Banks
& NGOs
TheGolden Handshake
Banks
and NGOs could work together towards building an efficient credit
support system for the rural poor.
Subash Wadhwa explains how
More
than two thirds of employment and one third of the gross domestic
products in India is generated from the rural sector. But even then,
poverty and unemployment, in the rural sector, continue to be India’s
problems. With massive branch network of commercial banks, Regional
Rural Banks and co-operative banks in rural and semi-urban areas,
the banks can play an important role by providing credit support
to rural activities.
But
despite the best intentions of the banks, still a large number of
rural poor, do not have access to credit for their agricultural
and non-agricultural activities. In the last few years the growth
in bank’s providing credit to the rural sector, particularly to
the poor, has shown a declining trend. The percentage of direct
agricultural loans to net bank credit has also declined. This is
despite the fact that the percentage of non-performing assets (NPA)
in rural and agricultural lending is less as compared to urban and
industrial lending. The Voluntary Retirement Scheme in many banks
has also affected business in this sector.
In
order to be productive and to ensure better recoveries, rural lending
is required to be done as supervised credit. However, with reduced
field staff and high cost of dispensation, banks have not been able
to follow the principles of supervised credit. One needs to look
for certain alternative systems, which will be less costly and more
effective. It is in this context that NGOs working in the rural
areas can provide meaningful support to the banks based on proper
collaborative arrangement on agreed terms.
The
experiment of active collaboration between banks and NGOs started
a decade ago with the launch of Nabard’s Self-Help Groups (SHGs)
– banks linkage project – with the approval of RBI. Started as a
small pilot project comprising 500 SHGs, it has become a national
programme. The NGOs act as facilitators for formation and nurturing
of the groups and also act as their link with the banks. In a few
cases NGOs have also acted as micro-finance institutions (MFI) and
have borrowed from banks such as Nabard and Sidbi for further lending
to the SHGs. More than 6.5 lakh SHGs have already been formed with
the help of NGOs, out of which around 4.5 lakh groups have been
linked with banks for micro-credit operations.
The
above association proves to be a beneficial situation for all the
players. The banks can increase their outreach of credit and savings
to a large number of poor, particularly women, at much reduced transaction
cost (around 50 per cent) with recoveries at more than 95 per cent,
as against normal recoveries at 50 to 60 per cent. The NGOs involved
in socio-economic upliftment of the targeted beneficiaries, can
also help them in undertaking income generating activities with
banks’ finance and create a nucleus of development activity at the
SHG level.
There
is scope and urgent need for increasing such collaborations between
banks and NGOs to further enhance the banks’ rural business in a
mutually beneficial manner. It could cover rural savings and deposits,
general rural lending and recoveries, rural housing, in addition
to micro-finance operations. While this requires availability of
more and more professional NGOs, with good local presence, their
financial sustainability is a crucial factor. So far the banks have
not shared the cost of NGOs who have been facilitating the micro-finance
operations. If NGO’s collaboration is found beneficial, and if it
could be utilised for further expending the bank’s business, there
is no reason why the banks would not like to share a part of margins
with the NGOs towards their cost of operations. This is all the
more necessary when banks are finding it difficult and costly to
supervise scattered rural loans.
The
following proposals have been made for a mutually beneficial collaboration
between the banks and NGOs:
General
rural lending
- NGOs
would help in identifying beneficiaries and the activities, preparation
of loan proposals and completion of formalities and forward their
recommendations to the banks for sanction of rural loans.
-
Keeping in view the recommendations of the NGOs, banks would examine
the proposals as per their norms and sanctions, and consequently
grant loans for viable activities to eligible beneficiaries.
- NGOs
would also help in diversification of banks’ lending including
rural housing, storage, processing, trade and marketing. Wherever
necessary, NGOs will help in providing skill training, supply
of inputs and marketing of produce, besides building general awareness
for various schemes , the services offered by banks and their
requirements and formalities.
- NGOs
would keep in touch with the borrowers and suggest prompt action
for any problems in regard to income generation and repayment.
-
On the due dates, NGOs would help the banks in recovery of the
loans by contacting the borrowers.
- NGOs
would also help in mobilising savings for SHGs as well as of individuals.
Recovery
of loans
With
the help of SHG members and leaders, NGOs can have first hand knowledge
about the borrowers and the defaulters in the village, whether they
have actually lost the assets or suffered genuine crop loss, whether
they have actually purchased the asset or sold the same. Such information,
if acted upon promptly, could be very helpful to the banks in improving
their recoveries. In the recent past many banks have been following
the practice of technical or prudential write-off of rural loans.
Apparently they do not find it worthwhile to pursue such cases due
to the cost involved and uncertain response.
It
is strongly felt that NGOs, through regular dialogue with the borrowers
and better understanding of the field situation, can be of great
help to the banks in reducing the rural NPAs and prudentially written
off accounts. This would require a proper strategy on the part of
banks as well as NGOs. Based on the assets and income generation
capability, a suitable scheme of compromise and recovery of such
loans could be worked out by the NGOs in accordance with the banks’
policies. It is expected that a good part of such prudentially written
off accounts as well as NPAs could be recovered through such strategy
and regular contacts. This amount would straightway go to the profits
of the banks. If NGOs are paid a certain percentage of such recoveries
it can lead to further flow of credit. Part of this amount can also
be shared with the SHGs’ or to individual leaders who help in such
recovery efforts.
Micro-finance
operation
To
meet their cost, NGOs need to be supported for their facilitating
activities based on the number of groups, number of beneficiaries
and the amount disbursed. The expenditure towards building awareness
and training can be reimbursed on actual basis. As a long-term formal
arrangement, it is necessary that such financial support be provided
to all NGOs by the concerned banks with or without the support of
either Nabard or the Government. It may not be possible for most
NGOs to bear this cost if they have to nurture these groups and
bring them to maturity for receiving loans and help in recovery.
NGOs
as MFIs
In
this case, besides undertaking the above function as facilitator,
the NGO can also work as a financial intermediary. Here the banks
give the loan to the NGOs for on-lending to the SHGs or individual
poor. The NGOs would be legally responsible for repayment to the
banks and will bear the risk of non-payment. They should therefore,
have adequate margins, not only to bear the cost of operations,
but also to make provisions for possible loan losses. It is felt
that banks may keep a margin of around 2 per cent and lend to NGOs
at around 10 per cent. The NGOs, in turn, may charge around 15 per
cent from the SHGs. While SHGs may charge as per their own decision,
say around 18 per cent. At present Nabard is providing re-finance
at 7.5 per cent to the banks for micro-finance lending.
It
will be observed from the above, that NGOs play a crucial role in
helping banks in enhancing and intensification as well as recovery
of rural loans. They can also help in recovery of NPAs and prudentially
written off accounts based on suitable strategy and action plan.
At the same time NGOs would be in a position to help rural poor,
particularly women, to bring them above the poverty line and create
rural employment. This is also necessary to contain the migration
from rural to urban areas, which is causing many socio-economic
and environmental problems. For this purpose the NGOs need to operate
in a financially sustainable manner at reasonable margins or service
charges linked to their performance. This would be beneficial to
the banks as well as the NGOs in achieving their long term objectives.
The
author is Director, Dena Bank
