Theme 3: Risk Management in Microfinance: Emerging Challenges in Indian Context
In India, the exponential growth of Self Help Group Bank linkage program has brought in challenges, which expose the banks to varying levels of risks. Even though the lending to SHGs is outside the purview of the individual credit risk rating framework right now and only portfolio approach is adopted, the banks have to be ready with a roadmap for managing both the credit risk and the operational risk in Micro finance so that they will be comfortable to comply with the forthcoming Basel II norms.
The present study is a descriptive one and focusing more on qualitative aspects. Focus group discussions were held with the stakeholders to elicit their views on emerging risks at the SHG and NGO level, which led to short listing of ten major risk factors. A 5-point scale was constructed and used after pre-testing to find out the perception of the branch managers on those 10 risk factors. The data was collected from 68 Branch managers of commercial banks involved in SHG lending in 5 districts. Categorization of risk was done using the mean and the standard deviation for each risk factor.
Out of the ten risk factors, branch managers perceived 6 risk factors as high risk category, viz Reduction in grants to NGOs for group promotion, Maintenance of group accounts by a few and not in a transparent way, Frequent switch over of NGO field staff, Loan size not commensurate with the capacity of SHG members, Increasing possibility for loan default with increase in loan size and SHGs shouldering too much government program responsibilities beyond their capacities.
The present study recommends risk mitigation / management measures, suggests credit risk rating tools for SHG loans and also offers suggestions for policy changes. The major suggestions made are as hereunder:
- The banks shall consider the credit risk rating tools suggested in this study as given in the annexure I and II as a base and shall develop their own SHG credit risk rating tools to suit their context. The calibration on the risk rating scale can be linked with credit decision making especially with reference to loan amount, tenure and pricing of the loan. The risk based pricing will encourage the SHGs to keep up the credit discipline and enforce the repayment ethics.
- NABARD shall form Micro Credit Information Bureaus at the district level as a pilot and make available the credit histories of the SHGs to the banks over online.
- NABARD shall organize more capacity building programs for NGOs and CBOs on basic risk management strategies in Micro finance.
- Government should change the mode from rapid growth to consolidation phase so as to ensure a growth with stability and improve the quality of the groups.
- NGOs shall form Federation of SHGs (CBOs) and train them to take up the responsibility from the NGOs for monitoring of SHGs.
The study findings & some of the suggestion made in the study have been incorporated by the author into the training module of the SHG training for Branch Managers and the author has conducted three training programs for Branch Managers on 13th Jan 2006, 21st Feb 2006 and 11th Nov 2006 at Madurai. The Branch managers have found that the risk mitigation / management inputs imparted through the training were very useful to them and have become confident to face the challenges in enlarging the microfinance outreach.