Finance Matters column in The Hindu Business Line – Farzana Najeeb of Advocacy writes the fifth article in the series.
Excerpt:
In the past few weeks with microfinance under public scrutiny, the self-help groups (SHG) channel is being positioned as a cheaper alternative of delivering microfinance compared to MFIs. A close look at the characteristics of the SHG model, its cost structure and interest rates to the ultimate customer shows that its cost is comparable to the MFI model despite a lot of implicit subsidies.
The SHG Bank Linkage Programme (SBLP) has contributed significantly to making credit available to the rural poor, but the true costs and risks inherent in this model need to be better understood. Understanding the SBLP
Under the SBLP, a SHG with 10-20 members (usually women) is formed with the support and guidance of a self-help promoting institution (SHPI). The SHG members are encouraged to make voluntary savings, which is internally lent.
To read the full article click here.
10 Responses
The Hindu article is disingenuous. It takes opportunity cost of meeting of women. First of all these meetings are held usually at night. Secondly, micro-credit is just one of the elements of the intervention, so costs needs to be apportioned. Thirdly, it is no as if MFIs do not have SHGs.
The interest rates the article places between 24-48%. While some NGOs might be guilty of promoting such high rates, most practice moderation – less than 18%.
If the article was based on some concrete study, then we could take it seriously. Instead it is a PR leaflet of the beleaguered MFI now under siege. Pity a respected like Hindu has permitted itself to be reduced to this!
Mr. Alexander, we are eager to understand your rebuttal of this article in some more detail. Request you to point out the critical assumptions that are wrong and your own analysis of the true costs.
The Hindu article is disingenuous. It takes opportunity cost of meeting of women. First of all these meetings are held usually at night. Secondly, micro-credit is just one of the elements of the intervention, so costs needs to be apportioned. Thirdly, it is no as if MFIs do not have SHGs.
The interest rates the article places between 24-48%. While some NGOs might be guilty of promoting such high rates, most practice moderation – less than 18%.
If the article was based on some concrete study, then we could take it seriously. Instead it is a PR leaflet of the beleaguered MFI now under siege. Pity a respected like Hindu has permitted itself to be reduced to this!
Mr. Alexander, we are eager to understand your rebuttal of this article in some more detail. Request you to point out the critical assumptions that are wrong and your own analysis of the true costs.
I think this comparison is fair and should be highlighted to have a better sense of where taxpayers money is spent and how. It is not bad though that poor are subsidized but it is equally important to make it explicit. From my own experience of promoting SHGs about 10 years ago in Khammam Dist of AP, the direct cost of promoting and linking an MFI to a bank added up to Rs. 10,000 per group. It typically takes about a year to link with banks. Each member used to save Rs. 50 per month making it Rs. 1000 for 20 members. Banks used to lend 2x savings but lock-in the savings in FDs until loans are paid back. 50% cash collateral which yield 7-8% p.a as against loans which are charged at 12%. Members get Rs. 24,000 loan, i.e., Rs. 1200 each in first cycle but they wouldn’t have access to their own savings. Things might have changed now but at the same time costs of SHG promotion also might have skyrocketed.
The analysis presented in this article is impressive. I am sure some other hidden costs like opportunity loss on savings, cost of maintenance of groups post-linkage etc are still missing.
I think this comparison is fair and should be highlighted to have a better sense of where taxpayers money is spent and how. It is not bad though that poor are subsidized but it is equally important to make it explicit. From my own experience of promoting SHGs about 10 years ago in Khammam Dist of AP, the direct cost of promoting and linking an MFI to a bank added up to Rs. 10,000 per group. It typically takes about a year to link with banks. Each member used to save Rs. 50 per month making it Rs. 1000 for 20 members. Banks used to lend 2x savings but lock-in the savings in FDs until loans are paid back. 50% cash collateral which yield 7-8% p.a as against loans which are charged at 12%. Members get Rs. 24,000 loan, i.e., Rs. 1200 each in first cycle but they wouldn’t have access to their own savings. Things might have changed now but at the same time costs of SHG promotion also might have skyrocketed.
The analysis presented in this article is impressive. I am sure some other hidden costs like opportunity loss on savings, cost of maintenance of groups post-linkage etc are still missing.
@ Sasi: Thanks. It seems your estimates are even higher than what our analysis has shown.
@ Rajan: Thanks for your comments. During the group formation process in the SBLP model, the meetings are typically held in the morning or day time, with direct wage loss implications. Once the group gets the loan, the meetings are held during day time or night time. In economic analysis, cost of leisure time also needs to be accounted for, because it is being foregone by the clients. In our analysis, we have adjusted for this mix of work time and leisure time by taking a lower (25% less) per unit opportunity cost of time for SHGs under SBLP than that for MFI clients. Also, we know that meeting time is usually longer and responsibilities of group members are more in SBLP.
The comparison in this article is being made for the SHGs formed under SBLP primarily for lending purpose otherwise the comparison won’t be fair. Of course, some MFIs organise groups as SHGs, but that doesn’t change our analysis. The comparison, in case for you it wasn’t clear from the article, is being made between the stylised SHG-Bank Linkage Programme model, wherein the groups are formed by NGOs and linked to banks, which then directly deal with groups, and the MFI model, where the MFI takes a bank loan and lends onwards to the group (JLG or SHG).
Let’s not miss key points being made in the article: high group formation costs that are subsidised, operating costs moved to members, and very high defaults that probably point at flaws in the model. Are you challenging any of these?
@ Sasi: Thanks. It seems your estimates are even higher than what our analysis has shown.
@ Rajan: Thanks for your comments. During the group formation process in the SBLP model, the meetings are typically held in the morning or day time, with direct wage loss implications. Once the group gets the loan, the meetings are held during day time or night time. In economic analysis, cost of leisure time also needs to be accounted for, because it is being foregone by the clients. In our analysis, we have adjusted for this mix of work time and leisure time by taking a lower (25% less) per unit opportunity cost of time for SHGs under SBLP than that for MFI clients. Also, we know that meeting time is usually longer and responsibilities of group members are more in SBLP.
The comparison in this article is being made for the SHGs formed under SBLP primarily for lending purpose otherwise the comparison won’t be fair. Of course, some MFIs organise groups as SHGs, but that doesn’t change our analysis. The comparison, in case for you it wasn’t clear from the article, is being made between the stylised SHG-Bank Linkage Programme model, wherein the groups are formed by NGOs and linked to banks, which then directly deal with groups, and the MFI model, where the MFI takes a bank loan and lends onwards to the group (JLG or SHG).
Let’s not miss key points being made in the article: high group formation costs that are subsidised, operating costs moved to members, and very high defaults that probably point at flaws in the model. Are you challenging any of these?
The article does not portray the correct picture and goes by preset notion of hidden costs. Group meetings are a naturally alley of the women, and many cases they are promoted by NGOs which work in a social sector, be it health or literacy etc etc. So group formation is a add-on function for the NGO. There is limited incremental costs for the NGO or the poor women in the villages. Second, group formation and its impact has a cascading / ripple effect , as the promotional costs gets drastically reduced when numbers increase – even if the costs are to be met by someone. The author should remember that the promotional cost are often met by NABARD out of the microFinance Fund created by the NABARD and banks. They can view this as a CSR. NABARD’s average cost for this is a very limited figure / groups.
I have a detailed assessment of these in the sabbatical work that I did with 3 NGOs in three states.
The author seems to have put costs to every single step that the women SHG member takes. As a part of trust building the SHPI also promotes the members to visits banks during their trips out of the village, the tremendous confidence they build is very perceptible and priceless. The return on building a inclusive and empowered society is do profound that the curt money lending institution can hardly dream of doin.
Can the MFIs give the poor at their door-step and charge 18 % p.a instead of doubling the cost of delivery to 36 ++ . the choice should be left to the client ???
God save, bring some understanding to the subject
Cheers
Suran
The article does not portray the correct picture and goes by preset notion of hidden costs. Group meetings are a naturally alley of the women, and many cases they are promoted by NGOs which work in a social sector, be it health or literacy etc etc. So group formation is a add-on function for the NGO. There is limited incremental costs for the NGO or the poor women in the villages. Second, group formation and its impact has a cascading / ripple effect , as the promotional costs gets drastically reduced when numbers increase – even if the costs are to be met by someone. The author should remember that the promotional cost are often met by NABARD out of the microFinance Fund created by the NABARD and banks. They can view this as a CSR. NABARD’s average cost for this is a very limited figure / groups.
I have a detailed assessment of these in the sabbatical work that I did with 3 NGOs in three states.
The author seems to have put costs to every single step that the women SHG member takes. As a part of trust building the SHPI also promotes the members to visits banks during their trips out of the village, the tremendous confidence they build is very perceptible and priceless. The return on building a inclusive and empowered society is do profound that the curt money lending institution can hardly dream of doin.
Can the MFIs give the poor at their door-step and charge 18 % p.a instead of doubling the cost of delivery to 36 ++ . the choice should be left to the client ???
God save, bring some understanding to the subject
Cheers
Suran