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Indian Financial System

Notes He also pointed out that MFIs were "funding too much to SHGs".
According to a report released by Sa-Dhan, which has 264 members, the total loan
outstanding for all 264 MFIs that reported to Sa-Dhan is ` 18,343.9 crore reaching out to
2.67 crore active borrowers, and an additional ` 4,200 crore of outstanding portfolio is
being managed by MFIs on behalf of banks and other financial institutions, taking the
total outstanding portfolio managed by MFIs to about ` 22,544 crore.
In contrast, a Nabard report on the 'status of microfinance in India 2010', says that during
2009-10, banks in India financed 15.87 lakh SHGs, including repeat loan to the existing
SHGs, with loans of ` 14,453.30 crore, registering a growth of 17.9 per cent over the
previous year in loans disbursed. As on March 31, 2010, 48.51 lakh SHGs had outstanding
bank loans of ` 28,038.28 crore, a growth of 23.6 per cent in bank loans outstanding against
SHGs.
The RBI official said that with active help from Nabard, Central and State agencies, public
and private sector banks should "aggressively fund SHG projects directly instead of present
practice of using MFIs as middlemen".
As banks have access to cheap credit, they should take advantage and fund SHGs at village
level, he suggested. "Through this, banks can win over the trust and lay a strong foundation
for financial inclusion and creating joint liability groups at village or taluk level," he
added.
With banks now on a wait-and-watch mode as far as lending to MFIs goes, the present
crisis in Andhra Pradesh could well present them good avenues to reach out to SHGs
better, said an official with a public sector bank. "Banks can offer direct linkage to SHGs at
within 12 per cent, and even after including the SHG margin of 3 per cent, credit is available
at around 15 per cent, which is much lower than the high rates of interest that MFIs
charge," he explained. This is one way of tackling the MFI issue.

Some banks like Canara Bank, which were not aggressive lenders to MFIs, want to continue
having direct credit-linkage to SHGs. "We have always thought of lending directly, and
there is no need for a change in that philosophy now. And we have never been aggressive
lenders to the MFI sector," Mr S. Raman, Chairman and Managing Director, Canara Bank,
told Business Line recently.
This fiscal, the bank has disbursed credit of ` 1,000 crore to SHGs directly, and expects to
close the year with a 25 per cent growth in this portfolio.

As banks are now looking at direct credit-linkage to SHGs aggressively, MFIs are now
forced to operate on a low-margin high-volume model. With MFIs being forced to reduce
their rate of interest, "margins will be significantly impacted for several of them," pointed
out Mr Suresh K. Krishna, Managing Director, Grameen Koota.
The drop in margins could be as high as 30-40 per cent for those who offer higher rates
now. "But others, who currently offer loans at less than 30 per cent interest rate, there
wouldn't be much of a difference," he added.

Question
Discuss the role of RBI in helping the Self Help Groups.

Source: http://www.thehindubusinessline.in

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