Sustainability of Microfinance Self Help Groups in India: Would Federating Help?

Ajai Nair, Graduate Student

Woodrow Wilson School of Public and International Affairs Princeton University

Abstract

Self Help Group (SHG) banking is the primary mode of microfinance in India today, reaching over six million families. In spite of its considerable outreach, successful savings mobilization and high repayment rates, as with most other microfinance models, the financial viability of SHG banking has not been clear. SHG federations attempt to provide financial viability and sustainability to SHG banking. This study explores the merits of federating and finds that SHG federations create economies of scale, reduce promotional and transaction costs, enable provision of value added services and increase empowerment of the poor.

Acknowledgements

This study was done for the South Asia Region Finance and Private Sector Development Unit of the World Bank. The support of Sophie Sirtaine at the World Bank, who helped design the study and took time to read through the different drafts, is gratefully acknowledged. I thank all the organizations visited and individuals interviewed for their cooperation, and participants of the various fora at which the initial drafts were presented for their valuable comments. I also thank Marilou, Director, South Asia Region Finance and Private Sector Development Unit and other members of the unit for their support during the course of the study. Finally, I thank Maya Tudor and Kathryn Gwatkin, my classmates at the Woodrow Wilson School, who read through the final draft and suggested changes that make the report read better.

Currency Equivalents (Exchange Rate Effective June 2001)

Currency Unit = Rupees (Rs.)
US$ = Rs.47.00

Definitions

Block: Sub-district geographical unit that is the basis for development planning and implementation in India.
Mandal: Sub-district geographical unit unique to Andhra Pradesh that is both a revenue and development planning unit, but smaller in size than a Block.
Promotion: Process of NGOs or government agencies extending support – financial and non-financial for formation and development of SHGs and SHG federations. The words promotional cost and promoter organizations are also used in this context.

Abbreviations

APDPIP Andhra Pradesh District Poverty Initiatives Project
ACCU Association of Asian Confederation of Credit Unions
CDA Cluster Development Association
CDC Community Development Corporation
CDCU Community Development Credit Union
CDF Cooperative Development Foundation
CIG Common Interest Group
DHAN Development of Humane Action
GCMMF Gujarat Cooperative Milk Marketing Federation
HDFC Housing Development Finance Corporation
HUDCO Housing and Urban Development Corporation
IRDP Integrated Rural Development Program
KVK Kurinji Vattara Kalanjium
MACS Mutually Aided Cooperative Society
MFO Microfinance Organization
MYRADA Mysore Resettlement and Development Agency
NABARD National Bank for Agriculture and Rural Development
NGO Non-government Organization
NHG Neighborhood Group
PRA Participatory Rural Appraisal
PRADAN Professional Assistance for Development Action
RBI Reserve Bank of India
ROSCA Rotational Savings and Credit Association
SAPAP South Asia Poverty Alleviation Project
SERP Society for Elimination of Rural Poverty
SEWA Self Employed Women Association
SHG Self Help Group
SGSY Swarnajayanthi Gram Swarozgar Yojana
SIDBI Small Industries Development Bank of India
SIFFS South Indian Federation of Fishermen Societies
SMMS Sanghamitra Mandala Mahila Samakhya
SPMS Sri Padmavathy Abyudaya Sangam
SVAWTC Sri Viswabharati Association of Women’s Thrift Cooperatives
TC Thrift Cooperative
UNDP United Nations Development Program
VO Village Organization
WOCCU World Council of Credit Unions
WWF Working Women Federation

Table of Contents

Executive Summary 5

1. Introduction 9

2. The Current Study 14

3. Services Offered And Functions Performed 17

4. Benefits Of Federating 20

5. Financial Analysis 24

6. Issues / Challenges: Internal 28

7. Issues / Challenges: External 31

8. Conclusion 34

Appendix 1: Financial Analysis Of Selected Federations 35 A. Shadow Prices B. Financial Analysis Of The Federations: KVK i. Actual Prices ii. Profitability Of The Federation iii. Profitability Of The SHGs C. Financial Analysis Of The Federations: SPMS i. Actual Prices ii. Profitability Of The Federation iii. Profitability Of The SHGs

Appendix 2: Organizational Structure And Systems Of The Selected Federations 38

Appendix 3: Profiles Of The Promoter Agencies 45

Appendix 4: Organizations Visited And Individuals Interviewed 47

Bibliography 48

Executive Summary

Self Help Group (SHG) based microfinance combines the strengths of Rotational Savings and Credit Associations (ROSCAs) and formal financial institutions. They are similar to ROSCAs in being membership and savings based. Unlike ROSCAs, however, SHGs receive loans from formal banking institutions to supplement their resources, are much smaller – membership is less than 20, and are promoted exclusively among the poor by different promoter organizations. Some promoter organizations have also federated the SHGs formed by them into SHG federations. These federations vary in size, their legal characters and the range of functions they perform.

SHGs are now the main suppliers of microfinance in India. The number of SHGs has been estimated to be over 400,000, with an outreach of over six million families. Women make up around 90% of the membership. As of March 2001, 263,825 SHGs had received Rs.4.81 billion (US$102.34 million) as loans under an innovative program of the National Bank for Agriculture and Rural Development (NABARD) that links the SHGs and the formal banking system. The on-time repayment rate on these loans is over 95%. The savings accumulated in the SHGs that have received loans under this program is estimated to be over Rs.5 billion (US$106.38 million).

In spite of their dominance as providers of microfinance, the financial viability and organizational sustainability of SHGs has been in question because of its costs being subsidized by the promoter organizations, the subsidy in loans they receive from banks, and its organizational characteristics of small size and predominantly poor and illiterate membership. SHG federations attempt to address many of these issues, and this study focuses on the potential of the SHG federations for making SHGs sustainable. The analysis is based on case studies of three SHG federations, and a thrift cooperative federation. The cooperative federation is included as a comparative case since it is another type of member-based model of microfinance that has also adopted the federation model. The specific objectives of the study were to:

a) Identify the services provided by the selected federations, b) Analyze the benefits of federating, c) Assess the financial viability of the federations and estimate the cost of promoting them, d) Identify the constraints involved in federating SHGs, and e) Recommend strategies to strengthen the federations.

The study identified a variety of services are available to the SHG members of the federations in question. The SHGs provide some directly, while the federations provide others. SHGs primarily provide savings and credit facilities. Multiple savings and loan products are provided, and there is no lower limit on amounts that can be saved. Members’ monthly savings range from Rs.25 (US$0.53) to Rs.250 (US$5.30) per month. Loans range from very small loans of Rs.100 (US$2.13) to large housing loans of Rs.40000 (US$851). By contrast, federations provide financial services such as insurance (human and livestock) and non-financial ones such as healthcare, education and livestock care. The primary role of the federations, however, is in providing support services to the SHGs that contribute to its sustainability, rather than in providing direct services to individuals.

Federations provide an organizational identity to SHGs that, while crucial for sustainability, is difficult for small organizations such as the SHGs to develop. Federating helps SHGs realize benefits of a larger organization, without losing the advantages of small organization. The study identifies the following benefits to the SHGs from federating:

a) By creating economies of scale, federations make it possible for essential services such as accounting, audit, conflict resolution and performance monitoring to be made available to SHGs. They also contribute to capacity building of SHGS through facilitating planning and review processes, and mutual learning events. In the absence of federations, many of these services are provided by promotional agencies, an inherently unsustainable mechanism.

b) Federations reduce transaction costs of financial institutions, such as banks and insurance companies that have business with the SHGs, and the SHGs themselves. For the financial institutions, they reduce the cost of dealing with a large number of small groups; sometimes directly by acting as intermediary organizations and at other times by acting as a social collateral. They reduce costs of SHGs by providing a mechanism for cost sharing.

c) Federations reduce default rates at all levels – from SHG members to SHGs, and from SHGs to banks – by improving monitoring, and providing both positive and punitive incentives. In the long run, the reduced transaction costs and improved repayment rates should have a positive impact on the lending rates to SHGs
.
d) Federations provide certain value-added services. The value added financial services include special loan products such as housing loans and insurance for members and livestock. Non-financial services include primary education, health-care, livestock care and technical support for house construction.

e) Federations reduce the cost of promoting new SHGs because of their information advantage, low staff costs, and voluntary time offered by SHG office-holders for forming new SHGs. This enhances the replicability and sustainability of the model.

f) Finally, federating enhances the empowerment of the poor by developing local human capital. Federations provide opportunity for SHG leaders to increase their capacities as they take leadership positions in the federations, and develop the abilities of local youth recruited as staff. Federations also contribute to empowerment by exposing SHG leaders to diverse organizations and social institutions.

The financial viability analysis of two SHG federations reveals that the cost coverage of both federations has improved in the last three years. Currently, one has achieved 108% operational self-sufficiency while the other covers 91% of its operational costs.[1] When operational self-sufficiency of SHGs is estimated, it is 110% and 91% respectively, indicating that the self-sufficiency at the federation level is not come at the expense of self-sufficiency at the SHG level. Financial self-sufficiency of the SHGs in the two federations is estimated to be 104% and 90% respectively. The marginal difference between operational self-sufficiency and financial self-sufficiency indicates very low financial subsidies of SHGs, a feature significantly different from most microfinance organizations. The thrift-cooperative federation is 100% operationally and financially self-sufficient as it does not receive any external funds and the support from promotional agency is minimal compared to the SHG federations. Promotional cost is estimated for one of the SHG federations and was Rs.1.57 million (US$33404) till date. The promotional agency expects the final promotional cost for this federation (at the end of financial year 2001-02, when they plan to cease support) to be Rs.1.77 million (US$ 37,659).

The constraints and challenges facing SHG federations can be divided into two categories – internal factors that related to the SHGs federations, and external ones that relate to the other stakeholders. The internal factors include:

a) Initial capacity for self-governance is low since most SHG members and leaders have no earlier experience in organized activities. This is so since there are few opportunities available for the poor and women to get involved in such activities. This necessitates significant investment in developing governance capacity.
b) The federations have difficulty in attracting high quality managers since they either lack sufficient social identity. The current solution, promoter organization placing their staff as managers or recruiting managers on contract, raises the issue of dual accountability – the managers have to be accountable to both the promoter organization and the federation.
c) The organizational systems and processes of the federations need to be improved to keep pace with the increasing volume of transactions and variety of services offered.
d) Accountability in a membership-based organization is enhanced if members relate the payments they make to the services they receive. The complex cost structure of federations performing a wide range of functions constrains this understanding, however. Generating income through direct payments such as fee for specific services or general service charges as a proportion of profits or business volume is an innovative attempt to make the federations more accountable to the SHGs.
e) All the SHG federations are also involved in non-financial activities. While diversification is justifiable given the needs of the members and the larger goal of poverty alleviation, the federations need to ensure that they establish microfinance as their core competency before diversifying.

The external factors that affect the development of SHG federations concern the promoter organizations, financial institutions and the legal environment. They include the following:

a) The organizational character of SHGs is not sufficiently clear to all stakeholders. The financial institutions perceive SHGs as means to reduce their cost of lending to the poor, and the government sees them as a new means to disburse subsidized funds. In contrast, the stakeholders have to see SHGs as intermediary organizations that while, being small in size, require systems and processes similar to that in any other organization, if they are to be sustainable. Recognizing this is crucial in appreciating the role played by SHG federations.
b) NABARD has been focusing on increasing outreach of the SHG-Bank Linkage program. While this was justified till very recently when the outreach was limited, the rapid increase in the last two years necessitate that it should instead shift its focus to the sustainability of SHGs.
c) There are very few promoter organizations with the capacity to replicate successful models of SHG federations. This necessitates significant investment in organizational capacity building of existing NGOs, and if needed, new organizations should be promoted for this purpose.
d) A suitable legal framework is lacking for SHG federations. The options offered by the Mutually Aided Cooperative Societies (MACS) Act, a new law recently enacted in seven states of the country, should be explored further to see if they can be used in the current form or an amended form.

This study concludes that SHG federations make SHGs financially viable, and provide other benefits that would contribute to SHG-based microfinance becoming a sustainable financial system. Furthermore, SHG federations contribute to the potential of microfinance as a poverty reduction tool by reducing the vulnerability of poor communities, and empowering them. Though currently in an infant stage, SHG federations have the potential to become community organizations that not only provide a wide range of services to the community, and are accountable to the community. The study recommends that further research be conducted on a variety of areas related to the promotion and performance of federations so as to create better understanding of the model among all stakeholders in microfinance. The study also identifies the following specific roles promotional, regulatory agencies and other actors can play in helping SHG federations achieve their potential.

1. Shifting focus to viability and sustainability of SHGs from that of increasing outreach, 2. Expanding the knowledge base concerning the role of SHGs and SHG federations, 3. Increasing investment in capacity building of SHG federations and SHG promotional agencies, and 4. Developing a suitable legal framework for SHG federations.
1.0 Introduction

In the last two decades, many Micro-Finance Organizations[2] were able to reach significant number of poor, provide them credit at unsubsidized interest rates, and have relatively low default rates on these loans. Given the critical role of credit markets in economic development, this led to microfinance being seen as a panacea for poverty. In addition, microfinance has been seen as empowering since a large segment of microfinance clients are women. Of late however, the initial euphoria has given way to the recognition that credit is only one of the many services the poor need to increase their incomes, and increased income itself is not sufficient to eradicate poverty. Amartya Sen convincingly argued that poverty is not merely insufficient income, but rather the absence of a wide range of capabilities, including security and ability to participate in economic and political systems.[3] Recognizing this, the World Bank’s World Development Report 2000/2001 identifies three priority areas for efforts to address poverty: promoting economic opportunity, facilitating empowerment and enhancing security[4].

This study examines an innovative model of microfinance that incorporates all the three areas identified by the World Development Report 2000/2001 for poverty reduction. This model, federations of Self Help Groups (SHGs), extends the unique features of SHG-based microfinance, and contributes to factors that improve the sustainability of SHGs. Federations increase the economic opportunity offered by the SHGs, expands empowerment through leadership building, and addresses the component of security through insurance services. In contrast to conventional microfinance, which is NGO-based and operates independent of mainstream institutions, SHGs and SHG federations are membership-based organizations, and collaborate with commercial banks and government agencies.

The report is laid out as follows. Section One looks at membership-based microfinance models in India, and federations of membership-based organizations. Section Two spells out the objectives of the study, and gives brief profiles of the federations studied. Section Three describes the services provided by the federations. Section Four analyzes the benefits of federating, and Section Five presents the results of financial analysis conducted for two federations. Section Six and Seven identify issues related to the functioning and promotion of SHG federations. Finally, Section Eight consolidates the findings of the study and identifies areas for further study.

1.1 Membership Based Microfinance Models In India

a) Self Help Groups (SHGs)

The SHG-based microfinance is the main form of microfinance in India. This unique approach combines the strengths of traditional Rotational Savings and Credit Associations (ROSCAs) with those of formal financial institutions. In addition to providing savings and credit facilities to members from their own funds, SHGs supplement their resources with loans from formal banking institutions. They also differ from ROSCAs in being smaller (SHGs have 15-20 members), in not being constituted for a specific time period, and in their being promoted exclusively among the poor by an external agency.

SHGs were initially promoted by some NGOs in response to the failure of formal banking institutions to reach India’s poor. The idea was based on the prevalence of informal saving and credit groups – ROSCAs, temple funds, chit funds, etc. – in villages that enabled people to pool their money and lend it out to each other. The innovation of SHGs was in forming groups exclusively of the poor, having small group size (to facilitate interaction and understanding) and convincing formal banks to lend to them. The number of SHGs currently in existence is estimated to be around 400,000[5]. Since the average membership is around 15, SHGs reach over six million families. Estimates of savings in SHGs are not available, but by conservative approximation they exceed Rs.5 billion (US$106.38 million).[6]

The SHG-Bank Linkage program of National Bank for Agriculture and Rural Development (NABARD) allows the SHGs to obtain loans from formal banking institutions. Under this program, commercial, rural and cooperative banks lend to SHGs, and NABARD refinances these loans at a subsidized interest rate. The program’s main claim to success has been repayment rates of over 95% compared to other poverty lending programs that have had repayment rates of less than 50%. The program, started in 1992 as a pilot project and upgraded to a regular banking program in 1996, has expanded rapidly in the last two years.

As of March 2001, 263,825 SHGs had received Rs.4.81 billion (US$102.34 million) under this program. NABARD plans to finance one million SHGs through this program by 2008, reaching approximates 75 million poor[7]. Recently, a Microfinance Development Fund was established at NABARD with a start up fund of Rs.1 billion (US$21.28 million) using contributions from the Reserve Bank of India, NABARD and other commercial banks.

However, the growth of the program was slow during the initial years for many reasons. The program is not mandatory like many other subsidized lending programs supported by the government. The program requires multiple actors – promoter organizations to form the SHGs, the SHGs themselves and bankers to finance them. The promotional process has been slow because of the paucity of capable organizations and insufficient funds. Even after significant number of groups had been formed, and their membership and leadership sufficiently educated, lending to the SHGs was hampered by the novel lending methodology. In contrast to the individual and activity based lending that the bankers involved in, SHG-lending is organization-based. In addition to the necessary criteria of having poor membership, lending is to be based on adherence to strong organizational practices such as proper maintenance of accounts, regular group meetings and good repayment performance. Banks have also been hesitant to lend to SHGs because the loans are to be extended without any collateral, and SHGs are informal organizations that do not have body corporate status, and hence cannot be sued in case of default. [8]

On the other hand, program growth has been faster in the last two years due to various factors. First, the natural pace of promotion of SHGs has increased. NABARD’s training programs have also resulted in many bank officers’ trying out the program. The adoption by the central government of the SHG concept as its primary anti-poverty self-employment program has also aided growth. Finally, one state in India, Andhra Pradesh, made the model their flagship strategy in rural development resulting in various government agencies forming group. Currently, 750 NGOs and over 14,000 branches of 318 banks are associated with the program. The program is still concentrated predominantly in South India (73% of total SHGs and 82% of the amount lent) and, within South India, in the state of Andhra Pradesh (48% of total SHGs and 53 % of the amount lent). In addition to the NABARD program, SHGs have received loans from other apex financial institutions, like Small Industries Development Bank of India (SIDBI) and Rashtriya Mahila Kosh (RMK), through NGOs and SHG federations, and from private financial institutions like Basix.

b) Other Models

Thrift cooperative is the other main membership-based microfinance model in India. Thrift cooperatives have traditionally been urban-based, formed typically among employees within an organization. State or federal laws regulate these cooperatives, and their performance often suffers due to excessive state control and political interference. Two significant exceptions to the rule have been the cooperatives promoted by two organizations: Cooperative Development Foundation (CDF) and Working Women’s Federation (WWF).

CDF has promoted village level cooperatives that are fully owned and managed by their members. These are governed by a new cooperative act that limits state control. There are 350 such cooperatives in CDF’s working area, and they cumulatively handled Rs.137 million (US$2.91 million) at the end of 2000. The thrift cooperative promoted by WWF, Indian Cooperative Network for Women, has branches in the states of Tamil Nadu, Andhra Pradesh and Karnataka. The WWF cooperative had 98,184 members as of March 2001, Rs.11 million in savings and a loan portfolio of Rs.54.75 million.

1.2 Federations

A federation is an association of primary organizations. Primary organizations may federate to realize economies of scale or to gain strength as an interest group. Federations of cooperatives have a long history. Credit unions have federated at national, regional (e.g. Association of Asian Confederation of Credit Unions – ACCU) and global (e.g. World Council of Credit Unions – WOCCU) levels. WOCCU represents 36,512 credit unions with a combined membership of 108 million, and they have more than US$466 billion in savings and US$371 billion in loans[9]. Among national federations, Desjardins of Canada is among the best known. There are over five million members, in approximately 1,200 primary cooperatives, associated with Desjardins. These cooperatives are grouped into 11 federations that are in turn members of a national confederation. As of December 1997, the primary cooperatives had US$54 billion in assets, and the federations had an additional US$18 billion in assets.[10] The federations of village banks in Africa, mostly promoted by FINCA, are a well-known case of federations in microfinance[11].

In India, cooperative banking and marketing societies are federated at the district, state, and national levels. Excessive state regulation in the cooperative sector in India, however, leaves hardly any member control in these federations. Gujarat Cooperative Milk Marketing Federation (GCMMF), a federation of dairy cooperatives, is an exception. GCMMF is a three-tiered federation composed of 10,411 village-level primary societies, 12 district-level federations, and a state-level confederation of the district federations. GCMMF produces the AMUL brand of products, which generated US$493 million in sales in 1999-00. The South Indian Federation of Fishermen Societies (SIFFS), in Kerala, is an example of well functioning federation of primary societies outside the regulated cooperative sector. SIFFS is also a three-tiered federation with a similar structure to that of GCMMF.[12] In this case, the primary societies and the federations are registered as charitable societies to circumscribe the regressive nature of the cooperative law.

1.3 SHG Federations

The primary difference between a SHG federation and other federations is in the nature of the primary organization. The primary organizations in all the other cases of federations are formal organizations that have body corporate status. By contrast, SHGs are small informal organizations. SHG federations were promoted by organizations primarily as an exit strategy, i.e. to allow an organization that had founded SHGs to withdraw its support to SHGs while ensuring their sustainability.

Professional Assistance for Development Action (PRADAN) and Mysore Resettlement and Development Agency (MYRADA), two large NGOs that pioneered the concept of SHGs, were also the earliest agencies to promote SHG federations. However, the model of federation promoted by the two differed significantly. PRADAN promoted Sri Padmavathy Abyudaya Sangam (SPMS), profiled in this study, in 1992. Development of Humane Action (DHAN) Foundation, a spin off organization of PRADAN that took over PRADAN’s programs in South India, has since refined the SPMS model, and promoted 20 more federations. It is currently promoting an additional 30 federations. Each of the federation has more than 200 SHGs as members, and is a formally registered organization. These federations involve in financial intermediation and employ paid staff.

Federations promoted by MYRADA are unregistered associations of 15-25 SHGs each. These federations do not have paid staff and do not perform any financial intermediation. The MYRADA federations primarily focus on building solidarity, addressing delinquency and dealing with social issues. Some of the federations are starting to offer audit services. A federation visited during the field study, for example, performed all these roles. This federation empowers the women in its member SHGs to agitate against illegal liquor sale in the village, identifies children for sponsorship support from MYRADA, and has collected funds for a maternity ward for the local hospital. The federation has no permanent staff, office or funds, and the SHGs pay Rs.25 per month for its incidental expenses. MYRADA has promoted over 50 such SHG federations.

Apart from DHAN and MYRADA, another major attempt to scale up the SHG federation model in India is UNDP’s South Asia Poverty Alleviation Project (SAPAP). The project, started in 1994, has promoted SHGs and their federations in 20 mandals[13] in three districts. The SAPAP project is now being expanded to 180 mandals with the backing of the World Bank-supported District Poverty Initiatives Project (DPIP). Other NGOs that have promoted SHG federations include SEWA in Gujarat, PREM in Orissa, Chaitanya in Maharashtra, Gram Vikas in Karnataka, ASA in Tamil Nadu, and YCO in Andhra Pradesh[14]. The structure of the federations and the functions performed vary and depend significantly on the promoting NGO. While many NGOs have promoted federations, not many have replicated them on as large a scale as DHAN or MYRADA.

2.0 The Current Study: Methodology, Objectives And Scope

2.1 Methodology

The broad objective of the study is to explore the potential of SHG federations to contribute to sustainability of SHGs. Since the focus is on federations, a thrift cooperative federation is also included in the study so as to give the study a comparative perspective. A two-stage selection was used to select the federations. First, organizations that have promoted federations were identified on the basis of a literature review and the author’s personal experience. From among these organizations, three organizations that have promoted a significant number of federations with the following characteristics were selected: the core activity is microfinance, and the federations are formal organizations that have their own board, staff and funds. Once the promoter organizations were selected, the specific federations were suggested by the agencies, subject to the condition that they have been in existence for at least three years.[15]

In addition to the representatives of the federations and their promoter organizations, representatives of NABARD, commercial banks (ICICI Bank and Canara Bank) and other models of microfinance (Basix, WWF and MYRADA) were interviewed. The complete list of organizations visited and individuals interviewed is presented in Appendix IV. The study was carried out over a period of three months, including three weeks of fieldwork in India

2.2 Specific Objectives

The specific objectives of the study were the following:

a) Identify the services provided by the selected federations, b) Analyze the benefits of federating, c) Assess the financial viability of the federations and estimate the cost of promoting them, d) Identify the constraints involved in federating SHGs, and e) Recommend strategies to strengthen the federations.

2.3 The Selected Federations

a) Sri Padmavathy Mahila Abyudaya Sangam (SPMS)

SPMS is a federation of SHGs in the small temple town of Tirupati in Andhra Pradesh. Tirupati is famous for being the city of the richest temple in India, but, as most cities in India, has its share of poor, who predominantly live in the slums. Most of the SHGs that are members in SPMS are located in these slums. Promoted in 1992, it is perhaps the oldest SHG federation in India and one of the largest. DHAN Foundation currently supports SPMS by providing management professionals, strategic advice and support for resource mobilization.

b) Kurinji Vattara Kalanjiam (KVK)

KVK is a federation of SHGs near Madurai, a southern city in the state of Tamil Nadu. The SHGs in the area were initiated in 1995 and the federation was promoted in 1997. The SHGs in the federation are from an area that corresponds roughly to a Community Development Block, the basic unit of development planning in India. KVK is typical of the federations with a nested structure promoted by DHAN Foundation– all SHGs in a block are federated into a block level federation (KVK) and SHGs in a cluster of villages form a Cluster Development Association (CDA).

c) Sanghamitra Mandala Mahila Samakhya (SMMS)

SMMS is located in the Hindupur mandal of Anantpur district in Andhra Pradesh. SMMS is a federation of Village Organizations (VOs), which include all SHGs in a village as their members. Mandal is the unit in Andhra Pradesh, equivalent to the Community Development Block, though significantly smaller. Anantpur is among the least developed regions in Andhra Pradesh. SHGs in the area were initiated in 1996, and the federation was started in1998. SMMS is supported by UNDP’s SAPAP project.

d) Sri Viswabharthi Association of Women Thrift Cooperatives (SVAWTC)

SVAWTC, formed in 1991, is a federation of thrift cooperatives in Warangal District of Andhra Pradesh. Compared with the other types of federations analyzed in this paper, SVAWTC comprises a much smaller number of primary groups, but there are many more individual members in each of the primary groups. Cooperative Development Foundation (CDF) supports SVAWTC.

In all the cases except SVAWTC, membership is restricted to the poor, who are identified by Participatory Rural Appraisal (PRA) techniques.[16] Though the membership of SVAWTC is not exclusively poor, the majority of members are poor. Given that landholdings are a good proxy of wealth in rural areas,[17] it is worth noting that a CDF study on the member profile of SVAWTC in 1997 found 44% of members to be landless and 22% to hold less than 2 acres. The uniform thrift requirements, and loans being in proportion of thrift (rather than total savings that may include other deposits), also make the cooperative unattractive to the rich. The thrift amounts in most cooperatives is low enough (Rs.20) for the poorest member to be able to save.

More detail on the structure and systems of each of these federations can be found in Appendix 2.

Table 1: Organizational Profiles of the Federations

In US$

|Particulars |SPMS |KVK |SMMS |SVAWTC |
|Clientele |
|Members |7272 |3900 |2699 |4337 |
|Primary Groups |617 |242 |206 |11 |
|Average membership |12 |16 |13 |394 |
|Savings | | | | |
|Savings |429,783 |115,674 |81,739 |172,652 |
|Average Savings |59 |30 |30 |40 |
|Nominal Interest on savings % |12 |12 |None |12 |
|Loans |
|External loans to date |675,130 |514,130 |25,283 |None |
|External grants for on lending |26,957 |22,391 |141,761 |None |
|Total credit generated |1,690,435 |1,043,696 |665,870 |N.A. |
|Loan portfolio at primary level |613,043 |262,391 |265,652 |246,522 |
|Loan portfolio at apex level |434,348 |206,304 |106,739 |50,870 |
|Staff and Infrastructure |
|Full time staff |10 |32 |10 |12 |
|Office |Rented |Rented |Rented |Own |

N. A.: Not Available

3.0 Services Offered By The Primary Groups And Federations

Though the primary interest of this study is in the services offered by federations, information on the services offered by the primary groups is also presented to better understand the full range of services available to SHG members.

3.1 Primary Groups

SHGs and the thrift cooperatives primarily provide savings and loan facility to their members. Savings is at the core of the SHG model and particularly so for thrift cooperatives, as they do not receive external funds. Savings are retained in the SHGs and thrift cooperatives, and not deposited with the federation or local banks. In the SHGs, savings are compulsory but each member can save a different amount. In the thrift cooperative, thrift (savings) is uniform, the amounts being decided during the annual general body meetings. In addition to the compulsory savings/thrift, SHGs in KVK and SPMS, as well as the thrift cooperatives, offer other voluntary saving products, although these have not become very popular. The thrift cooperatives, and SHGs in KVK and SPMS, pay 12% as annual interest on all savings. SHGs in SMMS do not pay interest on savings. Members’ monthly savings range from Rs.25 (US$0.53) to Rs.250 (US$5.30) per month.

The ability of the SHGs and thrift cooperatives to provide both small and relatively large loans at the time of need, at costs lower than those available in the local market, and without collateral or excessive documentation attract the poor to these organizations. In KVK, SPMS and SVAWTC, interest rates on general loans range from 24% to 36% per annum, while in SMMS all loans have an annual interest rate of 24%. Housing loans in KVK and SPMS are available to members at 15% to 18 %. KVK and SPMS also permit a member to have up to three loans at the same time. In contrast, the other federations do not permit members to have more than one active loan at a time. Loans range from very small loans of Rs.100 (US$2.13) to large housing loans of Rs.40000 (US$851).

3.2 Cluster Development Associations And Village Organizations

CDAs provide a wide range of services, the primary one being loans to SHGs. The apex federation is their principal source of funds, but they also have their own funds (equity from SHGs, grants from NGO and accumulated profit). The other services include training new groups, accounts and auditing support, dissemination of information on new programs (initiated by the apex federations) and support for getting loans from banks. CDAs are also involved in promotion of new SHGs.

VOs have fewer resources than the CDAs and therefore provide a smaller range of services. They provide minimal general support to SHGs and some basic health care and livestock care through trained volunteers. The VO also provides a forum for all the SHGs in a village to discuss common issues and interact with village leaders. Since the CDAs have their own staff, they also work more autonomously than the VOs.

Table 2: Services Offered By SHGs And Thrift Cooperatives

|Levels |SPMS |KVK |SMMS |SVAWTC |
|Savings |
|Compulsory savings |Variable amounts, |Variable amounts, |Uniform amount, withdrawals |Uniform amount, withdrawals |
| |withdrawals only on |withdrawals only on |only on membership |only on membership |
| |membership cancellation |membership cancellation|cancellation |cancellation |
|Voluntary Savings |Yes, withdrawal on |Yes, withdrawal on |None |Yes, withdrawal on maturity |
|Products |maturity |maturity | | |
|Nominal Annual Interest |12% |12% |None |12% |
|Rate | | | | |
|Loans |
|Nature |Savings linked, repeat and|Savings linked, repeat and|Not linked to savings, |Linked to thrift amount, |
| |multiple |multiple |repeat but not multiple |repeat, multiple loans linked|
| | | | |only to voluntary savings |
|Nominal Annual Interest |24 to 36 % |24 to 36 % |24% |24 to 36% |
|Rate on microfinance | | | | |
|loans | | | | |
|Nominal Annual Interest |18% |15% |No Housing Loans |No Housing Loans |
|Rate on Housing Loans | | | | |
|Maturity |Flexible, variable with |Flexible, variable with |Fixed – 20 monthly |Fixed |
| |amount and purpose. |amount and purpose. |installments | |
| |Borrower gives schedule, |Borrower gives schedule, | | |
| |but within limits set by |but within limits set by | | |
| |the SHGs. |the SHGs. | | |

3.3 Apex Federations

One of the unique functions performed by KVK and SPMS (that differentiates them from many other federations including those studied here, and those promoted by MYRADA) is the mobilization of loan funds from commercial lending organizations. Both organizations have received loans from national lending agencies (development banks and housing banks). In SPMS, SHGs till recently could not receive loans from banks, and external loan mobilization was therefore done exclusively by SPMS. In contrast, KVK supplements SHG resources since the commercial banks are the primary source of external loan funds. However, the recent introduction of housing loans (not yet directly available to SHGs) has significantly increased the proportion of KVK funds in SHG liabilities. SMMS has not accessed loan funds but uses UNDP grant funds as capital to lend to SHGs (through VOs). SVAWTC does not receive loans from external lending agencies, but has a small lending portfolio from the deposits that the thrift cooperatives make with the federation. Loans from the federation contribute to only 20% of the total loan portfolio of the thrift cooperatives.

Insurance is another crucial service offered by the federations. KVK, SPMS and SVAWTC offer life insurance schemes. The federations implement some of these schemes independently, while offer others in collaboration with commercial insurance companies. KVK and SMMS also offer cattle insurance for their members in cooperation with commercial insurance companies.

The federations also offer non-financial services such as educational support, livestock care and technical support for housing. SPMS recently started providing HIV counseling. KVK runs a training center on handicraft production and computer software. KVK and SPMS provide technical support for house construction and purchase of materials (both employ technical personnel for this). SPMS operates a housing material production unit, which produces low cost construction materials.

Though the services provided by the federations to SHG members complement those provided by the primary groups, more crucial are the services provided to the SHGs. These include accounting support and auditing, monitoring and co-ordination, conflict resolution, and training services. Monitoring is central to improving the performance of SHGs, especially lowering default rates. Training for SHG members, leaders, and staff includes both formal classroom training and exposure visits to other well-functioning SHGs. KVK and SPMS have exclusive staff for all these areas. The benefits of the roles performed by federations are discussed in the next section. More details on the functions performed by federations can be found in Appendix 2.
4.0 Why Federate SHGs

The primary purpose of federating SHGs is to ensure their sustainability. Though the SHG model of microfinance has been significantly successful in terms of its outreach, resource generation, and use of funds, SHGs are unlikely to be sustainable if they are not federated. In the absence of federations, both formation and most of the maintenance costs of SHGs have to be permanently borne by the promoter organizations, rendering the system inherently unsustainable. SHG federations not only ensure that SHGs bear all their maintenance costs but also absorb part of the costs of promoting new SHGs.

Sustainability though, is not just an issue of cost coverage. Federations help SHG members to see SHGs as part of a larger organization. They provide a sense of solidarity among members of different SHGs in an area, and helps build membership stake in the SHGs. Creating a sense of ownership is important since SHGs are not self-promoted organizations, and the small size of SHGs makes it difficult for their members to visualize them as sustainable organizations. This section discusses specific factors that enable SHG federations to contribute to SHG sustainability.

4.1 Economies Of Scale

SHGs require many maintenance services that can neither be provided for by individual SHGs themselves nor are available on the market at a scale needed by the SHGs. Many of these services are initially provided by the organizations that form the SHGs, but this is not sustainable since the SHGs rarely pay for the services, and also since providing maintenance services is not the core competency of the promoter organizations. Federations make permanent availability of these services more likely as it provides the necessary scale at which the services can be offered, and the possibility of it being custom designed to suit the requirements of the SHGs. Audit is one such service that is provided by all federations studied here. Even when external auditors audit SHG accounts, federations help SHGs prepare for the process.

Capacity building is another service that SHGs cannot provide internally. All the SHG federations studied provide capacity building services to their member SHGs. This involves training the SHG members, leaders, and staff. By providing a common forum for review of SHG performance and enabling them to plan for further development, federations also create space for internal learning.

Finally, federations provide a means to resolve conflicts. Such conflicts are both internal (between members) and external (with other SHGs in the village, the federation or outsiders such as the village leaders and the banks). Federations help in resolving such conflicts by making available leaders and staff acceptable to both sides of the conflict to play the mediator role. In some cases, the federation leaders and staff strengthen the negotiating position of the SHGs when the conflict is with outsiders.
4.2 Reduction In Transaction Costs

The main innovation of SHGs was in reducing the costs that banks incur when lending to the poor. This was primarily achieved since SHGs consolidate what could potentially have been 15-20 individual accounts into one single SHG account. Even on a per account basis, a NABARD study found the costs of lending to SHGs to be less than that of lending directly to individuals. The transaction cost on a SHG loan account was 35.6% less than that of a general priority sector loan account on a first loan and 55.7% less on a second loan[18].

Apart from reduction of paperwork because of account consolidation, cost reduction is made possible because the organizations that form and support the SHGs bears a high proportion of the monitoring costs. Though the banks are expected to make periodic visits to the SHGs, and lend to them based on factors such as the quality of accounts, regularity of meetings and credit history (for repeat loans), the reputation of the promotional agency plays a significant role in the bankers’ decision. The bankers substitute the reputation of the promoter organization for part of the task of assessment and monitoring. The social collateral that the promoter organization provides is insufficient, however, when the number of SHGs increases and when amounts being lent to individual SHGs increase, as these conditions necessitate closer scrutiny. When the SHGs are federated, the federations fulfill this role better as they are nearer to SHGs, and thus have better information on their performance.

While banks lending to SHGs and their federations seem to be benefiting from lower transaction costs, this is not reflected in a reduction in interest rates, even after the banks were permitted to set their own interest rates on SHG lending. In contrast, the insurance companies offering insurance products to the federations are able to offer discounted premiums that reflect the lower transaction costs. The lower transaction costs arise from the federations diminishing the probability of fraudulent claims, and they making it possible for the companies to reach clients who have never previously insured themselves or their assets.

4.3 Reduction In Defaults Rates

Through better monitoring and the provision of both positive and punitive incentives, federations reduce default rates at all levels – from members to SHGs, and SHGs to banks. Federation leaders and staff interfere on behalf of SHGs when a member consistently defaults on her loans to the SHG. In the case of SHG loans from banks, the banks share information with the federation on a periodic basis, and the federation follows up any defaults immediately. Availability of loans and other services from the federation, the peer pressure from other SHGs, and social prestige associated with SHGs having good repayment record are incentives for SHGs to maintain timely loan repayment performance.

In the case of KVK, the trust between the federation and the local branch of Canara Bank is such that the manager is willing to extend any number of loans to the SHGs if the federation can vouch for their performance. The staff of a bank lending to SHGs in SPMS also expressed a similar level of trust. This trust comes from the federation ensuring that SHGs maintains an excellent repayment record with the bank. In the long run, reduced transaction costs and timely loan repayments should have a positive impact on the interest rates on loans to SHGs.

4.4 Providing Value-Added Services

Micro-insurance services are the main value added service provided by three of the four federations studied. Federations provide these services either on their own or in collaboration with insurance companies. These services are valuable since the insurance companies either have little reach in the populations being served by the federations or do not have products suitable to the needs of the poor. The information advantage of a member owned entity, and an established financial system, allows the federations to provide insurance services in spite of the relatively small number of clients.

At present, the federations offer only minimal education, health and livestock support services. The quality and quantity of services can increase along with federation resources and their capacity to manage these programs. In view of the inadequate provisions of all these services for the poor, especially in rural areas where market options are not available, there is a great potential for the federations to provide these services on a cost basis or in collaboration with the government agencies that currently provide them. Two services that significantly improve the lives of the poor that the federations could play a role in providing effectively are the supply of essential food commodities (currently provided by Fair Price Shops run in a highly inefficient manner by government-controlled cooperatives), and child care services for preschool children (currently provided directly by the state). The federations could also play a role include the supply of agricultural inputs and marketing of produce in places where private market organizations are absent or weak.

Over time, SHG federations have the potential to become community-based development organizations that play a significant role in development of not just their members but communities as a whole.[19]

4.5 Increasing Outreach And Reduction Of Promotional Cost

The federations studied employ some of their revenue and staff time in the promotion of new groups. The federation and primary group leaders also volunteer time for forming and grooming new groups. It was observed that in all the federations studied, the federation leaders perceived promotional activity as one of their key responsibilities. Furthermore, group formation by federations is faster than that by NGOs because federations possess better local information and have greater legitimacy in the eyes of local residents due to their being based in the community. The staff and leaders of the federations are able to identify the poor and persuade them to form groups more quickly than outsiders.

Increasing outreach also contributes to the viability of the federations by helping them to increase their membership to levels necessary to maximize economies of scale. The involvement of federations in promoting new SHGs also contributes to sustainability of SHG based microfinance on a macro level as it reduces the overall promotional investment needed for reaching all the poor in the country.

4.6 Empowerment

SHG federations require human resources of much higher capacity than that required by individual SHGs because of the variety of tasks involved. The members in the governing bodies of the apex federations build on the organizational experience they have gained in the secondary organizations and SHGs, and also gain from more focused capacity building efforts the promotional agencies are able to undertake at the level of apex federations. Thus, the organizational/managerial capacities of individuals who take up governance positions in the federations develop more than if they stayed in the SHG, an improvement in human capital adds value to the community capacity. In addition, skills and knowledge gained by the local youths recruited as staff of the federations also increase the total human capital available in the community.

Federations also increase empowerment beyond that achieved by SHGs. While SHGs provide an opportunity for the poor to organize and realize many of their capabilities, federations produce a new generation of leaders. Federation leaders also gain the respect of the larger community that includes the non-poor because of the scale of the organizations they lead. Further, since a federation operates at a level that also has other mainstream organizations, it creates opportunities for the federation leaders to deal with the power structures at these levels, leading to a higher level of empowerment than that achieved by SHGs.
5.0 Financial Analysis

5.1 Financial Viability

Analyzing financial viability is straightforward in the case of conventional MFOs that lend to individuals. Even in the case of MFOs such as Grameen Bank that use joint liability groups, loans are made to individuals, and the primary income for the MFO is the interest on loans paid by the borrowers. In the case of SHG federations, however, SHGs do the primary lending, and therefore receive interest and other fee payments. The SHG federations are either not involved in any financial activity or, if involved, as in the case of the SHG federations studied here, lend to SHGs rather than to the ultimate borrowers. The case of thrift cooperative federations is similar - thrift cooperatives lend to individuals and the federation, if it does lend, lends to the member cooperatives. Hence, in the case of such federations, financial viability must be analyzed at both primary and federation levels.

Financial viability analysis in this study has been done for two SHG federations. For the analysis at the SHG level, the consolidated income and expenses of all SHGs is used. The federation costs are added to the SHG costs in this analysis, on the premise that the federation is required for the sustainability of the SHGs, and since federations are membership organizations, SHGs should have sufficient income to meet the costs of their federation. This approach, while not revealing if individual SHGs are profitable, indicates if all the SHGs together have adequate income to bear all their costs. In contrast, the federation level analysis estimates the adequacy of the federation’s actual income to meet its costs. For the federation level analysis, only operational self-sufficiency is calculated, whereas for the SHG level analysis, both operational self-sufficiency and financial self-sufficiency is computed.[20]

Operational costs for the SHG level analysis includes all administrative costs of SHGs and the federation, and financial costs such as interest to be paid on loans and savings deposits. The administrative costs for the federation includes costs subsidized by the promoter organization, both in terms of direct transfers and cost of personnel on seconded to the federations. Operational income includes interest and fee income SHGs receive from their members, and does not include income such as penalties payments from members or grants from promoter organizations. For the federation level analysis, operational costs included administrative costs of the federation – both incurred by the federation and provided by promoter organizations, and operational income includes only interest income from the SHGs. In the case of KVK that has two levels of federations, costs of both federations are added, whereas income to the CDAs is taken as income.

For financial self-sufficiency analysis, adjustments are made for inflation and the opportunity cost of funds. The national annual inflation rate is used to calculate the change in general reserves, which is then added to the expenses. Overdue loans are not treated as losses (and added to expenses), since information on overdue categorized according to age was not available. However, both federations maintain a loan loss reserve at the SHG level that is created from a fee (1% of loan amounts), collected from members who take loans. The lending rate (15%) to SHGs of a private MFO operating on a for-profit basis (Basix) was used as the opportunity cost. This rate is higher than the lending rate of Bank of Madura, another private bank that lends to SHGs.[21]

Some loans, however, were not adjusted to the opportunity cost. KVK and SPMS have received housing loans from Housing Development Finance Corporation (HDFC) and Housing and Urban Development Corporation (HUDCO) at below market cost. The lending agencies impose a cap on the interest rate that can be charged to the ultimate borrowers. In these cases, if the federations had obtained these loans at a higher cost, the lending rate to members would also be higher. The demand for the loans would not have been affected as the SHG members are already getting loans for the same purpose from other sources at rates higher than 24%. The analysis for SPMS at the SHG level has been done for one year only due to data limitations.

The complete analysis is presented in Appendix I.

Table 3: Profitability Analysis of the SHG Federations

|Particulars |98-99 |99-00 |00-01 |98-99 |99-00 |00-01 |
| |KVK |SPMS |
|Operational Self Sufficiency – Federations |65% |63% |91% |89% |99% |108% |
|Operational Self Sufficiency – SHGs |112% |80% |91% |n.a. |n.a. |110% |
|Financial Self Sufficiency -SHGs |106% |79% |90% |n.a. |n.a. |104% |
|Financial Self Sufficiency - SHGs– |102% |75% |86% |n.a. |n.a. |98% |
|Sensitivity | | | | | | |
|(If inflation and cost of funds increase by | | | | | | |
|3%) | | | | | | |

As can be seen from Table 3, the current operational self-sufficiency at the federation level is more than 90% for KVK, and more than 100% for SPMS. The same pattern is observed for operational and financial self-sufficiency in both federations at the SHG level also. The ratios are quite robust when subjected to sensitivity analysis. The operational self-sufficiency at the federation level has steadily increased during the last three years for SPMS. For KVK, it decreased in 1999-00 relative to the previous year, and then improved in 2000-01. The same pattern is observed for KVK when the analysis was done at the SHG level, both for operational self-sustainability and financial self-sufficiency. The management of KVK attributes the reduction in ratios during 1999-00to the sharp expansion of the federation’s activities during that year. The marginal difference in percentages of operational and financial self-sufficiency rates indicates a low level of subsidies, a notable feature, different from most MFOs.

The above analysis shows that SHG federations can achieve financial viability. While SPMS has taken nine years to achieve complete viability, KVK seems likely to achieve it in seven. DHAN Foundation expects the federations currently being promoted to achieve full self-sufficiency in five years. DHAN attributes the decrease in time to the increased readiness of the financial institutions to lend to SHGs, and also improvements in the organizational systems of the federations over time.

5.2 Cost Of Promotion

The costs of promoting SHGs and their federations are primarily twofold. One is the direct cost of operational support: share of operational expenses of SHGs and SHG federations incurred by the promoter agency. The indirect promotional cost includes the establishment expenses of the promotional agency and salary expenses of their senior staff, whose services are available across federations. Only the direct costs are used in the analysis done here, because they are likely to be the major proportion of costs and the objective of the analysis is only to get an approximation of the resources needed.

Through March 2001, the DHAN Foundation incurred approximately Rs. 1.57 million (US$ 33404) in direct costs in promoting KVK, including capital grants of Rs. 0.57 million (US$ 12128). DHAN Foundation has stopped giving grant support for regular administrative expenses, but continues to bear the salary expenses of two of its staff working with KVK, support that is to cease at the end of 2001-02. This would add a maximum of Rs. 0.20 million to costs, taking the total cost of promotion to Rs. 1.77million (US$ 37,659). This figure implies a cost of around Rs. 7080 (US$ 151) per SHG (assuming 250 groups, currently there are 242 groups; the costs for previous years are not adjusted for inflation, and hence real costs are likely to be slightly higher than this amount). Promotional cost of SPMS and SMMS could not be determined, as the information for the initial years of the federation is not available.

In a recent funding proposal, DHAN has projected total promotional expense of Rs. 2.3 million (US$ 48936) per federation (Rs. 9200 per SHG) for support over a period of five years. This cost would cover the promotional costs required to promote 250 SHGs, 10 CDAs and an apex federation. The World Bank-supported Andhra Pradesh District Poverty Initiatives Project (APDPIP), the project that is scaling up the SMMS model of federations, envisages a budget of US$ 20.34 million (US$ 113,000 per federation) to promote 180 Common Interest Group (CIG) federations, that would promote 18, 000 CIGs and support 20, 000 existing SHGs.[22]

Thus, taking a broad cost range of US$ 50000 to US$ 100,000 per federation, an investment of US$ 200 to 400 million is needed to promote 4000 Federations (assuming 250 SHGs per federation) if the one million SHGs that NABARD plans to support through its SHG-Bank Linkage program by 2008, are to be federated. NABARD’s Microfinance Development Fund, set up in 2001 to support promotional activities in the microfinance sector (that includes a wide range of activities other than supporting SHG federations), has start-up capital of only Rs.1 billion (US$21.28 million). Though NABARD is seeking to increase the capital available to the fund through contributions from commercial banks, and private donors funds to NGOs involved in SHG promotion may continue to be available, the projected quantum of funds needed just for federating the SHGs indicates need for a significant increase in the resources.

Innovative approaches have to be adopted to increase the pool of available resources. While conventional means of development aid in the form of grants from bilateral donor agencies and low interest loans from multilateral development banks can be a source of funds, policies to make more local funds available should be put in place. One such policy can require commercial banks to invest part of their profits to support MFOs such as SHG federations. Tax incentives can also be offered to the commercial banks and other financial institutions for the same purpose.

6.0 Issues And Challenges: Internal

The previous section described the benefits of federating SHGs and indicated that federations can become financially viable if the initial investment in promotional costs is made. The cost of promoting KVK, typical of the federations that have been promoted by DHAN, further demonstrates that this investment is affordable. As was mentioned earlier, however, cost coverage is just one of the factors that makes an organization sustainable. This section and Section Seven discuss other factors that affect sustainability of SHG federations.

6.1 Governance

Illiteracy and insufficient organizational experience constrain the governance capacity of federation board members. These constraints, though inherent to being an organization of poor women - since both poverty and gender limit chances of being literate and involving in public activities, affects the ability of the governing body to effectively perform oversight functions. One example of this weakness was the insufficient understanding of auditing expressed by the board members interviewed; members perceived auditing more as a means to check for accounting errors rather than as a check on management.

The promoter organizations are attempting to address this issue by investing in capacity building of the board members. But given the enormity of the challenge, capacity building needs to be supplemented with other measures. Inviting educated and respected individuals in the society to serve on the board (if needed, as non-voting members) and having advisory boards composed of such individuals are some measures that could be considered. The performance of elected board members from the SHGs will also improve if they are on the board long enough to learn from experience. Too short tenures are a problem in one of the federations studied, where officeholders change every year. Giving board members (or at least the Chairpersons) sufficient financial compensation to permit them to spend more time on federation-related duties would also improve the effectiveness of governance.

6.2 Staffing

In two of the SHG federations studied, chief executives of the federations are also staff of the promoter organizations[23]. DHAN, the promoter agency in both cases, justifies this practice on the basis that its federation model requires managerial staff of professional caliber that federations, -being new organizations with limited social identity and resources– would not be able to attract. SMMS has its own employee in the chief executive position, but for the new locations to which the program is being expanded, SERP is recruiting university graduates on three-year contracts. These persons are expected to promote new SHGs and once federations are formed, take over as its chief executives. SERP also expects these individuals to become employees of the federations at the end of this period. SERP justifies its strategy in light of its plans to expand rapidly.

Though the skills required for effectively managing SHG federations and the need to expand rapidly justify the strategies adopted by DHAN and SERP, these strategies do affect the development of SHG federations as independent organizations. On one hand, the chief executives of the federations have dual reporting requirements – to the federation board and the senior staff at the promoter organization. On the other hand, the federation boards find it difficult to set the agenda for their chief executives.

The ability of federations to hold the chief executives accountable does increase when federations start paying chief executive salaries – SPMS and other older federations promoted by DHAN already do this. In the case of SMMS, however, it was observed that the board members felt inhibited in questioning the chief executive though he is an SMMS staff and the federation pays his salary. This inhibition arose since the current federation chief executive has been involved all through the process of federation development, and hence, is perceived more as benevolent do-gooder than as an employee. It follows that, even when the model of seconding staff from promoter organization is followed, when the federations are formed, new staff are deputed to take over as chief executives rather than continue with the person involved in SHG and federation promotion. Organizations promoting SHG federations should also study the CDF strategy of not placing their staff in executive positions in the thrift cooperative federations, though the cooperative federations do perform limited functions compared to the SHG federations.

6.3 Processes And Systems

Good systems provide efficient ways to carry out regular functions of an organization. The systems should be cost effective and easy to use, while ensuring sufficient controls and efficiency. All the federations studied need to improve their systems and processes. Risk management, repayment monitoring and financial management are some of the systems to which the federations should pay increased attention. Though delinquency does not seem to be a significant problem in any of the federations, inability of the federations to produce an accurate cumulative repayment performance for SHGs / TCs is a weakness that needs to be addressed immediately. Sound processes contribute equally to effective organizations. Governing body meetings, annual general body meeting and annual staff performance review are some key organizational processes. Governing bodies and staff need to perceive the importance of these processes, although in some cases too much participation (such as participation of all staff in the governing body meetings in SMMS) undermines the functionality of these processes.

Promotional agencies should also devote increased attention to this area to improve the operational efficiency of the federations and make the organizations sustainable. Development of quality systems and processes would also facilitate replication. Regular system audits within the federations and adoption of best practices would hasten the development of sound organizational practice. The promotional agencies should facilitate this process, and promote enhanced mutual learning among the SHG federations so as to avoid duplication of effort. At the same time, processes and systems should be designed in such a way that federations do not start micro-managing the affairs of the SHGs.

6.4 Financial viability and accountability

Financial viability is a pre-requisite to a sustainable organization. The analysis in Section Five suggests that SHG federations can be viable if the initial promotional investment is made. In the long-term, financial viability in a member-owned organization depends on ability of the members to bear all costs without the external support. The financial self-sufficiency ratio estimated in Section Five suggests that the SHGs in the two federations, for which the analysis was done, have this capacity, or would soon have it.

While the bottom line is whether SHGs can pay for the services received from the federation, the accountability of the federation to the SHGs is also influenced by how the SHGs pay for services. SHG federations that earn income primarily from service charges or fees rather than as interest spread are likely to be more accountable to their members. When SHG federations earn income primarily from interest spread, SHGs tend to see the federation more as a lending agency, and less as ‘their’ federation. Furthermore, since federations are not the primary source of funds for SHGs, dependence of SHGs on the federation is bound to shrink as the SHGs’ own funds and the access to banks increases.

Recognizing the advantage of such a system, all federations promoted by DHAN Foundation are shifting to such a system. The SHGs pay service charges to the federation in proportion to their share in cumulative loan portfolio of all SHGs. This system, on the one hand forces the federation to justify their expenses to the SHGs, on the other hand, makes it clear to the SHGs that they need to bear the costs of the federation, if the services rendered are useful. SVAWTC has in effect largely been always following such a system since it earns its income primarily from audit fees since lending to thrift cooperatives is marginal in thrift cooperative federations.

6.5 Retaining Core Competency While Diversifying

Financial programs require very different management processes than non-financial ones, a point that justifies the question of whether microfinance services can and should be combined with other non-financial services. Nonetheless, the increasing recognition of the limits to poverty reduction capacity of microfinance justifies MFOs providing other complementary services needed for poverty reduction. Furthermore, in a member-based organization, the successful provision of microfinance naturally leads to a demand for other services. All federations in this study except SVAWTC provide non-financial services in addition to microfinance services. Under the new World Bank-funded DPIP project, which SERP would be implementing, the federations would also channel resources for investment in community infrastructure.

While it is desirable that the SHG Federations take up new activities that benefit their members, it might prove counter productive for them to do so before they have evolved fully as microfinance organizations, and have sufficient resources and capacity (in terms of both governance and staff) to carry out these additional functions. There is also a danger that promoter agency’s attention is diverted to developing the new functions before the SHGs and the federations sufficiently established. Hence, it is advisable that SHG federations establish their competency as Microfinance MFOs before diversifying into other activities.
7.0 Issues And Challenges: External

7.1 Stakeholder Perceptions On The Role And Capacity Of SHGs

Banks and governments are two crucial stakeholders of the SHG-based microfinance model. Despite the evidence of it being a profitable lending activity, most banks continue to perceive SHGs just as another means to extend loans to the poor, i.e. primarily as a charitable activity. Governments, as evidenced by the introduction of SGSY program and involvement of the District Rural Development Agencies in SHG formation, perceive SHGs as an easily replicable mechanism for poverty eradication.[24] Unfortunately, neither the Banks nor the government seems to perceive SHGs as micro-organizations that need to become viable and sustainable if they are to play a significant role in poverty reduction.

On the other hand, many of the NGOs involved in SHG promotion seem to believe that SHGs are sustainable even if they are not federated, although this proposition seems unlikely based on the analysis done for this study. These NGOs argue against federating SHGs citing the possibility of federations leading to bureaucratization, and loss of the advantages to SHGs in being informal, grassroots groups. That the detractors of federations fail to recognize the many benefits derived from the model indicates a lack of awareness of the role of federations.

Thus, significant efforts are needed to focus the attention of all SHG stakeholders around viability and sustainability of SHGs. Further studies on the utility of SHG federations and discussion among the stakeholders of study results can be a starting point of these efforts.

7.2 The Role Of NABARD

NABARD has played a crucial role in the development of SHG microfinance model through its promotional activities and refinancing activities of the SHG-Bank Linkage program. But NABARD too has also been slow to recognize the need for sustainability of SHGs. It has been focusing, perhaps justifiably given the slow initial progress of the program, on increasing the outreach of SHGs and strengthening their linkage with the banking system. However, given the exponential increase in the program in the last two years and similar trends observed in other microfinance programs around the world, its growth can be expected to be rapid in the coming years.[25] The focus then would have to shift on sustainability rather than outreach. Interestingly, both the Task Force on Microfinance, and NABARD’s projections, envisage approximately 2000 federations in the process of the SHG-Bank Linkage program reaching one million SHGs by 2008.[26] Nonetheless, NABARD is yet to take a pro-active role in the promotion of SHG federations.

NABARD needs to shift from exclusively focusing on outreach and refinancing, to ensuring the sustainability of the SHG model. Measures NABARD may consider to strengthen the federations, as part of these efforts, are:

a) Creation of a database of SHGs and SHG federations, b) Facilitation of mutual learning among the promoter agencies and federations by funding workshops and study visits to the federations, c) Funding for capacity building and training of federation staff and board members, and d) Commission process documentation and independent assessments of the different federation models.

7.3 Capacity Of Promotional Agencies

Limited organizational capacity of promoter organizations is a major constraint in federating SHGs. Promotion of federations requires institution-building skills beyond that needed for the promotion of SHGs. Although NGOs have been the primary agencies involved in promoting SHGs and SHG federations, there are very few NGOs that have the skills to promote federations. Of late, many government agencies have also become involved in forming SHGs and their federations though they lack the grassroots organizing skills needed for this. Some governments have sought to overcome this limitation by creating special agencies such as SERP.

The limited capacity of the potential promoter organizations calls for significant investment to improve this capacity. This might require both generating the required resources and developing new organizations that can build the skills of organizations involved in promoting SHGs and their federations. An interesting effort in this direction is the creation of Mahila Abhivrudhi Society, Andhra Pradesh (APMAS) in 2001[27]. APMAS plans to work on quality assessment of SHGs and SHG federations, and quality enhancement of SHGs, SHG federations and SHG promoter organizations.

While the formation of APMAS in Andhra Pradesh is most apt given that a large proportion of existing SHGs and SHG federations are in this State, similar efforts are needed in other States too so as to ensure the quality of SHGs and SHG federations at the promotion stage itself. Capacity building of the promoter organizations is the most crucial component among the services that can provided by such organizations since the capacity of the promoter organizations primarily determine the quality of SHGs and SHG federations. Additionally, State governments might avoid involving District Rural Development Agencies and its regular departments in SHG promotion.[28] While promoting special agencies such as SERP is a better alternative, the performance ability of such agencies will depend on the autonomy available to their management and governing boards.

7.4 Legal Framework:

SHGs are not registered and as such do not have body corporate status. Bank officials cite this as one reason for the slow initial growth of lending to SHGs, and expect it to be a constraint as repeat loans to SHGs become larger. SHG federations are mostly registered under legislation governing charitable societies. Though the mutual benefit nature of the SHGs make them more suitable for being registered under cooperative laws, this has not been done because the regressive nature cooperative laws (entailing excessive government control). The Companies Act, the federal law governing corporate entities, has too many statutory requirements that make it difficult to incorporate SHG federations under it.

Given this background, the cooperative laws recently enacted in seven states in the country offer an interesting legal option.[29] These laws grant functional autonomy to cooperatives not receiving funds from the government, and the regulatory powers of the government are limited to approaching independent tribunals in case of a violation of the norms. Some SHG federations in Andhra Pradesh have already registered under this new law. There are, however, some constraints in SHG federations incorporating as a Mutually Aided Cooperative Society (MACS). First, as of now the law has been enacted only in seven states, though efforts to get it enacted in other states are in progress. Second, the Act permits only individuals or cooperatives to become members of a MACS; SHGs cannot become members. Thus, SHG members, rather than the SHGs themselves, are the members in SHG federations that have registered as MACS. In this scenario, the SHG federation is no longer a federation of SHGs but rather a large primary cooperative.

SMMS is planning to register their Village Organizations as MACS with all members of SHGs in the village as members in the MACS. If this is done, the Mandal federations can be registered as federations of the village level MACS (though SAPAP is not currently considering this). The first approach is easier but it is unlikely that such a large MACS would have either member participation and control of SHGs or the other strengths of a federation. Under the second option, the MACS would be of a smaller size and the federation structure could be retained if Mandal level federation of VOs is also registered as a MACS. But SHGs would not have a legal character and would have to remain independent entities with individuals as members of both SHGs and village level MACS. Between the two options, registering VOs as MACS seems to a better alternative. In the long run, if banks come forward to lend to the MACS, SHGs could continue as unregistered groups within MACS. This would further reduce the transaction costs of both the SHGs and banks.
8.0 Conclusions

The SHG-based microfinance model that combines the strengths of small and informal groups with those of NGOs and formal financial institutions has emerged as the largest form of microfinance in India. SHGs involved in microfinance reach over six million families. They have received more than Rs.4.81 billion (US$102.3 million) in loans from commercial banks and other financial institutions. In spite of these successes, the small size of SHGs, and cost subsidization by promoter organizations and NABARD has led critics to question the sustainability of the model.

SHG federations offer a means to sustain SHGs. This study finds that SHGs federations help SHGs internalize their costs, and thereby make them financially viable. In contributing to their sustainability, SHG federations provide SHGs with an organizational identity, generate economies of scale, and provide value added services. SHG federations also reduce the transaction costs of lenders and other service providers, enhance local human capital, and reduce the cost of promoting SHGs. Some limitations to promoting more SHG federations are insufficient clarity regarding the role of SHGs among stakeholders, insufficient capacity of the promoter agencies and an unclear legal framework.

Some actions that stakeholders might take to address these crucial issues include:

1. Shifting focus to viability and sustainability of SHGs rather than increasing outreach, 2. Expanding the knowledge base of the role of SHGs and SHG federations, 3. Increasing investment in building capacity of SHG federations and SHG promoter agencies, 4. Developing a suitable legal framework for SHG federations.

Issues that warrant further study, to provide practitioners, donors and policy makers with a better understanding of SHG federations include:

1. The effect of federating on transaction costs and default rates, and on loan pricing by formal financial institutions; 2. The effect of federating on SHG promotional costs, and outreach of the SHG-Bank Linkage program; 3. The cost benefit analysis of federating; 4. Analysis of SHG federations compared to other federated models in microfinance– village banking and credit unions. 5. Study to assess impact of SHG federations on community social capital. 6. Analysis of potential legal options to enhance the functioning of the system.

Appendix 1: Financial Analysis Of Selected Federations

A: Shadow Prices

|Particulars |98-99 |99-00 |00-01 |
|Annual Inflation rate |11.0% |6.0% |3.0% |
|Inter-bank lending rate |9.0% |8.0% |7.0% |
|Prime rate paid by commercial bank borrowers|13.0% |12.5% |12.0% |
|Marginal commercial rate available to MFI |15.0% |15.0% |15.0% |
|Exchange rate (LC/US$) | 42.5 | 43.5 | 46.0 |

B: Financial Analysis Of The Federations -KVK

i. Actual Prices For KVK All in %
|Particulars |98-99 |99-00 |00-01 |
|Interest paid on Savings |12 |12 |12 |
|Cost of loans from bank |12.5 |12.5 |12.5 |
|Cost of loans from CDA |18 |18 |18 |
|Cost of funds for housing |13.5 |13.5 |13.5 |
|Interest charged on general loans |24 |24 |24 |
|Interest on housing loans |15 |15 |15 |

ii. Profitability Of The Federation

|Particulars |98-99 |99-00 |00-01 |
|Operational Income | 212,599 | 569,812 | 1,442,600 |
|Financial Expenses | None | 212,448 | 804,470 |
|Administrative Expenses | 161,579 | 335,272 | 613,468 |
|Expenses borne by DHAN | 163,495 | 362,560 | 175,992 |
|Total operational expenses| 325,074 | 910,280 | 1,593,930 |
|Operational Surplus / Loss| (112,475) | (340,468) | (151,330) |
|Operational self |65% |63% |91% |
|sufficiency | | | |

iii. Profitability Of The SHGs

|Particulars |98-99 |99-00 |00-01 |
|Operational Income | 1,087,087 | 1,911,642 | 3,815,099 |
|Financial Expenses | 403,804 | 1,002,791 | 2,150,691 |
|Administrative Expenses in Groups | 237,428 | 700,976 | 1,260,782 |
|Administrative Expenses in CDAs | 139,457 | 247,011 | 353,525 |
|Administrative Expenses in apex | 22122 | 88261 | 259,943 |
|federation | | | |
|Administrative Expenses borne by DHAN | 163,495 | 362,560 | 175,992 |
|Foundation | | | |
|Total Operational Expenses | 966,306 | 2,401,599 | 4,200,933 |
|Operational Surplus / Loss | 120,781 | (489,957) | (385,834) |
|Operational self sufficiency |112% |80% |91% |
|Adjustments |62636 |30566 |27968 |
|Financial self sufficiency |106% |79% |90% |
|FSS if inflation and cost of funds |102% |75% |86% |
|increase by 3% | | | |

C: Financial Analysis Of Federations -SPMS

i. Actual Prices For SPMS All in %
|Particulars |98-99 |99-00 |00-01 |
|Interest paid on savings |12 |12 |12 |
|Cost of loans from bank |12.5 |12.5 |12.5 |
|Cost of loans from federation |18 |18 |18 |
|Cost of funds for housing |13.5 |13.5 |13.5 |
|Interest on general loans |24 |24 |24 |
|Interest on housing loans |18 |18 |18 |

ii. Profitability Of The Federation

|Particulars |98-99 |99-00 |00-01 |
|Total Income | 1,086,451 | 1,453,396 | 2,647,389 |
|Total Expenses | 1,113,837 | 1,423,386 | 2,375,089 |
|Profit / Loss | (27,386) | 30,010 | 272,300 |
|Operational Income | 1,024,379 | 1,387,413 | 2,498,524 |
|Financial Expenses | 331,813 | 563,226 | 1,283,772 |
|Administrative Expenses | 740,409 | 744,371 | 909,766 |
|Expenses borne by DHAN | 80,000 | 100,000 | 120,000 |
|Total operational expenses | 1,152,222 | 1,407,597 | 2,313,538 |
|Operational Surplus / Loss | (127,843) | (20,184) | 184,986 |
|Operational self sufficiency |89% |99% |108% | iii. Profitability Of The SHGs

|Particulars |00-01 |
|Operational Income | 5,348,795 |
|Financial Expenses | 3,673,235 |
|Administrative Expenses in SHGs | 167,987 |
|Administrative Expenses in federation | 909,766 |
|Administrative Expenses borne by DHAN | 120,000 |
|Total Operational Expenses | 4,870,988 |
|Operational Surplus / Loss | 477,807 |
|Operational self sufficiency |110% |
|Adjustments |256,974 |
|Financial Self Sufficiency |104% |
|FSS if inflation and cost of funds |98% |
|increase by 3% | |

Notes:
a) Operational Income does not include donations, sundry, Techno-managerial service fee, bank interest
b) Operational Self Sufficiency = Operational Income / (Operational Expenses +Financial Expenses)
c) Financial Self Sufficiency = Operational Income / (Operational Expenses +Financial Expenses + Adjustments)
d) Adjustment for inflation done by multiplying capital fund, deposits in clusters and deposits in federation by the rate of inflation.
e) For adjustment of cost of funds, 15% market cost was assumed. This is the rate used by Basix, a for-profit MFO. This was also the estimated interest rate required to operate profitably according Microfinance advisor for ICICI, a large private sector bank involved in microfinance.
f) Adjustment has not been made for housing loans as it is assumed that if the cost of funds to SHGs increases to 15%, lending rate to SHG members would be increased proportionally.
g) At the federation level, operational Expenses do not include loan losses as both federations maintain 100 % loan recovery rate. At SHG level, a separate loan loss reserve (Rs.361000 in SPMS and Rs.208000) is maintained, which the management claims is large enough, to cover any loan losses.

Appendix 2: Organizational Structure and Systems In The Federations

1.0 Organizational characteristics

1.1 Structure

There are three distinct organizations in KVK and SMMS, and two in SPMS and SVATWC (Figure1). In addition, SVAWTC and SPMS have other informal structures for easier operation. SVAWTC has joint liability groups (groups of five that are jointly liable for the loans of each individual in the group) within the thrift cooperatives. SPMS is organized into three regions and into branches within the regions. But these are not autonomous organizations as are the CDAs and VOs.

The legal character of the federations and the primary organizations also vary. SHGs are not registered under any law and hence do not have body corporate status. The thrift cooperatives are registered as MACS. The CDAs and VOs are also not registered under any law, but SMMS is considering registering the Village Organizations as MACS. Of the apex agencies, KVK is registered as a Charitable Trust, SPMS as a Charitable Society, SVAWTC as a MACS, and SMMS is not registered[30].

1.2 Governance

Governance in SHGs is primarily the responsibility of all members since all members decide jointly on most issues (loans to members, applying for bank loans, membership in federation, expenses, etc.). The SHG officeholders facilitate group meetings (during which savings and loan are made), represent the SHG at the general body meetings of the federation and on transactions with banks, communicate information from the federation to the SHGs, and resolve conflicts among members. The thrift cooperatives have an executive committee of 12 members with President, Secretary, and Treasurer elected from among them.

In the federations, governance is shared between the general body and governing body. In SPMS, KVK and SVAWTC, the general body meets once a year, but in SMMS it meets every month. The governing body meets at least once a month in all the federations. In SPMS and KVK, the governing body members can remain in the board for a maximum of three years on being elected; they can however be reelected again. In SVAWTC, a staggered election process is followed with one third of members being elected every year. The position of the President, Secretary and Treasurer has to compulsorily change every year in SMMS. This design feature has been adopted to provide opportunity for more people to hold leadership positions and prevent problems of entrenched leadership. However, the short period is inadequate for the leaders to learn their roles and start performing functions. Figure 1: Structure Of The Four Federations And Fund Flow

SPMS SVAWTC

KVK SMMS

Table 4: Structure, Staffing And Funds In The Federations

|PARTICULARS |SPMS |KVK |SMMS |SVAWTC |
|Structure |
|Members |SHG |SHG |VO |TC |
|General Body |2 from each SHG |3 from each SHG |3 from each VO |2 from each TC |
|Governing Body |28 members |16 members |14 members |7 members |
|Staff |
|1. SHG / TC |Accountant – part time |Accountant – part time |Accountant – part time |Accountant –Full time |
|2. CDA / VO |NA |Cluster Associate |Animator / Activist part |NA |
| | | |time | |
|3. Apex Federation |
| Managerial |Three |Two |One |None |
| Accounts |Two |Five |One |One |
| Others |Four |Seven |Nine |Nil |
|Membership Contributions |
|Apex Federation |Rs.100 paid annually by |Rs.200 per SHG member one |Rs.100 per SHG paid |5% of deposit in the TCs |
| |all SHG members |time plus monthly service |annually | |
| | |charges | | |
|CDA / VO |Not Applicable |Rs.1500 per SHG one time |Rs.10 per SHG member per |Not Applicable |
| | |deposit plus monthly |month | |
| | |service charges | | |

Notes: a) All contributions in SMMS and service charges in KVK are non returnable. All other contributions are returnable. b) Service charges is the main form of cost coverage in KVK, where all the costs of the apex federation and CDAs are shared by the SHGs in proportion to their total loan portfolios.

1.3 Staffing

The SHG federations employ more staff than the thrift cooperative federation. As described earlier, the managerial staffs in SPMS and KVK are employees of DHAN. However, SPMS pays the salary of the deputed DHAN staff too. The SHG federations have separate staff for accounts and development functions, though the staffs in charge of development also monitor accounts periodically and assist in audit preparation. In SMMS, all the staffs are locally recruited, but their salaries are paid from SAPAP program funds. Recruiting and training of local staff is a major function of the promoter organizations. SVAWTC has a very lean staff structure, with just one full time employee. This employee maintains the books of the federation and audits the accounts of the thrift cooperatives.

1.4 Equity And Other Funds

Capital for KVK comes from one-time deposits bySHGs (that may be taken back only if the SHGs withdraw from the federation) and grant funds received from DHAN. Member deposits in KVK are in lieu of equity, as equity is not permitted in non-profit organizations in India. Source of funds are similar in CDAs. In SPMS, capital comes from an initial capital grant from the Ford Foundation and annual deposits from the SHGs. SVAWTC has member equity and mandates that all its member cooperatives keep 5% of their deposits with the federation. Grant funds from UNDP are the primary source of capital for SMMS; VOs receive one time deposits from SHGs. Accumulated profits are a common source of capital in all the federations.

Operational income in KVK comes from service charges paid by SHGs. The proportion of the costs (of both the apex federation and CDAs) to be borne by each SHG is determined in proportion to the total loan portfolio available with each SHG. Interest income is the major source of income for SPMS and SMMS. SPMS lends at 12% per annum to VOs, who in turn lend it to SHGs at 18% per annum. SPMS charges 18% on general loans and 15% on housing loans. Audit fee and interest are the major income sources for SVAWTC.

2.0 Infrastructure And Systems

2.1 Infrastructure

All four federations have their own offices; so do the CDAs in KVK and VOs in SMMS. SPMS has offices for its branches, and all the thrift cooperatives have offices in the villages. All federations have telephones, and SPMS has Internet access. KVK and SPMS have computers, and SMMS provides vehicles (motorcycles) for its employees.

2.2 Savings And Lending Process

A unique feature of SHG banking is that members make all payments- savings, loan repayment, insurance premium, etc. - during the weekly or monthly group meeting, even if some of them are to be transferred to the federation. The loan repayments made by members include those on loans issued out of group’s own funds as well as that from outside sources. This practice of not differentiating between the group’s own funds and external funds is considered crucial for good repayment performance. Loans are issued during the regular meeting or in a specially convened meeting, when the funds from the banks or federations are received after the regular meeting day.[31]

In SHGs, members request loans during the weekly/monthly group meeting. The group, based on the lending norms of the SHG and purpose of the requested loan, accepts the request if there is a consensus. If the requested loan is small or urgent, it is given out from the collections during the day after money for payment to the federation or the bank has been set apart. Larger loan applications are sent to the federation (CDA/VO), which decides on the request based on its lending criteria. In the thrift cooperatives, members submit loan applications to the cooperative after getting the signature of all members of the joint liability group, and the cooperative then decides on the loan during its monthly executive body meeting.

2.3 Accounts Keeping

All the autonomous organizations in the federations (identified in Figure 1) maintain separate accounts. However, given the relatively small volume of transactions at an SHG and CDA/VO, they do not have full time accounts staff. KVK and SPMS have an accountant for 15 to 20 SHGs (they are part time staff and their salaries is shared among these SHGs); KVK has an accountant for four to five CDAs. SHGs and VOs in SMMS hire their own accountants locally. There are fulltime accountants for the federation in all the federations, and the TCs also have fulltime accountants. In KVK, a certified external accountant audits the accounts of all the levels annually. SVAWTC also does the same, while SPMS does so only at the federation level. SMMS carries out an annual internal audit of the primary groups, while external auditors audit only funds received from UNDP.

2.4 Resource Mobilization

KVK and SPMS give more attention to resource mobilization than the other two federations. SMMS started out with a large capital grant from UNDP to be used for lending to the SHGs. SVAWTC does not receive external funds, as CDF does not encourage this on the premise that self-management of the cooperatives and their federations would be compromised by doing so.[32] The principle of equal thrift and the loans being proportional to the thrift also serves as a disincentive for increased savings by those who can afford this. Programs for mobilizing fixed deposits and specific purpose savings have not been very successful in any of the federations (they are relatively more successful in SPMS).

KVK and SPMS make multiple efforts to mobilize resources – both internally and from external sources. Internally the federations organize savings campaigns for increasing the regular savings and popularizing product-linked savings. The primary mode of external resource mobilization in KVK is from the commercial banks through the SHG- Bank Linkage program, though the recent loans (especially the housing loans) received by KVK have significantly increased the federation’s share in total SHG liabilities.[33] In SPMS, the primary source of external funds is the federation, since SHGs have started receiving loans directly from banks only recently.

2.5 Risk Management

In the SHG and thrift cooperative federations, this task is performed at multiple levels. In the SHG federations, all the structures have their own lending norms that incorporate risk assessment. Ideally all the structures that lend independently assess the risk on their immediate lending; i.e. the apex federation only assesses the risk of its lending to VO/CDA/SHG and not of the SHG members to whom the SHG lends in turn. Banks that lend to the SHGs under the SHG-Bank Linkage program adopt a similar approach.[34] In practice, however, the federations (apex as well as CDA/VO) also appraise some of the member loan applications. The federations attribute this to limited capacity within most SHGs to carry out this assessment, and the increased diligence needed when external funds are involved. The Cluster Associates in KVK and SPMS and Cluster Volunteers in SMMS are specifically trained to do this.

KVK maintains a risk fund (equivalent to a loan loss reserve) from a fee raised on all loans issued by the SHGs. The SHGs pay a similar fee on the loans they receive from the CDAs, and the CDAs pay the same on the loans received from apex federation. Interestingly, SHGs also pay a similar fee to CDAs on loans received from the banks; the reason cited is that the federation is responsible for these loans, although it does not guarantee them. CDAs use the fund for lending purposes, but SHGs do not; SHGs keep it in saving deposit in their bank accounts. In SPMS, only the federation collects has a risk fund (collected by SHGs from the specific members who receive loans from SPMS funds received by the SHGs). SVAWTC and the thrift cooperatives create a loan loss reserve from the annual profits.

None of the federations maintain information on their portfolio at risk. The federations perceive the current systems of repayment monitoring and lending norms to be sufficient means of risk management, though they agree that the repayment monitoring needs further improvement.

2.6 Repayment Monitoring

All federations have a repayment monitoring system. A repayment schedule (standardized in SMMS and SVAWTC, and flexible – members specify the schedule within the limits set by the lending norms- in KVK and SPMS) is specified at the time of making the loan. Collection against this schedule is monitored, and actions such as penalties, stopping further loans, etc. are taken in case of delinquency. The federation interferes if an SHG is unable to rectify the problem -through special meetings conveyed by the staff and board members of federation, visits by officeholders of well-performing groups, personal counseling of individual member groups, etc. The loans are rescheduled when the default is perceived to be due to genuine reasons. KVK and SPMS have written down lending policies that prescribe penalties for delinquency, but adherence to the policies is not very rigid, and there is difficulty in getting all the SHGs to fully adopt the lending policy.

KVK, SPMS and SMMS monitor repayment performance of loans by repayment rate, i.e. the percentage of current expected repayments to actual repayments. In any given period (month or quarter), overdue balance gets added to next period’s expected loan repayment. This is a more rigorous measure than that followed by many MFOs; Grameen consider a loan overdue only after it has been delinquent for a year, WWF expresses repayment rate as percentage of cumulative demand to cumulative collection. KVK also prepares a report of the overdue amounts categorized according to the time duration for which they have been overdue. SVAWTC calculates number and amounts of installments that have been defaulted. The scheduling of the loans, accuracy of calculation and consolidation of the information at the federation level needs improvement in all federations.

In spite of the weakness in the availability of information, the federations do not seem to be having major problems of loan defaults because of the peer pressure from within the SHGs as well as the existence of federal structures that supports the SHGs when they have repayment problems. The group mechanism also enables the SHG to bear some loan losses while maintaining better repayment performance with its external lenders. However, inability of federations to produce an accurate cumulative statement on repayment performance is a weakness that requires immediate attention.

2.7 Financial Management

None of the federations have given adequate attention to financial management. This is partly because loan demand exceeds supply, and shortage of funds, rather than idle cash, is the main problem. Nonetheless, the federations that receive external funds do have surplus cash problem since cash flow from the external agencies is difficult to predict accurately. Given the large amounts of loans received by KVK and SPMS, even a small period during which the funds are idle causes significant financial losses. Even in the absence of external loan funds, insufficient attention to financial management might be causing loss of interest income in SVAWTC and SMMS due to funds remaining idle for periods between the members’ repayment and issue of new loans.

2.8 Review, Planning And Budgeting

In KVK, the review and planning process is done intensively at the cluster level and consolidated at the federation level. The SHG officeholders participate in the cluster level review and planning meetings, and plan on behalf of the SHGs. SMMS facilitates preparation of micro-investment plans at the SHG level. The preparation of the plans in the SHGs and its consolidation at the VO level is a prerequisite for utilization of the UNDP grant funds. Budgeting is done to a limited extent only in SVAWTC. KVK, SMMS, and SVAWTC also prepare annual reports of their activities. The practice of printing the annual reports and making them to all member cooperatives and the public is a practice that needs to be adopted by all

Appendix 3: The Promoter Agencies

a) Development Of Humane Action (DHAN) Foundation, Madurai: Promoter of SPMS and KVK

DHAN Foundation is primarily involved in promoting community-based organizations in microfinance and irrigation water management in rainfed-tanks. It works in the three southern states of Tamil Nadu, Andhra Pradesh and Karnataka as well as in the union territory of Pondicherry. It is also involved in microfinance and tank management policy at the national level. DHAN Foundation was promoted as a spin off organization from PRADAN in 1998.

DHAN has greatly refined the SHG federation model. It has promoted more than 5000 SHGs (with over 80,000 members) and 20 federations and is in the process of promoting federations in 30 more blocks. The SHGs have Rs.106 million (US$2.6 million) in savings and have obtained Rs.169 million (US$ 3.69 million) as loans from formal financial institutions. The federations have around 200-250 SHGs as members. DHAN’s federation model is a nested one - all SHGs in a block are members in a block level federation (KVK) and SHGs in a cluster of villages are members in Cluster Development Associations (CDAs). The federations employ staff at both the CDA and apex federation levels and the federations are involved in financial intermediation in addition to other tasks.

DHAN is represented in many national level committees. It was a member of the microfinance task force appointed by the Reserve Bank of India in 1998 to help define a national policy for microfinance. It regularly conducts capacity building workshops for officers of commercial banks on SHG-Bank linkage.

a) Society for Elimination of Rural Poverty (SERP), Hyderabad: Promoter of SMMS

SERP was promoted as an autonomous society by the Government of Andhra Pradesh to implement projects for poverty eradication. Among other projects, it implements the World Bank supported District Poverty Initiatives Project (DPIP) that is scaling up the SAPAP project. The DPIP is being implemented in 180 mandals of the state. The society is chaired by the Chief Minister and has other eminent members of society in its governing board. SERP continues to implement the SAPAP project that has been extended to 2003.

As of May 2001, the SAPAP project had 5,201 SHGs with 74,777 members. The total savings in the SHGs were more than Rs.81 million (US$ 1.78 million). The project has received grants totaling Rs.75 million (US$ 1.60 million), that is used as seed capital for the federations and has mobilized more than Rs.52 million (US$ 1.11 million) in loans.

b) Cooperative Development Foundation (CDF), Hyderabad: Promoter of SVAWTC

CDF, earlier known as Samakhya, has done pioneering work in the cooperative sector. It is involved in promoting cooperatives, capacity building of cooperatives, and in advocacy work to free cooperatives from government control. It has promoted different types of cooperatives – multi-purpose, rice, seed, dairy and thrift. Among the various cooperatives it has promoted, it has been most successful in thrift cooperatives. It has promoted more than 359 thrift cooperatives with over 75,000 members. Forty-six federations of thrift cooperatives have also been promoted by CDF. The cooperatives manage more than Rs.137 million (US$ 2.91 million) in own funds.

The advocacy work done by CDF has resulted in a new cooperative law (Andhra Pradesh Mutually Aided Cooperatives Act -APMACS Act 1995) that has the potential to dramatically alter the cooperative sector in the coming years. Similar Acts have since been enacted in seven more states.

Table 5: Microfinance Program Profile Of The Promotional Agencies

In Million US$

|Particulars |DHAN |SERP |CDF |
|Clientele | | | |
|Members |80263 |67,226 |76681 |
|Primary Groups |5194 |5000 |359 |
|Average membership |15 |13 |214 |
|Federations |20 |20 |46 |
|Savings | | | |
|Savings |2.60 |1.78 |2.07 |
|Average Savings |29 |26 |27 |
|Reserves and surplus |0.60 |0.26 |0.36 |
|Loans | | | |
|External loans to date |3.69 |1.11 |None |
|Total credit generated |N.A. |16.90 |3.35 |
|Loan portfolio at primary level |4.51 |N.A. |2.36 |

N.A.: Not Available

Appendix 4: Organizations And Individuals Met As Part Of The Study

Federations:

1. Governing Board members and Staff team, Community Development Society, Alappuzha
2. Governing Board members and Staff team, Community Development Society, Malappuram
3. Governing Board members and staff team, Kurinji Vattara Kalanjium, Alanganallur, Tamil Nadu
4. Governing Board members and Staff team, Sanghamitra Mandal Mahila Samakhya, Hindupur, Andhra Pradesh
5. Governing Board members and Staff team, Sri Padmavathy Abyudaya Sangham, Tirupati, Andhra Pradesh
6. Governing Board members and Staff team, Sri Viswabharati Association of Women’s Thrift Cooperatives, Warangal, Andhra Pradesh
7. Governing Board members and Staff team, Association of Men’s Thrift Cooperatives, Warangal, Andhra Pradesh

Promotional Agencies:

1. Ms. Jaya Arunachalam, President, Working Women’s Forum, Chennai
2. Mr. K.T. Jose, Chief Executive, Kudumbasree Program, Trivandrum, Kerala
3. Mr. Narendar, Program Leader, Development of Humane Action Foundation, Madurai
4. Mr.Vijay Mahajan, Executive Director, Basix, Hyderabad
5. Mr. K. Raju, Chief Executive, Society for Elimination of Rural Poverty, Hyderabad
6. Ms.Vidya Ramachandran, Mysore Resettlement and Development Agency, Bangalore
7. Mr. Rama Reddy, President, Cooperative Development Foundation, Hyderabad

Others:

1. Mr. Bikram Duggal, ICICI, Mumbai
2. Mr. R. Prabha, DGM, Canara Bank, Bangalore
3. Mr. Ramachandran Nair, Deputy General Manager, NABARD, Mumbai
4. Mr. C.S. Reddy, CEO, Mahila Abhivrudhi Society, Hyderabad
5. Mr. K.M. Thiagarajan, Advisor - Microfinance, ICICI (Ex-Chairman,Bank of Madurai

Bibliography

Basix, “PREM – A case study”, unpublished paper, Hyderabad, India

Basix, “Desjardins: The cooperative movement of Quebec, Canada,” Hyderabad, India

CDF, 1997, “Member Participation rates in New Generation Thrift Cooperatives around Warangal Town in Andhra Pradesh,” Hyderabad, India

Eschborn, Renee Chao-Beroff, 1999, Self Reliant Village Banks, Mali (Case Study), CGAP, Washington DC

FWWB, 1997, “India’s emerging SHG Federations”, Ahmedabad, India

Harper, Malcom. “Why are commercial banks not entering the microfinance market?” Paper presented at Banker’s Institute of Rural Development, Lucknow workshop, ‘Kick-starting Microfinance, a Challenge for the Indian Banks’

Kabeer, Naila, 2001, “Conflicts over Credit: Re-evaluating the Empowerment Potential of Loans to Women in Rural Bangladesh”, World Development, Vol.29, No. 1, pp. 63-84.

Puhazhendhi.V, 2000, “Evaluation Study of Self Help Groups,” NABARD, Mumbai.

RBI, 1999, “Task force on supportive policy and regulatory framework for microfinance in India”, Mumbai, India

Sen, Amartya, 2000, Development as Freedom, Anchor Books, New York.

World Bank, 2001, “Microfinance in India: Issues, Constraints, and Potential for Sustainable Growth”, Washington, DC.

World Bank, 2001,World Development Report 2000/2001, The World Bank, Washington DC.

World Bank, Project Appraisal Document, Andhra Pradesh District Poverty Initiatives Project, Washington DC, 2000.

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[1] The definitions of operational self-sufficiency and financial self-sufficiency used here are a modified version of those used by the Consultative Group to Assist the Poorest (CGAP) at the World Bank. Operational self-sufficiency defined as the ratio of all operational costs of the organization (administrative, including those borne by the promotional agency and actual cost of resources) to operational income. Financial self-sufficiency is defined as the ratio of adjusted operational costs (adjustment made for inflation and subsidized cost of funds) to operational income.

[2] This paper uses the terminology of microfinance organizations (MFOs) instead of the more commonly used microfinance institutions (MFIs) since ‘organizations’ better describe the diverse type of entities involved in microfinance.
[3] Sen, Amartya, 2000, Development as Freedom, Anchor Books, New York.
[4] World Bank, 2001,World Development Report 2000/2001, The World Bank, Washington DC.
[5] 263,825 SHGs have been financed by NABARD. SHGs have also accessed finance from other apex development banks in India such as SIDBI, RMK, HDFC as well as private financial agencies such as Basix. According to NABARD guidelines, SHGs must be in existence for six months before they can be extended loans. In practice, however, it takes at least one year before SHGs access loans from banks. The estimate is based on these facts, and the trend in the number of SHGs financed by NABARD over the last two years.
[6] NABARD guidelines for its SHG-Bank linkage program recommends that banks start lending with a ratio of 1:1 or 1:2 (loan to savings) and may increase it to 4:1. Only around 20,000 have received loans more than once. Cumulative lending under the program is Rs.4.81 billion (US$102.3 million)
[7] Assuming 15 members per SHG and five members per family. NABARD estimates this number to be 100 million since they assume 20 members per SHG.
[8] Harper, Malcom, “Why are commercial banks not entering the microfinance market?” Paper presented at Banker’s Institute of Rural Development, Lucknow workshop, ‘Kick-starting Microfinance, a Challenge for the Indian Banks’. http://www.alternative-finance.org.uk
[9] Website information, http://www.woccu.org
[10] Basix, “Desjardins: The cooperative movement of Quebec, Canada”, http://www.basixindia.com/
[11] Eschborn, Renee Chao-Beroff, 1999, Self Reliant Village Banks, Mali (Case Study), CGAP, Washington DC
[12] Website information, http://www.siffs.org
[13] Mandals are sub-district development unit unique to Andhra Pradesh. These are smaller in geographical size and population than “block”, the development unit in all other states in India.
[14] FWWB, 1997, “India’s emerging SHG Federations”, Ahmedabad, India Basix, “PREM – A case study”, Unpublished paper, Hyderabad, India
[15] Kudumbasree, a government program in Kerala that forms groups similar to SHGs (termed Neighborhood Groups (NHGs)) and their federations was originally included in the study and visited as during fieldwork. However, the program was dropped in the analysis stage, since the federations formed by this program focus more on channeling government-subsidized credit to the poor rather than microfinance per se. The program focuses on utilizing the subsidized poverty-lending program of the commercial banks (a mandatory component of commercial banking in India), subsidized housing for urban poor, and training for self-employment. The interviews with the leaders of the organizations visited revealed considerable success in implementation: identifying and organizing the poor into groups, promoting federations of the primary groups, encouraging the members to save in the groups and, most significantly, eliminating corruption in accessing the subsidized loans from the banks. The weakness of the system is its focus on subsidized credit to the detriment of savings and non-subsidized bank credit such as the SHG –Bank Linkage and dependence on government grants for operational expenses of the federation.
[16] PRA techniques, which became popular in the early 1990s, are tools used to collect reliable information regarding a village, street, etc. by a process of consultation with area residents, often in a group. The tools are cost effective when compared to conventional survey methods.
[17] CDF, 1997, “Member Participation rates in New Generation Thrift Cooperatives around Warangal Town in Andhra Pradesh,” Hyderabad, India
[18] Puhazhendhi.V, 2000, “Evaluation Study of Self Help Groups,” NABARD, Mumbai.
[19] There are two types of organizations in the United States that suggest a potential future scenario for the SHG federations: Community Development Corporations (CDCs) and Community Development Credit Unions (CDCUs). There are more than 5,000 CDCs in the United States that provide a range of services to impoverished communities. These organizations receive funding from both private and public sources. CDCUs, of which there are more than 1,500, focus on community development activities in addition to the traditional roles performed by credit unions. Though CDCs and CDCUs are not federations, the size of the community served by an SHG federation is similar to those served by many of these organizations. http://www.ncua.gov/news/cdcu/cdcufact.html [20] The CGAP definitions are as follows: a) Operational Self Sufficiency (OSS) = Operational Income / (Operational Expenses +Financial Expenses) b) Financial Self Sufficiency (FSS) = Operational Income / (Operational Expenses +Financial Expenses + Adjustments for subsidies and inflation) While CGAP includes in kind personnel costs incurred by promotional agency in Adjustments, in this study it is included in Operational Expenses itself, since by doing so the OSS ratio reflect operational subsidy involved and FSS ratio, the financial subsidy.
[21] Bank of Madura was taken over by ICICI, a large private sector investment bank, in 2001. Though Bank of Madura was losing money in its SHG portfolio, it attributed this to the cost of promoting and supporting the SHGs.
[22]World Bank, Project Appraisal Document, Andhra Pradesh District Poverty Initiatives Project, Washington DC, 2000. APDPIP uses the terminology CIGs to include common activity groups other than microfinance SHGs. The cost estimates given here refer only to the direct cost of promoting the CIGs and CIG federations. The cost of program administration and other expenses are not included. This is done to make the data comparable to the costs available from DHAN Foundation.

[23] The chief executive of SPMS is also the program leader of the DHAN Foundation’s Community Banking Program. This case, however, is not typical of other federations. The typical federation chief executive, though a DHAN staff, spends his/her time primarily on management of the federations. The day to day management in SPMS is handled by a general manager who is also a DHAN staff.
[24] Swarnajayanti Gram Swarozgar Yojana (SGSY) replaces the Integrated Rural Development Program (IRDP) and other poverty eradication programs. IRDP, the largest anti-poverty program implemented in India, was in place for two decades. The program, of which a major component was bank loans, had a disastrous average repayment rate of less than 40%. The major change in SGSY from that of IRDP is that a significant portion of the funds –both loans and grants are to be made available to SHGs rather than individuals. SHGs are to be supported where they exist and new ones promoted where they do not. But unlike the SHG-based microfinance program, SGSY is a subsidy-based program and lending by banks is mandatory. Furthermore, though SGSY envisages an increased role for Banks and NGOs, the program is primarily administered by the District Rural Development Agencies, agencies that lack the capacity to administer such a program.
[25] World Bank, 2001, “Microfinance in India: Issues, Constraints, and Potential for Sustainable Growth”, Washington, DC. The study notes the similarity between the growth trend of the SHG-Bank Linkage program and outreach of the Grameen Bank.
[26]RBI, 1999, “Task force on supportive policy and regulatory framework for microfinance in India”, Mumbai, India
[27]Website information, www.basixindia.com
[28] This is especially important given the possibility of this happening under the SGSY program.
[29] The first of these innovative laws was passed in Andhra Pradesh as the Andhra Pradesh Mutually Aided Cooperative Societies Act (AP MACS Act 1995) after persistent lobbying efforts by CDF . CDF has also played a significant role in getting the law passed in other States in the country. In Andhra Pradesh, many cooperatives, currently incorporated under the earlier restrictive act (which continues to exist), are incorporating under the new act after repaying the government’s share capital.
[30]Non-profit organizations may register as Trusts and Societies. The former category has less regulatory control than the latter. The mutually aided cooperative societies are cooperatives under the Mutually Aided Cooperative Societies Act, which has freed cooperatives that do not have government funds from state control.
[31] Though norms state that loans have to be issued only in a group meeting, in practice, the officeholders may issue the money after it has been sanctioned in the previous meeting. Some groups retain the money in their accounts till the meeting date and draw it on the meeting date or on the previous day and issue the loans during the group meeting. Some of the older groups that have better access to the bank branch have also started issuing checks to their members.
[32] According to Mr. Rama Reddy, CDF is not against thrift cooperatives and their federations ever receiving external funds. Rather, they believe that, at the current level of organizational maturity, doing so would divert the attention of the organization from becoming a member owned and managed organization to one dependent on external funds.
[33] Another significant source of external funds for SHGs is the SGSY program. This loan program is subsidized by the Government of India and replaces Integrated Rural Development Program, the earlier flagship government-subsidized poverty-lending program.
[34] This is one of the innovations of the SHG-Bank Linkage program, as this is a shift from the individual lending to which the rural/poverty lending officers were accustomed in the traditional programs. It is crucial that banks do not start doing this, not only because it would dilute one of the unique characteristics of lending to SHGs but also because it would not be feasible without dramatically increasing the bank costs.

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SHG

Village Organization

Federation

SHG

Cluster Development Association

Federation

Thrift Cooperative

Federation

Federation Branch

SHG

Federation