a

Non-core works delegation: 

1

Delegating non-core works: The Branch managers need to spend a lot of time in sourcing the SHG applications, processing them and disbursing the loans as they do not have the last mile connectivity like MFIs to reach out to the people. 

• All activities in the SHG financing processes may be split into two categories – Core work and non-core work. 

• All the core work – like approving a loan, verifying the filled in documents, disbursing a loan and supervising the repayment follow up has to be retained with the bank.

• All other works like enrolment, sourcing, preliminary screening, documentation filling , repayment follow up on a daily basis, asset creation verification should be delegated / outsourced to intermediaries  (Panchayat Level Federations of Self Help Groups, Bank Correspondents, Small Micro Finance Institutions (less than Rs.100 crore outstanding), Non- Government Organizations and Govt. Project Unit Structures -One Stop facilities like SVEP-Sustainable Village Entrepreneurship Program) engaged by the bank. 

2

Facilitation fee: No uniform system is at present to compensate the time and efforts of the intermediaries.

• In some cases, this is being followed, but the rate paid by the banks is not cost covering. Hence, the intermediaries are not motivated. Even for an MFI with around Rs.500 crore loan outstanding, the operating cost comes to nearly 6% (the normal cost is around 8% for MFIs). Most of the intermediaries listed here are community oriented, 4% fee will be a highly motivating for them to support the bank.  This 4% will be paid in two stages. First 2% on the loan disbursement amount. The second part of 2% is linked with the repayment collected by the intermediaries every month. 

• This 4% will be loaded to the clients to make the SHG financing a sustainable portfolio for the long term.  E.g. Bank’s normal lending rate to SHGs  10%, after loading this fee component, the end rate to the SHGs will be 14%, which will be absolutely fine for SHGs, as they still view the access to finance as the main constraint. (Some Private banks even pay 8 to 10% to the intermediaries). 

3

Due diligence: The proposed intermediaries have some inherent risks in each of the model. There should be a proper due diligence system. The present due diligence formats mostly give weightage to the financial parameters, whereas social parameters also equally important. 

• The due diligence for empaneling the intermediaries should be strict and only ethical players who are really committed to the development of the people should be given entry. 

• Both, financial and social backgrounds of those intermediaries should be taken into consideration. 

• Intermediaries should enjoy a high reputation in the local community. 

• Intermediaries having any key persons with political influence should not be allowed.

4

FLDG (First Loss Default Guarantee): As the bank is delegating its main functions, there should be a mechanism to improve the accountability of the intermediaries, which is lacking now. 

• Bank can introduce the FLDG – First Loss Default Guarantee, which is now widely used by the private banks and MFIs, while they employ the BCs. The normal risk in SHG financing is 5 to 10% (The national level NPA for SHG financing is 5.19 % as of Mar 2019). 

• Depending upon the risk assessment of the intermediaries during the due diligence process, bank can decide the FLDG of each intermediary and prescribe the FLDG from 5 to 10%. If the perceived risk is low, bank can fix FLDG is 5% or if the perceived risk is more, the FLDG is 10%.

• The intermediary will deposit the FLDG amount as cash collateral with the bank. E.g. If an intermediary wants a limit of Rs.1 crore for SHG financing to be availed over a period of time and their FLDG is 5%. They will deposit Rs.5 lakh with the bank as collateral.  Any loss due to NPAs in this Rs.1 crore portfolio, first Rs.5 lakhs loss will be borne by the intermediary and the balance loss will be borne by the bank. Hence, FLDG will protect the interest of the bank. 

b

Shift to Low-touch model: 

5

Reinventing the model: Now, lending to SHGs involve a high touch model with more frequent face to face contacts and group meetings. But, in the post COVID scenarios, as we need to follow the social distancing norms, we need to reinvent our model. 

• Virtual meetings: 

Office-bearers of the SHGs (Animators and representatives) and the field staff of the intermediaries should be trained on using the virtual meetings apps through their mobile phones.

• When they meet the SHGs and conduct the meetings following the social distancing norms, they connect to the Branch managers or field officers over virtual meetings apps and the branch managers or staff can address the SHG meetings and can see the clients on screen and connect to the groups. 

• This will reduce the travel time to the Branch managers and will enable the Branch managers to see the clients and interact with the members. 

• Virtual House checks: On a random basis, branch managers can ask animators to show the houses of a few members to make a random check of individual houses as selected by the Branch managers at random.  This will avoid the risk of impersonation by some vested interests. 

c

Digitization of the processes: 

6

Turn Around Time: MFIs even though charge around 20 to 24% interest, they win over the SHG members as their TAT is low, which may range from  3 to 5 days. In general, banks take 3 to 6 months for disposing the SHG loan applications. In some branches, when the branch managers are interested in SHG financing, they disburse the loans within a week to fortnight. Hence, there is a good scope banks to reduce the TAT. 

Head office and Zonal offices of banks should put in place a system to monitor the flow of SHG applications at the branch level and give an alert to the branches, if the branches are not following the TAT of 6 working days. To ensure the TAT becomes a reality, all the processes right from on-boarding of customers should be re-visited and revamped to overcome the challenges of post-COVID scenarios as well. 

7

Blended system: Now, SHG financing involves lot of paper-work, which takes more time. This can be reduced by introducing the digitization of processes. E.g. On-boarding of SHG member-wise details including KYC documents in a tablet by intermediaries. Paper work to be minimized to the barest minimum. 

Another major problem faced in the sector is the multiple memberships in SHGs and JLGs by members against the RBI’s regulation of one member should be in one SHG or JLG. As there is no system to check this, the members get enrolled in different SHGs promoted by Banks and MFIs or NGOs and take loans from multiple sources beyond their capacity leading to over indebtedness.  Hence, there is a need to develop a robust system to register all SHGs and JLGs at the district level so that they will be identified with unique IDs and this unique ID of SHGs/JLGs to play a role like AADHAAR ID played a helpful role to remove the ghost accounts and helped to save a lot of money through DBT (Direct Benefit Transfer). 

Digitalization of SHG enrolment process: Member-wise data  to be digitized. Now, banks have only SHG level information. Now, banks have to move to capture the member level data to use the Big data analysis. Field staff of intermediaries can be trained to handle the tablets and they can enter the data and banks will verify online and approve the on-boarding. 

Unique ID for SHGs/JLGs at district level: Registration of all SHGs and JLG irrespective of whether they are promoted by NRLM or NULM or MFI or NGO or other Govt project, should be made compulsory. NABARD should come out with a software to capture this data through their DDMs offices in each district. Each SHG/JLG with their member level data and ID proofs should enter the data in the system. This will avoid the dual membership of members in Bank and MFI programs. The system should remove the members having membership in more than one group, using the ID proofs matching. Banks and MFIs should give loans only to the groups which have registered themselves at the district office and taken an unique ID for them. 

8

Lending Processes: Now, branches are taking so many formats, which have been prescribed some two decades age, which was necessary during the initial stages of evolution of SHGs. But, now the rationalization of forms & documents have to be taken up, as it takes up more time, which delays the TAT. 

• Digital Screening and rating: Preliminary screening and rating should be completed by the intermediaries and branch managers will only check and approve the rating accorded by the intermediaries. 

• As member level data is collected, banks can check with High Mark / Equifax credit bureau which maintain the most of the MFI clients data and this will check the multiple borrowing by SHG members, as now banks are not sharing the individual member level borrowing data to credit bureaus.

• Branch managers will do a random check of specific households at least one household per SHG over a video call. 

• Simple 2 Page only Document: A two page simple application cum loan document should be introduced (as member level details are captured separately in the system, this is very well possible).

• All documents filling should be system driven and not manual filling. 

• Disbursement should be done to the individual member SB accounts after getting the authorization from the SHGs and this will avoid the misuse of loan funds by the group leaders. 

• Repayment collection from SHG also should be through only digital mode by asking them to remit the collections to the nearest BC, so that they will be converted to real digital mode.

• SMS confirmation: SMS should be sent to the mobile of SHG members on receiving the repayment amount. This will increase the efficiency and that will also save their  travel expenses and time.

9

MIS on SHG lending:  

At present, the branches have only very limited data on SHG lending. Hence, they are not able to analyze further down to fix the issues related to their portfolio. The data tracked now is applications received, sanctioned no and amount, disbursed no and amount, loan outstanding and repayment collections. 

• Branches should collect more data in the system during the enrollment stage itself so that they can make critical analysis and take an informed decision to avoid the risks associated with the concentration risks and portfolio risks and so on. 

• The data to be captured, apart from what is captured now,  includes the following. 

• Sector-wise lending

• Activity for which loan is given

• Loan application pending for sanction for more than a week.

• Demand list – day-wise and intermediary-wise

• Loan utilization check

• Age-wise overdues

• Product-wise details (disbursed and outstanding)

• Loan cycle-wise details

• Geography-wise details

• With the loan amount, Whether started new enterprise

• With the loan amount, Whether expanded the existing enterprise

d

Client Value Optimization: 

10

Product innovations:  Banks now mostly offer vanilla products like Basic SHG loans. Very few branches only offer other specialized loan products for SHGs. There is a good scope for increasing the lending as the credit needs of the target groups are varied and multifold. The potential demand estimated for microfinance is Rs.8.86 lakh crore, where the supply during the financial year 2018-19 was only Rs.2.13 lakh crore, which is only 24% of the total potential demand. 

Banks to offer multiple loan products to the targeted groups to cater to the varied needs of the SHG members. 

• Hybrid loans: Loans with 4 years term- first year as cash credit (as the recovery of the economic sectors in the post COVID scenario may not be uniform and may be slow) and the loan is repayable in 36 months from 2 to 4th year like a term loan. 

• Individual loans to SHG members: The loan for graduating SHG members i.e. those who have completed 4 or 5 loan cycles under group loans and really aspiring to expand their existing enterprises or diversify their enterprises as a part of backward or forward integration. Is not available easily. Even though MUDRA loan is available without security up to Rs.10 lakhs (now recently revised as up to Rs.20 lakhs) for this segment, the branch level persons are not tuned to seize this opportunity.  Intermediaries can be given a specific target to identify this target group and give a handholding support to facilitate bank loan to them.  

• Mobile Loans to SHG women:  As the SHG process is going to be digitized, all women should have mobiles in their hands. To bridge the digital divide among women and also digital is the future for enterprise also. Loan of Rs.10,000 to buy a mobile with a special package The loan for purchase of smart phone  in tie up with a mobile manufacturer & telecom service provider with a special package for women in SHGs.