RISK MANAGEMENT IN MICROFINANCE –

EMERGING CHALLENGES IN INDIAN CONTEXT.

International Conference on Rural Finance Research:

Moving results into Policies and Practice.
19th -21st March 2007 at Rome.

N.JEYASEELAN,
CONSULTANT, INDIA.
Vijayjeyaseelan@yahoo.co.in
 SHG BANK LINKAGE PROGRAM

 NABARD – TECHNICAL SUPPORT -

REFINANCE

 BANKS – LOAN DELIVERY

 NGOs – PROMOTION OF SHG

 SHGs-INFORMAL GROUP
 PROGRESS UNDER MICROFINANCE IN INDIA
Upto 31st March 2006 - in Million US dollars
Agency / Cumulative No.of persons
Program micro credit disbursed reached (in
Millions)
Amount % share to total
NABARD SHG
Bank linkage 2590.45 69.2 164.9

SIDBI-MFI 173.14 4.6 2.6

SGSY 893.81 23.9 3.2

Others(RMK 88.10 2.3 1.1

&FWWB)

Total 3745.50 100 171.8

 CUMULATIVE PROGRESS OF SHG BANK LINKAGE
PROGRAM.
As of March SHGs credit Growth over SHG loan Growth over
end linked in last year disbursed in last year
million million USD

2002-03 0.71 55.5 465.61 99.6

2003-04 1.07 50.4 887.32 90.6

2004-05 1.59 48.1 1560.59 75.9

2005-06 2.23 40.1 2590.45 65.0

 BANK SHG LOAN PORTFOLIO GROWTH
in Million US dollars

1813.32
2000

1500 955.77
1000
500

0
2005 2006
 EMERGING SCENARIO UNDER BASEL - II

 June 2004- Basel II was put in place.

 Feb 2005- RBI issued guidelines on Basel II to Banks
in India.
 Migration to Basel II by Mar 2008/2009
 Basel I covered Credit and Market risks
 Basel II also covers Operational risks
 Basel II has three pillars viz Capital requirements,
Supervisory process Review and Market discipline.
 MF assets come under retail category and carry 75%
risk weight.
 If studies carried out on the default rate and proved
that MF assets are lesser riskier, then lobbying shall
be made for Lower risk weight to MF assets.
 RISK MANAGEMENT IN MICROFINANCE
 Identification of risk
 Measuring the risk
 Evolving strategies for risk mitigation
 Implementing the risk mitigation measures
 Monitoring the risk level.

 Major risks – Credit & Operational risks

 Credit risk-Possibility of Loss associated with
diminution in the credit quality of the
borrowers.
 Operational risk- Risk of Loss resulting from
the inadequate or failed internal process or
people or system or external events.
 RESEARCH GAP

 No studies have been carried out

so far on how the branch managers
implementing the SHG Bank linkage
program perceive the risks in SHGs
and NGOs.

 The present study fills this gap.

 RESEARCH DESIGN

Objectives:
To review the emerging risk management scenario
in Banks delivering micro finance to Self Help
Groups and Micro Finance Institutions in India.
 To identify the potential risk factors associated with
SHG-Bank linkage
 To analyze the risk perception of the Branch
Managers on SHG lending
 To classify the risk factors into High, Medium and
Low risk categories.
 To evolve a tool for Credit Risk rating of Self Help
Groups
 To offer suggestions for risk mitigation measures.
 RESEARCH DESIGN: METHODOLOGY.

 A descriptive study
 Purposive sampling to select 68 Branch
managers implementing SHG program
 Sample drawn from 5 districts of Tamilnadu
 Study is more of qualitative nature
 Ten major Risk factors identified through
FGDs with stakeholders
 A 5-point risk rating scale was constructed
 Based on the Branch manager’s perception,
risk factors were classified as
High/Medium/Low risk categories.
 ANALYSIS AND FINDINGS

 For each choice in the scale, scores are

given from one to five.

 Total scores by all the respondents for

each risk factor have been summed up
and their Mean & Standard Deviation have
been calculated. The risk categorization
has been done using the mean and
standard deviation for each factor.
 FINDINGS
SIX MAJOR HIGH RISK FACTORS AS PERCEIVED BY
THE BRANCH MANAGERS.

     Reduction in grants to NGOs for group promotion.

     Frequent switch over of NGO field staff
     Maintenance of group accounts by a few
     Loan size not commensurate with the capacity of
the SHG members.
     Increasing possibility for loan default with increase
in loan size
  SHGs shouldering too much government program
responsibilities beyond their capacity.
 FINDINGS
Based on the perception of the Branch Managers

 Risk factors such as

- Lack of monitoring of SHGs by NGOs
- Dependence on a single SHG leader
- which are in Medium risk category as of now,
also have potential to move into the high risk
category in the near term, if no corrective
measures are taken in time.
 SUGGESTIONS FOR RISK MITIGATION -
BANK LEVEL.

 Bank loan not to be shared by all members of the

group.
 Loan term be short 6 / 8 / 10 /12 months
 Repeat loan delivery should be very quick
 Analyze the need for Restructuring the SHG after
closure of each cycle of loan
 Graduating members to individual larger loans
 Use of Credit risk rating tool to offer risk based
pricing
 Banks shall share a part of the cost of group
promotion by NGOs.
 SUGGESTIONS FOR RISK MITIGATION
NABARD LEVEL.

 NABARD to hike the group promotion cost to

NGOs.
 NABARD to pilot a District level Micro credit
information bureau
 NABARD to arrange capacity building program
on risk management to NGOs / CBOs and SHG
leaders.
 SUGGESTIONS FOR RISK MITIGATION
NGO LEVEL.

 NGOs shall ensure rotation of SHG leaders

 NGOs shall select their staff from the SHGs to
avoid the problem of staff turn over
 NGOs shall form federation of SHGs and shall
delegate their functions to them
 NGOs shall ensure auditing of group accounts
by the internal team as well as by the
external audit teams.
 NGOs shall strengthen the SHG’s bookkeeping
skills and ensure financial transparency
through the IT.
 SUGGESTIONS FOR RISK MITIGATION
GOVERNMENT LEVEL

 Government departments should limit the

delivery responsibilities of the SHGs for
selective programs only matching with its
capability.
 Government should change the mode
from rapid growth to consolidation phase
so as to ensure a growth with stability &
quality.
 MOVING RESULTS INTO POLICIES & PRACTICE

 Some results have already been disseminated to the

branch managers in the field through the training
programs.

 Some of the suggestions require policy changes and to

be addressed by the Policy makers
 Customized Individual loans for Graduating SHG
members
 Banks to offer Risk based pricing of micro loans
 Micro credit information Bureau at the district level
 Use of Risk rating tools on an ongoing basis
 Use of IT in financial transparency
 MOVING RESULTS INTO POLICIES & PRACTICE

 Government’s focus to be shifted from rapid

growth (numbers) to consolidation (quality).
 NABARD to hike the group promotion grants
to NGOs and banks shall share a part of the
group promotion cost.
 NABARD to organize more Capacity building
programs on risk management to NGOs
/CBOs and SHG leaders.
 Building on the qualitative insights gained
through this rapid study, a detailed study on
MF - Risk management covering all the
models shall be carried out
 THANK YOU.

For further details, Please contact:

N.Jeyaseelan, Consultant,
7/633-A-Jeevanantham street,
Nagamalai Pudukottai, Madurai, 625 019,
INDIA.
Phone :00-91-452-2456546
Mobile : 00-91-9344108120
Skype : vijayjeyaseelan