RISK MANAGEMENT IN MICROFINANCE – EMERGING CHALLENGES IN INDIAN CONTEXT.

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RISK MANAGEMENT IN MICROFINANCE EMERGING
CHALLENGES IN INDIAN CONTEXT.
International Conference on Rural Finance
Research Moving results into Policies and
Practice. 19th -21st March 2007 at Rome.

• N.JEYASEELAN,
• CONSULTANT, INDIA.
• Vijayjeyaseelan_at_yahoo.co.in

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SHG BANK LINKAGE PROGRAM

• NABARD TECHNICAL SUPPORT - REFINANCE
• BANKS LOAN DELIVERY
• NGOs PROMOTION OF SHG
• SHGs-INFORMAL GROUP

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PROGRESS UNDER MICROFINANCE IN INDIAUpto 31st
March 2006 - in Million US dollars

• Agency / Cumulative
  No.of persons
• Program micro credit disbursed
  reached (in Millions)
• Amount
  share to total
• NABARD SHG
• Bank linkage 2590.45 69.2
  164.9
• SIDBI-MFI 173.14 4.6
  2.6
• SGSY 893.81
  23.9 3.2
  
• Others(RMK 88.10 2.3
  1.1
• FWWB)
• Total 3745.50
  100 171.8
  

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CUMULATIVE PROGRESS OF SHG BANK LINKAGE PROGRAM.
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BANK SHG LOAN PORTFOLIO GROWTHin Million US
dollars
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EMERGING SCENARIO UNDER BASEL - II

• June 2004- Basel II was put in place.
• Feb 2005- RBI issued guidelines on Basel II to
  Banks in India.
• Migration to Basel II by Mar 2008/2009
• Basel I covered Credit and Market risks
• Basel II also covers Operational risks
• Basel II has three pillars viz Capital
  requirements, Supervisory process Review and
  Market discipline.
• MF assets come under retail category and carry
  75 risk weight.
• If studies carried out on the default rate and
  proved that MF assets are lesser riskier, then
  lobbying shall be made for Lower risk weight to
  MF assets.

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RISK MANAGEMENT IN MICROFINANCE

• Identification of risk
• Measuring the risk
• Evolving strategies for risk mitigation
• Implementing the risk mitigation measures
• Monitoring the risk level.
• Major risks Credit Operational risks
• Credit risk-Possibility of Loss associated with
  diminution in the credit quality of the
  borrowers.
• Operational risk- Risk of Loss resulting from the
  inadequate or failed internal process or people
  or system or external events.

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RESEARCH GAP

• No studies have been carried out so far on how
  the branch managers implementing the SHG Bank
  linkage program perceive the risks in SHGs and
  NGOs.
• The present study fills this gap.

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RESEARCH DESIGN

• Objectives
• To review the emerging risk management
  scenario in Banks delivering micro finance to
  Self Help Groups and Micro Finance Institutions
  in India.
• To identify the potential risk factors associated
  with SHG-Bank linkage
• To analyze the risk perception of the Branch
  Managers on SHG lending
• To classify the risk factors into High, Medium
  and Low risk categories.
• To evolve a tool for Credit Risk rating of Self
  Help Groups
• To offer suggestions for risk mitigation
  measures.

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RESEARCH DESIGN METHODOLOGY.

• A descriptive study
• Purposive sampling to select 68 Branch managers
  implementing SHG program
• Sample drawn from 5 districts of Tamilnadu
• Study is more of qualitative nature
• Ten major Risk factors identified through FGDs
  with stakeholders
• A 5-point risk rating scale was constructed
• Based on the Branch managers perception,
• risk factors were classified as
  High/Medium/Low risk categories.

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ANALYSIS AND FINDINGS

• For each choice in the scale, scores are given
  from one to five.
• Total scores by all the respondents for each risk
  factor have been summed up and their Mean
  Standard Deviation have been calculated. The
  risk categorization has been done using the mean
  and standard deviation for each factor.

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FINDINGSSIX MAJOR HIGH RISK FACTORS AS PERCEIVED
BY THE BRANCH MANAGERS.

• v     Reduction in grants to NGOs for group
  promotion.
• v     Frequent switch over of NGO field staff
• v     Maintenance of group accounts by a few
• v     Loan size not commensurate with the
  capacity of the SHG members.
• v     Increasing possibility for loan default
  with increase in loan size
• v  SHGs shouldering too much government
  program responsibilities beyond their capacity.

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FINDINGSBased on the perception of the Branch
Managers

• Risk factors such as
• Lack of monitoring of SHGs by NGOs
• Dependence on a single SHG leader
• which are in Medium risk category as of now, also
  have potential to move into the high risk
  category in the near term, if no corrective
  measures are taken in time.

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SUGGESTIONS FOR RISK MITIGATION -BANK LEVEL.

• Bank loan not to be shared by all members of the
  group.
• Loan term be short 6 / 8 / 10 /12 months
• Repeat loan delivery should be very quick
• Analyze the need for Restructuring the SHG after
  closure of each cycle of loan
• Graduating members to individual larger loans
• Use of Credit risk rating tool to offer risk
  based pricing
• Banks shall share a part of the cost of group
  promotion by NGOs.

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SUGGESTIONS FOR RISK MITIGATIONNABARD LEVEL.

• NABARD to hike the group promotion cost to NGOs.
• NABARD to pilot a District level Micro credit
  information bureau
• NABARD to arrange capacity building program on
  risk management to NGOs / CBOs and SHG leaders.

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SUGGESTIONS FOR RISK MITIGATIONNGO LEVEL.

• NGOs shall ensure rotation of SHG leaders
• NGOs shall select their staff from the SHGs to
  avoid the problem of staff turn over
• NGOs shall form federation of SHGs and shall
  delegate their functions to them
• NGOs shall ensure auditing of group accounts by
  the internal team as well as by the external
  audit teams.
• NGOs shall strengthen the SHGs bookkeeping
  skills and ensure financial transparency through
  the IT.

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SUGGESTIONS FOR RISK MITIGATIONGOVERNMENT LEVEL

• Government departments should limit the delivery
  responsibilities of the SHGs for selective
  programs only matching with its capability.
• Government should change the mode from rapid
  growth to consolidation phase so as to ensure a
  growth with stability quality.

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MOVING RESULTS INTO POLICIES PRACTICE

• Some results have already been disseminated to
  the branch managers in the field through the
  training programs.
• Some of the suggestions require policy changes
  and to be addressed by the Policy makers
• Customized Individual loans for Graduating SHG
  members
• Banks to offer Risk based pricing of micro loans
• Micro credit information Bureau at the district
  level
• Use of Risk rating tools on an ongoing basis
• Use of IT in financial transparency

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MOVING RESULTS INTO POLICIES PRACTICE

• Governments focus to be shifted from rapid
  growth (numbers) to consolidation (quality).
• NABARD to hike the group promotion grants to NGOs
  and banks shall share a part of the group
  promotion cost.
• NABARD to organize more Capacity building
  programs on risk management to NGOs /CBOs and SHG
  leaders.
• Building on the qualitative insights gained
  through this rapid study, a detailed study on MF
  - Risk management covering all the models shall
  be carried out

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THANK YOU.

• For further details, Please contact
• N.Jeyaseelan, Consultant,
• 7/633-A-Jeevanantham street,
• Nagamalai Pudukottai, Madurai, 625 019,
• INDIA.
• Phone [phone]
• Mobile [phone]
• Skype vijayjeyaseelan