26

CASES IN MICROFINANCE
Edited By:
H.S. Shylendra
Prabal K. Sen
Smita Mishra Panda
(Submitted to SIDBI Foundation for Micro Credit,

Lucknow)
Institute of Rural Management Anand

2003
Institute of Rural Management Anand Cases in Microfinance
CONTENTS
Preface
I. GETTING STARTED
1. To Diversify or Not Into Microfinance?: The Case of a 1-6

Multi-Activity NGO (J.N.Poddar with Aseem Hasnain)
2. How to Get Started ? (B. Raghini) 7-23
II. CREATING LINKAGES AND INSTITUTIONS
3. SHG-Bank Linkage: A Case of ANARDE Foundation 24-32

(Naresh Singh)
4. The Nandipet SHG Federation (S. Rama Lakshmi) 33-42
5. The `Bank (H.S. Shylendra) 43-52
III. MICROFINANCE PRODUCTS
6. MDs Dilemma: A Case on Rural Electricity and 53-61

Microfinance (A. Umarani with Dharmraj)
7. Loan Product For Daughters Marriage (K.C. Sharma) 62-67
8. Microinsurance: Is it a Viable Solution? (Nidhi Ranjan) 68-77
IV. DELINQUENCY MANAGEMENT
9. Containing Delinquency Virus (K.C.Sharma) 78-84
V. PERFORMANCE ANALYSIS
10. Link Metrics To Your Mission: Performance Measurement 85-96

System of FWWB (Keyur Thaker)
11. Attaining Self-Sufficiency: The Case of Credit and Savings 97-107

Programme of RGVN (Krishan Jindal)
12. Do You Deserve More Funds ?: The Case of MVS 108-123

(Swandip Sinha)
i
VI. SCALING-UP
13. BHASS Micro Credit Mission (N.V.Namboodiri) 124-131
14. Scaling Up of An MFI: The case of Village Welfare 132-141

Society (Prabal K. Sen)
VII. SYSTEMS AND OPERATIONS OF MICROFINANCE INSTITUTIONS
15. Introducing Incentive Based Remuneration (Rahul Mittra) 142-151
16. Systems and Processes of Credit Operations : The Case of 152-171

BASIX (Samar K. Datta)
LIST OF CASE-WRITERS
ii
PREFACE
The volume Cases in Microfinance is a compilation of cases which were

developed as a part of the multistage Workshop on Developing Cases and
Other Training Materials in Microfinance held at the Institute of Rural
Management, Anand (IRMA) during 2002. The Workshop was sponsored by
SIDBI Foundation for Micro Credit (SFMC), Lucknow. The primary objective of
the Workshop was to develop appropriate training materials needed for
conducting quality short-term and long-term training programmes for
microfinance professionals and for use in Training of Trainers. The Workshop
also aimed at enhancing the capacity and expertise for case and training
material development in the country which could be tapped in future for the
benefit of the microfinance sector.
There were 15 case writers from all over the country representing various
management schools, training institutions and practicing Microfinance
Institutions (MFIs). Given the varied nature of the emerging training needs in
the microfinance sector, it was necessary to involve both academicians and
practitioners as case writers. The Workshop aimed at developing cases,
which are relatively shorter in length so as to ensure wider reading and
applicability. The cases included in the volume satisfy this norm. The case
writers were given orientation in case method before they went back for
writing their cases. Also as a part of the Workshop, all the cases have been
tested in the presence of practitioners and experts so as to ensure the
minimum rigour required of cases.
Another major feature of the volume is that the cases developed capture the
lessons and experience of many well known and leading microfinance
institutions in the country. In terms of topics, the cases cover all major areas
of microfinance such as strategy and policy of MFIs, governance and
organizational issues, operational aspects, financial ratio analysis,
delinquency management, design of microfinance products and HRM issues.
A separate Training Guide has been prepared as a supplement to the main
volume so as to enable the trainers to make best use of the cases.
The entire exercise has been made possible by the generous support of
SIDBI Foundation for Micro Credit, Lucknow, who are aiming at
mainstreaming microfinance as a major tool for poverty alleviation in the
country. We would like to thank Mr. Brij Mohan ED, SFMC and his
colleagues Mr. Anil Vidyarthi, Ms. K.C. Ranjani for their constant
encouragement and support. We would like to wholeheartedly thank Prof
Malcolm Harper, Consultant to SFMC on Training, who not only encouraged
IRMA to undertake this exercise as a project, but also, participated actively in
the case testing process by offering his valuable comments. We are extremely
grateful to Prof. B.M. Desai (formerly with IIM, Ahmedabad) who provided his
expertise in training the participants in case methodology and also facilitated
the testing of the cases.
iii
A major part of the credit for the successful completion of the Workshop goes
to all the case writers who wholeheartedly participated in the multistage
workshop and contributed cases for the volume. We would like to thank all
the case writers and their organisations who allowed them to take part in the
case writing exercise. We also thank all those organisations which enabled
and facilitated writing of case on their experiences.
We thank the present Director of IRMA, Professor K. Prathap Reddy and the
former Director Dr. Katar Singh for providing all the institutional support and
encouragement in various stages of the Workshop. We would like to thank the
faculty members of IRMA who enriched the Workshop by contributing their
expertise. They are Professors K.V. Raju, V. Ballabh, G. Krishnamurthy,
Haribandhu Panda and Kameshwar Choudhary. We are also thankful to the
staff of various departments of IRMA who helped in many ways in
successfully conducting the Workshop.
The case writing Workshop has been a major effort towards filling the need to
develop indigenous training material. We hope the present volume and the
Training Guide would serve as useful training materials in the field of
Microfinance in particular and Development Management in general.
2003 HS Shylendra
Anand Prabal K Sen
Smita Mishra
iv
GETTING STARTED
TO DIVERSIFY OR NOT INTO MICROFINANCE?: THE CASE OF A

MULTI-ACTIVITY NGO 1
In the Board Room
The core functionaries of a multi-activity NGO have gathered for an important

strategic meeting in June 2002. The issue involved is:
Should we diversify into microfinance or remain as we are?
Microfinance intervention basically involves providing the poor easy and

informal access to savings and credit facilities. There are two strong opinion
groups in the organisation. One group is of the view that the diversification
into microfinance is a necessity; while the other is very critical of this line of
thinking.
The Group for diversification (Group I) has the following arguments:
The basic reason for rural underdevelopment is the paucity of funds

and lack of information. Because of lack of funds the entrepreneurial
activity of the households is adversely affected keeping them away
from proper education and health care. If financial support could be
made available to them, the major problem of underdevelopment would
vanish. Once the poor get financial support for agriculture and other
activities they are able to improve their economic condition. This
would ensure a minimum income security helping them to strive for
obtaining better education and health for their family members.
The experiences from Andhra Pradesh and Karnataka within and

Bangladesh outside the country show enough evidence that when
1
. Case prepared by Prof. J.N. Poddar with Ms. Aseem Hasnain, Indian Institute of Forest
Management, Bhopal, under the aegis of the `Workshop on Developing Cases and
Training Material in Microfinance, sponsored by SIDBI Foundation for Micro Credit,
Lucknow.
1
microfinance is provided to the poor women, it has brought about the

desirable changes. The women have become economically
independent and have even forced others to listen to them while
making decision on various issues. The women as a matter of fact
have been able to organise successfully big social events and
interventions after gaining economic independence through
microfinance.
If microfinance could elevate the status of women, why not it should be

extended to all the needy and poor so that they can engage
themselves in gainful activities to break the vicious cycle of poverty? If
we can take up microfinance activities, credit can be provided to the
needy for investing in gainful activities which would ultimately generate
them enough income to meet health and education needs also.
The other group lobbying against diversification (Group II) has the following
arguments:
As an organization our basic commitment is to work with the whole

village community or the entire social spectrum. It is not the
strengthening of women alone in the village which can build the social
capital. We cannot just stop all other programmes of social upliftment
and start working as a Microfinance Institution (MFI).
MFIs in their present form necessarily depend on business principles

and stress on the factors like Return on Investment (ROI) and Internal
Rate of Return (IRR). They behave more like a typical lending
institution. Further, the investments in health and education are long-
term strategies which cannot be justified on the basis of returns in
monetary terms. All the present financial studies show unfavourable
ROI. and IRR on such social investments. So where on the earth will
we find money to pump into these fields?
2
We are primarily working for human development, where social capital

building is the prime concern. For this, we need to invest more in
health, education, community development, people's institutions and
social security measures. Microfinance can be a good support only for
livelihood enhancement. It is likely to force us to think purely on
financial planes and may diffuse our basic philosophy. The
microfinance activity would drag the organisation towards adopting
business like approach making it less human development oriented.
There are various institutions providing financial services. But once

NGOs like us give up the cause for which we have been existing and
take up financial activities, the cause is likely to suffer seriously.
The Organisation
'Sakshar India' was founded in the early 1980s by a group of very committed
and urban educated young people to provide mass education that could
bring about rapid social development. They were some of the best brains
available and had left behind enviable careers before they collectively decided
to live with the poorest people in the remote villages of Madhya Pradesh.
The earlier interventions of the organization were in primary education,

classroom experiments, curriculum development, teachers training and
related co-curricular activities. The organization of late has diversified into
various other activities like natural resources management and womens
empowerment.
Health is another important area in which the organisation has been working
for quiet some time. Under health, the emphasis is on creating community
managed health centres including providing mobile health vans. The
organization has been doing a lot of interaction and networking with the
government functionaries of the health department particularly at the local
level.
3
The basic philosophy of the organization is that quality education will build
social capital which in turn will bring about human development. Here
education is not taken as mere schooling alone. The organization believes in
providing education pertaining to health, natural resource management and
other aspects of life also.
The values of the organization rest on the principles of equity, participatory

development and democratic decision-making. These values guide all the
programmes as well as the internal decision making process. All the people
in the organization, in one way or other, are fully involved in the decision-
making system.
The total staff strength of the organization comes to around 35 including 10

professionals and 25 other staff posted in the field areas. The professionals
visit the field regularly while the other staff stay in the field for most of the
time. Several government and private funding agencies have been
supporting the organization. Because of the reputation of the organisation, the
funding has never been a problem. Though foreign funding agencies have
also offered to support, the organisation till now has avoided taking these
funds even though there is no policy to refuse foreign funds.
For quite some time the members of the organization have been debating on
their achievements and failures. The current debate on diversification into
microfinance is an outcome of their recent thinking.
The Field Situation
The participants of the meeting have spent considerable time in the villages
interacting with the community. They have a fair understanding of the
problems and challenges that the poor face in their day to day life.
The area is drought prone and is poverty stricken. Agriculture is the main
stay of the local economy. But agriculture being rainfed, the majority of the
people in the area cannot be sure about getting two square meals a day
4
throughout the year. Irrigation being the privilege of a very few who are
generally outside settlers and moneylenders, the economy has remained in a
tattered situation. The households, majority of whom are tribals, have been
into cultivation for virtually two or three generations. Almost every household
has some land to till, no matter how poor the quality is. Credit and inputs are
available but on a very exploitative terms.
The forest resources are in a poor shape. Given their state of depletion, the
local needs of the people are only partially satisfied. The alternative livelihood
opportunities available are very few though some activities with potential for
employment generation have been identified in the area.
The people migrate to distant areas twice a year for at least a month each
time. They go in search of labour work. The lean period sees a mass
exodus from the villages when all the education and schooling comes to a
halt.
The area in question is generally poor in terms of transport facilities and

roads. Reaching the nearest bank costs Rs. 20 for the round trip; while the
wage rate in the area is around Rs. 40 per day. The moneylenders are the
major source for both credit and agricultural inputs. The interest rates
charged by the moneylenders vary from 50 percent to 120 percent
depending on the season, credibility of the borrower and the demand
situation.
Apparently, lack of minimum level of income is proving to be the biggest

hurdle in the development process. The people are not able to participate
fully in the self-governance and in other interventions for education and
health as they always keep struggling for subsistence.
The pressure on the organization is to provide them with some alternative

livelihood avenues along with making the agriculture more dependable. This
would let people to stay back in their villages for a longer period. Then they
5
would be able to organize themselves, think about their development and

plan for some productive ventures.
The External Environment
The World Bank, international and national funding agencies, mainstream

policy advocacy groups, the Central and State governments are all lobbying
for and pushing microfinance through the vehicle of womens Self- Help
Groups (SHGs). These agencies seem to consider microfinance as the
ultimate solution for underdevelopment in India especially in the rural areas .
Funds are made available easily and there is a ready support system for
capacity building and infrastructure development of NGOs if they choose the
microfinance intervention. There is also a lot of publicity available to any
developmental agency working with the microfinance model.
There are a lot of NGOs and government agencies which have taken up
microfinance dispensation through women SHGs. This has created a hype
and seemingly an atmosphere that microfinance works wonders. There is a
presence of considerable number of success stories both from within and
outside the country. There are a number of documented case studies of
empowerment and development of women through SHGs and microfinance.
These are also acting as motivational factors for adoption of the microfinance
programme.
With this, we now move back to the meeting room where a decision has to be
taken by the NGO to enter into microfinance or not.
6
HOW TO GET STARTED?1
Mr. Viswanath is the Chief Executive of the Pragati Foundation an NGO

working in Theni district in Tamil Nadu. The Pragati Foundation is involved in
implementing an agriculture development programme to improve the
livelihoods of the farmers for the past five years. Mr. Viswanath had visited a
few NGOs which are implementing the microfinance programme in their
areas. These NGOs are of the opinion that it is a very good programme and
has the potential to benefit the poor people. The farmers with whom the
Pragati Foundation is working had also indicated that lack of credit was one
of the problems they were facing. In the last Board Meeting of the Pragati
Foundation held in June 2002, the members had suggested to Mr. Viswanath,
to explore the feasibility of initiating a microfinance programme in their
working area. Since the Pragati Foundation is implementing only agriculture
development programme which has got stabilized to some extent, it was time
to think of new programmes for the people.
Prakash and Siva are two fresh agriculture graduates who have recently
joined the Pragati Foundation. Mr. Viswanath decided to assign them the
task of doing an exploratory study of the savings and credit system in a
village in which the Pragati Foundation operated. Prakash, Siva and
Kalaiselvi, another young staff member in the Foundation, took up this task
under the guidance of Sumathi, a senior staff. They decided to take up the
Valayapatti village for their study. The following is an account of what
happened over the next few days.
Siva: Lets go to Boothipuram. Valayapatti is just 3-4 kms from there. Lets
find some means of transport to reach there.
The three boarded the rickety corporation bus. The bus with its groaning and
creaking noise rattled along the pot-holed road and left them at Boothipuram.
1
. Case prepared by Ms. B. Raghini, DHAN Foundation, Madurai, under the aegis of the
`Workshop on Developing Cases and Training Material in Microfinance, sponsored by
SIDBI Foundation for Micro Credit, Lucknow.
7
Prakash: Is there any auto or vehicle that can take us to Valayapatti village?.
Even if any tractor or goods van go at this time, we can ask for a ride.
Villager: Theres none. You have to either wait for the next bus or walk.
Siva: What? Walk down?. The four kilometres will take an hour or so.
Villager: It isnt four kilometres. It is a little over a kilometre only. Just go

down this road (pointing to a path) and you will reach there.
On the path that had once upon a time been a tar road they went walking.
There were hills on the three sides only a few kilometres from the road. A lot
of dry lands with just a few pockets of greenery around the wells met their
eyes.
Siva: Thank god its not as hot as it was yesterday. It would have been very
difficult to walk otherwise. I saw the PRA map done two years ago by the
Foundation. The village had around 250 houses.
Kalai: Seems like we have reached the village. It looks quite big. That place
looks like a veterinary hospital.
After some small talk with the villagers, they introduced themselves as
students interested in learning about the village. They got a few villagers
interested in drawing the village map. Rajan, one of the villagers, started to
draw the map. Soon the villagers started arguing among themselves about
the number of houses, whose house etc. Finally Siva, Prakash and Kalai left
the place with 2-3 villagers to draw different parts of the village as part of PRA
exercise. They planned to create the entire village map by joining the different
parts. Along with the map, the small teams also gave serial numbers to the
houses and noted down the names of the couple living in the house. They
found it hilarious writing down the names against the serial numbers. As
almost all the persons had some nickname or the other, the villagers tried
hard to recollect the original names but met with only partial success.
On their way back to the town Siva, Prakash and Kalai shared their learnings.
8
Siva: Here agriculture is the main source of livelihood. About 90 percent of

the people own some land, of which only about 10 percent have wet lands.
The remaining are landless. Those with well grow paddy in a small portion of
the land for their own consumption. The major area is then used for raising
sugarcane. Depending on the availability of water, they grow different
vegetables round the year to get some additional income. If the monsoon is
good, others can raise sorghum, ragi or groundnut in their dry lands. Only
during the crop period some agricultural labour work is available.
Prakash: Many of them go as labourers for sugarcane cutting in this area.

The women are paid Rs.25-40 wage per day, while the men are paid Rs. 70-
100 per day. For the other agricultural activities, the wages paid are less by
Rs.10-20 as the time of work is less and the work is also not as tedious as in
the case of sugarcane cutting.
Kalai: There is a labour contract system called Kothu here. Under Kothu
there is a leader who has under his fold about 20-25 labourers who would
come for work when called. The leaders negotiate for getting the work and
disburse the wages to the labourers with a small fee for themselves. There
are 5 or 6 such kothu groups in this village.
Siva: Did you notice? There are many milch animals in this village.
Prakash: That explains the fodder grass grown in small pockets here and
there.
In the evening after the dinner they sat in the office for consolidating the map.
Siva: Take a look at my list. There are 87 households. How many in yours?
Kalai: Nearly 106. I think either a few households are left out or repeated
twice. I need to check that. In Prakash's list there are around 150 households.
The next day they decided to spend some time in studying about the savings
and credit system in the village. They had made quite a few friends from
among the villagers while doing the village map. They decided to gather
information regarding the occupation of different households, loans taken
9
from outside, terms and conditions of the loans, purposes for which loans are
taken and the present status of savings sources used by them.
The three went to different parts of the village and asked for the information.
Some of the households declined to give answers, some gave vague
answers, some of them answered after some probing and light hearted banter
and some explained freely. This exercise took them almost the whole day.
They reached back to the office fully tired but were happy that some work had
been completed. They sat down and consolidated the information available
with them. A number of households had to be deleted as the information
obtained was either not clear or inconsistent. Out of 343 households in the
village, they had collected information from 209 households. Of the 209
households surveyed, 56 households were without any loans. Siva was the
one with an interest in computers. He got the data entered and brought out
the following table about the borrower households.
10
Table 1: Loans availed by occupation category at different interest rates

(Amount in Rs.)
<3% 3% 5% 10% Total
Occupation
No. Amount No Amount No. Amount No. Amount No. Amount
Agricultural Labourers 4 2,30,100 5 68,000 53 5,04,000 116 14,62,000 178 22,64,100
Labourers - - - 6 1,35,000 6 70,0000 12 2,05,000
Farmers 7 7,85,000 6 1,91,000 2 19,000 11 2,55,000 26 12,50,000
Mill labourers - - - - 1 1,000 3 15,020 4 16,020
Others - - 1 20,000 1 6,500 3 20,000 5 46,500
Total 11 10,15,100 12 2,79,000 63 6,65,500 139 24,22,020 225 37,74,620
Note: The rate of interest charged is per month.
11
Sumathi: The three of you have been immersed in your work. Its half an hour
since I came into the room. None of you noticed me. How was your field visit?
Siva: We have done a village mapping exercise and a quick survey of loans
borrowed from various sources in the village. These are the consolidated figures.
We have to go and do some detailed case studies to understand how the credit
system operates in the village.
Prakash: Have a look at the map. This village is located at the end. There are no
other villages nearby. You have to cross this river and go for two kilometres to
reach the village. But during the rains it is not possible to cross the river. The
other two sides are hills.
Sumathi: What are the main sources of livelihood?
Kalai: Agriculture labour, agriculture, dairying, carpentry and mill work are the
major occupations. You said that there are only 250 families from your earlier
PRA exercise. But according to the PRA done by us, there are 343 households.
Perhaps we may have missed some households.
Sumathi: Thats interesting. We need to find out why it is so. Also it is such an
interior village and dairying is an important activity. Lets take a look at it.
On the third day all four of them went to the village. Since they had become
familiar faces several villagers greeted them on their way. They sat down with a
few women who were waiting near the water tank.
Sumathi: Why is it that not many youngsters, both male and female, are to be
seen moving around in the village?
Village Woman: Most of them are working in the nearby spices company or in
the cotton mill. They do not remain idle. They find some work either here or in
Theni, the district town. Some accompany their fathers who work as carpenters.
Some are working as apprentices to tailors in Theni. That is why you do not find
them loitering around here at this time of the day. They earn about Rs.800-1600
depending on their age and experience.
12
Prakash: Hows that within three years the number of households in your village
has increased from the 250 to 343?
Village Woman: It is due to setting up of new houses by the sons who are
moving out after the marriage. A few of the girls who are married have returned
to the village with their husbands due to lack of opportunities in their places. Also
the relatives of the few villagers have come and settled here. This is the (pointing
to the map) new settlement area.
Siva: What are the other occupations followed by the people here?
Village Woman: Earlier in addition to the agriculture, a majority of the people

here earned their livelihood by cutting and selling firewood from the nearby
forests. But there are no trees now in the forests. The Forest Department does
not allow us even to pick twigs for cooking. We are also not allowed to graze our
animals though we were getting permission earlier. In the last 15-20 years,
dairying has become another major occupation of the people. A few people go
for 8-10 kilometres to collect firewood and sell them for their livelihood.
Siva: What is it that lady carrying on her head?
Village Woman: It is a creeper plant found in the nearby Bodi area. When there
is no work the women go and cut it and bring it here. After a process of soaking,
drying and cutting it is made into brooms. The brooms are sold to the agents who
come here for collection.
Siva: How much would they get for a load this woman is carrying?
Village Woman: Oh, from that load she will make about 10 brooms and each will
fetch six rupees. She will not process this bundle alone. After collecting 3-4
bundles only she will process. Also the sale is possible only when the agent
comes.
Siva: How many women are involved in this activity?
13
Village Woman: May be around 10-15 women. Usually they are the ones who
cannot do strenuous work in the field. Some women are also involved in making
brooms from the palm trees found in the nearby area.
Sumathi: Tell me something more about your village?
Village Woman: Presently, the sixth generation is living here. More than 175
years ago, six families from four villages came and settled down in this village.
Those who are living here are the descendants of these families. The six families
belonged to the Valayar community. Nearly 80 percent of the people belong to
this community. There are about 50 Scheduled Caste families living here. They
are mostly Christians. There are two churches and seven Hindu temples each
worshipped by the respective clans.
Oh, Murugeswari why don't you come here? You have milch animals.
This girl here is interested to talk with you.
Kalai: How long are you doing this activity?
Murugeswari: I am doing it for the last 10-12 years. During

M.G.Ramachandran's (the ex-chief minister) period, they gave loans to some of
us for buffalo. The village Panchayat President helped us to get it. I got a buffalo
for Rs. 2,400. A milk cooperative was formed for procuring the milk. Due to poor
management, slowly all the members left the cooperative and started supplying
the milk to Chinnakalai who started a private dairy farm. The co-operative dairy
has closed down since the last two years.
Kalai: How much do you get paid for a litre of milk?
Murugeswari: Seven rupees per litre.
Kalai: What, just seven rupees? In Kodangipatti they are getting nine rupees per
litre. Why don't you sell it over there?
Murugeswari: I have been very loyal to Chinnakalai so far. How can I change
just like that? Besides I do not have anyone to take the milk there.
14
Kalai: Don't you think you are being exploited?
Murugeswari: What exploitation?. Now I have only one animal, 10 years ago I
had 7-8 animals. Even at that time I supplied milk to him. My three daughters
were young and were going to school.
Kalai: What happened to all the animals?
Murugeswari: I sold two animals and got my elder daughter married. After 2-3
years, I again sold 2-3 animals and got my second daughter married.
Kalai: Was that money alone enough?
Murugeswari: I used to borrow money from Chinnakalai whenever the need

arose, be it small or big amount. The loan repayment would be adjusted in the
milk payment.
Kalai: What about the interest?
Murugeswari: The interest also in a way adjusted in the milk rate and payments.
See, here Rs. 7 is paid against Rs. 9 outside. When he started the dairy many
years ago, he had no land and house. But today he has got 10 acres of land with
a well, a big house and all the facilities. Tears of blood will come if I narrate the
hardships I took to rear those animals and supply the milk.
When my children were very young, I had to do the entire household work and go
to the fields to cut grass for the animals. There were days when I went very early
in the morning to get grass. After coming back I did the household work, took
care of the animals and sent the children to school. Sometimes I went three
times in a day to the field for getting grass.
Today I have no wealth after having laboured so hard these many years.
Kalai: What is the use of having worked so hard?
Murugeswari: Nothing. The only consolation is that I got my daughters married.
Kalai: Is it only marketing and credit support you get from Chinnakalai?
15
Murugeswari: Someone who is interested to rear animals can pay Rs.4000-

5000. Chinnakalai will pay the remaining and get you the animal. The loan will be
adjusted against the milk supplied. The payment for milk supply is made once in
a month after making deductions for loans. Some flexibility is shown in making
monthly loan deductions. Like, if I am expecting a big expenditure this month, I
will ask him to deduct only a small amount from the milk payment and give the
balance. There are nearly fifty of us supplying milk to him. Many of them have
purchased their animals in this manner only.
Kalai: Is your animal insured?
Murugeswari: No. When I had more animals I had them insured. Chinnakalai
used to do it for all of us. But now he has declined saying that whoever is
interested can get it done on their own. He says, Why should I pay the insurance
premium in lump sum in the beginning of the year for you, when the milk
payments will come in a trickle over the year?
It is time for me to go and take care of the animal.
Lakshmi: This woman's husband died long ago. She has single handedly
managed the family and got her daughters settled. Just like Chinnakalai,
Veluswamy is also doing this dairy business for quite a long time.
Kalai: Does that veterinary hospital in the village function?
Lakshmi: Yes it does. The doctor here is responsible for three villages. He
comes twice a week early in the morning. He is here for a few hours and then
leaves.
While this interchange was going on Sumathi was interacting with a small group
of labourers who had just returned from work.
Sumathi: Are your returning from the sugarcane fields?
Villager: Yes. Probably this work will be there for another 15-20 days. The cane
is almost over. This year the mill may shut down for more than 2-3 months due to
less cane production.
16
Sumathi: After that what work will you do?
Villager: After that we have no work. The rains also seem not to be in favour of
us. Otherwise, we will have work in the dry fields. Some of us own small pieces
of dry land.
Sumathi: How will you meet your family expenditure during this period?
Villager: Somehow we manage by doing whatever work comes our way. There
is some income from our children who are working and we also borrow from our
neighbours or moneylenders. Sometimes to meet an emergency need we
mortgage our land and get loan from big farmers at low interest rate of 3-5
percent per month. The interest rate also depends upon our relationship with
the big farmer who is lending. Unfortunately a few were unable to repay the
money and after a period of time had to forfeit their land.
Sumathi: Are there no other opportunities available for you?
Villager: Some people go to Kerala to work in the tea and coffee estates. About
6-7 years ago 15 families have migrated and settled there permanently. Others
go and work when there is a peak demand. A few others go to the coffee and
cardamom plantations in Bodimettu and come back here during the lean season.
We have to find some way to get our daily food.
Sumathi: What about the education here?. Are the children encouraged to
study?
Villager: There is a primary school here up to fifth class. Earlier the teaching was
very poor. Now we have three excellent teachers who are doing a good job. Up
to fifth class every child goes to the school. Next, they have to go to
Boothipuram. Mostly they drop out after the eighth class. A few of them study up
to 12th class. We have only two graduates in this village. One of them is doing his
Ph.D and is working as a lecturer in a college.
17
Meanwhile Kalaiselvi and Siva were interacting with Palani, a sugarcane farmer
at his house.
Palani: I have 10 acres of land. For 2.5 acres, well irrigation is available in which
I cultivate sugarcane. My father got a loan for a tractor from the Union Bank of
India, Theni in 1984. All the land documents were in different names i.e. his
name and his father's name. He had to register all the documents in his name
and give the surety document as a single document. Also he was asked to make
a deposit of Rs. 30,000 in the bank.
The loan of Rs. 1,35,000 was obtained and a tractor was purchased. The deposit
of Rs.30,000 was also withdrawn. My uncle was using the tractor. For three
years he had paid only the interest. The bank asked for repayment of the
principal. Immediately, my father took over the tractor. Over the next 12 years he
paid Rs. 54,000 in addition to the Rs.18,000 paid earlier.
Soon he realized that the loan was growing. He sold a piece of 25 cents land for
Rs. 50,000 and paid it towards loan in 1998-99. In early 2001, the bank sent a
letter stating that the loan amount to be paid was Rs. 1,06,000. If the account is
fully closed he can get Rs. 50,000 discounted. He wished to use this opportunity
to get out of the debt. He sold his tractor for Rs. 63,000 and went to the bank. At
the bank he was told that the current due was Rs. 75,000. He then sold some
jewels to get the remaining amount. The account was settled in June 2002. He is
now awaiting the return of the documents.
Palani offered them tea and said at least in his well there is some water.
Chinnakalai who recently deepened his well is in a soup as the bore failed. He
had spent nearly Rs. 80,000 which was borrowed at 3 percent interest per
month from a moneylender.
Kalai went over to the Scheduled Caste (SC) Colony where the Asaris
(carpenters) lived.
Villager: More than 15 Asari families are living in this village. We go out for work
to Theni, Bodi, Kerala and other places. We go as a group if we get a contract.
Otherwise we go individually. On an average, in a month we get work for 15
18
days. I can earn about Rs.100 -150 per day depending upon the nature of the
work. If we can buy some wood and do the work the income will be increased
due to the margin we get in the sale of wood. But most of the time that never
happens.
Kalai: If you go to Kerala where do you stay there?
Villager: See, if I leave early morning by 6.00 am I can reach there by 8.00 am
Similarly in the evening, I reach here by 8.30 pm at the latest.
Kalai then did a detailed study of one of the carpenter families.
Arogyasamy (40 years) and Muthumani (32 years) live in Valayapatti.

Arogyasamy is a carpenter by profession. He has three sons. Two of them after
finishing schooling up to the 5th standard now work with him. The youngest one
is studying in the 5th class. The two older boys did not continue their education
due to lack of interest, insufficient financial means and their father needing an
extra pair of hands to support him in the work. They want to educate their
younger son at least up to 10th or 12th standard. Arogyasamy gets work on an
average for 10 -15 days in a month. The combined monthly earnings of the family
ranges from Rs.3,000 to Rs.4,500 depending on the availability of work, available
outside the village only. For meeting any emergency needs, they have to
depend on the local moneylenders.
Muthumani shared the situation in which her family is compelled to borrow

money. Four years ago, her father died at Kumbum. They borrowed Rs. 2,000 at
10 percent interest for the funeral. So far they have paid Rs. 3,000 as interest.
They still have Rs. 1,800 outstanding as interest with the principal amount of Rs.
2,000 remaining as such. Two years ago in order to meet their festival expenses
and interest dues she borrowed Rs. 3,000 from another moneylender. So far she
has paid Rs. 3,000 as interest and still has some interest and the entire principal
outstanding. Last month, to meet an emergency, she got a loan of Rs. 2,000 to
be repaid in daily instalment of Rs. 20 per day for hundred days. She has repaid
Rs.450 in the last 25 days. In between many times when the need for credit
arose they had borrowed at an interest rate of Rs.10 per week for every Rs.100
19
borrowed. We earn, pay the interest, eat and sleep. We cannot dream of coming
out of this circle of debt and interest. We toil hard each day just to pay the
interest. This is the way our life goes on, said Muthumani.
After these discussions in the village the four of them left to the office. Siva and
Prakash decided to go to Bodi and talk to the Canara Bank Manager about this
village and his experience.
Siva: How come Valayapatti falls in your service area in spite of the fact that it is
18 kilometres away from here?
Manager: It is a long story. When the government introduced various

programmes for the poor, the bank mangers at Theni had issued loans. But the
repayment was very poor. Only a few people cleared the loans and that too after
a very long time. When the service area concept was introduced, all the nine
bank branches in Theni declined to cover Valayapatti and few other neighbouring
villages under their fold. They felt that the people there are not fit for banking.
Since we are the Lead Bank for this district we had to take it under our fold.
Prakash: What is your experience with this village?
Manager: We have issued various loans in these villages. But the repayment
performance is poor except for a few farmers. The loans issued under PMRY, a
self-employment programme, are in a bad state.
Thanking the manager the two returned to Theni. On their way back they met
Palani again. Seeing them he stopped.
Palani: Is your enquiry in the village over?. Are you going to give us any loan? If
so, give me a loan. I am on my way to Kodangipatty to meet a farmer to pledge
these jewels. I need urgently a loan of Rs.5,000.
Siva: We are doing only a study. How much interest will he charge you?
Palani: He will charge me 3 percent per month. Since I regularly borrow from him
he will just take these jewels and give me a loan. No hassles here. Any time I go,
I get the loan. Even if I am late in repaying, it is not a big issue. In the bank, I can
20
get a loan at a lesser rate. But every time there is a formality. They will verify if
the jewel is actually gold or not and will send me a notice at the end of the year
for auction if I do not pay the loan.
Siva: Can you not get it within your village itself?
Palani: Yes, it is possible. But I do not like some of those fellows. I prefer to
come here. Most of the villagers usually get loan from within the village. Quite a
few farmers and others who have a little surplus lend money. My bus has come.
Will you come again to our village?
Kalai met the Union Bank Manager at Theni. He explained that after the service
area was demarcated there have been no transactions with the village except for
a few big farmers who come regularly and some who borrow jewel loans.
At night the four of them sat down discussing the events of the past four days.
Prakash: I tried to gather some information regarding the social aspects of the
village. Here, it appears, they are very much united. When there is a threat to the
village in any form they organize the villagers to do patrolling and guard the
village. If any person from the village is accused of any crime, they hand over the
person to the police, if it is true. Otherwise, they help the person to escape.
Similarly, most of the conflicts in the village are resolved by bringing them to the
notice of the family which has been traditionally handling conflicts. They have
faith in the judgment and accept it. Many a times it is resolved among themselves
as they are mostly related to each other.
Similarly, there is practice of collecting a tax on all items that go out of the village
for sales. The right to collect tax is given to a person through auction in the
village. The tax is added to the village fund. Whenever there is a death in the
village, a contribution of Rs. 2 per family is collected towards the funeral
expenses. One can voluntarily contribute more than Rs.2 in case of death in a
poor household.
Sumathi: What about the marriage systems and other things?
21
Prakash: Here the family is a nuclear one. The old people live alone even after
the death of one of the spouses although the children are living nearby. There
are 25 such women living by themselves. The reasons seem to be either due to
the incompatibility between the women and their daughters-in-law or the sons not
interested in taking care of them.
Dowry is not a major issue here. Many of them go for second and third marriage.
After the marriage, the couple register a bond in which the details of separation
and the monetary implications are mentioned with the elderly as witnesses.
There are a very few arranged marriages and also marriages without a bond.
Siva: I did not have the idea to look at these kind of things.
Prakash: Thats not all. I came to know that nearly 20-25 percent of the men
here are habitual drinkers. They drink either at the nearby town or buy from the
lady who sells liquor at the village corner in the evening. Also, the desire to get
rich quick is making at least 20 percent of the men to spend on lottery and the
like. Playing cards for money is another favourite pastime amongst a section of
the men.
Kalai: I discussed with them regarding the village festivals. Here each community
celebrate their temple festival on their own. However, all the villagers celebrate
the Karuppasamy temple festival in a grand manner for two days during March-
April. Similarly in September-October they celebrate another festival by offering a
goat sacrifice while praying for rain. The expenses for both these festivals are
met through funds raised from the village. Another festival celebrated is the
temple festival at Veerapandi which is about 20 kilometres from here. All the
people in the village celebrate Christmas.
Sumathi: All these details are fine. Did anyone of you get information about the
savings systems here?
Kalai: Savings with banks and post office are not prevalent except by a few rich
who keep their surplus money temporarily. They have lost money in local chits
which are the informal savings and credit associations. Recently, ten people lost
their money up to Rs.20,000 to a person. The person claimed that that he was
22
working in an enterprise from where household items such as cots, cupboards,

grinder etc., can be purchased. The goods would be delivered after they have
paid 30 percent of the cost in instalments. When he did not turn up for a few days
they enquired at the shop. They realized that they were duped as the shop had
no such person employed with them.
Similarly, six months ago a person came to the village in a car with a map and
survey tape. He informed them that he had been given the contract for
construction of free houses for the poor and that he was supposed to start the
work on the basement of the proposed houses. The individuals would have to
give him Rs. 5000-10,000 per house based on the size. This way he
accumulated more than one lakh rupees by fooling the people.
The four of them shared their experiences with Mr. Vishwanath. He was
supposed to present before the Board some thing concrete about the
microfinance programme. He asked them to do a detailed analysis of the data
and address the following questions:
1. What are the major characteristics of the village?
2. What are the various informal sources of savings and credit available in the
village to different categories of households?
3. How is the formal banking system functioning in the village?
4. List out the advantages and disadvantages of the both formal and informal
sources of savings and credit?
5. Is there a need for microfinance intervention in the village?
6. What is the target group they should reach out in case there is a need for a
microfinance initiative? What kind of features should it have in order to attract
the people? What kind of financial products could be offered to the people?
7. In what way the various livelihood options available to people and the social
factors in the village have a role to play in the design and implementation of
the microfinance programme?
23
CREATING LINKAGES AND
INSTITUTIONS
SHG-BANK LINKAGE:
A CASE OF ANARDE FOUNDATION 1
The SHG-Bank Linkage Programme
The Self-Help Group (SHG)-Bank Linkage Programme has emerged as a major

approach for the promotion and development of micro-finance sector in India.
Started by National Bank for Agriculture and Rural Development (NABARD) in
1992 as a pilot experiment, it has undergone changes from the pilot phase to
the scaling up phase. The Linkage Programme is based on the simple
preposition that the Non-Government Organisations (NGOs) or banks motivate
the poor to form the groups for mobilising savings and to link them with the
banks for credit support to start income generating activities. There are three
models in the Linkage Programme: i) Banks directly promote the SHGs and
provide credit to them, ii) NGOs promote SHGs and link them with the banks
for credit support, and iii) NGOs promote SHGs and act as intermediaries for
on-lending to the SHGs by taking bulk-lending from financial institutions.
SHG-Bank Linkage Programme of ANARDE Foundation
The ACIL-Navsarjan Rural Development Foundation, Mumbai (ANARDE

Foundation) is one of the leading Self Help Promoting Institutions (SHPI) in India.
The ANARDE Foundation has taken up group linkage in North Gujarat since
1997 with the support of NABARD. The ANARDE Foundation was
established in 1979 under the Bombay Public Trust Act of 1950. It was
established for the purpose of promoting integrated rural development with
financial support provided by Aegis Chemical Industries Ltd. The ANARDE
Foundation has identified a set of programmes as their priorities based
on weightages given in terms of percentage. The weightages given to
different programmes are: economic development programmes - 60%, health
1
. Case prepared by Dr. Naresh Singh, Narsee Monjee Institute of Management Studies, Mumbai
under the aegis of the `Workshop on Developing Cases and Training Material in Microfinance
sponsored by SIDBI Foundation for Micro Credit, Lucknow.
24
programmes-10%, educational programmes- 10%, environmental programmes-

10%, and social development programmes- 10%. The objectives ofthe ANARDE
Foundation are: i) inculcation of self-help among the rural people, ii) provide
management inputs in the use of natural resources, iii) coordination of the
programmes through grassroots level management team, and iv) create
involvement of beneficiaries to ensure effective participation.
The SHG-Bank Linkage Programme in North Gujarat has been implemented by

the North Gujarat Zone branch of the ANARDE Foundation. The North Gujarat
Zone branch operates and coordinates activities in the seven districts of Gujarat,
namely, Sabarkantha, Banaskantha, Panchmahal, Kheda, Mehsana,
Ahmedabad and Gandhinagar. The districts in the Zone are further desegregated
into 61 talukas encompassing 3000 villages. The Zonal headquarter is located at
Himatnagar in the Sabarkantha district.
The Zonal Co-ordinator, Mr. S.S. Patel, who holds a management post graduate
degree and having work experience in the development sector, realised the need
for streamlining the credit delivery system in the rural areas. His first job was to
ensure intensified flow of credit for economic growth of the rural people and
reduce their dependence on the informal sources of credit. In the initial stages,
he convinced the donors based locally and in Mumbai to allocate funds for
promoting SHGs. In the year 1996-97, NABARD granted a sum of Rs. 5 lakh to
ANARDE Foundation for promoting SHGs. With this support, the ANARDE
Foundation promoted 150 SHGs in the area. NABARD provided a further grant of
Rs. 23 lakh to the ANARDE Foundation during the year 1997-98. By 2000, in all,
ANARDE Foundation promoted 3,216 SHGs in the seven districts of North
Gujarat (see Exhibit 1).
The ANARDE Foundation believes that there are three stakeholders in the SHG-
Bank Linkage Programme. They are: i) primary stakeholders i.e. the rural poor
and the women, ii) secondary stakeholders i.e., the ANARDE Foundation
consisting of project staff, volunteers and other networking NGOs, and iii) tertiary
25
stakeholders i.e., the funding agencies, financial institutions and government

agencies. The ANARDE Foundation further believes that an effective Linkage
Programme can be evolved only in the presence of a fruitful association between
the various stakeholders.
The ANARDE Foundation works in four stages for the implementation of the
Linkage Programme. These stages are, forming, storming, norming and
performing. At the forming stage, the field workers of the ANARDE Foundation
concentrate on selling the idea of SHG to the people. Initially it takes a
considerable amount of time to motivate the people. But subsequently the time
required for forming SHGs decreases in the presence of proven information
about the functioning groups. In the norming stage the basic rules for the smooth
operation of the groups are laid down. In the performing stage, groups are left
on their own to hone up their skills of self-help. The grassroot level workers of
the ANARDE Foundation remain in constant touch with the SHGs to ensure the
smooth working of the SHGs.
Working of SHGs
The members of the groups are not eligible for loans for the first six months.
They keep saving and do not borrow. Each SHG has a President and a
Secretary. The SHGs hold meetings at predefined intervals and the President
records the minutes of the meetings. Every member saves per month at least
Rs. 20. The monthly savings per member across groups varies from Rs. 20 to
Rs. 60. But the saving amount is common for all the members in a group. Each
SHG creates a common fund, which is built up from the fee and the members
contribution by way of regular savings. The interest accrued on internal lending,
fines collected from members are also added to the common fund. After saving
for six months, the group starts internal lending. The common fund becomes a
revolving fund from which the loans are advanced for consumption and
emergency requirements. A box is maintained called dibba to pool the common
fund.
26
All the terms and conditions are documented in the byelaws of the SHGs. The
different books to be maintained by the SHGs are: admissions register,
attendance register, resolution register, visitors book, meetings register, receipt
book, voucher book and loan register. A record of the monthly savings and
receipts is maintained. Irregular attendance of meetings, irregular saving and
irregular repayment of loan, each entails a fine of Rs. 5/-. The fines, interest,
donations are all equally distributed among the members of the group once in a
year.
After completing one year of operations, a group is linked to a bank for

borrowing purpose. The bank linkage is the most vital part of the credit
intensification mechanism. The bank linkage helps a SHG to avail loans after
saving regularly for a minimum of six months. The ANARDE Foundations
approach comes under the second model of linkage of NABARD mentioned
above. After linking of a SHG by the NGO, the bank provides credit directly to
the group. The group in turn would undertake lending to its members on terms
agreed upon mutually by the members as per the byelaws. The quantum of
credit given to a group is in proportion to the savings mobilized by the group.
The savings-credit ratio varies from 1:1 to 1:4 depending upon the assessment
of the capabilities of a SHG by the bank. The rate of interest on the bank loan
to the SHG is 12 percent per annum. The SHGs are, however, free to decide on
the rate of interest to be charged on the loans given to their members. The
SHGs normally charge between 24 to 36 percent per annum. The repayment
period from members to the SHG is one year; while the bank lends to the SHGs
for 3 to 5 years. The SHGs are following one year repayment period for the
members with the purpose of using a single bank loan to lend to a large number
of members.
The Strategy of ANARDE Foundation
As evident from the Exhibits given at the end, the ANARDE Foundation
undertook the SHG-Bank Linkage Programme in a big way in North-Gujarat
27
The North-Gujarat Zone is headed by a Zonal Co-ordinator. At the district level

there are District Co-ordinators in each district who directly report to the Zonal
Co-ordinator. At the taluka level there are Taluka Co-ordinators in each taluka
who report to the District Co-ordinator. Below the Taluka Co-ordinators, there
are Supervisors who implement the projects at village level. Each Supervisor
overseas the work of a cluster comprising 5 to 10 villages.
Before launching the project of SHG-Bank Linkage, the ANARDE Foundation

provided training to its District and Taluka Co-ordinators on Microcredit Delivery
System at Entrepreneurship Development Institute of India (EDI), Ahmedabad.
Subsequently, the District and Taluka Co-ordinators developed the teaching
material in Gujarati language to train in turn the Supervisors. They also designed
credit records and other information systems for the SHGs in Gujarati language.
The Supervisors started implementing the SHG-Bank Linkage Programme. To
provide mouth-to-mouth publicity to the project and to develop confidence
among the people about the SHGs, the ANARDE Foundation organized
exposure visits of the potential SHG members to other villages where SHGs
are working. The Supervisors also provided training to the SHG leaders.
Mr. S. S. Patel realised that to speed up the Linkage Programme it is beneficial

to involve the leading banks in the region as they can easily understand the
socio-economic needs of local people. The ANARDE Foundation started
motivating officials of the Bank of Baroda, a major bank in several districts of
North Gujarat, by organizing a series of two-day orientation programmes on the
SHG-Bank Linkage Programme. The staff members of the ANARDE Foundation
because of their good relations with the people in villages also started helping
the bank officials in the recovery of delayed loans of the banks. These two
initiatives, brought the ANARDE Foundation and the Bank of Baroda closer to
each other. The Bank of Baroda showed considerable interest in the SHG-Bank
Linkage Programme of the ANARDE Foundation. Besides organising orientation
programmes for the leaders of the SHGs and the bank officials, ANARDE
28
Foundation also organised a series of one-day interface workshops of bankers

and members of the SHGs to bring mutual confidence and trust between them.
In all from 1995 to March 2000, the ANARDE Foundation formed 3,216 SHGs in
seven districts of North Gujarat. The total membership of these SHGs is 39,649,
On an average there are 12 members per SHG. The SHGs accounted for a
cumulative savings of Rs. 26.06 million with the average savings per group and
per member, respectively, being Rs. 8,104 and Rs. 657. Out of the 3,216 SHGs,
2,167 SHGs (67.4 percent) are linked with the banks for credit support. About
22.3 percent of the members (8,843) have borrowed bank loan from their SHGs.
A total loan amount of Rs. 26.03 million has been disbursed to these 2,167
SHGs by the banks during the above period. The average loan amount per
SHG and per member, respectively, comes to Rs. 12,011 and Rs. 2,943.
Along with establishing the linkage, the ANARDE Foundation conducted a

series of Rural Entrepreneurship Development Programmes (REDP) for the
selected SHGs so that members of the SHGs can start their micro-enterprise
activities. These REDPs were conducted in collaboration with EDI, Ahmedabad
and were supported by Khadi and Village Industries Commission (KVIC),
NABARD and Small Industries Development Bank of India (SIDBI). Later on, the
ANARDE Foundation started conducting REDPs independently with the support
of NABARD as it was having a cadre of REDP Trainers trained at EDI.
The ANARDE Foundation is now not implementing the SHG-Bank Linkage

Programme in North Gujarat. The Programme was closed, once the duration of
the NABARD supported grant was over. There are no records available either on
the recovery of the loans from the SHGs or on the impact of the Programme in
helping the poor to improve their economic conditions. The association with the
Bank of Baroda also seems to be not working as cases of default or poor
recovery have surfaced.
29
The ANARDE Foundation did not make any plan for sustainability and for
withdrawal before closing the project in North Gujarat.
Response from the Banks and NABARD
The SHG-Bank Linkage Programme had offered a great opportunity for a closer
interaction between the banks and group members. In most of the cases, the
branch managers were visiting the groups before initiating the linkage process.
The bankers had relied mainly on the strength and reputation of the ANARDE
Foundation in extending their services to the SHGs. The bankers were happy
with the performance of the grassroot level workers of the ANARDE Foundation.
But this relationship could not be continued as there was no clear plan for
sustainability and withdrawl from the project once the grant was over.
NABARD is concerned about the sustainability of the Programme implemented

by the ANARDE Foundation as the experience in other parts of India has shown
that SHGs may disintegrate after the withdrawal of NGO. According to NABARD
officials, the ANARDE Foundation should emphasis on the sustainability of the
SHGs by imparting training to the group members. The ANARDE Foundation
should think about a gradual withdrawal by forming alternative arrangements for
backup support to the SHGs. Otherwise the whole concept of the SHG may get
diluted. The other suggestion by NABARD is that the ANARDE Foundation
should avoid geographical expansion in diverse areas. As the strategies of
success are not generic, the expansion may dilute the resources the ANARDE
Foundation currently possesses.
The ANARDE Foundation is implementing the SHG-Bank Linkage Programme in

13 states covering 49 districts with the financial support from apex agencies like
NABARD, Rastriya Mahila Kosh (RMK), SIDBI and Swa-Shakti Project. The
states covered are Gujarat, Madhya Pradesh, Maharashtra, Tamilnadu, Andhra
Pradesh, Haryana, Himachal Pradesh, Rajasthan, Uttara Pradesh, Bihar, West
Bengal, Orissa and Jharkhand. It has also taken a bulk loan of Rs. 10 million
30
from SIDBI for on lending to the SHGs. As per the records of the ANARDE
Foundation as of March 2002 they have formed 13,170 SHGs with a total
membership of 1,95,955. These SHGs have mobilized a total savings of Rs.
149.61 million. These figures also include the SHGs that are formed by the
network of NGOs supported by the ANARDE Foundation in different states.
Exhibit 1: Progress of SHGs of ANARDE Foundation (1994-2000)
Sr. District / Year 1994- 1995- 1996- 1997- 1998- 1999- Total
No. 1995 1996 1997 1998 1999 2000
1. Sabarkantha - 22 141 286 98 55 602
2. Banaskantha 1 13 52 271 170 163 670
3. Mehsana - 18 48 213 253 105 637
4. Kheda 1 15 63 168 70 45 362
5. Ahmedabad - - 23 134 106 55 318
6. Panchmahal - 10 95 242 155 117 619
7. Gandhinagar - - 4 4 - - 8
Total 2 78 426 1318 852 540 3216
Exhibit 2: Membership and Savings Details of SHGs of ANARDE Foundation

(2000)
Sr. District / Year Total no. Total Cumulative Average Average saving Average
No. of SHGs Members Savings Member per per member Savings per
(Rs.) SHG (Rs.) group (Rs.)
1. Sabarkantha 602 7223 4671404 12 647 7760
2. Banaskantha 670 7840 4504821 12 575 6724
3. Mehsana 637 7796 5287650 12 678 8301
4. Kheda 362 5242 3522142 14 672 9730
5. Ahmedabad 318 4289 2649437 13 618 8332
6. Panchmahal 619 7121 5266699 12 740 8508
7. Gandhinagar 8 138 161833 17 1173 20229
Total 3216 39649 26063986 12 657 8104
31
Exhibit 3 : Bank Linkage Details of SHGs
Sr. District / Year Total Total SHGs Total Cumulative Average Average
No. no. of Members linked members Loan Amount loan Amt loan Amt
SHGs with with bank (Rs.) per group per
banks loans (Rs.) member
(Rs.)
1. Sabarkantha 602 7223 430 1715 3548100 8251 2069
2. Banaskantha 670 7840 435 1387 4989100 11469 3597
3. Mehsana 637 7796 382 965 5123280 13412 5309
4. Kheda 362 5242 271 1062 3619500 13356 3408
5. Ahmedabad 318 4289 242 1000 2714600 11217 2715
6. Panchmahal 619 7121 401 2694 5974000 14898 2217
7. Gandhinagar 8 138 6 20 60000 10000 3000
Total 3216 39649 2167 8843 26028580 12011 2943
32
THE NANDIPET SHG FEDERATION 1
GRAM
Gram Abhyudaya Mandali (GRAM) is a non-profit rural development

organization registered under the Andhra Pradesh Public Societies Act. GRAM
which is working since 1980 has been focussing on resolving the issues
affecting the Dalit community. It is currently operating in fifteen mandals (an
administrative unit comprising of 20-30 villages) in Nizamabad district and four
in Adilabad district in Andhra Pradesh.
GRAMs initial approach was to organise its target groups into informal village
level institutions called sanghas to resolve common socio-economic problems.
However, as it moved into agricultural initiatives, the approach seemed to shift in
the direction of service delivery and facilitation. Since the beginning of 1990s,
GRAM has moved strongly in the direction of forming Self-Help Groups (SHGs)
to promote savings and credit and federate them as larger institutions at mandal
and district levels. The federation, in turn, would provide a platform to its target
group for articulating their needs and creating an armour for shielding them from
offensive practices of dominant socio-economic groups.
GRAM entered the Nandipet mandal in 1994 and started promoting sanghas.
After several rounds of discussions with the women in the villages, it took about
four months to form the sanghas. Initially the sanghas have taken help from
GRAMs staff for record keeping and to conduct meetings. GRAM facilitated
each sangha to open its bank account with a sangha representative and a
GRAMs staff as joint signatories. After one year GRAM provided Rs 5,000 as
revolving fund to these sanghas to increase their resources. The sanghas
appointed GRAM trained book-keepers by paying a small honorarium.
1
. Case prepared by Ms. S. Rama Lakshmi, Mahila Abhivrudhi Society, Andhra Pradesh
(APMAS), Hyderabad under the aegis of the `Workshop on Developing Cases and Training
Material in Microfinance, sponsored by SIDBI Foundation for Micro Credit, Lucknow.
33
Apex Body
After implementing its programme in ten villages, GRAM found it difficult to

expand further into new villages. To resolve the expansion problem and also to
promote the idea of forming an apex institution comprising all the sanghas,
GRAM organized meetings of the representatives from village sanghas. An
Apex body came to be formed for the purpose. The Apex body in turn formed a
sub-committee of 5 members to promote sanghas in new villages. The Apex
body also took up issues like untouchability and anti-arrack movement. After one
year, a cultural team was formed to mobilize more women with the help of
GRAM. GRAM gave Rs.100/- as incentive under the `Intideepam scheme for
those women who came forward to join the sanghas. The practice continued for
18 months and led to high expectations among the women. The members of the
Apex body were trained by GRAM on their roles and responsibilities. The
members of the Apex body decided to meet once in six months to discuss the
common issues facing the sanghas.
In 1997, in order to meet the norms stipulated by National Bank for Agricultural
and Rural Development (NABARD) for bank linkage, the village sanghas were
split into smaller SHGs with 10 to 20 members. All the SHGs in a village were
brought together under the sangha, which acted as an advisory body. The Apex
body at the mandal level continued to address the common socio-economic and
political issues. The Apex body along with GRAM also started gaining
credibility and reputation with the government departments and financial
institutions.
Creation of MACS
Meanwhile, GRAM started envisioning the promotion of sustainable and self-

reliant community based financial institutions. The purpose of such institutions
34
was both to provide financial services and to take up livelihood promotion and
community development activities.
Towards this, GRAM organized workshops for members of the Apex body and
village level SHGs. The idea was to form a federation having the legal status of
a Mutually Aided Co-operative Society (MACS) under the MACS Act. The
members of the Apex body were taken on exposure visits to similar institutions
functioning successfully in other places. The core staff of GRAM met several
times to get clarity on the concept of incorporation and for preparation of a model
byelaws for the co-operative.
The Apex body was formally registered on May 6, 2000 as the Nandipet
Intideepam Mutually Aided Co-operative Thrift and Credit Society Limited. The
Nandipet MACS was constituted and capitalised initially by taking SHG members
as shareholders. The membership in MACS is allowed only for individual
members of SHGs. MACS thus became a parallel membership-based structure
along with the existing SHGs.
The process of enrolling all the SHG members in MACS took two years. Initially
resistance for enrolment came from the old SHGs. They were not willing to part
with their funds to be deposited in MACS. GRAM staff and the board members
of MACS jointly conducted village level meetings with such SHGs to encourage
them to join MACS.
Governing Structure and Functions of MACS
The governing structure of MACS consists of a 32 member Representative

General Body (RGB) of 32 village sanghas, and an 11 member Board of
Directors (BoD) elected from the RGB (Diagram 1). One director is elected for
every cluster consisting of 3 or 4 villages. The BoD is elected once in three
years with one-third of the members rotated every year as per the byelaws.
35
The BoD meets once in a month and takes decisions on various matters
including loan appraisal and sanctioning. Each Director is responsible for
supervising a cluster. When problems like bad debt arise, they are brought to the
notice of the entire Board for discussion and appropriate action.
Table 1: Progress of SHGs
Year SHGs Members SHG borrowings from

banks during the year
No. of SHGs Amount
(Rs.)
1997 97 1541 1 15,000
1998 114 1763 12 2,20,000
1999 129 2002 17 4,10,000
2000 183 2809 94 16,15,000
2001 222 3291 106 25,74,000
2002 239 3491 128 28,25,000
The services of MACS include providing loans for both production and
consumption purposes, mobilising savings, disbursing relief under Death
Relief Assurance Scheme (DRAS) and providing training to the leaders of the
SHGs. The idea of DRAS was introduced after an exposure visit to a successful
MACS. The members have to save compulsorily Rs.30 per month with their
SHGs. The SHGs in turn will deposit annually Rs. 120 per member with MACS.
MACS pays 6 per cent interest on members savings. The members and the
SHGs are also depositing their excess cash with the MACS in their savings
account on which MACS pays 4 percent interest. MACS has recently introduced
voluntary savings scheme both for the members and the SHGs.
In the initial stages, the group members saved and lent out small amounts among
themselves. With a rise in their credit requirements, the SHGs started mobilising
loans from the financial institutions with the help of GRAM in the beginning and
then with MACS. MACS claims 2 percent margin from the SHGs as its service
fee for linking them to the banks. Previously, GRAM used to recommend such
36
Diagram 1: Structure and Governance of Nandipet MACS
Board of Directors
(One from each cluster)
MACS
Representative General Body
(One from each sangha)
I
N
D Vill. Vill.
S I Sangha Sangha
H V
A I
R D
E U
H A
O L Vill.
L L Sangha (One representative from each
D E
E N group)
R D
S I
N
G
SHG SHG SHG SHG
10-20 members 10-20 members 10-20 members 10-20 members
applications of the SHGs to the banks for loan. The rate of interest charged by
different banks to SHGs varies from 12 to 13 percent per annum. Nearly 87
percent of the SHGs are now linked to banks under the SHG-Bank Linkage
programme. 27 SHGs are linked to BASIX, a microfinance institution working in
AP.
MACS has started direct lending to those members whose loan applications
are recommended by the SHGs. The members of an SHG can get loans both
from their SHG and also directly from MACS. To meet direct loan demand of
members, MACS borrows from commercial banks and BASIX.
37
MACS has received a loan of Rs. 11 lakh from BASIX at 18 percent interest
per annum on which it has received 2 percent rebate for prompt repayment.
MACS also has got a loan of Rs. 5 lakh from the Indian Overseas Bank (IOB) at
10.5 percent per annum.
Table 2: Particulars of MACS (March 2002)
1 No. of Staff 7
2 Total Savings Rs.36, 91,950
3 No. of Groups Linked to Banks 209
4 Cumulative Bank Loan Rs. 77,69,000
5 No. of Groups Linked with BASIX 27
6 No. of Members Taken Loan from 1006
MACS
7 Total Loans Taken from MACS Rs.63, 39,000
MACS initially released loans to its members after they fulfilled the criteria of
minimum period of membership and credit worthiness based on their savings. A
member gets a loan at 1:8 ratio of her savings. In case of lending to members of
a new SHG, MACS keeps the particular SHG under scrutiny for 3 months to test
its creditworthiness and then starts lending out small loans. The second loan to a
member is sanctioned only after she clears the outstanding loan with MACS.
MACS lends directly to the members at 24 percent interest per annum. The
members repay their loans through their SHG. Out of the 24 percent interest
paid by members on their loans, the SHGs retain 3 percent with them and the
remaining 21 percent goes to MACS.
MACS adopts a stringent recovery method to keep default low.

In case a member is not able to repay her loan on time, it becomes the groups
responsibility to recover the loan and repay to MACS. Cumulatively, MACS has
been able to recover 99 percent of the loan amount due. The recovery rate of
the current loan amount due comes to 93.85 percent.
38
Challenges before MACS
The vision and objectives of MACS are widely shared by the Board and the staff.
The Board members are adequately aware of all the operational aspects of
MACS and have good exposure to microfinance. Their involvement during the
Board meetings is good. There is active participation during agenda setting and
decision-making. However, a major role in decision making is played by old
Board members and staff of GRAM, as one third get newly elected every year.
The Board of MACS is trying to evolve its operational strategy through a process
of experimentation. For ex. DRAS became a loss-making product due to
unexpected death of four members within a year. The members feel that there
was no clarity about the age requirement (18 to 55 years ) prescribed for
DRAS. Several aged members are now demanding that they also be covered
under the scheme.
GRAM has deputed a manager and field staff to MACS. The staff have also
been trained by GRAM in accounting system and record maintenance. GRAM is
of the view that MACS will succeed only when the staff become accountable to
MACS and its members. There were many challenges and difficulties during this
transformation. In the first year MACS found it difficult to manage book-keepers
for each SHG because of high expectation and exploitation. To resolve this
problem, GRAM with the approval of the Board of Directors of MACS selected
four candidates and appointed them as Community Based Workers (CBW) to
manage the SHGs,
Being currently dependent on GRAM for technical and financial support, MACS
would like to attain self-sufficiency. GRAM is bearing the salary of all the staff.
Only recently MACS started paying the salaries of two CBWs. Though during
2001-02, MACS has earned profit (see Exhibit 1), it is yet to achieve operational
self-sufficiency fully. MACS is unable to meet all its operational costs out of its
operational income. Including salaries and travel expenses of the staff which
are met by GRAM, MACS is able to cover only 77.7 percent of its operational
39
costs. The operations at MACS are not generating enough income to cover all
their costs.
MACS has attempted to test its business skills to generate some surplus income.
It has started a fair price shop and saris trading for the purpose. The Manager
of MACS looks after these two activities. However, the Manager has found it
difficult to allot full time to manage them along with the primary activities of
MACS.
MACS is trying to forge links with external agencies for availing various
benefits. Since MACS is emerging as a direct lender, the focus of the financial
institutions is getting diverted more towards MACS than SHGs to reduce their
transaction costs. The lending relationship of MACS remains only with the
individual members through SHGs which are able to access funds from various
sources. MACS provides training to the Board members about their role. But
training has to be provided frequently as one-third of the directors get elected
newly every year. There is high level of commitment and involvement by the
staff. The records are fairly well maintained and regularly updated though the
information flow between the SHGs and MACS is inadequate. MACS also
wants to emerge as a livelihood promoter and a facilitator for community
development though the SHGs perceive it as a financial intermediary.
Pursuing members to borrow for various income generating activities has been
a major challenge to MACS. MACS is trying to play only a passive role in
resolving any caste-based conflicts within the community.
The idea of promoting a district level federation of all the 14 MACS promoted by
GRAM has been mooted in the Board on which the SHGs are yet be taken into
confidence.
40
SHGs view points
There is a feeling among the SHGs that the formation of a federation like MACS
should take place only after two years of SHGs formation. GRAM management
feels that the formation of federation can be taken up when the SHGs are at
least one year old and have been given intensive training for capacity building.
The SHGs which were hither to mainly borrowing from the banks are now
looking towards MACS for the purpose. In a participatory assessment exercise
carried out, 12 SHGs gave highest rank to MACS as compared to other
institutions like the District Rural Development Agency (DRDA), banks, BASIX,
GRAM and the Scheduled Caste (SC) Corporation both on the basis of
importance they attach and the frequency with which they interact with these
institutions. Both the old and the new SHGs gave similar kind of ranking in the
exercise.
Questions for Discussion
1. What is the approach followed by GRAM in forming the federation?

2. What is the organisational and governance structure of the federation?
3. How is the Nandipet MACS performing as a federation?
4. Whether GRAM was right in promoting the SHG federation?
5. How to make the Federation self-reliant ?
41
Exhibit 1: MACs Income and Expenditure Statement for the

Year Ending 31.03.2002
EXPENDITURE AMOUNT INCOME AMOUNT

Registration/Administration/ 3,300.00 Membership fee 13,725.00
visiting fee
Stationery expenses 15,210.00 Documentation fee 14,675.00
Board of Directors TA/DA 43,271.00 Interest on Loans 328,211.00
Documentation/Bank charges 7,380.00 Interest on SB 4,713.00
Account
Meeting expenses 11,839.00 Contribution/ 5,850.00
Visitors fee
Office maintenance/ 20,778.00 SHG bank linkage 45,980.00
Telephone sponsorship fee
Audit fees 1,000.00
Training to SHG leaders 2,616.00
Interest on loans 32,781.00
Incentive paid to members 2,400.00
Interest on deposits 54,612.00
DRAS Fund 56,060.00
CBWs Honorarium 4,793.00
Excess of income over 157,114.00
expenditure (surplus)
Total 413,154.00 Total 413,154.00
Exhibit 2: Sources and Uses of Funds of MACS
PARTICULARS As on
31.03.2002
SOURCES OF FUNDS:
Authorised Share Capital 450,000.00
Issued & Subscribed Capital 346,300.00
Reserves 40,535.00
Administrative Self-reliance/ Deficit Cover Fund 364,810.00
Loan from Financial Institutions 1,863,673.00
Total 2,615,318.00
APPLICATION OF FUNDS:
Fixed Assets 12,547.00
Deposits 268,000.00
Income Generation Programme 29,655.00
Debtors (Loans to members) 2,295,589.00
Cash in hand & Bank 9,527.00
Total 2,615,318.00
42
THE `BANK 1
The Name of NGO Disappears
The name of our organization as promoter has been removed from the two
name boards of the Co-operative `Bank. This has been done by the `Bank at
the insistence of the office of the district registrar of co-operative societies,
remarked Mr. Kunal of the NR Foundation who worked as an Extension Agent in
the International Labour Organisation (ILO) sponsored Project under which the
`Bank was promoted.
The disappearance of the name of the Non-Governmental Organisation (NGO)

from the board appeared symbolic of the real separation that has taken place
between the `Bank and the NGO. As remarked by the Director of the NGO,
We have no links with the `Bank. They are working on their own. We cannot
support them any more.
The separation that has taken place between the NGO and the Co-operative
`Bank seemed to be a touchy issue. The NGO is known for its capacity to build
strong village level co-operatives and maintain a long-standing relation with them
through continued support and guidance. The NR Foundation is a non-profit
organization working since 1974 in Western part of India for the upliftment of the
tribal community. The main thrust of NR Foundation is to improve the capacity of
the local natural resource base for supporting livelihoods on a sustainable basis.
In order to attain its objective, the NR Foundation takes up interventions like lift
irrigation schemes, construction of checkdams, watershed development, forestry
and income generating programmes in the villages of its jurisdiction. The NR
Foundation also promotes savings and credit self-help groups (SHGs) mainly for
1
. Case prepared by Dr. H.S. Shylendra, Institute of Rural Management, Anand, under the
aegis of the `Workshop on Developing Cases and Training Material in Microfinance,
43
the women in the intervention villages. The formation of co-operatives to be

managed by the participants is the major strategy adopted by the NR Foundation
for attaining success and sustainability of its various interventions. In all the co-
operatives, the NR Foundation formally maintains ex-officio representation on the
executive committee in order to provide the necessary guidance and support. Till
March 2002, the NR Foundation has promoted over 260 village level co-
operatives under various interventions.
The `Bank
It is actually a co-operative credit society. But all of us have been calling it a

`Bank as it was visualized that the co-operative society would emerge as a major
womens bank in the area, narrated the Director of the NR Foundation referring
to the vision they had for the Co-operative.
The `Bank which is actually known as the Adivasi Mahila Savings and Credit Co-
operative Ltd., was established in March, 1999. The establishment of the `Bank
was the culmination of the efforts to hand over 24 womens SHGs formed since
1994 to a local co-operative managed by the members. These SHGs had been
formed under an ILO supported Project implemented by the NR Foundation
during 1994-99. The Project aimed at promoting self-reliance among the tribal
community through co-operatives and self-help organizations. The Project was
implemented in nine villages of one taluka where the NR Foundation had already
made interventions through lift irrigation schemes and checkdams. Besides the
formation of the SHGs, the ILO Project also supported the formation of four
womens dairy co-operatives, capacity building of the lift irrigation co-operatives
through training, implementation of income generating schemes and promoting
non-formal education.
The 24 women SHGs had been promoted with the main purpose of encouraging
savings and credit for attaining self-reliance. The SHGs with nearly 500
members had started initially with a monthly savings of Rs. 10 per member. By
44
1999, some of the SHGs had increased their monthly savings instalment to as
much as Rs. 50. Being able to mobilise capital through members savings, the
SHGs went in for internal lending utilising their own funds. The members
savings were supplemented by additional capital provided to each SHG from the
revolving loan fund created under the Project. All the SHGs were recording 100
per cent recovery of the loans lent to the members. The members and the
leaders of the SHGs were trained by the NR Foundation in various aspects of
SHG management. While the SHGs were making impressive progress, the ILO
Project was approaching its end by 1999. It was visualised under the Project that
the SHGs would be taken over by a co-operative to be formed for the purpose.
The exploration for creating such a local institution had started much before the
termination of the Project.
The members of the SHGs were taken on exposure visits to two organizations
which had created womens credit co-operatives. Inspired by the exposure visit,
the members decided to go in for the creation of a co-operative by pooling the
savings of all the 24 SHGs from nine villages. The effort which started in
November 1998 finally ended with the registration of a co-operative credit society
in March 1999. The office of the Co-operative was located in a nearby town
called Simdi. Ms. Savitaben and Ms. Kantaben were selected by the members
as the Chairperson and the Secretary of the Co-operative. These two leaders
were found to be quite articulate and talented by the SHG members. Before the
creation of the Co-operative, the SHG members used to meet every month at the
NR Foundation to discuss their progress and problems.
Ms. Savitaben who has been the Chairperson of the `Bank since its inception
remarked, We decided to form a co-operative based on the idea we got during
the exposure visit. Our purpose was to meet our members need for loans by
pooling the savings of the SHGs and mobilizing funds through borrowing. Though
our SHGs had savings accounts with a commercial bank, the bank would not
give us any loan.
45
While the Co-operative came to be established, some of the plans the NR

Foundation had for the Co-operative did not materialize. As Mr. Kunal said, The
SHGs were functioning only in nine villages. Our idea was to form a co-operative
which can have jurisdiction over a large area. However, this required taking no
objection certificates from a large number of credit co-operatives in the area.
The district registrar of co-operative societies limited the area of the co-operative
only to the nine villages. At the same time, the district registrar refused
permission for ex-officio representation of the NR Foundation on the executive
committee of the co-operative. The reason given to us was that the Co-operative
is for the adivasi (tribal) women and the NR Foundation does not have the status
of an adivasi person.
The refusal for the ex-officio representation was surprising as the NR

Foundation is represented on the committees of all the co-operatives promoted
by us in the tribal areas, said the Director of the NR Foundation. He further said:
We could have insisted with the district registrar for our representation, but some
how we did not pursue it. As Ms. Savitaben, Chairperson of the Co-operative
said, Even we wanted the NR Foundation to be on our committee but the
registrar refused it.
There was all-round enthusiasm when the `Bank started functioning. The NR
Foundation staff and the women leaders wanted to take the Co-operative to new
heights through their joint efforts. Though the ILO Project came to an end and
staff were withdrawn from the Project, the NR Foundation decided to continue
with its support for the Co-operative as per the `continuation strategy followed
with respect to all its interventions.
The staff working under other projects continued to interact with the Bank on a
regular basis. The NR Foundation was reimbursing the Co-operatives monthly
rent for the building and the honorarium for the staff. Ms. Sujatha, a social work
post-graduate who had joined as the Project Manager of a new government
46
project was entrusted with the task of co-ordinating with the Co-operative. Ms.
Sujatha remarked, The leaders of the `Bank were regularly approaching us for
help and guidance on various issues; we actively helped in getting a site allotted
to the Co-operative for the construction of a building.
The NR Foundation also sanctioned a sum of Rs. 2.5 lakh to the Co-operative
from the revolving loan fund (RLF) of the ILO Project for meeting its additional
working capital needs. The ILO Project had visualised that the RLF would be
finally transferred to the local institutions created. The cash transactions of the
Co-operative were carried out through a joint account held with a commercial
bank in the name of the Co-operative and the NR Foundation.
The Separation
The collaboration between the `Bank and the NR Foundation which was going
quite smoothly took a `U-turn within a year. The leaders of the `Bank refused to
take any honorarium for their staff from the NR Foundation and decided to be on
their own. The long partnership which had started with the formation of the SHGs
came to an end as many differences cropped up between the leaders of the
`Bank and the staff of the NR Foundation. By July 2002, the `Bank and the
Foundation had totally lost touch with each other. As Ms. Parameet, a Senior
Programme Executive of the NR Foundation remarked, It had even become
difficult for us to obtain the annual balance sheet of the `Bank. We had to argue
with the district registrar to get a copy of the recent balance sheet.
How is the `Bank doing?
To Ms. Parameet, Going by the balance sheet there seems to be some problem
with the `Bank. She further elaborated, Most of the loans of the Co-operative
seem to have gone only to two villages from where the Chairperson and the
Secretary of the Co-operative come. Also there seems to be some internal
conflict and the leaders have come under local influence. The overdues are also
growing. It is not good if the `Bank gets derailed.
47
Mr. Kunal said, When we were supporting it, the `Bank was nicely managed.
Now even the premises is not well kept. The Director of the NR Foundation said,
I am not sure whether they would be able to get the government funding for
constructing their building. We would have given them the necessary support.
But if the co-operative is able to function well on its own, we are happy. Our
ultimate purpose is to create an institution which can become really
autonomous.
Ms. Savitaben and Ms. Kantaben assessed the performance of their co-operative
in the following way:
We have expanded our area of operation recently to six more villages to admit
300 more members. The Co-operative has got a cash credit loan of Rs. 50,000
from the District Central Co-operative Bank (DCCB), the limit of which has now
been enhanced to Rs. 80,000. We use both the members savings and the loan
from the DCCB. We sanction loans on a yearly basis as we are a co-operative.
A member is given a loan up to Rs. 10,000 based on the purpose and her
savings with the Co-operative. The members have to apply directly to the Co-
operative for loans with two guarantors. The loan is approved by the Executive
Committee. The members save and repay through their SHGs. Different SHGs
have different savings rate. Many members have been able to take up dairying
and other income generating activities through the loan support received from the
Co-operative.
The same Executive Committee is continuing for the second time. The Co-
operative has implemented a government housing scheme for some of the
members. A watershed scheme also has been sanctioned to the Co-operative.
We will recruit new staff for the watershed project. Currently, we have six staff
members and pay a monthly rent of Rs. 800 for the building. The Co-operative
has made profit every year. The auditor has given a `B grade to the Co-operative
48
(meaning doing reasonably well). We have sanctioned loans for 400 members
this year. The co-operative has a total outstanding loan of Rs.7.14 lakh at the
end of March 2002. The loan recovery which was 100 per cent in the earlier
years has come down to 70 per cent during 2001-02 because of the drought.
Some of the staff of the NR foundation have also instigated our members in a
village not to repay the loan of the Co-operative.
Table 1: Progress of the Co-operative

(Amount in Rs.)
Particulars 1998-99 1999-00 2000-01 2001-02
Share Capital 11,900 11,900 1,38,520 NA
Reserve Fund 595 595 595 NA
Revolving Loan 3,79,228 2,36,828 NA NA
Members Savings 3,25,749 3,89,597 2,83,669 2,90,544
Loan Outstanding 4,27,201 5,50,915 6,54,698 7,14,198
Why the Separation?
We have received so much support and help from the NR Foundation,

acknowledged Ms. Savitaben, who is the Chairperson of the co-operative since
inception. Continuing further she said, But we got separated because we had
so many problems with the staff of the NR Foundation who were dealing with us.
After our Co-operative was registered, the staff of the NR Foundation started
telling us that we have to follow only their suggestions and systems. The district
registrar was telling us that we must follow the co-operative procedures. They
were not able to understand our problems. We had to change all our ledgers and
make new entries. We opened our own savings account with the DCCB. All
these steps were questioned by the NR Foundation staff. We felt insulted.
49
We made a complaint to the NR Foundation to change the staff. A meeting was

held at the NR Foundation to thrash out the differences. But nothing changed
despite the promise. Hence we decided to part company.
Currently, the Co-operative has changed the bye-laws to suit the co-operative
system. The original bye-laws were framed by the staff of the NR foundation. The
auditor has made a suggestion to close the savings account jointly held with the
NR Foundation. The leaders are now taking guidance from the DCCB and the
district registrar.
The reasons given from the side of the NR Foundation for the separation are as
follows:
Ms. Sujatha, the Programme Manager of a Government Project who was co-
ordinating with the Co-operative disagreed with the views expressed by the
leaders. She said, All the things have been pre-planned, be it the changeover
into the co-operative system or opening a savings account with the DCCB only in
the name of the Chairperson and the Secretary of the Co-operative. The
revolving fund given to the Co-operative and the SHGs has to be repaid. They
were not repaying it. By insisting that it has to be repaid, I was only doing my
duty, though I was new. The two leaders never changed and they started
dominating the whole Bank. Moreover, the staff of the NR Foundation, the
Bank leaders and the registrar never held any joint meeting while framing the
rules. Hence there is also lack of some clarity and consensus.
The Co-Director of the NR Foundation said, The women leaders seem to have
come under some local influence. They are not interacting with us probably
because they have not repaid the revolving loan fund to us. They must be
thinking that we will insist on repaying that money.
To Ms. Parameet, the Senior Programme Executive, the reasons for the
separation are two-fold: First, there were frequent changes in staff of the NR
50
Foundation dealing with the Co-operative. The new staff were not able to deal
with the Co-operative. Differences came up between the Project staff and the
leaders. Secondly, the leaders must have been influenced by some local
elements. The current Chairperson has become very powerful. She has also
become a member of the District Rural Development Agency (DRDA).
The Director of the NR Foundation summed up the whole episode in the

following way: To be fair to everybody, our staff have not handled the
relationship well. There was frequent change of staff. The ILO Project had
stopped, we could not continue with all the staff. We wanted to support them as
our own institution. We wanted it to expand to cover larger area. Some local
people and politicians would have influenced the women leaders by telling them
that it is an adivasi institution and hence they would get all the government
support. Moreover, the women leaders must have thought that they may lose
control over the Co-operative, if the area of operation is expanded as planned by
us.
New MFI
The NR Foundation has now promoted a large number of SHGs under various
programmes. They are planning to promote a new microfinance institution (MFI)
to serve all the SHGs in the entire district. They are exploring whether it should
be a co-operative institution or a Non-Banking Financial Company (NBFC).
51
Questions for Discussion:
1. What seems to have gone wrong between the NGO and the MFI (Co-
operative)?
2. Who is to be blamed?
3. How to sort out the difference and re-establish the relationship between the
MFI and the NGO?
4. What precautions the NGO needs to take if they launch a new MFI?
52
MICROFINANCE PRODUCTS
MDS DILEMMA
(A CASE ON RURAL ELECTRICITY AND MICROFINANCE) 1
Part - 1
Posers to EMVS MD by SHG members from Malukan Village
Poser 1: I am Sumathi, I have a five-year old son studying in a primary school.

We belong to Scheduled Caste. I have studied up to 10th standard. My parents
were unable to send me for further studies due to financial constraints. After two
years I completed 10th standard. I got married at the age of 18.
Government has allotted this house to us. We are living in this house for more
than five years. My husband is a wage labourer, who gets employment for ten
days in a month. Sometimes he gets fishing job and sometimes he does palm
mat weaving. Till last year, he was doing the work of climbing palmyrah trees to
cut palm leaves. One day he fell down from the tree and broke his legs. He
stopped the climbing activity. He earns Rs 500 to Rs 1,000 per month depending
on the work available as a wage earner.
I do not know agricultural work but I know tailoring. As I have a child to look
after, I cant afford to take up any full time work other than tailoring. But I want to
engage myself in some work to earn income to support my family. We live
frugally. We do not have many facilities including electricity connection. In the
evening after it is dark, I cannot do any work. I cannot move out of my house. In
this area snakebite is common. I have to do something about it. But I do not
know what to do?
Poser 2 : I am Poomayil. I have two sons and one daughter. They are
th th th
studying, in 7 , 9 and 10 standards. My husband and I do only agricultural
1
. Case prepared by Ms. A. Umarani with Mr. Dharmaraj, DHAN Foundation, Madurai, under
the aegis of the `Workshop on Developing Cases and Training Material in Microfinance,
53
labour work. We get employment only in the agriculture season. During the lean
season, we make and sell 7-8 palmyrah mats and earn Rs. 30-35. In a year we
get 160-180 days of employment.
We are living in a mud hut for over 17 years. There are 22 families like us living
here on one side of the tank bund. It is our own land. As we live in one corner of
the village, we do not have much interaction with the other villagers who live in
the centre of the village. Our hamlet gets very dark in the evenings as there is no
electricity for the past 45 years. We cannot move out of the house to interact
with others due to darkness. If we want to watch TV, we have to pay Re 0.50 to
the TV owner. We do not get any worthwhile support from the better off in the
village. After it is dark, my children cannot study for long hours. Neither I can do
any household chore nor take up any income earning activity. All the 22 houses
are located little away from an electric pole. Even then we have not got
electricity connection. I cannot imagine bearing the heavy cost of getting the
electricity connection.
Part - 2
The Genesis of EMVS
Malukan is a village which has 164 households. It is 11 km away from the

Mapadnam block headquarters in the Danmar district. It has a hamlet of more
than 30 Valayar families located in the outer periphery close to the tank bund.
More affluent households live in the centre of the village with facilities such as
potable water, electricity, TV and transportation. As the Valayar families belong
to lower caste, they do not get any support from the villagers. They are engaged
in fishing and in making palm mats. Rarely they get employment in agriculture.
Some of them work as permanent labourers in coconut gardens.
The livelihood of the people in the Danmar district depends more on coastal and
marine resources. Fishing and palm mat weaving are the major sources of
income for the poor families. As agriculture is a seasonal activity, the income of
54
poor families wildly fluctuates. Moneylenders support these families by providing

credit at 120 to 180 percent interest. Because of drought, many families have
migrated to other villages.
In this context, the HAND Foundation, a Non-Governmental Organisation (NGO),

came into operation in 1992 to provide the poor women with access to credit at
reasonable interest rate to support their livelihood. Self-Help groups (SHGs) with
15-20 women members came to be formed for the purpose. The HAND
Foundation encourages women to save and pool their income to lend to the
members. The SHGs can also borrow from the commercial banks. The purpose
of loan and the rate of interest are decided by the SHGs (see Exhibit 4).
To sustain the whole initiative, the members of the SHGs have promoted a
federation of SHGs in 1995 called the Earth Mahalir Vattara Sangam (EMVS)
with the HAND Foundations support. The aim of EMVS is to enable the poor
families to cross the poverty line and bring about desirable changes in their
standard of living. EMVS is a peoples organization managed by the leaders of
the affiliated SHGs. It is a registered body under the Societies Act of 1983. The
long term aim of EMVS is to gradually move out of savings and credit activity by
leaving it to the SHGs and to become a community development organisation.
Presently, EMVS is operating in 26 panchayats consisting of 105 villages. It has

promoted 176 self help groups, called sangams, with a total membership of
3,153 women. It has mobilised savings to the tune of Rs. 8.8 million from the
poor women members who have stakes in EMVS with ownership rights. Apart
from providing security and ownership, the savings also serve as a means to
attain self-respect for the poor. Besides regular savings, EMVS offers various
need-based savings products through which it has mobilized over Rs.0. 9
million.
55
EMVS has now reached a stage where other financial institutions and banks
have come to recognize it as a prestigious peoples organization. Because of
this reputation, it could mobilize a loan of Rs 0.5 million from the Housing and
Development Finance Corporation (HDFC). Till March 1998, EMVS has
disbursed a total loan of Rs 73.92 million to 6160 borrowers. To meet the
various credit needs of its members, EMVS offers nearly ten types of loan
products. EMVS charges 15 to 18 percent rate of interest per annum on its
loans to the SHGs.
To carryout its various functions, EMVS has appointed six staff directly at the
federation level and 17 staff at the cluster level. There are 80 part-time workers
who help the SHGs in their management like accounts keeping. The salaries of
the staff at different levels are met by the organizations at respective levels (see
Exhibit 2). Through the income earned from its microfinance activity EMVS has
created a reserves and surplus fund of Rs. 0.65 million.
The Electricity Problem
Sumathi and Poomayil are the members of two SHGs affiliated to EMVS. Along
with them another 45 members expressed the need for electrification of their
houses. In Malukan village, the 22 Valyar families living near the tank bund
have put continuous efforts to get electricity connection but in vain. They are
located little far away from the main village and are without electricity. As the
school going children cannot study in the evening hours, their standard of
education has been affected. The women who come back from work in the late
evening find it difficult to cook and do other household chores. This has been
the case for the last 45 years.
During the lean season these families do mat weaving. In the evenings they
take all the leaf materials to one of the houses having electricity to continue with
mat weaving till 10 p.m. During the rainy season the situation is even worse.
56
These 22 families have approached the government officials in the Danmar

district to get the electricity connection freely under some government scheme.
As these households rejected the demand for payment of bribe, the officials
took no interest. They approached the village president for help. None of the
four presidents in the village in the last 45 years have been able to solve their
problem.
When they approached the Electricity Board (EB), the officials of the EB replied
that the area in which the families are residing do not have even a single
electricity pole. Though near by there is a school with electricity connection but
it is located little over 110 feet away. As per the EB officials they have to satisfy
three norms for getting the electricity connection, viz, (i) an electric pole should
be within 110 feet, (ii) the wiring should not cross others land, and (iii) each
family should obtain from the Village Administrative Officer a title certificate for
the house owned. As they were unable to satisfy any of these norms, they could
not get any positive response from the EB. One of the engineers said that it
would involve a cost of more than Rs 10,000 to install a minimum of three poles.
They approached all the concerned persons which involved frequent travel and
submission of numerous applications. They had to spend nearly Rs 5,000 which
was shared by all the 22 families. But they failed to make any breakthrough.
These 22 families are members of four SHGs functioning in the village. The
financial status of the four SHGs as of March 1998 is given in Exhibit 3.
MD on a Wild Goose Chase
One day in their regular meeting the members of the Malukan SHGs raised the
issue of electricity and discussed it threadbare. They brought the issue to the
notice of the EMVS Managing Director (MD), Mr. Vel. Similar demands started
surfacing from other SHGs. The MD started taking more interest to address the
issue. He organized a meeting in June 1998. All the members who needed
electricity connection, the cluster level leaders and the board members of EMVS
57
were called for the meeting. The issue was discussed at length. The members
asked the MD to explore the ways of getting the connection.
The MD sent one of the staff members to assess the need for electricity
connection in the entire block. It took nearly 15 days to carry out the survey. It
was found that nearly 1200 women members were living without electricity and
900 of them expressed immediate need for connection. The MD felt miserable
as he had failed to notice the gravity of the issue in the area.
On August 4, 1998 he wrote to the Director of the EB on behalf of EMVS

requesting to provide electricity connection to all the needy members in the
block. He had four rounds of discussion with the Board. The result was not too
positive. Some petty officials of the Board demanded Rs. 1000 as bribe per
family. To get the connection the following procedures are involved: Electric
poles should be erected wherever they are not there; ensure purchase of quality
electrical materials; identify a private contractor who is authorized by the EB to
carry out the works for all the houses, and ensure the completion of work.
The MD also approached a number of local contractors. The lowest reliable

estimate given for getting connection to one house with five points was Rs
2,900. The total cost varied from Rs. 4000-5000 which included material cost
and also the bribe. The members expressed difficulty in meeting the estimated
cost. They enquired with their MD whether it was possible to reduce the cost by
Rs 1,000. They were also particular about the use of quality material and
completion of the work within a short period of time. Also the SHGs did not have
sufficient money with them to sanction new loans to their members.
EMVS strictly adheres to the principle of not giving bribe to anybody. This took a
good deal of time and soul searching by EMVS. The MD remained worried and
tense all through this period. After long persuasion, the EB officials agreed to
relax the norms and provide connection to the members by taking a service
58
charge of Rs. 100 per connection as a large number of households are involved.
The MD still has to find the solution to help the SHGs in overcoming their
problem of insufficient funds and ensure quality work at affordable cost to the
members.
1. Should EMVS take up the responsibility of tackling the electricity problem

of its members?
2. Suggest ways to MD to find the best solution to help the SHGs in
overcoming their problem of insufficient funds and ensure quality work at
affordable cost to the members?
3. What specific role EMVS can play as a microfinance institution to help the
SHGs in tackling the problem?
59
Exhibit 1: Simple Balance Sheet of EMVS as on March 1998
Assets Rs. Liabilities Rs.

Cash in hand 62,495.70 Excess rent 59,012.80
Cash in Bank 32,029.35 Loans outstanding 56,700.00
Total deposits 500,000.00 Bad debts 565,078.00
Deposits outside 607,329.75 Welfare fund 20,385.00
Rent advance 2,400.00 Health fund 3,079.00
Loan outstanding with 500,000.00
HDFC
Total 1,204,254.80 Total 1,204,254.80
(The EMVS Balance Sheet does not include groups savings and lendings)
Exhibit 2: Organisational Structure and Processes
Organisation Leaders/ No. of Processes

Representatives Staff
SHG Three leaders in each 80 - Weekly Meetings for
group (part savings, lending and
time) recovery
Cluster 15-20 SHGs from 4-5 17 - Monthly
Development nearby villages meeting of leaders
Association(CDA) promote CDA. Three - Monthly EC
leaders from each meeting
group form into CDA. - General body
A 5-7 member meeting held once
Executive Committee in six months of all
(EC) take care of the SHG members in
activities of CDA the cluster.
EMVS All SHGs are 6 - Monthly Board
members of EMVS. Meeting
One leader from each - Special
cluster is represented Meetings
on Board consisting - Annual General
of 13-15 members Body Meeting
60
Exhibit 3: The Status of Four SHGs in Malukan
Kamatchi
Vinayagar Kailasamuni Annai
Particulars amman
Sangam Sangam Sangam
Sangam
Total Members 21 22 20 20
Members demanding
electricity connection 2 9 6 3
Total Savings by
members (Rs.) 35,787 43,288 31,346 22,057
Special Savings (Rs.) 2,748 27,717 4,200 1,579
Loan outstanding with
members (Rs.) NA 65,148 58,864 22,420
Exhibit 4: Purpose wise Loans issued by SHGs

Rate of
Purpose Share(%)
Interest
Consumption loan 43.3 24 36%
Redeeming outside debt 18.6 24 36%
Medical expenses 10 24 36%
Festival and social obligation 13 24 36%
Income generating activities 6.4 24 %
Housing 3 15 %
Education 3 36 %
61
LOAN PRODUCT FOR DAUGHTERS MARRIAGE 1
Part - 1
The Need for a New Loan
The daughters marriage is one of the biggest family expenses in our society.
People have to borrow money from their relatives, friends and many a times
from the moneylenders with rates of interest ranging from 3 to 10 per cent per
month. To obtain a loan from the moneylenders, the borrowers have to
mortgage their land, jewellery and other assets.
The Executive Chairman of the CASHPOR Financial and Technical Services

(CFTS) Limited is repeatedly told by the clients during his field visits and the
meetings with them about the felt-need for a loan to pay off the expenses of their
daughters marriage. The CFTS is a microfinance institution (MFI) registered as
a company, initially as a private company in October 1996 and later as a public
limited company in 1999. It is following the Grameen Bank of Bangladesh
approach. The Grameen Bank approach involves forming groups of five
members, providing collateral free loans, adhering to weekly repayments and
giving exclusive focus on poor women. The potential clients are encouraged to
form groups of five members. The groups are then organised into centres
consisting about six to eight such groups.
The CFTS operates in the backward district of Mirzapur in the eastern Uttar
Pradesh. Keeping in view the extent of poverty, large proportion of backward
castes and classes, and very low repayment rate in respect of formal bank loans,
the management of the CFTS felt that if the experiment could succeed in
Mirzapur district, it would succeed elsewhere also. The mission of the CFTS has
1
. Case prepared by Dr. KC Sharma, Bankers Institute of Rural Development, Lucknow, under
62
exclusive focus on poor women in rural areas and it aims to become a financially
sustainable institution while working for the poor. The mission of the CFTS is to
deliver financial services to its clients in an honest, timely and efficient manner. It
is operating since September 1997.
The management of the CFTS rests with the Board of Directors, which comprise
four members. Professor David Gibbons, a pioneer in replicating Grameen Bank
model in Malaysia, is its Executive Chairman. The CFTS plans to serve about
25,000 households by March 2003 when it will be able to become operationally
self-sufficient. By then it would have covered about 25 percent of the poor
households of Mirzapur district.
The CFTS provides two kinds of service financial and technical. The financial
services include lending, savings and insurance services and the technical
services relate to Management Information System (MIS), monitoring and
evaluation, training, special research and income generating projects for the
poorest.
The most common loan product of the CFTS is the General Loan. It is repaid in
50 weekly instalments. The average size of the general loan comes to Rs.
5,433 and the range of loans taken so far varies from Rs. 500 to Rs. 20,000.
The amount of loan sanctioned can be from Rs. 500 to Rs. 8,000 in the first
cycle; the second cycle of loan is up to Rs. 15,000 and the third cycle of loan is
up to Rs. 25,000.
The rate of interest charged on loans is 20 percent flat and is based on the
Consultative Group to Assist the Poorest (CGAP) method of setting economic
rate of interest. The economic rate of interest is basically the rate of interest
which covers the cost of funds, administrative expenses, loan loss provision and
a margin for future growth. Nearly fifty per cent of the loan portfolio of the
CFTS is devoted to animal husbandry, mainly buffaloes, followed by trading
63
which accounts for about twenty five per cent. The other activities for which loans
are taken include carpet making, transportation and agriculture. Much of the
agricultural loan is borrowed for leasing-in land by the clients. All the loans are
given for income generation activities except the emergency loan. All the loans
are of 50 weeks or less in duration. The loan outstanding of CFTS in March
2002 was Rs. 55 million.
The repayment procedure in the CFTS is dictated by a high sense of credit

discipline. The repayment is done in weekly instalment for 50 weeks and
irregular repayment is not permitted. The amount due but not paid in any week
by a client must be paid by the group and the centre members at the same
centre meeting. However, the CFTS faced a serious repayment problem in July
1999 and it assumed an alarming proportion by October 1999. However, by
taking judicious measures based on incentives to clients and the staff, the
repayment problem was contained. By June 2000, the situation came under
control. The overall recovery per cent of the CFTS loans during the period April
2000 to June 2002 has been more than 98 per cent.
The issue of marriage loan was bothering the management and the staff of the
CFTS as it was the felt-need of the clients. Therefore, the issue was further
discussed with the women members of the CFTS at the branch level. They
showed great interest in the proposed loan product. The CFTS decided to launch
a loan product for the marriage of daughters in October 1999. The product was
launched in two branches of the CFTS on a trial basis. Subsequently, all the
branches started offering it.
1. How would you market this loan product in terms of the eligibility criteria,
loan size, repayment schedule and loan approval and disbursement?
2. Does this product raises any social issues?
64
Part - 2
The Marriage Loan
The eligibility criteria, loan size, repayment schedule and loan approval and
disbursement details of the product are outlined below:
The eligibility criteria for the loan :
i) The centre should have a perfect repayment record at least for the last 12
months.
ii) There should be at least 6 groups in a centre with no split in any group.
iii) The clients should be all second cycle borrowers with perfect repayment.
iv) The clients should have proper loan utilization record and should not have
more than 4 absences from the weekly centre meetings in a year.
v) The client should not have more than one loan outstanding.
vi) The loan is only for the marriage of clients own daughter.
vii) The client should have life insurance wherein the CFTS is a beneficiary by
way its loan being secured (optional only).
The Loan Amount Linked to Saving:
i) The client should have maintained a minimum weekly savings of Rs.10 for at
least 25 weeks. The single deposit paid should not be more than 10 percent
of the total savings amount.
ii) Based on her savings, the CFTS will provide four-times of her savings as
marriage loan but not exceeding Rs.4,000. In April 2001, it has been made
as 8 times of her savings but not exceeding Rs. 8,000.
iii) After the settlement of one marriage loan, the client will be eligible for the
second marriage loan.
65
Repayment Schedule:
i) The marriage loan is for a maximum of 4 years. However, the client can
settle it earlier.
ii) The principal and the total interest due should be recovered by weekly
instalment with in 200 weeks. The interest amount will be spread over in
equal instalments along with equal instalment of principal.
iii) The interest will be charged at 20 percent flat per annum on a declining
annual balance basis.
Loan Approval and Disbursement:
The loan is for medium term and is meant for consumption purpose. The
approval and disbursement procedures to be followed are as under:
i) The loan proposal should be approved by the centre with a resolution signed
by the centre chief with the consent of all the centre members.
ii) The marriage loan should be finally approved by the Financial Services
Manager or General Manager of CFTS at headquarters. Since April 2001,
the Deputy Financial Services Manager is authorised to approve the loan.
The Deputy Financial Services Manager is also located in the head office but
visits the branches and centres regularly.
iii) The Branch Manager of CFTS should be present at the time of loan
disbursement in the centre meeting. This is not mandatory since April 2001.
The following Table shows the marriage loan off-take by the clients of CFTS:
66
Table 1: Marriage Loan off-take in CFTS

(October 1999 to June 2002)
No. of Loan Amount Principal
Period Clients Disbursed Outstanding
(Rs.) (Rs.)
1 October, 1999 to 31 March, 2000 0 0 0
1 April 2000 to 31 March, 2001 1 4,000 2,700
1 April 2001 to 31 March 2002 21 1,06,000 56,950
1 April 2002 to 31 June 2002 82 4,89,000 4,76,305
Grand Total 104 5,99,000 5,35,955
1. Evaluate the Marriage Loan Product of CFTS in comparison to your

marketing strategy arrived earlier ( Part 1 of the Case).
2. What could be the reasons of poor loan off-take initially?
3. There is a sudden increase in the loan off-take during April-June 2002.
What could be the reasons?
4. Do you foresee any recovery problems?
67
MICROINSURANCE: IS IT A VIABLE SOLUTION?1
Part - 1
The Cashpor Financial and Technical Services (CFTS) was started in 1996 by
Prof. Gibbons (a pioneer in replicating the Grameen Bank Model in delivering
savings and credit to the poor) and Mr. A. Hasan in the Mirzapur district of the
eastern Uttar Pradesh (U.P.). The organisation was setup with the purpose of
providing microcredit to the poor women. Being a backward district, the main
occupations of the households are agriculture and wage labour. The
dependence on unpredictable rainfall is one of the main reasons for poverty and
agricultural backwardness. As a result, a large number of poor households face
difficulty in making both ends meet. More often they are driven to the doorsteps
of the moneylenders. The poor turn to the moneylenders as not many
formalities are involved in their system. The formal system of banking does not
reach the poor due to remoteness of the area and low literacy rate.
Given the need of the area, the CFTS soon started expanding its work. In
March 2000 it became a Public Limited Company working both in the urban and
the rural areas of the district. The aim of the CFTS is to reach 25,000 clients by
2003 and become operationally self-sufficient. The CFTS operates on the
Grameen Bank model using five member group for delivering unsecured loans
linked with weekly compulsory savings and loan repayments. As of May
2002, the CFTS has 10 branches with a loan outstanding of Rs.57.9 million
covering about 15,000 clients.
The CFTS initiated its work with two types of financial services- savings and
credit. While credit was directly delivered; savings, was started in collaboration
with the Mirzapur Mutual Benefit Savings Trust. The CFTS started realizing the
1
. Case prepared by Ms. Nidhi Ranjan, Friends of Womens World Banking (FWWB),
Ahmedabad under the aegis of the Workshop on Developing Cases and Training Material in
Microfinance, sponsored by SIDBI Foundation for Micro Credit, Lucknow.
68
inadequate resources of its clients to mange their risk. Their inability to cope up
with the loss of assets like livestock or even loss of life of either the client or her
spouse was noted. The loss of life was found to be either because of
complications during pregnancy or due to some illness or malnutrition. Even
inadequate health service facilities were found contributing to the problem.
Under such circumstances, the CFTS faced a difficult situation due to the sudden
demise of one of its client. Parvati, a client of CFTS from Gyanpur who had
taken a loan of Rs.5000/- for setting up a small readymade garment shop expired
all of a sudden during the time of her delivery. She had repaid just four
instalments till that time. Her husband, Sunderlal, is a carpet weaver and works
for the big traders. He does not get regular work due to the increasing
competition in the market and due to the introduction of new labour displacing
technology. Much of the income of Sunderlal was being spent on the medical
expenses of his wife.
Parvati had set up a garment shop using the loan money. She had to face some
initial set back in the business. Being a small town, her place did not have a
regular market for the readymade garments. However, during the festival season
the business had started gaining momentum and she started getting enough
profits. Her work was going on fine till the early stage of pregnancy. As the days
passed by, complications developed. She had to make regular visits to the
district hospital for check up and each time she had to spend heavily on various
tests and medicines. She was not only spending all her earnings from the shop
but also had to even sell off the items in the shop to other merchants at a very
low price. She was unable to repay the remaining instalments of her loan. Her
husband had to skip his work frequently as she needed constant care and
attention which resulted in loss of work and income. They faced a huge
financial crisis. Parvatis condition deteriorated further and she had to be
hospitalised. The doctors could not save her. By then their financial condition
69
was so bad that even for her funeral, Sunderlal had to borrow money from his
friends and relatives.
Sunderlal was in no position to repay the loan Parvati had borrowed from CFTS.
Including interest Parvathi owed Rs. 5,520 to CFTS. The only option left for her
husband was to approach the local moneylender for a loan which would only
push him further into the vicious circle of debt.
Though CFTS has the provision for providing emergency loans but it is found
inadequate to address this kind of a situation. Emergency loans are short
duration loans specifically given for purposes such as marriage. The CFTS also
has the provision to write off loans in case of death of first time borrowers.
However, this was also not feasible for the organisation as it involved a risk to a
larger extent. In case of any calamity striking the region, the CFTS may have to
write-off loans for large number of borrowers. This may put the organisation in
a difficult situation.
Part - 2
The CFTS started exploring the possibility of providing insurance services to its
clients. However, it could not decide which type of insurance would serve the
purpose. Considering the interest of the organisation, a number of private and
public insurance companies approached CFTS and offered to launch their
services.
The CFTS decided to launch on a pilot basis two types of insurance services, life
insurance and livestock insurance to its members. Four insurance companies
introduced the products in different branches of CFTS. The first company to offer
its product was the HDFC Standard Life Insurance Company, which began life
insurance venture in August 2001. Initially it was started in three CFTS
70
branches. The ICICI Prudential Life Insurance and the Life Insurance Corporation
of India (LIC) introduced their services in three more branches. The National
Insurance Company (NIC) also started the livestock insurance to the clients of
CFTS. The life and general insurance products offered by these companies
varied in their coverage, premium, sum assured, benefits offered and claim
settlement procedures. As a result each scheme had its own advantages and
disadvantages. The major features of these different schemes are given in
Exhibit 1.
The main reason why CFTS decided to work with different companies was to
experiment and pilot test the schemes before expanding further with the best
one. It has now been one year since the different schemes began and the
practical issues and problems of implementing these schemes are also clearly
visible.
The procedural requirements of all the companies are different.
ICICI: Working in two branches- City and Gyanpur, requires a minimum group
of 100 clients. The premium is collected in the months of March, April, and May
in the City Branch and March and April in Gyanpur branch.
HDFC: Working in three branches, Maharajganj, Rajatalab and Bihasara. The

policy is taken only twice a year, with a minimum group of 500 clients. The
premium is collected in the month of July and November.
LIC: Working only in one branch of Ahraura. The policy is taken in a minimum
group size of 25 clients. The premium is collected in the months of February,
March, and May.
In all 3000 clients have been covered under different life insurance schemes till
May 2002. HDFC scheme has attracted 1323 clients; LIC scheme has
71
attracted 373 clients, and ICICI scheme has been subscribed by 1304 clients.
Only one claim is settled so far by HDFC in the branch of Rajatalab.
When the CFTS was asked as to what would be their next step, they were in a
dilemma. First of all, they have to decide whether to continue with the insurance
schemes or not. If they have to continue then the question is which of three
companies they should choose to continue? To answer these questions a cost-
benefit analysis was carried out based on the income and expenditure incurred
by CFTS. This was done for the insurance products offered by three
companies -- HDFC, ICICI and LIC. The two schemes of ICICI have been taken
together for the purpose of calculating income and expenditure. For the purpose,
the following information was collected from six branches of CFTS where
insurance is being offered.
The Expenditure/Costs include the following sub-heads:
The salary of the staff and the Branch Manager

The salary and perks of the Insurance Officer
Administrative expenses such as courier, stationary, phone and bank
charges.
Expenses on Claim Settlement
Staff Trainings expenses
All the expenses are based on the actuals.
The Income/Benefits include the following sub-heads:
Administrative and Service charges reimbursed from the company to

CFTS on getting the premium. LIC does not reimburse the administrative
charges.
72
Benefits obtained from insurance i.e. the loan money at risk secured.
During the study period only one claim was settled. Thus the amount of
money secured was the loan amount.
The final cost-benefit analysis based on the above calculation for each company
is given in the following table. The total expenditure is subtracted from the total
income. At the current level of coverage of clients and the costs incurred, CFTS
has incurred losses during the period July 2001 to May 2002 on all the
schemes. The HDFC scheme has the least loss and the maximum loss is
incurred in the case of the LIC scheme.
HDFC LIC ICICI

No. of Clients 1323 373 1304
Income (Rs.) 23,663 1,865 20,495
Expenditure (Rs.) 46,472 36,127 45,182
Loss (Rs.) -22,809 -34,262 -24,687
After seeing the above result, CFTS was worried as they were in loss in the
case of all the three companies. They tried to analyze the situation by calculating
the break-even point for all the three schemes to know when they would be in
a no loss or no profit situation.
The cost calculation for break-even analysis is done on the basis of following
assumptions and information:
Salary: The number of staff on an average is 7 per scheme. The time devoted
or contributed by a staff is 8.3 percent on insurance activity per month for an
average of 10 clients per day. The average salary of a staff is Rs.2,861 per
month. The accountants salary is same as that of a staff but the time contribution
on insurance is half that of a staff (4.15 percent). There is one Branch Manager
(BM) per scheme and the time contribution on insurance on an average is 6.25
percent. The average salary of a Branch Manager is Rs.4,255. There is one
73
Insurance Officer (IO) for each scheme getting a monthly salary of Rs. 7,000
inclusive of all allowances. A cost of Rs.1, 000 is incurred per year on staff
training for each of the schemes.
Other costs: The administrative expense per client varies across companies.
For ICICI it is Rs. 2.3; HDFC Rs.1.6 and LIC Rs. 0.32. The per client expense
incurred on claim settlement for different companies also varies. For ICICI it
is Rs.250, for HDFC Rs. 250 and for LIC Rs. 20.
The income calculation is done on the basis of following information. The

administrative and service charges taken together per client and reimbursed by
different companies come to Rs. 15.7 for ICICI, Rs.15 for HDFC and Rs. 5
for LIC. The average size of loan claimed per client is Rs. 3,818.
The break even analysis can be carried out for different group sizes of
members to be insured like 1000 or 2000 or 4000 for different time durations
like 6 months or 1 year or 2 year. The average number of claims to be settled is
calculated based on the prevailing death rate in the area. The death rate in the
district is 10.3 per 1000 population as per the Census Department.
Based on the above information the break even point was calculated for each of
the Companies as given in Exhibit 2. From the calculation it can be seen that
insuring 1000 clients in a time period of 6 months with each company would
result in earning profit from HDFC.
74
1. What are the advantages and disadvantages one can identify from the
major features of insurance schemes being offered by different companies
through CFTS?
2. Should CFTS continue with all the three companies for some more time?
3. Should CFTS choose only one company for providing insurance service to
its clients ?
4. If so, which of the three companies is most beneficial to CFTS?
75
Exhibit 1 : Main Features of the Insurance Schemes
HDFC Standard Life LIC of India ICICI Prudential ICICI Lombard

Insurance Life Insurance General Insurance
1. Age Group 18-50 Years 18-60 Years 20- 60 Years 20-60Years
2. Premium per client. Rs.95 p.a. Rs100 p.a. Varies from Rs.15 to Rs288/. Rs. 6 p.a.
p.a (In case of CFTS, average
premium comes around Rs30/.)
3. Minimum no. of 500 25 100 -

Clients
4. Premium collected July and November February, March and May March, April and May -
5 Coverage Natural and Natural Death, accidental death, PTD Natural death only Accidental death, PTD &
accidental death & PPD PPD due to accident
6 Benefit Rs.10,000 in case of natural Rs.20,000 in case of natural death. Rs10,000 in case of natural Rs.10, 000 in accidental
death. death. death,
Rs.50, 000 in Accidental death, Rs.10,000 in PTD &
Rs15000 in case of accidental Rs.5,000 in PPD
death. Rs.50,000 in PTD, Rs.25,000 in PPD
7. Formalities Required In Natural Death: In Natural Death: Only death certificate from 1. Death certificate
on Claim Death certificate from Gram Death Registration certificate Gram Pradhan. 2. Doctor's report
Pradhan. In Accidental Case: 3. Police report
In Accidental Death: 1. Copy of FIR
1. Copy of FIR 2. PM Report
2. PM Report 3. Police investigation Report
If client is having any problem 4. Police Final Report
to get the above two, 5 Doctor's report in case of
certificate from CFTS is disability.
accepted.
6. Commission to CFTS Rs10/ Per client No Commission 20% of the Premium No Commission
Note: PTD= Permanent Total Disability, PPD= Permanent Partial disability
76
Exhibit 2 : Solution to the Exercise on Break-Even Analysis
Particulars ICICI HDFC LIC

GENERAL NFORMATION
1000 1000 1000
1.Number of clients
2. Duration 6 months 6 months 6 months
3. No. of Staff 7 7 7
4. No. of working months 6 1 6
5. No. of clients per month 166.67 1000 166.67
6. No. of clients per staff per month 23.71 142.86 23.71
7. Staff Time Contribution per month (%) 8.3 8.3 8.3
8. No of claims as per death rate 10.3 10.3 10.3
A. COST
1. Salary of Staff (2861x7) (.083x6) =9973 (2861x7)(.083x1)=1662 (2861x7)(.083x6)=9973
2. Salary of Accountant (2861)(.0415x6)=712 (2861)(.0415x1)=118 (2861) (.0415x6)=712
3. Salary of BM (4255)(.0625x6)=1595 (4255)(.0625x1)=261 (4255)(.0625x6)=1595
4. Salary of IO (7000x6)=42000 (7000x6)=42000 (7000x6)=42000
5. Administrative cost (2.3x1000)=2300 (1.6x1000)=1600 (0.32x1000)=320
6. Claim settlement (250x10.3)=2575 (250x10.3)=2575 (20*10.3)=206
7. Training 1000 1000 1000
Sub-Total (Rs) 60,155 49,216 55,806
B. INCOME
1. Administrative & Service costs (15.7x1000)=15700 (15x1000)=15000 (5x1000)=5000
Reimbursed
2. Loan Claim 3818x10.3)=39325 (3818x10.3)=39325 (3818x10.3)=39325
Sub-Total (Rs.) 55,025 54,325 44,325
Profit (B-A) (Rs.) -5,130 5109 -11,481
77
DELINQUENCY MANAGEMENT
CONTAINING DELINQUENCY VIRUS 1
The CASHPOR Financial and Technical Services (CFTS) Limited is a

microfinance institution (MFI) registered as a company, initially as a private
company in October 1996 and later as a public company in 1999. It is following
the Grameen Bank of Bangladesh approach. The Grameen Bank approach
involves forming groups of five members, providing collateral free loans, adhering
to weekly repayments and giving exclusive focus on poor women.
In the Grameen approach, potential clients are encouraged to form groups of five
members. The groups are then organised into centres consisting about six to
eight such groups. The members make weekly savings with the MFI and they
also take loans. All the clients have individual saving and loan accounts with the
MFI. The main responsibilities of the groups and centres are to facilitate the
financial intermediation process. The following functions are performed by the
groups and the centres:
(i) To hold weekly centre meetings that are supervised by the MFI staff
member who maintains the financial records of saving and loan accounts
of the members. The savings and repayments are collected by the group
leaders and handed over to the MFI worker in front of all the members
during the centre meeting.
(ii) To provide group guarantee for loans to individual members by accepting

joint and several liability. In this regard the group has to raise group fund
for the purpose of default management and has to accept that no member
1
. Case prepared by Dr. KC Sharma, Bankers Institute of Rural Development, Lucknow, under
78
of a group will be able to take a new loan if any member of the group is in
default.
(iii) To appraise fellow members' loan applications and to ensure that they
maintain regular saving contributions and loan repayments.
The CFTS operates in the backward district Mirzapur in the eastern Uttar
Pradesh. Keeping in view the extent of poverty, large proportion of backward
castes and classes, and very low repayment rate in respect of formal bank loans,
the management of the CFTS felt that if the experiment could succeed in
Mirzapur district, it would succeed elsewhere also. The mission of the CFTS has
exclusive focus on poor women in rural areas and it aims to become a financially
sustainable institution while working for the poor. The mission of the CFTS is to
deliver financial services to its clients in an honest, timely and efficient manner. It
is operating since September 1997.
The management of the CFTS rests with the Board of Directors, which comprise
four members. Professor David Gibbons, a pioneer in replicating Grameen Bank
model in Malaysia, is its Executive Chairman. The CFTS plans to serve about
25,000 households by March 2003 when it will be able to become operationally
self-sufficient. By then it would have covered about 25 percent of the poor
households of Mirzapur district.
The CFTS provides two kinds of service financial and technical. The Financial
services include lending, savings and insurance services and the technical
services relate to Management Information System (MIS), monitoring and
evaluation, training, special research and income generating projects for the
poorest.
The most common loan product of the CFTS is the General Loan. It is repaid in
50 weekly instalments. The average size of the loan in CFTS comes to Rs.
79
5,433 and the range of loans taken so far varies from Rs. 500 to Rs. 20,000.
The amount of loan sanctioned can be from Rs. 500 to Rs. 8,000 in the first
cycle; the second cycle of loan is up to Rs. 15,000 and the third cycle of loan is
up to Rs. 25,000.
The rate of interest charged on loans is 20 percent flat and is based on the
Consultative Group to Assist the Poorest (CGAP) method of setting economic
rate of interest. The economic rate of interest is basically the rate of interest
which covers the cost of funds, administrative expenses, loan loss provision and
a margin for future growth. Nearly fifty per cent of the loan portfolio of the CFTS
is devoted to animal husbandry, mainly buffaloes, followed by trading which
accounts for about twenty five per cent. The other activities for which loans are
taken include carpet making, transportation and agriculture. Much of the
agricultural loan is borrowed for leasing-in land by the clients. All the loans are
given for income generation activities except the marriage loan and the
emergency loan. All the loans are of 50 weeks or less in duration except the
marriage loan which is lent for 200 weeks. The loan outstanding of CFTS in
March 2002 was Rs. 55 million.
The repayment procedure in CFTS is as follows. The weekly repayment is 2 per

cent of the principal and the interest per week commencing from the second
week after the disbursement of the loan. The repayment continues for 50 weeks.
Irregular repayment is not permitted. The amount due but not paid in any week
by a client must be paid by the group and the centre members at the same
centre meeting. It is the responsibility of the group and the centre leaders to
know in advance if any member is likely to default and ensure that full
repayment is made at the centre meeting.
The role of the Customer Service Representative (CSR), the CFTS field staff, is
very crucial in resolving the repayment problem. When any repayment due is not
made, the CSR is to immediately advise the group and the centre that it is a
80
challenge that they must face to grow stronger. It is to be conveyed to them that
it is their problem as they have admitted the person into the group and that they
have agreed to take collective responsibility for her. Further, the CSR is to make
sure that credit discipline in the group and the centre is maintained through
persuasion. The verbal contract between the CFTS and the clients through CSR
is the moral binding force and it is to be respected by both the sides. The verbal
contract or pledge that is repeated at the beginning of every centre meeting, in
essence, is about timely repayment on the part of the clients and timely
disbursement of loan on the part of the CFTS. More significantly, the CFTS staff
members get incentives for containing the delinquency problem.
The delinquency management is crucial for continued functioning of any MFI as

well as for its clients. Also, the issue of measurement of delinquency is important
as there are a variety of measures used. These measures are meaningful if the
formulas for measuring are clearly defined. One popular measure of
delinquency is the Portfolio at Risk (PAR).
PAR is defined as a proportion of loan outstanding past due by more than 30

days to total loan portfolio outstanding on a particular date. It is the experience
of MFIs worldwide that PAR represents the most comprehensive measure of
delinquency. PAR of not more than 5 percent is an international standard for
measuring loan portfolio quality. However, PAR may be defined variously by
considering past due as 'past due by one week', 'past due by two weeks' etc.,
i.e. breaking down arrears by age. It is important to note that only the principal
amount of loan is considered for PAR calculations.
The problem of delinquency as it was noticed in CFTS was as follows. PAR in

CFTS rose above 6 percent in July 1999. It kept on rising in August and
September and it went above 11 percent in October 1999 ( see Table 1 and
Figure-I).
81
Table 1: PAR in CFTS (March 1998 to October 1999)
Month March March April May June July August Sept. Oct.
1998 1999 1999 1999 1999 1999 1999 1999 1999
PAR 0 4.0 4.7 4.2 4.5 6.1 7.5 10.8 11.3
(%)
Figure-I PAR in CFTS (March 1998 to October 1999) (%)

12
11.3
10.8
10 PAR (%)
8
7.5
PAR (%)
6 6.1
4.7 4.5
4 4 4.2
0 0
Mar- Apr- May- Jun- Jul- Aug- Sep- Oct- Nov- Dec- Jan- Feb- Mar- Apr- May- Jun- Jul- Aug- Sep- Oct-
98 98 98 98 98 98 98 98 98 98 99 99 99 99 99 99 99 99 99 99
Month
The management of CFTS got worried as its mandate was to become financially
self-sustainable as early as possible and its funds position was tight. The
situation was reviewed by the management of CFTS. It was found that in April
1999, the CFTS had rotated all the branch managers in older branches and in
turn most of the new branch managers rotated their CSRs. The problem of
delinquency initially surfaced in some of the older branches in May 1999 when
there was little agriculture work and no surplus funds available with the clients to
make weekly payment. Then the problem spread to other branches.
The institutional arrangement to take care of delinquency in the CFTS was the
implementation of the Collective Responsibility Fund (CRF). The CRF is
expected to come in force automatically once any weekly repayment is dropped.
It is Rs. 2 per week for members of the affected group and Re. 1 per week for the
82
other members of the centre. The CRF would not settle the arrears but it would
remain in force until the arrears are completely repaid. Once the arrears are
settled by the client, the CRF would be returned to the respective members who
had contributed. The purpose of CRF is just to demonstrate the group members
collective responsibility against delinquency of a fellow client.
The CRF in the instance presented above was not implemented properly. The
matter was taken seriously by the management of CFTS. In October 1999, the
CFTS took measures to contain the problem of delinquency.
In November 1999, PAR did not rise further. Then it fell down every month and
by June 2000 it came down to 5 percent (see Table 2 and Figure II).
Table - 2: PAR in CFTS (November 1999 to June 2000)

Month Nov. Dec. Jan. Feb. March April May June
1999 1999 2000 2000 2000 2000 2000 2000
PAR (%) 11.3 11.2 10.3 9.1 7.2 6.4 5.6 5.0
Figure-II PAR in CFTS (Nov. 1999 to June 2000) (%)
12
PAR (%)
11.3 11.2
10.3
10
9.1
8
7.2
PAR (%)
6.4
6
5.6
5
4
0
Nov. 1999 Dec. 1999 Jan. 2000 Feb. 2000 Mar-00 Apr-00 May-00 Jun-00
Month
83
1. What are the possible reasons for the delinquency problem faced by CFTS?
2. What measures do you think the CFTS took to contain the delinquency
problem?
84
PERFORMANCE ANALYSIS
LINK METRICS TO YOUR MISSION: PERFORMANCE MEASUREMENT

1
SYSTEM OF FWWB
Introduction
The Friends of Womens World Banking (FWWB) was established in 1982 as a

non-profit organization with the purpose of promoting the direct participation of
women in economic development. An affiliate of the Womens World Banking,
the FWWB works with a network of organizations providing financial services to
the poor in eight states of India. Initially, the main activity of the FWWB was
confined to capacity building of partner organizations which was later on
extended to include credit support as well. The current activities of the FWWB
include, among other things, providing regular loan fund to microfinance
institutions (MFIs), capacity building and training, staff development and
publication. The FWWB acts as a sub-wholesaler channelising funds from apex
financial institutions and donors to local MFIs.
The participants of the FWWBs training program include the leaders and
managers of MFIs as well as leaders of the women savings and credit groups. It
networks with important national and international agencies that are active in the
microfinance sector including government agencies, donors, bankers, academic
organizations, private sector agencies and technical assistance providers. More
specifically, the FWWBs current program of activities include:
1. Providing revolving loan funds to partner organizations that provide

financial services to the poor.
2. Support the partner organizations through institutional development
programs to expand their capacity to manage credit and savings activities.
1
. Case prepared by Mr. Keyur Thaker, National Institute of Cooperative Management,
Gandhinagar, under the aegis of the `Workshop on Developing Cases and Training Material in
85
3. Pursue broader policy advocacy activities to improve the policy

environment for the growth of microfinance sector both in India and at the
global level.
4. Take up awareness building on microfinance issues particularly related to
women through research, publication and wider information dissemination.
Mission, Strategy and Objectives
The mission of FWWB is to assist in the formation and strengthening of peoples

organization by bringing them into the mainstream of the economy and thereby
participating in the process of nation building. The strategy of FWWB focuses on
identifying and building the capacity of promising and committed microfinance
institutions to play a leading role in providing financial services to the poor.
The objectives of the FWWB are:
- Ensure womens leadership in the local economy by increasing their

access to financial services through appropriate and sustainable delivery
mechanism.
- Support and strengthen microfinance institutions, which have a clear
vision towards providing financial services to the poor on a sustainable
basis.
- Promote high performance standards among its partners.
- Support innovations and best practices in areas of microfinance and micro
enterprise development.
- Expand and strengthen the network of institutions working for women and
active in financial policy making aspects.
- Enhance the FWWBs capacity to retain its niche as an institution builder
in the microfinance sector.
86
During the year 2001-02, the FWWB has reached 81 partner organizations
through its credit programme with an outreach of 46,753 women. It has
achieved a gross loan outstanding portfolio of Rs.169 million during the same
year (see Exhibit 1). FWWB provides capacity building support by creating
awareness about the self-help groups (SHG). This is achieved mainly through
training programmes organized for the SHG leaders.
Governance
The governance structure of FWWB consists of a Board of Trustees headed by

the veteran social worker Ela.R.Bhatt. The Chief Executive Officer looks after the
day-to-day operations. There are six departments or sections looking after the
various activities of FWWB (see Table 1). The Credit Program Department,
headed by a Manager, is responsible for credit disbursal and institutional
development. Loans are sanctioned based on the approval given by the Credit
Committee consisting of Board representatives and experts. The Special Projects
Department works on sponsored projects like SHG federation formation,
promoting micro-insurance and encouraging investment for community
infrastructure. The Research and Documentation department takes care of
research publications and their dissemination; while the Training Programme
section handles training programmes meant for capacity building and leadership
development.
Table 1 :Organizational Structure
Board of Trustees
Chief Executive Officer (CEO)
Credit Special General Finance Research and Training
Program Projects Administration and Documentation Program
Accounts
Programme Programme Administrative Finance Programme Programme
Manager Manager officer Manager Officer Officer
87
Performance Measurement System
The Performance Measurement System plays a key role in developing a

strategy, exercising management controls, evaluating the achievement of
organizational objectives and in compensating managers. In a non-profit
organization, a financially oriented performance measurement system does not
work adequately even though a major emphasis is placed on financial
sustainability of such organizations. The FWWB from the very beginning has
been using global norms developed for microfinance sector as the criteria for its
performance measurement. Over the period, they have adopted and modified the
norms to suit their requirements. The performance measures of FWWB in
relation to vision, mission and objectives may be depicted as given in Table 2.
The actual performance of FWWB in relation to various indicators are presented
in Exhibit 3.
The Credit Program Manager opined that these norms are inadequate and are
still evolving. They need to be customized to meet specific country needs and
scenario. She added that there are certain objectives of Credit Program
Department which are not adequately measured by the existing performance
measurement system.
The major decisions taken by the Credit Program Manager are:
- Which organizations should be approached for support?

- Credit appraisal and loans granting decisions.
- What type of non-credit assistance for capacity building and institutional
building should be given to the organization?
- Whether to continue or bring change in current credit policy?
- What should be the pricing of loans and other services provided by
FWWB?
88
Table 2: Mission and Metrics of FWWB
Vision
To promote direct participation of women in the economy through access to financial services
Mission
To assist in formation and strengthening of peoples organization by bringing them to mainstream
Strategy
Building capacity of MFIs to play a leading role in providing financial services to the poor
Objectives
A. Ensure womens B. Support and C. Promote high D. Support E. Capacity
leadership through strengthen performance innovation and enhancement and
access to financial MFIs with standards among best practices. retain its niche as
services focus on partners Network for institution builder
providing policy making
financial
services to
poor on
sustainable
basis
Actions/Drives
A B C D E
1.Increase 3.Ensure 1.Provide 1.Monitoring and 1.Identification, 1.Operational

womens appropriate training and extending Documentation efficiency
access to and other capacity financial and non- Development 2.Financial
financial sustainable building financial support of innovations efficiency
resources delivery support 2.Propagation 3.Human
2. Ensure mechanism of innovations Resource
end use 3.Networking Development
of fund and Partnering 4.Differentiation
Indicators/Measures
A B C D E
1.No of MFIs 1.Progress and 1.No of 1.Sustainability

1.Outreach
supported performance of innovations and Growth
2.Average loan size
2.Sustainability the partner and best 2. Niche Activity
3.Operational and
of supported organizations practices 3.No.of MFIs
financial sustainability
MFI 2.Comprehensive supported developed
of delivery mechanism
measure of 3.Networks 4.Human resource
4. Loan portfolio at
performance developed development
Risk
5.Equity Multiplier
5.Recovery rate
Section / Department Primarily Responsible
A B C D E
Credit Program Credit Credit Program Credit Credit Program,

Program and Program and Administration and
Training Special Finance
Projects
89
- Determining the fund requirements for the credit program and mobilizing
the resources
- Devising strategic or long term plans
- One-year business development plans
- Evaluating performance of credit officers and decide about their
compensation and rewards.
- Review of partners performance, assessing problems arising in advance
and work out amicable solutions for troubled MFIs.
The information required for such decisions are generally requested from the
Credit Program team. The information sources include statements about portfolio
status and client database. However, it is felt that the information and reports
received form the clients cannot be fully relied upon as they are incomplete, not
uniform and irregular. Since the information generated to aid in decision making
are not detailed enough, judgment has to be exercised. Further, certain
objectives which are qualitative in nature are difficult to measure. For ex.
measuring FWWBs capacity to retain its niche as an institutional builder, extent
of development of partner organizations and community development are tricky.
The FWWB focuses on providing credit and capacity building support to mainly
small and infant MFIs and units without net worth. The services of FWWB are
unique in the sense that it offers collateral free loan and identifies NGOs for
development with at least one year of operation.
The Finance Section lead by a manager is involved in taking following decisions:
- Investment of surplus funds

- Budgeting viz., how much to spend on what activity? Expenses budget
under various heads
- Cost allocation or transfer pricing
- How much of owned and external/borrowed funds are to be made
available to various credit programs?
90
- Mobilization of funds by way of loan and/or grant from domestic and

multilateral financial agencies.
- Cash and working capital management, and bank relationship
- Product pricing
- Ensuring financial and operational self-sufficiency and sustainability
Various information and reports to aid in above decisions include: Funds position
report; Cash flow statements; Grant utilization report; Financial Ratio Analysis;
Annual Budget; Variance analysis; and Financial statements and audit reports.
The Finance Manager has to say the following on the issue: Since the data are
available on electronic spreadsheet, tailor-made information reports and
performance measures can be generated. However, the client database is not
adequately computerized and we do not get timely information in uniform format
from the clients. We are still not able to adequately devise non-financial
measures of performance which are equally important for management controls.
Being an enabling type of MFI, the FWWBs success primarily depends on the
success of the client organizations which is difficult to measure only through
financial parameters.
The different stakeholders of FWWB include the promoters, the lenders, partner
organizations, donors and employees. The funding agencies are primarily
interested in end use and repayment of the loan. The donors, based on their
funding objectives, offer support to specific programs which may be different from
FWWBs main activities. The FWWB though a non-profit organization but
aspiring to achieve international performance standard needs to keep very
qualified and satisfied employees to help achieve its mission. Hence ensuring
employees development and satisfaction is one of the key challenges in
attaining the success.
91
The FWWB was set up to strengthen MFIs and other partner organizations. Its
success greatly depends on the success of the client organizations. The training
department was set up to offer technical inputs and meet training needs of the
partner organizations. Training being perceived as a supportive function did not
receive adequate attention. The training largely remained confined to developing
operational level abilities of SHG leaders and training of trainers. Training for
enhancing managerial level skills and institutional building of clients could not be
offered though such training requirements are out sourced by FWWB.
Strategic Issue
Presently, the total loan of outstanding of FWWB comes to nearly Rs.170 million.
In the next 4 years, the target is to reach a loan portfolio of Rs.500 million
covering more than 1 lakh women clients. To achieve such a growth, the FWWB
is contemplating changing its legal status as a Trust to a Non-Banking Financial
Company (NBFC) or a Corporate body registered under companies act. The
FWWB also wants to spin-off separately its training and capacity building division
as a charitable activity from the Credit Programme activity. Close integration with
the client organizations, expanding client base and volume of credit, bringing in
more professionalisation in credit program, meeting statutory requirements,
achieving cost efficiencies in providing technical inputs, and improving the
productivity of spending on partners are some of thrust areas for achieving high
growth and sustainability by FWWB.
92
Questions for discussion
1. Do you think FWWB adequately measures its performance satisfying all

the stakeholders to achieve its objectives?
2. What information the existing performance measurement system fails to

offer for decision-making and future planning?
3. What demands you would put on the performance measurement system

to meet the strategic objectives of FWWB?
4. Given the development of microfinance sector for the poor why

maintaining sustainability is demanded from the partner organizations?
93
Exhibit 1: Coverage and Portfolio Size
Sr. 1998-99 1999-00 2000-01 2001-02

No
1 No. of Organizations 82 78 80 81
2 Number of Loans Outstanding 97 113 169 237
3 Gross Loan Portfolio ( Rs lacs) 387 580 970 1690
Outstanding
4 Loan Amount Disbursed 223 450 800 1373
(Rs lacs)
5 No. of Loans Disbursed 61 74 101 137
6 Outreach of Women 18706 19621 32119 46753
Exhibit 2 : Performance of Credit Program Status
Sr. 1998-99 1999-00 2000-01 2001-02

No
1 Interest Income (Rs. lacs) 35.4 57.5 100 157
2 Yield on average portfolio 10% 12% 13% 12%
3 Total Outside Borrowing (Rs 326 389 742 1538
lacs)
4 FWWB own Loan funds (Rs 61.1 166 234 295
lacs)
5 Cost of fund (Rs lacs) 22.5 32.8 65 109
6 Ratio of Cost of fund to 6.4% 6.8% 8.5% 9%
average portfolio
7 Loan loss provision amount 25.1 12.4 11.8 25
(Rs lacs)
8 Loan Portfolio at risk 14% 10% 4% 1.4%
94
Exhibit 3: Performance Measurement of FWWB
Indicators Definition 1999 2000 2000 2001
Actual Values Indicator Actual Values Indicator

A. PORTFOLIO Principal Repaid 25197944 90% 39425599 94.62%
QUALITY Principal Repaid + Principal 27969163 41665700
1. Repayment Rate as more than 30 days past due
of 30 Days
Outstanding Balance of 5878018 10% 3801643 4%
2. Portfolio at Risk as Loans With Arrears >30 57995993 98377208
of 30 Days days
Ending Portfolio Outstanding
B.SUSTAINABILITY
1. Operational Self- Total Internally Generated 14002992 86% 18356728 93%

Sufficiency Income 16276456 19678553
Total Expenses
2. Financial Self- 14002992 18356728
Sufficiency Total Internally Generated 18714171 75% 21680127 85%
Income
Total Expenses +Imputed
Cost of Capital
C. COST EFFICIENCY
1. Operating Cost per Operating Cost 1732546 0.04 1584056.00 0.02

Unit of Money lent Average Portfolio 48353503 78186600.50
Outstanding
2. Average loan Size Amount of Loans Disbursed 45025486 2295 80146700.00 2495
Total Numbers of Loans 19621 32,119
Disbursed
3. Caseload:
a. Number of Loans Number of Loan 105/3 35 141/3 47

per Loan Officer Outstanding
Number of Loan Officer
Average Loan Portfolio 48353503 78186601

b. Average Portfolio 16117834 26062200
Number of Loan Officer 3 3
per Loan Officer
D. CAPITAL
STRUCTURE Total Assets 88806953 5.98 141934840 6.64
Total Equity 14850208 21364416
1. Equity Multiplier
E. OUTREACH
1. No. of active client Number of client 78 78 80 80

Organisations
2. Number of active Number of borrowers 19621 19621 32119 32119

borrowers
95
F. FOCUS ON LOW
INCOME CLIENTS
Amount of Loans Disbursed 45025486 2295 80146700 2495
1 Average Loan Size Total Numbers of Loans 19621 32119
Disbursed
G. WOMEN
PARTICIPATION
1. Credit & Savings

Programme:
a. % Women Clients No of Women clients 19621 32119

Total Number of Client 19621 100% 32119 100%
b. % of portfolio to Total portfolio held by 57995993 98377208

women women 57995933 100% 98377208 100%
Total portfolio outstanding
2. Leadership &
Decision Making
(FWWB Level)
No. of women staff 13/14 93% 17/23 74%

a. % Women Staff
Total number of staff
No of women middle
b. % Women in middle 8/9 89% 14/16 88%
managers
Management
Total number of middle
managers
c. % of women in No of women senior

senior managers 100% 100%
4/4 4/4
management Total number of senior
managers
d. % women in Board No of women on the Board 69% 69%

9/13 9/13
Total number of board
members
Source: Friends of Womens World Banking, Annual Report 2000-2001, Ahmedabad, 2001
96
ATTAINING SELF-SUFFICIENCY :
THE CASE OF CREDIT AND SAVINGS PROGRAMME
OF RGVN 1
Rashtriya Gramin Vikas Nidhi
The Rashtriya Gramin Vikas Nidhi (RGVN) was established in April 1990 as an
autonomous and nonprofit organisation. It is registered under the Societies
Registration Act XXI of 1860 in the State of Assam with headquarters at
Guwahati. The RGVN has been sponsored by the Industrial Finance Corporation
of India (IFCI), the Industrial Development Bank of India (IDBI) and the National
Bank for Agricultural and Rural Development (NABARD). These organisations
have contributed a sum of Rs. 101.8 million towards its corpus fund. The RGVN
has a 13 member Governing Board consisting of representatives of its sponsor
organisations and eminent development professionals involved in various socio-
economic developmental efforts.
The aim of the RGVN is to improve the quality of life of the poor rural and urban
people through social action. It operates through two main programmes viz., the
Non-Governmental Organisation Support Programme (NGOSP) and the Credit
and Savings Programme (CSP). The NGOSP involves in lending to the poor
through small NGOs in the form of returnable grants or soft loans. The guiding
principle of the programme, over the years, has been transfer of resources while
inducting commercial discipline among the NGOs engaged in income generating
activities. Under the NGOSP, the RGVN has made a cumulative disbursement of
over Rs. 110 million to more than 900 NGOs. These NGOs are spread across
the states of Sikkim, Orissa, North Andhra Pradesh, Chattisgarh, Bihar,
Jharkhand and eastern Uttar Pradesh. The CSP which was launched in May
1
. Case prepared by Mr. Krishan Jindal, Bankers Institute of Rural Development, Lucknow under
sponsored by SIDBI Foundation for Micro Credit, Lucknow. The author is grateful to Mr.
N.C.Medhi, Director and other staff of CSP for their valuable help in preparing the case study.
97
1995, on the other hand, is a direct lending programme of the RGVN that
operates through the formation of groups.
Credit and Savings Programme
The RGVN launched its Credit and Savings Programme (CSP) in 1995 as an
Action Research Project to meet the credit needs of the poor people who
continue to be out of the reach of the formal lending system. The initial idea was
to have an alternative credit delivery system for the North Eastern region of the
country on the lines of the Grameen Bank of Bangladesh. The objective was to
gain in-house experiences, catalyse the activities in the region and lay foundation
for eventually promoting independent development financial institutions.
The CSP started operations with four area offices (branches) in four districts
located in Assam and Megalaya. In 1996, after an external evaluation
demonstrated the effectiveness of the programme, CSP was institutionalised as
a regular RGVN programme.
The CSP is structured with in RGVN as a separate unit1 which acts as a Central
Coordination Unit (CCU) for monitoring the field level activities. The CCU is
guided by six-member committee of the Governing Board of RGVN. Mr. N.C.
Medhi, the Director of CSP functions as the Member Secretary of this committee.
As on March 2001, the CSP was working in 4 districts of Assam, one district of
Meghalaya, two districts of Orissa and one district of Bihar. The organisation
works through its ten Area Offices located in Matia, Mukalmua, Jania, Bejera,
Morigaon, Saptagram and Kharupetia (in Assam); Tikrikilla (in Meghalaya),
Bhejiput (in Orissa) and Dhanpur (in Bihar). There are nine outreaches under the
area offices - two under Mukamua, one under Jania, five under Matia and one
2
. The CSP activities are proposed to be taken over by Luit Microcredit, a company licensed
under section 25 of the Companies Act, 1956, promoted by RGVN on compliance of
necessary formalities.
98
under Bhejiput to strengthen the operations of the CSP. In 2001-02, the CSP has
closed Tikrikilla and Saptagram area offices and merged the operation of these
two areas with Matia area office. Each area office is usually manned by an area
supervisor and four field supervisors. The CSP has a total staff of 45 forty in
the area offices and five in the headquarters.
Group Formation and Functioning
The CSP has borrowed a lot of systems from the Grameen Bank Model but has
made many modifications to suit the local conditions. Loans are provided to
groups and not to individual members. The groups promoted by the CSP consist
of 15 to 20 members each. Initial entry meetings are held in the village to
sensitise and build awareness in the community. The process of group formation
begins after these initial meetings. The broad criteria for becoming a member of
the group include:
Only one member per family is taken

There should be no government employee in the family
The family income is less than Rs. 25,000 per annum
The members age is between 18 to 50
Each group elects a chief and a treasurer who manage the group and also keep
group records. The savings begin once the groups are formed. The group
meetings are held weekly. Training is provided to the chief and the treasurer in
maintaining the records and to the entire group on group norms. The bank
accounts for groups are opened. The member profiles are also prepared during
this period. This includes information on occupation, income and assets
ownership. After three weeks of regular savings, a Group Recognition Test
(GRT) is held. The GRT gives scores on aspects like regularity, group discipline
and maturity in the group. The groups which pass the GRT can apply for a loan.
The group members unanimously decide about the members who should receive
99
the loans and submit a joint application to the area office. The applications are
recommended by the field supervisors of CSP in the group meetings. The area
supervisors are authorised to sanction loans within the specified ceilings. The
loans are sanctioned to the individuals but are disbursed to the groups through
cheques. The internal distribution of loans to individuals is done by the groups
with the supervision from the CSP staff. The repayments are collected at the
group meetings by the field supervisor of CSP and deposited in the nearest bank.
The field supervisor reports about the groups under him to the Area Supervisor.
The area supervisor in turn reports to CCU through monthly reports.
Saving and Loan Products
Savings: The members of the groups save every week from the day of group
formation. Presently each member has to compulsorily save a minimum of Rs. 5
per week. The members can make additional voluntary savings. These savings
are kept in the group accounts maintained with the CSP. The group savings can
be withdrawn at any point of time after 6 months of the group formation.
However, a minimum balance of 10 percent of the loan outstanding from the
group has to be maintained at any time before the payment of the loan. The CSP
pays an interest of 9 percent per annum on the savings. Interest is credited to
the group accounts on a half yearly basis.
The CSP offers two types of loan products: General Loans and Seasonal Loans.
General Loans: This is the main loan product presently being offered to the
groups. The loan size for the first cycle is limited to a maximum of Rs. 2,000
per member. For the second and third cycle, the maximum loan limit goes up to
Rs. 4,000 and Rs. 8,000 respectively. The loans are repayable in 50 weekly
installments. The CSP charges a flat interest of 15 percent per annum on these
loans.
100
Seasonal Loans: The CSP has introduced this loan product recently. The loan is
provided to members who have been associated with the programme for a
minimum of 3 years having a good repayment record and an already existing
business. The loan amounts range between Rs. 10,000 to Rs. 15,000 in size.
This loan is to be repaid in 25 weekly installments. A flat interest rate of 18
percent per annum is charged on these loans.
Human Resources Management
The CSP has adequate staff strength at the head office. The staff at head office
is well qualified with sound experience in microfinance. Presently, the CSP is
working with two levels of staff: (i) staff on deputation from RGVN, and (ii) staff
on contract with the CSP. The majority of the staff of CSP, except for those at
head office and some of the area managers, are on contract. The field
supervisors are paid a lumpsum salary of Rs.2,500 per month in the beginning
and it goes up by Rs. 200 every year. The other support staff are paid on an
average a salary of Rs. 1,000 per month. In addition, the field staff are provided
free of cost with a shared bachelor lodging facility. The new recruits undergo a
rigorous induction training programme.
Accounting and MIS
Separate accounts for CSP operations are prepared, on a mercantile basis. The
accounting system is systematic and computerised at the head office level.
Though most of the costs and revenue pertaining to CSP have been separated,
the income and expenditure are transferred to and accounted for in RGVNs
central accounts. The present Management Information System (MIS) at the area
office covers information on a weekly basis although it is consolidated and sent
to the head office every month. The MIS covers the information on amounts
disbursed, amount due and recovered, amount of overdues, interest dues and
101
collections, savings mobilised and withdrawn, interest paid on savings, new

groups formed, total groups existing and composition of the groups.
At the area offices, collection and recording of financial information is carried out
with the help of collection sheets, savings and repayment receipts, and savings
withdrawal forms. These are used to update the savings of the loan ledgers and
the cash book at each area office. The monthly progress reports to the head
Office are prepared from these ledgers and cash books. The above information
is provided in a detailed monthly report to the head office, which has separate
sections on each of the aspects mentioned above. A fund requirement statement
is prepared monthly or quarterly by each branch and is used by the head office
for overall cash management.
An internal audit is also carried out every quarter. The internal audit reports
concentrate on the errors in recording, cash management at branches and other
financial aspects.
Progress of CSP
The CSP has made a good progress over the years in terms of outreach. It has
promoted 2,109 groups as on March 2001 having 37, 838 members. The
progress over three years period is presented in Table 1.
The loan portfolio is moderately diversified with 60 percent of the portfolio

accounted by trade and vending, 18 percent by manufacturing, 16 percent by
animal husbandry, 1.3 percent by service enterprises and 0.7 percent by
agriculture. The annual loan repayment over the last three years has been above
91 per cent. Though there is a scope for improvement in the repayment
performance, it is has to be seen in the context of operating in North Eastern
Region where repayment performance of formal financial institutions is extremely
poor.
102
Table 1: Progress of CSP
(Savings and Loan Amount in Rs.)

Items March 31,1999 March 31, 2000 March 1,2001
No. of Groups 814 1611 2,109
Total Members 15,297 21,427 37,838
Of which Women 13,491 19,782 36,138
Savings with CSP 37,63,195 60,83,016 1,02,35,215

Total loan disbursed 4,50,42,300 8,06,68,300 12,37,89,800
Loan received by:
Number of groups 677 922 1458
Number of members 12,476 16,343 23,042
Repayment rate (%) 94.97 91.78 91.17
Loan outstanding 1,79,29,927 2,62,67,938 3,33,11,498
The CSPs activities are funded mainly by the Small Industries Development
Bank of India (SIDBI) and NABARD 3. SIDBI has sanctioned a loan assistance to
the tune of Rs. 30 million at 9 per cent rate of interest per annum. Under
NABARDs Revolving Fund Assistance (RFA), an amount of Rs. 0.4 million has
been sanctioned for on-lending activities of which Rs. 0.2 million has been
released in March 2000. A grant of Rs. 0.784 million has been given as
operational assistance. The Balance Sheets and Income and Expenditure
statements for the financial years 1998-99, 1999-2000 and 2000-2001 are
presented in Exhibit 1, 2 and 3. The statements wherever required have been
regrouped for the purpose of better understanding,
3
. RGVN has made contribution to a Loan Redemption Fund for repayment of borrowings from
SIDBI since 1997-78 treating the same as Direct expenditure on pursuance of its objectives.
No such redemption fund is deemed necessary in respect of borrowings from NABARD.
Appropriates amounts will be contributed by RGVN from its central accounts as and when
required for repayment to NABARD.
103
Attaining Self-sufficiency?
Mr. Medhi, the Director of CSP, reflecting on the performance of CSP, expressed
satisfaction that the programme has many strengths in organisational,
managerial and financial areas:
Organisational: There is a clear focus on microfinance; experienced board;

suitable and flexible organisation structure; and good outreach and positive
impact on poverty.
Managerial: Good human resource; good MIS; effective internal controls; and ,
effective utilisation of assets.
Financial: Good circulation of funds and good savings mobilization.
But Mr. Medhi feels that the difficult task has been to attain twin goals of moving
towards financial sustainability and making a positive impact on poverty. Mr.
Medhi takes pride in sharing that the CSP has definitely made a difference in
enhancing poor peoples livelihood security in the isolated regions where
productive potential remains unexploited due to scarcity of capital.
Further, according to Mr. Medhi, the CSP has also tried to move closer to
attaining operational self-sufficiency4 by opening new outreaches, forming more
and more groups, mobilizing higher savings, and accessing loan funds from
mainstream financial institutions like SIDBI. Attaining operational self-sufficiency
leading eventually to financial self-sufficiency of CSP has been a priority on Mr.
Medhis agenda. This he hopes would pave the way for the integration of CSP
with the formal financial sector helping it in accessing commercial sources of
finance. Mr. Medhi is worried that CSP is still not operationally self-sufficient. The
4
. Operational self sufficiency is a situation when the organisation is able to recover its cost of
operations (including financial costs, operating expenses and loan loss provisions) from
income from its operations (interest and fee income) .
104
operational self-sufficiency ratios of CSP were 76.6 percent for year ending
March 1999, 84.1 percent in March 2000 and 69.3 percent in March 2001.
Mr. Medhi wonders what more he has to do. He somewhat differs with many
experts who have suggested him to increase the rate of interest further on loan
products as he believes that such a step may prove counter-productive.
1. What are the Strengths and Weaknesses of CSP?
2. If you were in the place of Mr. Medhi, what would you do so that CSP can
attain operational self -sufficiency?
105
Exhibit 1: Sources of Funds of CSP
(Amount in Rs.)
As on As on As on
31.3.2001 31.3.2000 31.3.1999
Capital Reserve: 3,73,566 3,03,016 -
Unsecured borrowings from:

SIDBI 2,87,50,000 2,30,00,000 1,50,00,000
NABARD 20,00,000 20,00,000 -
Group Savings 1,02,35,215 60,83,016 37,63,195
Other Liabilities:
Grants (pending utilisation) 1,06,434 4,91,692 -
Interest accrued 9,27,842 6,74,849 4,47,534
RGVN: - 2,33,589 6,45,179
Outstanding expenses 3,697 - -
Total 4,23,96,754 3,27,86,162 1,98,55,908
Exhibit 2: Application of Funds by CSP
(Amount in Rs.)
Application of As on As on As on
Funds 31.3.2001 31.3.200 31.3.199
0 9
Fixed Assets 10,22,237 8,07,176 3,69,216
(depreciated )
Investments:
Long Term 30,83,84 8,00,000 N.A
Deposits 6
Short Term 21,50,00 52,33,846 36,46,00 N.A
Deposits 0 0 44,46,00 7,24,777
0
Loans (to Self Help 3,33,11,49 2,62,67,9 1,79,29,9
Groups) 8 38 27
Balance:
In hand 80,173 53,017 1,51,950
With Bank 6,94,228 7,74,401 11,05,72 11,58,73 3,75,855 7,27,805
0 7
Advances and 20,54,772 1,06,311 1,04,183

Receivable
Total 4,23,96,75 3,27,86,1 1,98,55,9
4 62 08
106
Exhibit 3: Income and Expenditure Statement of CSP
(Amount in Rs)
Items As on As on As on
31.3.2001 31.3.2000 31.3.1999
1. Financial Income
Interest on loans 55,06,880 43,55,122 24,51,506
Interest in Investment 2,74,222 1,24,279 46,706
Miscellaneous income 1,17,040 63,706 12
Total Financial Income 58,98,142 45,43,107 24,98,224
2. Financial Cost of Funds

Interest on debt 27,80,937 18,59,096 10,67,671
Interest paid on deposits 4,87,179 3,08,270 2,23,426
Total Financial costs 32,68,116 21,67,366 12,91,097
3. Gross Financial Margin (1-2) 26,30,026 23,75,741 12,07,127
4. Provision for loan losses - - -
5. Net Financial Margin (3-4) 26,30,026 23,75,741 12,07,127
6. Operating Expenses
Rent and Electricity 3,75,293 1,75,298 1,05,823
Salary and benefits 26,21,545 15,64,182 9,43,614
Training 60,667 43,741 1,81,839
Travel 7,10,706 5,79,358 3,30,151
Repairs and Maintenance 25,497 33,469 8,142
Incentives for recoveries 2,24,499 2,68,510 97,509
Depreciation 2,11,483 1,76,400 90,313
Others 10,12,642 3,90,064 2,14,277
Total Operating Expenses 52,42,332 32,31,022 19,71,668
6. Net Income From Operations (5-6) (26,12,306) (8,55,281) (7,64,541)
7. Income from Grants 3,14,708 6,49,292 3,00,000
8.Excess of Income over Expenses (6-7) (22,97,598) (2,05,989) (4,64,541)
107
DO YOU DESERVE MORE FUNDS ? : THE CASE OF MVS 1
Part - 1
Meeting the Target
It was the last Monday of August 2000, Mr. Ramesh, the Kishanganj Branch
Manager of MVS (see Annexure 1 for more details on MVS) was conducting the
monthly staff meeting.
As you all know I was in the Head Office last week, Mr. Ramesh addressed his
staff, I learnt that the internal audit of our branch is likely to be held during the
first week of October. Though it is still a month away, we should start preparing
ourselves. What do you think we should do for this audit?
Sir, this year we will take the audit team to Bagdongri village. It has several old
groups which have taken many repeat loans, said Mr. Adarsh, a veteran field
staff.
Mr. Mohan, the field staff in charge of Bagdongri who has just joined the MVS
two months back, was glad that Mr. Adarsh recommended his village. He was
sure that the internal audit team would appreciate the groups and his work.
Nevertheless, he was worried about the conversation he had with Mr. Ramesh
the day before about being far behind the targets. He feared that the audit teams
praise for him would be marred if he failed to meet the disbursement target for
the quarter ending in September.
The day before, Mr. Ramesh had called Mr. Mohan to his table. Pointing at the
target for the Bagdongri cluster of 20 villages he said, Our branch has a target of
1
. Case prepared by Mr. Swandip Sinha, EDA Rural Systems, Gurgaon under the aegis of the
`Workshop on Developing Cases and Training Material in Microfinance, sponsored by
SIDBI Foundation for Micro Credit, Lucknow.
108
500 new loans by the end of this quarter in Bagdongri cluster but so far we have
disbursed only 50 new loans. We must somehow disburse at least 450 new
loans in the next month. I know you have been in the MVS for just two months
but you must work hard and achieve the target. Do whatever is needed including
consulting your seniors. Mr. Ramesh paused. Our donors set these targets,
and we have to keep our reputation with them. How could we ignore them? Their
help is so vital for all our programmes. Could the MVS ever have been such a
large organization without the commitment of the donors to help the poor in this
region?
Four hundred and fifty new loans! The target constantly bothered Mr. Mohan and
at the end of the day he decided to visit Mr. Adarsh at his home.
You have been with the MVS for 6 years and I was told that you have always
met your target. Please advise me on how to achieve the target of 450 new
clients in just one month, said Mr. Mohan. There is so little time. I also have to
organize the childrens vaccination programme next month and at the same time
plan for seed distribution to farmers, he added.
I do not understand why you are so worried about internal audit. In the last five
years, I have never seen anything adverse resulting from these. You must
understand that internal audit is the managements headache and not ours. Now
that you have come to me, I will definitely advise you, said Mr. Adarsh. Their
discussion continued for an hour and finally as Mr. Mohan left for his home, he
was quite relieved.
For the next few days, whenever he visited the field, Mr. Mohan summoned
special meetings of the leaders of the five or six nearby groups. Once the groups
gathered, he asked the leaders to prepare a list of names of future borrowers
from their groups. Mr. Mohan was sure that it will take an entire week for all the
109
groups to prepare the list, and he could safely devote this time to his other
development responsibilities.
He missed a few group meetings but was not too worried as the leaders were
responsible women. Even in the past, when Mr. Mohan, was unable to attend
meetings, the leaders collected savings and loan repayments from the members
and handed it over to him during his visits. They also helped him fill the
individual collection sheet, which highlighted the loan repayment and savings
position for each member. However, Mr. Mohan knew that the records which the
groups gave him were not always accurate or complete. Mr. Adarsh had told him
that while deciding who gets a fresh loan, it was the performance of that group
which mattered the most. Therefore, Mr. Mohan always made it a point to
update the group information himself. He always crosschecked the information
regarding savings, loan repayments and loans outstanding with the groups
during group meetings.
As planned, after one week, Mr. Mohan collected a list of 500 names from the
group leaders. Filling in their loan application forms took another four days.
Again the group leaders were of immense help. Finally, everything was ready
and Mr. Mohan took the applications to the branch for approval. The loan
sanctioning committee headed by the deputy district manager scrutinized the
applications and selected 425 applications for new loans. The applications of 75
members were rejected mainly because the information available from the
Management Information System (MIS) at the branch office showed that their
groups had a very long history of loan delinquency.
A day before disbursements were to begin, Mr. Mohan was preparing the papers
when he suddenly noticed that many individuals who were to receive fresh loans
still had past loans outstanding in their names. Once again, he went to Mr.
Adarsh and asked him how to handle this problem.
110
We follow a simple method in these cases, explained Mr. Adarsh. One method
is to add the new loan to the old outstanding amount and treat them together as
the amount payable within the duration for the new loan. In the second
method, Mr. Adarsh continued, You could use a part of the new loan to adjust
the old outstanding amount and show the remaining amount as the sum
disbursed. That solved the problem for Mr. Mohan.
The internal audit team finally visited the Kishanganj branch on 1 November,
2000. Though Mr. Mohan was sure everything was okay, he was slightly
nervous when the team asked why some of the individual collection sheets were
not complete. On the second day, the team visited the Bagdongri village. After
attending a group meeting, they accompanied Malti Saha, one of the members
who had recently taken a loan for purchasing a cow, to her home.
On reaching her home, one of the team members asked, Where is the cow you
purchased?
My son has taken it out to graze, Malti replied.
Nevertheless, the team wanted to know more and asked her several questions
such as from where she purchased the cow and for how much.
How do you expect me to spend on a cow when my house still does not have a
roof after the last cyclone? Malti finally retorted.
The internal audit team took notes diligently.
That evening Mr. Mohan visited Mr. Adarsh and after narrating the incident said,
The internal audit report would reprimand me for negligence which may affect
my career.
111
Mr. Adarsh remarked, Dont worry Mohan. Every year there are so many
borrowers like Malti. But our management understands our commitment to the
poor and needy. After all Malti used the money to satisfy a basic need. Where
else would she have got the money to repair her house, had we not given her
loan? Isnt the final objective of all our programmes is to help the poor?
Part - 2
Funding MVS
Mr. Adam Walsh, the Microfinance Programme Head at Assist Poverty

Worldwide (APW) was meeting his colleagues. The APW is a leading supporter
of the MVS programme. He started, I am sure you all have studied this recent
application for funds from MVS. Waving the proposal in his hand he asked,
Could I have your opinion about it?
I think our grants to MVS have really helped them. Their report shows quite a
good performance for the microfinance programme in the last financial year. In
fact their financial statements show profits for the last year. Their repayment rate
has also improved from 89 percent to 91 percent, said Mr. Alan King, one of Mr.
Walshs colleagues.
I think we should fund them again, said Mr. Tom, another colleague. Only this
time we should give them a loan for expanding their portfolio and not a grant.
They seem to have developed their capacities quite well, he added.
Everyone in the room agreed to the suggestion.
However, I think we should have an independent assessment of MVS, said Mr.

Walsh. It would not only make it easier for us to justify our support to MVS, but
would also help identify how the programme can be further strengthened in
future.
112
Soon a team of three microfinance experts from Micro Consultants was in MVS.
They spent seven days meeting the staff at all levels and collecting data from the
head office, unit offices and the branches. Amongst a host of staff, they also met
Mr. Adarsh and Mr. Mohan. The team spoke to them in detail about their
functions and experience. Carrying with them the internal audit report, they
visited the field when they met Malti Saha in Bagdongri. She was yet to purchase
the cow.
In the head office and in the branches the team worked extensively to determine
the actual costs incurred by the microfinance programme of MVS. It allocated
staff costs based on time spent on microfinance. Similarly it allocated fixed
assets based on their use for the microfinance programme and accounted for
depreciation. The operational income for microfinance was separated from non-
operational income to reflect the actual income from microfinance services only.
Soon the team submitted its report to the APW (see Exhibits 6-8 in Annexure 3)
After studying it carefully, APW decided to hold the decision to lend to MVS.
Instead, it commissioned another study for restructuring the microfinance
programme of MVS.
113
Session 1
1. What did the portfolio and financial analysis carried out by Micro Consultants
about MVS reveal to APW which made them to reverse their lending
decision? Why were some of the Micro Consultants figures different from the
figures reported by MVS?
Session 2
1. What do you think are the causes which have led to the present situation?
2. APW has hired you as a consultant for restructuring microfinance

programme of MVS. What are your suggestions to restructure MVS?
114
ANNEXURE - 1
Manav Vikas Samity (MVS)
Manav Vikas Samity (MVS) was established as a non-governmental orgnisation

in 1971 by the Poverty World Federation (PWF) for the socio-economic
development of the poor community in North Bengal. Starting with the
construction of roads, bridges, markets and schools, the MVS soon devised
programmes to assist the poorest in agriculture, community development, health
and womens economic activities. Its activities resulted in the greening of the
north through roadside tree plantations and raised awareness about womens
rights. It also helped in the emergence of self-managed peoples organisations
(Federations) to facilitate development activities in the region.
Providing the poor with access to credit facilities for enabling economic activities
was an integral part of the MVS development strategy from the beginning. It
provided loans often interest-free, to its target group in the 1970s and 1980s.
MVS concentrated on funding mens ventures. From 1988 the focus shifted to
giving loans to women. In 1991, the MVS started group based lending to
formalise the savings and credit operations. In the subsequent years
microfinance became an important part of its development strategy.
Though growth of the microfinance programme was relatively slow at first, the
outreach by the year 2000 has extended to 16,700 groups (250,000 member
households) in 29 thanas (police stations) of six districts. There are around
195,000 active loan clients from 13,000 groups. The microfinance operations
are managed through 36 Branch Offices and supervised by eight Project Units.
The Head Office at Siligarh, serves as the Credit Coordination Unit (CCU) and is
led by the Credit Coordinator (CC). However, the CC has limited administrative
control over the credit operations. The Project Coordinator, who is responsible
for all community level development activities, also supervises credit operations
at the villages (Exhibit 1).
115
There are 903 staff members including around 350 Union Organizers (field staff)
who are common to most of the MVS programmes. There are also 177 persons
who work as Federation Credit Volunteers and paid by the MVS. In addition,
internal auditors and the accounts staff of the CCU provides support service to
the credit programme. The microfinance operation is supported mainly by grant
funds from the MVS core budget as well as from several of bilateral
programmes. In addition, it has received subsidized loans from the Central
Bank and some apex financial institutions (Exhibit 2).
The MVS follows a joint liability group model similar but not identical to
Grameen Bank, for its microfinance operations. The Union Organisers form
between 15-25 groups in a village. A President and a Treasurer are selected
after the group formation. The meetings of the group are held weekly during
which members deposit Rs. 2 to 5 as compulsory weekly savings. The members
also discuss issues other than microfinance in these meetings. The Union
Organiser attends all the meetings and assists the Treasurer in each group in
keeping records.
The groups are provided loans after 3-6 months period from the first meeting.
Regular savings, regular attendance and a minimum savings deposit of Rs.200
per member are prerequisites for obtaining loans. The loan proposals are
scrutinised for feasibility. The groups performance in terms of repayment as well
as record keeping is also taken into account. The Upazila Manager makes final
recommendation after a sample check of the loan proposals. Loans are
disbursed to individual group members at the Branch Office.
The MVS has also promoted informal federations of groups which are at least
five years old. The federations have substantive self-management, decision-
making and record keeping capabilities. There are 254 such federations
consisting of 8,200 groups. The federations supervise their groups and are
116
responsible for savings and repayment collection. They also formulate,

scrutinize and recommend loan proposals for the member groups. The MVS
pays an honorarium to the Federation Credit Volunteers and provides institutional
support to the federations through its Social Development and Education Officers
(SODEO) based at the Project Units. In the long run MVS plans to formalize the
federations and enable them to take over some of the development roles.
The MVS has several loan products for different purposes ranging from
agriculture and allied activities to asset purchase for production purpose and
house construction (Exhibit 3). The loan sizes are related to the volume of
savings. A minimum savings ratio of 5, 10,15 and 20 percent has to be
maintained respectively for first, second, third and fourth round of borrowings.
The MVS charges 15 percent flat interest rate per annum.
The savings of the members are not a part of MVS loan funds. They are treated
as collateral for loans and deposited in a savings account with a commercial
bank. Out of the interest of 8 percent earned on these savings, the MVS retains
a margin of 2 percent for handling the funds. The remaining 6 percent is passed
on to the members on an annual basis by adding it to the accumulated savings
in their passbooks.
The target group of MVS mostly consists of poor women. There exists
reasonable demand for loans for agriculture and allied services. The region is
characterized by a high population density dotted with numerous small markets.
In addition, most of the districts covered by the MVS have strong trade links and
good communication facilities with Kolkata which provide ample trade and
business opportunities to the members. The demand for loans for milch animals
has increased substantially after three chilling centers were established in three
districts of the region during the last one year. The demand for loans for grocery
shops, vegetable and fruit vending and small roadside eateries is also
substantial.
117
The otherwise stable economy of the region has been adversely affected by
cyclones and repeated floods during the last few years. The microfinance
programme has also suffered as a result. However, the government has taken
fresh initiatives for constructing dams on the main rivers which are likely to
reduce the incidence of natural disasters in the future.
Exhibit 1
Director
Field Programmes
Credit Coordinator Project Coordinator

- Assistant Credit - Assistant Project
Coordinator & Staff Coordinator
Credit Officer (MB) - Credit & Enterprise Devt.
Officer
- Field Officer, Small Farmer
Group
Upazila Manager
- Assistant Upazila - Asstt Upazila Managers (Genl)
Manager (Credit) - Union Organisers
- Credit Assistants - Administrative Assistants
Federation Credit
Volunteers
Members
(250,000 women & men)
Administrative responsibility Information flows
118
Exhibit 2
MVS Core Budget Central Bilateral Donors

Bank
subsidized loan grant funds
grant funds @4.5%
MVS Revolving Loan Fund

savings enterprise loans
@8% savings @15% flat
@6%
Commercial Groups/Members
banks
Exhibit 3
Loan product Purpose Size Norms Interest Rate
MVS Normal Income and Decided on the Loan term is 12 15% flat rate
(from the MVS employment basis of level of months with per annum.
generation. savings.
Core Fund and weekly 15%
loans from installments for declining
financial primary and basis on
institutions) fortnightly for overdue
secondary amounts after
activities. completion of
period
MVS Seasonal For agricultural Different loan Loan term 6, 12 15% per
(MVS Core and allied ceilings for or 24 months, annum flat
each activity
Fund) production but linked to
collected in 1-4
including savings installments
livestock and based on cash
irrigation flow.
equipment
Bilateral Varies by donor- All standardised and follow the above options
Loans preferred activity depending on the nature of the income
generating activity.
119
ANNEXURE - 2
Exhibit 4: Balance Sheet for Microfinance Operations - As on 31

December 2000 (Prepared by MVS)
Assets Rs.
Cash in hand/bank 19,75,81,391
Advances and other receivables 35,44,043
Loans outstanding 48,98,13,441
(Loan loss reserve) -5,89,47,594
Net loans outstanding 43,08,65,847
Total current assets 63,19,91,281
Total Assets 63,19,91,281
Liabilities and Net worth
Current liabilities 2,03,705
Long term debt 2,31,85,689
Long term/compulsory savings 12,10,18,178
Total long term liabilities 14,42,03,867
Donated equity for RLF 28,49,29,035
Retained net surplus/(deficit) 11,55,50,509
Current net surplus/(deficit) 8,71,04,165
Total net worth 48,75,83,709
Total Liabilities and Net worth 63,19,91,281
Exhibit 5: Income Statement for Year Ending 31 December, 2000

(Prepared by MVS)
Rs
Interest received on loans 5,34,42,939
Interest received on investments 76,69,884
Income from grants 5,22,62,499
Other income 2,15,001
A. Total Income 11,35,90,323
Interest paid on borrowings 11,27,972
Commission to Federations 7,25,427
Bank charges 2,22,683
Interest on member savings 62,80,034
B. Total Cost 83,56,116
C. Gross Financial Margin (A-B) 10,52,34,207
Provision for loan losses 1,08,94,706
D. Net Financial Margin (C- Provision for Loan Loss) 9,43,39,501
Salaries 71,88,448
Administrative/office expenses 46,888
E. Operating Costs 72,35,336
F. Net Surplus/Deficit (D-E) 8,71,04,165
120
ANNEXURE - 3
Exhibit 6 : Balance Sheet prepared by Micro-consultants, As on 31

December, 2000
Rs
Assets
Cash in hand/bank and in transit 7,33,48,336
Interest bearing deposits 12,42,33,055
Advances and other receivables 35,44,043
Loans outstanding 47,74,21,462
(Loan loss reserve) -4 65 55 615
Net loans outstanding 43 08 65 847
Total current assets 63,19,91,281
Total long term assets 3,55,08,289
Total Assets 66,74,99,570
Liabilities and Net worth
Interest payable on savings 62,80,034
Other liabilities 2,03,705
Total current liabilities 64,83,739
Long term debt 2,31,85,689
Long term/compulsory savings 11,47,38,144
Total long term liabilities 13,79,23,833
Total external liabilities 14,44,07,572
Donated equity for RLF 33, 90,60,391

Grants for operating expenses 33,61,55,875
Capital grants for fixed assets 4,43,85,361
Retained net surplus/(deficit) -18,14,41,561
Current net surplus/(deficit) -1,50,68,068
Total net worth 52,30,91,998
Total Liabilities and Net worth 66,74,99,570
121
Exhibit 7: Income Statement for year ending 31 December, 2000

(As Prepared by Micro consultants)
Rs
Interest received on loans 5,34,42,939
Interest received on investments 76,69,884
Other income 2,15,001
A.Total Income 6,13,27,824
Interest paid on borrowings 11,27,972
Commission to Federations 7,25,427
Bank charges 2,22,683
Interest on member savings 62,80,034
B. Total Cost 83,56,116
C. Gross Financial Margin (A-B) 5,29,71,708
Provision for loan losses 1,08,94,706
D.Net Financial Margin 4,20,77,002
Salaries 4, 72,10,060
Travel/logistics 26,34,882
Depreciation 18,68,857
Administrative/office expenses 54,31,271
E. Operating costs 5,71,45,070
F. Net Surplus/Deficit (D-E) -1,50,68,068
122
Exhibit 8: Ratio Analysis and Portfolio Report

(As Prepared by Micro Consultants)
Ratios Year ending 2000

Yield on Portfolio 12.4%
Investment income 1.8%
Other income 0.1%
A. Total Income 14.3%
Financial Cost Ratio 1.9%
Loan loss provisioning ratio 2.5%
Operating Cost ratio (OCR) 12.9%
B. Total Cost 17.4%
Return on Portfolio (A-B) -3.1%
Operational Self-Sufficiency(OSS) 82.3%
PAR>=60 days (after write-offs) 66.0%
Arrears rate>=60 days (after write-offs) 42.0%
Cumulative repayment rate (after write-offs) 89.3%
Annual loan loss or write-off rate 2.9%
Annual Percentage Rate (APR) 26.5%
Yield/APR 47.0%
Return on Average Investments 6.6%
Savings/Total Assets 18.2%
Notes:
1.Cumulative repayment rate: Ratio of cumulative principal recovered (net

of pre-payments) to the cumulative principal due till the date of
measurement. 2.Portfolio at risk (PAR>=60): Ratio of the principal balance
outstanding on all loans with overdues greater than or equal to 60 days to
the total loans outstanding on a given date. 3. Yield on portfolio : The
interest income on loans divided by the average loan portfolio for the
year. 4. Financial cost ratio: Total interest expense for the year divided by
the average portfolio. 5. Loan loss provisioning ratio: Total loan loss
provisioning expense for the year divided by the average portfolio.
6.Operating cost ratio: Ratio of salaries, travel, administrative costs and
depreciation expenses to the average loan portfolio. 7.Annual Percentage
Rate: It is the maximum possible return MVS can earn on portfolio given
the fact that MVS charges 15 percent flat rate of interest per annum.
8.Operational Self-Sufficiency: It is the ratio of financial income to total
costs consisting financial cost, operating cost and loan loss provision.
-----0----
123
SCALING-UP
BHASSs Microcredit Mission1
SHG Programme of BHASS
Mr. Krishna Kumar, officer-in-charge of microcredit programme of BHASS, is

concerned with the recent performance of their microcredit programme. He says,
"We are in the sixth year of the programme. We began the microcredit
programme with a target of covering one million poor families by the year 2005.
So far we have organised 2700 groups with a membership of 54,000. Our loan
recovery rate has been as high as 95 to 97 per cent. Our clients have been very
prompt in repaying the loans at the respective offices. But recently the clients are
somewhat reluctant in their loan repayments and we have to make door-to-door
visits for loans recovery. Since last two years or so a large number of Self Help
Groups (SHGs) have been promoted by various political parties, religious bodies
and government agencies in our area of operation. They often offer many
incentive schemes in their credit activity to attract members. Today many
members of SHGs have multiple memberships."
BHASS is a non-governmental development agency working in the southern

state of Kerala in India to mobilise people to participate in the development
process. It has vast experience in formulating and implementing developmental
programmes for the poor. It has initiated the formation of SHGs since 1996 in the
districts of Thiruvananthapuram, Kottayam and Kasargod. It has also made a
beginning in nine more districts recently
The major objective of BHASS is to help attain self-sufficiency and upliftment of

the poor women belonging to the marginalised sections through natural resource
management, capacity building, empowerment, poverty alleviation and financial
upgradation (see Exhibit 1 for more details on objectives). The SHG programme
is targeted at women belonging to fishing community, agricultural labourers, slum
1
. Case prepared by Dr. N.V. Namboodiri, Indian Institute of Management, Ahmedabad, under the
aegis of the `Workshop on Developing Cases and Training Material in Microfinance, sponsored
by SIDBI Foundation for Micro Credit, Lucknow.
124
dwellers, manual labourers and others who are living under poverty. The
members of the SHGs are from neighbouring families. The basic criterion for
group formation is given in Exhibit 2. There is no caste or religious discrimination
in forming the groups. The majority of the groups consists of members who are
poorest with low educational levels and having no personal source of income.
An SHG consists of four micro units. A micro unit is at the ultimate level in a
village. The micro units have been promoted primarily to ensure homogeneity of
groups for undertaking income generating activities.
Participatory decentralized decision-making is the key principle underlying the

microcredit programme of BHASS. The decisions on selection of members,
assessing credit needs, loan disbursement, loan recovery etc., are taken in a
decentralised way by each village and district units of BHASS. The fund
mobilization and accountability to the donors is the responsibility of the BHASS
central unit. BHASS provides finances to SHGs only to take up income
generating activities. Loans for consumption purpose may be provided out of
SHGs own resources. A number of lending agencies such as the Small
Industries Development Bank of India, Bridge Foundation, Rashtriya Mahila Kosh
and Friends of Women's World Banking support BHASS credit programme.
BHASS neither has faced any major difficulties in mobilizing funds nor incurred
any losses in lending activities. For individual members, BHASS does not
suggest any programme and the group themselves should identify the
programme to suit their conditions. The group members have medical insurance
coverage under the programme. The organizational set up of the SHG
programme is given in Exhibit 3. The monitoring and implementation of the
programme is carried out by the leaders of SHGs, councillors, field officers and
programme officers of BHASS.
Functioning of SHGs
A secretary and a councillor are elected from the group by the members. An
SHG conducts its meetings once a week. The savings are collected weekly and
125
there is fixed criteria for the amount to be saved. But large variations in the
savings amount are discouraged. The members can avail credit on the basis of
their savings. Each member is given an individual passbook and the weekly
savings amount is entered in it. Each group has its own bank account held jointly
by the group secretary and the programme staff of BHASS. Apart from the
individual passbook and the group passbook, the groups also maintain a
cashbook, ledger, saving register, loan register, attendance register and a
minutes book. The savings collected each week will be deposited in the bank.
After eight months of formation of the group, the group will utilize its savings for
lending to members. As and when the group matures, BHASS extends outside
loan to the group members. The criteria used for assessing the group maturity
include age of the group, attendance of the members, savings mobilised, lending
experience with own savings, amount of loan advanced, amount repaid, and
utilization of the loan.
The loaning procedure is as follows. The needy members have to submit loan
applications to their SHG. The application will be assessed based on the need
and amount of savings held by the member. Then the SHG leaders recommends
the loan application through the field officers to the Programme Officer at the
district level who in turn sanctions the loan. A member can avail loan up to 4 or 5
times of the savings. The same procedure is followed even for group loans. The
rate of interest charged by BHASS is 12 per cent per annum to the SHGs. The
SHGs in turn charge 18 per cent rate of interest to their members. The amount
of loan to individuals varies from Rs. 100 to Rs.10,000. Generally, loans of small
amount are being taken for consumption purposes. The repayment period varies
from 1 to 12 months depending on the size and nature of the loan. The members
who are interested in taking loans for income generating projects have to submit
their project plan. Only viable projects are eligible for loans. The members also
use credit as a means to address the needs of group asset creation. The overall
progress of the SHG programme since inception is given in Exhibit 4.
126
The major purposes for which loans are issued is shown in Figure 1 below. The
major activities undertaken by the groups include coconut processing, pappad
making, palm leaves processing, food processing, bag making and chappal
making (see Exhibit 5). Among the major activities the least preferred ones are
chappal making, bag making and food processing. The major reasons given for
this by the groups are: failure to withstand the market competition from branded
items, preference of customers to branded items, and inability to maintain
quality similar to branded items.
Fig.1: Classification of Loans
Others(5%)
Entreprenuership
(35%)
Trading(25%)
Agriculture(35%)
Members Perception About SHG Activities
The important implications of the saving activity as perceived by the members of

the group are: saving is an asset; improves the capacity to borrow; enables
growth of individuals business which improves repayment rates; ensure financial
discipline; source to grow economically and attain improvement in status; and
serves as form of security in times of financial crisis. The various benefits that
accrue due to availing credit in the opinion of the members are: creation of
assets; increased productivity of the income generating activities; use of better
technology; increased volume of business; improvement in the quality of
products; and sustainable employment. However, members also pointed out
some of the weaknesses in the present credit schemes. The high demand for
credit is often not met due to lack of adequate funds at the disposal of BHASS.
The method of weekly repayment causes problem in availing credit as most of
the members are wage earners.
127
The opinion of the members belonging to the poor and poorest of the poor
categories varied with regard to their borrowing activity. The poorest of the poor
are not much enthusiastic about the credit activity of the SHG programme. This is
mainly because of their inability to repay loans, lack of adequate savings in their
names to borrow and inability to undertake any income generating activity. They
feel that they are very poor and they should be helped by means of subsidies
and grants. But those who belong to the category of poor are highly enthusiastic
about the credit activity. They actively participate in the meetings and other
activities of SHGs. They are regular in savings and repayment, have better
awareness about the programmes, and interested in taking up income generating
activities.
BHASS conducts various training programmes to the members of SHGs. To

BHASS, training is an essential part of the empowerment process. The members
perceive that the training programmes are beneficial to them. The training
programmes motivate and persuade them to come together, inculcate the merits
of participatory approach, enhance group dynamism, equip them about how to
manage the group activities, improve communication and account keeping skills,
assist in selecting suitable income generating activities, and in improving savings
and credit management.
1. What are the strengths and weaknesses of BHASSs SHG Programme?

2. How can BHASS overcome its weaknesses?
3. Do you suggest BHASS to go for forming more groups to achieve its target
set for 2005? If no, why? If yes, why and how it should go about expanding?
128
Exhibit 1: Major Objectives of BHASS on SHGs
To provided people living in poverty access to small savings and credit

for undertaking productive activities
To free people from the bondage of poverty
Enable participation of the poor in mainstream social, economic and
political arena of the society
Provide a forum for collective learning on equal basis
Help to cultivate entrepreneurial culture
Provide common platform for dialogue and cooperation in developmental
programmes
Promote effective credit delivery system
Convert the developmental and financial process for the total
advancement of the members by creating employment and income
generating opportunities
Provide various types of insurance coverage to the members
Exhibit 2: Criteria for Group Formation
1. Clientele Only Women

2.Method of By the groups in the village using tools of Participatory
Selection of Rural Appraisal. The interested women will form a five
members member group in the village. The guidance and
supervision of the field staff is provided for facilitating the
selection process.
3. Criteria for Poorest of the poor are those who have an annual income
identifying poor and of below Rs.5,000. Their selection is further confirmed
poorest of Poor by looking at their standard of living, health status,
members infrastructure facilities and educational standard of the
children. For deciding the category of poor, besides the
above conditions the annual income should be below Rs.
11,000.
129
Exhibit 3: Organizational set up of SHGs
A Micro Unit 5 members from 5 families
A Self help Group 4 micro units (20 members from 20

neighbouring families)
A Council 10 Self Help Groups
A Development Centre 5 Councils
A District Unit 50 to 80 Development Centres
Exhibit 4: Progress of SHGs Since Inception
(Amount in Rs. Lakhs)
Item Dec. Dec. March March March Dec.

1997 1998 1999 2000 2001 2001
1. Number of villages 3 8 18 42 50 58
2. Number of SHGs 164 492 1220 2344 2560 2682
3. Number of members 3280 9840 24400 46880 51200 53640
4. Number of Active clients1 - - 7320 16408 23040 24138
5. No. of BHASS Staff - - 23 46 53 63
6. Loan Amount Disbursed - - 125.6 358.7 399.4 281.5

during the Year
7. Loan Outstanding - - 125.6 484.2 883.6 1165.1
8. Loan Recovered during the - - 62.8 193.7 353.4 112.6

year
9. Loan Amount Recovered - - 62.8 256.5 609.9 722.5

Cumulative
10. Balance Outstanding (7-9) - - 62.8 227.8 273.7 442.6
11. Recovery Rate (%) - - 95 96 97 97

1
Active clients are those who regularly save, borrow and repay.
130
Exhibit 5: Types of Activities undertaken by Members or Groups by

Availing Credit
Activity Heads SHG Members Group as a whole
Agriculture Organic Farming Technology Vermi Composting, Ayurvedic

Development, Vermi Planting
Composting, Ayurvedic
Planting, Azolla Cultivation
Entrepreneurship Coconut processing, Pappad (Same as the ones undertaken

making, Palm leaves by SHG Members)
processing, Bag making,
Chappal and Leather Goods,
Tailoring, Food processing,
Ayurvedic products, Soaps,
Candle, Book Binding
Trading Household items, Provisions, (Same as the ones undertaken

Snacks, Clothes, Bag, by SHG Members)
Chappal
Others Screen Printing, Meter Fabric Printing, Handicrafts,

Repairing, Flower Technology, Bed and Pillow Making
Fabric Printing, Handicrafts,
Bed and Pillow Making
131
SCALING UP OF AN MFI 1
(The Case of Village Welfare Society)
The Beginning
Havoc wrought in 1978 in Howrah and Hooghly districts of West Bengal by the
devastating floods caused by the river Damodar the sorrow of Bengal, saw a
few young men of Pancharul village in Howrah district rising to the occasion and
coming to the rescue of the victims of the natural fury. The young men joined
hands and registered themselves in 1982 as a non-government organization
(NGO) under the West Bengal Registration of Societies Act and named their
organization as the Village Welfare Society (VWS). That was the beginning of a
journey along social action and enterprise, which continues till date. The VWS
commenced operation from its registered and only Office at Pancharul as a
charity-cum-welfare organization with its thrust laid on activities like running of an
old-age home, a day-care unit for the elderly among the poor, a short-stay home
for destitute women and a training-cum-guidance centre for children who are
forced to sell their labour for living.
VWS Turns into a Development Organization
Gradually, the organization expanded its activities first functionally and then over
space. By early 1990s we shifted our focus to sustainable development as we
were by then convinced that no real dent can be made into the day-to-day
problem of poverty of the people unless we did something which would benefit
the poor on an ongoing basis, said the Secretary and chief functionary of the
organisation. Some of the activities which the organisation diversified into since
1990-91 are wasteland development and afforestation, installation of mini deep
tubewells, construction of improved smokeless chulha, promotion of activities in
1
. Case prepared by Prof. Prabal K. Sen, Institute of Rural Management, Anand under the
aegis of the `Workshop on Developing Cases and Training Material in Microfinance,
132
sectors allied to agriculture with a view to providing people with supplementary

sources of income, and capacity building of the women, youth and NGOs through
regular training programmes on economically useful vocations.
Entry into Microfinance
Then came economic reforms (1991-92) and reforms in the financial sector
(1992-93) as a part of the larger restructuring of the economy. The banks and
other financial institutions in the country entered an era when mere accrual of
interest in their ledgers could no longer be reckoned as income until such interest
was actually realised by them. Thus, emerged the distinction between an asset
(a loan account), which was performing, and an asset which was non-
performing depending upon whether interest on the account was actually
received by the bank in time or not. The financial sector reforms enjoined upon
all banks and financial institutions to reduce the proportion of their non-
performing assets (NPAs) to the minimum, or face gradual decline and eventual
disappearance from the scene.
With increasing NPAs, the net worth of many of the rural credit institutions in the
country and particularly in West Bengal got severely eroded and needed
recapitalization for survival and sustenance. As the impact of reforms gradually
sank in by the middle of 1990s, enthusiasm for social banking witnessed in the
two and a half decades since nationalization of major commercial banks in 1969
gave place to a high degree of circumspection among most banks. The credit-
deposit ratio (CDR) for commercial banks began to slide almost everywhere in
the country and more so in the rural and semi-urban areas. The CDR in the
country fell from 66.2 per cent in March 1991 to 59.2 per cent in March 1995. The
ratio for rural and semi urban areas declined more sharply from 54.2 per cent to
43.3 per cent. The CDR for rural and semi- urban areas of West Bengal fell from
34.5 per cent in March 1991 to 29.8 per cent in March 1995. The proportion of
net bank credit to priority sectors hovered around 30-33 per cent during this
133
period although the target stipulated by the government continued to be 40 per

cent. The formal credit institutions were flush with funds but wary of lending.
It was also the time when some of the apex institutions like Small Industries
Development Bank of India (SIDBI) came out with their pilot programmes for
microfinance intervention. These programmes were proposed to be implemented
not only through the banks but also through the NGOs. Similarly, the Rashtriya
Mahila Kosh (RMK) or the National Credit Fund for Women was set up in March
1993 by Government of India with an initial corpus of Rs. 31 crore with the
purpose to fill the gap between what the banking sector offers and what the poor
need. The RMK funds were envisaged to be routed through Intermediate
Microfinance Organizations (IMOs), which included (a) NGOs, (b) appropriate
State Government agencies, and (c) Co-operatives with at least 33 per cent
women members and working in profit for at least two years. The National Bank
for Agriculture and Rural Development (NABARD) also announced its
microfinance programme of linking Self-Help Groups (SHGs) to banks in 1992.
Given the felt needs of the poor for small quantum savings and credit and the
assured support of funds from apex agencies promoting microfinance like RMK
and SIDBI, the VWS itching to further enhance its poverty alleviation role decided
to launch microcredit activity in a formal way since 1995. The global summit on
microcredit held in February 1997 which was attended by the Secretary of
VWS, thanks to financial support by SIDBI, acted as a further fillip to upscale the
microfinance activities.
The Path Traversed
With a small beginning made during 1995-96 when there were 72 SHGs with
1,106 members and a credit disbursement of Rs. 4.53 lakh, the VWS increased
its involvement significantly during the subsequent few years (See Exhibit 1). By
the end of 1998-99, the third year from the formal inception of microfinance
initiative, the total membership rose to 3,301 and the amount of credit disbursed
134
shot up to Rs. 61.32 lakh. By the end of 2001-02, the number of members
organised into SHGs increased to 14,841 and the volume of credit disbursed
reached a level of Rs. 414.46 lakh (See Exhibit 1). The VWS organises two
kinds of groups viz., Self-Help Groups (SHGs) and Small Entrepreneurs
Group(SEGs). The SHGs are basically savings and credit groups promoted only
for women, while SEGs are small groups consisting of only entrepreneurs
who can take up some entrepreneurial activity. The SHGs and SEGs, however,
are not linked to banks. They are being financed with members savings and
funds mobilised by VWS from outside sources (see Exhibit 4). The major
features of these two kinds of groups and the operational norms followed by
them are indicated in Exhibit 3.
The VWS has achieved the expansion in its MF activities so far by adopting a
three-pronged strategy:
a) Expansion in the organizational infrastructure and increase in the staff

strength: The number of units increased from a singular office at Pancharul
in Howrah district in 1995-96 to 17 in 2001-02 spread over five districts of
West Bengal and one in the neighbouring Chhattisgarh state. The employees
number grew from 30 in 1995-96 to 146 in 2001-02.
b) Training and orientation of staff: Continuous efforts were made to train and
retrain the staff so as to raise their general level of skill and efficiency and
also to impart in them necessary orientation for working for the poor with
dedication and zeal; and
c) Broadbasing the sources of finance: In the first two years of its intervention,
the VWS depended only on funds mobilised from the RMK. From the third
year (1997-98) onwards, VWS attempted to source funds from other
agencies like SIDBI Foundation for Micro Credit (SFMC), the National
Backward Classes Finance and Development Corporation (NBCFDC) and the
National Minorities Development and Finance Corporation (NMDFC). The
135
position of source-wise mobilisation of funds from 1995-96 through 2001-02 is

indicated in Exhibit 4.
Plan for Future Scaling up
The VWS intends to further scale up its microfinance activities. The total
membership of SHGs and SEGs is proposed to be increased from 14,368 in
2001-02 to 20,000 in 2002-03, 30,000 in 2003-04 and 40,000 in 2004-05. The
credit disbursement is intended to be raised from Rs. 4.14 crore in 2001-02 to
Rs. 8 crore in 2002-03, Rs. 14 crores in 2003-04 and Rs. 26 crore in 2004-05
(see Exhibits 1 and 2).
The following strategies are proposed to be adopted to achieve the ambitious

scaling up programme:
a) Increase the number of units from 17 in 2001-02 to19 in 2002-03, 22 in 2003-

04 and 25 in 2004-05, so that the incremental business is distributed evenly
over space.
b) Raise the staff strength from 146 in 2001-02 to 151 in 2002-03, 178 in 2003-
04 and 200 in 2004-05.
c) The funds are to be mobilised not only from RMK, SFMC, NMDFC and
NBCFDC, but also from the commercial banks. In June 2002, VWS has put
up a proposal for cash credit accommodation from Allahabad Bank. Certain
other major banks in the region are also proposed to be approached for funds
so that flow of funds does not stand in the way of the organization achieving
its goal. The organization expects that its attempts to secure funds from
commercial banks will succeed because quite a few of such banks currently
show interest in extending credit through microfinance institutions (MFIs) as
this route promises lower transaction cost and lower credit risk to them as
lenders. The MFIs like VWS take responsibility not only to on-lend the
amount to the final clients (members of SHGs) but also to make prompt
136
repayment of the loans with interest to the commercial banks. The VWS also
hopes that the average cost of funds is not expected to go up as the interest
rates on bank credit are likely to decline further.
The Dilemma of Upscaling
The strategies notwithstanding, the targets fixed for the coming years are
evidently too high vis--vis the projected strength of employees during the period.
The goals set for 2002-03 through 2004-05 imply that per employee membership
size and per employee credit disbursement will have to go up manifold from the
2001-02 level. The organization is conscious of the difficulty of the task. It seeks
to smoothen the scaling up path by introducing, in the first place, a computer-
based management information system (MIS). Because of the MIS, the recording
and transmission of data for monitoring would occupy relatively less time of the
staff enabling them in the process to devote longer hours to work with the people
in the field. As of June 2002, the computerization process has been almost
completed.
Secondly, the VWS is contemplating to put in place a suitable package of

incentives for the staff at the field-level. One of the major problems we have to
face is the turnover of our employees. As we cannot compensate adequately for
the services rendered by them, some of our employees leave the organisation
every year for greener pastures. We, therefore, feel the need for introducing a
package of incentives for them so as to prevent the outflow of trained staff and
also to secure a further increase in their productivity, said the Secretary of
VWS.
The organization is convinced that if the minimum expectations remain unfulfilled,

the dedication and commitment can take an employee only up to a certain level
but not beyond. A consultant has since been assigned with the task of
suggesting an appropriate scheme of incentives for the employees. The
organization is aware that the scheme when implemented will entail some
enhancement in its working expenses. However, because of the increase in the
137
overall scale of operations, such enhancement in cost is not likely to affect the
solvency of the organisation. The year wise position with regard to the income
and expenditure of the VWS from the microfinance operation till 2001-02 and
the scenario projected for the coming years are shown in Exhibit 5. The
Exhibit indicates that the financial viability of the microfinance operations of VWS
will improve over the years, notwithstanding the estimated increase in the salary
and other working expenses.
The challenge inherent in the scaling up operations is not merely one of

achieving sustainability on financial ground but also that of retaining its
commitment to the mission of the organisation. It is possible to scale up easily
the level of business by covering a small number of large borrowers rather than
a large number of small borrowers. That would mean cutting at the very root of
the principle of microfinance and the mission VWS had adopted two decades
ago, namely, to work for the good of the poor and the disadvantaged. Only time
will show whether the scaling up operations is achieved by VWS by taking to the
easier course and thus compromising on the mission or by treading the harder
way.
Questions for Discussions
1. What were the circumstances which led to the entry of VWS into
microfinance activity and launching it in a formal way?
2. Identify and analyse the strategies adopted by VWS for upscaling its
microfinance activity between 1995-96 to 2001-02.
3. What are the dilemmas faced by VWS in its scaling-up projected from
2002 onwards?
4. Do you think the strategy adopted by VWS is adequate to tackle the
dilemmas of its future growth? If not, how best such dilemmas should be
attempted to be addressed?
138
Exhibit 1: Growth of Microfinance Activity of VWS
Year No. of No. Of No. of Membership Credit Members Loan

Unit Employees SHGs of Disbursement Savings Recovery
Offices SHGs/SEGs (Rs. lakh) (Rs. Lakh) (% to
Demand)
Actual
1995-96 1 30 72 1,106 4.53 7.40 94
1996-97 2 35 100 1,914 15.13 9.96 94
1997-98 3 55 224 2,565 27.71 10.54 94
1998-99 6 70 280 3,361 61.32 14.78 95
1999-00 10 120 415 7,579 110.98 24.90 97
2000-01 15 140 560 10,626 219.77 37.00 97
2001-02 17 146 645 14,368 414.46 NA 98
Projected
2002-03 19 151 - 20,000 800.00 - 100
2003-04 22 178 - 30,000 1,400.00 - 100
2004-05 25 200 - 40,000 2,600.00 - 100
Exhibit 2: Select Performance Indicators Relating to Microfinance Activity

of VWS
Per Unit Office Per Employee

Year Members Credit Members Credit
Handled Disbursed Handled disbursed
(No.) (Rs. lakh) (No.) (Rs. lakh)
Actual
1995-96 1,106 4.53 37 0.15
1996-97 957 7.56 55 0.43
1997-98 855 9.24 47 0.50
1998-99 560 10.22 48 0.88
1999-00 758 11.10 63 0.92
2000-01 708 14.65 76 1.57
2001-02 873 24.38 102 2.84
Projected
2002-03 1,053 42.11 132 5.30

2003-04 1,364 63.64 168 7.86
2004-05 1,600 104.00 200 13.00
139
Exhibit 3: Self Help Groups (SHGs) and Small Entrepreneurs Groups

(SEGs) of VWS
Type of Size Loan Amount (Principal) Minimum Interest Average

Group (in Rs.) Savings rate recovery
Range Present Range Present required charged (%)
Average Average ( Flat )
(No.) (Amount) p.a.
SHG 10-25 18 2,000-2,500 3500 1/3 rd of 17.5 % 98
Loan Amt.
SEG 3-5 5 1,000-4,000 5000 -Do- 20 % 96
Exhibit 4: Sources of External Funds of VWS

(Amounts in Rs. Lakh)
Year Source-wise Amounts Mobilised
Source 1 Source 2 Source 3 Total
(RMK) (SIDBI) (NBCFDC &
NMDFC)
1995-1996 - - - 0.23
1996-1997 11 - - 11
1997-1998 13 15 - 28
1998-1999 27.50 - - 27.50
1999-2000 45 15 - 60
2000-2001 86 100 5 191
2001-2002 - 30 4.50 34.50
140
Exhibit 5: Income-Expenditure of Village Welfare Society on Microfinance Activity
(Amounts in Rs. lakh)

Cost of Salary Other Total Income from Net Add Grant Surplus/
Year Funds Expenses Expenses Expenses Micro Finance Income Deficit
(2+3+4) Activity (6-5) (7+8)
2 3 4 5 6 7 8 9
1
Actual
1995-1996 0.01 - 0.04 0.05 0.014 -0.036 Nil -0.036
1996-1997 0.82 0.69 0.56 2.07 1.41 -0.66 0.05 -0.61
1997-1998 2.01 2.86 0.78 5.65 4.18 -1.47 0.11 -1.36
1998-1999 2.86 3.12 4.34 10.32 7.63 -2.69 0.24 -2.45
1999-2000 5.98 5.34 6.32 17.64 16.00 -1.64 1.73 0.09
2000-2001 13.92 16.03 15.67 45.62 39.16 -6.46 11.93 5.47
2001-2002 20.84 31.30 28.09 80.23 78.89 -1.34 1.48 0.14
Projected
2002-2003 26.00 38.00 48.30 112.30 150.00 37.7 - 37.7
2003-2004 51.00 45.00 72.40 168.40 275.00 106.6 - 106.6
2004-2005 120.00 50.00 83.60 253.60 500.00 246.4 - 246.4
141
SYSTEMS AND OPERATIONS OF
MICROFINANCE INSTITUTIONS
1
INTRODUCING INCENTIVE BASED REMUNERATION
Jeevan Foundation
Established in 1986, Jeevan Foundation (JF), a non-governmental organisation

was born out of the need for betterment of the labouring communities spread
over 113 slums of Kanpur city and in nearly 225 villages of over 6 blocks in and
around Kanpur. The entire work operation falls in a radius of 50-60 kilometres.
JF is specifically focused to work on women related issues like advocacy on
gender biases, vocal and physical participation of the women outside home and
empowerment of the women. Till recently, addressing issues relating to
reproductive health, care for the aged and providing basic amenities in its
operational area was the primary focus of JF. Over the years JF has developed
its core competency in the areas of health and microfinance.
A governing body of 7 persons including 4 employees manages the

organisation. The overall responsibility for managing the organisation rests with
the Convener, Mr. Girija Nanda who is also the founder of JF. The Convenor is
assisted by the Core Programme Committees constituted for different sectors
of intervention (see Exhibit 1). A Programme Committee consists of internal and
external experts in the relevant sectoral area. The Programme Coordinators in
collaboration with the In-charge of finance and administration manage the
programmes.
Micro Save Programme (MSP)
The microfinance intervention of JF called MSP was started in 1989 with the
Self-Help Groups (SHGs) being the intermediation methodology adopted by the
organisation. The main objective of the programme was promotion of savings,
1
. Case prepared by Mr. Rahul Mittra, Entrepreneurship Development Institute of India,
Lucknow under the aegis of the `Workshop on Developing Cases and Training Material in
142
credit and income generation activities for poor women through SHGs. Apart
from the regular savings of the groups, funds were mobilised from apex banks
and financial institutions. Initially, the programme started with JF managing the
formation and development of the groups. The loan requirements of the group
members were met from the internal savings of the groups with JF providing no
financial assistance. The groups charged an interest rate of 18 percent per
annum on the amount lent to the members. Of this, 12 percent went back to
the group members and the remaining 6 percent was transferred to group
reserve funds. The groups formed in the early stages of the programme are still
continuing on this pattern. With effect from the year 2000, the 6 percent is
being transferred to JF as administrative charges.
In 1994, Rashtriya Mahila Kosh (RMK) extended its support to the programme
by providing funds at 8 percent interest with the condition that JF will ensure
that the ultimate borrower does not have to pay more than 12 percent interest on
the loan. Subsequently, in the year 2000 JF has been able to avail assistance
from HUDCO for the purpose of providing housing loans to the SHG members.
JF charges 14 percent on housing loans and gets a spread of 4 percent. The
SIDBI Foundation for Microcredit (SFMC) has also started providing assistance
to JFs microfinance operations since 2001. The SFMC has supplemented loan
funds with grant support for capacity building of the operation and project staff of
JF. The microfinance programme of JF has been able to achieve an operational
self-sufficiency (OSS) of only 49 percent in the year 2001. In other words, only
49 percent of the operational expenses of the microfinance programme has
been recovered from the operational income. By March 2002, the OSS ratio
has increased to 65 percent.
The Core Programme Committee consisting of the Convener and internal and
external microfinance experts provide overall guidance to the programme. The
Programme Co-ordinator heads a team of three Assistant Programme
Coordinators (ACP), eighteen field facilitators and three accountants (see Exhibit
143
1 and 3). Each field facilitator handles about forty groups in both urban and rural
areas. The Co-ordinator helps by giving leads about the new areas of
interventions developed by the Core Committee and in strategising to take
care of the pulls and pushes in the programme.
Taking into consideration the prevailing diversity in terms of interest rates on

loan and savings, intermediation methodology and operational area, JF has set
in a process for streamlining its operations. During a strategic planning meeting
the governing body of JF decided to form federations of SHGs. It was decided to
register federations as mutual benefit trusts. These federations will have equity
stake in a non-banking financial company through which JF will implement its
microfinance programme. It was also decided that both the existing and the new
SHGs to be formed will take membership of the proposed federations.
Transition to a New System
Mr. Rajneesh who is in charge of the administration and finance of JF was

entrusted with the responsibility of managing the transition of the microfinance
programme from diverse projects and programmes into an institutional form. Mr.
Rajneesh has been associated with the programme for the past 12 years. An
external expert was hired for assisting Mr. Rajneesh in managing the operational
issues. As a first step towards the transition process, Mr. Rajneesh called a
three-day brainstorming session of his whole team to share the plans of the
organisation and seek the views of the team members on the organisational
plans. Achieving the financial viability of the programme and adopting a human
resource policy having no negative consequences on the performance were
the primary concerns of Mr. Rajneesh. Deciding about an incentive based
remuneration package to the project officials formed an important component of
the human resource policy to be evolved. In the absence of clear guidelines and
rules regarding remuneration JF had adopted, on an ad-hoc basis, a package
which provides for an annual increment of 10 percent for all the employees
144
regardless of their performance and responsibilities being handled (see Exhibit 3

for the current salary structure).
The Response of the Staff
In this scenario, Mr. Rajneesh called Mr. Jairam, the Project Coordinator to get
his views on adopting an incentive based remuneration system for the project
officials. Mr. Jairam is primarily responsible for overall coordination and
management of the MSP. Prior to joining JF, Mr. Jairam was working as a
computer instructor after completing his B.Com and post-graduate diploma in
computer applications. Initially, Mr. Jairam worked in the family planning project
of the organisation and was gradually given additional responsibilities in group
formation, training and development in the MSP. Subsequently, in 1999 Mr.
Jairam was handed over the complete responsibility of the programme. During
his discussion with Mr. Rajneesh, Mr. Jairam expressed his desire to work
under an incentive based remuneration system linked to the performance
measured in terms of loan recovery, disbursement, turnover, target
achievement, staff satisfaction etc. At the same time he expressed his concern
with regard to the resource position of the organisation, staff inadequacy and
procedural and administrative delays acting as major dampeners in target
achievements. Mr. Jairam also mentioned that the programme is covering both
urban slums and rural areas which are totally diverse in terms of their socio-
economic conditions and cultural fabric. While urban areas are characterised by
a limited credit absorption capacity, migratory population and people pursuing
service jobs not having sufficient time for group meetings; in rural areas there is
relatively a better capacity for absorbing large amounts of loan, people find
sufficient time for attending meetings and communities are more homogenous in
nature.
Mr. Rajneesh also called the three Assistant Project Coordinators (APC)Ms.
Surekha, Mr. Narain and Mr. Umesh, for interaction. The APCs are at the crux of
145
the affairs and have been associated with the programme since inception. Apart
from monitoring the functional aspects, they are involved in promotion of new
groups and in assessing their trainings needs. Of the three, Ms. Surekha is a
post-graduate and is working for the organisation for the longest duration. She is
managing the groups in urban areas and is also the highest paid of the three
APCs. Mr. Narain who is a high school pass-out was earlier associated with JF
as a volunteer in the adult education project and then was taken into
microfinance programme in the year 1994. Mr. Narains work area is highly
spread out but he is handling the least number of groups. Mr. Umesh, an
intermediate pass, joined the microfinance programme after he had been laid off
on completion of a grant based project in 1994. Managing groups in rural areas,
Mr. Umesh has been a star performer in terms of loan disbursement and
recovery and is a vehement supporter of an incentive based remuneration
system.
During the discussion, Mr. Narain and Ms. Surekha expressed reservations on
incentive based remuneration system. Both shared the understanding that JF
has been formed with an objective of serving and empowering the downtrodden
communities who are left out of the development process. By becoming
incentive and target oriented, the group selection criteria may get affected.
Under such circumstances, the staff may have to think whether they are really
serving the objectives of the organisation.
Ms. Surekha said, Though I favour an incentive based remuneration system, I

fear that with incentives becoming the major motivational force, the quality of the
groups and loans could be affected negatively. She further said, JF has always
valued social factors and human relations in its programmes and if we start
attaching monetary benefits we might be overlooking our core objectives. If
taking higher responsibilities becomes one of the key performance indicators,
then we might have to undergo additional training or capacity building. Even if we
146
are willing to go for a training programme at our own expenses, will the
organisation give us leave with pay and also allocate our work to someone else.
Mr. Narain said that poverty level of the groups associated should form a key
performance area for incentives. In addition, Mr. Narain stated: The other
developmental programmes of JF attract participants to the organisation
thereby making the initial work of group formation easier ensuring in the process
acceptability of the organisation by the community. My work area is poverty
ridden and there are no other welfare programmes of JF. Hence, my work
becomes slightly more difficult than others. Spreading out in the rural areas is
more difficult than the urban areas. The villages are located far away and are
sparsely populated.
Mr. Umesh, a staunch supporter of the incentive based remuneration system felt
that economic development is the core issue to be addressed in all
developmental programmes and JF is trying do the same. Mr. Umesh said,
There is a need to identify separate key performance areas for various
hierarchical levels. A remuneration system should take both qualitative and
quantitative parameters into consideration. I also favour a system of
disincentives in case of non-performance in order to ensure continuous
performance by the project staff. Mr. Umesh, however, felt that that they are
working as a team in which the accountants, administrators and various support
systems play a major role. Hence, any non-performance in achieving the targets
due to negative role played by others should not attract disincentives.
All the three APCs felt that sufficient care should be taken to ensure that the
project staffs remuneration does not suffer in case of natural calamities and
unforeseen circumstances like demolition of a slum by municipal authorities,
death of a borrower, death of a cattle for which loan has been provided, and
theft or robbery.
147
Mr. Rajneesh then approached the accountants who formed the backbone of the
microfinance operations to assess their willingness to work under an incentive
based system. The three accountants handled different stages of accounting
and recording. While Mr. Arun who has been with the organisation for six years
handles manual accounting; Mr. Varun who is a cashier in the organisation for
the last ten years manages the cash transactions. Mr. Tharun, the senior most
having the longest experience handles data feeding with the help of a tailor-
made software acquired by JF. Being used to a fixed remuneration system, the
three accountants could not help Mr. Rajneesh in identifying their key
performance areas. They could only express their concern with regard to
workload over number of groups and accounts handled, inappropriateness of the
accounting software and lack of support for capacity building by the
organisation. Only Mr. Tharun could help Mr. Rajneesh by saying that although
he is not into microcredit but he can take care of the formation of SHGs and in
linking them to lending institutions as he had seen this in an earlier project
supported by the World Bank.
The Dilemma
Mr. Rajneesh taking the findings before the Convener expressed his views on
the whole affair. He emphasised that any new system and procedures should
not be introduced in an arbitrary manner. At the same time he also underscored
the need for adopting the best practices followed in the sector for establishing
a sustainable microfinance intervention.
Responding to the reactions the Convenor asked, Have we reached the right
stage for introducing an incentive based remuneration system or do we need to
set other things in order before exploring the option?
148
1. Do you think an incentive based remuneration system for the staff is suited
for an organisation like JF?
2. Should JF introduce an incentive based remuneration system for its staff or

not?
149
Exhibit 1: Organisational Chart of JF* / MSP**
Governing Body*
Convener*
Core Programme Committees*

(Health Micro Credit Wasteland Development)
In charge * Programme Coordinators*

(Finance and Administration) (Health, Micro Credit, Wasteland Development)
Accountant ** Assistant Programme Coordinators **
Field Facilitators **
( Each managing 40 groups)
150
Exhibit 2: Status of JFs Microfinance Programme
Particulars March 31, March 31, 2002

2001
1. No. of Blocks Covered 2 2
2. No. of urban slums covered 50 62
3. No. of Groups 439 530
Rural NA 270
Urban NA 260
4. Total Members 14,349 NA
5. No. of Active Borrowers 9,600 8,274
6. Cumulative Savings of SHGs Rs.102,59,691 Rs.156,80,239
7. Loan disbursed (from internal sources)

during the year Rs.156,63,210 Rs.233,81,515
8. Principal recovered during the year
( loans from internal sources) Rs.115,16,600 Rs.173,39,182
9. Loan disbursed (from external sources)
during the year Rs.58,84,800 Rs.123,73,000
10. Principal recovered during the year
(loans from external sources) Rs.42,25,846 Rs.77,29,980
11. Recovery Rate 98% 98%
12. External Loan Received during year RMK 25.00 SIDBI 60.00
(Rs.Lakh) HUDCO 14.00 NMDFC 2.25
Exhibit 3: Salary Structure of the Microfinance Programme Staff
Position No. of Minimum Maximum Emoluments

Persons Salary p.m. Salary p.m. (conveyance)
Field 18 Rs. 2,000 Rs. 3,500 Rs. 500
Facilitators
Assistant 03 Rs. 4,850 Rs. 6,200 Rs. 1,200
Programme
Coordinators
Accountants 03 Rs. 3,200 Rs. 5,500 -
Project 01 Rs. 9,686 - Rs. 1,700
Coordinator
NB: The salary of the Incharge (Administration and Finance) and the Convener of
the organization is fixed on time cost basis and there are no specific norms for
the same.
151
SYSTEMS AND PROCESSES OF CREDIT OPERATIONS: THE CASE OF
BASIX 1
With the objective of closely observing the systems and processes of credit
operations in a modern non-bank financial company (NBFC), committed to the
goal of creating and promoting the rural livelihood support system, I reached in
the morning of September 13, 2002 the Unit Office of BASIX at Ramayampet. It
is one of the 18 unit offices of BASIX, through which the entire credit activities
are undertaken. It is located at a distance of about 100 kilometers from the
headquarters of BASIX at Hyderabad. When I reached the Unit Office, the Unit
Head, Mr. Uday Shankar along with his team members were waiting for me.
"Each Unit Office covers an area of about 60-70 kilometers radius" started Uday
Shankar, adding, "Each Unit Head (UH) is supported by 3-4 Field Executives
(FX), who are professionals with MBA degrees having technical education such
as agriculture, dairy, veterinary and fishery. An FX operates with the help of 3
Customer Service Agents (CSAs), each of whom covers about 20-25 villages
and an exclusive area of about 15 kilometers radius.
I asked, How are UHs and FXs recruited? He explained, There is a process of
recruitment in which each applicant has to undergo a written test at the Unit,
followed by preliminary interview. After qualification, the selected candidates
have to visit field and write a report, which is reviewed by Unit Head. The Unit
Head also provides feedback on the candidates, especially on their aptitude to
work in rural areas. Further screening is done at Head Office (HO) based on the
written test scores, field report and feedback. The screened candidates are
required to appear for a final interview at HO, which is chaired by the Top
Management. The final selection is done based on interview performance and
other parameters. The induction of field executives is done through both
classroom and on-the-job training in field. After six months they have to qualify in
a written test as well as in an interview for their confirmation. Similar
1
. Case prepared by Prof. Samar K. Datta, Indian Institute of Management, Ahmedabad under
the aegis of the `Workshop on Developing Cases and Training Material in Microfinance
sponsored by SIDBI Foundation for Micro Credit, Luncknow.
confirmation process is followed for other staff, who are initially required to pass
through a written test in their functional areas. Feedback, both formal and
informal, from peer and superior staff plays a vital role in confirmation of any
candidate in the organization.
Do you follow the same process for recruitment of CSAs? was my question at
this stage. Certainly not, he continued, The process of CSA recruitment is
somewhat different. The CSAs are recruited by local unit office. They are usually
people with intimate knowledge of neighboring areas. Generally, CSAs have 10
plus 2 years of schooling. Field Executives recommend names of potential
candidates for CSA' s position based on their experience, reputation of such
candidates and their family, and the sources of income of their families. The
potential candidates are required to undergo a written test and a preliminary
interview for screening, before they are asked to appear for a motivational field
test in the presence of a representative from the HO for final selection. Offer for
the position of a CSA is made after counter-party check of an applicant is found
successful. The aptitude of the CSA is observed for three months after which an
agreement is drawn for the job. Note that there is no confirmation to the post of a
CSA. The CSAs are agents who earn exclusively on the basis of performance of
their portfolio.
Two young people - one lady and a gentleman, sitting in a nearby room, were
working on computers. When Uday Shankar's eyes fell on them, he said,
apologetically, "I am sorry Professor, not to have introduced to you the two
transaction assistants (TAs) for this Unit. They are in fact the housewives of this
Unit, each handling more than 1500 accounts. They maintain and organize all the
records using a software package developed in-house by BASIX."
When we came back to the discussion table after a brief chat with the two TAs, I
asked Uday Shankar, "I heard that BASIX follows a performance based payment
system for its employees. Is this correct? Would you please explain?" Uday
Shankar asked one of his FXs to respond. He started, Remuneration is both
fixed and performance based. The former is the monthly pay. The latter is
153
performance pay (PP), paid semi-annually based on fixed parameters, namely,

disbursement index, recovery index, functional and HRD index, task delivery
index, profitability index and compliance index. The first three are individual
performance indices, whereas the latter three are related to the Unit level
performance. The composite index determines the performance pay of an
executive, which is thus linked to both individual performance and overall unit
performance. The performance pay is linked to the gross remuneration rate and
not basic pay. The maximum allowable performance pay is 3 months gross
salary, which is paid in two semi-annual installments, if one obtains a score of
100 percent.1
Uday Shankar was looking at my face, and when I was about to ask him a
related question, he passed on to me copy of one blank Personal and
Professional Learning Review Form (PLR) for the latest year. He began,
"Professor, please look into the copy in your hand. PLR assessment is done
once in every 6 months. It is an exercise to identify the training/learning needs of
an individual, which helps in achieving his/her objectives - both personal and
professional. At the beginning of each year, a two-day workshop is held
regionally (involving all staff from 2-3 Units) for PLR, in which a representative
from HO is also present to co-ordinate the task. In this workshop, the PLR
process is completed. Similar exercise for HO is also done. The process starts
with every staff individually completing Section I of PLR assessing his/her own
learning needs. Then the staff concerned hands over the PLR form to one junior
colleague and a peer of his/her choice to fill Section II. These two people bring
out the strengths and weaknesses of the staff concerned. The reporting officer,
that is, the boss of the staff concerned fills up Section III of this form, making his
assessment of learning needs and suggesting mechanisms of addressing them.
The next step involves a counseling session between the reporting officer and
the staff concerned. In the next stage, the PLR process is reviewed (in Section
IV) by a reviewer, after which it is given back to the staff for his knowledge and
information. The PLR form is returned at the end of this cycle to the head office.
1
. Field Executives gross salary is around Rs 11-12 thousand per month whereas for Unit Head
it is around Rs. 15-16 thousand.
154
Then, a consolidation of the learning needs is done from which the training
calendar is drawn. However, that is not the end of the loop. A second review is
done at the Unit level to identify whether it has actually helped an individual in
achieving his/her needs and whether further steps need to be taken. This is done
at the Unit level between the reporting officer and the concerned staff. It involves
a joint review by the reporting officer and the concerned staff of the learning
objectives and achievements (Section V of PLR) and a further half-yearly review
by the reviewer, before it is sent to the head office again."
It is a very complicated process, I remarked at this stage. He immediately

responded, Yes, it is. We evolved this mechanism through our experiences over
the years, so that we can carefully assess the training needs of our staff and also
judge the effectiveness of the training process. In our view PLR is necessary to
empower our staff with adequate tools and experiences, so that they can serve
our customers in the best possible manner.
Now I became more curious and asked a further set of questions, But how do
you motivate your staff to undergo this complicated training process? Do you
have any incentive system?" He continued, While we don't want our customers
to suffer, at the same time we make sure that genuine efforts on the part of our
service staff also do not go un-recognized and un-rewarded. So, besides
performance-based payment, BASIX has introduced awards - best FX award,
best Unit award and even best CSA award.
"Do you pay a fixed commission to your CSAs?" I asked at this stage. Uday
Shankar hinted at one of his CSAs present to answer this question. "Our salary is
totally commission based - commission we earn on interest collection from the
borrowers. But it is not a fixed percentage commission. The commission we get
on interest earned varies positively with our performance. For example, the
commission earned on interest collection is l/8th if recovery is above 97%, 1/10th
if recovery is between 95-97%, 1/12th if recovery lies within the range of 92-95%,
1/16th if recovery is 90-92%, and nil if it is below 90%. In fact, if recovery goes
155
below 90% mark, we are given 6 months' time to improve or else to leave,"
answered the identified CSA.
"So, is it appropriate to interpret the CSAs as mere commission agents, who

stand in vendor relationship to the organization of BASIX? I mean, are you then
treated as outsiders?" I threw this question at him with an intention to provoke
him. "Why do you think so?" the CSA immediately asked me, adding, "We feel
we are the basic pillars of BASIX. Why is our mindset of a job always runs in
terms of risk-free fixed monthly salaries?
"Anything else do you get from BASIX?" I asked him. "Yes, of course," he
answered, "we get rigorous computer training, so that we can make use of palm-
tops, which are currently being tested. If I perform well, I can get best CSA award
at the end of each year. Given our kith and kin relationship with the unit office, we
always feel that we are a part of the system. We have developed a tradition of
having four get-together per year, in which the CSAs and FXs treat each other in
rotation."
At this stage, I turned to Uday Shankar and asked him, "Since there is so much
of emphasis on in-house training in your organization, can you give me some
details about the kind of training you undergo in general?" "Certainly," he said.
Then he added, "We, first of all, impart classroom training to our staff on the
broad parameters of our activities. Then we send our staff to field for a month to
come out with a field report. A staffs field level operations actually start after 2-3
months of his joining. After 6 months' of functioning, every Unit staff has to pass
a confirmation test. Weekly CSAs' meetings, quarterly planning and review
meetings, and interaction with visitors, just like what we are doing today, are
also part of in-house training of staff. Apart from the induction process as
mentioned earlier, Indian Grameen Services (IGS), an affiliate of BASIX,
conducts specific trainings such as finance for non-finance executives,
agriculture for non-agriculture graduates, etc. In addition, BASIX organizes with
the help of experts specialized trainings on communication, IT, etc. The staff
members are also sent for institutional training programs."
156
While returning to office after lunch break for further discussion, Uday Shankar
took me to two nearby tea stalls and introduced me to the borrower tea stall
owners. Both were very poor and nearly landless people who could not access
any source of credit. They got in touch with the local CSAs to learn about the
possibility of getting a very small loan (less than Rs.5,OOO) from BASIX. After
several interactions with the BASIX staff, they were registered free of cost, and
then when the BASIX staff were fully convinced about clarity of purpose behind
loaning and the borrowers' capabilities, these potential borrowers were
encouraged to submit formal applications. Both the guys got loans after
evaluations of their loan applications were found positive. They had to sign a
letter of undertaking, which clearly specified their repayment obligations. BASIX
staff also made sure in public that they understood them properly before
receiving the loan.
After return to his office, Uday Shankar started narrating the loaning process. He
said, "Origination of loan proposal actually begins with the first contact between
the CSA and the potential borrower. After checking the credentials and reputation
of the potential borrower, CSA generally offers him to register. The registration
form (Exhibit 1) asks for details about the person like his main occupation, his
social status, his bank account number, particulars of his family's movable and
immovable properties, details about family members, his family's expenditure
pattern, together with the comments from FX/CSA on reputation, credibility and
credit record of the applicant. Once the signals are found positive after
registration, each potential borrower is encouraged to apply for one small loan.
The loan application form (Exhibit 2) gives information about borrower code,
besides indicating his loan number, village and whether is a repeat borrower or
not. It contains details about the loan size sought together with purpose, present
sources of earnings (both gross and net) of family members, names of co-
obligants or mutual guarantors, and of course the comments from FX/CSA about
the borrower's focus on the activity to be supported from loan, family income and
background of the co-obligants. After receipt of the application, we constitute a
loan committee with the Unit head as the chairman and one or two FXs as
members. The concerned FX visits the field and presents before the loan
157
committee an appraisal report, wherein he provides in detail the economics of the

proposal, the employment situation in the family, family's investments and
sources of funding of such investments, the family's past credit records, as well
as the nature of technical assistance and support services needed for the
success of the credit activity and the proposed repayment schedule, besides his
recommendation. The detailed evaluation report brings out the cash flow of each
credit project. Our FX thus makes an assessment of the counterpart risk,
business risk and external factor risk before giving his recommendations. If the
loan is approved, the applicant is advised to collect disbursement on a specific
day (generally, one such day in each month) after signing the letter of
undertaking (jointly by the borrower and his co-obligant), which details the assets
to be hypothecated, and the repayment dates and amounts, besides authorizing
the creditor to deduct principal or interest on the loan from the sale proceeds of
the borrower's firm/company (Exhibit 3). Please note that although such
provisions are there, we always prefer loan payment in cash. In case a loan
application is rejected, we also explain reasons to the applicant."
"It seems you are doing a very thorough job", I added in appreciation of what he
described to me about the pre-credit processes. He said, "Yes, of course. We
believe in doing an intensive job before a credit is given, so that we can take
appropriate precautions on time and minimize our efforts on recovery and losses
due to non-repayment."
"What do you do afterwards? Can you tell me the major post-contractual action
points of the 'credit-plus' approach your website talks of, maybe with a few
examples, if you can cite?" I asked at this juncture.
"Yes, I will explain to you," he continued, adding, "As you must be aware, as an
organization, BASICS (BASIX) is a group of financial services and technical
assistance companies. Bhartiya Samruddhi Finance Limited (Samruddhi),
registered with the Reserve Bank of India as a Non-Banking Finance Company,
is the main operating entity through which credit is delivered. Indian Grameen
Sevices (IGS) is an NGO, registered as a Section 25, not-for-profit company,
158
involved in providing technical assistance and support services to Samruddhi

borrowers and other rural producers and institutions. The two are held together
by BASICS Ltd, the holding company, through which initial equity investments
were made in Samruddhi. As Samruddhi has at best an imperfect knowledge of
what interventions to make in order to make its credit operations a success, the
job of experimentation and bearing the learning cost has been entrusted to IGS,
the R & D wing of BASIX. So, I shall first summarize the complementary activities
of IGS."
He continued, As the main job of IGS is to identify borrowers' needs for

technical assistance, identify reliable suppliers of inputs and input services, and
to bring the two sides together, it is engaged in networking with suitable self-
interested collaborators. Such collaborators include government, non-
governmental, cooperative and private agencies. Thus, while credit is provided
by Samruddhi, necessary non-credit support is arranged by IGS. The IGS
came into being in 1987, and this year it recovered 60% of its costs. It is
determined to become a profit center of BAS IX."
"What actions do you take to handle willful and non-willful defaults?" I asked at
this juncture. He responded immediately, "We do not sit idle after a loan is made.
Our staff members maintain regular contact with the borrowers and keep track of
their activities. They meet each borrower formally at least once in every month.
To handle non-willful defaults, BASIX uses a de-risking strategy. It undertakes
prior actions mainly in the form of support services to ensure borrowers safety,
safety of the borrower activity and safety of its overall portfolio mix."
Moreover, BASIX is getting ready to provide insurance alongside credit to its

borrowers to take care of unforeseen contingencies. With detailed cash-flow data
of 35,000 farmers at its fingertips, we are slowly but steadily building up our
capability to supply insurance to our borrowers at nominal marginal cost?"
"Good beginning, I must say, though it has to be a long-drawn battle to handle

non- willful default of people of small means and capabilities. Do you do
159
anything to ensure overall safety of your loan portfolio?" I asked. "Yes, our head
office ensures macro de-risking of this portfolio," came the reply. He then added,
"Nearly 46% of our loans are made toward agriculture and allied activities,
spread over different agro-climatic zones ((Exhibit 4). The rest are off-farm and
non-farm loans. Most of our loans are also short term in nature.
"What are your sources of funds?" I asked at this stage. Immediately he replied,
"We raise resources from the market, the details of which must have been
supplied to you by our Head Office in the folder, you are holding in your hand
(Exhibit 5). Since most of the loans we have taken are to be repaid over 5-10
years, I think, we have enough portfolio balance. In order to cut down on the cost
of our credit, so that we can deliver credit cheaper, we have now taken a move to
have our own Local Area Banks (LABs). In February 2001, we got a license from
the Reserve Bank of India to open a Local Area Bank. The Krishna Bhima
Samruddhi Local Area Bank promoted by BASIX commenced operations in
March 2001 in the districts of Mahboobnagar in Andhra Pradesh and Raichur and
Gulbarga in Karnataka. "
I decided to provoke him at this stage and posed this question, "Even though you
can cut down the cost of your credit a little bit, since you follow such an elaborate
loan process, your own transaction cost of conducting credit operations must be
very high. Can you throw some light on this aspect?"
"We had anticipated this question from you. Although these are not direct
estimates of lender's transaction cost, the results in this report (Exhibit 6) must
provide you some clues to take care of your concern over high transformation
and transaction costs of organization" he said with a smile of satisfaction. I could
realize that they had done good homework before this meeting.
I was not fully satisfied, however, as my expectation level was very high. But
considering the fact that BASIX is really a very young organization with only 2 to
2.5 years experience in most places, I wanted to get a perspective of how they
were looking at the future in this regard. So, I asked, "How would you ensure that
160
your transaction costs go down sufficiently to give you the necessary competitive
edge in the years to come?" He answered very carefully, I must say, "You see,
most of the current loans are in the form of handshake loans. We are still in the
phase of expansion into new areas, diversification, and intensification of our
activities in existing villages. So, we expect the real economics to flow after
second or third loans, when we would have enough experience and information
to cope with any contingency. In fact, currently on our own, we have decided to
grant loan over telephone and within 2 hours of a request from a known
customer, who would successfully complete three consecutive loan repayments."
"Very good, I wish you great success. But let us again come back to the current
situation. Now tell me how you are handling willful default, which has been an
endemic problem of our formal credit institutions," I uttered to allow our
discussion to continue for some more time.
After a sip of tea from his cup, he continued, "To handle willful defaults, BASIX
undertakes several functions. First, it has started with a distinct identity, which is
neither of a public sector bank, nor of a rural moneylender, so that borrowers
expectations are set right from the very beginning. Second, it makes a clear
distinction between repayments and recoveries, besides laying down clear-cut
norms of behavior for its borrowers and employees. For example, when a loan is
first defaulted, the branch office is required to take a follow up action and submit
a report on it before the 5th of the next month. Default beyond 60 days is
individually reported by the CSA and the Unit Head is required to personally
follow up on the matter. As most loan overdues are recouped with a lag and
involve additional transaction costs in recovery, BASIX writes off overdues
beyond one year, such incidences being about 5% of total loans. Although the
option of legal action is kept open to set up examples, BASIX prefers negotiated
settlement to legal action in cases of such foreclosure. So, even though we may
look quite flexible before a loan is made, we are extremely rigid and strict
afterwards, especially in handling defaults, because we do not want even a
single case of this disease to spread like a cancer in our villages".
161
He continued: "But as most poor borrowers do not have marketable collateral,

majority of BASIX's loans happen to be unsecured ones. So, BASIX has replaced
the notion of traditional marketable collateral with a social process of lending
supported by a carefully designed incentive-disincentive structure for timely
repayment of loans. Our socialization process - that is, free mixing and intimate
relationship with the borrowers and their peer groups, therefore, plays a crucial
role in handling default. We also adjust interest rates and incentives-disincentives
in interest charges based on our experience over time and space. Currently, we
are charging a uniform 24% per annum interest rate irrespective of purpose, thus
eliminating any possibility of adverse usage of loans across purpose. While 2%
rebate on interest is granted on timely loan repayment, we also impose an
additional 2% penal rate for delayed payments. Lesser than commercial rate of
interest is charged only in case of Self Help Group (SHG) loans, where refinance
is available at sub-commercial rates. Norms guiding the underlying actions are
regularly reviewed for necessary changes."
"Do you do anything beyond that?" I asked. "Yes, of course," came the reply,
"With the help of an independent agency and based on a representative sample
of both direct and indirect customers together with a suitable control group of
non-customers, BASIX undertakes Customer Satisfaction Audit every year to dig
out its competitive strengths and weaknesses and take appropriate actions to
fine-tune its systems and processes."
I felt I had learnt enough. As I was about to leave, after expressing my thanks
and gratitude to them, all of them together asked me to come back to them
again.
1. What are the systems and procedures adopted by BASIX to improve the
delivery of credit?
2. What are their merits and demerits both for microfinance lenders and
borrowers?
3. Can they be replicated by other Microfinance Institutions?
162
Exhibit 1: Registration form for Small Loans ( up to Rs. 50,000/-)
Passport size
For Office use only photograph
(please enclose
To: Unit Manager Regn. No. an additional
copy for pass
book)
BASIX,________________ Unit Borrower Code
I, Sri./Smt.
S/o/W/o/D/o_________________________ aged__________ resident of __________________

Village would like to register as a potential customer of BASIX, I understood that this is no way
binds me to borrow from BASIX, nor does BASIX agrees to provide loans for all or any purpose.
1. My Main Occupation
Agriculture Labor Animal Husbandry Rural Artisan
Trade Service Any other ___________
2. I belong to: SC ST OBC Minority Comm. General
3. Full Address: ______________________________________________________________

Pin: _______________
4. My Bank A/c No. ____________________ Name of the Bank __________________ Branch

__________________
5. Particulars of Immovable Property (Furnish certified copies of record of rights)
Agricultural lands
Village Sy. No. Extent Irrigated Source of Value

(acres)
Residential Lands & Housing
Village Plot No. Extent No. of rooms Type of roof* Value

Sq. yds)
* Type of roof: 1. Thatched 2. Tiles 3. Stones 4. Sheet 5. RCC
163
6. Particulars of Movable Property owned by the Family
Type of Asset Description Approx. Mkt.

Value
Livestock
Age Implements
Vehicles
TV
Any other
Grand Total
7. Introduction by ________________________________ of _____________________ (place)

(BASIX Customer/Collaborator/CSA/Others) Please tick one
8. My Family Details
SL Name Relationship Sex Age Occupation Educational

Status
1.
2.
3.
4.
5.
9. Consumption Expenditure
No. of Family Regular Monthly Annual Spending

Member Household on Festive
Expenditure (Rs.) Seasons (Rs.)
Nomination:
In case of my death/permanent disability, my nominee, _________________________, who is
my ________________
(relationship with customer), aged ___ years, resident of _________________ , shall be entitled
to receive from and settle any claims to Bhartiya Samruddhi Finance Ltd. On my behalf.
Declaration:
I hereby declare that the particulars given above are true and correct to the best of my knowledge
and belief.
Nominee's Signature Applicant's Signature Place: Date:
10. Comments from FX/CSA (with focus on reputation, credibility and credit record of applicant)
---------------------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------------------
Credibility Check done with:
---------------------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------------------
Name & Signature of FX/CSA: Place: Date:
164
Exhibit 2: Application Cum Appraisal Form for Small Loans

For Office use only
To: Unit Manager -------------------------------
BASIX, ___________________ Unit Repeat Borrower Yes/No
Borrower Code
Loan No
Village
Dear Sir,
I, Sri/Smt.
S/o/W/o/D/o/S/o ___________________________ aged _____________, resident of village

_____________________
Would like to apply for a loan of Rs. _______ (Rupees ____________________________ ) for
the purpose of :
Farm: Crop Agri Investment Allied
Non Farm: Trade/Services Manufacturing Gen.Purpose Housing
I furnish the following necessary particulars:
1. Present Sources of Earnings of Applicant or Other Members of Family
Annual Revenue Annual Expd. In Annual Net Surplus

from Activity Activity from Activity
a. Primary Occupation
b. Other Activity-1
c. Other Activity-2
d. Activity of other
Family Members
Total
2.Present Sources of Credit (Banks, Finance Cos. Commission Agents, Traders, Relatives, etc.)
Source Purpose Amount Borrowed Amount Due
3. Financial Assistance sought for

Activity/Item Vol. Of Activity Loan Reqd.
a.
b.
4.. Co-obligant/Mutual Guarantors (Strike out whichever is not applicable)
1. _____________________________ 2. ______________________________
2. _____________________________ 4. ______________________________
Nominee's Signature Co-obligant's Signature Applicant's Signature

(If not a Mutual Guarantee) Place:
165
5. Comments from FX/CSA (with focus on activity, family income & background of co-obligant)
______________________________________________________________________
_______________________________________________________________________
Name & Signature of FX/CSA
Appraisal Report
Name of the Applicant: ________________________________
1. Economics of the Proposal
Volume of Activity (units) Experience in Activity (years)

Income from Activity (Rs.) Expenditure on Activity (Rs.)
Surplus from Activity (Rs.) Time Period considered
Peak Business Period Loan Business Period (months)
(months)
No. of persons employed Full Time: No. of persons employed Part Time:
Male: Female: Male: Female:
Investment in Activity (Rs.) Funding of Investment (Rs.)

Fixed Investment Loan from Banks
Working Capital Credit from input supplier
Investment
Loan from Others
Credit given Own Investment
TOTAL TOTAL
Strengths of
the Proposal:
Weaknesses of
the Proposal:
2. Technical Assistance and Support Services (TASS)
Service Present Source Specify, if needed

Input/Equipment Supply
Technical Assistance
Market Linkage
Other Support
3. Applicant's & Family's Credit Record with BASIX:
4. Comments of FX: ____________________________________________________________

___________________________________________________________
166
A loan of Rs. ________________ is sanctioned/recommended for sanction under the following

terms and conditions: (please tick one)
a) Guarantee/Co-obligation of ________________________________________________
b) Proposed Repayment Schedule
No. of installments :
Installments (specify with dates) Equal: ________________________________
Irregular: ________________________________________________________
Unit/Field Executive
Unit Loan Committee's Decision
Sanctioned Rs. ___________

Rejected (give reasons)
Place: Date: Chair, Unit Loan Committee
167
Exhibit 3: Letter of Undertaking

From
1. ______________ 2. _____________
______________ _____________
______________ _____________
(Borrower) (Co-obligant)
Sir,
Sub: Loan amount of Rs. ______ sanctioned to me/us for the purpose of
_____________________________________________________________
1. With reference to subject loan, I have already executed On Demand Promissory Note dated
_______________ for Rs. __________________ .
2. In addition, the assets created out of the subject loan stands automatically hypothecated to
you and the details of these assets are furnished below:
Name of the Assets Description Value
The above securities will not be pledged, charged, hypothecated, sold or disposed of without your
consent.
3. You are authorized t remit the loan proceeds in part or in full directly to the supplier of
inputs/equipments livestock.
4. The entire loan amount of Rs. ____ will be paid back in _____ installments as follows:
Installment Date of Installment Installment Date of Installment

No. Repayment Amount No. Repayment Amount
5. I/We authorize _________________________ (Name of Company Firm, if any) to deduct

towards the loan amount a and interest, service charges, penalty thereon, if any, from the
sales proceeds of my produces sold by the company from and credit the same to you on my
behalf:
6. In the event of default or misutilisation of loan amount you are authorized to recall the entire
amount.
Place: Yours faithfully,
Date: (Borrower) (Co-obligant)
168
Exhibit 4
Portfolio Analysis of BASIX as on 31st March 2002
SL No. of Disburse- On-Time

Ultimate ments as % Repayme
Loans as % of total nt
of total Portfolio
Portfolio
1 Purpose-wise Classification
A Farm Loans 46% 47% 89.8%
B Non-Farm Loans 47% 46% 94.2%
C General Purpose Loans 7% 7% 96.3%
Total 100% 100% 92.4%
2 Channel-wise Classification
A Direct Loans 71% 71% 93.2%
B Direct with Joint Liability 23% 24% 90.2%
Groups
C Self Help Groups 6% 6% 96.5%
D Onlenders (eg. Trade 0% 0% 53.1%
Intermediaries)
Total 100% 100% 92.4%
169
Exhibit 5: Funding Update of BASIX as of July 2002
SL Institute Year Amount Amount Rs. Status

Rs. Million Million
1 Global Trust 2000 Rs. 20mn 20 Closed in May 2002.
Bank Ltd, 2001 @10.5% 40 Sanction for Rs. 100
India Rs. 40mn lacs received.
@10.5% Negotiating with
bank for Rs. 400
lacs
2 Cordaid, 1999 Rs. 40mn @10% 40 Loan of Rs. 40 mn
Netherlands 2002 approved, and Rs
20mn drawn down
II Draw down of Rs.
20 mn approved
3 SIDBI, India 1999 Rs. 20mn @11% 20 Fully Disbursed
2001 Rs. 30mn @11% 30 Fully Disbursed
2002 Rs. 40mn @11% 40 Approved
4 ICICI Bank 2000 Rs. 40mn 40 Loan approved and
India 2002 @13.5% 40 Operational Limits
Rs. 40mn renewed
@13.5%
5 HDFC Bank, 2000 Rs. 10mn @12% 10 Disbursed
India 2002 Rs. 40mn @12% 40 Preliminary
Discussions had with
their senior Team in
June 2002
6 HDFC, India 2002 Rs. 100mn 15 Term sheet received
@13% over three for Rs. 15 million.
years Meeting with India
Head in July 2002
7 DID, Canada 2000 C$0.4 mn @6% 12 Disbursed
2002 C$0.45 mn @6% Disbursed
8 Shorebank 2001 US$0.5 mn 24 Disbursed
Corporation, 8.33%, 3
USA years
9 UTI Bank 2002 Rs. 120 mn over 120 Proposal submitted
3 years and discussion are
on. Appraisal Team
visiting in July 2002
10 HDFC KFW 2002 Rs. 120 mn over 120 Preliminary appraisal
3 years completed
170
Exhibit 6: Comparative Financial Results
SL BASIX MFIs in All MFIs

South
Asia
I Operating Expense as a Percentage of Total Assets
A Operating Adjusted Operating 25.8% 18.5% 31.2%
Expense: Expense/Average
Total Assets
B Interest Expense: Interest 8.1% 3.6% 3.9%
Expense/Average
Total assets
C Loan Loss Loan Loss Provision 7.2% 1.7% 2.2%
Provision Expense/Average
Expense Total Assets
D Salary Expense Salary 3.6% 5.4% 10.6%
Expense/Average
Total Assets
E Other Other Administrative 5.5% 4.9% 9.1%
Administrative Expense/Average
Expense: Total Assets
II Efficiency and Productivity Indicator
A Total Total Administrative 11.3% 16.6% 30.4%
Administrative Expense/Average
Expense: Loan Portfolio
B Salary Expense: Total Remuneration 4.5% 9.1% 16.2%
Expense/Average
Loan Portfolio
C Physical Number of Loan 183 146 114
Productivity of Clients per Staff
Staff: Member
Source: Micro-Banking Standards Project, November, 2001.
171
LIST OF CASE-WRITERS
Sr. No. Name & Address

1. Dr. KC Sharma
Faculty Member
Bankers Institute of Rural Development
SectorH, LDA Colony, Kanpur Road
Lucknow 226 012
Email: kailash.sharma@indiatimes.com
2. Shri.Rahul Mittra
Assistant Faculty
Entrepreneurship Development Institute of India (EDI)
432/36, Kala Kankar Colony, Old Hyderabad
Lucknow 226 007
Email: rahul_mittra@yahoo.com
3. Ms. Nidhi Ranjan
Friends of Womens World Banking (FWWB)
G-7, Sakar1
Opp. Gandhigram Railway Station
Ashram Road
Ahmedabad 380 009
Email: fwwb@wilnetonline.net
4. Prof. JN Poddar
Area of Finance & Control
Indian Institute of Forest Management
Nehru Nagar, Post Box No.357
Bhopal 462 003
Email: jnpoddar@iifm.com
5. Ms. A Uma Rani
DHAN Foundation
18, Pillayar Koil Street, SS Colony
Madurai 625 010
Phone: 91-452-610794, 610805
Fax: 91-452-602247
Email: dhanacademy@satyam.net.in / dhan@md3.vsnl.net.in
6. Ms. Raghini B
DHAN Foundation
18, Pillayar Koil Street
SS Colony
Madurai 625 010
Tamil Nadu
Email: dhan@md3.vsnl.net.in
7. Mr. Keyur Thaker
National Institute of Cooperative Management
Near Indroda Circle
Gandhinagar 382 009
Gujarat
Email: thakerkeyur@yahoo.com
172
8. Dr. Naresh Singh

Narsee Monjee Institute of Management Studies
Juhu Vile Parle Development Scheme
Vile Parle (West)
Mumbai 400 056
Email: naresh@nmims.edu
9. Ms. S. Rama Lakshmi
Capacity Building Coordinator
Mahila Abivruddhi Society
Plot No.20, Road No.2
Banjara Hills
Hyderabad 500 034
Email: srama@apmas.org
10. Shri Swandip Sinha
EDA Rural Systems
107, DLF Qutab Plaza
DLF Qutab Enclave, Phase-1
Gurgaon 122 002
Email: swandipsinha@id.eth.net
11. Prof. Samar Datta
CMA
Indian Institute of Management
Vastrapur
Ahmedabad 380 015
Email: samardatta@hotmail.com
12. Dr. N.V. Namboodiri
CMA
Indian Institute of Management
Vastrapur
Ahmedabad 380 015
13. Shri Krishan Jindal
Faculty Member
Bankers Institute of Rural Development
SectorH, LDA Colony, Kanpur Road
Lucknow - 226 012
Email: kishanjindal@hotmail.com
14. Prof. Prabal K Sen
BOB Chair
Institute of Rural Management, Anand-388001
Email: prabalks@irma.ac.in
15. Dr. HS Shylendra
Faculty Member
Institute of Rural Management, Anand-388001
Email: hss@irma.ac.in
173

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CASES IN MICROFINANCE

(Submitted to SIDBI Foundation for Micro Credit,

Institute of Rural Management Anand

1. To Diversify or Not Into Microfinance?: The Case of a 1-6

2. How to Get Started ? (B. Raghini) 7-23

II. CREATING LINKAGES AND INSTITUTIONS

3. SHG-Bank Linkage: A Case of ANARDE Foundation 24-32

4. The Nandipet SHG Federation (S. Rama Lakshmi) 33-42

5. The `Bank (H.S. Shylendra) 43-52

III. MICROFINANCE PRODUCTS

6. MDs Dilemma: A Case on Rural Electricity and 53-61

7. Loan Product For Daughters Marriage (K.C. Sharma) 62-67

8. Microinsurance: Is it a Viable Solution? (Nidhi Ranjan) 68-77

IV. DELINQUENCY MANAGEMENT

9. Containing Delinquency Virus (K.C.Sharma) 78-84

10. Link Metrics To Your Mission: Performance Measurement 85-96

11. Attaining Self-Sufficiency: The Case of Credit and Savings 97-107

12. Do You Deserve More Funds ?: The Case of MVS 108-123

13. BHASS Micro Credit Mission (N.V.Namboodiri) 124-131

14. Scaling Up of An MFI: The case of Village Welfare 132-141

VII. SYSTEMS AND OPERATIONS OF MICROFINANCE INSTITUTIONS

15. Introducing Incentive Based Remuneration (Rahul Mittra) 142-151

16. Systems and Processes of Credit Operations : The Case of 152-171

The volume Cases in Microfinance is a compilation of cases which were

TO DIVERSIFY OR NOT INTO MICROFINANCE?: THE CASE OF A

In the Board Room

The core functionaries of a multi-activity NGO have gathered for an important

Should we diversify into microfinance or remain as we are?

Microfinance intervention basically involves providing the poor easy and

The Group for diversification (Group I) has the following arguments:

The basic reason for rural underdevelopment is the paucity of funds

The experiences from Andhra Pradesh and Karnataka within and

microfinance is provided to the poor women, it has brought about the

If microfinance could elevate the status of women, why not it should be

As an organization our basic commitment is to work with the whole

MFIs in their present form necessarily depend on business principles

We are primarily working for human development, where social capital

There are various institutions providing financial services. But once

The earlier interventions of the organization were in primary education,

The values of the organization rest on the principles of equity, participatory

The total staff strength of the organization comes to around 35 including 10

The Field Situation

The area in question is generally poor in terms of transport facilities and

Apparently, lack of minimum level of income is proving to be the biggest

The pressure on the organization is to provide them with some alternative

would be able to organize themselves, think about their development and

The External Environment

The World Bank, international and national funding agencies, mainstream

HOW TO GET STARTED?1

Mr. Viswanath is the Chief Executive of the Pragati Foundation an NGO

Villager: It isnt four kilometres. It is a little over a kilometre only. Just go

Siva: Here agriculture is the main source of livelihood. About 90 percent of

Prakash: Many of them go as labourers for sugarcane cutting in this area.

Table 1: Loans availed by occupation category at different interest rates

Sumathi: What are the main sources of livelihood?

Village Woman: Earlier in addition to the agriculture, a majority of the people

Siva: What is it that lady carrying on her head?

Siva: How many women are involved in this activity?

Sumathi: Tell me something more about your village?

Kalai: How long are you doing this activity?

Murugeswari: I am doing it for the last 10-12 years. During

Kalai: How much do you get paid for a litre of milk?

Murugeswari: Seven rupees per litre.

Kalai: Don't you think you are being exploited?