Page 55 - DMGT512_FINANCIAL_INSTITUTIONS_AND_SERVICES

Financial Institutions and Services

Notes

Case Study RBI asks Banks to Fund Self-help Groups Directly

–Alarmed at micro-finance institutions' exposure to SHGs.
oth public and private sector banks were too "lethargic" in financing and re-financing
SHGs, which has "led to MFIs taking advantage and becoming aggressive lenders
Bat high rate of interest".
Alarmed at micro-finance institutions' exposure to self-help groups (SHGs), the Reserve
Bank of India has asked public and private-sector banks to step up lending to SHGs. This
directive also comes at a time when micro-finance institutions (MFIs) have been asked to
reduced their high rate of interest being offered to their customers.
Speaking at a Dharwad District Consultative Committee meet recently, an RBI official
said that both public and private sector banks were too "lethargic" in financing and re-
financing SHGs, which has "led to MFIs taking advantage and becoming aggressive lenders
at high rate of interest".
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 crores reaching out to
2.67 crores active borrowers, and an additional 4,200 crores 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 crores.
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 crores, 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 crores, 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.
Contd...

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