The Microfinance Meltdown - Crisis or Opportunity for Savings Groups

Where the rest of the world sees problems, entrepreneurs see opportunities. ‘The Andhra Pradesh microfinance crisis’ is by now a globally familiar problem; can the bankers of India, catalysed by the National Bank of Agriculture and Rural Development (NABARD), be entrepreneurial, and see it as an opportunity ? Not only an opportunity for their own business, but for the financially excluded majority of India’s people.

THE OPPORTUNITY

The SHG movement – SHGs being one of India’s many forms of savings groups – is the world’s largest microfinance programme, and in many ways the world’s best. It has evolved in response to Indian conditions, in particular to India’s unrivalled banking network. NABARD is internationally known and admired for having developed it.

In the last few years, however, a different and alien system has appeared in India. This was developed in Bangladesh, and has recently been ‘captured’ by foreign and Indian for-profit institutions.

This system has recently grown much faster that the SHG movement. Large numbers of specialised microfinance institutions, usually based on the Grameen model, have entered the field.  Their interest rates are higher than the rates charged by banks to self-help groups, or the rates which the groups in turn charge their members, but they offer larger loans and their group system demands less of the members.

Most important, the MFIs focused wholly on micro-credit, or rather micro-debt. Initially as NGOs, and latterly as for-profit non-bank finance companies, they were not allowed to take client savings, and it was in any case much easier, and less expensive, to take bulk loans from international and local sources, and to focus their whole attention on marketing a product which everyone wants, and which, like any drug, creates its own demand; that is, debt.

The SHG movement had and still has the potential to satisfy the financial service needs of India’s unbanked people, but the MFI system has been able to enter and grow because of weaknesses in the SHG movement, including inertia, lack of leadership, and political interference.

In October 2010, however, just as had happened two years earlier in the global financial system, the MFI system ‘stumbled’ and the microfinance bubble burst, as a result of what is known as the Andhra Pradesh crisis. Many parties were responsible, but the underlying cause was over-selling of microdebt.

The final outcome is unclear, but MFIs’ activities have been seriously curtailed not only in Andhra Pradesh but throughout India. Recoveries have stalled, and new and quite restrictive regulations have been imposed. The supply of bank credit and foreign funds to the specialist MFIs has to an extent dried up, and in spite of the new regulations recently announced by the Reserve Bank of India many aspects of the MFIs’ operations are in doubt.

This crisis has created a brief window of opportunity for NABARD to re-assert the pre-eminence  of the SHG movement. Some MFIs may disappear, others may merge or be taken over, while others may survive, but surely NABARD and India’s banks should proactively seize this opportunity, to ensure that India’s poor can enjoy the benefits of a system that can help them escape from poverty, rather than keep them poor.

SHGs ARE BETTER THAN MFIs

SHGs serve their members better than MFIs serve their clients in many different ways. A successful‘re-launch’, however, like any effective marketing campaign, must focus on a small number of specific benefits. I suggest that the following six ‘unique selling points’ (USPs) should be the core of the message, and the reality, of the SHG re-launch.

• Loans from SHGs are more affordable, around half the cost of loans from MFIs
• SHG membership offers an opportunity to save, not merely to get further into debt.
• SHG members can grow, can ’graduate’ to individual savings accounts, and loans.
• The profit from SHG lending goes to SHG members, not to a bank or other institution.
• SHG members are empowered, they are in charge of the operation
• SHGs are linked to banks, which are guaranteed by the government of India; they are not ‘fly by night’ institutions, which may go away tomorrow.

BUT ARE MFIs ALSO BETTER THAN SHGs ?

MFIs have succeeded thus far, in spite of the advantages of SHGs, because of a number of weaknesses in the SHG movement. Some of the most important are: 

• Banks are slow to open accounts for new SHGs, and to approve loans.
• Bankers perceive SHGs as a channel for credit, not as a source of savings.
• The amounts of credit are often limited to below what members need and can manage.
• SHG members have to manage and keep records for their groups themselves; MFIs’ manage their own operations. It is easier to be an MFI client than an SHG member.
• Weak SHGs are exploited and corrupted by irresponsible politicians, or by their own officers who exploit their fellow-members.

NABARD cannot remedy these weaknesses overnight, because NABARD has to work through banks, NGOs and other intermediaries which NABARD itself does not control. The advantages  of SHGs, if they are properly presented, are sufficiently powerful to compensate for these weaknesses, however. The weaknesses can be remedied, but it is not necessary to delay the re-launch of SHG 2 until they are remedied. SHG 2 should be designed and launched as soon as possible, and it should be designed to have the same dramatic positive effects on the SHG movement as ‘Grameen two’ did on the Bangladesh Grameen Bank when it ran into difficulties some years ago. The SHG movement is around ten times larger than the Bangladesh Grameen Bank; it deserves to be as widely admired internationally, and the proposed re-launch should aim to have this effect.

HOW SHOULD SHG 2 DIFFER FROM THE ORIGINAL SHG ?

The basic principles of SHGs do not need to be changed; an effective re-launch can in itself revive local, national and international enthusiasm for what is fundamentally a good product.

Certain changes are necessary, however; they must be ‘hard-wired’ into the new design.

These include:

Bankers and existing and potential SHG members should regard SHG membership as a route to financial inclusion through individual banking services, starting with savings.  Banks should be encouraged, or if possible mandated, to open individual no-frills savings accounts for all SHG members.

The present emphasis on credit (that is, indebtedness) should be corrected. SHGs should be seen as a way of saving, in a group and individually, as a way of accessing pensions and other transfers, and also to get a loan when it is required.

SHG 2 should not be presented as a ‘scheme’. There may be a need for some limited temporary incentives to ‘kick-start’ the revival process, but the overall message must be that membership of an SHG is worthwhile in its own right, as the preferred source of financial services for the poor, and that business with SHGs is good business for banks, without subsidies.

SHGs cannot be promoted to the stage of taking, or even repaying, a first loan, and then abandoned. Most SHGs need indefinite support, which they may be able to pay for themselves or which may have to be subsidized. The concept of ‘SHG Linkage’ should be revised so that it means an SHG which is making regular use of its SB account, with or without credit, not merely an SHG which has borrowed once, and can then be counted and forgotten.

THE LAUNCH OF SHG 2

New guidelines for SHG 2 should be rapidly finalized and the programme should be launched at the Microfinance India Conference in December 2011, with a substantial ‘splash’. The new features and the existing advantages should be widely and effectively publicised, in order to achieve full media coverage nationally and in local languages. The Honourable Finance Minister should be invited to preside over the main national launch event, but further SHG 2launch events must also take place locally, to ensure that the message reaches every concerned banker, in the remotest areas, as well as actual and potential SHG members themselves and clients of the competing MFI system.

The details of SHG 2 must be disseminated in a circular, but circulars alone cannot achieve full awareness and behaviour change.

Two or three private commercial advertising and promotion firms should if possible be asked to submit proposals for the design of the launch, but if NABARD’s procedures make it impossible for such bids to be invited and appraised within the time available, the launch should be designed and managed by NABARD itself.

GENERAL PRINCIPLES FOR SHG 2

• The focus should be on developing new strong groups and improving existing ones, rather than on ‘sidelines’ such as enterprise training, or federations or other institutional structures. The members of a strong group can themselves decide whether and how to work with others, and to use their money, and will do it effectively.
• SHGs need to keep simple records, and many excellent systems have been designed which can be used even by illiterate people.  There is no need to ‘reinvent’ the wheel; the best existing systems should be selected and ‘rolled out’.
• There may be no effective SHG promoting agencies in a given area. Funds are available to make it possible to create appropriate agencies, in the same way as commercial businesses create distribution channels for their products if none are present.
• It is not necessary to look to foreign funding agencies to support new SHG-related initiatives. NABARD has sufficient funds, and they should be rapidly made available to support new ideas.

OTHER POSSIBILITIES FOR SHG 2

The above suggestions are critical to the success of SHG 2. There are a number of other possibilities which may be addressed, but only when the re-launch has been satisfactorily completed.

• India’s urban poor will soon outnumber the rural poor. The urban poor need SHGs as much as rural people do, and have been the main targets of the MFIs.  SHGs must be promoted in cities and towns as well as in rural areas.
• BASIX and some other institutions have successfully developed fee-based one-on-one livelihoods development promotion tools which are now being provided to and paid for by around ten lakhs of clients. These may also be promoted to SHG members.
• Problems often arise as SHGs mature, because members’ needs diverge, and some borrow or save more than others. It is difficult to advise SHGs on such issues, and NABARD should study the Village Savings and Loan Association method of avoiding these problems by annual ‘closings or share-outs’, which is now used by over some two hundred thousand groups in Africa, Bangladesh and some parts of Eastern India.
• SHG 2 should be used as part of the Primary Agricultural Cooperative (PACs) revival programme, to bring more women members into PACS.
• SHGs and needed and can and should be promoted in Naxalite affected areas, by local entities regardless of their relationship to Naxalites.  Effective SHG membership can be a powerful tool against insurgency.

NB: Originally published July 2011. Malcolm's article is a bit out of date, but still important, and so we changed the date to move it nearer to the top of our chronological list.