How small loans can be made cheaper
What do Shalini Shetty, 29, and Shakila Banu, 30, have in common?
Well, both are entrepreneurs. Shetty is into trading and Banu into catering. Shetty lives in Dakshina Kannada district and Banu at Udupi in Karnataka. Shetty is part of Manjushri and Banu of Shri Lakshmi self-help groups—a financial intermediary composed of local women who save regularly in small quantities and are “linked” to banks for delivery of micro credit.
Both received RuPay cards from Prime Minister Narendra Modi on 29 October.
After offering prayers at the ancient Lord Manjunatheshwara temple in the coastal Dakshina Kannada district in Karnataka, Modi distributed the debit cards at a function of the Shri Kshetra Dharmasthala Rural Development Project (SKDRDP) at Ujire, while launching a campaign called ‘Digitised SHG Member Transaction’.
Shetty and Banu are two of the 1.2 million self-help group members who have received the cards, as the Indian government pushes towards an era of digital currency.
“Our mothers and sisters who live in villages, whether they are educated or not, have taken a pledge. Twelve lakh people have taken a pledge that they will transact their self-help group-related business cashlessly; they will go with digital transaction, with RuPay cards,” Modi said.
SKDRDP’s executive director L.H. Manjunath is driving the digital movement among semi-literate men and women, some 3.8 million people who save and borrow money in small quantities from nine banks to make a livelihood. SKDRDP, which was a not-for-profit lender till 2008, is a business correspondent (BC) and business facilitator (BF)—a Reserve Bank of India (RBI)-approved intermediary between the banks and these people.
SKDRDP has formed 3.9 lakh SHGs (each self-help group has roughly 10 members) and 80% of them are women. To get perspective, there are 8.5 million SHGs spread across Indian states. Roughly, SKDRDP accounts for 5% of these groups nationwide, but when it comes to loan outstanding, its share is at least 10%.
Overall, the 8.5 million SHGs have Rs61,000 crore of outstanding loans, far less than 1% of the bank credit in India (which is little over Rs79 trillion). While bad loans are to the tune of 6.7% of the Rs61,000 crore SHG portfolio, in SKDRDP’s Rs6,242 crore outstanding loan portfolio (as on 31 March 2017), bad assets are nil. In fact, while SKDRDP-managed SHGs have no bad loans in Karnataka, other SHGs in the state have Rs292 crore of bad loans, close to 15% of their loan outstanding.
SKDRDP, a non-governmental organization (NGO), has been functioning since 1982. Its members are spread over 29 districts in Karnataka and one in Kerala. It has 6,840 employees on its rolls and another 11,000 workers on contract, who work in the community promoting and handholding the SHGs. Its loan book is expected to top Rs7,700 crore by the fiscal year-end. Since inception, it has disbursed Rs30,000 crore of loans.
The digital challenge
The day Modi distributed the debit cards, SKDRDP and India’s largest lender State Bank of India entered into an agreement to help digitize all financial transactions of SHGs. It is a challenge considering that most transactions in rural areas, specially involving the poor, are in cash. But Manjunath is confident.
As a BC of the banks, SKDRDP is already managing 8,500 customer service points in rural Karnataka, where SHG representatives come and undertake banking transactions. Everyday, approximately Rs30 crore cash is collected as savings of the group members and their loan instalments. Almost a similar amount is disbursed as fresh loans.
Almost all transactions are in cash. If the plan succeeds, by 2020, all transactions will be digitized. How will that happen? SKDRDP has already created a database of the KYC (know your customer) details of the SHG members, some of whom have bank accounts. The plan is to make all members open bank accounts in a year. Simultaneously, SKDRDP will convert the 11,000 contractual workers as BC agents, known as Bank Sakhis. They will educate SHG members to deposit their daily incomes into their accounts by using their services available round the clock.
During the weekly SHG meetings where collection of savings and loan instalments takes place, the members will use digital technology such as the AEPS (Aadhaar-enabled payment system), the BHIM app, and other payment gateways for digitally transmitting the money from their individual accounts to the SHG group accounts.
SKDRDP will play the role of an aggregator and run an escrow account for receiving all the money. An escrow account is a temporary pass-through account held by a third party during the process of a transaction between two parties.
Charging lowest interest rate
While the move towards digitalization is on, what differentiates SKDRDP from all other micro lenders is the interest it charges the small borrowers—the lowest in the industry. It is charging 16% interest rate on all small loans against 19-20% or even 24-25% charged by some of the microfinance institutions.
It has been able to do so by giving up its role as a micro-lender and becoming a BC-BF. Simply put, it does not give loans anymore to any member directly. Instead, it generates loans for banks and takes care of the loan repayments as a business facilitator (BF). As a BC, it is currently managing the 8,500 customer service points where SHGs come and complete their banking transactions. As BC-BF, SKDRDP does not have any exposure to loans but manages the loan assets. For generating the loans and managing them for recovery, it earns a fee of 5% on the outstanding even as it earns 0.5% fee for handling the cash of SHG members.
At this point, the cost of bank loans is 8.5-11%; add 5% that SKDRDP charges for managing the loan portfolio and that’s how we get the figure of 16%, the maximum charged by the NGO.
This could be as low as 13.5% in some cases. If SKDRDP is not able to collect all loan instalments and there are defaults, it loses the fee to the extent of default. Till now, there has been no case of default. Manjunath is confident the business will remain robust, unaffected by any defaults.
In 1995, SKDRDP started its microfinance activities; by 2001, it had formed 3,000 SHGs and had a loan book of Rs1.9 crore. At that time, the interest rate was 11.5-12%, as much as what the banks were charging. The operational expenses were borne by the Manjunatha temple trust and there was no surplus from its microcredit programme. Around that time, Manjunath, then 44, a scale-III officer of Syndicate Bank with 21 years’ experience, joined SKDRDP with a dream of creating 100,000 SHGs.
For almost a decade, SKDRDP worked as a self-help group-promoting institution, borrowing in bulk from commercial banks, and refinancing them to the SHGs. In 2009, SKDRDP started working as a BC-BF for the State Bank of India after the RBI opened up that route. For a few years, the parallel stream of running a BC as well as giving loans continued, but by 2014, it wound up the business of giving loans and migrated to the BC-BF model, which it felt was relatively easier to manage. It still has a minuscule Rs15 crore of its own portfolio. In that sense, it has a hybrid model, but none is complaining.
The key to the success of this model is continuous innovations. For instance, under the norms of the National Bank for Agriculture and Rural Development (Nabard), which nourishes the SHG movement in India, the group members need to start saving money first and only after six months, they become eligible for loans—10 times their savings. SKDRDP has convinced Nabard to bring down the time limit from six months to three months and push up the threshold limit for the loan to Rs50,000 per group (instead of 10 times of savings, which is much less). The amount goes up to Rs1.5 lakh after six months, Rs3 lakh after 18 months and Rs5 lakh after 36 months.
This has been done to provide need-based credit to the members and prevent poaching of borrowers from the groups by microfinance entities, which give loans almost instantly and offer a higher amount as the first loan.
Another important break with tradition is that instead of term loans, the SHGs are given cash credit (CC) facilities. The SHG members borrow money and repay in instalments to their CC account, which is then readily available for any needy member within the SHG to make fresh borrowings. The CC agreements last three to five years, which allows the SHG members to borrow and repay without any hassle.
Although the limit for the group is cash credit, members are expected to repay in regular instalments. If any time they have surplus, they can prepay their loans into the CC account and reduce the interest burden. In comparison, for the term loans, credit given to the SHG has to be repaid in regular instalments and any fresh requirement of the members within the SHG can be availed of with a fresh term loan only. This means more visits to the bank branch.
Following the CC arrangement, the branches’ capacity to handle SHG accounts have gone up manifold. SKDRDP helps the bank branch in sourcing the account, updating the KYC of members, digitizing the applications, credit appraisal, disbursing the credit, ensuring end utilization and follow-ups for recovery.
Since SKDRDP is working as a BC-BF and not a micro finance institution (MFI), it doesn’t require capital, as it does not have to maintain a capital adequacy ratio. It is a charitable trust.
By managing the assets astutely, it has been able to provide credit to borrowers at a rate much cheaper than all MFIs in India. It’s a win-win for banks who get business and the borrowers who get credit promptly. SHG credit is classified as the so-called priority loans and banks are always willing to give such credits, as they have the target to achieve (40% of their loan portfolio has to be priority loans, under RBI norms).
Why can’t others emulate it? I have asked the question to a few MFIs but have not got an answer. One of them has pointed out that since it is an arm of a temple—the Dharmasthal Manjunatha Temple, which dates back to the 14th century—the borrowers are afraid of defaulting. But that’s only one side of the story. I am told there have been instances where rogues have exploited the reverence and fled with money collected from people, making it difficult for SKDRDP to convince people to form groups for savings and small loans. So, the temple background has both pros and cons.
SKDRDP has customers from all religions and castes in its books. Theoretically, a temple-led financial movement could have faced resistance from the members of minority communities, but the leaders of such communities support the SKDRDP-led SHG movement. Proof of this is the fact that SKDRDP has hardly been affected by the community-driven repayment crisis seen in areas like Mysuru and Hubballi in Karnataka.
SKDRDP has shown that small loans can be given at a much cheaper rate than what the mainline MFIs are charging. In the wake of the Andhra Pradesh law that nearly killed the MFI industry in 2010, an RBI panel—headed by noted chartered accountant Y.H. Malegam—capped the rates of small loans at 10% above the cost of money for relatively large MFIs and 12% for small MFIs.
An interest rate of up to 26% is recommended by the report and many MFIs are charging this rate.
According to the panel, this spread is required to take care of the operational costs as well as credit costs. But SKDRDP has proved that this is too much and 5% is enough to take care of the cost of operations and even profits. It has Rs184 crore surplus in its kitty as on 31 March, 2017; this is expected to cross Rs200 crore by March 2018.
SKDRDP wants to expand in Kerala (where it has one branch) and bring more people under its coverage. But it does not want to become a bank or a for-profit non-banking finance company. That will be a “mission drift”, Manjunath says. It may continue to do what it believes it should but can some of the not-for-profit MFIs emulate this model? If they do, the borrowers will get the benefit and come out of the clutches of moneylenders in rural India. Meanwhile, SKDRDP is confident that its digital journey to make India’s hinterland a less-cash economy may become a reality in Karnataka in two years.
It will help its poor clients save more in banks and earn interest on their savings instead of keeping them idle at home.
Tamal Bandyopadhyay, consulting editor at Mint, is adviser to Bandhan Bank. His latest book From Lehman to Demonetization: A Decade of Disruptions, Reforms and Misadventures will be released on 6 December. His Twitter handle is @tamalbandyo.
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