Sustainability of self-help groups in India : two analyses

Public Disclosure Authorized 40961 OccasionalPaper NO. 12 AUGUST 2007 Public Disclosure Authorized Public Disclosure Authorized S U S TA I N A B I L I T Y O F S E L F - H E L P G R O U P S I N I N D I A : T W O A N A LY S E S Introduction and Summary The self-help group (SHG) model is the dominant form of microfinance in India. Authors of Part I of this Occasional Paper are Jennifer million SHGs were reaching about 33 million members.1 Such outreach appears to Isern, lead microfinance represent a major breakthrough in a country where 50 million households live in specialist, CGAP; L. B. Prakash, executive director, Akshara; poverty, with very limited access to financial services. Anuradha Pillai, research Although the term self-help group is used in different countries to describe a vari- assistant, CGAP; and Syed ety of financial and nonfinancial associations, in India it refers to a group of 10–20 Hashemi, senior microfinance specialist, CGAP. poor women who band together for financial services—beginning with periodic, compulsory savings and then mainly loans—and sometimes social services as well. Robert Peck Christen, founder, Boulder Institute of Microfinance, and Gautam SHGs are managed by their members, with varying degrees of external support. SHGs are formed with the assistance of self-help promotion institutions (SHPIs), Ivatury, microfinance specialist, which include nongovernmental organizations (NGOs), government agencies, banks, CGAP, wrote Part II of this cooperatives, and microfinance institutions. In addition to helping with group forma- Occasional Paper. tion, SHPIs provide training, monitoring, and other support services. Occasionally, Richard Rosenberg, senior promoters give SHGs initial seed capital to lend, but more typically, groups begin by policy advisor, CGAP, wrote the saving and lending out their members’ own resources. Most, but by no means all, Introduction. The authors are grateful to the Public Disclosure Authorized SHGs have grown explosively in recent years. It is reported that by March 2006, 2.23 SHG programs that provided their time and information for this study. Richard Rosenberg, CGAP; Jeanette Thomas, CGAP; and Vijay Mahajan, BASIX/India, provided helpful comments on an earlier version of the paper. SHGs eventually borrow from an external source, usually a bank. This bank linkage is the most distinctive characteristic of the Indian SHG model. The massive outreach of SHGs has generated interest in the model’s sustainability and replicability in India and elsewhere. Although SHGs have been widely studied (see the bibliography for examples), relatively little information has been published on their financial performance. This Occasional Paper reports on two separate studies of SHG programs conducted by CGAP staff and partners. In Part I, Jennifer Isern, L. B. Prakash, Anuradha Pillai, and Syed Hashemi review SHGs developed by five different SHPIs, represent- © 2007, Consultative Group to Assist the Poor ing the main approaches to SHG promotion in India. The study looks primarily at the financial viability of these SHG programs. 1 Data from NABARD: http://nabard.org/pdf/stmt1.pdf. Building financial systems for the poor Table 1. SHG Programs Included in the Two Studies Part Self-help promoting institution Location Part I Panagal Mandal Mahila Samakhya (PMMS), supported by United Nations Development Programme (UNDP) South Asia Poverty Alleviation Program (SAPAP) of Government of Andhra Pradesh Sakhi Samiti promoted by Professional Assistance for Development Action (PRADAN) Professional Assistance for Development Action (PRADAN) Chitradurga Gramin Bank (CGB) People’s Action for National Integration (PANI) Andhra Pradesh Jharkand Karnataka Uttar Pradesh Oriental Bank of Commerce (OBC) Saravodaya Nanofinance Ltd. Dhan Foundation Microcredit Foundation of India (MFI) Uttaranchal Tamil Nadu Tamil Nadu Tamil Nadu Part II Rajasthan The study reported in Part II was done by strong programs, rather than weak ones, are most Robert Peck Christen and Gautam Ivatury for a relevant to assessing the potential of the SHG leading commercial bank in India. This study pro- movement. poses a methodology for designing SHG programs The reason for this approach can be illustrated to ensure their sustainability. In essence, this by looking at the evolution of conventional micro- approach asks (1) whether and how SHG pro- finance institutions. Most of the world’s microfi- grams provide essential support services, and (2) nance institutions are probably unsustainable, for whether those services, and the SHGs they sup- reasons that include poor loan collection and inter- port, can be self-financing, without requiring con- est revenue that cannot cover operating costs. But tinuing infusion of external subsidies. The study not surprisingly, sustainable microfinance institu- demonstrates the methodology by analyzing the tions have grown much faster than unsustainable operational structure and financial performance of ones, and they now dominate the field. For four leading SHG programs. This study was not instance, of all the world’s microcredit clients who originally intended for publication, but in CGAP’s were reached by nongovernment microfinance view there continues to be a need to improve the institutions in 2005, about two-thirds of them got sustainability of SHG programs, and the method- their services from institutions that were already ology proposed is likely to interest a wider audi- financially sustainable.2 One strong microfinance ence. institution or SHG program that thrives and grows The nine SHG programs that were analyzed in both studies (see Table 1) are not a representative to massive size is more important than a dozen that remain small or perish. sample of Indian SHG programs. Knowledgeable Some of the more interesting findings that observers indicate that many SHG programs are emerge from these nine programs are listed below. weak and unsustainable. The nine programs stud- It is reasonable to suppose that they may have ied here were chosen because most of them were some broader relevance as well. reputedly stronger than average. The intent was to 2 Based on data from the Microfinance Information eXchange (MIX) get a picture of the potential of the SHG model and the MicroCredit Summit, provided by Adrian Gonzalez, MIX re- when it is well executed. The authors believe that searcher for CGAP projects. 2 ■ ■ Sustainability. Many well-executed SHG Most Indian SHGs are externally funded by banks programs are achieving financial sustainabil- or by promoter organizations who borrow from ity, even when all promotion and support banks. Indian commercial banks, most of which are costs are included, though this cannot be government owned, began lending to SHGs generalized for the entire SHG movement. because of government-imposed, priority-sector Support services. Well-run SHPIs seem to lending quotas. Elsewhere in the world, it is hard be able to provide an adequate package of to find success stories among community-managed external support services to establish SHGs loan funds that are externally funded. Rather, and then keep them functional, and the almost all of the successful programs are savings SHGs seem to be willing and able to pay the based.3 What accounts for the success of externally cost of that support. ■ Loan collection. In well-run SHG pro- funded community finance in India? One is grams, there is usually very little default on tempted to speculate that the difference might be repayment of external loans to the SHGs that, in India, external funding comes in the form from banks or promoters. In addition, SHGs of a direct or indirect loan from a commercial bank in some of the programs studied are quite that is serious about getting its money back. On successful in eventual collection of their the other hand, Indian banks have experienced internal loans even though those loans had high default rates on other priority-sector lending been subject to unusually high levels of late in the past. If the banking relationship is important to the payment. ■ Cost levels. Generally, the SHG programs studied here compare favorably with other microfinance models in terms of administrative costs. However, this does not factor in the time members have to spend at meetings and the risks group members are subject to. ■ Savings. Though all SHGs require periodic fixed amounts of savings from members, the model is credit driven. Clients of the nine programs studied in this paper joined an SHG mainly to get loans, not to save. For some programs, there is little voluntary saving beyond the minimums required to qualify for loans. ■ Reaching the poor. Most of the programs in the studies reach very poor and marginalized clients. ■ Elite capture. The researchers found little success of the Indian SHG model, this may have implications for the replicability of the model in other countries. It remains to be seen how many other governments will impose such directed credit requirements, and whether commercial banks will be willing to lend to community groups without them. Note that the performance information on programs discussed in this paper is fairly old. We do not view this as a major concern, because the point of the paper is not to give a current overview of the Indian SHG movement, but rather to investigate the question of whether and how SHG programs can be run sustainably. 3A recent CGAP study (Murray and Rosenberg 2006) found that mem- bers of community-managed loan funds were much less disciplined in handling outside money than they were in handling their own money accumulated through savings. evidence of elite capture, which has been a problem with some other forms of community-based and member-managed finance. 3 Part I. Do India’s Self-help Groups Provide Value for Money? programs; some even participate in local government elections. Because Indian law requires that larger organizations be formally registered, SHGs What Is an SHG? have no more than 20 members. Most groups have SHGs are autonomous collectives that deliver 10 to 20 members. Members typically are poor small loans to their members. SHGs are run by women who have similar socioeconomic back- their members, who choose their own leaders and grounds and who are from the same locality. bank account signatories. They decide on compul- Members join to get loans and other services, such sory savings amounts, interest rates, lending as livelihood support—where the group offers norms, and distribution of surpluses. Accounts are skills training, promotes new markets, provides maintained by literate members, hired bookkeep- access to assets in addition to credit, and provides ers, or staff of promoting institutions. access to irrigation. Most SHGs are part of a federation that helps Most SHGs are formed with assistance from a them with governance and financial monitoring promoting and promotes new groups where needed. Industries Development Bank of India (SIDBI), Federations and other promoters also link individ- Rashtriya Mahila Kosh (RMK), Housing and ual groups to external financial and social resources. Urban Development Cooperation (HUDCO), SHGs collect periodic savings and make loans Housing Development Finance Corporation to their members. Savings are usually compulsory, (HDFC), and Friends of Women’s World Banking with the amount and frequency of savings collec- (FWWB). Most of them receive funding from tions decided by the group. Loans are funded by commercial banks (almost all government owned) savings, revenues (interest, fees, penalties), and or their promoting institutions. loans from banks and other external sources. institution—such as the Small The SHG-Bank Linkage Program, launched in Initial loans to members are usually funded by 1992 by the National Bank for Agriculture and savings. Such loans are typically small and used for Rural Development (NABARD), stimulated the consumption or to repay existing debt borrowed at development of many SHGs nationwide. NABARD higher interest rates from other sources. These loans is a government-owned apex refinance (wholesale range from 100 to 2,000 rupees (US$2.5–US$45), loan) institution with a combination of promo- with a maximum loan period of six months and a tional, supervisory, and refinance functions for bullet repayment scheme (that is, all principal is retail institutions—rural branches of commercial repaid in a single installment at the end of the banks, regional rural banks, and cooperative banks. loan, with interest paid monthly or with the prin- SHGs were initially promoted mainly by NGOs cipal repayment). Over time, SHGs mobilize more such as MYRADA and PRADAN. Since the middle savings, retain earnings, and often borrow external of the 1990s, when the model was scaled up, pro- funds, enabling larger loans for consumption and motional work was largely done by specialized gov- business purposes. These loans range from 1,000 to ernment agencies, such as the District Poverty 20,000 rupees (US$23–US$450) and are repaid in Initiatives or the Velugu project in Andhra Pradesh monthly installments over one to three years. and the Kudumbshree project in Kerala, the In addition to financial services, some SHGs Women’s Development Corporations in the states provide health care services (such as polio vaccina- of Tamil Nadu and Maharashtra, the Women and tions and family planning information), social Child Development departments, and the District empowerment activities (such as literacy training), Rural Development Agencies (DRDAs) in most food-for-work opportunities, and mid-day meal others states. Although the more specialized agen- 4 Table I-1. Models of Support for Bank-Linked Indian SHGs Type of support Model 1 Model 2 Model 3 Promotion NGO or government agency promotes the group NGO or government agency promotes the group Bank promotes the group Financing Bank lends directly to the group NGO or government agency obtains funds from bank and lends to the group Bank lends directly to the group cies have, by and large, established SHGs of fair these two models because the costs of group for- quality, the departments and the DRDAs pursued mation and support are borne by SHPIs. a numbers approach that produced SHGs of indif- In the third model, a bank acts as an SHPI— ferent quality. In Andhra Pradesh, for example, the forming SHGs, training them, and then lending to government uses gas connections and revolving them. As of March 2005, 21 percent of bank- loan funds as incentives to encourage women to linked SHGs had been promoted by banks. form SHGs. Members joined the groups to cap- NABARD’s program is designed to integrate ture these benefits. But after achieving their short- informal savings and credit groups with the main- term goals, most of these groups stopped func- stream banking system. Under the program, tioning. SHGs in which members have not been NABARD refinances bank loans to SHGs—that is, “bribed” by quick-and-easy subsidies have proven it provides financing to banks at a below-market more durable. The incentives for such groups are interest rate (currently 6%), though banks continue more conducive to member participation and to carry the risk for their loans. group solidarity, both of which are crucial to a group’s sustainability. By March 2006, NABARD’s program had lent 114 billion rupees (US$2.8 billion to 545 banks through 44,362 branches, half of which was still Models Linked to Banks outstanding). These banks in turn extended loans Most—though not all—Indian SHGs eventually to 2.23 million SHGs that served an estimated 33 get loans from commercial banks. Three models million poor women over 13 years.4 have emerged for SHG–bank linkages. In the Banks establish links with groups that have dominant model, used by NABARD’s SHG–Bank maintained regular savings relationships with them, Linkage Program, a bank lends directly to a group usually after six months. Banks then lend to the after evaluating the group’s operations, maturity, group without collateral, relying on self-monitoring and capacity to absorb credit. The groups lend the and group peer pressure for repayment. Banks typ- proceeds to their members. An SHPI—an NGO ically initiate lending to SHGs with a loans-to- or government agency—remains involved with the savings ratio of 1:1 or 2:1, then gradually increase group, but is not part of its funding chain. As of this ratio to 4:1. March 2005, 72 percent of bank-linked SHGs had been financed through this model. SHGs normally borrow from banks at an annual interest rate of 8–12 percent and lend to their In the second model, the promoting institution members at 24 percent, although in some cases it also plays a funding role. A bank lends to the pro- has come down to 18 percent. Groups retain the moter, which then on-lends the funds to its SHGs. interest rate differential as earnings. Over several As of March 2005, 7 percent of bank-linked SHGs had been financed using this approach. Banks like 4 http://nabard.org/pdf/stmt1.pdf 5 years, this revenue typically surpasses member sav- (formerly known as the Velugu project) and ings as a source of funds. More than 95 percent of funded by the World Bank. the bank loans to SHGs backed by the NABARD program are repaid.5 ■ Sakhi Samiti, an SHG federation in Rajasthan, The NABARD program is initially promoted by Professional Assistance nationwide, but it is especially active in the south- for Development Action (PRADAN), an ern states of Andhra, Tamil Nadu, and Karnataka, NGO. In 1999, the federation assumed which are home to more than half of all bank- responsibility for SHG promotion. linked SHGs. ■ A PRADAN program in the Lohardaga dis- Most of the banks that lend to SHGs in India trict of Jharkhand, formed in 1992, that began are government owned, though a few private promoting SHGs for savings and credit in banks participate as well. What motivates the 1996. banks to lend to such unconventional borrowers? The dominant factor is government-mandated ■ bank in Karnataka selected by NABARD in lending targets of 40 percent of total bank credit 1992 as one of nine regional rural banks to to borrowers from priority sectors, including agri- promote SHGs. culture, microfinance, small industry, housing, and education. Of this, 10 percent must be to the “economically weaker sections.” These targets are monitored by bank senior managers and government officials, who are answerable to Members of Parliament. But some banks are engaging in SHG and other microfinance operations because they think this market may be profitable. It is an open question whether banks would have much interest in doing business with SHGs if there were no gov- Chitradurga Gramin Bank (CGB), a rural ■ People’s Action for National Integration (PANI), a leading NGO in Uttar Pradesh that espouses a Gandhian ideology of integrated human development. Table I-2 summarizes the inception, goals, and services of these five groups. Table I-3 provides a statistical overview of the five programs and the 150 SHGs covered by the study. Methodology ernmental lending targets. A two-stage sampling process was used to select Stud y F i n d i n g s SHGs for detailed review. First, villages were cho- The analysis in Part I is based on data from five sen through probability proportionate to size sam- well-established institutions that represent the pling, which weighted samples based on the popu- main models for promoting Indian SHGs, cover- lations of different villages. This approach ensured ing diverse regions: appropriate representation of small, medium-size, and large villages. Next, 30 SHGs were randomly ■ Panagal Mandal Mahila Samakhya (PMSS), an selected from each institution’s list of those that SHG federation in Andhra Pradesh, was pro- had been active for at least three years in the sam- moted ple villages. as part of a United Nations Development Programme (UNDP) South Data for the 150 SHGs in the sample were col- Asia Poverty Alleviation Programme (SAPAP) lected between May 2003 and April 2004 and cov- initiative that ended in 2000. PMSS is cur- ered all the members of the sample groups. rently supported by Indira Kranti Pathakam Analysis focused on the source and volume of SHG funds, loan portfolio quality, profitability, operating costs, efficiency, growth, outreach, and per- 5 Here and elsewhere in Part I, “repayment rate” is calculated as (amount repaid minus prepayments of loans) / repayment due during the period. 6 ceived life changes among members resulting from Table I-2. Overview of Five Selected Institutions That Promote SHGs in India Institution PMMS Panagal Mandal,a Mahabubnagar Society, Andhra Pradesh Legal form of SHG promoter Mutually aided cooperative society Three tiers: SHGs, village clusters, and mandal federation Sakhi Samiti Public society (Kishangarh Bas block, Rajasthan) Two tiers: SHGs and federation When and how SHG promotion began Objective Services to SHG members/clients 1995: Five-year program to organize poor women for social change and livelihood generation began as part of the UNDP-SAPAP project. UNDP initially contracted NGO partners to form SHGs; later the NGOs withdrew and SHGs were formed directly by project staff. Empower poor women to overcome social, economic, cultural, and psychological barriers through self-managed institutions of the poor. • Training of SHG members and bookkeepers 1987: SHGs formed during a severe drought to buy fodder on credit. PRADAN promoted the initial SHGs, but the federation handles promotion now. Improve women’s access to government schemes and enable them to meet emergency financial and/or credit needs. • Linkages to banks and other external funders • Conflict resolution • Market linkages • Reproductive and child health services • Social initiatives b • Bookkeeping • Internal audits • Linkages to banks and other external funders • Conflict resolution • Reproductive and child health services • Social services PRADAN Unregistered (Lohardaga District, Jharkand) c Two tiers: SHGs and federation 1996: PRADAN formed SHGs to ensure sustainability of irrigation activities in Lohardaga district. PRADAN has since withdrawn; groups are now self-managed by members. Promote and strengthen women’s SHGs as a viable financial intermediary, create compact clusters for outreach, and follow up by consolidating enterprise-based livelihood activities. • Internal audits Regional rural bank; no federation 1992: Five SHGs promoted by MYRADA linked as part of the SHG-Bank Linkage Program. Groups are self-managed; CGB provides credit linkages and mentoring. Inculcate savings habits among the poor, facilitate access to bank credit through an effective credit delivery system, and build mutual trust between CGB and the rural poor. • Training of SHG members PANI Unregistered Two tiers: SHGs and federation 1995: Formed SHGs for free bonded laborers to help liquidate their debt. Empower the target community so that they may help themselves. • Training of SHG members (Faizabad District, Uttar Pradesh) CGB (Chitradurga District, Karnataka) • Computerized bookkeeping • Linkages to banks and other external funders • Facilitation of SHG clusters • Monitoring of SHG operations • Bookkeeping • Internal audits • Linkages to banks and other external funders Notes: a A mandal is an administrative unit below the district consisting of 40–50 villages. In Andhra Pradesh, development blocks are divided into mandals, while the rest of the country used the taluk as the administrative block. b Social initiatives include promoting the rights of lower caste people, advocating against child marriages, promoting schooling for female child laborers, and promoting livelihoods for disabled and destitute women. c PRADAN promoted its first SHGs in 1987 in the Kishangarh Bas block of Alwar district, Rajasthan. They were later federated in 1997 as Sakhi Samiti. 7 Table I-3. Statistical Overview of 150 Indian SHGs, by Promoting Institution Indicator PMMS Sakhi Samiti Average age of SHGs (years) Total number of members in sample SHGs Average number of members per SHG SHG members with outstanding loans (percent) Average SHG outstanding loan portfolio (US$) Average SHG outstanding bank loan (US$) Average SHG savings (US$) Average savings per member (US$) b Number of SHG promotion staff 6 429 14 98 2,301 162 a 580 41 28 c 6 389 13 88 1,846 903 881 68 5 PRADAN CGB PANI Average 5 533 18 76 509 84 573 32 10 4 475 16 89 1,845 1,177 1,101 69 NA 5 378 13 90 441 372 166 13 79 5 441 15 88 1,388 740 660 45 31 Note: The survey covered 30 groups for each institution. Dates for financial information are for the year ending March 2003 for PMSS, Sakhi Samiti, and PRADAN and for the year ending March 2004 for CGB and PANI. Loan analysis was based on annual information: PMSS, 31 March 2003; Sakhi Samiti, 31 October 2003; PRADAN, 30 November 2003; CGB, 28 February 2004; and PANI, 31 March 2004. For all five SHG programs, financial information for the periods ending March 2001, March 2002, March 2003, and March 2004 was converted at Rs. 46.577 to US$1, Rs. 48.733 to US$1, Rs. 47.65 to US$1, and Rs. 44.125 to US$1, respectively. a All PMSS SHGs had borrowed from their federation. The federation borrows from banks and then on-lends the proceeds, together with the federation’s own funds, to member SHGs. b Estimated as average savings per SHG/average members per SHG. c Staff consists of 5 PMSS staff and 23 village organization staff. SHG participation. Members were interviewed for bank, such as CGB, which serves clients who live both personal information and information about near its offices. To determine how effectively the their SHG. Financial and meeting records were SHG model reaches these populations, the study reviewed, verified, and entered into spreadsheets analyzed the locations of the 150 SHGs in the to create detailed financial statements, loan port- sample and the economic and demographic pro- folio reports, and attendance records for each files of their members (see Table I-4). Most of the group. Data were cross-checked using loan and groups’ members live far from paved roads, bank saving ledgers, member passbooks, and minutes of branches, and health centers, although there is meetings, and verified with members during indi- variation among the programs. CGB, for example, vidual and group interviews. The CGAP research is based in a district capital, and its SHGs are closer team assessed the five institutions, focusing on to paved roads and health centers. PRADAN, on their costs of forming SHGs, provision of ongoing the other hand, aims to work with more disadvan- support, and links to external sources of credit. taged groups and so operates in one of India’s least developed states (Jharkhand), where settlements Outreac h are more remote. Most Indian SHG programs reach out to vulnera- Accordingly, of the five programs studied, ble and marginalized people who own little or no PRADAN had the deepest outreach: almost all land, are predominantly illiterate, and who lack SHG members are tribal people or members of access to formal sources of financing. The depth of scheduled castes. PRADAN’s clients are also the programs’ outreach to such populations depends poorest: 85 percent had no homestead land or only on program design and on their promoters’ vision, marginal nonagricultural landholdings, and almost leadership, and commitment. An NGO, such as 90 percent live in thatched huts or are squatters. PRADAN, whose mission is to help vulnerable CGB’s clients were somewhat better off, with 70 groups, has deeper outreach than a regional rural percent living in concrete or brick houses and 40 8 Table I-4. Depth of Outreach of SHGs, by Promoting Institution Indicator Distance from paved road or highway (miles) Members from scheduled castes and tribes a (percent) Clients who are marginal farmers or have no homestead or agricultural land (percent) Members who are illiterate or can only sign name (percent) Members without a house or only a thatch hut (percent) PMMS Sakhi Samiti PRADAN CGB PANI Average 3.3 1.7 10.6 2.4 8.2 5.2 21.9 58.4 96.6 35.2 68.0 56.0 58.5 83.3 85.6 60.6 96.6 76.9 88.0 89.0 86.0 14.0 93.0 74.0 11.2 28.0 87.6 29.7 35.2 38.3 a Scheduled castes and tribes are communities accorded special status by the Constitution of India. These communities were considered “outcastes” and were excluded from the four-caste system that was the social superstructure of Hindu society in India for thousands of years. These castes and tribes were relegated to the most menial labor, with no possibility of upward mobility, and degenerated into the country’s most economically and socially backward communities. percent owning agricultural land. In addition, 86 Leadership percent of CGB clients are literate, compared with In about two-thirds of the SHGs, elections for just 7–14 percent in other programs. Annex tables leadership positions had been held at least once IA-1 through IA-6 provide further data for each since the group was created. In some cases, the program. same leaders were reelected, reportedly to avoid problems in changing bank account signatories. Institutional perf ormance Decision-making The institutional sustainability of SHGs depends Most SHGs reported that decisions were made at on their management, systems (including external meetings attended by all (58%) or most members support), and membership. Overall, the five pro- (31%). But a quarter of the groups promoted by grams studied had good survival rates among their CGB and PANI reported that decisions were made SHGs, relatively low member dropout levels, and by a few members. consistent attendance and member participation. In addition, field staff of the promoting institutions rated most groups in the sample as above average to exceptional in their management, systems, and membership, indicating that these groups were probably capable of managing themselves. Record-keeping. Because of low literacy rates among members, SHG records are maintained by NGO staff, a literate member of the group or its federation, or—most commonly—a literate person in the village who is paid for the service. Records generally include data on attendance, savings, loans, and member passbooks. The quality of records was rated good or acceptable in more than Membership and group stability Over an average of five years before the study’s start, 15 percent of members dropped out of the 150 sample SHGs; 9 percent joined as new members.6 The main reasons for dropping out were death, marriage, or migration. Inability to meet savings requirements or attend weekly meetings was also cited in a few cases. SHGs tend to last longer if their promoters provide good organizational support and social mobilization. For example, only 2 percent of SHGs promoted by PANI—which achieved deep outreach to 6 In most cases, if someone wants to join an SHG, she has to contribute half of the sample SHGs and average in one-third to the group an amount equal to the accumulated savings per member of the sample. Rating criteria are defined in annex at that time. This deters prospective members from joining existing groups, Table IA-7. and they often choose to motivate other people and start a new SHG. 9 Table I-5. Age Distribution of SHGs, by Promoting Institution Program PMMS Sakhi Samiti PRADAN CGB PANI Total 3–5 years 5–7 years More than 7 years Average 11 14 26 23 20 94 6 8 4 7 8 33 13 8 0 0 2 23 6.0 5.9 4.5 4.2 4.5 5.0 vulnerable and marginalized groups—disbanded groups promoted by the three other institutions. between April 2001 and March 2004. When the Members were more likely to have family members government had actively promoted SHGs (typi- make payments when meetings were held in the cally by offering immediate incentives for joining), morning, which is a more convenient time for higher numbers of recently launched groups disin- hired SHG bookkeepers than for members who tegrated, reflecting the absence of adequate time need to be at work. When group members or leaders for group organization and social mobilization. managed records, most meetings were held in the Table I-5 shows the ages of the 150 SHGs ana- evening. (Annex Table IA-8 provides further details.) lyzed for this study. Perceptions of promoting institutions The low rates of dropout and turnover convey a The research team asked field staff from the five strong message about the groups’ utility. Members promoting institutions to rank the cohesion and would not continue to attend and invest in their overall functioning of SHGs based on their links to groups unless they found them helpful. external funding (such as from a bank or MFI), Meeting attendance repayment rates on internal loans, and adherence SHG meetings are held regularly, with 82–100 to group norms. Although all the programs rated percent of groups reporting regular meetings. But highly on cohesion, ratings were less impressive for meetings seem to become less frequent as groups overall functioning (Table I-6). (Annex Table IA-9 age. Attendance was consistent across the five provides rating criteria.) programs, with about 80 percent of members Financial perf ormance attending. In a quarter of the SHGs, members sometimes Savings sent family members or others to make payments Savings in the 150 SHGs consisted entirely of the on their behalf. This practice was more common compulsory deposits that are a condition of mem- among the groups promoted by Sakhi Samiti and bership and loan access. The absence of large vol- PRADAN, which have poorer members than the untary savings balances probably indicates that Table I-6. Promoting Institutions’ Ratings of SHGs (percentage of groups considered above average or exceptional) Area Group cohesion Overall functioning 10 PMMS Sakhi Samiti PRADAN CGB PANI Average 77 70 71 60 80 47 90 64 84 60 80 60 Table I-7. SHG Members with Outstanding Loans, by Promoting Institution (percent) PMMS Sakhi Samiti PRADAN CGB PANI Average 98 88 76 89 90 88 most members do not consider groups useful for Lohardarga, Jharkhand, where PRADAN works, storing surplus cash and use other savings mecha- SHG members reported that moneylenders went nisms. In addition, the complexity of managing out of business because of reduced demand for cash flows may limit SHGs from offering such their services. Overall, 14 percent of members of services to their members. the sample SHGs supported by PRADAN still bor- Loans to members The average outstanding loan portfolio (loans to members) was US$1,388 per SHG. Almost all the groups surveyed charged members a monthly interest rate of 2 percent for loans.7 Only two of the 150 groups charged 3 percent a month— though in the past (generally at the start of the microfinance program), most SHGs in India charged that amount. Loan terms, typically six months to three years, with monthly repayments, were not related to loan size. At the time of the survey, 88 percent of SHG members had outstanding loans (Table I-7). About two-thirds of the loans (68%) were reportedly for business use: agriculture (32%), animal husbandry (23%), and microenterprise (13%). The other third was reported as consumption loans.8 (Annex Table IA-10 provides further details.) Loans were not concentrated in the hands of a few members. For example, SHG leaders represented 16 percent of group members and 21 percent of loans outstanding. Among the sample SHGs, 23 percent of members still used moneylenders for credit. But among SHGs promoted by NGOs, only 2 percent of members borrowed from moneylenders. In rowed from moneylenders. The average loan per member was 6,750 rupees, where SHGs had access to outside capital from federations or banks, and 1,450 rupees where there was no such support. Loans to members accounted for 68–98 percent of the SHGs’ assets. Although data on portfolio at risk can be artificially improved by rescheduling loans, none of the SHGs in the sample did so. None of the SHGs, however, maintained loan loss reserves. Although most SHGs nominally required monthly repayments, in practice, members repaid their loans flexibly based on available cash flows, which did not necessarily correspond to monthly loan installment schedules. Such repayment behavior was especially common among members who depend on seasonal income, such as from agriculture and animal husbandry. SHGs in the PMMS program had the best portfolio quality (lowest portfolio at risk), possibly because of the program’s more individualized loan terms (see Table I-8). Members of all five programs said they consider SHG loans to be from family and friends; as a result, these loans are treated with less discipline than loans from banks to SHGs. But members also reported that most SHG loans to members are eventually repaid, with low eventual default rates. The only exception was for groups that receive funds from Rashtriya Because the SHGs in the sample did not provi- Mahila Kosh, a government program that limits the nominal annual in- sion for loan losses, the analysis adjusted their 7 terest rate on member loans to 12 percent. between business and consumption microloans are inher- financial statements to include loan loss allowances ently difficult to track. Other microcredit studies have found that actual based on rating standards developed by APMAS, loan use often differed from reported loan use. an Indian agency that specializes in assessment and 8 Distinctions 11 Table I-8. Average Outstanding Loan Portfolio and Portfolio at Risk for SHG Loans to Members, by Promoting Institution Indicator Average outstanding loan portfolio (US$) Portfolio at risk > 30 days (percent) Portfolio at risk > 90 days (percent) Portfolio at risk > 365 days (percent) PMMS Sakhi Samiti PRADAN CGB PANI Average 2,301 8 7 1 1,846 18 18 13 509 23 21 7 1,845 53 49 19 441 25 25 16 1,388 25 24 11 Note: Portfolio at risk is calculated as the total outstanding balance of loans with any payments overdue by more than x days divided by the total outstanding loan portfolio. capacity building of SHGs and their federations (Table I-9).9 APMAS derived these standards from an empirical analysis of SHGs’ success in eventually collecting overdue loans. This provisioning schedule is much less stringent than is normal for microfinance institutions or banks—where, for instance, loans more than a year overdue are usually provisioned 100 percent or written off. This is because APMAS has found that SHGs eventually collect a substantial portion of late loans. The levels of loan delinquency shown in Table I-9 would be disastrous for most microcredit providers.10 Yet it appears that SHGs are surviving Table I-9. Adjustments Made to SHGs’ Financial Statements for Loan Losses Number of days of overdue principal repayment Loan loss allowance (percent) 1–30 31–60 61–90 91–180 181–365 > 365 0.0 0.0 2.5 5.0 12.5 50.0 Note: When adjusting financial statements, loan loss allowances were spread over two financial years, on the assumption that the delinquency had accumulated over that period or longer. despite this. This has to do with the fact that a significant part of the SHG loans were used for crop cultivation and livestock rearing, neither of which offer a monthly cashflow. Yet loan installments were often fixed at monthly intervals, often out of inexperience and sometimes out of a desire to keep a discipline of “repaying something in each meet- revenues from interest rate spreads, fees, and penalties for late loans. SHGs in the CGB program had the worst repayment record on member loans and, not surprisingly, the worst repayment rates on external (bank) loans. ing.” Thus the high level of late repayments in Loans from external sources SHGs did not always translate into defaults. Three-quarters of the sample SHGs had borrowed Nonetheless, this is an area to monitor closely for from a bank or federation. In the case of PMMS, SHG programs, as it is for any lending operation. member SHGs borrowed from federations; SHGs Despite late repayments from their members, under the other programs borrowed directly from SHGs in the sample were generally able to repay banks. Outstanding loan balances from all external their loans to banks using member savings and sources among the five programs ranged from US$84 to US$1,177 per SHG, with an average 9 APMAS, a technical organization based in Hyderabad, Andhra Pradesh, has developed a rating methodology for SHG federations and rated more than 200 of them. loan balance of US$739 (Table I-10). Some of the programs achieved high repayment of their bank most other forms of microcredit, loan collection tends to spin out loans, while others did not. Portfolio at risk at 30 of control if the portfolio at risk more than 30 days late stays above 10 and 365 days was excellent in three programs but 10 In percent for very long. 12 poor in the other two. Table I-10. Average Outstanding Loan Portfolio and Portfolio at Risk of Loans from External Sources to SHGs, by Promoting Institution Indicator Average outstanding loan portfolio (US$) Portfolio at risk > 30 days (percent) Portfolio at risk > 90 days (percent) Portfolio at risk > 365 days (percent) PMMS Sakhi Samiti 1,162 0 0 0 903 14 14 9 PRADAN 84 0 0 0 CGB PANI 1,177 32 26 13 372 0 0 0 Average 740 9 8 4 Costs of group promotion women for empowerment, social change, and Costs of promoting SHGs include the costs of livelihood generation. The program sets up three launching, providing training, and monitoring tiers (SHG, village cluster, and federation) and them for about three years, after which groups can provides an initial US$105 per SHG and per vil- usually function with considerably less—and less lage cluster to defray the costs of launching the costly—external support. Promoters’ costs were group or cluster. The program also gives each group analyzed based on total spending over three years and cluster US$210 to meet ongoing expenses. divided by the number of SHGs promoted or sup- CGB had the cheapest promotional model. This ported during that time. The average cost was program focuses on literate, less poor women who US$259 per SHG, although costs varied widely live close to bank branches. Its promotion costs are among the five programs. The highest costs were mainly limited to the launch of SHGs, plus initial for multipurpose programs that promote empow- orientation and training, with the remaining costs erment of members, such as PMMS (US$443 per covering CGB’s administration. CGB SHG mem- SHG) and PRADAN (US$361).11 The average bers have the highest socioeconomic backgrounds cost of the CGB program, which formed SHGs of all sample groups, which means that they had solely for onlending, was only US$50 per group. the least proportion of poor members. They had Several factors led to the higher costs for the weakest performance for on-time loan repay- PMMS, which aims to organize poor people and ment. CGB’s groups were the least profitable (see 11 Table I-12), at least before promotional costs are Costs for the PRADAN Lohardaga program included research and considered. development for a pilot program. Table I-11. Costs of Promoting SHGs, by Promoting Institution (US$) PMMS Sakhi Samiti PRADAN CGB PANI Average Number of groups promoted 300 135 123 360 785 341 Total cost of promotion and support per group 443 232 361 50 211 259 Average cost per group launch 201 139 93 30 111 115 Average cost of training and monitoring per group 241 94 268 20 100 145 32 18 20 3 16 18 Indicator Average promotion and support cost per group member Note: Data are for costs incurred over the previous three years, on average. For additional details, see annex Table IA-11. 13 Table I-12. Financial Sustainability (Profitability) of SHGs, by Promoting Institution (percent) PMMS Sakhi Samiti PRADAN CGB PANI Average Return on assets without adjustment for loan loss provisions or SHPI costs 9 15 18 7 11 12 Return on assets after adjustment for loan loss provisions 9 12 16 1 7 9 Return on assets after adjustments for loan loss and SHPI costs 2 7 –1 1 –9 0 Indicator Note: For additional financial information, see Annex I, Table IA-12. Several SHG promoters believe that the higher based on solidarity groups or village banks, and cost, NGO-led model generates greater social these costs should not be excluded when looking benefits in the form of member empowerment and at SHGs. well being. But this study’s results do not consis- Thus the third stage includes the SHPIs’ costs tently find that higher promotional costs lead to and amortizes them over three years. Once these higher portfolio quality, deeper outreach, higher costs are included, the profitability picture is SHG ratings, or greater profitability after adjusting mixed. The return on assets at this final stage for loan provisions. The results are more nuanced ranges from very poor (a 9% loss for PANI) to very and depend on the promoting institution. strong (a 7% profit for Sakhi Samiti). By way of Financial sustainability (profitability) The study measured profitability in three stages. The first-stage return on assets was calculated from SHG records with no adjustment. By this comparison, returns on assets in most commercial banks are 1–2%.12 Conc lusion measure, the SHGs in all five programs were SHGs in India reach almost 33 million households highly profitable, with a return averaging 13 per- and provide loans, empowerment, and social serv- cent. But this result cannot be considered a reli- ices in addition to limited, largely compulsory, sav- able indicator of financial sustainability because it ings mechanisms. It is true that many SHGs and does not take into account the fact that there will SHG programs do not perform well. But the same likely be losses when uncollectible loans are finally has been true historically of most other microfi- written off. nance institutions. If the purpose is to determine Thus, the second-stage return on assets includes whether the Indian SHG model is a sustainable provisions (expenses) for estimated loan losses, one, it is more relevant to look at the programs spread over two years. This stage of measurement that are performing well than those that are not. reflects the SHGs’ ability to continue operating One can expect that over time, the weak SHG pro- into the future. At this level, all the SHG models were still profitable, averaging a healthy 9 percent 12 Financial return. But this stage of measurement ignores the cost-of-funds adjustment” if the program receives loans at rates signifi- fact that some part of the costs of each SHG is analyses of microcredit programs often include a “subsidized- cantly lower than market rates. There has been no adjustment for cost of funds in this analysis because the rate SHGs pay banks (10–12%) is paid by external actors: their SHPIs. These are real higher than the 90-day deposit rate in the banking system (5.0–6.5% a costs, and SHGs cannot be formed without them. year during 2002–04) and close to the average bank lending rate (11%). The costs of the promoter would always be included in an analysis of a microfinance program 14 Further, given India’s long history of priority-sector lending requirements, SHGs will probably continue to have access to large quantities of loans on similar terms in the future. grams will stagnate or close, and most outreach and monitoring more difficult, but the SHGs pro- will be dominated by well-managed programs. moted by PMMS have managed this challenge. This is what has happened among conventional Members do not use SHGs as savings vehicles. microfinance institutions over the past three Another concern is that SHGs mobilize only mod- decades. est amounts of member savings, mainly through Thus, this study analyzed five better performing compulsory deposits that members make, not SHG programs. The findings paint a largely posi- because they want to save, but only because the tive picture: Based on results to date, the Indian deposits are required to get a loan. Only a limited SHG model can work sustainably in well-managed number of SHGs offer voluntary savings, possibly programs. Compared to many other microfinance because groups or promoting institutions do not approaches early in their development, the SHG want to address the complexities that voluntary model seems to be producing more rapid outreach savings entail, including liquidity management, and (as Part II will show) lower costs. But there more staff or volunteer time to meet member are also concerns. requests for access to their savings, and more How effective are Indian SHGs in reaching record-keeping for SHG managers. Other reasons for low voluntary savings may be that members vulnerable and marginalized groups? SHGs reach poor and excluded groups. Most members of the SHGs studied come from poor households, including marginalized groups; most say that participation has improved their lives. have other satisfactory options for savings or may not consider savings to be secure or accessible in an SHG. How financially sustainable are Indian SHGs? SHG financial services are not fully matched to In well-managed programs, SHGs can be profitable, member need. Many group members pay their and many are. High income from their loan port- loans late, suggesting that SHG loan terms do not folios and low operating expenses enabled most of match members’ needs and cash flows. SHGs the SHGs in the study to be profitable, even after under the PMMS model offer more individualized adjusting for loan loss provisions and the costs of loan terms and experience lower late payments and launching, supporting, and monitoring in their ini- default rates. Many SHPIs are concerned that tial three years. (Part II of this Occasional Paper adapting loan terms would make loan origination addresses the sustainability of another group of Table I-13. Average Operational and Outreach Indicators for SHGs, by Promoting Institution PMMS Sakhi Samiti PRADAN CGB PANI Average Portfolio at risk > 90 days (percent) 7 18 21 49 25 24 Return on assets after adjustment for loan loss provisions and promotional costs (percent) Indicator 2 7 –1 1 –9 0 Promotion and support cost per group member (US$) 32 18 20 3 16 18 Promotion and support cost per group (US$) 443 232 361 50 210 259 Group members from scheduled castes and tribes (percent) 22 58 97 35 68 56 Group distance from paved road/highway (miles) 3.3 1.7 10.6 2.4 8.2 5.2 15 SHG programs, with greater focus on the costs of costs, such as PMMS and PRADAN, have varying ongoing external support.) results. PMMS’s SHGs scored higher on overall Do Indian SHGs provide value for money? The sample SHGs reach poor and marginalized groups with loans and other services and appear to produce social and economic benefits for members. It is clear that they can be financially sustainable, and most were profitable. Although costs of promotion and support have been subsidized, SHGs compare favorably with many other microfinance approaches in terms of the subsidy required per client and financial sustainability. The study’s financial analysis indicates that most of the SHGs would be financially sustainable even if they had to pay the costs of external promotion and support. SHG ratings and have better loan repayment, but PRADAN has deeper outreach and better profitability. SHGs promoted by CGB, the least expensive model studied, had weaker outreach, collection, and profitability net of potential loan losses. This shows that “money saved” in the careful promotion of SHGs may be lost later through loan losses and other problems with the SHGs. The SHG movement is still relatively young. Final assessment of its effectiveness will have to wait until more experience is acquired. One important question for the future is whether the increasing patronage by politicians and the resulting high growth rate of SHGs and their bank linkage could How do differences in SHG models lead to high default rates. Another is the extent to affect performance? which SHGs can adapt their lending and savings Is more intensive group formation and support products to provide an appropriate fit with their worth the added cost? No simple answer emerges members’ financial preferences. from the study. Programs with higher promotion 16 Part II. Designing SHG Programs for the Long Term must fulfill two conditions: first, the program must provide groups with an ongoing set of essential support services; second, the program must collect NGOs, government agencies, and banks in India enough revenue to cover the cost of providing choose to promote SHGs for a variety of reasons, these continuing services. not all of which are focused on long-term financial service access. Some of these SHPIs see SHGs pri- Ju d g i n g S u s t a i n a b i l i t y marily as a vehicle for grassroots social mobiliza- In mid-2005, a leading Indian commercial bank tion. Such promoters sometimes suggest that the asked CGAP to review its SHG lending operation social empowerment goals of their SHG programs and to suggest improvements. In response, CGAP are achieved even if the groups cease operations researchers tried to identify those elements that are after a few credit cycles. Other promoters see essential for long-term success. Our first step was SHGs as part of a permanent system providing vil- to review the literature. In addition, we studied lage-level financial services. four Indian SHG programs reported to be leading SHGs vary widely in approach and quality. Some are little more than one-time events, often organ- examples and sought to learn from their experiences. ized by government workers after hours, while oth- A desk review of the SHG literature revealed ers have been carefully built by NGOs as stable that few studies have tackled the problem of sus- providers of various development services. In tainability of SHG programs. The studies that do many programs, SHGs are organized into federa- treat financial performance (summarized in Table tions that provide services to individual groups and II-1) provide only a partial understanding of the build the leadership capacity of SHG members. issue. Some studies focus on the costs of running Some observers question whether many SHGs an SHG program, such as the costs of forming or will offer permanent access to finance. In confer- maintaining the group, but do not look at revenue. ence presentations, proponents of the SHG These studies reveal little about whether SHGs can approach tend to focus on the numbers of clients pay for the costs of forming and maintaining the served rather than on how to maintain the sys- group. Other studies look at whether lending to tem’s financial viability. APMAS, a specialized sup- SHGs is profitable for banks, but ignore the costs port institution for SHGs, has trained thousands incurred by NGOs and others in forming and sup- of professionals and analyzed over 300 SHG fed- porting these groups. These studies create an arti- erations. It claims that only a minority of SHGs ficially optimistic impression of the viability of across India are of “good quality,” or rated “A” SHG programs. using the APMAS grading scale. Nearly 40 percent Only the studies done by Nair (2005) and Reddy of the SHGs it examined in one district of Andhra and Prakash (2003) directly address the question of Pradesh state in 2002 had “grossly neglected” or sustainability. These studies analyze superstructures nonexistent book-keeping. Groups that lack such (SHG federations) designed to provide support a basic tool of financial service delivery are unlikely services to SHGs, including capacity building, per- to last long. 13 formance monitoring, and helping to access bank How can an SHPI ensure that SHGs continue credit. But neither study examines whether other to operate over the long term? Its SHG program external actors provide services to SHGs alongside the federations. Nair’s analysis does not account 13 See “The Study of SHG Movement in Visakhapatnam District.” Avail- able on www.apmas.org. for the setup costs of SHG federations in examining their sustainability (Christen 2005). 17 Table II-1 Studies on the Costs and Sustainability of the SHG-Bank Linkage Model Au t h o r O b j e c t i v e o f a n a ly s i s A c t o rs ex a m i n e d Findings Srinivasan (1999) Profitability of SHG model for banks 1 RRB Cost/SHG/year is US$18 a SHG promotion costs under various models 20 promoters, 34 SHGs, 16 banks Harper (2002a) Gross margin (interest revenue minus costs) is (0.07%) to 2.05% Cost/SHG unit linkage: NGO-promoted (US$25–US$424) Bank-promoted (US$25–US$182) Agent-promoted (US$8–US$87) Government-promoted (US$4–US$145) Individual-promoted (US$69) b Seibel and Harishkumar (2002) Tankha (2002) Profitability of SHG model for banks SHG promotion costs and model sustainability 1 commercial bank, 1 RRB, 1 district central cooperative bank Revenues/average costs is 101–165% 7 SHG programs Cost of promoting SHG over various periods from 15 months to 7 years is US$93–US$517 c Return on assets is 1.4–7.5% (no sustainability indicators provided) Sinha (2003) Reddy and Prakash (2003) Profitability of SHG model for banks 5 RRBs SHG lending is unprofitable Efficiency and sustainability of SHG federations 26 federations of SHGs Portfolio yield of 12.5–13.0%, but operating cost of 19.0% All 3-tier SHG federations unprofitable: Operating costs/average portfolio is 10–25% Revenues/costs is 24–98% RRB = rural regional bank a Converted from rupees using rate at December 31, 1998. b Converted from rupees using rate at November 30, 2002. c Converted from rupees using rate at August 31, 2002. To remain viable over the long term, SHGs are like other community-level savings and loan necessary for the long-term stability of community finance models.14 They include the following: groups in that they require an adequate level of external support (Christen 2005). Given that most ■ Promotion—Groups need help forming and Indian SHGs borrow from commercial banks, one maintaining their structure, especially in man- might argue that they need even more support aging member exits and entrances. than other forms of community-level finance that do not assume external liabilities. Christen (2005) discusses the types of support that have proven 14 Rotating savings and credit associations (ROSCAs) are informal groups where all members contribute a fixed quota at each meeting, and members take turns receiving the entire amount collected at each meeting. Extremely simple mechanisms like ROSCAs can operate without continuing external support, but more complex arrangements seldom can. 18 ■ Training—SHG members must be trained in that provides these services must generate enough basic operations if they are to maintain quality income from the SHGs to cover its costs. service, especially in light of limited human We studied four well-regarded SHG programs resources available at the community level. in India to see whether they meet this two-part test Clients also need to be trained to understand and to uncover lessons they might have in helping the products being offered and the proce- SHGs achieve long-term viability. dures they need to follow to access these ■ ■ products and services. Four SHG Pr omoter s Standardized Products and Norms—Local The four SHG promoters we selected were reputed entities, such as SHGs, are usually better off to be building sustainable SHG programs, based when they can offer standardized products on conversations with government officials, micro- that have been developed by a higher level finance practitioners/consultants, and others. organization that is in a better position to They are the Oriental Bank of Commerce (OBC), develop supporting management information headquartered systems, rules, and risk mitigation strategies. Nanofinance Ltd. (Sarvodaya), in Tamil Nadu; Administration—Sometimes regular operat- Dhan Foundation (Dhan), in Tamil Nadu; and the ing functions, such as book-keeping, process- Microcredit Foundation of India (MFI), in Tamil ing transactions, and serving clients must be Nadu.15 ■ New Delhi; Sarvodaya These organizations are not representative of all performed by nonmembers. ■ in Operations— SHG promoters; three of the four are located in When corrupt or unhealthy practices, includ- just one of India’s 28 states, Tamil Nadu in south- ing capture by SHG leaders, occur, someone ern India. They are not the largest, the most prof- outside the group should be able to intervene itable, or the best-known practitioners of the SHG and help correct the problems. approach. Rather, these organizations were chosen Oversight/Intervention in Liquidity—SHGs can provide better service if group members can draw from an external fund when cash flow needs are higher than usual, and deposit into that fund when excess cash is available. An external fund also may be used to invest excess cash in liquid instruments. We do not argue that all of the above support services are essential for every community finance model. But some robust combination of most of these services seems to be important for long-term because their programs appeared to provide adequate support services—as confirmed by strong loan collection—and because their data and experience were available to us. The four included programs that were reported to serve large numbers of poor people and/or to operate particularly efficient programs. Dhan Foundation has several SHG programs in Tamil Nadu; only the one run by the Kurinji Vattara Kalanjiam (KVK) federation of SHGs, in Madurai, was studied for this paper. OBC is an Indian commercial bank with 1148 branches16; the stability. When community-level financial service programs fail, the problem usually can be traced to inadequate external support structures. 15 Data from these organizations presented in this paper were assembled through interviews and correspondence with their management and/or review of public sources, including annual reports, the Microfinance In- As noted earlier, long-term SHG viability formation eXchange (MIX), and case studies published in Small Cus- depends on two conditions. First, the individual tomers, Big Market by Sukhwinder Singh Arora and Malcolm Harper SHGs must receive an adequate package of external support services. Second, the SHG program (ITDG 2005). 16 As of April 29, 2006, according to the OBC Web site (www.obcindia. com/knowus/knowus_ourachivements.html). 19 Table II-2. Key Features of the SHG Programs Studied MFI (at 3/31/06) SNFL (at 3/31/05) OBC (at 3/31/03) Dhan (at 3/31/03) Unweighted average of 58 SHG promoters (M-CRIL) a Legal status Section 25 (not-for-profit) company NBFI Scheduled commercial bank Trust — Region South (Tamil Nadu) South (Tamil Nadu) North (Uttaranchal) South (Tamil Nadu) — SHG members 517,784 47,282 4,949 164,552 21,057 Total assets of promoter organization (US$ millions) 4.5 b 6.9 7,132.8 2.0 0.5 Promoter’s return on average assets NA 0.32% 1.0% NA –27.6% Portfolio at risk of loans to SHGs c 0.33% (90 days) 0.7% (60 days) 0.0% (90 days) d 2.94% (30 days) e 27.7% (60 days) Features a Calculated from “M-CRIL Microfinance Review 2003 (revised Feb. 2004),” Micro-Credit Ratings International Ltd., Gurgaon India. The numbers in this table do not always match numbers in similar tables from the original report, because some of those tables show weighted calculations and include results from non-Indian SHG programs. b Authors’ estimate. c Outstanding balance of all loans that are late by more than a given number of days, divided by total outstanding balance of the whole loan portfolio. This statistic reflects repayment of external lending, not the loans within the individual SHGs. d For Rudrapur program only. e For KVK program only. SHG program studied in this paper operates in their own performance. Thus, they probably are one branch, at Rudrapur in the northern state of more focused on sustainability than the average Uttaranchal. Indian SHG program. Table II-2 compares the four SHG promoters with an average of 58 Indian SHG promoters in Sustainability Test Par t 1: Are Essential India—including NGOs, cooperative bodies, and S u p p o r t S e r v i c e s P r ov i d e d ? nonbank financial intermediaries (NBFIs)—that The first part of our sustainability test was applied were rated by M-CRIL, an Indian rating agency to the four SHG programs in the study by examin- for microfinance institutions, between September ing whether an adequate package of support serv- 17 1998 and June 2003. According to M-CRIL, the ices is provided. In each of the four programs, sup- SHG programs it rated include some of the largest port services are performed by more than one in India. These programs probably sought ratings actor, including the following: either to access external funding or to improve ■ 17 Sarvodaya Nanofinance Ltd, one of the four promoters analyzed in this study, is also included in the M-CRIL sample of 58 SHG promoters. 20 A support organization, such as an NGO, nonprofit corporation, or NBFI, that is usually the SHG promoter and that supervises the overall ■ ■ ■ functioning of the program (used in the MFI, MFI gets one-third of the interest, or 6 percent, as Dhan, and Sarvodaya programs) a “service fee,” and ICICI Bank keeps the remain- An SHG federation, or collective of SHGs, ing 12 percent. usually with its own management and balance Sarvodaya Nanofinance Ltd. is a licensed non- sheet, that forms, trains, or otherwise sup- bank financial institution that acts as a support ports individual SHGs or smaller groups of organization. It establishes system-wide policies SHGs, such as local-level associations (used in and products, borrows at commercial rates from Dhan and Sarvodaya) banks, and on-lends to about 50 SHG federations An individual agent or facilitator contracted that then on-lend to SHGs. Sarvodaya’s field exec- by the support organization, SHG promoter, utives support and monitor these SHG federations, or the SHG itself to handle bookkeeping, cash and the federations’ field officers handle all group transactions, and other support services with formation, monitoring, and cash transactions. or without pay (used in OBC) Saravodaya and the SHG federations cover their One or more bank staff, such as branch managers and loan officers who handle local SHG business; these usually follow policies designed by, and reported to, a higher authority in the bank, such as a microfinance project unit (used in all programs) Based on short field visits, interviews with the SHG promoters, and the financial results of their programs, it appears that each program is providing an acceptable level of all the support services identified earlier. This is not to suggest that these programs could not be improved, but rather that the level of support services they offer is adequate to keep most of their SHGs healthy. Annex II-2 provides details of the support services offered in each program. Organizational structure and cost coverage are described below. In the MFI program, MFI acts as a support organization whose staff form, support, and monitor all SHGs. ICICI Bank, India’s largest private bank, is the only lender to SHGs and also handles cash deposits and withdrawals for SHGs at its branches. The costs of these and other support services are borne by SHG members, who pay 18 percent per annum on loans from ICICI Bank.18 costs through interest spreads. Saravodaya borrows from commercial banks at 7.5 to 8 percent per annum and lends to the federations at 12 percent, leaving it with a spread of 4 to 4.5 percent. The federations on-lend to the SHGs at about 22 percent, leaving a spread of 10 percent. In the OBC program, the only role of the bank’s Rudrapur branch is to service SHGs. The branch’s two officers oversee about 1,000 fivemember SHGs and perform most support functions. OBC charges SHGs 11 percent per annum on loans to cover the costs of funds, support services, and headquarters overhead. Day-to-day transaction and book-keeping services are provided directly to groups by individual “facilitators” who are identified by branch staff. Each facilitator is contracted by about 200 SHGs and is paid 1 percent of each group’s outstanding loans for his or her support. In the Dhan program, the Dhan Foundation NGO is a support organization that forms SHG federations to run SHG programs. In this case, it formed the KVK federation in 1997. The federation serves 350 SHGs at two levels: 16 local or cluster-level associations of 10–15 SHGs each, and the block-level federation of all the cluster-level associations. Cluster-level associations train and monitor SHGs and help them conduct bank trans- 18 All interest rates in Part II of this Occasional Paper are stated on an effective (declining balance) basis. actions. The block-level KVK federation borrows from banks, on-lends to SHGs and cluster-level 21 associations, and trains and monitors the associa- this analysis. The income may be paid by SHGs tions. Federation staff at both levels estimate their directly—through fees to an individual facilitator costs at the beginning of each year and collect this or interest payments to a lender—or indirectly, by from SHGs in proportion to their loans outstand- paying interest to an SHG federation that, in turn, ing. At the end of the year, any surplus contribu- pays interest to a local bank. Still, the revenue tion is returned to the SHGs. earned by the bank is, at its origin, paid by an SHG. Banks participating in the Dhan program lend External actors also earn nonoperating income to the KVK federation; they also lend directly to from supporting SHGs. For example, a support SHGs and handle their cash transactions at organization that collects fees from SHGs may branches. They cover their costs through the inter- deposit the sum in a bank and earn interest. This est rate they charge on loans to SHGs and SHG type of nonoperating income is not predictable and federations (typically 11–12% per annum). was not counted in this analysis. Quantifying costs is less straightforward. The Sustainability Test Par t 2: Are SHG Pr ograms most accurate approach is to measure the precise Ab le to Co ver the Costs of the External cost to each actor of performing each support serv- S u p p o r t T h e y P r ov i d e ? ice, separating out the cost of any activity unrelated After ensuring the SHG programs in our study to serving SHGs. Because doing this is not practi- offer adequate support services, we looked at cal, several simple assumptions and estimates were whether the total costs of providing support serv- made instead. ices are paid for out of operating income earned First, in some cases, it was assumed that all of an from SHGs. A three-step process was applied to actor’s operating costs relate to providing support each program. services to SHGs. For example, in MFI’s SHG pro- We did not investigate whether SHG internal gram, MFI plays the role of a support organization revenues exceed internal costs, in part because we whose main purpose is to perform administration, did not have access to internal group results. supervision, liquidity, and other functions for However, the findings of Part I of this Occasional SHGs. But MFI also performs nonfinancial serv- Paper have shown that, in general, group financial ices, such as teaching SHG members about health performance is generally positive. Also, in a study and environmental issues. To be conservative, all of cited earlier, Srinivasan found that SHG adminis- MFI’s operating costs are accounted for in this trative costs—such as stationery and travel— analysis, even though some costs were probably amount to roughly US$17 per SHG per year. We incurred to deliver nonfinancial services. assumed that even SHGs that save only a few dol- Second, assumptions were made for banks’ cost would be able to meet these of funds and their cost of handling SHG transac- annual expenses out of savings or the interest tions at branches. The Reserve Bank of India’s rate earned on savings. for reverse repurchase agreements was used as a lars each month 19 Step 1. Account for income earned and the costs of support services External actors earn two types of operating income from SHGs: fees and interest on loans. Both types of operating income are included in 19 The bank-organized groups we visited usually saved more—about US$20 per month per group. 22 proxy for cost of funds when the actual cost was unavailable. For processing SHG loans and group transactions at branches, a cost to banks of 3 percent of loans outstanding was assumed. This was reduced to 1 percent of loans outstanding in the case of the Sarvodaya program, because group transactions are not handled by the bank. These operating cost assumptions are conservative (that is, probably on the high side), based on conversa- earlier SHG program, and these costs would have tions with bank officials and on the 2002 Seibel been fully amortized by 2005, the year for which and Harishkumar study. That study found that a we analyzed the organization. commercial bank, a regional rural bank, and a dis- Third, we ensured that, for each SHG program, trict central cooperative bank incurred only a small subsidized funds received from international and marginal cost for processing SHG transactions, local donor agencies were not included in operat- because of underutilized branch capacity and ing income. By accounting for these subsidies sep- 20 arately, we are able to arrive at an understanding of Third, some costs we judged to be relatively the system’s inherent sustainability—the compari- insignificant were excluded. In most cases, the son of its internally generated income to its total apportioned cost of the bank’s head office over- operating costs. This gives a better picture of the head was not considered, because SHG lending is program’s ability to expand when subsidies are no usually only a tiny portion of a bank branch’s longer available. group-based transactions. operations in rural areas, and head office overhead One adjustment we did not make is to increase is allocated among a large number of bank branches. the interest rate banks charge SHGs to a commer- Step 2. Adjust Income and Costs After tallying the income and costs, three important adjustments were made to get a full picture of each SHG program’s sustainability. First, loan loss provisioning was standardized at 2 percent of average portfolio outstanding in each case. This is because each SHG program maintains a different policy on how much to provision against loan losses, and we wanted to be able to compare them without giving any one an unfair advantage. Second, the cost of forming SHGs and SHG cial level. Critics of the SHG approach argue that rates of 8–12 percent per annum on loans to SHGs are below market rates and that the true cost to banks of making and servicing these loans is much higher. They argue that treating the bank loans as if they carried a market interest rate presents a truer picture of SHG sustainability. We did not make this adjustment because it would presuppose the conclusion to our main research question: how are external actors (including banks) in four SHG programs servicing SHGs, and are they covering their costs? federations was amortized over five years when Step 3. Estimate loan portfolio and total assets this activity was not included in ongoing costs of Finally, we estimated the total value of external an SHG program. For instance, Dhan Foundation loans to SHGs and the total assets managed in each incurred a cost of US$200 per group in forming SHG program to help us understand how effi- its SHGs, its local-level associations (CLAs), and ciently the SHG program operates: the greater the the KVK federation over three years, beginning in loan portfolio and assets compared with the cost of 1997. We counted the amortized cost (one-fifth of providing support services, the more efficient the the total) when we analyzed the program’s 2003 program. performance. On the other hand, most of the External loans to SHGs include loans from com- SHGs and federations managed by Sarvodaya mercial banks, SHG federations, and support Nanofinance Ltd. were created before 2000 by an organizations. In the Dhan program, for example, total external loans to SHGs include loans from 20 In most cases, marginal costs were minimal because of excess capac- ity in the branch and no additional personnel requirement. The study also found that the SHG lending business resulted in returns on assets the KVK federation and from Canara Bank. The total assets managed by an SHG program of 4.6 percent to 11.8 percent versus –1.7 percent to 2.3 percent for include external loans, the total deposits SHGs the banks as a whole. maintain in bank accounts, and all the assets that 23 Table II-3 Dhan’s KVK SHG Program: Estimated Adjusted Income, Costs, and Assets (in US$) Type of actor Interest income Fee income TOTAL INCOME Staff costs Administrative expenses Training costs SHG promotion costs (amortized) SHG federation promotion costs (amortized) Total Operating Costs Dhan Foundation KVK Federation — Canara Bank TOTAL Support organization 0 0 0 SHG federation 41,800 2,800 44,600 Individual(s) — — — Bank 60,811 0 60,811 All actors 102,611 2,800 105,411 0 0 0 8,600 6,900 2,700 — — — 0 15,864 0 8,600 22,764 2,700 0 0 — 0 0 13,920 13,920 0 18,200 — — 0 15,864 13,920 47,984 Estimated cost of funds Adjusted loan loss provisions TOTAL COSTS 0 26,400 — 37,016 63,416 0 13,920 4,880 49,480 — — 5,696 58,576 10,576 121,976 Startup subsidies (amortized) Ongoing subsidies 13,920 0 0 0 — — 0 0 13,920 0 — 2,235 MARGIN (Income – costs) Estimated average external loans to SHGs Average SHG deposits Estimated average assets used for SHG program EST TOTAL ASSETS MANAGED a (13,920) (4,880) 284,793 227,471 a (16,565) 0 0 244,000 0 — — 528,793 227,471 0 77,872 — 0 77,872 0 321,872 — 512,264 834,136 These deposits are liabilities on the bank’s books, but are financial assets of the SHGs. external actors use to provide support services to serving SHGs, we made very rough estimates of SHGs. For instance, the total estimated assets of allocations. the Sarvodaya SHG program include external Data that emerged from this three-step process loans to SHGs from the Sarvodaya support organ- were used to construct a simple table that lists ization, the aggregate savings held by the SHGs in income, costs, and assets for each program. Table their own accounts, and all the assets owned by II-3 is a sample of this for the Dhan program. the support organization and the 50 SHG federa- Table II-3 suggests that Dhan’s KVK program is tions that support SHGs. These include office running a deficit in providing support services to equipment, working capital, and other fixed and SHGs and could lose its ability to provide these liquid assets. In cases where an external actor uses services over time if adjustments are not made. these fixed and liquid assets for more than just External actors involved in the program spent a 24 Table II-4. Four SHG Programs: Estimated Basic Financial Results, Adjusted (in US$) MFI Sarvodaya OBC (Rudrapur) Dhan (KVK Federation) Mean (unweighted) 517,784 304,380 47,282 67,061 4,949 4,848 6,264 5,356 144,070 95,411 1,846 613 10 35 626 7,315,521 1,718,635 85,775 105,411 2,306,336 Costs Estimated operating costs incurred by external actors (adjusted) Estimated total costs incurred by external actors (adjusted) 2,701,918 742,701 20,525 47,984 878,282 5,562,373 1,818,753 82,175 121,975 1,896,319 Margin (Income – Costs) 1,753,148 3,600 (16,564) Operations SHG members SHG borrowers Staff of external actors supporting SHGs Income Operating income earned by external actors Loans and assets Average external loans to SHGs Estimated average total assets managed (100,118) 410,017 40,863,636 4,306,169 602,500 528,793 11,575,275 45,358,636 9,500,218 987,291 834,136 14,170,070 total of about US$114,000 to support SHGs but ■ Indicator: Total cost/SHG borrowers collected only US$105,000 from them directly or indirectly. To correct this problem, Dhan What is the cost to support one borrower? ■ How productive is the collective staff of these Foundation or KVK federation needs to reduce SHG programs? Indicator: SHG borrowers/ the program’s cost of providing services or staff members increase the interest rates or fees charged to SHGs. ■ Basic operational and financial results for each borrowers? Indicator: Period-average external of the four SHG programs are summarized in Table II-4. (See Annex II-B for detailed tables.) loans/SHG borrowers ■ average external loans Pr ograms ple indicators that can help explain several aspects of the financial performance of the SHG programs. The most important question in this study is whether these programs are sustainable: What effective interest rate do borrowers pay on external loans? Indicator: Income/Period- A s s e s s i n g t h e F i n a n c i a l P erf o r m a n c e o f S H G Data from Table II-4 can be used to calculate sim- How big are the external loans provided to ■ What is the administrative cost to keep a given loan amount outstanding? Indicator: Operating cost/Period-average external loans The indicators calculated in Table II-5 are simple proxies for the industry standard indicators most analysts use in assessing a single microfinance insti- ■ Do SHG programs cover the costs of provid- tution. The precise data required for those latter ing support services? Indicator: Income/costs 25 Table II-5. Key Financial Results for SHG Programs MFI Portfolio at risk on 0.33% loans to SHGs (>90 days) Income/costs 131.5% Estimated operating costs/ borrower per year $8.9 Borrowers per staff person 165 Average external loan balance outstanding per borrower $134.3 Income/average external loans to SHGs 17.9% Estimated operating costs/ average external loans to SHGs 6.6% Sarvodaya OBC (Rudrapur) Dhan (KVK Federation) Mean (unweighted) 0.7% (>30 days) 94.5% 0.0% (>90 days) 104.4% 2.94% (>30 days) 86.4% — 104.2% $11.1 109 $4.2 485 $9.0 153 $8.3 228 $64.2 $124.3 $98.7 $105.4 22.2% a 14.2% 19.9% 18.6% 17.2% 3.4% 9.1% 9.1% a This is interest income earned by the federations for lending to SHGs. The federations, in turn, pay interest on loans to the Sarvodaya support organization. That income is not included here. indicators are not available because the SHG pro- and loan loss provisions. This administrative cost grams analyzed involve several external actors. turns out to be less than 10 percent. This is The indicators reveal that, on average, the four approximately the same as the full interest rate that SHG programs cover all (104 percent) of the costs many banks charge on SHG loans. Where a bank is of providing support services to SHGs. Two of the the only external actor supporting SHGs, it is dif- programs cover all of their costs. The other two ficult to see how the bank can charge this rate and must find ways to increase their revenues from cover all of its costs—but still expect to achieve SHGs or to become more efficient. On average, long-term group viability. the four programs spend US$8 per SHG member to provide support services. Table II-6 compares the performance of the four SHG programs with benchmarks from other The most efficient program in the group stud- groups of microfinance providers. All of those ied is OBC, at Rudrapur, which uses a small num- comparator groups consist of single-institution, ber of bank branch staff and external facilitators to stand-alone providers. It is not completely precise manage all SHG operations. Remarkably, nearly to compare single-institution performance indica- 500 SHG borrowers are served by each staff per- tors against proxy indicators that consolidate the son (three branch officers and seven individual performance of multiple actors. Even so, we think facilitators). Yet the program’s low outstanding that the comparison sheds some meaningful light. balance per borrower and its location in a rural The first comparator set is the group of 58 mountainous region suggest that it reaches among Indian SHG programs rated by M-CRIL between the poorest clients of the programs studied. September 1998 and June 2003 and shown in How much do SHGs pay for credit? The aver- Table II-2. The second comparator set is the group age yield of the four programs is 18.6 percent. In of nine Grameen-style microfinance institutions other words, SHGs pay about 19 percent interest that were also rated by M-CRIL during this for credit and a full set of support services. period. The third comparator set is a group of 37 The last indicator in the table shows the admin- leading microfinance institutions in India, of vari- istrative cost of keeping US$1 of loans outstand- ous types, that had voluntarily provided unad- ing to SHGs. It does not include the cost of funds justed financial information to the Microfinance 26 Table II-6. Key Benchmarks Source of data Average borrowers (unweighted) 58 SHG microfinance institutions in India 9 Grameenstyle microfinance institutions in India M-CRIL (2003)a 37 leading microfinance institutions in India 302 microfinance institutions (global) 4 SHG programs (proxy indicators) M-CRIL (2003) MixMarket b MixMarket/ MicroBanking Bulletin c This study 5,912 27,847 44,031 62,246 95,411 19.3% (>60 days, loans to SHGs) 4.2% (>60 days) 4.4% (>30 days) 3.9% (>30 days) <3.0% (>30 or 90 days, loans to SHGs) 48% 85% 98.5% 123.6% 104.2% Average outstanding loan balance per borrower (as % of GNI p.c.) US$37 (6.0%) US$54 (8.7%) US$134 (21.6%) US$814 (62.3%) US$105 (17.0%) Operating costs per borrower per year (as % of GNI p.c.) US$24 (3.8%) US$18 (2.9%) US$14 (2.3%) US$153 (NA) US$8 (1.3%) Operating costs/average loan portfolio 63.8% 33.4% 15.5% 28.9% 9.1% 118 142 439 140 228 38.1% 18.6% Portfolio at risk Operational self-sufficiency (income/costs) Borrowers per staff person Yield on gross loan portfolio 12.6% d 28.8% 20.7% a Calculations based on M-CRIL (2004). The numbers in this table do not always match numbers in similar tables from the original report, because some of those tables show weighted calculations and include results from non-Indian SHG programs. b MIX Market and World Bank (2005). c MIX (2006). d Financial revenue ratio (financial revenue as a percentage of total assets). Yield on gross portfolio was not available. Information eXchange (MIX) up to September 2005. 21 The single clearest measure of success or failure Microfinance institutions that report to in a microfinance program is the ability to recover the MIX are generally more commercially oriented money that is loaned. By this standard, the 58 programs, so the sample of 37 microfinance insti- SHG promoters rated by M-CRIL are not success- tutions is called “leading Indian MFIs” here. The ful, given their average portfolio-at-risk (>60 days) last comparator set is based on adjusted data for a of 19.3 percent. In other words, almost a fifth of group of 302 microfinance institutions worldwide the loans outstanding to SHGs by banks and other that voluntarily provided data for the 2004 fiscal lenders are two months or more late and thus at year on a confidential basis to the MIX; five-sixths substantial risk of default. Experience in other of these institutions have external audits, ratings, microfinance models suggests that when portfolio or assessments to support their performance infor- at risk measured at one repayment period rises mation. above 10 percent, it usually becomes unsustain- In general, the four SHG programs in our study compare highly favorably to the benchmarks. In particular, they seem to outperform the 58 stand- able—that is, it must be reduced quickly or it spins out of control.22 22 It is important to note that the portfolio-at-risk figures reported here alone SHG-promoting microfinance institutions are for external loans to the SHGs. It appears that SHGs can sometimes analyzed by M-CRIL. sustain high PAR on internal lending by groups to their members, while still ultimately collecting a very high percentage of these loans (see Table 21 Some, but not all, of the MFIs had external audits, ratings, or assess- ments to back up their financial information. II-6). But this does not mean that high PAR on external loans to the SHGs is sustainable. 27 This result leads us to suspect that, on average, But banks charge SHGs too little to cover the these 58 SHG promoters do not adequately per- costs of supporting the groups over the long run. form the support services necessary to ensure Banks normally fail to consider the sunk costs of group stability and loan repayment. In contrast, the NGOs that have organized and/or maintain the SHG programs studied here, and the other com- groups to which the bank is lending. If banks had parators, do a better job of collections. Their port- to provide all the support services needed to pro- folio-at-risk ranges from 0.0 percent to 2.94 percent tect the quality of their SHG loans, or pay NGOs (> 30 days), compared to 4.4 percent (>30 days) for or other actors to handle this function, they would the leading Indian microfinance institutions. have to charge SHGs higher interest rates or fees. Data from the four leading SHG programs International experience with grassroots-level studied indicate that, when it includes the neces- financial intermediaries has shown time and again sary support functions underpinning long-term that unless core external support functions are pro- sustainability, the SHG approach can compare vided in a sustainable manner, and are paid by rev- favorably with other models of financial service enue generated within the system itself, commu- delivery—despite the poor results of many Indian nity-level units will degrade over time and SHG programs, as represented by the M-CRIL eventually unravel. The history of savings and sample. Although three of the four programs do credit cooperatives, financial service associations, not yet cover all of their costs, they demonstrate community banks, and others have demonstrated the potential for doing so with relatively minor that the reputation and ultimate success of a sys- adjustments to cost and income. Moreover, they tem depends on the strength of centrally provided appear to serve people who are as poor as or support. In a few instances, this support has been poorer than clients of microfinance institutions in built over a period of several decades, allowing the India when measured by average loan outstanding. grassroots networks of membership-based financial The four SHG programs studied also compare intermediaries to compete into the modern era favorably to international benchmarks. Like most (Christen 2005). In most instances, this has not microfinance programs in South Asia, they make been the case. loans that are a far smaller percentage of average In those few instances where community-based income than in other regions. Low labor costs and financial systems have been successful, the support high population density in South Asia make tiny infrastructure was usually built during a second loans somewhat less expensive to deliver. phase, after the grassroots-level units were put in place. In India, therefore, it may not be too late, St ra t e g i c I mp l i c a t i o n s f or Pr oponents of the even though at present commercial banks and S H G A p p r oac h other promoters do not necessarily appreciate the The 2.2 million SHGs that currently exist provide necessity and the full cost of long-term support to a large and growing market for Indian banks. The maintain their SHG portfolio. results of this study show that well-run SHG pro- Making sure that such support is in place often grams compare favorably on outreach and opera- will require increases—usually modest—in the tional efficiency with alternatives. Thus there is a interest or fees charged to SHGs. But sustainable case to expand these types of programs. However, funding of such support is very much in the inter- a large number of SHG programs are not well run, ests of the members—and essential to the perma- and those need to be improved by adding essential nence of the SHG system. support services. 28 ■■■ Part I ANNEX Detailed Data on 150 Indian Self-Help Groups Table IA-1. SHG Location as Indicator of Outreach, by Promoting Institution (miles) Average SHG distance from Bank Health center Paved road/highway PMMS Sakhi Samiti PRADAN CGB PANI Average 19.8 9.4 3.3 5.0 1.6 1.7 8.6 4.8 10.6 2.7 2.7 2.4 3.5 5.8 8.2 7.9 4.9 5.2 Table IA-2. SHG Location: Type of Settlement, by Promoting Institution (percent) Settlement PMMS Sakhi Samiti Few scattered houses Small village Large village Town Total 0.0 60.0 40.0 0.0 100.0 0.0 6.7 66.7 26.7 100.0 PRADAN 6.7 66.7 26.7 0.0 100.0 CGB 0.0 43.3 56.7 0.0 100.0 PANI 3.3 73.3 23.3 0.0 100.0 Average 2.0 50.0 42.7 5.3 100.0 Table IA-3. SHG Members Belonging to Scheduled Tribes and Castes, by Promoting Institution (percent) Caste category a Scheduled tribes Scheduled castesa Subtotal: Scheduled tribes and castes Minorities Backward castesb Other castes Total PMMS Sakhi Samiti PRADAN CGB PANI Average 0.9 21.0 0.0 58.4 84.6 12.0 25.9 9.3 19.3 48.7 26.1 29.9 21.9 1.6 74.8 1.6 100.0 58.4 11.6 22.4 7.7 100.0 96.6 0.0 3.4 0.0 100.0 35.2 2.7 23.8 38.3 100.0 68.0 7.4 18.3 6.4 100.0 56.0 4.7 28.5 10.8 100.0 a Scheduled castes and scheduled tribes are communities accorded special status by the Constitution of India. These communities were considered “outcastes” and excluded from the four-caste system that was the social superstructure of Hindu society in the Indian subcontinent for thousands of years. These castes and tribes were relegated to the most menial labor, with no chance of upward mobility, and degenerated into the most economically and socially backward communities in the region. b “Backward castes” comprise the last of the four major castes in the Hindu social hierarchy. Though their status is above that of the scheduled tribes and castes, they are economically backward and have poor living conditions. 29 Table IA-4. Landholdings of SHG Members, by Promoting Institution (percent) Landholdings PMMS Landless (no homestead land) 11.0 Marginal: Owns no agricultural land 47.6 Subtotal: Landless and marginal 58.5 Small landholding 35.2 Large landholding 6.3 Total 100.0 Sakhi Samiti 44.2 39.1 83.3 16.2 0.5 100.0 PRADAN 0.8 84.8 85.6 12.0 2.4 100.0 CGB 21.9 38.7 60.6 18.5 20.8 100.0 PANI 8.5 88.1 96.6 3.4 0.0 100.0 Average 17.3 59.7 76.9 17.1 6.0 100.0 Table IA-5. Primary Source of Income of SHG Members, by Promoting Institution (percent) Source Work own land Agricultural labor Subtotal: Agriculture-dependent Nonagriculture wage labor Microenterprise Other Total PMMS Sakhi Samiti 42 40 82 10 5 2 100 26 34 60 22 17 1 100 PRADAN 80 14 94 2 3 1 100 CGB PANI Average 28 16 44 44 11 1 100 39 55 94 1 2 3 100 43 32 75 16 8 2 100 Table IA-6. Education Level of SHG Members, by Promoting Institution (percent) Level Illiterate Able to sign Literate: Read and write Primary school Secondary school Matriculate (passed 10th grade) and above Subtotal: literate Total 30 PMMS Sakhi Samiti PRADAN CGB PANI Average 17 71 43 46 61 25 14 0 74 19 42 32 4 4 3 1 10 1 7 1 5 33 23 9 0 2 4 9 8 4 1 12 100 0 12 100 1 14 100 22 87 100 1 7 100 5 26 100 Table IA-7. SHG Organizational Details (categories used in rating the SHGs) Number of records Details Marginal A few basic records exist and are being maintained. Below average All basic records exist, but only a few are maintained. Quality of minutes book is poor, containing only details of meeting date, number of members, financial transactions, and signatures. Average All basic records exist and are maintained, but are not up to date. Quality of minutes book is average, with details of meeting date, number of members, financial transactions and discussions related to loan sanctions, monitoring, and default, along with signatures. Above average All basic records exist and are maintained and up to date, but not updated regularly each month. Quality of minutes book is average, with details of meeting date, number of members, financial transactions, discussions related to loan sanctions, monitoring, default, federation functioning (if any), and social aspects, along with signatures. Complete and up to date All basic records exist and are maintained and up to date, but contain errors and do not tally with financial statements. Virtually no errors All basic records exist and are maintained and up to date and have virtually no errors. Table IA-8. SHG Organizational Details, by Promoting Institution (percent) Details SHG meetings held in the morning Records maintained by paid bookkeeper Member’s family sometimes makes payment PMMS Sakhi Samiti PRADAN CGB PANI Average 0 57 70 10 30 33 97 10 100 60 80 33 10 13 0 0 57 23 31 Table IA-9. Field Staff Rating Criteria for SHGs Group cohesion rating Criteria Exceptional All members have similar backgrounds; the SHG makes decisions by consensus; all members attend meetings regularly and participate in discussions and decision-making. Above average Most members have similar backgrounds; SHG decisions are made by leaders and 2–3 members; all, except 1–2 members, attend meetings regularly and participate in discussions. Average At least half of members have similar backgrounds; SHG decisions are made by leaders; all, except 1–2 members, attend meetings regularly and are aware of group transactions. Below average At least half of members have similar backgrounds; SHG decisions are made by one leader; more than half of members attend meetings regularly and are aware of group transactions. Poor Members have different backgrounds; SHG decisions are made by leader; attendance is variable—meets only for financial transactions. Overall rating of group functioning Criteria Exceptional Group meetings and savings and loan plus interest repayments are regular. Group norms exist and those related to attendance and savings are implemented. SHG has accessed loan from bank or federation. Above average Group meetings and savings and interest repayments are regular. Group norms exist, and those related to attendance and savings are implemented. SHG has accessed loan from bank or federation. Average Group meetings and savings are regular. Group norms exist but some or all are not implemented. Below average Group meetings are regular but not scheduled. Savings are regular, but group norms are not articulated. Poor Group exists but does not meet regularly. Savings and loan repayments are highly irregular. Table IA-10. SHG Members’ Use of Loans, by Promoting Institution (percent) Use Agricultural purposes Animal husbandry Consumption House construction and repair Microenterprise Loans for repayment of other loans Other 32 PMMS Sakhi Samiti PRADAN CGB PANI Average 51.7 17.3 11.0 11.0 6.2 0.0 2.8 9.6 33.9 23.5 13.6 14.8 0.0 4.7 51.0 9.4 16.0 0.0 17.0 0.0 6.6 34.0 25.0 7.0 7.0 9.0 5.0 13.0 12.0 30.0 28.0 2.6 21.0 2.0 4.5 31.7 23.1 17.1 6.8 13.6 1.4 6.3 Table IA-11. Average Cost of Promotion of SHGs over Three Years, by Promoting Institution (amounts in US$, exchange rate of 47.65 rupees to US$1 for year ending 31 March 2003 and 44.125 rupees to US$1 for year ending 31 March 2004) Item Number of SHGs promoted Cost of social mobilization Salaries, allowances, and honorariums Cost of books and materials Training costs Capital for entry-point activity of SHGs Subtotal Overhead—project management @ 10% Average social mobilization cost per SHG (A) Support costs Staff costs (excluding field workers) Office administration costs, including meetings Training of executive committee members and staff Endowment fund for federation (Mandal Samakhya) per SHG Average support cost per SHG (B) Total cost of mobilization and support per SHG (A + B) PMMS Sakhi Samiti PRADAN CGB PANI Average As % of average cost 300 135 123 360 785 341 — 34 5 39 101 10 15 47 — 38 14 — 13 68 — 33 53 3 28 20.2 1.2 10.5 105 183 — 126 — 85 — 27 — 101 21 104 8.2 39.9 18 13 8 3 10 10 4.0 201 139 93 30 111 115 44.1 13 21 116 — 29 36 13.8 12 47 152 20 65 59 22.6 7 26 — — 6 8 3.0 210 — — — — 42 16.4 242 94 268 20 100 145 55.9 443 233 361 50 211 260 100.0 33 Figure I-A1. PMMS—Statement of Income and Expenditure 2001–02 2002–03 Operating Income Service charge (interest from loans) Fines Interest on account with bank Interest refund of SHG from Federation Other: 1. Fees/membership 2. Resource Fee Total operating income 368 1 — 1 — 2 — 372 494 2 — 6 — — — 502 Operating Expenses Salaries/honorarium Stationery Interest on borrowings from Bank/VO/Fed. Interest paid on group savings Consumables Travel Equipment Social mobilization costs Support costs Loan loss provision Others Total operating expenses 11 1 215 — — 2 — 66 79 11 3 388 14 1 274 — — 3 — 67 80 12 4 455 Net operating profit/(loss) Non-operational income (grants from NGO, etc.) Non-operational expenses (16) — 1 47 — 5 Total consolidated profit/(loss) (17) 42 Note: For all five SHG programs, financial information for the periods ending March 2001, March 2002, March 2003, and March 2004 was converted at Rs. 46.577 to US$1, Rs. 48.733 to US$1, Rs. 47.65 to US$1, and Rs. 44.125 to US$1, respectively. Given the variable annual exchange rates, balances carried forward from one year to the next will have different values. 34 Figure I-A2. PMMS—Balance Sheet 2001–02 2002–03 6 11 2,069 (11) 2 7 16 2,324 (23) 2 17 — 2,094 20 — 2,346 LIABILITIES AND EQUITY Liabilities Savings: compulsory Savings: voluntary Loans: financial institution* Loans: village organization/federation Other short-term liabilities Total liabilities 450 — 145 760 291 1,646 583 — 179 889 102 1,753 Equity Paid-in-equity (membership share) Funds distribution Grant: revolving fund** Grant from promoting institution Previous years’ retained earnings/losses Current year retained earnings/loss Total equity Total liabilities and equity — (11) 75 144 257 (17) 448 2,094 — (80) 94 148 389 42 593 2,346 ASSETS Cash in hand balance Bank balance Total loan portfolio (with members) Loan loss reserve Deposits (investments by the SHG) Share capital (equity) in village organization Net fixed assets (after depreciation) Total assets Note: For all five SHG programs, financial information for the periods ending March 2001, March 2002, March 2003, and March 2004 was converted at Rs. 46.577 to US$1, Rs. 48.733 to US$1, Rs. 47.65 to US$1, and Rs. 44.125 to US$1, respectively. Given the variable annual exchange rates, balances carried forward from one year to the next will have different values. *Borrowings from financial institutions were through the federation or village organization. **The District Rural Development Agency (a state government institution that promotes SHGs) gives SHGs older than one year 5,000–20,000 rupees to meet members’ credit demands. 35 Figure IA-3. Sakhi Samiti—Statement of Income and Expenditure 2000–01 2001–02 2002–03 193 8 — — 270 12 — — 347 25 — — 9 1 211 16 — 298 17 1 390 39 2 44 5 54 5 32 — — 1 47 32 — 1 154 42 — — 1 45 31 66 1 235 62 1 — 1 46 31 67 — 267 Net operating profit/(loss) Nonoperational income (grants from NGO, etc.) Nonoperational expenses 57 — — 63 — — 123 — — Total consolidated profit/(loss) 57 63 123 Operating income Service charge (interest from loans) Fines Interest on account with bank Interest refund to SHG from federation Other 1. Fee/Commission 2. Stationery and others Total operating income Operating expenses Salaries/honorarium Stationery Interest on borrowings from bank/village organization/federation Interest paid on group savings Consumables Travel Social mobilization costs Support costs Loan loss provision Others Total operating expenses Note: For all five SHG programs, financial information for the periods ending March 2001, March 2002, March 2003, and March 2004 was converted at Rs. 46.577 to US$1, Rs. 48.733 to US$1, Rs. 47.65 to US$1, and Rs. 44.125 to US$1, respectively. Given the variable annual exchange rates, balances carried forward from one year to the next will have different values. 36 Figure IA-4. Sakhi Samiti—Balance Sheet * 2000–01 2001–02 ASSETS Cash in hand balance Bank balance Total loan portfolio Loan loss reserve Deposits (investments by the SHG) Equity in Federation (Sakhi Suvidha shares) Net fixed assets (after depreciation) Total assets 74 13 1,041 — — 14 3 1,145 56 14 1,373 (66) — 14 — 1,391 68 18 1,918 (72) — 14 — 1,946 LIABILITIES AND EQUITY Liabilities Savings: compulsory Savings: voluntary Loans: bank Loans: Federation (Sakhi Suvidha) Other short-term liabilities Total liabilities 591 — 431 7 — 1,029 714 — 527 18 — 1,259 881 — 811 6 — 1,698 Equity Distribution of funds/savings Funds with federation (Sakhi Suvidha) Promotional grant by promoting institution Previous years’ retained earnings/losses Current year retained earnings/loss Total equity Total liabilities and equity (54) 28 79 6 57 116 1,145 (73) 64 76 2 63 132 1,391 2002–03 (31) 75 77 4 123 248 1,946 Note: For all five SHG programs, financial information for the periods ending March 2001, March 2002, March 2003, and March 2004 was converted at Rs. 46.577 to US$1, Rs. 48.733 to US$1, Rs. 47.65 to US$1, and Rs. 44.125 to US$1, respectively. Given the variable annual exchange rates, balances carried forward from one year to the next will have different values. *In the case of Sakhi Samiti, some SHGs were not carrying forward profits and choosing to distribute a portion of retained earnings after the close of the fiscal year. This affects calculations for retained earnings for the subsequent year. 37 Figure IA-5. PRADAN—Statement of Income and Expenditure 2000–01 2001–02 2002–03 64 14 — — 88 14 — — 131 16 — — — — 78 — — 102 — 1 148 Operating expenses Salaries/honorariums Stationery Interest on borrowings from bank/federation Interest paid on group savings Consumables Travel Social mobilization costs Support costs Loan loss provision Other Total operating expenses — — 1 — — — 32 91 — 4 128 — — 1 — — — 30 87 17 2 137 — — 8 — — — 31 89 18 6 152 Net operating profit/(loss) Nonoperational income (grants from NGO, etc.) Nonoperational expenses (50) — 16 (35) — 14 (4) — 7 Total consolidated profit/(loss) (66) (49) (11) Operating income Service charge (interest from loans) Fines Interest on account with bank Interest refund of SHG from federation Other 1. Fees/commissions 2. Stationery and other Total operating income Note: For all five SHG programs, financial information for the periods ending March 2001, March 2002, March 2003, and March 2004 was converted at Rs. 46.577 to US$1, Rs. 48.733 to US$1, Rs. 47.65 to US$1, and Rs. 44.125 to US$1, respectively. Given the variable annual exchange rates, balances carried forward from one year to the next will have different values. Figure IA-6. PRADAN—Balance Sheet* 2000–01 2001–02 ASSETS Cash in hand balance Bank balance Total loan portfolio Loan loss reserve Deposits (investments by the SHG) Net fixed assets (after depreciation) Total assets 2002–03 46 42 284 — — — 372 87 72 366 (17) — — 508 112 129 509 (18) — — 732 LIABILITIES AND EQUITY Liabilities Savings: voluntary Savings: compulsory Loans: bank Loans: village organization/federation Other short-term liabilities Total liabilities 295 — 20 — — 315 422 — 21 — 4 447 573 — 47 — 10 630 Equity Distribution of funds/savings Promotional grant by promoting institution Previous years’ retained earnings/losses Current year retained earnings/loss Total equity — 123 — (66) 57 — 118 (8) (49) 61 — 120 (7) (11) 102 Total liabilities and equity 372 508 732 Note: For all five SHG programs, financial information for the periods ending March 2001, March 2002, March 2003, and March 2004 was converted at Rs. 46.577 to US$1, Rs. 48.733 to US$1, Rs. 47.65 to US$1, and Rs. 44.125 to US$1, respectively. Given the variable annual exchange rates, balances carried forward from one year to the next will have different values. *In the case of PRADAN, profitable SHGs were carrying forward only 20% of the previous year’s retained earnings and distributing 80%. However, loss-making SHGs would carry forward the losses. This affects calculations for retained earnings in subsequent years. 38 Figure IA-7. CGB—Statement of Income and Expenditure 2000–01 2001–02 2002–03 2003–04 Operating income Service charge (interest from loans) Fines Interest on account with bank Interest refund of SHG from federation Other 1. Fees/commissions 2. Stationery and others Total operating income 90 2 3 — — — — 95 129 2 3 — — — — 134 241 1 3 — — — — 245 219 1 3 — — — — 223 Operating expenses Salaries/honorariums Stationery Interest on borrowings from bank/federation Interest paid on group savings Consumables Travel Board Social mobilization costs Support costs Loan loss provision Others Total operating expenses — 1 15 — — — — 9 6 — 1 32 2 — 37 — — — — 9 6 — — 54 2 1 54 — — 1 — 9 6 118 3 194 2 — 64 — — 1 — 10 7 128 2 214 Net operating profit/(loss) Nonoperational income (grants from NGO, etc.) Nonoperational expenses 63 4 12 80 — 1 51 — 14 9 — 6 Total consolidated profit/(loss) 55 79 37 3 Note: For all five SHG programs, financial information for the periods ending March 2001, March 2002, March 2003, and March 2004 was converted at Rs. 46.577 to US$1, Rs. 48.733 to US$1, Rs. 47.65 to US$1, and Rs. 44.125 to US$1, respectively. Given the variable annual exchange rates, balances carried forward from one year to the next will have different values. 39 Figure IA-8. CGB—Balance Sheet* 2000–01 ASSETS Cash in hand balance Bank balance Total loan portfolio Loan loss reserve Deposits (investments by the SHG) Net fixed assets (after depreciation) Other loans Total assets LIABILITIES AND EQUITY Liabilities Savings: compulsory Savings: voluntary Loans: bank Loans: village organization/federation Other short-term liabilities Total liabilities Equity Distribution of funds/savings Sakhi Suvidha Fund Promotional grant by promoting institution Previous years’ retained earnings/losses Current year retained earnings/loss Total equity Total liabilities and equity 2001–02 2002–03 — 133 508 — — — 9 650 4 158 1,000 — — — — 1,162 3 189 1,716 (118) — — — 1,790 — 205 2,088 (243) — — 46 2,096 376 — 172 — 26 574 645 — 385 — 5 1,035 987 — 614 — 7 1,608 1,102 — 850 — 50 2,002 — 3 2003–04 — 4 (39) 3 (124) 4 16 1 55 76 15 69 79 127 15 127 37 182 17 194 3 94 650 1,162 1,790 2,096 Note: For all five SHG programs, financial information for the periods ending March 2001, March 2002, March 2003, and March 2004 was converted at Rs. 46.577 to US$1, Rs. 48.733 to US$1, Rs. 47.65 to US$1, and Rs. 44.125 to US$1, respectively. Given the variable annual exchange rates, balances carried forward from one year to the next will have different values. *In the case of CGB, there was no distribution of earnings. Therefore, retained earnings in a given year will be the sum of Current Retained Earnings + Promotion Grant + Previous Retained Earnings - Distribution of Funds/Savings. Figure IA-9. PANI—Statement of Income and Expenditure 2000–01 2001–02 2002–03 17 — 1 — 35 — 1 — 55 — 2 — 71 — 2 — — — 18 — — 36 — — 57 — — 73 — 1 — 2 — 2 1 3 3 — — — 35 32 — — 71 10 — — 1 33 30 — — 76 15 — — — 34 31 19 1 102 18 — — — 37 33 21 1 114 Net operating profit/(loss) Nonoperational income (grants from NGO, etc.) Nonoperational expenses (53) — — (40) — — (45) — 1 (41) — 2 Total consolidated profit/(loss) (53) (40) (46) (43) Operating income Service charge (interest from loans) Fines Interest on account with bank Interest refund to SHG from federation Other 1. Fee/commission 2. Stationery and other Total operating income Operating expenses Salaries/honorarium Stationery Interest on borrowings from bank/village organization/federation Interest paid on group savings Consumables Travel Social mobilization costs Support costs Loan loss provision Other Total operating expenses 2003–04 Note: For all five SHG programs, financial information for the periods ending March 2001, March 2002, March 2003, and March 2004 was converted at Rs. 46.577 to US$1, Rs. 48.733 to US$1, Rs. 47.65 to US$1, and Rs. 44.125 to US$1, respectively. Given the variable annual exchange rates, balances carried forward from one year to the next will have different values. 40 Figure IA-10. PANI—Balance Sheet * 2000–01 2001–02 2002–03 2003–04 ASSETS Cash in hand balance Bank balance Total loan portfolio (with members) Loan loss reserve Deposits (investments by the SHG) Other Net fixed assets (after depreciation) Total assets 1 35 133 — — — — 169 5 39 287 — — — — 331 1 75 327 (19) — — — 384 4 98 441 (41) — 4 — 506 LIABILITIES AND EQUITY Liabilities Savings: voluntary Savings: compulsory Loans: bank Loans: village organization/federation Other short-term liabilities Loan loss reserve Total liabilities 77 — 73 — — — 150 105 — 176 9 — — 290 131 — 192 2 1 — 326 166 — 211 42 1 — 420 Equity Distribution of Funds/Savings Distribution of retained earnings Promotional Grant by Promoting Institution Previous years' retained earnings/losses Current year retained earnings/loss Total equity — — 67 5 (53) 19 — (1) 64 18 (40) 41 — (4) 65 43 (46) 58 — (4) 70 63 (43) 86 Total liabilities and equity 169 331 384 506 Note: For all five SHG programs, financial information for the periods ending March 2001, March 2002, March 2003, and March 2004 was converted at Rs. 46.577 to US$1, Rs. 48.733 to US$1, Rs. 47.65 to US$1, and Rs. 44.125 to US$1, respectively. Given the variable annual exchange rates, balances carried forward from one year to the next will have different values. *In the case of PANI, there was no distribution of earnings. Therefore, retained earnings in a given year will be the sum of Current Retained Earnings + Promotion Grant + Previous Retained Earnings – Distribution of Funds/Savings. 41 ■■■ Part II ANNEX A How System Functions Are Covered ORGANIZATION STRUCTURE MFI SNFL OBC—Rudrapur Branch Dhan—KVK Federation Suppor t organization Suppor t organization, SHG federations Bank branch staff Individual agents SHG federations Support organization (MFI) designs basic SHG products along with ICICI Bank team. Products include mandatory and recurring savings, emergency fund, and bank and internal group lending. Support organization (SNFL) designs basic SHG products. Financial products include mandatory and voluntary savings, bank and internal group lending, and investments in the capital of the federation. OBC staff design products that are uniform across all branches doing microfinance. Products include mandatory and voluntary individual savings accounts, term deposits, bank and internal group lending, and others. Block-level SHG federation (BLF) designs basic SHG products. Products include term loans from banks, consumption loans from BLF, revolving line of credit to mature groups from bank, mandatory and voluntary savings. Support organization has tiered staffing structure, including promoter (manages 25 SHGs), assistant project officer (APO) (manages 8 promoters), project officer (PO) (manages 4 APOs), area manager (manages 2–3 POs), and zonal manager (manages 2 area managers). Promoters and APOs and POs handle bookkeeping and group meetings. Transactions are processed at ICICI Bank branches. Computerized MIS now being installed. Support organization has 4–5 person operational staff, 3person finance team, CEO, and support staff. Each federation has a CEO, 2–10 field officers, and an accountant. Group meetings, bookkeeping, and transactions are handled by field officers. Support organization appoints federation CEO and 2 members of federation Board of Directors. Computerized MIS in place at head office. Every SHG is organized in a center of 6–8 groups, and about 12 centers are managed by a facilitator who is paid for by the SHGs. The facilitator is a local secondary school graduate who handles bookkeeping, transactions, and client meetings. Bank branch has 2–3 staff dedicated to SHG business. Branch staff members supervise these facilitators. OBC also has a development manager who forms and nurtures groups in the Rudrapur area. Group meetings and bookkeeping are handled by CLA manager and accountant. Bank transactions are conducted at bank branches, although BLF has set up an office across from the bank branch to help SHG leaders complete transaction forms. Bank staff occasionally attends SHG and federation meetings. Promoters form and nurture groups with support of APOs and POs. Strict mechanisms in place for group exits and entrances, such as requiring new members to invest 1/20th of group profit account to join. Promoter organizes two meetings each month, one for business and one for discussion of social development topics picked by group. Federation field officers are responsible for forming and nurturing groups and for managing exits and entrances. SHGs are members of the federation, with 1 vote per group. New members pay a onetime admissions fee— Rs. 1,000—per group to join an MBT, but are not required to contribute share capital to the federation. Bank branch manager promotes groups for the first 2–3 months of SHG operations, and then relies on facilitators who emerge from groups or friends/relatives to handle group meetings and supervision. OBC requires members to be from similar economic backgrounds. Elected group and center leaders are also responsible for group nurturing and intergroup discipline. CLAs, the second-tier organization at the panchayat level, promote and strengthen groups at the village level, and also perform community mobilization and other social services. BLF, the thirdtier block-level federation, supervises these functions and supports CLAs with training, etc. FUNCTIONS Product design (loan terms and membership requirements/fees) Administration (bookkeeping, travel, management, transactions) Support (customer acquisition/group formation, group nurturing, management of exits/entrances) (Continued on next page) 42 Part II ANNEX A (continued) ORGANIZATION STRUCTURE MFI SNFL OBC—Rudrapur Branch Dhan—KVK Federation Suppor t organization Suppor t organization, SHG federations Bank branch staff Individual agents SHG federations Treasury functions are performed by the threeperson head office. All funding is sourced from ICICI Bank. Support organization handles all fundraising from banks. Federation staff handle treasury management for lending to SHGs, with support from support organization’s head office. Bank branch staff handle all treasury functions, including use of deposits for lending, and requests from OBC headquarters for additional funds. BLFs handle treasury management, including borrowing from banks, and lending to SHGs through CLAs. Staff training conducted by zonal and area managers. Client training conducted by project officers and area managers. Contract with BASIX (http://www.basixindia. com/), paid for by grants and earnings, to pay for staff training, systems, and planning. Bank branch staff trains facilitators and clients. Clients receive skills training from government or master craftsmen, and pay for this directly. CLAs conduct training for SHG members. BLFs conduct trainings and support CLA staff. CLAs and BLFs are set up and trained by Dhan Foundation over 2–3 years, funded by subsidies. APO, PO, area manager, and zonal manager staff perform all supervision functions, including monitoring bookkeeping, completing registers, and checking group meetings. Each level is responsible for intervention at lower levels. All SHGs have one external audit annually. Internal audit team supervises trusts (SHG federations), and support staff supervise and intervene in federation operations, including monitoring repayments. SHG members monitor each others’ loan use. OBC microfinance officer (development manager) monitors branch operations, verifies bookkeeping, etc. Facilitators supervise group operations and, in turn, are supervised by bank branch staff, who have power to intervene. Cluster-level and federation-level managers and accountants monitor credit use and repayments. Bank branch managers and federation staff visit groups to motivate members and solve problems. FUNCTIONS Liquidity (treasury and fundraising) Training (staff and client training) Direct supervision/ intervention in operations (verification of procedures, action in case of default) 43 ■■■ Part II ANNEX B Detailed Financial Analyses Table IIB-1. Microcredit Foundation of India Program: Estimated Adjusted Income, Costs, and Assets (in US$, as of March 31, 2006) Type of actor Interest income Fee income TOTAL INCOME Staff costs Administrative expenses Training costs SHG promotion costs (amortized) SHG federation promotion costs (amortized) Total Operating Costs MFI (Support organization) 0 2,411,885 2,411,885 ICICI Bank (Bank) 4,903,636 0 4,903,636 TOTAL (All actors) 4,903,636 2,411,885 7,315,521 1,016,563 327,805 115,033 16,608 0 1,476,009 0 1,225,909 0 0 0 1,225,909 1,016,563 1,553,714 115,033 16,608 0 2,701,918 2,043,182a 817,273 4,086,364 2,043,182 817,273 5,562,373 Estimated cost of funds Adjusted loan loss provisions TOTAL COSTS 0 0 0 Startup subsidies (amortized) Ongoing subsidies 0 0 0 0 0 0 935,876 817,272 1,753,148 40,863,636 NA 0 40,863,636 40,863,636 NA 4,495,000 45,358,636 MARGIN (Income – costs) Estimated average external loans to SHGs Average SHG deposits Estimated average assets used for SHG program EST TOTAL ASSETS MANAGED 0 0 4,495,000 a 4,495,000 Note: For all five SHG programs, financial information for the periods ending March 2001, March 2002, March 2003, and March 2004 was converted at Rs. 46.577 to US$1, Rs. 48.733 to US$1, Rs. 47.65 to US$1, and Rs. 44.125 to US$1, respectively. Given the variable annual exchange rates, balances carried forward from one year to the next will have different values. a CGAP estimate. Table IIB-2. Sarvodaya Nanofinance Ltd.’s SHG Program: Estimated Adjusted Income, Costs, and Assets (in US$, as of March 31, 2005) Sarvodaya (Support organization) 490,637 4,567 495,204 SHG Federation (Trusts) 864,766 63,917 928,683 Staff costs Administrative expenses Training costs SHG promotion costs (amortized) SHG federation promotion costs (amortized) Total Operating Costs 77,666 89,016 117,401 0 0 284,083 271,728 143,829 0 0 0 415,557 Estimated cost of funds Adjusted loan loss provisions TOTAL COSTS 294,748 0 578,831 490,637 86,123 992,317 204,543 0 247,605 989,928 86,123 1,818,753 Startup subsidies (amortized) Ongoing subsidies 0 117,401 0 0 0 0 0 117,401 MARGIN (Income – costs) (83,627) Type of actor Interest income Fee income TOTAL INCOME Estimated average external loans to SHGs Average SHG deposits Estimated average assets used for SHG program EST TOTAL ASSETS MANAGED 0 0 1,180,829 1,180,829 (63,634) 4,306,169 0 4,013,220 8,319,389 Bank (Banks) 294,748 0 294,748 0 43,062 a 0 0 0 43,062 47,143 0 NA NA 0 TOTAL (All actors) 1,650,151 68,484 1,718,635 349,394 275,906 117,401 0 0 742,702 (100,118) 4,306,169 NA 5,194,049 9,500,218 Note: For all five SHG programs, financial information for the periods ending March 2001, March 2002, March 2003, and March 2004 was converted at Rs. 46.577 to US$1, Rs. 48.733 to US$1, Rs. 47.65 to US$1, and Rs. 44.125 to US$1, respectively. Given the variable annual exchange rates, balances carried forward from one year to the next will have different values. a 44 CGAP estimate. Table IIB-3. Oriental Bank of Commerce’s SHG Program: Estimated Adjusted Income, Costs, and Assets (in US$, as of March 31, 2003) Type of actor Interest income Fee income TOTAL INCOME Facilitators (Individuals) 0 6,025 6,025 Oriental Bank of Commerce (Bank) 79,550 200 79,750 TOTAL (All actors) 79,550 6,225 85,775 Staff costs Administrative expenses Training costs SHG promotion costs (amortized) SHG federation promotion costs (amortized) Total Operating Costs 6,025 a 0 0 0 0 6,025 9,950 4,550 0 0 0 14,500 15,975 4,550 0 0 0 20,525 Estimated cost of funds Adjusted loan loss provisions TOTAL COSTS 0 0 6,025 49,600 12,050 76,150 49,600 12,050 82,175 Startup subsidies (amortized) Ongoing subsidies 0 0 0 0 0 0 MARGIN (Income – costs) 0 3,600 3,600 Estimated average external loans to SHGs Average SHG deposits Estimated average assets used for SHG program EST TOTAL ASSETS MANAGED 0 0 0 0 602,500 364,344 20,447 987,291 602,500 364,344 20,447 987,291 Note: For all five SHG programs, financial information for the periods ending March 2001, March 2002, March 2003, and March 2004 was converted at Rs. 46.577 to US$1, Rs. 48.733 to US$1, Rs. 47.65 to US$1, and Rs. 44.125 to US$1, respectively. Given the variable annual exchange rates, balances carried forward from one year to the next will have different values. a CGAP estimate. Table IIB-4. Dhan’s KVK SHG Program: Estimated Adjusted Income, Costs, and Assets (in US$, as of March 31, 2003) Dhan Foundation (Support organization) 0 0 0 KVK Federation (SHG federation) 41,800 2,800 44,600 Canara Bank (Bank) 60,811 a 0 60,811 Staff costs Administrative expenses Training costs SHG promotion costs (amortized) SHG federation promotion costs (amortized) Total Operating Costs 0 0 0 0 13,920 13,920 8,600 6,900 2,700 0 0 18,200 0 15,864 a 0 0 0 15,864 8,600 22,764 2,700 0 13,920 47,984 Estimated cost of funds Adjusted loan loss provisions TOTAL COSTS 0 0 13,920 26,400 4,880 49,480 37,016 5,696 58,576 63,416 10,576 121,976 Startup subsidies (amortized) Ongoing subsidies 13,920 0 0 0 0 0 13,920 0 Type of actor Interest income Fee income TOTAL INCOME MARGIN (Income – costs) Estimated average external loans to SHGs Average SHG deposits Estimated average assets used for SHG program EST TOTAL ASSETS MANAGED (13,920) 0 0 0 0 (4,880) 244,000 0 77,872 321,872 2,235 284,793 227,471 0 512,264 TOTAL (All actors) 102,611 2,800 105,411 (16,565) 528,793 227,471 77,872 834,136 Note: For all five SHG programs, financial information for the periods ending March 2001, March 2002, March 2003, and March 2004 was converted at Rs. 46.577 to US$1, Rs. 48.733 to US$1, Rs. 47.65 to US$1, and Rs. 44.125 to US$1, respectively. Given the variable annual exchange rates, balances carried forward from one year to the next will have different values. a CGAP estimate. 45 ■■■ Acknowledgments grams shared valuable perspectives. Prakash Bakshi, Vijayalakshmi Das, Deep Joshi, Ajit The authors of Part I are grateful to several indi- Kanitkar, Narendranath, Vipin Sharma, Matthew viduals and institutions for valuable contributions Titus, V. Satyamurthi, Sanjay Sinha, and Jayshree to this paper. Elizabeth Littlefield of CGAP iden- Vyas provided intellectual support and guidance. tified the need for it and provided essential guid- Any errors or omissions are the responsibility of ance and support. P. Kotaiah and C. S. Reddy of the authors. APMAS provided extensive comments on the The authors of Part II would like to thank the paper’s research and analysis of self-help groups. management of the organizations studied for their Consultant Ajay Tankha researched one of the cooperation, and in particular Mr. Manoharan and SHG programs and, with Jeffrey Ashe, helped Mr. Narayan of Microcredit Foundation of India develop the study’s conceptual framework. (now Madura Micro Finance Ltd.), Mr. Ravinder Headquarters and local staff of UNDP SAPAP’s Yadav of Oriental Bank of Commerce, Mr. Panagal Mandal Mahila Samakhya, Sakhi Samiti, Sowmithri of Sarvodaya Nanofinance Ltd., and Professional Assistance for Development Action, Mr. K. Narender of Dhan Foundation. Vijay Chitradurga Gramin Bank, and People’s Action Mahajan of BASIX and Richard Rosenberg of for National Integration gave generously of their CGAP provided invaluable comments. time. 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Mumbai: Micro Credit Innovations Department, National Bank for Agriculture and Rural Development, Thompson Press. 47 OccasionalPaper No. 12 Please share this Occasional Paper with your colleagues or request extra copies of this paper or others in this series. CGAP welcomes your comments on this paper. All CGAP publications are available on the CGAP Web site at www.cgap.org. CGAP 1818 H Street, NW MSN P3 - 300 Washington, DC 20433 USA Tel: 202-473-9594 Fax: 202-522-3744 Email: cgap@worldbank.org 48