– Aloysius P. Fernandez, Ex Chairman
In an environment where micro finance largely lost its stardom , where future policy was still unfolding and uncertainty reigned, where investors were concerned with re-scheduling loans rather than increasing exposure, and where potential clients were faced with reduced choices, Nabfins managed to grow in terms of outstandings from
Rs 42.7 crores in 2010-2011 to Rs 183 crores in 2011-2012. It was able to achieve this progress due to the support of its partners including 67 Business Correspondents/ Facilitators, 3 Producer collectives and 8969 SHGs. The growth during 2011-12 was partly due to the staff and infrastructure setup in late 2010 which became operational during 2011-12. As on March 31,2012, Nabfins has established offices in 31 Districts in 3 States , with 87 staff. It availed of Rs 200 crores refinance from Nabard during the year; the average cost of funds in 2011-2012 was 8.08%; its net owned funds stand at Rs 48.47 cr.
Nabard, since its inception, has been entrusted (amongst other major responsibilities) with the responsibility of providing small loans to the priority sector. It fulfils this responsibility by supporting several schemes for the small and marginal farmers and since 1992 ( by which time “micro finance” replaced “small loans”) by promoting the SHG-Bank Linkage Model which has spread all over the country. Further it promoted in 2008 a subsidiary called Nabfins (with equity from Nabard, Government.of Karnataka and several Commercial Banks)and positioned it in a field which till then was dominated by models of NBFC-MFIs which started with good intentions; some of the largest ones however were increasingly driven by private and venture capital, where profits, high growth rates and high remunerations became the dominant drivers because governance took a back seat.
Nabfins and the SHG-Bank Linkage program are not in conflict. Both are required in order to offer the client a choice. Nabfins on it part does not enter areas where the SHG-Bank Linkage program is doing well due to pro-active Bank managers who visit the SHGs regularly and mentor them. Unfortunately such areas are declining.. There are also large areas where people find it difficult to access a bank due to distance and lack of transport facilities; Nabfins operates in these areas. Over all, Banks’ involvement in the SHG-Bank Linkage program is decreasing, as reports clearly indicate. The reasons for this decline are many –ranging from acute staff shortage at Branches to amalgamations of Banks which tend to make small loans required by SHGs unviable.
Nabfins brief is to establish and run a NBFC-MFI model which would promote and sustain: i) good governance leading to transparency in accounting, remuneration and disclosure, ii) reasonable rates of interest and other costs which earn a profit but do not maximize profits or profiteer at the expense of the clients at the bottom of the pyramid, iii) investment in activities that generate income in the short, medium and long term and increase capital with the poor family; since these activities chosen by the group members are not only diverse in terms of sectors/categories but also in purpose, size, and repayment periods within a sector/category, it requires a business model which is able to customize loans and repayment schedules in order to respond to the diversity of livelihood situations; standardization therefore cannot be the main driver even though it results in higher profits for the NBFC-MFI, and iv) fair practices which ensure that there is no over/ multiple lending or coercion in collection which, experience has shown, results from business models driven by speed and scale to maximize profits and in many cases to provide space for quick exits of investors. Nabfins is in this business for the long term.
Keeping in mind these guiding norms, Nabfins decided in 2010 to promote a culture, organizational and financial systems and a software which would — “Balance business with inclusion in growth”. Inclusion here focuses on the poor and marginalised. To maintain this balance is the prime responsibility of the Governing Board. As a for profit entity, it endeavors to earn enough to cover all costs related to management and expansion, to design and absorption of appropriate technology support systems, to training and reasonable incentives to staff and management and to cover its risks especially arising from investment in second level institutions like producer collectives. All this is well accepted in the for profit sector.
But Nabfins also seeks to promote inclusion of the poor and marginalised in growth – not only financial inclusion which has been reduced to opening “no frill accounts”. Inclusion of the poor and marginalised in the growth sector in a sustained way, requires support from a variety of institutions involved in building confidence and management skills of the poor and their ability to lobby for change and build linkages with others; it also requires technical, organisational and infrastructure support in production, aggregation and marketing of products; these in turn require financial support like grants, term loans, cash credit, working capital, revolving funds and appropriate infrastructure. In the field of dryland agriculture- a high risk operation – where a large part of the loans of SHGs/JLGs are invested, support is required to reduce the clients risks and make her/his investment productive and sustainable. They need to be insured against crop failure – but even more the production risk has to be reduced. Hence Nabfins loans to groups involved in dryland agriculture are focused in areas where watershed management programs are being implemented by Nabard , Government and NGOs. This reduces the risk of investment in this sector. To build confidence and management skills, Nabfins provides grants sourced from Nabard for institutional capacity building and to improve the organizational and financial management of SHGs,JLGs and Producer collectives. Likewise where investment is in livestock, it partners with an intitution that has the expertise and outreach to provide animal health care. It responds to diversity in livelihood needs instead of standardizing loan sizes and products and staggers repayment schedules to cope with (customize) different cash flows of income generating activities; developing a software to support this diversity took time as those available off the shelf suited a standardised model which largely benefits the NFC-MFI not the client.
All these interventions require extra investment and a longer period of gestation, thus reducing profits to Nabfins; but they also help to develop a network and support system for the poor client to build a sustainable livelihood base and to be “included” in the growth sector.
The conflict between business driven by self interest, on the one hand, and inclusion of the poor in growth on the other ( which implies a social objective to alleviate poverty), has been a subject of debate since the middle of the 19th century. On the one hand some philosophers and economists hold a position that empties the market of all moral considerations; others hold that, left to itself, self interest can go too far and therefore needs regulation. In general two streams could be identified: one that maximises profits and later sets aside part of the profits “to pay back to society”. The other stream tempers the impact of market forces by several measures that reduce the stress on employees, improves their living conditions and ensures a standard of living while opening choices to customers; this model was the result of social movements that became enshrined in law. The first believes in growing the cake before it is shared, the second focuses on :growing the cake together or “creating value together” , which – in the case of NBFC-MFIs, implies provision not only of credit and other financial services, but of a larger number of livelihood opportunities, improving skills and governance.
Nabfins has no quarrel with the first approach as long as those involved do not claim to “alleviate poverty” and at the same time seek favors and benefits. In this case it is both immoral and unsustainable, Nabfins, however, would like to anchor itself firmly in the second category. But it realizes the extra challenges that this approach has to cope with. It does not accept that the first model is appropriate to include the poor in the growth sector In fact maximization of profits, in the final analysis, reduces capital in the hands of the poor and results in an increase in their vulnerability and often in their exclusion from the growth sector. Capital has been extracted from the bottom of the pyramid where it is in short supply and not controlled by the poor. It was commonly proclaimed that competition between NBFC-MFIs would bring down the interest rates as is the trend where market forces operate; in the case of micro finance, this was not the case, the customer obviously was not :”king/queen”.
Nabfins tries to keep the balance between “market forces geared entirely to earn profits” and “development finance” which attempts to open more opportunities to the marginalised,. As a business model which promotes development finance, it levies interest at reasonable rates but also ensures that the over all cost to the client remains low by providing door step services and quick turn around.
Up to March 31,2012 the rate of interest to SHGs/JLGs was 13.5%; to second level institutions, like producer collectives, it was 11.5% ; the margin cap was 4.66 % — both well below the RBI norms of 26% (interest) and 12% (margin cap)respectively . The average cost of funds , thanks to Nabard, was 8.08%.
How does Nabfins promote Inclusion of the poor in growth?
Among others, Nabfins endeavours to promote the following seven important features:
i) Governance- it plays a critical role in promoting inclusion of the poor especially in For profit NBFC-MFIs.. The drive to maximize profits does not arise only in for profit MFI-NBFCs,. It also exists in many Not for profits. Ultimately the difference is established by the policy and practice of the Members of the Governing Body of the NBFC-MFI.. History of the large NBFC-MFIs provides adequate evidence that the “transformation” from not for profits to for profits which was assisted by various institutional mechanisms held up as “innovations” , was also accompanied by a transformation from standard salary packages to pay packages higher than earned by the CEO of the largest private sector Bank, high bonuses, stock option plans and stock purchase schemes at highly preferential rates which when en-cashed brought in super profits in a very short period. If the Chairman and Directors create a environment where profit maximization at any cost is rewarded; others in the organization follow and the objective of providing adequate and customized credit at reasonable costs as well as other support to enable the poor client to build a sustainable livelihood base is forgotten.
Nabfins Board is aware of this danger and is taking steps to ensure that its Chairperson and independent Board members are not eligible for bonuses, loans or any payment arising from performance and related to incentives, which however the staff and BCs are entitled to. It is expected that these decisions will have an impact on the quality of over all governance.
ii) Staffing: Nabfins has a staffing pattern which helps it to reduce costs resulting largely from salaries, training and housing. Head Office is staffed by a team aged between 25 and 45 years drawn from other financial institutions and by three senior staff on deputation from Nabard, two of whom remain in Nabard’s payroll. At the Districts, it recruits just retired commercial bankers who have worked in the District and have a sound reputation, who have experience in working with the SHG bank Linkage program and relate well with NGOs; they need to have a House in the District headquarters in which they reside. A separate Nabfins office is provided; they are assisted by 2-4 Field Service officers. This team headed by the District officer deals with the first vertical, namely with SHGs/JLGs. This is a small team and is adequate since Nabfins lends directly to groups/institutions, not to individuals. The other vertical dealing with second level institutions like Cooperatives, Producer Collectives is managed by Institutions with experience in this area who function as Business Facilitators. During 2012-13 decentralisation will also take place through regional offices in Karnataka and Tamilnadu, which, among other outcomes, will also reduce costs.
iii)Working in Partnerships: The poor cannot be included in growth only through provision of credit and other financial services. To promote inclusion in growth Nabfins decided to work in partnerships. with NGOs, Cooperatives, producer Collectives, Federations which not only function as Business Correspondents and Facilitators, but more importantly are able to provide technical and other support services critical to make investment productive and/or to reduce production risk, to aggregate, add value and market commodities. Nabfins does not propose to take on all these activities when others can do them more efficiently. In the case of life insurance for example, given the various subsidies provided by States, Nabfins is engaged with the BCs in identifying pro-active Insurance Companies in their areas of operation and will provide any support required for insurance companies to extend their coverage.
Nabfins will provide only those services which others cannot provide at Nabfin’s level of costs, quality and social concern; it will however endeavor to actively promote institutions providing insurance (life insurance to begin with and later health); it must be noted that the SHGs advance loans for purchase of medicines and medical care while savings is a product of the SHGs .
There is no doubt that there is a higher risk in working with BCs as partners. Nabfins believes that this risk must be shared by supporting the partners to become more organizationally and financially sustainable, by maintaining a transparent relationship, responding to their justifiable demand, rewarding them for good performance and at the same time by ensuring that its own staff maintain a close relationship with the groups. . This is easier said than done.
Nabfins has taken the first steps in this direction and will continue to expand its support to BCs by mobilizing funds for organizational and financial management and, by introducing incentives for good performance. As on March 31, 2012 the average yield on Nabfins’ loans was 14.74% out of which 2% was passed on to its BC partners leaving 12.74% with Nabfins.
iv)Personal interaction between staff and SHGs/JLGs: Nabfins staff together with the BC staff assess the SHGs/JLGs together and those eligible are advanced loans directly by Nabfins staff who later keep in touch with the groups. The responsibility for ensuring repayments lies with the SHG itself; the responsibility for collection of repayments lies with the BC. Personal contact with the groups helps in maintaining and building mutual trust.
v) Support for second level institutions like Producer collectives, Cooperatives: If the poor are to be integrated in growth in a sustainable and incremental manner , provision of credit to the SHGs/JLGs and support for production is not enough. Since most of them are small and marginal farmers their produce needs aggregation, value addition and marketing. As on March 2012, Nabfins has invested Rs 2.42 cr cumulatively in second level institutions as working capital to support aggregation, value addition and marketing in cotton, handicrafts and fisheries.
The risk increases and diversifies with second level institutions. Efforts are being made to cover this risk through mobilizing support from financial institutions (unsuccessfully so far) as well as through building a risk fund from profits. Investing in second level institutions has taken time to take off because there are few functioning and the experience and expertise to support and mentor them is limited. NGOs who have devoted time and effort in promoting this sector find it difficult to mobilize financial support to build these institutions. Unfortunately there is no integrated organizational and financial scaffolding in the country to support aggregation value addition and marketing of agricultural commodities –the only example where such integration functions is in milk.
Nabfins intends to give priority to support the formation and functioning of second level institutions. It has sought Nabard’s support to achieve this objective. Its attempts to mobilize resources to cover the higher risk involved have so far not been successful. The Board decided to allocate a sum of Rs 5 lakhs for this purpose at the end of March 2012..
iv) Respect for diversity is a major requirement for inclusion in growth. Inclusion in growth demands customization to cope with the variety in purposes, sizes and repayment schedules. Recognising this diversity, in the early 90s before the SHG Bank Linkage program was launched, a major policy decision was taken by Nabard and supported by RBI to allow banks to lend one loan (bulk loan) to the SHG allowing the SHG to decide on the size, purpose and repayment schedule of the loans. This major policy decision enabled the SHG members to ask for what they could manage and the training provided to the group as well as their local knowledge equipped the group to decide whether the member was serious and able to manage the loan effectively. This was a major reason why the poor respond so well to the SHG program. Briefly Nabard did not mainstream the functioning of the SHGs by imposing pre-determined products and a cost structure. It left these decisions to the group and this resulted in “innovations” which no bank could have coped with. Since Nabard respected this diversity, it did not prescribe or plan “products” in the context of the SHG-Bank Linkage program. Recent communications from Nabard however are asking Nabfins for its “products”. Savings is listed as a “product”of Nabfins. It is really a product of the SHG. Studies of SHGs formed by NGOs show that members save and invest in the SHG common fund up to a certain point and then opt to open individual Bank accounts and deposit their savings there.
What also emerged from the decision to allow the group to decide, was that a family had a livelihood strategy comprising of several small activities and not of one or two large activities which many of our anti poverty programs assume they have. Loans from the SHG provided finance for these small activities some of which expanded while others were dropped after a year or so.. The group also knows whether some unexpected event has taken place which interrupts the cash flow or channels it elsewhere to meet an emergency, hence it is best suited to decide whether and how to reschedule the loan.
Unfortunately this is where most financial institutions hesitate to respond since it demands time and reduces their profits. Standardisation of sizes, purposes and repayment periods is easy to monitor no matter what its impact on the client or customer.
Nabfins realizes, as Nabard did in the early 90s, that inclusion in growth demands that the last mile has to be an institution which can cope with this diversity. ICT (which has been accorded a role far above its potential in this last mile) can help to collate and analyse the data after the SHG has decided. The data on the decisions taken by the group on the purpose, size etc of the loans to individuals must be taken from the Minutes Book of the SHG and not asked for in advance(before the loan is given) by the MFI-NBFC. In most cases the latter is the case, and experience has shown that this data does not give the real picture.
Since Nabfins gives one bulk loan to the SHG/JLG ( as in the SHG-Bank Linkage program) it reduces transaction costs as well as enables the member to borrow according to her/his requirements. The tenure of loans is not uniform or standardised; it ranges from 12 months to 36 months depending on the purpose of the loan and the cash flow. However as of April 1,2012 the shortest tenure will be 24 months in compliance with RBI norms.
vii)Institutional Capacity building (ICB before ICT) If the poor are to acquire skills to manage their own institutions (the last mile) like SHGs/JLGs/Producer collectives etc, they need training in institutional capacity building (ICB). Modules comprising how to meet, resolve conflict, foster participation, how to analyse the causes of poverty, how to build linkages etc. have been designed by Nabard and other NGOs and put to use. But conducting this ICB training takes time –at least 4- 6 months before loans are extended. Few for profit NBFC/MFIs will agree to provide this space even though funds are available from Nabard, Government programs and from institutions like IFAD and the World Bank. Even the private sector is now providing grants for ICB. Nabfins hopes that when SHG-2 is launched, adequate funds will be provided for ICB and NGOs with experience in ICB selected to train the groups. Looking back, however, what is more relevant is to go “back to the basics” on which the SHG movement was built.