only through

financial parameters.”

The different stakeholders of FWWB include the promoters, the lenders, partner

organizations, donors and employees. The funding agencies are primarily

interested in end use and repayment of the loan. The donors, based on their

funding objectives, offer support to specific programs which may be different from

FWWB’s main activities. The FWWB though a non-profit organization but

aspiring to achieve international performance standard needs to keep very

qualified and satisfied employees to help achieve its mission. Hence ensuring

employees’ development and satisfaction is one of the key challenges in

attaining the success.


92

The FWWB was set up to strengthen MFIs and other partner organizations. Its

success greatly depends on the success of the client organizations. The training

department was set up to offer technical inputs and meet training needs of the

partner organizations. Training being perceived as a supportive function did not

receive adequate attention. The training largely remained confined to developing

operational level abilities of SHG leaders and training of trainers. Training for

enhancing managerial level skills and institutional building of clients could not be

offered though such training requirements are out sourced by FWWB.

Strategic Issue

Presently, the total loan of outstanding of FWWB comes to nearly Rs.170 million.

In the next 4 years, the target is to reach a loan portfolio of Rs.500 million

covering more than 1 lakh women clients. To achieve such a growth, the FWWB

is contemplating changing its legal status as a Trust to a Non-Banking Financial

Company (NBFC) or a Corporate body registered under companies act. The

FWWB also wants to spin-off separately its training and capacity building division

as a charitable activity from the Credit Programme activity. Close integration with

the client organizations, expanding client base and volume of credit, bringing in

more professionalisation in credit program, meeting statutory requirements,

achieving cost efficiencies in providing technical inputs, and improving the

productivity of spending on partners are some of thrust areas for achieving high

growth and sustainability by FWWB.


93

Questions for discussion

1. Do you think FWWB adequately measures its performance satisfying all

the stakeholders to achieve its objectives?

2. What information the existing performance measurement system fails to

offer for decision-making and future planning?

3. What demands you would put on the performance measurement system

to meet the strategic objectives of FWWB?

4. Given the development of microfinance sector for the poor why

maintaining sustainability is demanded from the partner organizations?


94

Exhibit 1: Coverage and Portfolio Size Sr. No

1998-99 1999-00 2000-01 2001-02

1 No. of Organizations 82 78 80 81 2 Number of Loans Outstanding 97 113 169 237 3 Gross Loan Portfolio ( Rs lacs)

Outstanding 387 580 970 1690

4 Loan Amount Disbursed (Rs lacs)

223 450 800 1373

5 No. of Loans Disbursed 61 74 101 137 6 Outreach of Women 18706 19621 32119 46753

Exhibit 2 : Performance of Credit Program Status

Sr. No

1998-99 1999-00 2000-01 2001-02

1 Interest Income (Rs. lacs) 35.4 57.5 100 157 2 Yield on average portfolio 10% 12% 13% 12% 3 Total Outside Borrowing (Rs

lacs) 326 389 742 1538

4 FWWB own Loan funds (Rs lacs)

61.1 166 234 295

5 Cost of fund (Rs lacs) 22.5 32.8 65 109 6 Ratio of Cost of fund to

average portfolio 6.4% 6.8% 8.5% 9%

7 Loan loss provision amount (Rs lacs)

25.1 12.4 11.8 25

8 Loan Portfolio at risk 14% 10% 4% 1.4%


95

Exhibit 3: Performance Measurement of FWWB

Indicators Definition 1999 –2000

2000 –2001

Actual Values Indicator Actual Values Indicator A. PORTFOLIO QUALITY 1. Repayment Rate as of 30 Days 2. Portfolio at Risk as of 30 Days

Principal Repaid Principal Repaid + Principal more than 30 days past due Outstanding Balance of Loans With Arrears >30 days Ending Portfolio Outstanding

25197944 27969163

5878018 57995993

90%

10%

39425599 41665700

94.62%

4% 3801643 98377208

B.SUSTAINABILITY 1. Operational Self-Sufficiency 2. Financial Self- Sufficiency

Total Internally Generated Income Total Expenses Total Internally Generated Income Total Expenses +Imputed Cost of Capital

14002992 16276456

14002992 18714171

86%

75%

18356728 19678553

18356728 21680127

93%

85%

C. COST EFFICIENCY 1. Operating Cost per Unit of Money lent 2. Average loan Size 3. Caseload: a. Number of Loans per Loan Officer b. Average Portfolio per Loan Officer

Operating Cost Average Portfolio Outstanding Amount of Loans Disbursed Total Numbers of Loans Disbursed Number of Loan Outstanding Number of Loan Officer Average Loan Portfolio Number of Loan Officer

1732546 48353503

45025486 19621

105/3

48353503 3

0.04

2295

35

16117834

1584056.00 78186600.50

80146700.00 32,119

141/3

78186601 3

0.02

2495

47

26062200

D. CAPITAL STRUCTURE 1. Equity Multiplier

Total Assets Total Equity

88806953 14850208

5.98

141934840 21364416

6.64

E. OUTREACH 1. No. of active client Organisations 2. Number of active borrowers

Number of client Number of borrowers

78

19621

78

19621

80

32119

80

32119


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F. FOCUS ON LOW INCOME CLIENTS 1 Average Loan Size

Amount of Loans Disbursed Total Numbers of Loans Disbursed

45025486 19621

2295

80146700 32119

2495

G. WOMEN PARTICIPATION 1. Credit & Savings

Programme: a. % Women Clients b. % of portfolio to

women 2. Leadership &

Decision Making (FWWB Level)

a. % Women Staff b. % Women in middle Management

c. % of women in

senior management

d. % women in Board

No of Women clients Total Number of Client Total portfolio held by women Total portfolio outstanding No. of women staff Total number of staff No of women middle managers Total number of middle managers No of women senior managers Total number of senior managers No of women on the Board Total number of board members

19621 19621

57995993 57995933

13/14

8/9

4/4

9/13

100%

100%

93%

89%

100%

69%

32119 32119

98377208 98377208

17/23

14/16

4/4

9/13

100%

100%

74%

88%

100%

69%

Source: Friends of Women’s World Banking, Annual Report 2000-2001, Ahmedabad, 2001


97

ATTAINING SELF-SUFFICIENCY : THE CASE OF CREDIT AND SAVINGS PROGRAMME

OF RGVN1

Rashtriya Gramin Vikas Nidhi

The Rashtriya Gramin Vikas Nidhi (RGVN) was established in April 1990 as an

autonomous and nonprofit organisation. It is registered under the Societies

Registration Act XXI of 1860 in the State of Assam with headquarters at

Guwahati. The RGVN has been sponsored by the Industrial Finance Corporation

of India (IFCI), the Industrial Development Bank of India (IDBI) and the National

Bank for Agricultural and Rural Development (NABARD). These organisations

have contributed a sum of Rs. 101.8 million towards its corpus fund. The RGVN

has a 13 member Governing Board consisting of representatives of its sponsor

organisations and eminent development professionals involved in various socio-

economic developmental efforts.

The aim of the RGVN is to improve the quality of life of the poor rural and urban

people through social action. It operates through two main programmes viz., the

Non-Governmental Organisation Support Programme (NGOSP) and the Credit

and Savings Programme (CSP). The NGOSP involves in lending to the poor

through small NGOs in the form of returnable grants or soft loans. The guiding

principle of the programme, over the years, has been transfer of resources while

inducting commercial discipline among the NGOs engaged in income generating

activities. Under the NGOSP, the RGVN has made a cumulative disbursement of

over Rs. 110 million to more than 900 NGOs. These NGOs are spread across

the states of Sikkim, Orissa, North Andhra Pradesh, Chattisgarh, Bihar,

Jharkhand and eastern Uttar Pradesh. The CSP which was launched in May

1. Case prepared by Mr. Krishan Jindal, Bankers’ Institute of Rural Development, Lucknow under

the aegis of the `Workshop on Developing Cases and Training Material in Microfinance’, sponsored by SIDBI Foundation for Micro Credit, Lucknow. The author is grateful to Mr. N.C.Medhi, Director and other staff of CSP for their valuable help in preparing the case study.


98

1995, on the other hand, is a direct lending programme of the RGVN that

operates through the formation of groups.

Credit and Savings Programme

The RGVN launched its Credit and Savings Programme (CSP) in 1995 as an

Action Research Project to meet the credit needs of the poor people who

continue to be out of the reach of the formal lending system. The initial idea was

to have an alternative credit delivery system for the North Eastern region of the

country on the lines of the Grameen Bank of Bangladesh. The objective was to

gain in-house experiences, catalyse the activities in the region and lay foundation

for eventually promoting independent development financial institutions.

The CSP started operations with four area offices (branches) in four districts

located in Assam and Megalaya. In 1996, after an external evaluation

demonstrated the effectiveness of the programme, CSP was institutionalised as

a regular RGVN programme.

The CSP is structured with in RGVN as a separate unit1

As on March 2001, the CSP was working in 4 districts of Assam, one district of

Meghalaya, two districts of Orissa and one district of Bihar. The organisation

works through its ten Area Offices located in Matia, Mukalmua, Jania, Bejera,

Morigaon, Saptagram and Kharupetia (in Assam); Tikrikilla (in Meghalaya),

Bhejiput (in Orissa) and Dhanpur (in Bihar). There are nine outreaches under the

area offices - two under Mukamua, one under Jania, five under Matia and one

which acts as a Central

Coordination Unit (CCU) for monitoring the field level activities. The CCU is

guided by six-member committee of the Governing Board of RGVN. Mr. N.C.

Medhi, the Director of CSP functions as the Member Secretary of this committee.

2. The CSP activities are proposed to be taken over by Luit Microcredit, a company licensed

under section 25 of the Companies Act, 1956, promoted by RGVN on compliance of necessary formalities.


99

under Bhejiput to strengthen the operations of the CSP. In 2001-02, the CSP has

closed Tikrikilla and Saptagram area offices and merged the operation of these

two areas with Matia area office. Each area office is usually manned by an area

supervisor and four field supervisors. The CSP has a total staff of 45 – forty in

the area offices and five in the headquarters.

Group Formation and Functioning

The CSP has borrowed a lot of systems from the Grameen Bank Model but has

made many modifications to suit the local conditions. Loans are provided to

groups and not to individual members. The groups promoted by the CSP consist

of 15 to 20 members each. Initial entry meetings are held in the village to

sensitise and build awareness in the community. The process of group formation

begins after these initial meetings. The broad criteria for becoming a member of

the group include:

• Only one member per family is taken

• There should be no government employee in the family

• The family income is less than Rs. 25,000 per annum

• The member’s age is between 18 to 50

Each group elects a chief and a treasurer who manage the group and also keep

group records. The savings begin once the groups are formed. The group

meetings are held weekly. Training is provided to the chief and the treasurer in

maintaining the records and to the entire group on group norms. The bank

accounts for groups are opened. The member profiles are also prepared during

this period. This includes information on occupation, income and assets

ownership. After three weeks of regular savings, a Group Recognition Test

(GRT) is held. The GRT gives scores on aspects like regularity, group discipline

and maturity in the group. The groups which pass the GRT can apply for a loan.

The group members unanimously decide about the members who should receive


100

the loans and submit a joint application to the area office. The applications are

recommended by the field supervisors of CSP in the group meetings. The area

supervisors are authorised to sanction loans within the specified ceilings. The

loans are sanctioned to the individuals but are disbursed to the groups through

cheques. The internal distribution of loans to individuals is done by the groups

with the supervision from the CSP staff. The repayments are collected at the

group meetings by the field supervisor of CSP and deposited in the nearest bank.

The field supervisor reports about the groups under him to the Area Supervisor.

The area supervisor in turn reports to CCU through monthly reports.

Saving and Loan Products

Savings: The members of the groups save every week from the day of group

formation. Presently each member has to compulsorily save a minimum of Rs. 5

per week. The members can make additional voluntary savings. These savings

are kept in the group accounts maintained with the CSP. The group savings can

be withdrawn at any point of time after 6 months of the group formation.

However, a minimum balance of 10 percent of the loan outstanding from the

group has to be maintained at any time before the payment of the loan. The CSP

pays an interest of 9 percent per annum on the savings. Interest is credited to

the group accounts on a half yearly basis.

The CSP offers two types of loan products: General Loans and Seasonal Loans.

General Loans: This is the main loan product presently being offered to the

groups. The loan size for the first cycle is limited to a maximum of Rs. 2,000

per member. For the second and third cycle, the maximum loan limit goes up to

Rs. 4,000 and Rs. 8,000 respectively. The loans are repayable in 50 weekly

installments. The CSP charges a flat interest of 15 percent per annum on these

loans.


101

Seasonal Loans: The CSP has introduced this loan product recently. The loan is

provided to members who have been associated with the programme for a

minimum of 3 years having a good repayment record and an already existing

business. The loan amounts range between Rs. 10,000 to Rs. 15,000 in size.

This loan is to be repaid in 25 weekly installments. A flat interest rate of 18

percent per annum is charged on these loans.

Human Resources Management

The CSP has adequate staff strength at the head office. The staff at head office

is well qualified with sound experience in microfinance. Presently, the CSP is

working with two levels of staff: (i) staff on deputation from RGVN, and (ii) staff

on contract with the CSP. The majority of the staff of CSP, except for those at

head office and some of the area managers, are on contract. The field

supervisors are paid a lumpsum salary of Rs.2,500 per month in the beginning

and it goes up by Rs. 200 every year. The other support staff are paid on an

average a salary of Rs. 1,000 per month. In addition, the field staff are provided

free of cost with a shared bachelor lodging facility. The new recruits undergo a

rigorous induction training programme.

Accounting and MIS

Separate accounts for CSP operations are prepared, on a mercantile basis. The

accounting system is systematic and computerised at the head office level.

Though most of the costs and revenue pertaining to CSP have been separated,

the income and expenditure are transferred to and accounted for in RGVN’s

central accounts. The present Management Information System (MIS) at the area

office covers information on a weekly basis although it is consolidated and sent

to the head office every month. The MIS covers the information on amounts

disbursed, amount due and recovered, amount of overdues, interest dues and


102

collections, savings mobilised and withdrawn, interest paid on savings, new

groups formed, total groups existing and composition of the groups.

At the area offices, collection and recording of financial information is carried out

with the help of collection sheets, savings and repayment receipts, and savings

withdrawal forms. These are used to update the savings of the loan ledgers and

the cash book at each area office. The monthly progress reports to the head

Office are prepared from these ledgers and cash books. The above information

is provided in a detailed monthly report to the head office, which has separate

sections on each of the aspects mentioned above. A fund requirement statement

is prepared monthly or quarterly by each branch and is used by the head office

for overall cash management.

An internal audit is also carried out every quarter. The internal audit reports

concentrate on the errors in recording, cash management at branches and other

financial aspects.

Progress of CSP

The CSP has made a good progress over the years in terms of outreach. It has

promoted 2,109 groups as on March 2001 having 37, 838 members. The

progress over three years period is presented in Table 1.

The loan portfolio is moderately diversified with 60 percent of the portfolio

accounted by trade and vending, 18 percent by manufacturing, 16 percent by

animal husbandry, 1.3 percent by service enterprises and 0.7 percent by

agriculture. The annual loan repayment over the last three years has been above

91 per cent. Though there is a scope for improvement in the repayment

performance, it is has to be seen in the context of operating in North Eastern

Region where repayment performance of formal financial institutions is extremely

poor.


103

Table 1: Progress of CSP

(Savings and Loan Amount in Rs.) Items March 31,1999 March 31, 2000 March 1,2001

No. of Groups 814 1611 2,109 Total Members 15,297 21,427

37,838

Of which Women 13,491 19,782

36,138

Savings with CSP 37,63,195 60,83,016 1,02,35,215 Total loan disbursed

4,50,42,300 8,06,68,300 12,37,89,800 Loan received by:

Number of groups 677 922 1458 Number of members 12,476 16,343 23,042

Repayment rate (%) 94.97 91.78 91.17 Loan outstanding 1,79,29,927 2,62,67,938 3,33,11,498

The CSP’s activities are funded mainly by the Small Industries Development

Bank of India (SIDBI) and NABARD3

3. RGVN has made contribution to a Loan Redemption Fund for repayment of borrowings from

SIDBI since 1997-78 treating the same as Direct expenditure on pursuance of its objectives. No such redemption fund is deemed necessary in respect of borrowings from NABARD. Appropriates amounts will be contributed by RGVN from its central accounts as and when required for repayment to NABARD.

. SIDBI has sanctioned a loan assistance to

the tune of Rs. 30 million at 9 per cent rate of interest per annum. Under

NABARD’s Revolving Fund Assistance (RFA), an amount of Rs. 0.4 million has

been sanctioned for on-lending activities of which Rs. 0.2 million has been

released in March 2000. A grant of Rs. 0.784 million has been given as

operational assistance. The Balance Sheets and Income and Expenditure

statements for the financial years 1998-99, 1999-2000 and 2000-2001 are

presented in Exhibit 1, 2 and 3. The statements wherever required have been

regrouped for the purpose of better understanding,


104

Attaining Self-sufficiency?

Mr. Medhi, the Director of CSP, reflecting on the performance of CSP, expressed

satisfaction that the programme has many strengths in organisational,

managerial and financial areas:

Organisational: There is a clear focus on microfinance; experienced board;

suitable and flexible organisation structure; and good outreach and positive

impact on poverty.

Managerial: Good human resource; good MIS; effective internal controls; and ,

effective utilisation of assets.

Financial: Good circulation of funds and good savings mobilization.

But Mr. Medhi feels that the difficult task has been to attain twin goals of moving

towards financial sustainability and making a positive impact on poverty. Mr.

Medhi takes pride in sharing that the CSP has definitely made a difference in

enhancing poor people’s livelihood security in the isolated regions where

productive potential remains unexploited due to scarcity of capital.

Further, according to Mr. Medhi, the CSP has also tried to move closer to

attaining operational self-sufficiency4

4. Operational self sufficiency is a situation when the organisation is able to recover its cost of

operations (including financial costs, operating expenses and loan loss provisions) from income from its operations (interest and fee income) .

by opening new outreaches, forming more

and more groups, mobilizing higher savings, and accessing loan funds from

mainstream financial institutions like SIDBI. Attaining operational self-sufficiency

leading eventually to financial self-sufficiency of CSP has been a priority on Mr.

Medhi’s agenda. This he hopes would pave the way for the integration of CSP

with the formal financial sector helping it in accessing commercial sources of

finance. Mr. Medhi is worried that CSP is still not operationally self-sufficient. The


105

operational self-sufficiency ratios of CSP were 76.6 percent for year ending

March 1999, 84.1 percent in March 2000 and 69.3 percent in March 2001.

Mr. Medhi wonders what more he has to do. He somewhat differs with many

experts who have suggested him to increase the rate of interest further on loan

products as he believes that such a step may prove counter-productive.


1. What are the Strengths and Weaknesses of CSP?

2. If you were in the place of Mr. Medhi, what would you do so that CSP can

attain operational self -sufficiency?


106

Exhibit 1: Sources of Funds of CSP

(Amount in Rs.)

As on 31.3.2001

As on 31.3.2000

As on 31.3.1999

Capital Reserve: 3,73,566 3,03,016 - Unsecured borrowings from: SIDBI 2,87,50,000 2,30,00,000 1,50,00,000 NABARD 20,00,000 20,00,000 - Group Savings 1,02,35,215 60,83,016 37,63,195 Other Liabilities:

Grants (pending utilisation) 1,06,434 4,91,692 - Interest accrued 9,27,842 6,74,849 4,47,534 RGVN: - 2,33,589 6,45,179 Outstanding expenses 3,697 - -

Total 4,23,96,754 3,27,86,162 1,98,55,908

Exhibit 2: Application of Funds by CSP

(Amount in Rs.) Application of Funds

As on 31.3.2001

As on 31.3.200

0

As on 31.3.199

9 Fixed Assets (depreciated )

10,22,237 8,07,176 3,69,216

Investments: Long Term Deposits

30,83,846

8,00,000 N.A

Short Term Deposits

21,50,000

52,33,846 36,46,000

44,46,000

N.A 7,24,777

Loans (to Self Help Groups)

3,33,11,498

2,62,67,938

1,79,29,927

Balance: In hand 80,173 53,017 1,51,950 With Bank 6,94,228 7,74,401 11,05,72

0 11,58,73

7 3,75,855 7,27,805

Advances and Receivable

20,54,772 1,06,311 1,04,183

Total 4,23,96,754

3,27,86,162

1,98,55,908


107

Exhibit 3: Income and Expenditure Statement of CSP

(Amount in Rs)

Items As on

31.3.2001 As on

31.3.2000 As on

31.3.1999 1. Financial Income

Interest on loans 55,06,880 43,55,122 24,51,506 Interest in Investment 2,74,222 1,24,279 46,706

Miscellaneous income 1,17,040 63,706 12 Total Financial Income 58,98,142 45,43,107 24,98,224

2. Financial Cost of Funds

Interest on debt 27,80,937 18,59,096 10,67,671 Interest paid on deposits 4,87,179 3,08,270 2,23,426

Total Financial costs 32,68,116 21,67,366 12,91,097 3. Gross Financial Margin (1-2) 26,30,026 23,75,741 12,07,127 4. Provision for loan losses - - - 5. Net Financial Margin (3-4) 26,30,026 23,75,741 12,07,127 6. Operating Expenses

Rent and Electricity 3,75,293 1,75,298 1,05,823 Salary and benefits 26,21,545 15,64,182 9,43,614

Training 60,667 43,741 1,81,839 Travel 7,10,706 5,79,358 3,30,151

Repairs and Maintenance 25,497 33,469 8,142 Incentives for recoveries 2,24,499 2,68,510 97,509

Depreciation 2,11,483 1,76,400 90,313 Others 10,12,642 3,90,064 2,14,277

Total Operating Expenses 52,42,332 32,31,022 19,71,668 6. Net Income From Operations (5-6) (26,12,306) (8,55,281) (7,64,541) 7. Income from Grants 3,14,708 6,49,292 3,00,000 8.Excess of Income over Expenses (6-7) (22,97,598) (2,05,989) (4,64,541)


108

DO YOU DESERVE MORE FUNDS ? : THE CASE OF MVS1

Part - 1

Meeting the Target

It was the last Monday of August 2000, Mr. Ramesh, the Kishanganj Branch

Manager of MVS (see Annexure 1 for more details on MVS) was conducting the

monthly staff meeting.

“As you all know I was in the Head Office last week,” Mr. Ramesh addressed his

staff, “I learnt that the internal audit of our branch is likely to be held during the

first week of October. Though it is still a month away, we should start preparing

ourselves. What do you think we should do for this audit?”

“Sir, this year we will take the audit team to Bagdongri village. It has several old

groups which have taken many repeat loans,” said Mr. Adarsh, a veteran field

staff.

Mr. Mohan, the field staff in charge of Bagdongri who has just joined the MVS

two months back, was glad that Mr. Adarsh recommended his village. He was

sure that the internal audit team would appreciate the groups and his work.

Nevertheless, he was worried about the conversation he had with Mr. Ramesh

the day before about being far behind the targets. He feared that the audit team’s

praise for him would be marred if he failed to meet the disbursement target for

the quarter ending in September.

The day before, Mr. Ramesh had called Mr. Mohan to his table. Pointing at the

target for the Bagdongri cluster of 20 villages he said, “Our branch has a target of

1. Case prepared by Mr. Swandip Sinha, EDA Rural Systems, Gurgaon under the aegis of the

`Workshop on Developing Cases and Training Material in Microfinance’, sponsored by SIDBI Foundation for Micro Credit, Lucknow.


109

500 new loans by the end of this quarter in Bagdongri cluster but so far we have

disbursed only 50 new loans. We must somehow disburse at least 450 new

loans in the next month. I know you have been in the MVS for just two months

but you must work hard and achieve the target. Do whatever is needed including

consulting your seniors.” Mr. Ramesh paused. “Our donors set these targets,

and we have to keep our reputation with them. How could we ignore them? Their

help is so vital for all our programmes. Could the MVS ever have been such a

large organization without the commitment of the donors to help the poor in this

region?”

Four hundred and fifty new loans! The target constantly bothered Mr. Mohan and

at the end of the day he decided to visit Mr. Adarsh at his home.

“You have been with the MVS for 6 years and I was told that you have always

met your target. Please advise me on how to achieve the target of 450 new

clients in just one month,” said Mr. Mohan. “There is so little time. I also have to

organize the children’s vaccination programme next month and at the same time

plan for seed distribution to farmers,” he added.

“I do not understand why you are so worried about internal audit. In the last five

years, I have never seen anything adverse resulting from these. You must

understand that internal audit is the management’s headache and not ours. Now

that you have come to me, I will definitely advise you,” said Mr. Adarsh. Their

discussion continued for an hour and finally as Mr. Mohan left for his home, he

was quite relieved.

For the next few days, whenever he visited the field, Mr. Mohan summoned

special meetings of the leaders of the five or six nearby groups. Once the groups

gathered, he asked the leaders to prepare a list of names of future borrowers

from their groups. Mr. Mohan was sure that it will take an entire week for all the


110

groups to prepare the list, and he could safely devote this time to his other

development responsibilities.

He missed a few group meetings but was not too worried as the leaders were

responsible women. Even in the past, when Mr. Mohan, was unable to attend

meetings, the leaders collected savings and loan repayments from the members

and handed it over to him during his visits. They also helped him fill the

individual collection sheet, which highlighted the loan repayment and savings

position for each member. However, Mr. Mohan knew that the records which the

groups gave him were not always accurate or complete. Mr. Adarsh had told him

that while deciding who gets a fresh loan, it was the performance of that group

which mattered the most. Therefore, Mr. Mohan always made it a point to

update the group information himself. He always crosschecked the information

regarding savings, loan repayments and loans outstanding with the groups

during group meetings.

As planned, after one week, Mr. Mohan collected a list of 500 names from the

group leaders. Filling in their loan application forms took another four days.

Again the group leaders were of immense help. Finally, everything was ready

and Mr. Mohan took the applications to the branch for approval. The loan

sanctioning committee headed by the deputy district manager scrutinized the

applications and selected 425 applications for new loans. The applications of 75

members were rejected mainly because the information available from the

Management Information System (MIS) at the branch office showed that their

groups had a very long history of loan delinquency.

A day before disbursements were to begin, Mr. Mohan was preparing the papers

when he suddenly noticed that many individuals who were to receive fresh loans

still had past loans outstanding in their names. Once again, he went to Mr.

Adarsh and asked him how to handle this problem.


111

“We follow a simple method in these cases,” explained Mr. Adarsh. “One method

is to add the new loan to the old outstanding amount and treat them together as

the amount payable within the duration for the new loan.” “In the second

method,” Mr. Adarsh continued, “You could use a part of the new loan to adjust

the old outstanding amount and show the remaining amount as the sum

disbursed.” That solved the problem for Mr. Mohan.

The internal audit team finally visited the Kishanganj branch on 1 November,

2000. Though Mr. Mohan was sure everything was okay, he was slightly

nervous when the team asked why some of the individual collection sheets were

not complete. On the second day, the team visited the Bagdongri village. After

attending a group meeting, they accompanied Malti Saha, one of the members

who had recently taken a loan for purchasing a cow, to her home.

On reaching her home, one of the team members asked, “Where is the cow you

purchased?”

“My son has taken it out to graze,” Malti replied.

Nevertheless, the team wanted to know more and asked her several questions

such as from where she purchased the cow and for how much.

“How do you expect me to spend on a cow when my house still does not have a

roof after the last cyclone?” Malti finally retorted.

The internal audit team took notes diligently.

That evening Mr. Mohan visited Mr. Adarsh and after narrating the incident said,

“The internal audit report would reprimand me for negligence which may affect

my career.”


112

Mr. Adarsh remarked, “Don’t worry Mohan. Every year there are so many

borrowers like Malti. But our management understands our commitment to the

poor and needy. After all Malti used the money to satisfy a basic need. Where

else would she have got the money to repair her house, had we not given her

loan? Isn’t the final objective of all our programmes is to help the poor?”

Part - 2

Funding MVS

Mr. Adam Walsh, the Microfinance Programme Head at Assist Poverty

Worldwide (APW) was meeting his colleagues. The APW is a leading supporter

of the MVS programme. He started, “I am sure you all have studied this recent

application for funds from MVS.” Waving the proposal in his hand he asked,

“Could I have your opinion about it?”

“I think our grants to MVS have really helped them. Their report shows quite a

good performance for the microfinance programme in the last financial year. In

fact their financial statements show profits for the last year. Their repayment rate

has also improved from 89 percent to 91 percent,” said Mr. Alan King, one of Mr.

Walsh’s colleagues.

“I think we should fund them again,” said Mr. Tom, another colleague. “Only this

time we should give them a loan for expanding their portfolio and not a grant.

They seem to have developed their capacities quite well,” he added.

Everyone in the room agreed to the suggestion.

“However, I think we should have an independent assessment of MVS,” said Mr.

Walsh. “It would not only make it easier for us to justify our support to MVS, but

would also help identify how the programme can be further strengthened in

future.”


113

Soon a team of three microfinance experts from Micro Consultants was in MVS.

They spent seven days meeting the staff at all levels and collecting data from the

head office, unit offices and the branches. Amongst a host of staff, they also met

Mr. Adarsh and Mr. Mohan. The team spoke to them in detail about their

functions and experience. Carrying with them the internal audit report, they

visited the field when they met Malti Saha in Bagdongri. She was yet to purchase

the cow.

In the head office and in the branches the team worked extensively to determine

the actual costs incurred by the microfinance programme of MVS. It allocated

staff costs based on time spent on microfinance. Similarly it allocated fixed

assets based on their use for the microfinance programme and accounted for

depreciation. The operational income for microfinance was separated from non-

operational income to reflect the actual income from microfinance services only.

Soon the team submitted its report to the APW (see Exhibits 6-8 in Annexure 3)

After studying it carefully, APW decided to hold the decision to lend to MVS. Instead, it commissioned another study for restructuring the microfinance

programme of MVS.


114


Session 1

1. What did the portfolio and financial analysis carried out by Micro Consultants

about MVS reveal to APW which made them to reverse their lending

decision? Why were some of the Micro Consultants’ figures different from the

figures reported by MVS?

Session 2

1. What do you think are the causes which have led to the present situation?

2. APW has hired you as a consultant for restructuring microfinance

programme of MVS. What are your suggestions to restructure MVS?


115

ANNEXURE - 1 Manav Vikas Samity (MVS)

Manav Vikas Samity (MVS) was established as a non-governmental orgnisation

in 1971 by the Poverty World Federation (PWF) for the socio-economic

development of the poor community in North Bengal. Starting with the

construction of roads, bridges, markets and schools, the MVS soon devised

programmes to assist the poorest in agriculture, community development, health

and women’s economic activities. Its activities resulted in ‘the greening of the

north’ through roadside tree plantations and raised awareness about women’s

rights. It also helped in the emergence of self-managed people’s organisations

(Federations) to facilitate development activities in the region.

Providing the poor with access to credit facilities for enabling economic activities

was an integral part of the MVS development strategy from the beginning. It

provided loans – often interest-free, to its target group in the 1970s and 1980s.

MVS concentrated on funding men’s ventures. From 1988 the focus shifted to

giving loans to women. In 1991, the MVS started group based lending to

formalise the savings and credit operations. In the subsequent years

microfinance became an important part of its development strategy.

Though growth of the microfinance programme was relatively slow at first, the

outreach by the year 2000 has extended to 16,700 groups (250,000 member

households) in 29 thanas (police stations) of six districts. There are around

195,000 active loan clients from 13,000 groups. The microfinance operations

are managed through 36 Branch Offices and supervised by eight Project Units.

The Head Office at Siligarh, serves as the Credit Coordination Unit (CCU) and is

led by the Credit Coordinator (CC). However, the CC has limited administrative

control over the credit operations. The Project Coordinator, who is responsible

for all community level development activities, also supervises credit operations

at the villages (Exhibit 1).


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There are 903 staff members including around 350 Union Organizers (field staff)

who are common to most of the MVS programmes. There are also 177 persons

who work as Federation Credit Volunteers and paid by the MVS. In addition,

internal auditors and the accounts staff of the CCU provides support service to

the credit programme. The microfinance operation is supported mainly by grant

funds from the MVS’ core budget as well as from several of bilateral

programmes. In addition, it has received subsidized loans from the Central

Bank and some apex financial institutions (Exhibit 2).

The MVS follows a joint liability group model – similar but not identical to

Grameen Bank, for its microfinance operations. The Union Organisers form

between 15-25 groups in a village. A President and a Treasurer are selected

after the group formation. The meetings of the group are held weekly during

which members deposit Rs. 2 to 5 as compulsory weekly savings. The members

also discuss issues other than microfinance in these meetings. The Union

Organiser attends all the meetings and assists the Treasurer in each group in

keeping records.

The groups are provided loans after 3-6 months period from the first meeting.

Regular savings, regular attendance and a minimum savings deposit of Rs.200

per member are prerequisites for obtaining loans. The loan proposals are

scrutinised for feasibility. The group’s performance in terms of repayment as well

as record keeping is also taken into account. The Upazila Manager makes final

recommendation after a sample check of the loan proposals. Loans are

disbursed to individual group members at the Branch Office.

The MVS has also promoted informal federations of groups which are at least

five years old. The federations have substantive self-management, decision-

making and record keeping capabilities. There are 254 such federations

consisting of 8,200 groups. The federations supervise their groups and are


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responsible for savings and repayment collection. They also formulate,

scrutinize and recommend loan proposals for the member groups. The MVS

pays an honorarium to the Federation Credit Volunteers and provides institutional

support to the federations through its Social Development and Education Officers

(SODEO) based at the Project Units. In the long run MVS plans to formalize the

federations and enable them to take over some of the development roles.

The MVS has several loan products for different purposes ranging from

agriculture and allied activities to asset purchase for production purpose and

house construction (Exhibit 3). The loan sizes are related to the volume of

savings. A minimum savings ratio of 5, 10,15 and 20 percent has to be

maintained respectively for first, second, third and fourth round of borrowings.

The MVS charges 15 percent flat interest rate per annum.

The savings of the members are not a part of MVS’ loan funds. They are treated

as collateral for loans and deposited in a savings account with a commercial

bank. Out of the interest of 8 percent earned on these savings, the MVS retains

a margin of 2 percent for handling the funds. The remaining 6 percent is passed

on to the members on an annual basis by adding it to the accumulated savings

in their passbooks.

The target group of MVS mostly consists of poor women. There exists

reasonable demand for loans for agriculture and allied services. The region is

characterized by a high population density dotted with numerous small markets.

In addition, most of the districts covered by the MVS have strong trade links and

good communication facilities with Kolkata which provide ample trade and

business opportunities to the members. The demand for loans for milch animals

has increased substantially after three chilling centers were established in three

districts of the region during the last one year. The demand for loans for grocery

shops, vegetable and fruit vending and small roadside eateries is also

substantial.


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The otherwise stable economy of the region has been adversely affected by

cyclones and repeated floods during the last few years. The microfinance

programme has also suffered as a result. However, the government has taken

fresh initiatives for constructing dams on the main rivers which are likely to

reduce the incidence of natural disasters in the future.

Exhibit 1

Director

Field Programmes

Credit Coordinator

- Assistant Credit Coordinator & Staff

Project Coordinator - Assistant Project

Coordinator - Credit & Enterprise Devt.

Officer - Field Officer, Small Farmer

Group

Credit Officer (MB)

- Assistant Upazila Manager (Credit) - Credit Assistants

Upazila Manager - Asstt Upazila Managers (Genl) - Union Organisers - Administrative Assistants

Federation Credit

Volunteers

Members

(250,000 women & men)

Administrative responsibility Information flows


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Exhibit 2

MVS Core Budget

Central Bank

Bilateral Donors

grant funds

subsidized loan grant funds @4.5%

MVS Revolving Loan Fund

savings @8%

enterprise loans savings @15% flat @6%

Commercial banks

Groups/Members

Exhibit 3

Loan product Purpose Size Norms Interest Rate

MVS Normal (from the MVS Core Fund and loans from financial institutions)

Income and employment generation.

Decided on the basis of level of savings.

Loan term is 12 months with weekly installments for primary and fortnightly for secondary activities.

15% flat rate per annum. 15% declining basis on overdue amounts after completion of period

MVS Seasonal (MVS Core Fund)

For agricultural and allied production including livestock and irrigation equipment

Different loan ceilings for each activity but linked to savings

Loan term 6, 12 or 24 months, collected in 1-4 installments based on cash flow.

15% per annum flat

Bilateral Loans

Varies by donor- preferred activity

All standardised and follow the above options depending on the nature of the income generating activity.


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ANNEXURE - 2

Exhibit 4: Balance Sheet for Microfinance Operations - As on 31 December 2000 (Prepared by MVS)

Assets Rs.

Cash in hand/bank 19,75,81,391 Advances and other receivables 35,44,043 Loans outstanding 48,98,13,441 (Loan loss reserve) -5,89,47,594

Net loans outstanding 43,08,65,847 Total current assets 63,19,91,281

Total Assets 63,19,91,281 Liabilities and Net worth

Current liabilities 2,03,705 Long term debt 2,31,85,689 Long term/compulsory savings 12,10,18,178

Total long term liabilities 14,42,03,867 Donated equity for RLF 28,49,29,035 Retained net surplus/(deficit) 11,55,50,509 Current net surplus/(deficit) 8,71,04,165

Total net worth 48,75,83,709 Total Liabilities and Net worth 63,19,91,281

Exhibit 5: Income Statement for Year Ending 31 December, 2000

(Prepared by MVS)

Rs Interest received on loans 5,34,42,939 Interest received on investments 76,69,884 Income from grants 5,22,62,499 Other income 2,15,001

A. Total Income 11,35,90,323 Interest paid on borrowings 11,27,972 Commission to Federations 7,25,427 Bank charges 2,22,683 Interest on member savings 62,80,034

B. Total Cost 83,56,116 C. Gross Financial Margin (A-B) 10,52,34,207

Provision for loan losses 1,08,94,706 D. Net Financial Margin (C- Provision for Loan Loss) 9,43,39,501 Salaries 71,88,448 Administrative/office expenses 46,888

E. Operating Costs 72,35,336 F. Net Surplus/Deficit (D-E) 8,71,04,165


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ANNEXURE - 3

Exhibit 6 : Balance Sheet prepared by Micro-consultants, As on 31

December, 2000

Rs Assets

Cash in hand/bank and in transit 7,33,48,336 Interest bearing deposits 12,42,33,055 Advances and other receivables 35,44,043 Loans outstanding 47,74,21,462 (Loan loss reserve) -4 65 55 615

Net loans outstanding 43 08 65 847 Total current assets 63,19,91,281

Total long term assets 3,55,08,289 Total Assets 66,74,99,570

Liabilities and Net worth Interest payable on savings 62,80,034 Other liabilities 2,03,705

Total current liabilities 64,83,739 Long term debt 2,31,85,689 Long term/compulsory savings 11,47,38,144

Total long term liabilities 13,79,23,833 Total external liabilities 14,44,07,572

Donated equity for RLF 33, 90,60,391 Grants for operating expenses 33,61,55,875 Capital grants for fixed assets 4,43,85,361 Retained net surplus/(deficit) -18,14,41,561 Current net surplus/(deficit) -1,50,68,068

Total net worth 52,30,91,998 Total Liabilities and Net worth 66,74,99,570


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Exhibit 7: Income Statement for year ending 31 December, 2000 (As Prepared by Micro consultants)

Rs Interest received on loans 5,34,42,939 Interest received on investments 76,69,884 Other income 2,15,001

A.Total Income 6,13,27,824 Interest paid on borrowings 11,27,972 Commission to Federations 7,25,427 Bank charges 2,22,683 Interest on member savings 62,80,034

B. Total Cost 83,56,116 C. Gross Financial Margin (A-B) 5,29,71,708

Provision for loan losses 1,08,94,706 D.Net Financial Margin 4,20,77,002

Salaries 4, 72,10,060 Travel/logistics 26,34,882 Depreciation 18,68,857 Administrative/office expenses 54,31,271

E. Operating costs 5,71,45,070 F. Net Surplus/Deficit (D-E) -1,50,68,068


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Exhibit 8: Ratio Analysis and Portfolio Report

(As Prepared by Micro Consultants)

Notes: 1.Cumulative repayment rate: Ratio of cumulative principal recovered (net of pre-payments) to the cumulative principal due till the date of measurement. 2.Portfolio at risk (PAR>=60): Ratio of the principal balance outstanding on all loans with overdues greater than or equal to 60 days to the total loans outstanding on a given date. 3. Yield on portfolio : The interest income on loans divided by the average loan portfolio for the year. 4. Financial cost ratio: Total interest expense for the year divided by the average portfolio. 5. Loan loss provisioning ratio: Total loan loss provisioning expense for the year divided by the average portfolio. 6.Operating cost ratio: Ratio of salaries, travel, administrative costs and depreciation expenses to the average loan portfolio. 7.Annual Percentage Rate: It is the maximum possible return MVS can earn on portfolio given the fact that MVS charges 15 percent flat rate of interest per annum. 8.Operational Self-Sufficiency: It is the ratio of financial income to total costs consisting financial cost, operating cost and loan loss provision.

-----0----

Ratios Year ending 2000 Yield on Portfolio 12.4% Investment income 1.8% Other income 0.1%

A. Total Income 14.3% Financial Cost Ratio 1.9% Loan loss provisioning ratio 2.5% Operating Cost ratio (OCR) 12.9%

B. Total Cost 17.4% Return on Portfolio (A-B) -3.1%

Operational Self-Sufficiency(OSS) 82.3% PAR>=60 days (after write-offs) 66.0% Arrears rate>=60 days (after write-offs) 42.0% Cumulative repayment rate (after write-offs) 89.3% Annual loan loss or write-off rate 2.9% Annual Percentage Rate (APR) 26.5% Yield/APR 47.0% Return on Average Investments 6.6% Savings/Total Assets 18.2%

SCALING-UP


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BHASS’s Microcredit Mission1

SHG Programme of BHASS Mr. Krishna Kumar, officer-in-charge of microcredit programme of BHASS, is

concerned with the recent performance of their microcredit programme. He says,

"We are in the sixth year of the programme. We began the microcredit

programme with a target of covering one million poor families by the year 2005.

So far we have organised 2700 groups with a membership of 54,000. Our loan

recovery rate has been as high as 95 to 97 per cent. Our clients have been very

prompt in repaying the loans at the respective offices. But recently the clients are

somewhat reluctant in their loan repayments and we have to make door-to-door

visits for loans recovery. Since last two years or so a large number of Self Help

Groups (SHGs) have been promoted by various political parties, religious bodies

and government agencies in our area of operation. They often offer many

incentive schemes in their credit activity to attract members. Today many

members of SHGs have multiple memberships."

BHASS is a non-governmental development agency working in the southern

state of Kerala in India to mobilise people to participate in the development

process. It has vast experience in formulating and implementing developmental

programmes for the poor. It has initiated the formation of SHGs since 1996 in the

districts of Thiruvananthapuram, Kottayam and Kasargod. It has also made a

beginning in nine more districts recently

The major objective of BHASS is to help attain self-sufficiency and upliftment of

the poor women belonging to the marginalised sections through natural resource

management, capacity building, empowerment, poverty alleviation and financial

upgradation (see Exhibit 1 for more details on objectives). The SHG programme

is targeted at women belonging to fishing community, agricultural labourers, slum

1. Case prepared by Dr. N.V. Namboodiri, Indian Institute of Management, Ahmedabad, under the

aegis of the `Workshop on Developing Cases and Training Material in Microfinance’, sponsored by SIDBI Foundation for Micro Credit, Lucknow.


125

dwellers, manual labourers and others who are living under poverty. The

members of the SHGs are from neighbouring families. The basic criterion for

group formation is given in Exhibit 2. There is no caste or religious discrimination

in forming the groups. The majority of the groups consists of members who are

poorest with low educational levels and having no personal source of income.

An SHG consists of four micro units. A micro unit is at the ultimate level in a

village. The micro units have been promoted primarily to ensure homogeneity of

groups for undertaking income generating activities.

Participatory decentralized decision-making is the key principle underlying the

microcredit programme of BHASS. The decisions on selection of members,

assessing credit needs, loan disbursement, loan recovery etc., are taken in a

decentralised way by each village and district units of BHASS. The fund

mobilization and accountability to the donors is the responsibility of the BHASS

central unit. BHASS provides finances to SHGs only to take up income

generating activities. Loans for consumption purpose may be provided out of

SHGs’ own resources. A number of lending agencies such as the Small

Industries Development Bank of India, Bridge Foundation, Rashtriya Mahila Kosh

and Friends of Women's World Banking support BHASS credit programme.

BHASS neither has faced any major difficulties in mobilizing funds nor incurred

any losses in lending activities. For individual members, BHASS does not

suggest any programme and the group themselves should identify the

programme to suit their conditions. The group members have medical insurance

coverage under the programme. The organizational set up of the SHG

programme is given in Exhibit 3. The monitoring and implementation of the

programme is carried out by the leaders of SHGs, councillors, field officers and

programme officers of BHASS.

Functioning of SHGs

A secretary and a councillor are elected from the group by the members. An

SHG conducts its meetings once a week. The savings are collected weekly and


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there is fixed criteria for the amount to be saved. But large variations in the

savings amount are discouraged. The members can avail credit on the basis of

their savings. Each member is given an individual passbook and the weekly

savings amount is entered in it. Each group has its own bank account held jointly

by the group secretary and the programme staff of BHASS. Apart from the

individual passbook and the group passbook, the groups also maintain a

cashbook, ledger, saving register, loan register, attendance register and a

minutes book. The savings collected each week will be deposited in the bank.

After eight months of formation of the group, the group will utilize its savings for

lending to members. As and when the group matures, BHASS extends outside

loan to the group members. The criteria used for assessing the group maturity

include age of the group, attendance of the members, savings mobilised, lending

experience with own savings, amount of loan advanced, amount repaid, and

utilization of the loan.

The loaning procedure is as follows. The needy members have to submit loan

applications to their SHG. The application will be assessed based on the need

and amount of savings held by the member. Then the SHG leaders recommends

the loan application through the field officers to the Programme Officer at the

district level who in turn sanctions the loan. A member can avail loan up to 4 or 5

times of the savings. The same procedure is followed even for group loans. The

rate of interest charged by BHASS is 12 per cent per annum to the SHGs. The

SHGs in turn charge 18 per cent rate of interest to their members. The amount

of loan to individuals varies from Rs. 100 to Rs.10,000. Generally, loans of small

amount are being taken for consumption purposes. The repayment period varies

from 1 to 12 months depending on the size and nature of the loan. The members

who are interested in taking loans for income generating projects have to submit

their project plan. Only viable projects are eligible for loans. The members also

use credit as a means to address the needs of group asset creation. The overall

progress of the SHG programme since inception is given in Exhibit 4.


127

The major purposes for which loans are issued is shown in Figure 1 below. The

major activities undertaken by the groups include coconut processing, pappad

making, palm leaves processing, food processing, bag making and chappal

making (see Exhibit 5). Among the major activities the least preferred ones are

chappal making, bag making and food processing. The major reasons given for

this by the groups are: failure to withstand the market competition from branded

items, preference of customers to branded items, and inability to maintain

quality similar to branded items.

Members’ Perception About SHG Activities

The important implications of the saving activity as perceived by the members of

the group are: saving is an asset; improves the capacity to borrow; enables

growth of individual’s business which improves repayment rates; ensure financial

discipline; source to grow economically and attain improvement in status; and

serves as form of security in times of financial crisis. The various benefits that

accrue due to availing credit in the opinion of the members are: creation of

assets; increased productivity of the income generating activities; use of better

technology; increased volume of business; improvement in the quality of

products; and sustainable employment. However, members also pointed out

some of the weaknesses in the present credit schemes. The high demand for

credit is often not met due to lack of adequate funds at the disposal of BHASS.

The method of weekly repayment causes problem in availing credit as most of

the members are wage earners.

Fig.1: Classification of Loans

Entreprenuership(35%)

Agriculture(35%)

Trading(25%)

Others(5%)


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The opinion of the members belonging to the poor and poorest of the poor

categories varied with regard to their borrowing activity. The poorest of the poor

are not much enthusiastic about the credit activity of the SHG programme. This is

mainly because of their inability to repay loans, lack of adequate savings in their

names to borrow and inability to undertake any income generating activity. They

feel that they are very poor and they should be helped by means of subsidies

and grants. But those who belong to the category of poor are highly enthusiastic

about the credit activity. They actively participate in the meetings and other

activities of SHGs. They are regular in savings and repayment, have better

awareness about the programmes, and interested in taking up income generating

activities.

BHASS conducts various training programmes to the members of SHGs. To

BHASS, training is an essential part of the empowerment process. The members

perceive that the training programmes are beneficial to them. The training

programmes motivate and persuade them to come together, inculcate the merits

of participatory approach, enhance group dynamism, equip them about how to

manage the group activities, improve communication and account keeping skills,

assist in selecting suitable income generating activities, and in improving savings

and credit management.


1. What are the strengths and weaknesses of BHASS’s SHG Programme?

2. How can BHASS overcome its weaknesses?

3. Do you suggest BHASS to go for forming more groups to achieve its target

set for 2005? If no, why? If yes, why and how it should go about expanding?


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Exhibit 1: Major Objectives of BHASS on SHGs

• To provided people living in poverty access to small savings and credit

for undertaking productive activities

• To free people from the bondage of poverty

• Enable participation of the poor in mainstream social, economic and

political arena of the society

• Provide a forum for collective learning on equal basis

• Help to cultivate entrepreneurial culture

• Provide common platform for dialogue and cooperation in developmental

programmes

• Promote effective credit delivery system

• Convert the developmental and financial process for the total

advancement of the members by creating employment and income

generating opportunities

• Provide various types of insurance coverage to the members

Exhibit 2: Criteria for Group Formation

1. Clientele Only Women

2.Method of Selection of members

By the groups in the village using tools of Participatory Rural Appraisal. The interested women will form a five member group in the village. The guidance and supervision of the field staff is provided for facilitating the selection process.

3. Criteria for identifying poor and poorest of Poor members

Poorest of the poor are those who have an annual income of below Rs.5,000. Their selection is further confirmed by looking at their standard of living, health status, infrastructure facilities and educational standard of the children. For deciding the category of poor, besides the above conditions the annual income should be below Rs. 11,000.


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Exhibit 3: Organizational set up of SHGs

A Micro Unit 5 members from 5 families

A Self help Group 4 micro units (20 members from 20 neighbouring families)

A Council 10 Self Help Groups

A Development Centre 5 Councils

A District Unit 50 to 80 Development Centres

Exhibit 4: Progress of SHGs Since Inception

(Amount in Rs. Lakhs)

Item Dec. 1997

Dec. 1998

March 1999

March 2000

March 2001

Dec. 2001

1. Number of villages 3 8 18 42 50 58

2. Number of SHGs 164 492 1220 2344 2560 2682

3. Number of members 3280 9840 24400 46880 51200 53640

4. Number of Active clients1 - - 7320 16408 23040 24138

5. No. of BHASS Staff - - 23 46 53 63

6. Loan Amount Disbursed during the Year

- - 125.6 358.7 399.4 281.5

7. Loan Outstanding - - 125.6 484.2 883.6 1165.1

8. Loan Recovered during the year

- - 62.8 193.7 353.4 112.6

9. Loan Amount Recovered Cumulative

- - 62.8 256.5 609.9 722.5

10. Balance Outstanding (7-9) - - 62.8 227.8 273.7 442.6

11. Recovery Rate (%) - - 95 96 97 97 1 Active clients are those who regularly save, borrow and repay.


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Exhibit 5: Types of Activities undertaken by Members or Groups by

Availing Credit

Activity Heads SHG Members Group as a whole

Agriculture Organic Farming Technology Development, Vermi Composting, Ayurvedic Planting, Azolla Cultivation

Vermi Composting, Ayurvedic Planting

Entrepreneurship Coconut processing, Pappad making, Palm leaves processing, Bag making, Chappal and Leather Goods, Tailoring, Food processing, Ayurvedic products, Soaps, Candle, Book Binding

(Same as the ones undertaken by SHG Members)

Trading Household items, Provisions, Snacks, Clothes, Bag, Chappal

(Same as the ones undertaken by SHG Members)

Others Screen Printing, Meter Repairing, Flower Technology, Fabric Printing, Handicrafts, Bed and Pillow Making

Fabric Printing, Handicrafts, Bed and Pillow Making


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SCALING UP OF AN MFI1

Gradually, the organization expanded its activities first functionally and then over

space. “By early 1990s we shifted our focus to sustainable development as we

were by then convinced that no real dent can be made into the day-to-day

problem of poverty of the people unless we did something which would benefit

the poor on an ongoing basis,” said the Secretary and chief functionary of the

organisation. Some of the activities which the organisation diversified into since

1990-91 are wasteland development and afforestation, installation of mini deep

tubewells, construction of improved smokeless chulha, promotion of activities in

(The Case of Village Welfare Society)

The Beginning

Havoc wrought in 1978 in Howrah and Hooghly districts of West Bengal by the

devastating floods caused by the river Damodar – ‘the sorrow of Bengal,’ saw a

few young men of Pancharul village in Howrah district rising to the occasion and

coming to the rescue of the victims of the natural fury. The young men joined

hands and registered themselves in 1982 as a non-government organization

(NGO) under the West Bengal Registration of Societies Act and named their

organization as the Village Welfare Society (VWS). That was the beginning of a

journey along social action and enterprise, which continues till date. The VWS

commenced operation from its registered and only Office at Pancharul as a

charity-cum-welfare organization with its thrust laid on activities like running of an

old-age home, a day-care unit for the elderly among the poor, a short-stay home

for destitute women and a training-cum-guidance centre for children who are

forced to sell their labour for living.

VWS Turns into a Development Organization

1. Case prepared by Prof. Prabal K. Sen, Institute of Rural Management, Anand under the

aegis of the `Workshop on Developing Cases and Training Material in Microfinance’, sponsored by SIDBI Foundation for Micro Credit, Lucknow.


133

sectors allied to agriculture with a view to providing people with supplementary

sources of income, and capacity building of the women, youth and NGOs through

regular training programmes on economically useful vocations.

Entry into Microfinance

Then came economic reforms (1991-92) and reforms in the financial sector

(1992-93) as a part of the larger restructuring of the economy. The banks and

other financial institutions in the country entered an era when mere accrual of

interest in their ledgers could no longer be reckoned as income until such interest

was actually realised by them. Thus, emerged the distinction between an asset

(a loan account), which was ‘performing’, and an asset which was ‘non-

performing’ depending upon whether interest on the account was actually

received by the bank in time or not. The financial sector reforms enjoined upon

all banks and financial institutions to reduce the proportion of their non-

performing assets (NPAs) to the minimum, or face gradual decline and eventual

disappearance from the scene.

With increasing NPAs, the net worth of many of the rural credit institutions in the

country and particularly in West Bengal got severely eroded and needed

recapitalization for survival and sustenance. As the impact of reforms gradually

sank in by the middle of 1990s, enthusiasm for social banking witnessed in the

two and a half decades since nationalization of major commercial banks in 1969

gave place to a high degree of circumspection among most banks. The credit-

deposit ratio (CDR) for commercial banks began to slide almost everywhere in

the country and more so in the rural and semi-urban areas. The CDR in the

country fell from 66.2 per cent in March 1991 to 59.2 per cent in March 1995. The

ratio for rural and semi urban areas declined more sharply from 54.2 per cent to

43.3 per cent. The CDR for rural and semi- urban areas of West Bengal fell from

34.5 per cent in March 1991 to 29.8 per cent in March 1995. The proportion of

net bank credit to priority sectors hovered around 30-33 per cent during this


134

period although the target stipulated by the government continued to be 40 per

cent. The formal credit institutions were flush with funds but wary of lending.

It was also the time when some of the apex institutions like Small Industries

Development Bank of India (SIDBI) came out with their pilot programmes for

microfinance intervention. These programmes were proposed to be implemented

not only through the banks but also through the NGOs. Similarly, the Rashtriya

Mahila Kosh (RMK) or the National Credit Fund for Women was set up in March

1993 by Government of India with an initial corpus of Rs. 31 crore with the

purpose to fill the gap between what the banking sector offers and what the poor

need. The RMK funds were envisaged to be routed through Intermediate

Microfinance Organizations (IMOs), which included (a) NGOs, (b) appropriate

State Government agencies, and (c) Co-operatives with at least 33 per cent

women members and working in profit for at least two years. The National Bank

for Agriculture and Rural Development (NABARD) also announced its

microfinance programme of linking Self-Help Groups (SHGs) to banks in 1992.

Given the felt needs of the poor for small quantum savings and credit and the

assured support of funds from apex agencies promoting microfinance like RMK

and SIDBI, the VWS itching to further enhance its poverty alleviation role decided

to launch microcredit activity in a formal way since 1995. The global summit on

microcredit held in February 1997 which was attended by the Secretary of

VWS, thanks to financial support by SIDBI, acted as a further fillip to upscale the

microfinance activities.

The Path Traversed

With a small beginning made during 1995-96 when there were 72 SHGs with

1,106 members and a credit disbursement of Rs. 4.53 lakh, the VWS increased

its involvement significantly during the subsequent few years (See Exhibit 1). By

the end of 1998-99, the third year from the formal inception of microfinance

initiative, the total membership rose to 3,301 and the amount of credit disbursed


135

shot up to Rs. 61.32 lakh. By the end of 2001-02, the number of members

organised into SHGs increased to 14,841 and the volume of credit disbursed

reached a level of Rs. 414.46 lakh (See Exhibit 1). The VWS organises two

kinds of groups viz., Self-Help Groups (SHGs) and Small Entrepreneurs

Group(SEGs). The SHGs are basically savings and credit groups promoted only

for women, while SEGs are small groups consisting of only entrepreneurs

who can take up some entrepreneurial activity. The SHGs and SEGs, however,

are not linked to banks. They are being financed with members’ savings and

funds mobilised by VWS from outside sources (see Exhibit 4). The major

features of these two kinds of groups and the operational norms followed by

them are indicated in Exhibit 3.

The VWS has achieved the expansion in its MF activities so far by adopting a

three-pronged strategy:

a) Expansion in the organizational infrastructure and increase in the staff

strength: The number of units increased from a singular office at Pancharul

in Howrah district in 1995-96 to 17 in 2001-02 spread over five districts of

West Bengal and one in the neighbouring Chhattisgarh state. The employees

number grew from 30 in 1995-96 to 146 in 2001-02.

b) Training and orientation of staff: Continuous efforts were made to train and

retrain the staff so as to raise their general level of skill and efficiency and

also to impart in them necessary orientation for working for the poor with

dedication and zeal; and

c) Broadbasing the sources of finance: In the first two years of its intervention,

the VWS depended only on funds mobilised from the RMK. From the third

year (1997-98) onwards, VWS attempted to source funds from other

agencies like SIDBI Foundation for Micro Credit (SFMC), the National

Backward Classes Finance and Development Corporation (NBCFDC) and the

National Minorities Development and Finance Corporation (NMDFC). The


136

position of source-wise mobilisation of funds from 1995-96 through 2001-02 is

indicated in Exhibit 4.

Plan for Future Scaling up

The VWS intends to further scale up its microfinance activities. The total

membership of SHGs and SEGs is proposed to be increased from 14,368 in

2001-02 to 20,000 in 2002-03, 30,000 in 2003-04 and 40,000 in 2004-05. The

credit disbursement is intended to be raised from Rs. 4.14 crore in 2001-02 to

Rs. 8 crore in 2002-03, Rs. 14 crores in 2003-04 and Rs. 26 crore in 2004-05

(see Exhibits 1 and 2).

The following strategies are proposed to be adopted to achieve the ambitious

scaling up programme:

a) Increase the number of units from 17 in 2001-02 to19 in 2002-03, 22 in 2003-

04 and 25 in 2004-05, so that the incremental business is distributed evenly

over space. b) Raise the staff strength from 146 in 2001-02 to 151 in 2002-03, 178 in 2003-

04 and 200 in 2004-05.

c) The funds are to be mobilised not only from RMK, SFMC, NMDFC and

NBCFDC, but also from the commercial banks. In June 2002, VWS has put

up a proposal for cash credit accommodation from Allahabad Bank. Certain

other major banks in the region are also proposed to be approached for funds

so that flow of funds does not stand in the way of the organization achieving

its goal. The organization expects that its attempts to secure funds from

commercial banks will succeed because quite a few of such banks currently

show interest in extending credit through microfinance institutions (MFIs) as

this route promises lower transaction cost and lower credit risk to them as

lenders. The MFIs like VWS take responsibility not only to on-lend the

amount to the final clients (members of SHGs) but also to make prompt


137

repayment of the loans with interest to the commercial banks. The VWS also

hopes that the average cost of funds is not expected to go up as the interest

rates on bank credit are likely to decline further. The Dilemma of Upscaling

The strategies notwithstanding, the targets fixed for the coming years are

evidently too high vis-à-vis the projected strength of employees during the period.

The goals set for 2002-03 through 2004-05 imply that per employee membership

size and per employee credit disbursement will have to go up manifold from the

2001-02 level. The organization is conscious of the difficulty of the task. It seeks

to smoothen the scaling up path by introducing, in the first place, a computer-

based management information system (MIS). Because of the MIS, the recording

and transmission of data for monitoring would occupy relatively less time of the

staff enabling them in the process to devote longer hours to work with the people

in the field. As of June 2002, the computerization process has been almost

completed.

Secondly, the VWS is contemplating to put in place a suitable package of

incentives for the staff at the field-level. “One of the major problems we have to

face is the turnover of our employees. As we cannot compensate adequately for

the services rendered by them, some of our employees leave the organisation

every year for greener pastures. We, therefore, feel the need for introducing a

package of incentives for them so as to prevent the outflow of trained staff and

also to secure a further increase in their productivity”, said the Secretary of

VWS.

The organization is convinced that if the minimum expectations remain unfulfilled,

the dedication and commitment can take an employee only up to a certain level

but not beyond. A consultant has since been assigned with the task of

suggesting an appropriate scheme of incentives for the employees. The

organization is aware that the scheme when implemented will entail some

enhancement in its working expenses. However, because of the increase in the


138

overall scale of operations, such enhancement in cost is not likely to affect the

solvency of the organisation. The year wise position with regard to the income

and expenditure of the VWS from the microfinance operation till 2001-02 and

the scenario projected for the coming years are shown in Exhibit 5. The

Exhibit indicates that the financial viability of the microfinance operations of VWS

will improve over the years, notwithstanding the estimated increase in the salary

and other working expenses.

The challenge inherent in the scaling up operations is not merely one of

achieving sustainability on financial ground but also that of retaining its

commitment to the mission of the organisation. It is possible to scale up easily

the level of business by covering a small number of large borrowers rather than

a large number of small borrowers. That would mean cutting at the very root of

the principle of microfinance and the mission VWS had adopted two decades

ago, namely, to work for the good of the poor and the disadvantaged. Only time

will show whether the scaling up operations is achieved by VWS by taking to the

easier course and thus compromising on the mission or by treading the harder

way.

Questions for Discussions

1. What were the circumstances which led to the entry of VWS into

microfinance activity and launching it in a formal way?

2. Identify and analyse the strategies adopted by VWS for upscaling its

microfinance activity between 1995-96 to 2001-02.

3. What are the dilemmas faced by VWS in its scaling-up projected from

2002 onwards?

4. Do you think the strategy adopted by VWS is adequate to tackle the

dilemmas of its future growth? If not, how best such dilemmas should be

attempted to be addressed?


139

Exhibit 1: Growth of Microfinance Activity of VWS

Year No. of Unit

Offices

No. Of Employees

No. of SHGs

Membership of

SHGs/SEGs

Credit Disbursement

(Rs. lakh)

Members’ Savings

(Rs. Lakh)

Loan Recovery

(% to Demand)

Actual 1995-96 1996-97 1997-98 1998-99 1999-00 2000-01 2001-02

1 2 3 6

10 15 17

30 35 55 70

120 140 146

72 100 224 280 415 560 645

1,106 1,914 2,565 3,361 7,579

10,626 14,368

4.53 15.13 27.71 61.32

110.98 219.77 414.46

7.40 9.96

10.54 14.78 24.90 37.00

NA

94 94 94 95 97 97 98

Projected 2002-03 2003-04 2004-05

19 22 25

151 178 200

- - -

20,000 30,000 40,000

800.00 1,400.00 2,600.00

- - -

100 100 100

Exhibit 2: Select Performance Indicators Relating to Microfinance Activity

of VWS

Year

Per Unit Office Per Employee Members Handled

(No.)

Credit Disbursed (Rs. lakh)

Members Handled

(No.)

Credit disbursed (Rs. lakh)

Actual 1995-96 1996-97 1997-98 1998-99 1999-00 2000-01 2001-02

1,106 957 855 560 758 708 873

4.53 7.56 9.24

10.22 11.10 14.65 24.38

37 55 47 48 63 76

102

0.15 0.43 0.50 0.88 0.92 1.57 2.84

Projected

2002-03 2003-04 2004-05

1,053 1,364 1,600

42.11 63.64

104.00

132 168 200

5.30 7.86

13.00


140

Exhibit 3: Self Help Groups (SHGs) and Small Entrepreneurs’ Groups

(SEGs) of VWS

Type of Group

Size Loan Amount (Principal) (in Rs.)

Minimum Savings required

Interest rate

charged ( Flat )

p.a.

Average recovery

(%) Range Present Average (No.)

Range Present Average (Amount)

SHG

10-25 18 2,000-2,500 3500 1/3 rd of Loan Amt.

17.5 % 98

SEG

3-5 5 1,000-4,000 5000 -Do- 20 % 96

Exhibit 4: Sources of External Funds of VWS (Amounts in Rs. Lakh)

Year Source-wise Amounts Mobilised Source 1

(RMK) Source 2 (SIDBI)

Source 3 (NBCFDC &

NMDFC)

Total

1995-1996 1996-1997 1997-1998 1998-1999 1999-2000 2000-2001 2001-2002

-

11

13

27.50

45

86

-

-

-

15

-

15

100

30

-

-

-

-

-

5

4.50

0.23

11

28

27.50

60

191

34.50


141

Exhibit 5: Income-Expenditure of Village Welfare Society on Microfinance Activity

(Amounts in Rs. lakh)

Year Cost of Funds

Salary Expenses

Other Expenses

Total Expenses (2+3+4)

Income from Micro Finance

Activity

Net Income

(6-5)

Add Grant Surplus/ Deficit (7+8)

1 2 3 4 5 6 7 8 9

Actual

1995-1996 1996-1997 1997-1998 1998-1999 1999-2000 2000-2001 2001-2002

0.01

0.82

2.01

2.86

5.98

13.92

20.84

-

0.69

2.86

3.12

5.34

16.03

31.30

0.04

0.56

0.78

4.34

6.32

15.67

28.09

0.05

2.07

5.65

10.32

17.64

45.62

80.23

0.014

1.41

4.18

7.63

16.00

39.16

78.89

-0.036

-0.66

-1.47

-2.69

-1.64

-6.46

-1.34

Nil

0.05

0.11

0.24

1.73

11.93

1.48

-0.036

-0.61

-1.36

-2.45

0.09

5.47

0.14

Projected

2002-2003 2003-2004 2004-2005

26.00

51.00

120.00

38.00

45.00

50.00

48.30

72.40

83.60

112.30

168.40

253.60

150.00

275.00

500.00

37.7

106.6

246.4

-

-

-

37.7

106.6

246.4

SYSTEMS AND OPERATIONS OF MICROFINANCE INSTITUTIONS


142

INTRODUCING INCENTIVE BASED REMUNERATION1

The microfinance intervention of JF called MSP was started in 1989 with the

Self-Help Groups (SHGs) being the intermediation methodology adopted by the

organisation. The main objective of the programme was promotion of savings,

Jeevan Foundation

Established in 1986, Jeevan Foundation (JF), a non-governmental organisation

was born out of the need for betterment of the labouring communities spread

over 113 slums of Kanpur city and in nearly 225 villages of over 6 blocks in and

around Kanpur. The entire work operation falls in a radius of 50-60 kilometres.

JF is specifically focused to work on women related issues like advocacy on

gender biases, vocal and physical participation of the women outside home and

empowerment of the women. Till recently, addressing issues relating to

reproductive health, care for the aged and providing basic amenities in its

operational area was the primary focus of JF. Over the years JF has developed

its core competency in the areas of health and microfinance.

A governing body of 7 persons including 4 employees manages the

organisation. The overall responsibility for managing the organisation rests with

the Convener, Mr. Girija Nanda who is also the founder of JF. The Convenor is

assisted by the Core Programme Committees constituted for different sectors

of intervention (see Exhibit 1). A Programme Committee consists of internal and

external experts in the relevant sectoral area. The Programme Coordinators in

collaboration with the In-charge of finance and administration manage the

programmes. Micro Save Programme (MSP)

1. Case prepared by Mr. Rahul Mittra, Entrepreneurship Development Institute of India,

Lucknow under the aegis of the `Workshop on Developing Cases and Training Material in Microfinance’, sponsored by SIDBI Foundation for Micro Credit, Lucknow.


143

credit and income generation activities for poor women through SHGs. Apart

from the regular savings of the groups, funds were mobilised from apex banks

and financial institutions. Initially, the programme started with JF managing the

formation and development of the groups. The loan requirements of the group

members were met from the internal savings of the groups with JF providing no

financial assistance. The groups charged an interest rate of 18 percent per

annum on the amount lent to the members. Of this, 12 percent went back to

the group members and the remaining 6 percent was transferred to group

reserve funds. The groups formed in the early stages of the programme are still

continuing on this pattern. With effect from the year 2000, the 6 percent is

being transferred to JF as administrative charges.

In 1994, Rashtriya Mahila Kosh (RMK) extended its support to the programme

by providing funds at 8 percent interest with the condition that JF will ensure

that the ultimate borrower does not have to pay more than 12 percent interest on

the loan. Subsequently, in the year 2000 JF has been able to avail assistance

from HUDCO for the purpose of providing housing loans to the SHG members.

JF charges 14 percent on housing loans and gets a spread of 4 percent. The

SIDBI Foundation for Microcredit (SFMC) has also started providing assistance

to JF’s microfinance operations since 2001. The SFMC has supplemented loan

funds with grant support for capacity building of the operation and project staff of

JF. The microfinance programme of JF has been able to achieve an operational

self-sufficiency (OSS) of only 49 percent in the year 2001. In other words, only

49 percent of the operational expenses of the microfinance programme has

been recovered from the operational income. By March 2002, the OSS ratio

has increased to 65 percent.

The Core Programme Committee consisting of the Convener and internal and

external microfinance experts provide overall guidance to the programme. The

Programme Co-ordinator heads a team of three Assistant Programme

Coordinators (ACP), eighteen field facilitators and three accountants (see Exhibit


144

1 and 3). Each field facilitator handles about forty groups in both urban and rural

areas. The Co-ordinator helps by giving leads about the new areas of

interventions developed by the Core Committee and in strategising to take

care of the pulls and pushes in the programme.

Taking into consideration the prevailing diversity in terms of interest rates on

loan and savings, intermediation methodology and operational area, JF has set

in a process for streamlining its operations. During a strategic planning meeting

the governing body of JF decided to form federations of SHGs. It was decided to

register federations as mutual benefit trusts. These federations will have equity

stake in a non-banking financial company through which JF will implement its

microfinance programme. It was also decided that both the existing and the new

SHGs to be formed will take membership of the proposed federations.

Transition to a New System

Mr. Rajneesh who is in charge of the administration and finance of JF was

entrusted with the responsibility of managing the transition of the microfinance

programme from diverse projects and programmes into an institutional form. Mr.

Rajneesh has been associated with the programme for the past 12 years. An

external expert was hired for assisting Mr. Rajneesh in managing the operational

issues. As a first step towards the transition process, Mr. Rajneesh called a

three-day brainstorming session of his whole team to share the plans of the

organisation and seek the views of the team members on the organisational

plans. Achieving the financial viability of the programme and adopting a human

resource policy having no negative consequences on the performance were

the primary concerns of Mr. Rajneesh. Deciding about an incentive based

remuneration package to the project officials formed an important component of

the human resource policy to be evolved. In the absence of clear guidelines and

rules regarding remuneration JF had adopted, on an ad-hoc basis, a package

which provides for an annual increment of 10 percent for all the employees


145

regardless of their performance and responsibilities being handled (see Exhibit 3

for the current salary structure).

The Response of the Staff

In this scenario, Mr. Rajneesh called Mr. Jairam, the Project Coordinator to get

his views on adopting an incentive based remuneration system for the project

officials. Mr. Jairam is primarily responsible for overall coordination and

management of the MSP. Prior to joining JF, Mr. Jairam was working as a

computer instructor after completing his B.Com and post-graduate diploma in

computer applications. Initially, Mr. Jairam worked in the family planning project

of the organisation and was gradually given additional responsibilities in group

formation, training and development in the MSP. Subsequently, in 1999 Mr.

Jairam was handed over the complete responsibility of the programme. During

his discussion with Mr. Rajneesh, Mr. Jairam expressed his desire to work

under an incentive based remuneration system linked to the performance

measured in terms of loan recovery, disbursement, turnover, target

achievement, staff satisfaction etc. At the same time he expressed his concern

with regard to the resource position of the organisation, staff inadequacy and

procedural and administrative delays acting as major dampeners in target

achievements. Mr. Jairam also mentioned that the programme is covering both

urban slums and rural areas which are totally diverse in terms of their socio-

economic conditions and cultural fabric. While urban areas are characterised by

a limited credit absorption capacity, migratory population and people pursuing

service jobs not having sufficient time for group meetings; in rural areas there is

relatively a better capacity for absorbing large amounts of loan, people find

sufficient time for attending meetings and communities are more homogenous in

nature.

Mr. Rajneesh also called the three Assistant Project Coordinators (APC)–Ms.

Surekha, Mr. Narain and Mr. Umesh, for interaction. The APCs are at the crux of


146

the affairs and have been associated with the programme since inception. Apart

from monitoring the functional aspects, they are involved in promotion of new

groups and in assessing their trainings needs. Of the three, Ms. Surekha is a

post-graduate and is working for the organisation for the longest duration. She is

managing the groups in urban areas and is also the highest paid of the three

APCs. Mr. Narain who is a high school pass-out was earlier associated with JF

as a volunteer in the adult education project and then was taken into

microfinance programme in the year 1994. Mr. Narain’s work area is highly

spread out but he is handling the least number of groups. Mr. Umesh, an

intermediate pass, joined the microfinance programme after he had been laid off

on completion of a grant based project in 1994. Managing groups in rural areas,

Mr. Umesh has been a star performer in terms of loan disbursement and

recovery and is a vehement supporter of an incentive based remuneration

system.

During the discussion, Mr. Narain and Ms. Surekha expressed reservations on

incentive based remuneration system. Both shared the understanding that JF

has been formed with an objective of serving and empowering the downtrodden

communities who are left out of the development process. By becoming

incentive and target oriented, the group selection criteria may get affected.

Under such circumstances, the staff may have to think whether they are really

serving the objectives of the organisation.

Ms. Surekha said, “Though I favour an incentive based remuneration system, I

fear that with incentives becoming the major motivational force, the quality of the

groups and loans could be affected negatively.” She further said, “JF has always

valued social factors and human relations in its programmes and if we start

attaching monetary benefits we might be overlooking our core objectives. If

taking higher responsibilities becomes one of the key performance indicators,

then we might have to undergo additional training or capacity building. Even if we


147

are willing to go for a training programme at our own expenses, will the

organisation give us leave with pay and also allocate our work to someone else.”

Mr. Narain said that poverty level of the groups associated should form a key

performance area for incentives. In addition, Mr. Narain stated: “The other

developmental programmes of JF attract participants to the organisation

thereby making the initial work of group formation easier ensuring in the process

acceptability of the organisation by the community. My work area is poverty

ridden and there are no other welfare programmes of JF. Hence, my work

becomes slightly more difficult than others. Spreading out in the rural areas is

more difficult than the urban areas. The villages are located far away and are

sparsely populated.”

Mr. Umesh, a staunch supporter of the incentive based remuneration system felt

that economic development is the core issue to be addressed in all

developmental programmes and JF is trying do the same. Mr. Umesh said,

“There is a need to identify separate key performance areas for various

hierarchical levels. A remuneration system should take both qualitative and

quantitative parameters into consideration. I also favour a system of

disincentives in case of non-performance in order to ensure continuous

performance by the project staff.” Mr. Umesh, however, felt that that they are

working as a team in which the accountants, administrators and various support

systems play a major role. Hence, any non-performance in achieving the targets

due to negative role played by others should not attract disincentives.

All the three APCs felt that sufficient care should be taken to ensure that the

project staffs’ remuneration does not suffer in case of natural calamities and

unforeseen circumstances like demolition of a slum by municipal authorities,

death of a borrower, death of a cattle for which loan has been provided, and

theft or robbery.


148

Mr. Rajneesh then approached the accountants who formed the backbone of the

microfinance operations to assess their willingness to work under an incentive

based system. The three accountants handled different stages of accounting

and recording. While Mr. Arun who has been with the organisation for six years

handles manual accounting; Mr. Varun who is a cashier in the organisation for

the last ten years manages the cash transactions. Mr. Tharun, the senior most

having the longest experience handles data feeding with the help of a tailor-

made software acquired by JF. Being used to a fixed remuneration system, the

three accountants could not help Mr. Rajneesh in identifying their key

performance areas. They could only express their concern with regard to

workload over number of groups and accounts handled, inappropriateness of the

accounting software and lack of support for capacity building by the

organisation. Only Mr. Tharun could help Mr. Rajneesh by saying that although

he is not into microcredit but he can take care of the formation of SHGs and in

linking them to lending institutions as he had seen this in an earlier project

supported by the World Bank.

The Dilemma

Mr. Rajneesh taking the findings before the Convener expressed his views on

the whole affair. He emphasised that any new system and procedures should

not be introduced in an arbitrary manner. At the same time he also underscored

the need for adopting the best practices followed in the sector for establishing

a sustainable microfinance intervention.

Responding to the reactions the Convenor asked, “Have we reached the right

stage for introducing an incentive based remuneration system or do we need to

set other things in order before exploring the option?”


149


1. Do you think an incentive based remuneration system for the staff is suited

for an organisation like JF?

2. Should JF introduce an incentive based remuneration system for its staff or

not?


150

Exhibit 1: Organisational Chart of JF* / MSP**

Governing Body*

Core Programme Committees* (Health Micro Credit Wasteland Development)

Convener*

Programme Coordinators* (Health, Micro Credit, Wasteland Development)

In charge * (Finance and Administration)

Assistant Programme Coordinators **

Accountant **

Field Facilitators **

( Each managing 40 groups)


151

Exhibit 2: Status of JF’s Microfinance Programme

Particulars March 31, 2001

March 31, 2002

1. No. of Blocks Covered 2 2 2. No. of urban slums covered 50 62 3. No. of Groups 439 530

Rural NA 270 Urban NA 260 4. Total Members 14,349 NA 5. No. of Active Borrowers 9,600 8,274

6. Cumulative Savings of SHGs Rs.102,59,691

Rs.156,80,239

7. Loan disbursed (from internal sources) during the year

Rs.156,63,210

Rs.233,81,515

8. Principal recovered during the year ( loans from internal sources)

Rs.115,16,600

Rs.173,39,182

9. Loan disbursed (from external sources) during the year

Rs.58,84,800

Rs.123,73,000

10. Principal recovered during the year (loans from external sources)

Rs.42,25,846

Rs.77,29,980

11. Recovery Rate 98% 98% 12. External Loan Received during year (Rs.Lakh)

RMK 25.00 SIDBI 60.00 HUDCO 14.00 NMDFC 2.25

Exhibit 3: Salary Structure of the Microfinance Programme Staff

Position No. of Persons

Minimum Salary p.m.

Maximum Salary p.m.

Emoluments (conveyance)

Field Facilitators

18 Rs. 2,000 Rs. 3,500 Rs. 500

Assistant Programme Coordinators

03 Rs. 4,850 Rs. 6,200 Rs. 1,200

Accountants 03 Rs. 3,200 Rs. 5,500 -

Project Coordinator

01 Rs. 9,686 - Rs. 1,700

NB: The salary of the Incharge (Administration and Finance) and the Convener of the organization is fixed on time cost basis and there are no specific norms for the same.

SYSTEMS AND PROCESSES OF CREDIT OPERATIONS: THE CASE OF BASIX1

I asked, “How are UHs and FXs recruited?” He explained, “There is a process of

recruitment in which each applicant has to undergo a written test at the Unit,

followed by preliminary interview. After qualification, the selected candidates

have to visit field and write a report, which is reviewed by Unit Head. The Unit

Head also provides feedback on the candidates, especially on their aptitude to

work in rural areas. Further screening is done at Head Office (HO) based on the

written test scores, field report and feedback. The screened candidates are

required to appear for a final interview at HO, which is chaired by the Top

Management. The final selection is done based on interview performance and

other parameters. The induction of field executives is done through both

classroom and on-the-job training in field. After six months they have to qualify in

a written test as well as in an interview for their confirmation. Similar

With the objective of closely observing the systems and processes of credit

operations in a modern non-bank financial company (NBFC), committed to the

goal of creating and promoting the rural livelihood support system, I reached in

the morning of September 13, 2002 the Unit Office of BASIX at Ramayampet. It

is one of the 18 unit offices of BASIX, through which the entire credit activities

are undertaken. It is located at a distance of about 100 kilometers from the

headquarters of BASIX at Hyderabad. When I reached the Unit Office, the Unit

Head, Mr. Uday Shankar along with his team members were waiting for me.

"Each Unit Office covers an area of about 60-70 kilometers radius" started Uday

Shankar, adding, "Each Unit Head (UH) is supported by 3-4 Field Executives

(FX), who are professionals with MBA degrees having technical education such

as agriculture, dairy, veterinary and fishery. An FX operates with the help of 3

Customer Service Agents (CSAs), each of whom covers about 20-25 villages

and an exclusive area of about 15 kilometers radius.”

1. Case prepared by Prof. Samar K. Datta, Indian Institute of Management, Ahmedabad under

the aegis of the `Workshop on Developing Cases and Training Material in Microfinance’ sponsored by SIDBI Foundation for Micro Credit, Luncknow.


153

confirmation process is followed for other staff, who are initially required to pass

through a written test in their functional areas. Feedback, both formal and

informal, from peer and superior staff plays a vital role in confirmation of any

candidate in the organization.”

“Do you follow the same process for recruitment of CSAs?” was my question at

this stage. “Certainly not”, he continued, “The process of CSA recruitment is

somewhat different. The CSAs are recruited by local unit office. They are usually

people with intimate knowledge of neighboring areas. Generally, CSAs have 10

plus 2 years of schooling. Field Executives recommend names of potential

candidates for CSA' s position based on their experience, reputation of such

candidates and their family, and the sources of income of their families. The

potential candidates are required to undergo a written test and a preliminary

interview for screening, before they are asked to appear for a motivational field

test in the presence of a representative from the HO for final selection. Offer for

the position of a CSA is made after counter-party check of an applicant is found

successful. The aptitude of the CSA is observed for three months after which an

agreement is drawn for the job. Note that there is no confirmation to the post of a

CSA. The CSAs are agents who earn exclusively on the basis of performance of

their portfolio.”

Two young people - one lady and a gentleman, sitting in a nearby room, were

working on computers. When Uday Shankar's eyes fell on them, he said,

apologetically, "I am sorry Professor, not to have introduced to you the two

transaction assistants (TAs) for this Unit. They are in fact the housewives of this

Unit, each handling more than 1500 accounts. They maintain and organize all the

records using a software package developed in-house by BASIX."

When we came back to the discussion table after a brief chat with the two TAs, I

asked Uday Shankar, "I heard that BASIX follows a performance based payment

system for its employees. Is this correct? Would you please explain?" Uday

Shankar asked one of his FXs to respond. He started, “Remuneration is both

fixed and performance based. The former is the monthly pay. The latter is


154

performance pay (PP), paid semi-annually based on fixed parameters, namely,

disbursement index, recovery index, functional and HRD index, task delivery

index, profitability index and compliance index. The first three are individual

performance indices, whereas the latter three are related to the Unit level

performance. The composite index determines the performance pay of an

executive, which is thus linked to both individual performance and overall unit

performance. The performance pay is linked to the gross remuneration rate and

not basic pay. The maximum allowable performance pay is 3 months’ gross

salary, which is paid in two semi-annual installments, if one obtains a score of

100 percent.”1

Uday Shankar was looking at my face, and when I was about to ask him a

related question, he passed on to me copy of one blank Personal and

Professional Learning Review Form (PLR) for the latest year. He began,

"Professor, please look into the copy in your hand. PLR assessment is done

once in every 6 months. It is an exercise to identify the training/learning needs of

an individual, which helps in achieving his/her objectives - both personal and

professional. At the beginning of each year, a two-day workshop is held

regionally (involving all staff from 2-3 Units) for PLR, in which a representative

from HO is also present to co-ordinate the task. In this workshop, the PLR

process is completed. Similar exercise for HO is also done. The process starts

with every staff individually completing Section I of PLR assessing his/her own

learning needs. Then the staff concerned hands over the PLR form to one junior

colleague and a peer of his/her choice to fill Section II. These two people bring

out the strengths and weaknesses of the staff concerned. The reporting officer,

that is, the boss of the staff concerned fills up Section III of this form, making his

assessment of learning needs and suggesting mechanisms of addressing them.

The next step involves a counseling session between the reporting officer and

the staff concerned. In the next stage, the PLR process is reviewed (in Section

IV) by a reviewer, after which it is given back to the staff for his knowledge and

information. The PLR form is returned at the end of this cycle to the head office.

1. Field Executive’s gross salary is around Rs 11-12 thousand per month whereas for Unit Head

it is around Rs. 15-16 thousand.


155

Then, a consolidation of the learning needs is done from which the training

calendar is drawn. However, that is not the end of the loop. A second review is

done at the Unit level to identify whether it has actually helped an individual in

achieving his/her needs and whether further steps need to be taken. This is done

at the Unit level between the reporting officer and the concerned staff. It involves

a joint review by the reporting officer and the concerned staff of the learning

objectives and achievements (Section V of PLR) and a further half-yearly review

by the reviewer, before it is sent to the head office again."

“It is a very complicated process”, I remarked at this stage. He immediately

responded, “Yes, it is. We evolved this mechanism through our experiences over

the years, so that we can carefully assess the training needs of our staff and also

judge the effectiveness of the training process. In our view PLR is necessary to

empower our staff with adequate tools and experiences, so that they can serve

our customers in the best possible manner.”

Now I became more curious and asked a further set of questions, “But how do

you motivate your staff to undergo this complicated training process? Do you

have any incentive system?" He continued, “While we don't want our customers

to suffer, at the same time we make sure that genuine efforts on the part of our

service staff also do not go un-recognized and un-rewarded. So, besides

performance-based payment, BASIX has introduced awards - best FX award,

best Unit award and even best CSA award.”

"Do you pay a fixed commission to your CSAs?" I asked at this stage. Uday

Shankar hinted at one of his CSAs present to answer this question. "Our salary is

totally commission based - commission we earn on interest collection from the

borrowers. But it is not a fixed percentage commission. The commission we get

on interest earned varies positively with our performance. For example, the

commission earned on interest collection is l/8th if recovery is above 97%, 1/10th

if recovery is between 95-97%, 1/12th if recovery lies within the range of 92-95%,

1/16th if recovery is 90-92%, and nil if it is below 90%. In fact, if recovery goes


156

below 90% mark, we are given 6 months' time to improve or else to leave,"

answered the identified CSA.

"So, is it appropriate to interpret the CSAs as mere commission agents, who

stand in vendor relationship to the organization of BASIX? I mean, are you then

treated as outsiders?" I threw this question at him with an intention to provoke

him. "Why do you think so?" the CSA immediately asked me, adding, "We feel

we are the basic pillars of BASIX. Why is our mindset of a job always runs in

terms of risk-free fixed monthly salaries?”

"Anything else do you get from BASIX?" I asked him. "Yes, of course," he

answered, "we get rigorous computer training, so that we can make use of palm-

tops, which are currently being tested. If I perform well, I can get best CSA award

at the end of each year. Given our kith and kin relationship with the unit office, we

always feel that we are a part of the system. We have developed a tradition of

having four get-together per year, in which the CSAs and FXs treat each other in

rotation."

At this stage, I turned to Uday Shankar and asked him, "Since there is so much

of emphasis on in-house training in your organization, can you give me some

details about the kind of training you undergo in general?" "Certainly," he said.

Then he added, "We, first of all, impart classroom training to our staff on the

broad parameters of our activities. Then we send our staff to field for a month to

come out with a field report. A staff’s field level operations actually start after 2-3

months of his joining. After 6 months' of functioning, every Unit staff has to pass

a confirmation test. Weekly CSAs' meetings, quarterly planning and review

meetings, and interaction with visitors, just like what we are doing today, are

also part of in-house training of staff. Apart from the induction process as

mentioned earlier, Indian Grameen Services (IGS), an affiliate of BASIX,

conducts specific trainings such as finance for non-finance executives,

agriculture for non-agriculture graduates, etc. In addition, BASIX organizes with

the help of experts specialized trainings on communication, IT, etc. The staff

members are also sent for institutional training programs."


157

While returning to office after lunch break for further discussion, Uday Shankar

took me to two nearby tea stalls and introduced me to the borrower tea stall

owners. Both were very poor and nearly landless people who could not access

any source of credit. They got in touch with the local CSAs to learn about the

possibility of getting a very small loan (less than Rs.5,OOO) from BASIX. After

several interactions with the BASIX staff, they were registered free of cost, and

then when the BASIX staff were fully convinced about clarity of purpose behind

loaning and the borrowers' capabilities, these potential borrowers were

encouraged to submit formal applications. Both the guys got loans after

evaluations of their loan applications were found positive. They had to sign a

letter of undertaking, which clearly specified their repayment obligations. BASIX

staff also made sure in public that they understood them properly before

receiving the loan.

After return to his office, Uday Shankar started narrating the loaning process. He

said, "Origination of loan proposal actually begins with the first contact between

the CSA and the potential borrower. After checking the credentials and reputation

of the potential borrower, CSA generally offers him to register. The registration

form (Exhibit 1) asks for details about the person like his main occupation, his

social status, his bank account number, particulars of his family's movable and

immovable properties, details about family members, his family's expenditure

pattern, together with the comments from FX/CSA on reputation, credibility and

credit record of the applicant. Once the signals are found positive after

registration, each potential borrower is encouraged to apply for one small loan.

The loan application form (Exhibit 2) gives information about borrower code,

besides indicating his loan number, village and whether is a repeat borrower or

not. It contains details about the loan size sought together with purpose, present

sources of earnings (both gross and net) of family members, names of co-

obligants or mutual guarantors, and of course the comments from FX/CSA about

the borrower's focus on the activity to be supported from loan, family income and

background of the co-obligants. After receipt of the application, we constitute a

loan committee with the Unit head as the chairman and one or two FXs as

members. The concerned FX visits the field and presents before the loan


158

committee an appraisal report, wherein he provides in detail the economics of the

proposal, the employment situation in the family, family's investments and

sources of funding of such investments, the family's past credit records, as well

as the nature of technical assistance and support services needed for the

success of the credit activity and the proposed repayment schedule, besides his

recommendation. The detailed evaluation report brings out the cash flow of each

credit project. Our FX thus makes an assessment of the counterpart risk,

business risk and external factor risk before giving his recommendations. If the

loan is approved, the applicant is advised to collect disbursement on a specific

day (generally, one such day in each month) after signing the letter of

undertaking (jointly by the borrower and his co-obligant), which details the assets

to be hypothecated, and the repayment dates and amounts, besides authorizing

the creditor to deduct principal or interest on the loan from the sale proceeds of

the borrower's firm/company (Exhibit 3). Please note that although such

provisions are there, we always prefer loan payment in cash. In case a loan

application is rejected, we also explain reasons to the applicant."

"It seems you are doing a very thorough job", I added in appreciation of what he

described to me about the pre-credit processes. He said, "Yes, of course. We

believe in doing an intensive job before a credit is given, so that we can take

appropriate precautions on time and minimize our efforts on recovery and losses

due to non-repayment."

"What do you do afterwards? Can you tell me the major post-contractual action

points of the 'credit-plus' approach your website talks of, maybe with a few

examples, if you can cite?" I asked at this juncture.

"Yes, I will explain to you," he continued, adding, "As you must be aware, as an

organization, BASICS (BASIX) is a group of financial services and technical

assistance companies. Bhartiya Samruddhi Finance Limited (Samruddhi),

registered with the Reserve Bank of India as a Non-Banking Finance Company,

is the main operating entity through which credit is delivered. Indian Grameen

Sevices (IGS) is an NGO, registered as a Section 25, not-for-profit company,


159

involved in providing technical assistance and support services to Samruddhi

borrowers and other rural producers and institutions. The two are held together

by BASICS Ltd, the holding company, through which initial equity investments

were made in Samruddhi. As Samruddhi has at best an imperfect knowledge of

what interventions to make in order to make its credit operations a success, the

job of experimentation and bearing the learning cost has been entrusted to IGS,

the R & D wing of BASIX. So, I shall first summarize the complementary activities

of IGS."

He continued, “As the main job of IGS is to identify borrowers' needs for

technical assistance, identify reliable suppliers of inputs and input services, and

to bring the two sides together, it is engaged in networking with suitable self-

interested collaborators. Such collaborators include government, non-

governmental, cooperative and private agencies. Thus, while credit is provided

by Samruddhi, necessary non-credit support is arranged by IGS. The IGS

came into being in 1987, and this year it recovered 60% of its costs. It is

determined to become a profit center of BAS IX."

"What actions do you take to handle willful and non-willful defaults?" I asked at

this juncture. He responded immediately, "We do not sit idle after a loan is made.

Our staff members maintain regular contact with the borrowers and keep track of

their activities. They meet each borrower formally at least once in every month.

To handle non-willful defaults, BASIX uses a de-risking strategy. It undertakes

prior actions mainly in the form of support services to ensure borrower’s safety,

safety of the borrower activity and safety of its overall portfolio mix."

“Moreover, BASIX is getting ready to provide insurance alongside credit to its

borrowers to take care of unforeseen contingencies. With detailed cash-flow data

of 35,000 farmers at its fingertips, we are slowly but steadily building up our

capability to supply insurance to our borrowers at nominal marginal cost?"

"Good beginning, I must say, though it has to be a long-drawn battle to handle

non- willful default of people of small means and capabilities. Do you do


160

anything to ensure overall safety of your loan portfolio?" I asked. "Yes, our head

office ensures macro de-risking of this portfolio," came the reply. He then added,

"Nearly 46% of our loans are made toward agriculture and allied activities,

spread over different agro-climatic zones ((Exhibit 4). The rest are off-farm and

non-farm loans. Most of our loans are also short term in nature.”

"What are your sources of funds?" I asked at this stage. Immediately he replied,

"We raise resources from the market, the details of which must have been

supplied to you by our Head Office in the folder, you are holding in your hand

(Exhibit 5). Since most of the loans we have taken are to be repaid over 5-10

years, I think, we have enough portfolio balance. In order to cut down on the cost

of our credit, so that we can deliver credit cheaper, we have now taken a move to

have our own Local Area Banks (LABs). In February 2001, we got a license from

the Reserve Bank of India to open a Local Area Bank. The Krishna Bhima

Samruddhi Local Area Bank promoted by BASIX commenced operations in

March 2001 in the districts of Mahboobnagar in Andhra Pradesh and Raichur and

Gulbarga in Karnataka. "

I decided to provoke him at this stage and posed this question, "Even though you

can cut down the cost of your credit a little bit, since you follow such an elaborate

loan process, your own transaction cost of conducting credit operations must be

very high. Can you throw some light on this aspect?"

"We had anticipated this question from you. Although these are not direct

estimates of lender's transaction cost, the results in this report (Exhibit 6) must

provide you some clues to take care of your concern over high transformation

and transaction costs of organization" he said with a smile of satisfaction. I could

realize that they had done good homework before this meeting.

I was not fully satisfied, however, as my expectation level was very high. But

considering the fact that BASIX is really a very young organization with only 2 to

2.5 years experience in most places, I wanted to get a perspective of how they

were looking at the future in this regard. So, I asked, "How would you ensure that


161

your transaction costs go down sufficiently to give you the necessary competitive

edge in the years to come?" He answered very carefully, I must say, "You see,

most of the current loans are in the form of handshake loans. We are still in the

phase of expansion into new areas, diversification, and intensification of our

activities in existing villages. So, we expect the real economics to flow after

second or third loans, when we would have enough experience and information

to cope with any contingency. In fact, currently on our own, we have decided to

grant loan over telephone and within 2 hours of a request from a known

customer, who would successfully complete three consecutive loan repayments."

"Very good, I wish you great success. But let us again come back to the current

situation. Now tell me how you are handling willful default, which has been an

endemic problem of our formal credit institutions," I uttered to allow our

discussion to continue for some more time.

After a sip of tea from his cup, he continued, "To handle willful defaults, BASIX

undertakes several functions. First, it has started with a distinct identity, which is

neither of a public sector bank, nor of a rural moneylender, so that borrowers’

expectations are set right from the very beginning. Second, it makes a clear

distinction between repayments and recoveries, besides laying down clear-cut

norms of behavior for its borrowers and employees. For example, when a loan is

first defaulted, the branch office is required to take a follow up action and submit

a report on it before the 5th of the next month. Default beyond 60 days is

individually reported by the CSA and the Unit Head is required to personally

follow up on the matter. As most loan overdues are recouped with a lag and

involve additional transaction costs in recovery, BASIX writes off overdues

beyond one year, such incidences being about 5% of total loans. Although the

option of legal action is kept open to set up examples, BASIX prefers negotiated

settlement to legal action in cases of such foreclosure. So, even though we may

look quite flexible before a loan is made, we are extremely rigid and strict

afterwards, especially in handling defaults, because we do not want even a

single case of this disease to spread like a cancer in our villages".


162

He continued: "But as most poor borrowers do not have marketable collateral,

majority of BASIX's loans happen to be unsecured ones. So, BASIX has replaced

the notion of traditional marketable collateral with a social process of lending

supported by a carefully designed incentive-disincentive structure for timely

repayment of loans. Our socialization process - that is, free mixing and intimate

relationship with the borrowers and their peer groups, therefore, plays a crucial

role in handling default. We also adjust interest rates and incentives-disincentives

in interest charges based on our experience over time and space. Currently, we

are charging a uniform 24% per annum interest rate irrespective of purpose, thus

eliminating any possibility of adverse usage of loans across purpose. While 2%

rebate on interest is granted on timely loan repayment, we also impose an

additional 2% penal rate for delayed payments. Lesser than commercial rate of

interest is charged only in case of Self Help Group (SHG) loans, where refinance

is available at sub-commercial rates. Norms guiding the underlying actions are

regularly reviewed for necessary changes."

"Do you do anything beyond that?" I asked. "Yes, of course," came the reply,

"With the help of an independent agency and based on a representative sample

of both direct and indirect customers together with a suitable control group of

non-customers, BASIX undertakes Customer Satisfaction Audit every year to dig

out its competitive strengths and weaknesses and take appropriate actions to

fine-tune its systems and processes."

I felt I had learnt enough. As I was about to leave, after expressing my thanks

and gratitude to them, all of them together asked me to come back to them

again.


1. What are the systems and procedures adopted by BASIX to improve the

delivery of credit?

2. What are their merits and demerits both for microfinance lenders and

borrowers?

3. Can they be replicated by other Microfinance Institutions?


163

Exhibit 1: Registration form for Small Loans ( up to Rs. 50,000/-)

For Office use only To: Unit Manager Regn. No.

BASIX,________________ Unit Borrower Code

I, Sri./Smt.

S/o/W/o/D/o_________________________ aged__________ resident of __________________

Village would like to register as a potential customer of BASIX, I understood that this is no way

binds me to borrow from BASIX, nor does BASIX agrees to provide loans for all or any purpose.

1. My Main Occupation Agriculture Labor Animal Husbandry Rural Artisan Trade Service Any other ___________ 2. I belong to: SC ST OBC Minority Comm. General 3. Full Address: ______________________________________________________________ Pin: _______________ 4. My Bank A/c No. ____________________ Name of the Bank __________________ Branch __________________ 5. Particulars of Immovable Property (Furnish certified copies of record of rights)

Agricultural lands

Village Sy. No. Extent (acres)

Irrigated Source of Value

Residential Lands & Housing

Village Plot No. Extent Sq. yds)

No. of rooms Type of roof* Value

* Type of roof: 1. Thatched 2. Tiles 3. Stones 4. Sheet 5. RCC

Passport size photograph (please enclose an additional copy for pass book)


164

6. Particulars of Movable Property owned by the Family Type of Asset Description Approx. Mkt.

Value Livestock Age Implements Vehicles TV Any other Grand Total 7. Introduction by ________________________________ of _____________________ (place) (BASIX Customer/Collaborator/CSA/Others) Please tick one 8. My Family Details

SL Name Relationship Sex Age Occupation Educational Status

1. 2.

3.

4.

5. 9. Consumption Expenditure No. of Family Member

Regular Monthly Household Expenditure (Rs.)

Annual Spending on Festive Seasons (Rs.)

Nomination: In case of my death/permanent disability, my nominee, _________________________, who is

my ________________

(relationship with customer), aged ___ years, resident of _________________ , shall be entitled

to receive from and settle any claims to Bhartiya Samruddhi Finance Ltd. On my behalf.

Declaration: I hereby declare that the particulars given above are true and correct to the best of my knowledge and belief. Nominee's Signature Applicant's Signature Place: Date: 10. Comments from FX/CSA (with focus on reputation, credibility and credit record of applicant) --------------------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------------------- Credibility Check done with: --------------------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------------------- Name & Signature of FX/CSA: Place: Date:


165

Exhibit 2: Application Cum Appraisal Form for Small Loans

For Office use only To: Unit Manager ------------------------------- BASIX, ___________________ Unit Repeat Borrower Yes/No Borrower Code Loan No Village Dear Sir, I, Sri/Smt. S/o/W/o/D/o/S/o ___________________________ aged _____________, resident of village

_____________________

Would like to apply for a loan of Rs. _______ (Rupees ____________________________ ) for

the purpose of :

Farm: Crop Agri Investment Allied Non Farm: Trade/Services Manufacturing Gen.Purpose Housing I furnish the following necessary particulars: 1. Present Sources of Earnings of Applicant or Other Members of Family Annual Revenue

from Activity Annual Expd. In Activity

Annual Net Surplus from Activity

a. Primary Occupation b. Other Activity-1 c. Other Activity-2 d. Activity of other

Family Members

Total 2.Present Sources of Credit (Banks, Finance Cos. Commission Agents, Traders, Relatives, etc.) Source Purpose Amount Borrowed Amount Due 3. Financial Assistance sought for

Activity/Item Vol. Of Activity Loan Reqd. a. b. 4.. Co-obligant/Mutual Guarantors (Strike out whichever is not applicable)

1. _____________________________ 2. ______________________________ 2. _____________________________ 4. ______________________________ Nominee's Signature Co-obligant's Signature Applicant's Signature (If not a Mutual Guarantee) Place:


166

5. Comments from FX/CSA (with focus on activity, family income & background of co-obligant) ______________________________________________________________________ _______________________________________________________________________ Name & Signature of FX/CSA

Appraisal Report

Name of the Applicant: ________________________________ 1. Economics of the Proposal Volume of Activity (units) Experience in Activity (years) Income from Activity (Rs.) Expenditure on Activity (Rs.) Surplus from Activity (Rs.) Time Period considered Peak Business Period (months)

Loan Business Period (months)

No. of persons employed Full Time: No. of persons employed Part Time: Male: Female: Male: Female:

Investment in Activity (Rs.) Funding of Investment (Rs.) Fixed Investment Loan from Banks Working Capital Investment

Credit from input supplier

Loan from Others Credit given Own Investment

TOTAL TOTAL Strengths of the Proposal: Weaknesses of the Proposal: 2. Technical Assistance and Support Services (TASS)

Service Present Source Specify, if needed Input/Equipment Supply Technical Assistance Market Linkage Other Support 3. Applicant's & Family's Credit Record with BASIX: 4. Comments of FX: ____________________________________________________________

___________________________________________________________


167

A loan of Rs. ________________ is sanctioned/recommended for sanction under the following terms and conditions: (please tick one)

a) Guarantee/Co-obligation of ________________________________________________ b) Proposed Repayment Schedule

• No. of installments : • Installments (specify with dates) Equal: ________________________________

Irregular: ________________________________________________________ Unit/Field Executive Unit Loan Committee's Decision

• Sanctioned Rs. ___________ • Rejected (give reasons)

Place: Date: Chair, Unit Loan Committee


168

Exhibit 3: Letter of Undertaking

From 1. ______________ 2. _____________ ______________ _____________ ______________ _____________

(Borrower) (Co-obligant) Sir, Sub: Loan amount of Rs. ______ sanctioned to me/us for the purpose of _____________________________________________________________ 1. With reference to subject loan, I have already executed On Demand Promissory Note dated

_______________ for Rs. __________________ . 2. In addition, the assets created out of the subject loan stands automatically hypothecated to

you and the details of these assets are furnished below:

Name of the Assets Description Value The above securities will not be pledged, charged, hypothecated, sold or disposed of without your consent.

3. You are authorized t remit the loan proceeds in part or in full directly to the supplier of

inputs/equipments livestock. 4. The entire loan amount of Rs. ____ will be paid back in _____ installments as follows:

Installment No.

Date of Repayment

Installment Amount

Installment No.

Date of Repayment

Installment Amount

5. I/We authorize _________________________ (Name of Company Firm, if any) to deduct

towards the loan amount a and interest, service charges, penalty thereon, if any, from the sales proceeds of my produces sold by the company from and credit the same to you on my behalf:

6. In the event of default or misutilisation of loan amount you are authorized to recall the entire

amount. Place: Yours faithfully, Date: (Borrower) (Co-obligant)


169

Exhibit 4

Portfolio Analysis of BASIX as on 31st March 2002 SL No. of

Ultimate Loans as %

of total Portfolio

Disburse-ments as %

of total Portfolio

On-Time Repayme

nt

1 Purpose-wise Classification A Farm Loans 46% 47% 89.8% B Non-Farm Loans 47% 46% 94.2% C General Purpose Loans 7% 7% 96.3% Total 100% 100% 92.4% 2 Channel-wise Classification A Direct Loans 71% 71% 93.2% B Direct with Joint Liability

Groups 23% 24% 90.2%

C Self Help Groups 6% 6% 96.5% D Onlenders (eg. Trade

Intermediaries) 0% 0% 53.1%

Total 100% 100% 92.4%


170

Exhibit 5: Funding Update of BASIX as of July 2002

SL Institute Year Amount Rs. Million

Amount Rs. Million

Status

1 Global Trust Bank Ltd, India

2000 2001

Rs. 20mn @10.5% Rs. 40mn @10.5%

20 40

Closed in May 2002. Sanction for Rs. 100

lacs received. Negotiating with bank for Rs. 400

lacs 2 Cordaid,

Netherlands 1999 2002

Rs. 40mn @10% 40 Loan of Rs. 40 mn approved, and Rs 20mn drawn down

II Draw down of Rs. 20 mn approved

3 SIDBI, India 1999 2001 2002

Rs. 20mn @11% Rs. 30mn @11% Rs. 40mn @11%

20 30 40

Fully Disbursed Fully Disbursed

Approved 4 ICICI Bank

India 2000 2002

Rs. 40mn @13.5% Rs. 40mn @13.5%

40 40

Loan approved and Operational Limits

renewed

5 HDFC Bank, India

2000 2002

Rs. 10mn @12% Rs. 40mn @12%

10 40

Disbursed Preliminary

Discussions had with their senior Team in

June 2002 6 HDFC, India 2002 Rs. 100mn

@13% over three years

15 Term sheet received for Rs. 15 million. Meeting with India Head in July 2002

7 DID, Canada 2000 2002

C$0.4 mn @6% C$0.45 mn @6%

12 Disbursed Disbursed

8 Shorebank Corporation, USA

2001 US$0.5 mn 8.33%, 3 ½

years

24 Disbursed

9 UTI Bank 2002 Rs. 120 mn over 3 years

120 Proposal submitted and discussion are on. Appraisal Team visiting in July 2002

10 HDFC KFW 2002 Rs. 120 mn over 3 years

120 Preliminary appraisal completed


171

Exhibit 6: Comparative Financial Results

SL BASIX MFIs in South Asia

All MFIs

I Operating Expense as a Percentage of Total Assets A Operating

Expense: Adjusted Operating Expense/Average

Total Assets

25.8% 18.5% 31.2%

B Interest Expense: Interest Expense/Average

Total assets

8.1% 3.6% 3.9%

C Loan Loss Provision Expense

Loan Loss Provision Expense/Average

Total Assets

7.2% 1.7% 2.2%

D Salary Expense Salary Expense/Average

Total Assets

3.6% 5.4% 10.6%

E Other Administrative Expense:

Other Administrative Expense/Average

Total Assets

5.5% 4.9% 9.1%

II Efficiency and Productivity Indicator A Total

Administrative Expense:

Total Administrative Expense/Average

Loan Portfolio

11.3% 16.6% 30.4%

B Salary Expense: Total Remuneration Expense/Average

Loan Portfolio

4.5% 9.1% 16.2%

C Physical Productivity of Staff:

Number of Loan Clients per Staff

Member

183 146 114

Source: Micro-Banking Standards Project, November, 2001.


172

LIST OF CASE-WRITERS Sr. No. Name & Address

1. Dr. KC Sharma Faculty Member Bankers’ Institute of Rural Development Sector–H, LDA Colony, Kanpur Road Lucknow 226 012 Email: [email protected]

2. Shri.Rahul Mittra Assistant Faculty Entrepreneurship Development Institute of India (EDI) 432/36, Kala Kankar Colony, Old Hyderabad Lucknow 226 007 Email: [email protected]

3. Ms. Nidhi Ranjan Friends of Women’s World Banking (FWWB) G-7, Sakar–1 Opp. Gandhigram Railway Station Ashram Road Ahmedabad 380 009 Email: [email protected]

4. Prof. JN Poddar Area of Finance & Control Indian Institute of Forest Management Nehru Nagar, Post Box No.357 Bhopal 462 003 Email: [email protected]

5. Ms. A Uma Rani DHAN Foundation 18, Pillayar Koil Street, SS Colony Madurai 625 010 Phone: 91-452-610794, 610805 Fax: 91-452-602247 Email: [email protected] / [email protected]

6. Ms. Raghini B DHAN Foundation 18, Pillayar Koil Street SS Colony Madurai 625 010 Tamil Nadu Email: [email protected]

7. Mr. Keyur Thaker National Institute of Cooperative Management Near Indroda Circle Gandhinagar 382 009 Gujarat Email: [email protected]

mailto:[email protected]�









173

8. Dr. Naresh Singh Narsee Monjee Institute of Management Studies Juhu Vile Parle Development Scheme Vile Parle (West) Mumbai 400 056 Email: [email protected]

9. Ms. S. Rama Lakshmi Capacity Building Coordinator Mahila Abivruddhi Society Plot No.20, Road No.2 Banjara Hills Hyderabad 500 034 Email: [email protected]

10. Shri Swandip Sinha EDA Rural Systems 107, DLF Qutab Plaza DLF Qutab Enclave, Phase-1 Gurgaon 122 002 Email: [email protected]

11. Prof. Samar Datta CMA Indian Institute of Management Vastrapur Ahmedabad 380 015 Email: [email protected]

12. Dr. N.V. Namboodiri CMA Indian Institute of Management Vastrapur Ahmedabad – 380 015

13. Shri Krishan Jindal Faculty Member Bankers’ Institute of Rural Development Sector–H, LDA Colony, Kanpur Road Lucknow - 226 012 Email: [email protected]

14. Prof. Prabal K Sen BOB Chair Institute of Rural Management, Anand-388001 Email: [email protected]

15. Dr. HS Shylendra Faculty Member Institute of Rural Management, Anand-388001 Email: [email protected]








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CASES IN MICROFINANCE