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Aloysius P. Fernandez (Chairperson NABFINS)

                  On 16th October,2014, NABFINS – a subsidiary of NABARD, which is in its fourth year of operations inaugurated its office extension in Bengaluru.The Chairman of NABARD Dr Harsh Kumar Bhanwala and Shri S.V. Ranganath (IAS Rtd) the former Chief Secretary of Karnataka graced the occasion. ShriRanganath in this talk said: “ When Shri Fernandez and the then Chairman of Nabard visited my office in 2011 to inform me about Nabfins, I asked him at what interest rate will Nabfins be lending. He replied that he had joined Nabfins to promote an alternate financial model which would lend at a margin of 6%- 7%. I was sceptical since leading NBFC-MFIs at that time, mainly from Andhra, were making a strong case for a margin of 12% to 15%. Well, I am here today to recognise that Nabfins has kept to the challenge. It has made a net profit over the past four years with a margin of 6%-7%. My heartiest congratulations”. I then thanked ShriRanganath for not introducing an ordinance in Karnataka similar to the one in AP the objective of which both of us supported. Instead he accepted that to achieve the same objectives in Karnataka he would be willing to consider an initiative from the NBFC-MFIs to set up a body which was later called the All Karnataka Micro Finance Institution; this body took on the responsibility to being the first to cope with a crisis situation and to manage the media.I happened to be its first Chairperson.

But Nabfins is even more grateful to him for providing support and space for Nabfins to grow as an alternate model and for not following the Andhra decision to set up a Govt. sponsored Micro Finance Institution to fill the gap left by the withdrawal of NBFCMFIs. The Government of Karnataka has also put its money behind its support; it has
invested Rs. 20 cr. equity in Nabfins with a commitment of a further Rs 10. Cr. Several Commercial banks including Canara Bank, Union bank, Bank of Baroda have also invested equity; NABARD is the major shareholder and extends credit. The support of Shri H.K. Bhanwala has been critical to the growth of Nabfins; he has taken the lead in providing encouragement and timely support.

1. The Chairman of Nabard, Dr H.K.Bhanwala,announced a few months ago that Nabfins with a margin of 6%-7% made a profit of Rs 14crson a loan portfolio of Rs 620 crs during FY 2013- 14. It had also made a net profit since it started operations in 2010-11. Whyis theNABFINS model a low cost one when compared to most, if not all NBFC-MFIs,who findeven a12% margin inadequate. In fact one CEO even wrote that with a margin cap of 12%, NBFC-MFIs would not venture into remote areas like Vidarbha region,1 which Nabfins has succeeded in doing; it is now in 9 districts in this area; it took 18 months to break even –but that is the challenge that the poor bring to the table.
The major reasons why NABFINS transactions costs and hence interest rates are low are the following:Nabfins builds on the past. Considerable work has been done by Nabard/NGOs and others to establish the infrastructure for the SHG-Bank Linkage Model. Nabfins builds on this. It lends directly to SHGs continuing the SHG-Bank Linkage model. The SHG is a real joint liability group which takes over several functions of NBFC-MFI staff, thus reducing transaction costs; infact experience indicates that the SHGs perform these functions more effectively and efficiently than NBFC-MFI staff: The SHGs that emerged in the NGO Myrada between 1984-86 comprised 12-18 members who were part of the larger number of poor families identified in a village through PRA. There were two major features of these groups: The first feature was a social network – called affinity – among the members: they self-selectedthemselves and formed separate groups because they were linked by relations of mutual trust and support which cut across caste and creed. This affinity exists in our culture- it is a strength on which interventions should build. Instead, several effortsare made to undermine it and to deal with individuals.Myrada did not create this affinity; it is like a diamond in the mud. Myrada just happened to kick it, but can take credit for picking it up and polishingit through institutional capacity Building (ICB) training to take on new responsibilities. The SHG model builds on this strength –namely affinity. The second major feature was a tangible economic base, namely the common fund of the group, in which the members have a stake, since their savings, interest on loans to members, and other income like fines for dysfunctional behaviour and grants are credited to this common fund. Bank loans when they come are also credited to this common fund. Incidentally joint liability is only one side of the coin, the other side is joint support which the SHGmembers provided in the past and continue to provide to members in a more organised manner. As a result of forming the SHG they provide several new services. Today there is a proposal to raise “self-help equity” from the borrowers – since equity is not forthcoming as required. The SHG concept was based on this self-help equity.The common fund comprises member’s savings,interest on loans to members, fines (for not obeying to social norms set by the group) and grants. This comprises the self-help equity;the Bank loans also went into this common fund. The self-help equity percentage of the common fund in Myrada’s groups average one third. 1 Nabfins model also lowers the cost to clients and is perhaps the lowest among all FIs– this will be considered lowers the cost to clients and is perhaps the lowest among all FIs– this will be considered separately. 3 Joint liability therefore is underpinned by a) a social network and b) an economic base in which members have a stake. The claim that a Joint Liability group will work effectively if this base of two pillars does not exist (or is not matured enough – which takes at least 6 months) is misplaced. Joint liability groups wereformed by MBFC-MFI staff( in AP especially between 2007 and 2010) and given loans within a week. This claim of joint liability is based mainly and often only on a written agreement between the members. As a result the “joint liability” factor did not work to ensure repayments. NBFC staff have to be present forall SHG meetings (mostly weekly) to ensure repayments and spend time to visit borrowers homes when repayment was not made.(A visitor once noticed 4 motor bikes from different NBFC-MFIs outside one defaulting borrower’s home early in the morning). They also have to form new groups or cannibalise from existing ones as happened in Krishna District (2005-6) which led to the crisis. During the hectic growth period of 2008-2010 the staff could not manage all these responsibilities- (their work load increased from 200-250 groups to 800-900 groups), but the pace of growth driven by massive equity/debt inclusion demanded much larger number of borrowers.They began to rely more and more on local “agents” to form groups; these agents also controlled loans to these groups and introduced them to several MFI-NBFcs; (in Andhrain 2009 a household on average had 9 micro loans from different sources); they of course took their “cut”.

How do these two features (social network and economic base) of the SHGs reduce the transaction cost of Nabfins?

Nabfins staff do not have to go to weekly meetings of SHGs for repayment; they also do not have to go to members’ homes when they do not pay instalments. Even when an individual member cannot repay the instalment amount due to some emergency, the SHG makes up from the common fund – as a very short term measure. Nabfins staff do not have to form new groups as will be described in No 3 of this paper. Unfortunately the JLGs formed by many NBFC-MFIs are not supported by this social and economic base – which really is the basis of joint liability and joint support; hence the need for extra staff which adds to costs which are loaded on the client through higher interest rates.The SHG is really the last mile. But the NBFC-MFIs found that it takes too much time and money to invest in building the institutional strength of a SHG.

 2. Partnership with B&DCsreduces the transaction costs of Nabfins: Nabfins partners with 206 B&DCs. This partnership provides Nabfins with SHGs already formed by the B & DC (NGO/Federation of SHGs /Coops.). The best are selected by a team of Nabfins and B&DC staff. Nabfins extends loans directly to the SHG not through the B&DC. The B&DC manages repayments. Its staff are already in the area and this function of credit provision is an add on. The B&DC receives commission of 2% for its work (1% for involvement in extending loans and 1% on recoveries).Some B&DCs are earning over Rs 20 lakhs a year on commission. Nabfins studies indicate that this model is less costly for it than if Nabfins staff undertakes repayment ( and formation of new SHGs) through its own staff. Nabfins does not have to set up local units covering a radius of 5-10 kms as the B&DC already has this infrastructure. Formation of new SHGs and training (ICB) of old weak SHGs and new ones is supported by grants and done by the BC&D staff not by Nabfins staff. Nabfins however provides trainers where required. This reduces Nabfin’s costs and has an impact on interest rates. Partnership with BCs reduces the requirement of staff on the part of Nabfins. If it had adopted the NBFC-MFI model where staff deal directly with borrowers, it would have required around 1200-1400 staff to service 4,20,000 SHG borrowers which it presently does. Sangamithra, for example which also lends to SHGs as a 4 bulk loan but unlike Nabfins engages staff directly in lending operations employs 190 staff for a portfolio of Rs. 123 crs. Back up administration and HR support for staff in Nabfins is also reduced, hence transaction costs decrease. There are of course new sources of risk which is imbedded in the B & DCs and SHGs. This is why ( as mentioned in No 4) Nabfins invests in building the institutional capacity of both the B&DC as well as the SHG; but as a grant.

3. NABFINSextends one bulk loan to the Group rather than several loans to individuals in groups: In 1991-1992 NABARD commissioned a study which was done by Dr.Puhazhendi entitled – “SHG Transaction Cost Analysis”.The study assessed and compared the transaction costs of the three models of credit provision to the poor in operation namely a)loans to individuals as practised by IRDP and b) loans to individuals in groups –where the group exerted pressure to recover – which was a replication of the Grameen bank model. These were the two major models functioning at that time— in both cases the Bankers had to decide on each loan application from each member. He then compared these transaction costs with the third model operating on a pilot basis — c)namely one loan to the group – allowing the group to decide on size, purpose etc of loans to members – which Myrada had initiated and promoted with a grant from NABARD in 1987. It came out clearly that the transaction costs to the Financial Institution of the third model were the lowest of the three. The Banker did not have to spend time assessing individual loans. The SHGs had first hand knowledge of the strengths and weaknesses of each member as well as of their reputation in the community. The SHGs had a holistic measure; they called it KYCC which stands for “know your client and community”. The second loan in fact was even less costly as it was based on the SHGs credit performance. Nabfins adopts this model. It is an extension of the SHG-Bank Linkage model which provides one bulk loan to a SHG and has the lowest transaction costs. This reduces the need for Nabfins to incur costs of collecting detailed data from individual clients. Besides, as a result of KYCC and the pressure arising from affinity, the risk is lowered and the staff do not have to spend time and money to visit the homes of borrowers in case of default or delayed repayment. While Nabfins does make use of Credit Bureaux, it does take their information with a pinch of salt (There are many reasons for this which can be explained elsewhere). This is why in India surrogate information (in this case provided by the SHG) is considered to be important. However this first bulk loan is conditioned by several requirements on the part of the SHG like a)regular meetings of the SHG, b) regular savings, c) a group common fund, d) adequate training (ICB), d) initial borrowing from savings bymembers from the common fund d) recovery performance-credit history e) maintaining books of minutes of meetings.—and later regular updating of accounts and audits.Grants for providing training to the SHGs to build their institutional capacity were provided by NABARD and several major donors (private, bilateral and multilateral) involved in development; but more on this is the next para.

4. Financial Literacy (Institutional capacity Building- ICB)in the Nabfins model is provided up front and supported bygrants before the loans are extended and hence not included in transaction costs. Financial Literacy is understood as support to form and build new SHGs and to strengthen new ones. It is sometimes called Functional Financial Literacy to distinguishit from recent initiatives. As mentioned above,provision of the one bulk loan to the group requires investment in training the group and hand holding it. The training focuses on how to build institutions and is called Institutional capacity Building (ICB). Training Modules include: How to meet, to set an agenda, to encourage participation of all, to resolve conflict, to arrive at consensus, to read numbers (because they asked for numeracy before literacy),to apply norms of behaviour (eg. coming on time for meetings) and sanctions for breaking norms (sanctions are an important component of institution building);how and why to cultivate the habit of regular savings and the experience of lending and repayments ;the need to maintain minutes recording decisions etc. .these were some of the modules which were incorporated in a Training Manual brought out by Myrada in the early 1990s.It was a practical training manual –not a resource book — with games, charts queries etc. that were ready for us in a training session. It required that at most members of 2 SHGs could be handled at one session.It required at least 10-14 sessions each of a day over a period of 12 months to 18 months. It took about 6 months of experience in conducting meeting, savings,lending and recovery – before theSHGs were introduced to Banks. It helped to build the SHG as a sound institution which could take charge and manage the “last mile” the SHG took decisions on size and purpose of loans,repayment schedules etc.

This was the Financial Literacy as understood in those early years. Who paid for it?NABARD, donors (Private, Multilateral and Bilateral).Then came SGSY which allocated an amount of Rs.10,000 to train each SHG. How was it spent? In mobilising large gatherings to be addressed by politicians, in purchase of vehicles for Govt. related Institutions selected to do this training,and in collecting members of 10-20 SHG groups for a brief session of half a day where the focus was on keeping accounts. The critical importance of ICB was never sufficiently appreciated by many implementing State Governments. The exceptions were TN Govt. which allotted Rs. 12,000 per SHG (under the IFAD program). Karnataka allotted Rs. 60/- per SHG under the Stree Shakti program! Nabard gravitated between Rs. 2000 and Rs. 7000/. In 2000 Myrada assessed the cost at Rs 4000-Rs 6000 per SAG to provide 14 modules over 12 to 18 months. It could be mor today. However the availability of these grant fundsdecreased significantly. Even funds from Nabard declined as it moved to promote Joint Liability groups. Fortunately there are indications Briefly Nos 1,2&3 describe Nabfins model which builds on the past and establishes a partnership with existing institutions, namely the Self Help Groups and the B & DCs. This enables Nabfins to reduce transaction costs in five areas a) the cost involved in identifying SHGs with potential clients who have a good credit history b)the cost of establishing infrastructure to cover the last few kms ; c)the cost of the process required to formalise services -to lend, repay and utilise as approved by the SHG d) the cost of ensuring that the agreement is respected by the SHG e) extending one bulk loan to the group. On the flip side , Nabfins risks are embedded in these two institutions –namely the SHGs and B&DCs; hence it has to invest in strengthening them by mobilising grants for their institutional capacity building (ICB) which is far more holistic than what is implied by Financial Literacy as understood today 6 that Nabard has recently started investing more in ICB of SHGs. A recent circular from NABARD allocating Rs. 10,000/- for ICB Training of one SHG is a sure sign that the SHG movement is once again a priority with NABARD. However it would help if at least 60% of this amount was provided to training institutions in the first tranche. 

Today there is great deal of talk regarding financial literacy. The difference between ICB as adopted in the past by NABARD and some NGOs and the present Financial literacy as promoted by NBFC-MFIs is that while the former sought to build peoples institutions –namely SHGs which could be capable of deciding on their agenda on whether to give a loan or not, on the size,purpose and repayment etc.; the latter is focused on “educating” the clients to adopt the NBFC-MFI model andaccept its requirements. Nabfins promotes Institutional Capacity building – the first model and to distinguish it calls it Functional Financial Literacy. This investment in ICB in the past was provided as a grant. Many financialexperts debated whether these costs could be borne initially by a MFI and later debited to the SHG. It remained a debate. My position is that they should be provided as a grant. All of us reading this were educated largely by grants. My position is that functional financial literacy should be provided as grant support and not loaded on to the transaction costs. The NBFC-MFIs had no time to invest in ICB; they found SHG formation too time consuming and costly; so they switched to JLGs which they formto maximise profits today and to raise valuations in anticipation of an IPO and quick exits of investors. Nabard tried to counteract this by providing funds to promote and train JLGs, but hardly any NBFC-MFI availed of these funds. Nabfins model invests as grants in Functional Financial Literacy for SHGs,Second level Institutions like Producers Companies and for B&DCs before loans are given. These grant funds are mobilised from NABARD, from Nabfins own funds which it allocates for this purpose . In several cases the B&DCs already have invested in forming SHGs. Where Nabfins finds them weak, it provides grants to strengthen them. As a result the cost of forming SHGs is not loaded on to the SHGs by way of interest.

5. Nabfins makes profit but does not maximise profits; it does not profiteer; this in turn reduces pressure on interest rates. For example In 2012-13 on a loan portfolio of Rs 378 crs, its profit after tax was Rs 8.42 crs. And in 2013-14 on a portfolio of 620crs, its net profit after tax was Rs 14.08 crs. This make sound silly to many, especially to those who place micro finance squarely in the market driven sector as commercialised micro finance where profit is maximised, but if one is talking about the poor then this decision not to maximise profits is crucial; there has to be some features of the “Mahatma” in micro credit models (and governance)for the poor.
Micro finance was projected as a one bullet solution that would send poverty into the museums. CGAP went even further and projected it as an appropriate strategy for the “poorest of the poor”. (Though a more recent publication in 2012 leaves out the poverty angle completely from micro finance). When poor people are the target,there is surely a need to manage market forces which if left to themselves have never worked primarily for the common good.
It may be useful here to dwell a little on values like trusteeship.Many business leaders invested in society because of values. The Gandhian ideal that you never really own wealth, but merely 7 serve as its trustee, seems to have been relegated to the museum. Yehdil mange more! Trusteeship must bepart of the dominant ethic when working with a poverty alleviation objective. The general culture of those seeking power is not so much to be trustees as to extract every possible benefit that power opens the door to.Our Prime Minister Shri Narender Modihas challenged this culture and hopefully it will permeate downwards through the government. In this context of values, micro finance as a poverty alleviation strategy requires integrity in governance and fiduciary responsibility ; in turn this means that NBFC-MFIs in this sector cannot be fully driven by self-interest or by afocus only on the next quarter’s numbers. Every NBFC-MFI claims to have two objectives – one to be commercially viable and to promote a social objective of reducing/eliminating poverty. The balance between these two objectives is not easy to maintain. Unless the Governing Bodies of NBFC-MFIs are proactive, the commercial objective will take over entirely reducing the social objective to a slide in the power point presentation at Seminars. In fact this inability to balance these two objectives was a major feature of the Governing Bodies of the Andhra NBFC- MFIs and the gap between a stated mission and the reality grew rapidly till they lost credibility. This also resulted in the marginalisation of borrowers who now longer saw the NBFC as a supporting institution or one in which they had a stake . Hence it was amusing to read an article by a economist ( who had stakes in the major NBFC-MFI in AP) where he expected the clients to rise up against the AP Government’s notification. Nothing of the sort happened.

The question therefore can be asked. Are NBFC-MFIs which moved to a commercial objective entirely eligible to be included under the priority sector? The answer to my mind, is NO. One common feature which runs through the major NBFC-MFIs which had a causal influence on the shift to the commercialisation objective entirely is the influx of virtual capital and its accompanying baggage namely fast growth, high valuations, IPOs and exits. Therefore any NFBFC-MFI following this path needs to excluded from the list of institutions promoting inclusive growth and poverty alleviation and consequently from the priority sector. But experience shows that a financial institution cannot really maximise profits if it relies only on lending at acceptable interest rates – which the RBI has interpreted as 10%-12% . No other country or institution including CGAP has dared to set an indicative figure in the context oreven to refer to the unacceptablepractice of maximising profits. Since the NBFC-MFIs cannot maximise profits if they are to abide by the RBI’s regulations, they take up other activities like insurance and remittances; but their experience is that these are not profitable –of course there are exceptions where a NBFC charged premium both from the Insurance Company and the client and held the papers as a guarantee!. ThePrivate Banks, to maximise profits, took greater risks by entering into investment, derivatives, subprime, even money laundering etc. The NBFCMFIs therefore are pressurising the RBI to remove the margin cap. Some experts threatened that if the cap is not removed the NBFCs will not go into more remote areas –the example given was Vidarbha. Yet Nabfins with its margin of6 %- 7% is in 9 districts of Vidharba and Marathawada .It took 18 months to break even…but that’s the challenge that the poor bring to the table.

6. Salaries/ incentives and other emoluments. Over all Nabfins packages for senior staff are lower when compared to what the CEOs of the major NBFC-MFIs enjoy. The MD of Nabfins (who is on deputation from Nabard)is paid by Nabfins as per Nabard’s package. However, emoluments in the middle and lower scales are comparable to those in the industry. At the field level, the Field service Officers emoluments are amongst the highest in the sector. All staff are 8 provided with medical allowance and conveyance allowance, allowances for newspaper,electricity,vehicle,lunch ,telephone, Mobile charges; they are covered by ESI, PF,Gratuity,Group Insurance,Accident insurance,and can access loans apart from Salary,HRA and DA . They also get an incentive every year based on performance which goes up to three times their monthly salary.The Board of Nabfins took a decision that no Board member is entitled to any incentives and cannot borrow or avail of any monetary gains in terms of loans or grants from the organisation. This staff remuneration pattern cuts down costs especially when CEOs of NBFC- MFIs were awarding themselves between Rs 3 cr to Rs 6 cr packages every year together with other benefits like sweat equity and even taking loans from their institutions to invest either in the same institution or in new ones created as independent spin offs. Nabfins scalesoverall are relatively higher- except at the top; this does reduce costs of staff. Further, one Field Staff whose role it is to assess the SHGs with the B&DC and to visit them even after the
loan is given, manages about 200 SHGs on an average which works out to around 2400 clients (at 12 /SHG).This is far more when compared to field staff of NBFCs –MFIs who managed about 300 clients before 2008; during the highest growth period between 2008-2010 each staff managed 600-900 clients.

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