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RISK MANAGEMENT IN MICROFINANCE – EMERGING CHALLENGES IN INDIAN CONTEXT.

RISK MANAGEMENT IN MICROFINANCE – EMERGING CHALLENGES IN INDIAN CONTEXT. International Conference on Rural Finance Research: Moving results into Policies and Practice. 19 th -21 st March 2007 at Rome. . N.JEYASEELAN, CONSULTANT, INDIA. Vijayjeyaseelan@yahoo.co.in.

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RISK MANAGEMENT IN MICROFINANCE – EMERGING CHALLENGES IN INDIAN CONTEXT.

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  1. RISK MANAGEMENT IN MICROFINANCE –EMERGING CHALLENGES IN INDIAN CONTEXT. International Conference on Rural Finance Research: Moving results into Policies and Practice. 19th -21st March 2007 at Rome. N.JEYASEELAN, CONSULTANT, INDIA. Vijayjeyaseelan@yahoo.co.in

  2. SHG BANK LINKAGE PROGRAM • NABARD – TECHNICAL SUPPORT - REFINANCE • BANKS – LOAN DELIVERY • NGOs – PROMOTION OF SHG • SHGs-INFORMAL GROUP

  3. PROGRESS UNDER MICROFINANCE IN INDIAUpto 31st March 2006 - in Million US dollars Agency / Cumulative No.of persons Program micro credit disbursed reached (in Millions) Amount % share to total NABARD SHG Bank linkage 2590.45 69.2 164.9 SIDBI-MFI 173.14 4.6 2.6 SGSY 893.81 23.9 3.2 Others(RMK 88.10 2.3 1.1 &FWWB) Total 3745.50 100 171.8

  4. CUMULATIVE PROGRESS OF SHG BANK LINKAGE PROGRAM.

  5. BANK SHG LOAN PORTFOLIO GROWTHin Million US dollars

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

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

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

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

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

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

  12. FINDINGSSIX MAJOR HIGH RISK FACTORS AS PERCEIVED BY THE BRANCH MANAGERS. v     Reduction in grants to NGOs for group promotion. v     Frequent switch over of NGO field staff v     Maintenance of group accounts by a few v     Loan size not commensurate with the capacity of the SHG members. v     Increasing possibility for loan default with increase in loan size v  SHGs shouldering too much government program responsibilities beyond their capacity.

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

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

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

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

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

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

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

  20. THANK YOU. For further details, Please contact: N.Jeyaseelan, Consultant, 7/633-A-Jeevanantham street, Nagamalai Pudukottai, Madurai, 625 019, INDIA. Phone :00-91-452-2456546 Mobile : 00-91-9344108120 Skype : vijayjeyaseelan

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