Case2-August-2017
SHG’s have evolved as a tool for empowerment and development. Timely credit to the SHG members by way of formal linkages is the key to sustaining the success. This article recites the need for bridge loans in the absence of formal linkages.
Poverty is often defined with reference to certain basic amenities such as food, cloth and shelter. Inadequacies in access to the basic amenities are considered as extreme poverty condition. Extreme poverty is the greatest injustice facing humanity in the 21st century. India’s vast majority of poor people are located in rural areas. Poverty reduction is a challenging task. While there are many theories on poverty alleviation, one important element commonly accepted as a tool for poverty alleviation is the need for access to credit.
The process of economic growth, especially when it is on high growth path, must strive to encompass participation from all sections of the society. Lack of access to credit for weaker sections of the society has been recognised as a serious threat to economic progress. Limited access to affordable financial services leads to high-cost credit from informal sources such as money lenders. So, credit is one of the critical inputs for economic development.
Timely credit availability at an affordable cost goes a long way in contributing to the economic development of the poor. Thus, access to affordable financial services, especially credit, may increase livelihood opportunities and empower the poor people to take charge of their lives.
Financial inclusion means extending basic banking services at affordable prices to the low income and disadvantaged groups. The purpose of financial inclusion is to connect the excluded with the formal banking system in order to help them obtain an understanding of the financial services available and equipping them with the confidence to make informed financial decisions.
Financial inclusion in the form of having a bank account, save, invest and access formal credits, facilitates them to break the chain of poverty. The aim of financial Inclusion is drawing “unbanked” population into the formal financial system so that they have the opportunity to access formal financial services.
An SHG is a group of about 12-20 people from a homogenous class, who come together to address their common needs. They are encouraged to make voluntary thrift on a regular basis. They use these pooled resources to make small interest bearing loans to its members. The process helps them imbibe the essentials of intermediation, prioritisation of needs, setting conditions and accounts keeping. This gradually builds discipline and credit history for them, through their hard earned money. They learn to handle resources much beyond their capacities. Once the groups show the mature financial behaviour, banks are encouraged to give loans to the self-help groups (SHGs) in certain multiples of their accumulated savings. The bank loans are given without any collateral and at market interest rates.
SHGs acted as a fillip to promote financial inclusion, as they deliver banking services at an affordable cost to the vast section of disadvantaged and low-income groups. SHGs are being regarded as the world’s largest and fastest mechanisms to address poverty. Financial inclusion has acted as an umbrella to secure livelihoods, increase household income, and empower women through training and capacity building.
SHG–Bank Linkage Programme (SBLP) launched in 1992 by NABARD is an important strategy in promoting financial inclusion and inclusive growth. It is the main pillar of financial inclusion. The aim was to improve the rural poor’s access to formal credit system in a costeffective and sustainable manner. With this, the formal institutions in India have ventured into microfinance in a massive way. It is an outstanding example of an innovation leveraging on community-based structures and existing banking institutions. Moreover, it is the largest community-based microfinance programme in terms of outreach and also recognised as a part of priority sector lending and normal banking business by the RBI.
The programme had contributed towards women empowerment in the society through enhancing their contribution to household income and reduced dependency on informal money lenders and other noninstitutional resources.
DHAN Foundation’s two and a half decades of Kalanjiam Community Banking Programme experience has successfully demonstrated a unique model of development finance in the country. It has established linkages between the people’s organisations and formal financial institutions. It has proved that banking with the poor is a viable business proposition.
Convincing the bankers for SHG–bank linkage was quite challenging in the early days. The Kalanjiam programme tried out a number of approaches and strategies to change the attitude of the bankers towards SHG–bank linkage. These efforts have made a significant impact among the bankers that could be seen in the growth of SHG linkages. Now, the number of banks and branches involved in SHG–bank linkage is increasing year after year.
Though the response was positive, there existed a huge gap between eligible groups and those actually linked with the bank. The core issue for SHG–bank linkage is the bankers’ unwillingness in the new provinces of SHG promotion. In order to bridge this gap, DHAN realised the need for a people-managed financial institution to demonstrate the viability of such linkages on a large scale.
The following are some of the reasons for the need of bridge linkage.
There always exists a gap and would continue to exist till all the bankers consider micro credit as a viable and promising sector. To facilitate ongoing bank linkage, there arises the requirement for an institutional mechanism to demonstrate the linkage mechanisms and procedures to bankers. Thus, Kalanjiam Development Financial Services (KDFS) was formed and registered with the sole objective of facilitating bank linkage.
KDFS is a not-for-profit company incorporated under Sec. 25 of Companies Act 1956 (Sec.8 of Companies Act 2013) limited by share capital. It is promoted under the aegis of DHAN Foundation, combined with the efforts of the people’s organisations to ensure timely and adequate credit for the Kalanjiams (SHGs) and micro finance groups (MFGs). The motto of KDFS is to ‘bridge the gap’, that means to fill the gap in credit availability to the poor from the mainstream bankers. The objective is to provide financial assistance to SHGs through specific bridge financing.
KDFS provides timely linkage (bridge loan) to SHGs, which are finding it difficult to secure mainstream linkage. KDFS linkages help the poor to fulfil their emergency credit needs through the groups and prevent them from accessing credit from informal sources at an exorbitant rate of interest.
KDFS focuses on enhancing benefits to members with the lowest interest rate and not operating on high-income margin. This objective has gained greater appreciation in the banking community. So far, it has reached out to serve 33,963 groups across 12 states for credit linkages and provided credit worth of more than Rs.236.93 crores.
A study on credit services accessibility and the scope for bridge financing was conducted among the SHG members of Vaigai Vattara Kalanjiam and Karumbalai Vattara Kalanjiam. The study took note of the existing credit options and the members’ credit sources and gaps in addressing the credit demands. The synopsis of the study has brought out the ground realities in the need for timely bridge loans.
The poor access credit for their emergency needs. The Kalanjiam members avail credit for different purposes such as education, medical needs, livelihood activities, outside debt redemption, jewel redemption, social obligation, marriage/function, consumption, house up-gradation, house lease, asset creation, etc. They also prioritise the credit needs. Education, medical and livelihood activities credit needs occupy the top three ranks from the people’s perspective.
The SHG members availed credit from both formal and informal sources. The formal sources include SHG–bank linkage at an, interest rate ranging from 11-12.25% p.a. while KDFS interest rate is 13%. The Kalanjiam offers its members these funds at an interest rate of 18-24% p.a. The members availed jewel mortgage loan from nationalised and cooperative banks at interest rates ranging from 7-12% p.a. Some of the members avail credit from other MFIs at an interest rate of 18-24% p.a.
The informal sources of credit include money lenders and jewel mortgage shops, where the interest rate ranges from 24-120% p.a.
Every member has his/her own perspective to access credit from outside. Usually, members prefer credit access at a low-interest rate and easy repayable procedure. However, nowadays, members do not mind accessing high volume credit at higher interest rates if it is available on time.
The members of Vaigai Vattara Kalanjiam have accessed credit from different sources. At present, they have outstanding loans from different sources. The total debt of 52 members is Rs.54.45 lakhs. Out of 52 members, 62% of the members have debts from formal sources and remaining 38% of the members have debts from both formal and informal sources.
The members of Karumbalai Vattara Kalanjiam accessed credit from different sources. Presently, they have loan outstanding from different sources. The total debt of the 51 members is Rs. 55.42 lakhs. Out of 51 members, 65% of the members have debt with formal sources and remaining 35% of the members have debt with both formal and informal sources.
When compared to Kalanjiam and other sources, the loan outstanding from other sources is high to the tune of 1:4 among the Kalanjiam members of both Vaigai and Karumbalai Vattaram.
In Vaigai Vattaram, 16 groups were found to have a gap in the first linkage with the range of gaps from 10 to 37 months. In Karumbalai Vattaram, 12 groups were found to have a gap in the first linkage, ranging from 7 to 38 months.
When accessing subsequent linkages, in Vaigai Vattaram, out of 20 groups screened for the study, nine groups received timely linkages and the remaining 11 groups had gaps ranging from one to 12 months. In Karumbalai Vattaram, out of 20 groups, seven groups received timely linkages and the remaining 13 groups had linkage gaps ranging from three to 23 months.
The Kalanjiam members require credit continuously, so timely credit is very important in SHG. Otherwise, the members avail credit from other sources. While closing the bank or KDFS loan, the group has to access another credit from bank or KDFS immediately. Only then, the income from the interest may get accumulated in theaceous group itself. Otherwise, it will get leaked and benefit others. This is appropriate for the first linkage also.
The graduation of the loan amount is satisfactory in Vaigai Vattara Kalanjiam, except in four groups where the volume of loan is high. At Karumbalai Vattara Kalanjiam, almost in the groups, the loan amount is high.
The repayment performance of SHGs in Vaigai Vattaram is satisfactory; around 84% of loans were closed before the loan tenure period (pre-closure). The remaining 16% of the loans have defaults, the loans are closed after the tenure period, but they were not transformed into NPA. At Karumbalai Vattaram, SHGs are very good. Except two loans, all the other loans were closed within two years. The loans were closed before the tenure of the loan (pre-closure) and only a few groups have closed their loan close to its tenure.
Through the study, it is found that lack of timely credit has led Kalanjiam members to access credit from various sources with the various rates of interest. Though they had accessed these loans mostly on short-term basis, it is found that the members are losing income by way of accessing credit from informal sources at an exorbitant rate of interest. Timely SHG–bank linkage would definitely restrict a member from accessing credit from informal sources. If there are issues in SHG–bank linkage; KDFS linkage could be arranged to meet the members’ demand. Fulfilling the linkage gap by providing bridge linkages from KDFS will help the members of the SHGs to come out fully from the informal source of credit.