A Microfinance Institution with a Difference
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Economic and Political WeeklyMarch 31, 20071186government or private institutions or to influence public policyor to provide or manage services – like purchase of inputs inbulk, provision of marketing information and linkages and accessto technical support. The community managed resource centresthat have emerged in areas from which MYRADA has withdrawnare an example of the potential role that such federations canplay.(4) Financial support through bank linkages for independent SHGpromoting institutions and SHGs, which are self-managed (andhave the potential to be self-sustaining).(5) Reduction of administrative support to manage the creditprogramme through lending to the SHG as a group. Since onlyone loan is given to a group, this reduces paper work and savestransaction cost of loans. The loan portfolio of Sanghamithra,which has lent to about 11,000 SHGs (of which 60 per cent arein MYRADA projects), is currently managed by only 35 creditmanagers. In its rural programme, one credit officer serves 187SHGs and the outstanding per credit officer is Rs 82.25 lakh.In short, any view that reduces SHGs to financial intermediariesor makes them the last link in the delivery chain, which failsto understand their empowering role, fails to invest in the institu-tional capacity building4of each SHG or which imposes on thema standard pattern of savings, lending and repayment underminesthe basic structure of an SHG. Unless this investment in SHGsis made, one may achieve a limited degree of financial inclusion,but social inclusion and “market inclusion” will still remainelusive.The mechanisms of the financial system replicate the exclusivityof the market. To expect a financial system to be inclusive,therefore, is unrealistic. Other factors need to be brought intoplay – policies, supportive implementing systems and pressurefrom below. Policies are relatively easier to put in place. Hencefor policies to be implemented even partially it requires pressurefrom below – this the empowered SHGs can provide. However,to enable the SHGs to perform their multifaceted, empowermentrole, it is necessary that they are operationally and financiallysupported by other agencies, including MFIs. We now elaboratehow Sanghamithra, the MFI supported by MYRADA, has playedthe supportive role to its SHG model.What Is Sanghamitra?Sanghamithra5was promoted by MYRADA and incorporatedas a not-for-profit company in February 1995 under Section 25of the Indian Companies Act of 1956. Though Sanghamithra wasdeliberately set up by MYRADA as a separate institution, it sharesthe vision of MYRADA – promoting self-governed institutionsof the poor. The chairperson and several of the board membersof Sanghamithra are from MYRADA. The intention of promotingSanghamithra was that it would provide credit to SHGs (wherethe banks left gaps) formed by MYRADA in the first phase andthen to SHGs promoted by other institutions, provided they metthe performance criteria set by Sanghamithra. While, therefore,Sanghamithra functions independently with senior staff that havebanking experience, MYRADA continues to guide it so that itcontinues to share and promote a common vision. Apart fromlending to SHGs, Sanghamithra is also now lending to watershedmanagement associations (area groups comprising allstakeholdersin a micro watershed) formed by MYRADA and other NGOs.Why a Separate Institution?MYRADA was offered loans by several banks and by onegovernment-sponsored MFI to on-lend to SHGs in the mid-1990s.The reasons for this offer from banks were related to their prioritysector lending requirements, to image building and to the needto reduce transaction costs involved in lending to SHGs directly.This also provided the banks with a degree of security since theyheld (often implicitly) the NGO responsible for repayments.NABARD supported this approach of the banks to use NGOsas intermediaries since it helped to achieve the ambitious targetsset by government for the SHG-BLP.MYRADA at that time (and even today) was strongly promot-ing the SHG-BLP. While NABARD spared no efforts to persuadesenior banking staff to promote the programme, at timesbranchmangers were just too comfortable in their “box”;somecooperative managers were transferred and succeeded bytotally non-cooperative ones. Some major banks were responsiveand even proactive; others woke up to the SHG-BLP as late as2000. As a result, even in the so-called successful south, therewere and still are large gaps in SHG-BLP. MYRADA decidedthat an alternative arrangement/institution was required, mainlyto fill these gaps, to provide some degree of continuity in an areabut also to introduce an element of competition between thealternative institution and the banks. MYRADA’s position wasthat even if this institution was promoted, MYRADA wouldcontinue to promote the bank linkage programme. Theassumptionon MYRADA’s part was that competition was required; it wouldserve to keep both the banks and the proposed institution (i e,Sanghamithra) on their toes. Subsequent experiences between2000and 2003 proved this assumption to be correct [Srinivasan 2004].To fill in the gaps left by the banks, MYRADA had threemanagement options: (1) to borrow money and lend through itsexisting extension staff and organisational structure using thesame financial systems;6 (2) to borrow money and to lend underthe name of MYRADA but to set up a parallel department withinthe organisation which would function separately from theprogramme department; the need to collaborate would be present,but the pattern and dynamics would be worked out in the field;7(3) to set up a separate financial institution, with staff havingexperience in banking and finance, and an organisational struc-ture that would ensure the institution shared MYRADA’s visionand sought to promote this vision in its operations. MYRADAdecided in 1993, after considerable thought and discussion, onthe third option. The logic is as follows.The first option was rejected because while the financial systemsin MYRADA were good and suited its needs of programmemanagement, they did not suit the needs of an MFI. For example,MYRADA’s systems were not generated or programmed to throwup the critical ratios that a professional MFI management requiresto monitor performance. Besides, the culture of the NGO staffdiffered from what an MFI would feel comfortable with. Third,the general opinion was that MYRADA’s image as an NGOwould be compromised if it entered the business of lending moneyon interest. The current practice of NGO-MFIs both in othercountries and increasingly in India was to lend at real rates rangingfrom 20 to 35 per cent, which was far above the “acceptable”rates expected from an institution like an NGO.The second option did not find favour since cross subsidisationin terms of services could not be avoided and this would not helpto capture a correct financial picture of the microfinanceinitiative.Further, many in MYRADA suspected that the microfinancedepartment would very soon take priority and overshadow theconcerns and priorities of the social/development programmes(where the agenda and time of groups would begin to bedominatedby financial issues to the detriment of social ones).
Economic and Political WeeklyMarch 31, 20071187This left the third option, i e, that of starting a separate MFI.This had to face several hurdles as official policy in the mid-1990s did not favour or support such initiatives. These matterstook three-four years to resolve.8Should the SHG or MFI be the Vehiclefor Savings?MYRADA believes that assisting the poor in protecting andgrowing their savings is a clear route to financial independence.When MYRADA started identifying and promoting SHGs andbuilding their institutional capacities, the first activity promotedwas regular savings. Loans were promoted only after six monthsof savings and institutional capacity training. As of December31,2006, MYRADA has promoted 10,475 SHGs. They have a totalcapital of Rs 138 crore of which Rs 60 crore is savings and Rs33crore interest earned from giving loans to members. MYRADA’sexperience over 20 years confirms that poor households wantto save in cash provided the savings are in their control and safe.They are not inclined to invest their savings initially in bankseven if they earn interest. The transaction costs to the poor indealing with banks just to deposit small amounts of regularsavings – which is the only pattern of savings suitable to theirlifestyle – are too high. The priority concern for MYRADA isfor the poor to have an institution in which they have confidence.In MYRADA’s strategic approach, the appropriate institution isthe SHG and not the MFI. The SHG members decide on howmuch to save and invest in the commonfund of the group fromwhich they extend loans, whether to reduce or increase the amountof weekly savings depending on seasonal cash flows, etc. ManySHGs offer interest to their members on the savings in thecommon fund. After functioning for 10 years, several SHGs havedecided to distribute all or part of their common fund and to startover again, sometimes with several new members.Operational and Financial Sustainability of the MFIThere are three sets of activities involved in MYRADA/Sanghamithra’s microfinance strategy. The first is the identifi-cation of proper SHGs. This is the role of an NGO with experiencein participatory methods and institution-building. MYRADAinvolves people in a village to identify the poor and after in-troducing the approach, requests the poor to form groups of theirchoice. All these activities require to be subsidised and hencedonor funds are required. The second is building institutionalcapacity of the SHG. Once again this needs to be subsidisedusually by an NGO or government, though people do share someof the costs. The third set of activities includes advancing creditandmanaging repayments in SHGs. This can become self-sustainingwithin a short time. Sanghamithra restricts itself to the third setof activities. Part of its surplus is re-invested to promote the firstand second set of activities.9 However, there is a crucialdifferencehere between Sanghamithra and other MFIs. While being opera-tionally and financially sustainable, Sanghamithra continues tofunction as a not-for-profit company. There wassharp criticismof this choice between 1995 and 2000. It was assumed that anot-for-profit company would function less professionallythanaprofit-making one. MYRADA and Sanghamithra provedthat this assumption is not valid, since Sanghamithra was ableto meet all its financial and operational costs in the third yearof operations and has continued to do so yearly.10Sanghamithramade it clear from the beginning that it would lend at an effectiveinterest rate(including all costs of processing loan applications)of around14 per cent declining. It would endeavour during thefirst few years to mobilise grants as well as loans from banksis such a mix that it would keep the cost of credit around 4 percent. This would lower the pressure to grow too fast in orderto achieve financial sustainability. After breaking even, itwouldallow interest rates to reflect the actual costs ofborrowing.Even after the revision of its lending rates in recentyears, it has been able to keep interest rates to around 15 percent declining, which is still considerably lower than what MFIscharge normally.Expansion StrategySanghamithra’s expansion strategy in remote and neglectedareas is tied to the existence of SHGs in the area and to investmentfrom other sources focused on mitigating poverty. It does notexpand into remote and neglected areas where no investment isbeing made or no SHGs exist.This approach is based on theunderstanding that while credit may be critical in many casesit does not suffice for the family to come out of poverty. Itneedstobe supported by major investments in these backwardareas for various purposes: in all round developmentthroughgovernment programmes (preferably where multilateralor bilateral agencies are involved since this assures some degreeofcontinuity), improvements in the delivery systems andintroductionof mechanisms that raise efficiency and producti-vity. If these major programmes are not operational, thesecondchoice is to expand to areas where NGOs are promotingall round development as well as SHGs. This all round investmenthelps to open potential sectors (both on farm and off-farm),whichthe SHG members can exploit with the credit and otherinstitutional support that the SHG provides. To provide creditin remote and neglected areas where there is no developmentinvestment is not an effective strategy and surely will notreachthepoor.As far as investment required to reduce risk is concerned, oneexample may help. When MYRADA realised that the SHGs weregiving large number of loans for dryland agriculture, MYRADAtook up a major watershed management programme in the sameareas. This reduced risk – crops in these treated areas can nowwithstand a gap in rainfall of about 15-20 days; previouslyagapof7-10 days had reduced productivity considerably. An emergingissue here is the increasing evidence that marginal and even smallfarmers especially those in dryland areas no longer findagriculturea worthwhile occupation. Most of the youth of these familiesare out-migrating for non-farm jobs. Only the older generationis left behind to attend to the fields or to over-see lands leasedout. As a result, the potential for growth of credit in agricultureespecially for marginal and small farmers in drylands is limited.For example, a recent analysis of the purposes of loans givenby 238 SHGs all in rural areas showed that out of a total of 5,880loans (amounting to Rs 26 lakh) advanced to 3,558 membersduringone year (2003-04), the shares of agriculture and animalhusbandryin total loan amount were 25 per cent and 12 per cent respectively.All other loans were for non-farm activities.The average amountlent for agriculture was Rs 4,173 which was the lowest whencompared to averages of all other purposes except consumption(Rs 2,915).Sanghamithra also differs from other MFIs in its approach togrowth and expansion. It does not seek to grow faster and faster;it slows down at the curves, and gathers speed warranted by the
Economic and Political WeeklyMarch 31, 20071188external situation rather than that required by the internalorganisational demands. What does this mean on the ground?Sanghamithra has a clear policy that it will enter an area whereMYRADA and other NGOs have functioned for some years; itwill lend to SHGs only if the local banks are not responsive.In Dharmapuri district, for instance, MYRADA alone had over1,000 SHGs eligible for bank linkages, but very few werelinked.Sanghamithra opened a branch there. Within sixmonths,the bankmanagers who were aware of the success ofSanghamithra’s activities came forward to lend. The chairmanof the bank visited Sanghamithra’s chairman and offered fullcooperation in extending credit toSHGs. Sanghamithra, there-fore, scaled down its involvement. A similar situation wasencountered in Chitradurga district, where a very dynamic bankchairman increased the BLP by over 100 per cent enablingSanghamithra to withdraw from SHGs and to look for otherpeople’s groups that were functioning well. However, if thebank’s performance falls, as has happened in the service areasof some branches when the managers were transferred, Sangha-mithra enters the area once again. Sanghamithra’s corporatepolicyis not to grow rapidly or to grow into a mammoth institution.Itplans to target an outstanding portfolio of around Rs 30-35 croreand is planning its staff and supporting systems to managethisportfolio effectively and efficiently. MYRADA iscurrentlyplanning to set up more Sanghamithras in its areasofoperation.These will be supported and regulated by afundmanagementcompany that, it is hoped, will introduceandimplement a regulatory mechanism, which is bothinstitutionalised and distinct.Single Source Agency SyndromeThere is a trend for MFIs to get involved with a variety offinancial services particularly savings, loans and insurance. Isitnecessaryfor Sanghamithra to take on all functions? Sangha-mithra’s position is that microcredit is necessary but not enough;supporting services are required. However, these supportingservices need not be provided by the MFI; they can be providedby an NGO or come from the all-round growth in the area wherethe MFI operates. Other institutions more qualified and experien-ced can undertake these functions. An MFI could compromiseits core functions by attempting to undertake too many. This isone of the reasons why Sanghamithra, even though it providescredit directly to SHGs, nevertheless enters into formalpartnershipagreements with NGOs promoting the SHGs as part of a broaderdevelopment strategy. In the case of MYRADA for example,SHGsare formed in the context of livelihood support programmes suchas watershed development, skills training, linkages with technicaland marketing support services and animal husbandry,agriculture,horticulture and non-farm enterprise extension services. Sincetherisk mitigation measures and improved investment opportunitiesare created under the programme, credit linkages with banks orSanghamithra enable greater livelihood security and enterprisedevelopment. Once it breaks even and earns a surplus, the MFIcan provide funds to invest in certain of these support services(including management and skills training, market linkages andinfrastructure development). In fact, it can even raise separategrants for this purpose provided there is clarity on end-use andseparate tracking of such funds. This is exactly what Sanghamithrastarted to do after three years of functioning.11 In areas borderingsmall towns and cities which experience all round growth duetoinvestment from private and public sources, there are oftenadequate opportunities and support services including linkagesand market information without the need for NGO interventionin these areas.There are other instances of Sanghamithra fostering partner-ships. It brought in Birla Sun Life, which came up with a goodlife insurance product that appealed to SHG members. Thecompany relates directly with people’s institutions in areas whereSanghamithra is lending. The administration required to supportthe insurance policies is carried out by the community managedresource centres (which earn a commission) and not by MYRADAor Sanghamithra. Similarly, several insurance agencies have beenbrought in to cover animal insurance. Health insurance is nowbeing explored. Mobilising and managing savings, as alreadymentioned, is a service managed by the SHGs themselves. Sangha-mithra is looking forward to a situation where it can legallymobilisesavings; if the SHGs, as a result of their interaction with Sangha-mithra, have confidence that their savings will be safe if investedin Sanghamithra, it will be time to shift gear and perhaps morphinto a different avatar.Summing UpThe experience of MYRADA clearly shows that, while preser-ving their separate identities, the NGO and the MFI can be closelymeshed so that a balance can be maintained between promotinga supporting environment for poverty eradication and a loanportfolio which includes activities that increase income throughgenuine business initiatives. It is this meshing that MYRADAandSanghamithra have attempted to accomplish. What is commonto both institutions (MYRADA and Sanghamithra) is the vision;both believe in “building poor peoples institutions” and to workwith institutions of the poor, appropriate to manage finance.12Over the past five years during which Sanghamithra has beenfunctioning, there is ample evidence to show that these twoinstitutions have been able to work to support one another, whilemaintaining their identities.13Maintaining this balance is not easy. In substantial part, it hasbeen made possible by the fact that several of MYRADA’s seniorstaff are on Sanghamithra’s Board; and there is a regular exchangeand sharing of reports. It also requires that Sanghamithra sharesthe vision of MYRADA while maintaining an independent mission.This again is not easy to achieve. Sanghamithra is under variouspressures – both from external sources – (originating from variousappraisals by rating agencies and individuals prior to beingaccepted as eligible for a loan from a financial institution), aswellas from internal sources. These pressures can cause it to driftawayfrom its original objectives. Maintaining this balance requiresconstant monitoring of Sanghamithra’s operations. For this,thefollowing signposts guide the decisions of MYRADA andSanghamithra:Credit is critical but can be absorbed productively only withina larger development context: While MYRADA does notpromotemicrofinance, neither does Sanghamithra openbranchesexcept within a context of over-all development invest-ment and growth undertaken by the NGO. Most of this investmentis a grant. People’s investment in cash is mobilised and theirparticipationin planning, managing budgeting and imple-mentingthese activities and maintaining assets is critical. Withinthis context, Sanghamithra (or the banks) are brought in toextendloans.
EPW
