Case6-April-2013
This is a policy note prepared by International Network of alterative financial Institutions, India to RBI for creating a facilitating environment for microfinance based credit instituions. The note stress the importance of SHG bank linkage as an effective means of financial inclusion and suggest some policy changes that will facilitate reaching of credit to the most disadvantaged section of the society. Recommendations for supporting promotion of agriculture based producer companies by making the credit more accessible to the small and marginal farmers for such activity was also made through this note.
There has been a general acknowledgement about the strides made by the self help groups in South India in terms of their advancement, higher level of Bank linkage, etc. The reality now, however, belies this impression and an atmosphere of avoidance or even denial is prevailing for the SHG for linkage.
The KYC norms have increasingly been used as an instrument in this process and a case in point is that even very recently the RBI has been compelled to step in to issue policy guidelines on the KYC norms for SHGs for opening accounts and credit linkage, being a basic issue being addressed after almost two decades of SHG banking.
Some Banks have even resorted to sophisticated method of rating which is absolutely inappropriate for the informal groups of poor women who may not have sufficient functional literacy about the financials and other related matters.
Therefore, to reverse the slackness and apathy which is now creeping in quite large way, we would like to reemphasize our suggestions to put in place district level monitoring mechanism under the aegis of RBI which will play an enabling and smoothening role.
To make sure that this process is monitored and smoothened at the district level, the three functionaries from Banking and regulatory side – the Lead Bank, the District Development Manager of NABARD and the concerned Lead Bank Officer from Reserve Bank of India should be charged with this responsibility and the mechanism institutionalized as a distinct financial inclusion promotion and monitoring process of DLCC.
This monitoring process at district level would be able to ensure that no eligible groups would go unlinked with the nationalized banks/RRBs/Cooperative Banks. This timely linkage through monitoring would also serve as an incentive to the SHGs to function better with financial discipline.
SHG Bank linkage has been witnessing none too impressive progress in Northern states of India due to several factors including attitudinal issues and problem of staff shortage. The BC/BF model has also not been widespread and a few have been effective. Given this scenario, MFIs chip in and play a complementary role in extending credit.
There are many MFIs – small and moderate sized in the not-for-profit /non-commercial mode effectively bridging this gap to certain extent. The major constraint is that Commercial Banks have not been forthcoming/ reaching out to such MFIs and they are struggling to have access to funds.
Given the huge shortfall in DRI lending the resource allocation from Commercial Banks to these notfor- profit MFIs reaching out to the poor need to be encouraged and stepped up as a package without regard to the capital leverage ratio but on the strength of number of SHGs and their effective demand. For, far too long, these not-for-profit MFIs are languishing without adequate funds and support to them would be a direct contribution to the financial inclusion process.
Of late, Commercial Banks have now started insisting on cash margin of 10% of the credit limit sanctioned which is a impractical condition to comply with for the ‘not for profit’ MFIs to mobilize. Cash margin has become an impediment to access credit from the Banks and reach out to poor clients in far flung areas. The credibility of MFIs, strength of social capital (quality SHGs and their processes), savings of the SHGs should be the criteria to extend credit rather than cash margin.
In the light of the RBI guidelines from the perspective of capital adequacy for the Banks, all credit lines above 5 crores have invariably face the compulsions of going for rating and microfinance institutions seeking higher linkages above 5 crores are no exception and all Commercial Banks invariably insist on ratings.
Be that as it may, microfinance being purveyed by different kinds of institutions some purely commercial and some social with even ownership of communities (being clients). Yet, the parameters that are applied to assess the financial and other aspects of the MFIs by the rating agencies have been evolved purely from the commercial criteria or perspectives and the same set of parameters are reckoned for community owned MFIs without due regard to compelling differentiation in assessment methodologies.
Such methodology of assessment ignores many special characters and features of such community owned MFIs and thereby such MFIs end up getting unfair deal in rating and thereby resulting in denial of credit linkages by the Banks. We have been, for long, seeking for waiver of the rating for the community owned MFIs and in the given circumstances of policy framework for rating, we need to evolve an assessment with different set up criteria for community owned MFIs rather than stereo type. We urge upon the RBI to consider this suggestion for appropriate rating of community owned MFIs and facilitate smooth access to credit from Commercial Banks for such kind of community owned MFIs.
With the revised priority sector norms, the emerging producer companies are having an enabling framework to access credit under direct and indirect Agriculture for various purposes – be it production credit, investment credit, etc. This policy intent has not moved forward to help the intended constituencies and there is a road block in the form of collaterals being insisted upon from the producer companies. While the producer companies of big farmers would be in a position to offer such collaterals, the producer companies of small and marginal farmers are not able to offer collaterals as they do not have any property or assets, etc., being vulnerable poor.
While the recent budget proposal for the guarantee mechanism is welcome, given the practical difficulties, producer companies would not be able to access this facility and it may take more time to stabilize. By that time many producer companies which are currently languishing for want of access to credit would have really given up and gone back to square one. RBI would do well to goad the Commercial Banks and even NABARD for that matter to take an empathetic view of their handicaps to offer collateral and reach out to support the producer companies.
After all they are small and their requirements are also small and there is an urgency to ensure credit flow to these companies. These are all early days for producer companies and there are not many in vast country like India and if they get a message that their genuine requirements are denied, the whole policy initiative on the producer companies and the priority sector lending norms would be in vain.
We would also like to suggest that they are in a stage like SHGs in the early 90s in the formative years and they require hand holding support of not only for the enabling institutions of NGOs, civil societies which helped in promotion of these producer companies but also financial institutions. RBI could support this process by taking a reality check in their outreach programmes. This gesture would go a long way to facilitate the process of linking the producer companies with Banks and NABARD.