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Status of Micro Credit through SHGs in Meghalaya
                                                                                                                                                                                     Dr. Shreeranjan

(The contents below is extracted from author’s book on "Credit related Issues in Meghalaya", Published by NEICSSR Shillong, August, 2006. © Shreeranjan)

• high number of field staff, good outreach for disbursal and repayment collection;

• a reliance on group / core fund from deduction out of loans and providing insurance  mechanisms of default; additional deduction to meet risks and contingency; local and operational variations.

• Evidence from various studies suggests that micro credit has improved the conditions of poor women through enhanced  bargaining position with their husbands and family, boosting self-confidence, and participation in public life.

It has been established that microfinance programs both sponsored by NGOs and the state have been better in reaching out to moderately poor and vulnerable (not necessarily poor) households than to the extremely poor households. The usage of loans is often to protect against risk ahead of time than as ex-post coping mechanism, loans are rarely used for consumption directly which is generally met by smoothing income flows. When used as a coping device, loans usually go into rebuilding assets rather than direct consumption.

Presently micro finance institutions (MFIs) are broad spectrum entities which obtain finance from banks according to guidelines issued by RBI. MFIs seek to provide small scale credit and other financial services to low income households and small informal businesses.  As per one definition in MFDEF scheme of NABARD  “Micro Finance Institutions means an entity whose principal object or principal business is the provision of micro finance services to eligible clients and comprises microfinance organisations and MFI-NBFCs.”   MFIs appears to be ‘legally amorphous entities’ (RBI, 2005). In terms of nature and extent of regulation and supervision there are significant differences across the legal forms. .Most of these institutions are not under any prudential regulation and hence often do not enjoy confidence of lenders, donors and other stakeholders (RBI, 2005).  ‘For profit’ MFIs are incorporated under the Companies Act, 1956 and are registered as NBFCs under the RBI Act, 1934 which fall within the purview of RBI regulations. ‘not for profit’ companies under section 25 of the Companies Act, 1956 are exempt from the regulatory requirements under the RBI Act subject to certain conditions.

Legal forms of MFIs in India

[Source:  NABARD, 2003 ( cited by Sen and Shylendra) & Satish, P. 2005 Economic and Political Weekly, 23 April, 2005]

The position of micro credit providers and present legal framework governing them is as under(RBI, 2004 ):

In recent years, banks have also resorted to involving NGOs and other CSOs (Civil Society Organisations) for the SHG-Bank linkage programme, Joint Liability Groups,  MFOs, and Microfinance institutions (MFIs), as "pass through" agencies. New generation banks with a heavy reliance on technology but with a very limited branch network also have started to tap the rural credit market. There are  more than 800 MFIs operating in India and more than 3000 organisations involved in promoting and facilitating the SHG-Bank Linkage Programme as per RBI (2005).  MFIs provide a multidimensional  services, besides enabling  the poor to avail of some of the financial services. The activities covers wide spectrum such as promotion of SHGs, partnering with banks for financial services, to be facilitators without carrying the micro finance assets and liabilities on their balance sheets.  Barring some large NGOs, NBFCs, MACSs which function as "pass-through" entities in "partnership" with banks [ for Example  MFIs like SPANDANA (SPANDANA is a NGO  operating in  Guntur, Andhra Pradesh ), Share-Micro Finance Limited (Society for Helping and Awakening Rural poor through Education, Hyderabad,  Andhra Pradesh.,)] others do not handle cash. Most MFIs have lopsided geographical distribution concentrated in South India and the share of total microfinance business in the country is about 8% ( Satish, P. 2005).  

There are various  approaches, classification, models , categorisation of MFIs a snapshot of which is presented below: Francis Sinha, 2005,  indicates i) SHGs model ( MACS is included in this) and Grameen Model. Satish , P. (2005) mentions broadly five (5) categories of methodologies in  microfinance,  

(Source: Extracts from an article written and presented at the APRACA Seminar at Manila on Regulation of mFIs in July 2004 by K. Muralidhara Rao, General Manager, NABARD, Mumbai. The views expressed are personal and attempts to capture the present thinking of regulating institutions.)

There is ongoing debate in respect of a regulatory system for the MFIs which focuses on three stages approach as indicated by RBI and NABARD:

1. Stage one - to make the MFIs appreciate the need for certain common performance standards,

2. stage two - making it mandatory for the MFIs to get registered with identified or designated institutions and

3. stage three - to encourage development of network of MFIs which could function as quasi Self-Regulatory Organisations (SROs) at a later date or identifying a suitable organisation to handle the regulatory arrangements.

The Committee of RBI recommended that while the MFIs may continue to work as wholesalers of micro Credit by entering into tie-ups with banks and apex development institutions, more experimentation are needed about the suitability and sustainability of the MFI model. Such experimentation needs to be encouraged in areas where banks are still not meeting adequate credit demand of the rural poor such as North-eastern states and tribal dominated states such as Jharkhand, Chhattisgarh and Orissa which is pertinent to the Meghalaya context.  There is also a view that while the NGO-MFIs can continue to extend micro credit services to their clients, they could play an important role in facilitating access of their clients to savings services from the regulated banks. As regards allowing NGO-MFIs to access deposits from public / clients, the Committee of RBI consideresd that in view of the need to protect the interests of depositors, they may not be permitted to accept public deposits unless they comply with the extant regulatory framework of the Reserve Bank of India; further, as no depositors' interest is involved where they do not accept public deposits, the Reserve Bank of India need not regulate MFIs. The committee is also of the view that lenders of MFIs should ensure that these institutions adopt a ‘cost-plus- reasonable-margin’ approach in determining the rates of interest on loans.

NGO promoted Micro Finance Institutions either in the shape of SHGs and NBFCs traverse the thin line of formal and informal structure and could emerge as a sturdy hybrid which takes on the best elements if governed and delivered properly. According to a study by Kropp and Suran (2002), three different models of credit linkages have been found feasible while applying to their formation in the country:

1. SHGs formed and financed by banks (16%);

2. SHGs formed by NGOs and Formal agencies/ Govt. but funded directly by banks(75% of financed SHGs);

3. SHGs financed by banks using NGOs and other agencies as financial intermediaries (9%).

I would like to add 4^th dimension of stand alone or abandoned SHGs promoted by NGOs, Govt., banks as per some programmes and abandoned or left alone in the tumult of development and finance. An additional fifth column of SHGs is such that mutates from one form or format to another in the spirit of survival of the fittest through adaptation.

Based on above stipulations, there could be different models of the linkage between SHG and banks ( modified after study by Thorat, YSP.  2004; Nanda, Y.C. 1994 ):

Model 1: The simplest and most direct is a model in which the banks deal directly with the individual SHGs, providing financial assistance for on-lending to the individual members.

Model 2: Another model, a slight variant of the first, is where the bank gives direct assistance to the SHG and the SHG promoting instituion (SHPI), usually an NGO, provides training and guidance to the SHG and generally keeps a watch to ensure its satisfactory functioning.

Model 3: The third model places the NGO or SHPI as a financial intermediary between the bank and a number of SHGs. The linkage between the bank and the SHGs in this case is indirect. The NGO accepts contractural responsibility for repayment to the bank.

Model 4: The most common linkage  model in India is Bank-SHG with active support of Govt./ SHPI /NGOs. Banks deal directly with individual SHGs in this case but SHPI/NGOs/Govt. provides the initial training, guidance for organization, thrift, credit and economic activities. While linkage of the banks is direct with the SHGs, the SHPI has an important role in pre- as well as post-linkage stages. The fourth model envisages bank loans directly to individual members of SHGs upon recommendations of the Govt, SHG and NGO. In this case, the Govt. NGO assists the bank in monitoring, supervising and recovery of loans.

Model 5: In many cases, the NGO/ SHPI also provides or organizes/ channelise some amount of  initial support to these SHGs to augment their resources (for e.g. an NGO, MYRADA, provided such financial assistance to SHGs from an initial support of Rs. 1 million by NABARD before the Pilot Project was started). The SHPI/NGO also monitors and ensures satisfactory functioning of the SHGs even after the linkage.

Model 6 : Mixed or Variants: Very often in the older SHGs the linkages traverses an evolutionary process where there is movement from model five or three to model two and to model one and finally to model four as the objective is access to the quantum of finance and end use.

Growth, evolution or adoption or adaptation of various course very often depend on the perception and formalities of the bank and also on the strength of MFIs/ Govt and other agencies. There have been cases where banker is proactive, outgoing, having a first hand knowledge on the working of a SHG has straightway taken model two or even model one. On the other hand,   conservative banking may follow model three and rely on the NGO or SHPI or Model 4 which fits the Govt. Sponsored Programmes for defined objectives (e.g. SGSY, IWEP, SGSRY etc).

Group-based credit and insurance programs experimented over the last two decades, also offer good promise as it:

• reduces problems of wrong selection and dissolve moral aspects involved;

• reduces likelihood of members taking up projects with high risks;

• reduces or remove requirements for traditional norms of collateral, extending the spread to most poor;

• accommodates even very small loans and is more responsive to the needs of the borrower;

• has high repayment rates; and

• is more sustainable.

The shortcomings of Group-based credit and insurance programs are that:

• Success is not universal;  

• more successful in reaching the moderately poor than most poor Hulme and Mosley 1996; Khandker 1998; the poorest and most vulnerable groups may still be excluded;

• selection biases may overstate the benefits from program participation;

• financial sustainability remains a concern;

• In some cases subsidy dependence is high and in some cases, interest rates more than double.

Group credit schemes may need to think of innovative ways to lower costs while maintaining their outreach to the poor. On costs and benefits of credit subsidies issue limited evidence shows differences across programs and within programs across different groups of borrowers. Vijay Mahajan (2005) has mentioned limitations of micro credit in having five fatal assumptions:

1. Assumptions that the credit is the main financial service needed by the poor;

2. Assumptions that credit can automatically translate into successful micro enterprises;

3. Assumptions that all the poorest wish to be self employed and can be helped by the micro credit;

4. Assumptions that giving micro credit to people slightly above poverty line is mistargeting;

5. Assumptions that micro credit institutions can all become financially self sustaining.

Drawing upon the concept of livelihoods as mentioned in the opening portion of chapter I a more sustainable broad based expanded paradigm of micro credit is engulfed in the concept of ‘livelihood finance’( Mahajan, V.2005) as intrisincally linked. According to Mahajan (2005) ‘livelihood finance’ as a comprehensive approach includes the following which must be brought in more proactively in integrated policy and operational domain:

1. Financial services: savings, credit, insurance, infrastructure finance, investment in human development;

2. Agriculture and business development services: Productivity enhancement, risk mitigation, local value addition and alternate market linkages;

3. Institutional development services: producer organisation, systems of accounting, accountability, MIS, incentives etc.  

5.5.Status of Micro Credit through SHGs in Meghalaya

The main aspects, merits and demerits of micro credit have been touched upon in brief above. With paradigm shifts in credit dispensation and programmatic shifts in various sectors and schemes of Govt.of India , SHGs and NGOs have been brought to the forefront. There are burgeoning programmes requiring social mobilisation through SHGs for microcredit and delivery of services through participation, capacity building. and empowerment The SHG programmes which  had a slow start, has gradually picked up in the state. There are around 6500-7000 SHGs in the state under various programmes, as on  January,06, such as SGSY (C&RD deptt.), IWCP ( Social Welfare deptt.), IWDP ( Soil Conservation deptt.),  NABARD and Banks, Horticulture Mission ( Agriculture deptt.), IFAD projects (NEC, and Planning Deptt.) , NGO  promoted and run under various assistance programmes.  

There are also migration of groups for one objective to the other and thus, possible overlaps. There is a need to survey, rate and involve these socially mobilised groups towards consolidation, capacity building and effective partnership in developmental delivery in the state.

5.5. a. The SHGs bank linkage programme has not progressed in the State of Meghalaya at the same pace as in other parts of the country.  The main reason for the poor progress appears to be the lack of awareness of the concept of promotion, capacity building of SHGs etc.  Besides, most of the groups promoted by NGOs are now being covered under SGSY.  Micro-finance and mere provision of credit does not foster self-employment; at the same time, there is a need to facilitate and provide comprehensive micro enterprise development support.

As per NABARD, as on 30 November 2004 , the progress under SHG bank linkage programme is as below:

(Rs.in lakhs)

Source NABARD, 2005 & 2006

Besides the above NEDFi has also promoted around 65 numbers of SHGs for microfinance of which 51 are women SHGs. A total of Rs 41.37 lakh involving 759 beneficiaries have been assisted as on February, 2006. As on 30-11-2004 , 215 SHGs have been credit-linked to various banks. Further, as per RBI upto 30^th September 2005 , 1958 SHGs have been credit linked with the bank in Meghalaya with 785 lakh as disbursed amount.

5.5. b. Status of NGO facilitated SHGs formation

Most of the  micro credit initiatives in the State have taken place with the involvement of NGOs such as Bosco Reach Out, BAKDIL Diocesan Social Service Society, Bethany Society, FMA-Outreach for Underprivileged Women and Children, Women for Integrated Sustainable Empowerment (WISE), Nangroi Hynniewtrep Organisation, Namrhen Association, Western Cultural and Socio Welfare Association etc., to name a few. Of these, the Bosco Reach Out has been more successful in the formation and linking of SHGs with the banks.  NABARD has sanctioned grant assistance of Rs.8.00 lakh to Bosco Reach Out for conducting various training programmes for strengthening 400 existing SHGs and promoting 400 SHGs both in Meghalaya and Assam within a period of three years.  NABARD has also sanctioned Revolving Fund Arrangement of Rs.15 lakh for lending to 150 SHGs with an average loan of Rs.10000.00 per group for undertaking income generating activities.  As on June 2004, Bosco Reach Out has formed 5563 SHGs, of which 340 groups have been savings linked.

Table : District-wise NGO facilitated SHGs in Meghalaya