Microfinance / Self Help Groups -SHG

To most, microfinance means providing very poor families with very small loans (microcredit) to help them engage in productive activities or grow their tiny businesses. Over time, microfinance has come to include a broader range of services (credit, savings, insurance, etc.) as we have come to realize that the poor and the very poor who lack access to traditional formal financial institutions require a variety of financial products.

Microcredit came to prominence in the 1980s, although early experiments date back 30 years in Bangladesh, Brazil and a few other countries. The important difference of microcredit was that it avoided the pitfalls of an earlier generation of targeted development lending, by insisting on repayment, by charging interest rates that could cover the costs of credit delivery, and by focusing on client groups whose alternative source of credit was the informal sector. Emphasis shifted from rapid disbursement of subsidized loans to prop up targeted sectors towards the building up of local, sustainable institutions to serve the poor. Microcredit has largely been a private (non-profit) sector initiative that avoided becoming overtly political, and as a consequence, has outperformed virtually all other forms of development lending.

Traditionally, microfinance was focused on providing a very standardized credit product. The poor, just like anyone else, need a diverse range of financial instruments to be able to build assets, stabilize consumption and protect themselves against risks. Thus, we see a broadening of the concept of microfinance--our current challenge is to find efficient and reliable ways of providing a richer menu of microfinance products.

Micro Credit is defined as provision of thrift, credit and other financial services and products of very small amount to the poor in rural, semi-urban and urban areas for enabling them to raise their income levels and improve living standards. Micro Credit Institutions are those which provide these facilities.

Banks have been given freedom to formulate their own lending norms keeping in view ground realities. They have been asked to devise appropriate loan and savings products and the related terms and conditions including size of the loan, unit cost, unit size, maturity period, grace period, margins, etc. Such credit covers not only consumption and production loans for various farm and non-farm activities of the poor but also include their other credit needs such as housing and shelter improvements .

Microfinance refers to loans, savings, insurance, transfer services and other financial products targeted at low-income clients. Microcredit refers to a small loan to a client made by a bank or other institution. Microcredit can be offered, often without collateral, to an individual or through group lending.

The typical microfinance clients are low-income persons that do not have access to formal financial institutions. Microfinance clients are typically self-employed, often household-based entrepreneurs. In rural areas, they are usually small farmers and others who are engaged in small income-generating activities such as food processing and petty trade. In urban areas, microfinance activities are more diverse and include shopkeepers, service providers, artisans, street vendors, etc. Microfinance clients are poor and vulnerable non-poor who have a relatively stable source of income.

Access to conventional formal financial institutions, for many reasons, is directly related to income: the poorer you are, the less likely that you have access. On the other hand, the chances are that, the poorer you are, the more expensive or onerous informal financial arrangements. Moreover, informal arrangements may not suitably meet certain financial service needs or may exclude you anyway. Individuals in this excluded and under-served market segment are the clients of microfinance.

As we broaden the notion of the types of services microfinance encompasses, the potential market of microfinance clients also expands. For instance, microcredit might have a far more limited market scope than, say, a more diversified range of financial services which includes various types of savings products, payment and remittance services, and various insurance products. For example, many very poor farmers may not really wish to borrow, but rather, would like a safer place to save the proceeds from their harvest as these are consumed over several months by the requirements of daily living.

Experience shows that microfinance can help the poor to increase income, build viable businesses, and reduce their vulnerability to external shocks. It can also be a powerful instrument for self-empowerment by enabling the poor, especially women, to become economic agents of change.

Poverty is multi-dimensional. By providing access to financial services, microfinance plays an important role in the fight against the many aspects of poverty. For instance, income generation from a business helps not only the business activity expand but also contributes to household income and its attendant benefits on food security, children's education, etc. Moreover, for women, who, in many contexts, are secluded from public space, transacting with formal institutions can also build confidence and empowerment.

Recent research has revealed the extent to which individuals around the poverty line are vulnerable to shocks such as illness of a wage earner, weather, theft, or other such events. These shocks produce a huge claim on the limited financial resources of the family unit, and, absent effective financial services, can drive a family so much deeper into poverty that it can take years to recover.

A small group (15 to 20 members), voluntarily formed and related by affinity for specific purpose, it is a group whose members use savings, credit and social involvement as instruments of empowerment

Thrift and credit activities
Participatory monitoring of the groups
Group level poverty reduction plans

An economically poor individual gains strength as part of a group. Besides, financing through SHGs reduces transaction costs for both lenders and borrowers. While lenders have to handle only a single SHG account instead of a large number of small-sized individual accounts, borrowers as part of a SHG cut down expenses on travel (to & from the branch and other places) for completing paper work and on the loss of workdays in canvassing for loans.

With a view to facilitating smoother and more meaningful banking with the poor, a pilot project for purveying micro credit by linking Self-Help Groups (SHGs) with banks was launched by NABARD in 1991-92. Reserve Bank of India (RBI) had then advised commercial banks to actively participate in this linkage programme. The scheme has since been extended to RRBs and co-operative banks.

The dictionary meaning of federation is "Association of autonomous bodies uniting for a common perceived benefits". "an association of autonomous bodies united for common perceived benefits" (FWWB, 1998).

A federation is an association of primary organizations.  Primary organizations may federate to realize economies of scale or to gain strength as an interest group. Federations of cooperatives have a long history. (Nair 2002).

A Cluster Level Federation is a network of several SHGs and a structure or body evolved by SHGs themselves consisting of representatives from all member SHGs, with a motive of supporting member-SHGs attain the goals of economic and social empowerment of women members and their capacity building.  (TNCDW, 1999)

In other words, it is an another forum for SHGs to step up development of women members taking advantage of collective effort of members SHGs, enabling a holistic and need based economic and social development. A SHG Federation is a democratic body formed with certain number of SHGs functioning in a specific geographical area with the objective of uniting such SHGs for common cause and for achieving these causes which an individual SHG would not be able to do. In short, the SHG Federation has to be necessarily of SHGs, by SHGs and for SHGs. 

Experiences and literature shows that federations are set up with one or more of the following objectives:

• To get access to policy making bodies through political empowerment and social mobility
• To facilitate linkages between SHGs and banks/govt. agencies/local institutions
• To have better access to development information and marketing linkages
• To resolve any conflicts that may arise within member SHGs
• To assist in strengthening the performance of member SHGs
• To help in achieving sustainability of SHG
• To strengthen (through training, information dissemination, on-site support, etc) the capacity of member-SHGs in one or more of a variety of fields (bookkeeping, accounting, marketing, financial management, advocacy, bank-linkage, accessing government schemes, to name some)
• To provide credit, especially multiple credit lines
• To provide savings facilities, especially voluntary savings
• To undertake marketing of the produce of the members of the SHGs
• To provide life/loan insurance services
• To provide staff support to member-SHGs
• To write and/or audit the accounts of member-SHGs
• To review/regulate/supervise the functioning of member-SHGs
• To promote new SHGs
• To create the political/social space that women need to live their lives as fully as they desire to
• To be the window to the outside world, in replacement of the promoter organisation
• To undertake all that the external facilitator was undertaking, after its departure.

Quality Assessment (QA) as the name suggests, is an assessment of the quality of performance of an Institution a propos the services it provides. In micro finance, we talk about Self Managed Microfinance Institutions (SMFIs), QA of an SMFI would entail a comprehensive evaluation of its design, structure and performance

Small / nascent SMFIs may require a Rapid Quality Assessment, which is more of a SWOT Analysis, and not a comprehensive Assessment. RQA will help understand the program implementation status, issues in coverage & convergence, and identify gaps for capacity building.

Quality Assessment may be done for the following purposes

1. Assessment of credit worthiness
2. Identification of Strengths and Areas for improvement
3. Identification of key Capacity Building needs
4. Enhancement of Quality Consciousness and benchmarking for promotion of best practices among key stake holders.
5. Upgradation of SMFI sector in the state of Andhra Pradesh, at a macro level Also, the Quality Assessment will be a Capacity Building input in itself for the SHG Federation, to improve its performance

Government of AP, Banks and other SHPIs (Self Help Promoting Institutions) and SHG Federations/MACS could seek APMAS Quality Assessment for a fee.

The Quality Assessment involves both intensive and extensive data collection which involves holding meetings with key personnel of the promoting organisation, visiting the constituents operating at the ground level and reviewing the different books & records maintained by the concerned SMFI. Assessments are more participatory and also involve staff of the promoting organization. Assessment involves building rapport with the top management (Board) of the SHG Federation, facilitating small group discussions and presentations made by the Office Bearers, Board members and staff, about the Federation functioning. Debriefing meeting is held with the Federation Board members on the last day of the field assessment. Where the SHG Federation is a 3-tier structure, in addition to the Federation, two Cluster/Village Organizations are assessed.

Operational Self Sustainability (OSS) measures the ability of the Organisation to recover its operating expenses, explicit financial costs and the provision for loan losses. The Assessment Team must recast the financial statement of the federation to reflect the Operating Expenses related to salaries, travel, administration, depreciation, interest payments and loan losses for the rating period. OSS is calculated by dividing the Operating Income by operating Expenses.

The FSS incorporates the opportunity cost of funds by accounting for inflation and market rate of interest for the total funding requirement of the Federation. FSS is calculated by dividing the Operating Income by Total Adjusted Operating Expenses. To calculate the adjusted cost of capital, the cash and other liquid assets are adjusted for the inflation rate during the previous year and borrowings are considered at market rate of interest.

Operating Cost Ratio (OCR) gives an estimate of the Federations efficiency. A higher OCR shows that the Federation is incurring excessive costs and is not able to expand its portfolio sufficiently. A lower ratio indicates that the Federation is capable of transacting large volumes of business with a relatively low cost structure. The OCR for a Federation should optimally lie between 5 - 10% and not exceed that. Operating costs include salaries, commission, depreciation, travel, office expenses, insurance, audit fees, which are administrative costs. Financial costs like interest payments and loan loss provisions are excluded from this. OCR is calculated by dividing the â?oTotal operating costs for last one year by the Average loan portfolio for last one year.

Portfolio At Risk (PAR) measures the risk associated with the Federations active portfolio. A high PAR implies poor portfolio quality and high future risk. PAR is calculated normally for arrears in excess of 90 days. Portfolio refers to the Total Outstanding of all loan products of the Federation. It is an important asset that forms a major chunk of the Federations micro finance operations. PAR of 90 (days) is calculated by dividing the Principal balance of loans with arrears > 90 days by Outstanding Portfolio

Capital Adequacy Ratio shows the federations solvency by indicating its ability to service risky assets from its own capital (net worth), if needed.