Case Study

RBI asks Banks to Fund Self-help Groups Directly

–Alarmed at micro-finance institutions' exposure to SHGs. Both public and private sector banks
were too "lethargic" in financing and re-financing SHGs, which has "led to MFIs taking
advantage and becoming aggressive lenders at high rate of interest".

Alarmed at micro-finance institutions' exposure to self-help groups (SHGs), the Reserve Bank of
India has asked public and private-sector banks to step up lending to SHGs. This directive also
comes at a time when micro-finance institutions (MFIs) have been asked to reduced their high
rate of interest being offered to their customers.

Speaking at a Dharwad District Consultative Committee meet recently, an RBI official said that
both public and private sector banks were too "lethargic" in financing and refinancing SHGs,
which has "led to MFIs taking advantage and becoming aggressive lenders at high rate of
interest".

He also pointed out that MFIs were "funding too much to SHGs".

According to a report released by Sa-Dhan, which has 264 members, the total loan outstanding
for all 264 MFIs that reported to Sa-Dhan is 18,343.9 crores reaching out to 2.67 crores active
borrowers, and an additional 4,200 crores of outstanding portfolio is being managed by MFIs on
behalf of banks and other financial institutions, taking the total outstanding portfolio managed by
MFIs to about 22,544 crores.

In contrast, a NABARD report on the 'status of microfinance in India 2010', says that during
2009-10, banks in India financed 15.87 lakh SHGs, including repeat loan to the existing SHGs,
with loans of 14,453.30 crores, registering a growth of 17.9 per cent over the previous year in
loans disbursed. As on March 31, 2010, 48.51 lakh SHGs had outstanding bank loans of
28,038.28 crores, a growth of 23.6 per cent in bank loans outstanding against SHGs.
The RBI official said that with active help from NABARD, Central and State agencies, public
and private sector banks should "aggressively fund SHG projects directly instead of present
practice of using MFIs as middlemen".

As banks have access to cheap credit, they should take advantage and fund SHGs at village
level, he suggested. "Through this, banks can win over the trust and lay a strong foundation
for financial inclusion and creating joint liability groups at village or taluk level," he added.

With banks now on a wait-and-watch mode as far as lending to MFIs goes, the present crisis in
Andhra Pradesh could well present them good avenues to reach out to SHGs better, said an
official with a public sector bank. "Banks can offer direct linkage to SHGs at within 12 per cent,
and even after including the SHG margin of 3 per cent, credit is available at around 15 per cent,
which is much lower than the high rates of interest that MFIs charge," he explained. This is one
way of tackling the MFI issue.

Some banks like Canara Bank, which were not aggressive lenders to MFIs, want to continue
having direct credit-linkage to SHGs. "We have always thought of lending directly, and there is
no need for a change in that philosophy now. And we have never been aggressive lenders to the
MFI sector," Mr S. Raman, Chairman and Managing Director, Canara Bank, told Business Line
recently.

This fiscal, the bank has disbursed credit of 1,000 crores to SHGs directly, and expects to Notes
close the year with a 25 per cent growth in this portfolio.

As banks are now looking at direct credit-linkage to SHGs aggressively, MFIs are now forced to
operate on a low-margin high-volume model. With MFIs being forced to reduce their rate of
interest, "margins will be significantly impacted for several of them," pointed out Mr Suresh K.
Krishna, Managing Director, Grameen Koota.
The drop in margins could be as high as 30-40 per cent for those who offer higher rates now.
"But others, who currently offer loans at less than 30 per cent interest rate, there wouldn't be
much of a difference," he added.

Question

Discuss the role of RBI in helping the Self-help Groups.